Kamux Oyj (KAMUX) Earnings Call Transcript & Summary

Good morning. Welcome to Kamux's Q3 Results Presentation. My name is Juha Kalliokoski, I'm CEO and Founder of the company.

Good morning. My name is Marko Lehtonen. I'm Kamux's CFO.

As you have heard, we announced yesterday that I have decided to step down as CEO during the first half of 2023. And Board of Directors has appointed Tapio Pajuharju, who is currently CEO of Harvia, as Kamux's new CEO. I'm extremely proud of what we have achieved with the rest of the Kamux team, but now it's a good time for me to step down. We have grown and [indiscernible] sized at a fast-paced profitable, and we are now Europe's third largest dealer focusing purely on used cars. As next, we need to boost our international growth further, and Tapio has a strong track record of growing and scaling business -- international team. He has also the ability to spot new opportunities within the automotive industry, which is why I'm extremely pleased that he will be Kamux's next CEO. I believe that Tapio is perfectly suited to take Kamux to the next level from #3 to #1, and it's important that everyone understand what is good for Kamux, it's also good for me, and of course, the other -- or the rest of the shareholders. And now, let's take a review of our quarter 3 results. As usual, I will take you through the main points of our performance, and Marko will then focus on the financials. Our vision is to be #1 in used car retailer in Europe. And as we are already the third largest dealer focusing on used cars, our vision is very realistic. This table includes European operators that focus on sales of used cars. The figures are from our full year 2021, and you may notice that we have updated Aramis and Autohero's estimated figures with exact numbers. During Q3, the effects of the war in Ukraine reflected into energy crisis, inflation and rising interest rates, have continued to have a significant impact on the used car market. Demand between different power sources has also varied significantly and quickly during Q3. In spite of the exceptional market conditions, we succeeded in our main goal increasing turnover. This proves that our omnichannel strategy and concept works also in difficult conditions. We cannot be satisfied with the gross margin development in Finland and in Sweden. In Germany, however, gross margin developed positively. Our main goal during the strategy period is growth in our international operations, and we have made some progress here. The renewal of our group management team. There is coming -- Martin Verrelli began as the Country Director for Germany in the 1st of July, and Jarkko Lehtismaki started as Chief Digital Officer on September 1. Our revenue increased by 2.8% and gross profit decreased by 16.5%, and it came mostly from Finland and Sweden. Adjusted operating profit decreased compared to the previous year, and was EUR 5.2 million. Like-for-like showrooms revenue grew by 0.5%. Revenue from integrated services increased up to EUR 30 million or 5% of total revenue. The market for used cars has historically been very stable even during crisis. Now, the market has contracted more strongly than during COVID, when it's also bounced back very quickly. For the time being, we have not started to see signs of recovery. The decline in Q3 is similar to Q2. It was together minus 20% in all our markets. In Finland, minus 13%; in Sweden, minus 19%; and in Germany, minus 21%, decreasing the whole market. During the third quarter, we have increased our market share in all our operating countries. In Europe, registration of new passenger cars started to grow during Q3 after a long decline. Full year figures are still red, however. The market has been challenging for others too. Cazoo has announced it is leaving Mainland Europe, and it has sold its Italian business to Aramis Group. CarNext has stopped its consumer business in Germany and Norway. Aramis Auto has completed its acquisition of Onlinecars in Austria. Average prices of sold cars were still at a high level compared to last year. Sales of EVs and rechargeable hybrids grew 29% versus Q3 last year, and their average prices are higher. On its own, sales of EVs grew even faster. Clearly, we are not satisfied with the adjusted operating profit, which reflect the current weaknesses in our [ metal ] margin. The reason for this is the strong changes in demand between different power sources. At the end of the summer, we also bought in EVs at too high prices given that their demand declined since then. The number of sold cars decreased but less than the overall market, so we managed to grow our share. This happened in all our operating countries, and totally, we sold 9.3% less pieces than Q3 2021. Where we can be satisfied? We succeeded well in sales of integrated services. The growth was nearly 22%, so we are quite satisfied with that. We succeeded well in selling both financing services as well as the Kamux Plus products. In Finland, particularly the renewed Kamux Plus service performed well as penetration grew from 19% to 28%. In Germany, the financing services penetration grew from 18% to 33%. I would also like to remind you that the income from finance services and Kamux Plus are distributed across the entire contract period, and the total revenue was EUR 13 million. Here is the status of our showrooms. As of today, we have 78 showrooms across the 3 operating countries. In line with our strategy in Finland, we combined the Olari and Niittykumpu showrooms in August. And in Germany, we combined the Wentorf and Nedderfeld showrooms. In Sweden, we opened the Kalmar, new shopping showrooms at the turn of September/October. This concludes my part of the presentation, and I hand over to Marko for the financial review.

Thanks, Juha. So in the third quarter, the difficult market environment was very much reflecting our business. And of course, the demand was very much fluctuating different -- between different power sources, and that was of course impacting our car margin. And our gross margin per car, EUR 1,427 and it was weakening from the last year. Revenue from the integrated services was growing 21.7%, and clearly faster than the revenue. And especially there, the financing and the renewed plus -- Kamux Plus in Finland was going well. Our concept was also showing its capability and functionality in this very challenging market environment and our costs were kept in good control, and they were at last year's level. Return on equity was 17.5%, and it was weakening from the previous year. Equity ratio was 47.4%, and it is good to remember that it is including our IFRS 16 lease debt, which is roughly EUR 42.1 million. So if thinking without that, so the balance sheet is very strong in Kamux. Our earnings per share was EUR 0.09 and decreased 51.3% from the previous year. And I always like to remind that the strong balance sheet is the backbone of our growth strategy. Then a few picks from the key figures. The revenue was growing in the third quarter 2.8%, being EUR 261.7 million. And from January to September, the revenue was EUR 745.8 million, growing 7.6%. And the gross margin or gross profit was EUR 24.2 million, 9.2%. And as Juha was telling, it was quite strongly reflected by the car margin, so the so-called metal margin in here. Integrated Services was clearly developing positively, and that was growing fast, as I was mentioning. Operating profit, 5.2%, (sic) [EUR 5.2 million] minus 47.8% compared to previous year. And then in January to December, the operating profit, EUR 15.4 million, declining 31.5%. What was positive was that our sales growth from like-for-like showrooms was growing positively, although a small number. And the inventory turnover days was 52.9 days, which was slightly declining compared to last year. But what is positive, it was improving from the second quarter when it was 55.4 days, so we are trending into the right direction here. And then if we go to the segments and start with Finland. In Finland, our sold units were decreasing 8.5%, but the average prices were slightly increasing and that was coming from the car mix, what we sold, and also the integrated services were raising the revenue. So revenue was raising 3%, being EUR 169.2 million. And gross margin was decreasing compared to previous year and was EUR 17.4 million or 10.3% from the revenue. And here really was impacting us, the car margin, and that was due to very, very strongly and quickly changing customer demand between the power sources. And I have to say that in this year, so quick changes we have not seen really in the past. Operating profit decreased 34.7% and was EUR 7.2 million or 4.3% from the revenue, and it was in line coming from the gross margin. So as I was telling about the costs, so the costs were in line with the last year level. Integrated services revenue in Finland was also increasing well and being EUR 10.5 million or 6.2% of the revenue. In Sweden, in third quarter, the market -- so when we talk about the market, we talk about units. So sold units were declining even 19%, and in our sold units in Sweden were declining 10.4%. So we are slightly gaining market share there. Our total revenue was increasing 0.4%, being EUR 78.7 million. And the gross margin was compared to the previous -- was decreasing compared to the previous year and was EUR 4.8 million or 6.1% of the revenue. And in Sweden, we were not satisfied with the car margin development, and that was also impacted similarly as in Finland. The demand between the power sources and there, the fast changes. We have been also working quite hard with the inventory in Sweden, and that is also reflecting to the gross margin. Operating profit decreased compared to previous year and was exactly on a breakeven level or 0% for the total revenue. It is good to keep in mind that in Sweden in the third quarter, we were driving up 2 big stores. And that was, of course, increasing the costs. And in this year, we have been also adding Malmo earlier, so we have been opening 3 stores, big stores in Sweden. And that, of course is reflecting also in the profitability. Revenue from the integrated services increased to EUR 1.5 million or 2.2% (sic) [2%] of the external revenue. In Germany, the positive development was continuing even though the market, so meaning sold units, was totally dropping 21%. Our external revenue was increasing 5.6%, but the total revenue was increasing 2.2% and being EUR 24.6 million. Gross margin increased to EUR 2 million or being 8.2% of the revenue. And it is important to understand that in Germany, these fluctuations between the power sources were less as the electric vehicle sales, especially used electric vehicle sales, have been much smaller in Germany. So this dramatic speed with the power sources has been less in German market. In operating profit or operating loss, it decreased to EUR 0.1 million or being minus 0.4% of the total revenue. And in the Integrated Services, the revenue was developing very well, and it was increasing to EUR 0.9 million or being 3.8% of the external revenue. And in Germany, of course, the penetration and also the demand for the financial services was increasing well. As you might remember, in the COVID-19 times, the demand for financing was dropping significantly in Germany. So now, it has been recovering many quarters. Then when we look at the net working capital and the inventories from a CFO perspective, I cannot be satisfied with the development. So if I look the inventory, so they were growing 18.8% from the previous year. The net working capital was growing 48.7% from the previous year. For the net working capital, it was heavily impacted by the significant amount of accounts payables in comparison period that was impacted by Finnish customs, IT system renewal, which was prolonging or delaying the car tax decisions, so meaning that the car tax payments were staying longer in our accounts payables. In overall, the car availability or availability of the used cars have been improving. Also, the amount of cars in different portals have been slightly increasing. However still, the sought-after cars, for example the affordable and low consumption cars, there, of course, the purchasing market is still tight. But currently now, electric vehicles and plug-in hybrid markets, there, the availability has improved significantly. And as I was mentioning in the previous part, so we were happy that we were now able to turn the inventory turnover to lower trend, as it has been going up in the couple of previous quarters. The cash flow from the operating activities was EUR 6.8 million. And that is, of course, reflecting now the weakening of the operating profit compared to the comparison period. So -- and of course, still the stock itself was also in high level. Then when we talk about the investments. So in the third quarter, our investments were EUR 0.6 million from which EUR 0.3 million were going to material investments, so meaning our digital projects, and 0.2% for the material projects, meaning store network growth or building stores. And here, it is important to understand that we have been significantly building up and empowering our own digital resources and that you can see that our group functions cost has been slightly increasing, but the investments have been significantly decreasing. So it means that we are now doing much more ourselves, the digital development. Dividend has been in line with the new strategy and meaning that we are -- the new strategy has been putting more retained earnings for -- to finance the growth. And we have now paid the second installment of the dividend at the end of the October, being EUR 0.12 per share. Then I'll go to the strategy, outlook and financial targets. So in the strategy period '21 to '23, the focus was to accelerate the growth. So meaning seizing the huge market opportunity with strongly digital and international retail chain, and the profitability development is then built on business growth and scalability during the strategy period. And here, the cornerstone of the strategy has been the seamless omnichannel customer experience. And here, the key building blocks has been, of course, our digital presence, but also our KMS. So Kamux's Management System, what we are using in every country where we operate. And there, that is enabling us to have the one European level stock, also new services to be provided for the customers. Then if we look how we have been progressing with our strategy in the third quarter, and we start with different areas of the strategy. So in the seamless omnichannel customer experience and services, we have been now, in the third quarter, piloting or started the NPS pilot. So Net Promoter Score measurement in Finland, and the first results has been very good. Utilizing data and leading with the knowledge, we were talking last time about using the data more for purchasing. And then we have been now progressing with our DSP process, which means that we are systematically using data to guide the purchasing functions in the group. And we have been now piloting that in Finland, and we will take that into use in all Kamux countries until the year-end. Efficient processes, scalability and store strategy. We have been very active with store networks. And as Juha was mentioning, so we opened 2 new stores in Sweden. We combined Olari and Niittykumpu in Finland, and we combined Wentorf and Nedderfeld stores in Germany. Last but definitely not least is the developing capabilities and continuous learning. And there, we have started with the Kamux Passport program, which was enabling our international career path in the -- inside the company. I'm happy to tell that already, we have the first people working abroad among this program. Then about the financial targets for strategy period. The targets have been unchanged, and they are revenue growth over 20% annually, annually increasing as the adjusted EBIT and adjusted EBIT margin over 3.5%, a return on equity over 25% and targeted dividends at least 25% of the net profits. And now from January to September, the revenue growth has been 7.6%. Adjusted operating profit, EUR 15.4 million, adjusted operating profit margin, 2.1% return on equity 17.5% and dividend for the year '21 was 41%. We have also revised the outlook for the '22, and we have been -- and now, the revised outlook is that we expect the revenue to be over EUR 1 billion, and we expect the adjusted operating profit to be approximately EUR 23 million to EUR 26 million. And now, I will summarize this all. So revenue increased by 2.8% to EUR 261.7 million. Gross profit decreased by 16.5% to EUR 24.2 million. Adjusted operating profit decreased compared to the previous year and was EUR 5.2 million. Like-for-like showroom revenue grew by 0.5%, and the revenue from Integrated Services increased to EUR 13 million or 5% of the total revenue. And in the third quarter, the effects of the Ukrainian war and consumer purchasing power was weakening, so that we saw very strongly in our business. Thank you, and we are happy to answer your questions.

[Operator Instructions]

Okay. So we have no questions via the teleconference lines, but we do have a couple of questions via the webcast chat. Maria Wikstrom from SEB asks, what do you think about your inventory level and quality at the moment? Do you need to bring it down more or to change the type of cars you have in the current inventory? Will these impact gross margin going forward?

If we look back to the year, so you can see that our inventory level has been fluctuating between the quarters. During the COVID-19 times, that development has been different as the availability of the used cars have been scarce. If the availability improves, that of course gives us more space to maneuver, meaning that we can also adjust the inventory levels more effectively. We have been, in the third quarter, working with the inventory, and that is also impacting the margin. And also, I would say that the -- it is a work that never ends, but I would say that most of that is anyway done.

And then maybe if you continue about that. The outlook of this year, what we gave after Q2, it also tells about the story at the end of the year. .

Okay. Maria was also asking whether the Integrated Services kickbacks give us confidence for the low end of full year guidance range to hold?

It is, of course -- for Integrated Services and possible kickbacks, that is of course important part of our business and important part of our plans. But of course, that is not the only factor what is there. But it is an important factor there, of course.

Okay. Finally, when do you expect the used car market to start growing again? What would be the leading indicator?

Good question. The person who knows when it starts, can tell, but we don't have now to [ seeming ] at the time when it's improving. Of course, there are different scenarios next year, can it be the second part of the year? We don't know. But what we aim is that next year, of course, there is -- if we compare to the 2022 figures, we don't believe that the market declined for the whole next year.

Further questions. This one, definitely to you, Juha. Could you walk us through the process of deciding to leave the CEO spot and finding the new CEO? Where and how did you find Tapio Pajuharju, and why is he good for taking Kamux to the next level?

Of course, it was a long, long journey in my career in Kamux, nearly 20 years in next summer. I looked in a long time the possibilities to find the right -- what is the right time, and who is the right person. And if maybe I can say that when we -- when the Nomination Committee looked at Board members and so on. And there was the lump, so the brim, okay, Tapio and his background, and we started negotiating and discussing about role. And when I thought what are my capabilities and skills to grow with Kamux in internationally and compare to Tapio's skills I'm extremely sure that he have better skills to do or make a good shop with Kamux and the journey. And it's very good for the company, and that's why also for me.

Getting back to financials. What will drive the EBIT margin improvement? I missed the rationale and timing for -- okay, missed the rationale and timing for Mr. Kalliokoski's decision to step down. That was just answered. But then, what will drive the EBIT margin improvement?

I'm not quite sure if I caught the question correctly. But if I reflect the strategy period and how we have been setting our plans, of course, there -- capturing the market share growth, increased scale, and of course, the strategic activities are there. And currently, the market definitely has given us a strong headwind, so not helping in this task.

All right. Can you discuss the profit margin of Integrated Services now when interest rates are rising? Will profits get squeezed in the coming quarters? What have you done to mitigate these effects?

It works so that, for example, if we made finance agreement with the customer a year ago or a month ago, we have the purchase price for the money, and we sell it to the customer. And it's the whole contract period, how many years it is. Is it 1 or 72 months. It means that we earn when the customer pays, those money which is coming for us. But when the interest rates are increasing, it means that we, of course, grow our own interest rate for the customers. And it's a question about what is the margin between our purchase price and the selling price. And of course, we try to push the interest rate up as same as when our interest rate increase. Do we have some others?

Maybe I would like to note that currently still, the car financing interest rates has been lower than the inflation. So I don't think that that's been major blocking point for car business. .

And as we also saw, what Marko mentioned about the -- or what we can see from our Q3 results, that the penetration in all countries are a good level. There is no changes in Finland or Sweden, and it increased in Germany.

How would you describe the impact of effect of higher interest rates and energy costs on Kamux's business operations.

If thinking about the energy itself, and I translate this question that fuels what we use or the buildings what we operate, there -- of course, there are some increase of the cost. But on the total cost level, that is still not really like material thing. Maybe the bigger thing is, of course, how this is working with the consumer confidence and especially in the business operations. We see that the customers are preferring currently more affordable, lower consumption cars. .

And then for example, the electric price for us, we have...

We have a fixed contract.

Fixed contracts in the coming years. Something ending next year and something 2024, and so on and so on.

Which geographies were impacted by the EV purchasing mistake at the end of the summer, so higher prices before demand then softened?

I wouldn't -- I think that the purchasing mistake is a relatively strong word. I would like to remind that when we look in the earlier this summer, and in the second quarter, the EV demand was very strongly growing. And then with some media coverage about electricity prices and also possible power shortages in coming winter, so that was quite quickly cooling down the interest of those cars, and of course, we also cooled down our purchases there. But mainly, as I was saying that Germany was not impacted by this as in German used car business, the electric vehicles are still playing a very minor role. So impact was in Sweden and in Finland.

Further about interest rates and our prices. So can you still increase your prices regarding interest rates, or is there some upper limit on how high it can go?

When I started my career in car business -- used car business and car business, 1994, the interest rate was 15%, 16%. And now, we speak about the 5% to 6% level. We are quite far away from there. And of course, it's more about the mental thinking for the sellers and the customers. But as we saw that in many cases, when something happens, first, there is coming to impact. And after that, it's the normal -- as a normal. I don't see big issues in that sense. And of course, we are selling to the customers the monthly payment, not the interest rate. And it means that it can be a little bit longer -- longer time, but the payments per month is the most important thing. And if we compare to -- what means 1% if you have EUR 10,000 loan? It means EUR 10 per month. It's not so big issue.

Very good. There are no further questions. Are there any final remarks either of you would like to make? And now I see that we have a question here from the audience.

Thomas Westerholm here from Inderes. Just a couple of questions from me, if I may. So if we start off talking about the financing product, so could you provide us some color on how large of a share the variable component from interest rate finance or the interest rate variable component has been of your F&I product revenue?

Actually, if I got the question right, we are not selling car financing with the variable interest. So it has been always fixed, if that was what you meant.

Yes. Actually, I meant the spread between the interest rate you give out to the customer and the one you receive yourself, so this variable running components of the revenue.

As we have been also saying before is that when there has been this interest raises, so -- in the same token, we are changing our prices as well.

And if you think about the revenue side, it's -- we booked only what the finance companies pay for us. It is nothing -- how much the total assumed the customer pay for the finance companies. It's only between what we earn, what we [book] in the revenue.

Okay, fair. And regarding M&A, could you provide us some color how you view M&A as a possible part of Kamux's investment story? You have been quite conservative with that only one acquisition, but your new CEO or upcoming CEO, Mr. Tapio Pajuharju, has a very good track record of doing M&A deals. So could this be a bigger part of Kamux's story going forward.

In our growth plan, we didn't say that we don't make acquisitions. But at the same time, we have only this one in the last [ 19 ] years. Of course, it's Tapio's store when he's the CEO, and I can't say that -- nothing about that. And in my time, it is one of the 2, but we didn't have the right company to purchase or the price is longer in our side.

All right, and lastly for me. Have you seen any significant changes in either in the prices of either cars by fuel type or by model now during Q4, similar to what we saw during Q3 and Q2 to some extent?

As we were saying that the Q3 was relatively dramatic especially for the consumer preferences changing away from the electric vehicles. I think there is not really big, like, new trends or changes happening in the overall market at the moment as far as I see.

And maybe one point that is important to understand is we understand that the EV is coming, and it's there. But the reason why the demand of the EVs was so low was that the used car -- EVs' price was higher than the new cars, and there was not the right direction. And now, it changed and it went to the right direction and the normal, as we understand that the used car must be cheaper than the new one.

So thank you. We have no further questions from the chat either. So thank you, gentlemen, and until next time.

Thank you very much, and have a nice Friday.

Thank you.