Bilia AB (publ) (BILIA) Earnings Call Transcript & Summary

This call is being recorded. Welcome to the Bilia Q2 Report for 2023. [Operator Instructions] Now I will hand the conference over to IR, Carl Fredrik Ewetz. Please go ahead.

Thank you very much for that introduction, and a warm welcome to Bilia's Q2 results presentation with CEO, Per Avander; CFO, Kristina Franzen; and myself. The agenda looks pretty much as last quarter with one addition, and that we're showing the operational earnings separately for each country. But let's start with how we see the current market or the current market industry, and I'll leave the word to Per Avander.

Thank you very much, Carl Fredrik. Yes, Page #3 and the current market situation. In the car industry, there is a very good demand in the Service Business with long booking times. New cars have a weaker demand, especially for pure electrical vehicles. The government in Sweden stopped the climate bonus in the end of the last year. In Norway, they have added VAT for cars over NOK 500,000, which means more expensive cars. Fleet business is much more stable and there is a still high demand. The industry has still a strong order backlog of new cars in Sweden and Western Europe. What I mean with Western Europe is Belgium and Luxembourg, there we have operation with BMW and MINI. In Norway, it's a more normalized level. Norway has a challenging business climate. I mentioned tax regulations. Another challenge is cancellation of orders. The third is price reductions of new cars, which leads to lower margin in the used cars business. The demand for used cars are on a good level. It's a higher level than last year. It's still a consolidation of dealers in the industry. Some brands started many years ago. For example, BMW, they reduced from 22 dealers to 6 dealers in Sweden. Others will follow. For example, Toyota will start in the end of this year. It's a lot of discussions of new business models, especially agency model. It's already introduced with Mercedes and Volkswagen light commercial vehicles in Sweden. For Mercedes, we are a pilot market in Sweden. Several brands will follow, and we have a lot of negotiations and discussions for the moment. Both Porsche and Toyota have confirmed that they will not implement agency model. Please go to the next, Slide 4. Net turnover increased due to higher deliveries of cars and growth in the Service Business. We report for Bilia Group result of SEK 445 million and a margin of 4.5%. Bear in mind, we have some divested operations in Sweden and Norway. In Norway, we sold our Volvo business in Oslo area last summer. It was 3 outlets. In Sweden and Western Europe, we reported best quarter 2 results ever. I will get back to that on the next slide. In Norway, we reported lower profitability due to both Car and the Service Business, and as I mentioned, divested operations, and I will get back to the Norwegian market. Please go to the next. On this slide, you can see quarter 2 results from '19 to '23. On the left-hand side, you can see the Swedish operations. And if we go back 5 years ago, we had a profitability of SEK 220 million and this quarter, SEK 369 million. And on the right-hand side, you can see the Western Europe and the same, '19, SEK 25 million; and today, SEK 61 million. So really, really strong profitability in both Sweden and Western Europe. I will get back to Norwegian result on the next slides. Please go to the Service Business. Continued good demand in the Service Business with long booking times, much better compared with the same period last year. Right now, we are hiring more mechanics. We have an organic growth of 10%. It's a historically strong figure. Higher earnings than last year, considering divested operations, really good levels in both Sweden and Western Europe with a margin at the same level as last year in Sweden and a better margin in Western Europe. Norway. Norway reported a lower earning compared to the last year. It depends on different reasons. One is, as I've told already, divested operations in Oslo area, another is a brand new dismantling facility Southwest Oslo, the name is Røyken. The third reason is that we moved a body and paint shop, which means a lot of cost without any production. We also have had cost levels on rents and energy, high costs of that. We have already taken a lot of actions, for example, cost reduction, and we have a centralized business excellence team from Sweden helping our managers in workshop and spare parts departments. Let me go to the Car Business. Deliveries of new and used cars adjusted for divested and acquired operations, were 10% and 2% higher. We had a result of close to SEK 200 million. And for the used car, we were a little bit over SEK 100 million compared to SEK 120 million last year. But in a historical perspective, it's a really, really high level for the used car business. Order intake on new cars adjusted for divested operations were 41% lower. Norway declined with 78%. Western Europe increased the new car sales with 22% compared to the same period last year. So it's total different markets we are operating in. We have a good level of order backlog, close 20,000 new cars. The normal level for Bilia Group is around 13,000 to 14,000 new cars. So we'll go over to Kristina.

Yes. Thank you, Per. Then we move over to the financial position at the end of the quarter. So during the second quarter, we generated a solid operating cash flow of SEK 519 million, and thereby, we recovered the negative cash flow that were -- occurred in the first quarter. We will, during the coming quarters, continue our focus on working capital, where we, as you might have remembered from the last report for the first quarter, have had a higher working capital due to the push on electrical vehicles that we had around year-end, partly caused by the tax changes that Per mentioned earlier. That meant that at the end of the quarter, we utilized around SEK 1 billion of our available credit limits of SEK 2.5 billion. We have not had any cash flow from payments from acquisitions during the quarter, but have paid our first installment of dividends amounting to around SEK 200. There will be another 3 installments relating to the decided dividend that amounts to SEK 8.80 per share. If we move on to the net debt, it amounted to SEK 2.2 billion. And in relation to EBITDA, it remains on a stable level of 1.1x, which is well below our financial target of 2.0x. And then finally, during the quarter, we have successfully refinanced our SEK 800 million bond which had an ordinary maturity date in October this year. Our new bond have a 5-year duration time, meaning that it has a maturity in 2028 and was refinanced at terms on the level we expected. So with that, I think that's where we are on the financial position.

Yes. We had the outlook for quarter 3, and I will start, and then Carl Fredrik will take over. New cars in Sweden and Norway, we don't see the light in the tunnel yet. Often when we have a recession, we are early into a recession when we are talking new cars sales, and we come out often earlier than other industries and then start to sell cars again. But for the moment, we don't see the light in the tunnel, and we are waiting for the -- what will happen in the interest rate. So the private, I guess, for quarter 3, it will be low sales on new cars. So instead, often private consumers, they start to buy more used cars instead. And the fleet business, as I said, is a stable business. You have often 3 years leasing contracts and after you end in one, you're taking out a new car again. And what I told for quarter 2, it's a little bit the opposite in Western Europe. What we can see in Belgium, Luxembourg, we have a really good campaign for BMW, meaning there if you compare it to Sweden and Norway for the moment. So we see in the tunnel, we will have some lights and see a good demand for new cars in both Belgium and Luxembourg.

Yes. And perhaps I can show some light in the tunnel. We see an increasing demand for used car on the back of an underlying pent-up demand, less money for the consumer and less subsidies for electrical vehicles. Consumers used to keep their own cars or buying a cheaper used car, typically traditional IC car or hybrids. Depending on the demand, it's not impossible we will experience a lack of used cars in the Nordics soon. And I think Per mentioned it earlier, but when it comes to prices for used car, we see a stable situation during the coming quarters. And with the interest for used cars picking up, new car deliveries and our own continuous improvement, we see good demand and a solid outlook for the Service Business in the coming quarter. And just to be clear, in 2020, the Service Business represented 22% of our turnover and 58% of our operating profit and in this quarter, 62% of the profit. And I wouldn't say the Service Business is immune, but it's the least sensitive business area when it comes to economic downturns or upturns. When it comes to consolidation, we're a leading player in the industry, and we will take part in the ongoing consolidation, of course, without jeopardizing our balance sheet. We have become more proactive searching in areas we think would be a good fit for our current and future strategy. We continue to see slightly longer lead times, increased supply and lower prices due to higher financing costs and increased requirements for investments. So that's about it. Operator, we can open up for questions.

[Operator Instructions] The next question comes from Mats Liss from Kepler Cheuvreux.

Yes. Well, looking at the numbers here and in Norway, I mean, you mentioned that there are some changes going on there. You have not only sold off operations, but you have made some reshuffling there. And so could you give some sort of indication what we will see in the second half when things are sort of more stable or have been sort of settled?

Do you have the Service Business and the outlook for the Service Business in Norway in mind then with your question, Mats?

No. I mean in the report, you mentioned that in Norway, yes, well, you have sold off operations, but you have also made some changes there. And then what was the cost impact for these changes?

Yes. Yes. What I said is, if we talk about the service market. So we have a good growth in the Norwegian market. And then we had some actions we took with the dismantling to open up a new one and moved the body and paint shop [indiscernible] and then a little bit high cost level. But what we see it's a sort of a cost for once you can say...

One-off.

Yes. But -- so we take a lot of actions in the market. And what I didn't say we have had a mix of job in the quarter as well, a little bit with lower margin. Often I say the delivery workshops, there is a really good job for Bilia when we predelivery service, we call it internally [ Bil1Din ], the delivery workshops. So there, we have had full actions in the quarter. So therefore a little bit lower margin if we compare with the last year.

And then as you said, Mats, I mean, in the next quarter, there will, in Norway, be a like-for-like quarter in that sense after divested operations are no longer included. While, of course, the start-up operations will take a while before it's fully up and operating in the level compared to the other workshops. So -- but they will gradually come up to the speed that we have on the other areas, of course.

And then we have the centralized business excellence team from Sweden, and we opened up a new business excellence team in Norway as well. And what I have told in the past is that the team go out and see some -- a little bit workshop where we are talking profitability, help the workshop manager, put a lot of actions, have an action plan, processes, concepts, and then they come back after a couple of weeks and go and help the workshop managers. So it's a full of different actions in the Norwegian market for the moment.

Okay. And well, looking at other parts of the business, you seemed to do well in Western Europe there, I mean the earnings are picking up. Is it sort of a sustainable level? Or are there sort of one-offs included there that's not...

We still have a really high backlog of new cars. And in the quarter now, we delivered a lot of cars. But still, we have a lot of cars in our backlog. So I guess if we can get the cars from our manufacturers, no lack of components like semiconductors, we will deliver a lot of cars in quarter 3 and quarter 4 as well, but it's a really high level if you look at the total profitability in Western Europe.

Yes. It's of note, at a high level, right? So we have that on a long-term basis, it might be a little bit on the high side.

Good. Good. And I guess in Sweden, you...

[indiscernible]

She is a little bit more clerical.

Yes, yes. And in Sweden, I guess, things are moving along well with the support from the backlog and services is stable. So that's good news, I guess. But this -- well, price erosion in the new car segment, especially in electric vehicles, that's something that will be a headwind for some time. Yes, you indicate that, of course. So -- but when do you think this will sort of be stabilizing again and then we will see a return on the private consumer in the new car business as well?

Yes. So it's -- when do we expect the private customers to go back into the new car business and...

Yes. 10,000 car owners' question. But if I look at the recession 2008 and IT crash 2000 and the bank crisis '92, so when the private consumers see [ it don't ] will be worse, they start to buying new cars again. But we had the phenomenon with private leasing and the monthly amount you paid sometimes it's the double today if you compare 1 or 2 years ago because the interest rates, the government took off the climate bonus. So it's much more expensive today. But we see some manufacturers they start to calculate of private leasing again because they are about full in the factories. So if you have a full order book, we don't see it. So it's total different between the brands we have. But some, they are starting to discuss really good private leasing again. So -- and maybe remember, private consumers 2 years ago, 60% of all new cars to private consumer, it was private leasing. And now we try sometimes to find a solution with -- you pay cash 20% to take a bank loan, but still, you have a residual value. So we try to find new campaigns and solutions for our customers. So if Riksbanken say no more increasing of the interest rates, I guess the customer will come back again. Does that answer your question?

Yes. And finally, just about service, I guess you have this 10% organic growth, which is very impressive. How much of that is sort of price and how much is volume? Could you say something about that?

It's not so much price because when we -- for example, if you say we increased the price with 5%, we don't get it out in the figures, you can see because sometimes they have warranty jobs and there is another discussions and negotiations with our manufacturers and you have a lot of insurance business in our body and paint shops, so we have another negotiation with the insurance companies. So often we say if we increase the price with 5%, you can see in our profit 2.5%, the half. So it's not so much price in the growth that you can see in the figures here.

And is this volume increase then, some sort of a pent-up demand from the consumer has been sort of resistant in keeping the service for some time and now it's sort of -- well, need to be done? Or should we expect this to continue in the second half as well?

Let's see. Your question was, Mats, if it's some sort of -- that persons have not really performed their service due to lack of...

Yes. I mean thing is, was a bit more difficult to last autumn, I guess, then with the high energy prices, which have sort of...

Well, we don't see it. So the demand today in all our 4 countries is better, if I compare with the same period last year. So you take care of your car, you repair and you do your service. So we don't see the customer jump over in the service program like that. So it's a better market -- the service market today, if I compare 1 year ago.