Dogus Otomotiv Servis ve Ticaret A.S. (DOAS) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Dogus Otomotiv Q3 2024 Conference Call on the 12th of November 2024. Please note that today's conference call is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to the company Chief Financial Officer, Mr. Kerem Talih. Please go ahead, sir.

Thank you very much. Good afternoon. I'm welcoming you in the name of Dogus Otomotiv. I'm here with my colleagues from the Investor Relations department. So initially, we would like to thank you for your participation to our financial performance presentation meeting at the end of third quarter. Considering that the presentation has been revealed beforehand, I will be going through the presentation smoothly and letting you to ask your questions at the end of the session, of course, if you have any. Before going into the details of the slides, we are in a kind of area. Again, the Turkish automotive market has already touched the historical expected high level of total market size. At the end of October, the market size has almost reached to a level of almost 1 million units. And as you all would remember, last year, the figure was 1.2 million units. So at this point, it is not difficult to perceive or assume that at the end of the year, the total size of the market will again be at a level of, again, 1.2 million, respectively. The second point I would like to highlight is, of course, the main agenda of the market is, as it has been for the last couple of years, the electrification and the recent developments. There are new players in the market and lot of the current players in the market are launching their new models. And as Volkswagen Group's representative in Turkey, we are doing our side as well. So I will come to the related information in the forthcoming pages. But in the first quarter of next year, I can say at this stage that all of our brands will be in the EV market in the Turkish automotive market, respectively. And the third headline I would like to underline at this stage is, as you know, for the last couple of years, we are trying to play the game in such a high inflationary environment. Ministry of Finance of Turkey is very keen on lowering the figure of inflation. And they are playing all the cards, both in terms of interest rate policy and also with fiscal policy instruments within which the liquidity availability and the cost of funding is considerably high in such a period. In that respect, our customers are somehow preferring to buy the cars as compared to previous periods, of course, in cash. So this is also an important determinant in the market. So coming to the -- in line with the presentation, what is new? As it has already been disclosed in the public disclosure platform, we have got the permission from Capital Market Board to be able to issue a bond with a maturity of 3 years amounting to maximum TRY 2 billion. We have just made this specific application and got the approval in order to be able to create an alternative liquidity instrument. For the moment, as you can also see in our financials, our liquidity position is so strong. So if needed, this instrument will be a kind of alternative source of funding, considering that the current quotations in terms of cost of issuing a bond is not so much different than acquiring a bank loan. In that respect, we have not activated it yet, I can say, and we are just monitoring the developments in the market. And knowing that interest rates and the yield curve is downwards, we are not expecting an increase in interest rates for the following period. In that respect, we will continue to monitor the market respectively. Coming to the dividend payment -- advanced dividend payment, sorry. We have already paid TRY 2.2 billion, which is the distributable profit 50% in the form of advance. And yesterday in the public disclosure platform, we have announced that with the figures of the third quarter. We are not going to perform any advance payment of our dividends. And since the third item is the directors and officials' liability insurance that the authority forces us to announce it, we have renewed the related insurance policy respectfully and successfully. When we have just a look at the key takeaways. We are in a market rollout or circumstances within which the sales performance is almost the same of the previous years. These 126,000 units is the figure, including our Skoda brand. Just to refresh, Skoda brand is being represented in Turkey by Yuce Auto, which is a joint venture between Dogus Otomotiv and Yuce family members. So we have sold the same amount of vehicles as compared to the previous year in the same period. But the important point here is that our performance in the commercial vehicle sales is really going very successfully, which is more than 30% better than the previous year, which is in line with our supply availability, which has been better off as compared to last year, knowing that we have more vehicle availability in our leading models, namely Crafter, Amarok and Caddy. And as a result of this sales performance, our total vehicle park has almost reached to a level of 2.5 million units in Turkey. Coming to financial highlights, I will go through the details of them in the coming pages. But I must underline 2 major headings, which is the normalization of profitability in line with demand conditions, and also the influence of the inflation accounting, which is applicable and influential, I must say, not only for Dogus Otomotiv and Dogus Oto Pazarlama and Dogus Gayrimenkul, real estate investment company, but also are from associates as well. In that respect, we have a considerable decrease in net profitability. But I presume that all those participants in this meeting are totally aware that in line with the -- for the moment, we have 36 participants, by the way, in line with the influence of the inflation accounting for companies like us. The capital structure of which is so strong. In our financial statements we are definitely having the adverse effects of inflation accounting. And this is also applicable for our associates as well. And for all the companies who are quoted the Istanbul Stock Exchange and who are under the regulation of inflation accounting, just to remind you, for example, banks are exempted till the end of this year. And at the beginning of next year, they will start to apply the new inflation accounting regulations. Most of the companies who had a strong equity position in their balance sheets are in the comparative form in their financial statements are facing this downtrend in their net profitability. But I mean, as the management of Dogus Otomotiv, at this point, I must say that this is -- we do not name it as a kind of problem or a challenge, but definitely, it is a normalization phase. Because for the moment, even the current margins in terms of gross profitability, not only for vehicle sales, but also for used cars and also spare part sales are definitely above the historical average of the last 20 years, I can say. But even there is a slight decrease in our net profitability, we are still keen on maintaining our capital expenditures, both in the form of purchasing new test cars, the new facility of our Scania brand in Sekerpinar in our headquarter campus, plus the related infrastructure investments in the digital arena as well. And one good news here is that, since our equity performance is going successfully and since in inflation accounting, since it's being restated, the portion of financial liabilities has decreased 3% as compared to the previous year. On the next page, in fact, we have the details of the September market information. But knowing that we have already the figures, which is more up to date at the end of October, I just prefer to go to the details of the October market performance. As I had said, it has almost reached to a level of 1 million, which is almost only 2% less, identical to the performance of the previous year. And as you can see, our sales figure has increased even 5% and has reached to a level of 140,000 units. As a perception of what is going to happen at the end of the year, we are planning to sell, like, 125,000 units. And our Skoda brand is planning to reach to a level of almost 45,000 units and then we add them up. At the end of the year, our total sales performance will be around 170,000 units, which is almost similar to the performance of the previous year, I can say. When you just consider this performance on brand basis, as you can see, our leading and volume brand is Volkswagen Passenger Cars has reached to a level of 56,000 units. In light commercial vehicle segment, the performance is more than 35%, better off than the previous period. As I have noted, in line with the increase in vehicle availability and with the overcoming of some supply obstacles in the body of the OEM. There is still some shortage of supply in our Audi relating again to the planning of the German management, I can say. But in the next year, we are expecting these obstacles to be overcome. And as you can see, even the slide figures are less. Lamborghini is really performing so successfully. And we are getting the related market share in the luxury segment as well. And at this point, I must note the performance of Scania because this is in the -- in the import segment -- no, in the total heavy commercial vehicle segment this is the most expensive vehicle with the highest price index. But we are still being able to maintain our performance -- our sales performance, as we did last year at the end of the third quarter of the year. And when we just consider the allocation of market share performance, both in passenger car segment and light commercial vehicle segment, and in the total, by the way, this allocation is the same at the end of September as well. We are keeping our 1/3 share after Tofas and Stellantis Group and Renault Group, respectively, at a level of 14.6%. Coming to financials. Of course, the normalization of gross profitability has decreased our total revenue to a level of TRY 120 billion, which is 20% less than previous year. At this point, I must say that in the previous year -- maybe I will come to the details of these figures in the margins page. But there is a decrease in our gross profitability, mainly in our new vehicle sales. Respectively, in line with the increase in the operational expenditures, in such an inflationary environment and with the influence of devaluation of Turkish lira against U.S. dollar and euro, our EBITDA has decreased to a level of TRY 14.2 million. And after financing expenditures, our net profit is at a level of TRY 6 billion. In the next page, I will just be informing you going through a bridge, which we believe which will be more easier for you to be able to understand. As I have said, our capital expenditures are definitely almost doubled as compared to previous year. And with the normalization in the total market, our total assets have decreased slightly to a level of 10% within which working capital is a component of it. So in this slide, we just would like to go through to the movement of historical profitability performance of third quarter '23 to the index figures of this historical performance. When you just go through to the disclosed report, our previous year's third quarter performance is TRY 15.2 billion. From that day onwards, in the last 1 year, we had, let's say, almost -- not almost, 50% inflation. And all this performance has been increased by the coefficient to a level of an additional TRY 7.5 billion. And September of last year, the majority of the shares of real estate investment company has been acquired, but the privileged shares has not been acquired. In that respect, last year, it did not used to be consolidated, so knowing that at the end of last year, we started to consolidate it. In terms of comparative financial statements, the related company is also consolidated in our financial performance, financial statements, which brought additional TRY 400 million. And the net of inflation accounting policy change, which is the presentation of our real estate in the market value as compared to the minus effect of inflation accounting at net has brought minus TRY 934 million. And as a result of it, this historical performance of TRY 15.2 million (sic) [ TRY 15.2 billion ] is now in inflation reporting has turned out to be TRY 22.2 billion. So in the following page, as you can see, we are just bridging this TRY 22.2 billion to the net profit of the third quarter of year '24. So in our -- change in our gross profitability is minus almost TRY 14 million. At this point, I must note that the gross profitability last year was -- for new vehicle sales was more than 20%. At the end of third quarter, it has decreased to a level of 14%. As I have tried to explain in the beginning of the presentation, even this 14% is above the minimum last 10 to 15 years' average. So we are still getting advantage of this surplus in our gross profitability. And 3, as you can see in the presentation, our operational expenditures in total is TRY 3 billion more than the previous year. But within that onetime effect of the social cultural donations to Hatay region, as you can see in the footnote, is TRY 1.8 billion. So when we just eliminated it, the incremental effect in the last year was only TRY 1.2 billion. So when we just consider the launches of new models, so on and so forth and the salary adjustments and so on and so forth, it is just in line with the increase in the inflation. The profit arising from investing activities, which is mainly denominated by the sale of test cars and the performance of time deposits of FX preventive deposits has just ended this year. In that respect, there is a slight decrease, but more important than that, we will see the detail in the coming pages. The contribution coming from affiliates and business partnerships is TRY 5.1 billion, lower than the previous year. And here, at this point, more than the normalization of gross profitability in Turkish automotive market, the adverse effects of inflation accounting is really playing a very key role, unfortunately. And on the positive side, the financing costs are TRY 3.6 billion, lower than the previous year. Again, at this point for clarification, I would like to note that, all those comparative figures are -- all those figures are inflation accounting embedded figures. In that respect, the historical financial costs have already been indexed and this comparative figure is the difference between the performance of the end of third quarter '24. And within which one key point is, the relatively lower interest rates, but more than that the normalization of currency loss, knowing that the value of devaluation last year was definitely was much more than the degree of devaluation this year. And at the end, the monetary loss, which is mainly driven from the indexation of shareholders' equity and other instruments at the net, is minus TRY 2.2 billion. And knowing that there is considerable decrease in our profitability, our taxation expense, of course, which also covers deferred taxes as well, is TRY 4.7 billion less than the previous year. And at the end, we end up with a profitability performance of TRY 6 billion. In fact, with those 2 slides, I have already increased all the variances and important financial takeaways in the P&L comparison. And coming to the performance of our margin, our gross profitability, which is the weighted average of new vehicle sales, most importantly, plus, spare parts plus used car and other service areas has decreased to 16.6% from more than 22%. As I said, the major determinant here is the normalization of new vehicle sales profitability, which used to be more than 20%, which is, for the moment, less than 6% less than the previous year, which is definitely underlined by the market conditions as you just can consider the financial performance of the competitors. As we are doing so, we are kind of really in a better position as compared to them. And when you just consider the OpEx over sales performance, here, the donation to Hatay region after this devastating earthquake, when this TRY 1.8 billion is eliminated, the OpEx over sales is, in fact, since this is a onetime effect, is TRY 4.6 billion. As you may recall, our historical threshold of upper ceiling is 5% in the average of last 10 years. So in such an inflationary environment with more than 50%, I can say that operational expenditures are 100% under the control of our management. And respectively, our EBITDA margin and EBIT margins has decreased to the respective levels of 11.8% and 10.5%. And after the financing costs and after the material and devastating influence of inflation accounting, our net profit margin has decreased to a level of 5%, respectively. In the detail of the income statement, in fact, in the related pages that I was explaining the reconciliation of the previous year and this year and the effects of inflation accounting, I have already gone through all those information. But here, as you can see in the footnotes, on the revenue side, the yearly increase of euro to Turkish lira rate is at a level of 30%. And the variation in our model mix and also inflation accounting has really somehow how to sell has really created a different scheme in the financial statements of all companies. As you can see here, our financing costs are definitely considerably lower than the previous year. And as you can see in the explanation chart in the right side of the table, the average cost of funding, which used to be 22% in the third quarter of previous year, it has increased to a level of 50% this year. But as I have already said, since the FX loss is at a very lower level, we are just having the cost out of the interest rate -- interest paid to working capital loans and also to the loans for acquired for investment purposes. This page is only a comparison of the quarterly performance, which is, of course, a reflection of the third quarter as well. And as you can see, the profitability in line with the normalization and in line with the monetary gain and loss, not only the gross profitability and the profit contribution coming from main activities, but also the income from associates has also decreased considerably. And coming to the performance of the associates, as you can see, the positive contribution is coming from TUVTURK, which is the vehicle inspections company at the consolidated level. And the major variance we can see here is in vdf and Yuce Auto. In Yuce Auto, the output is almost -- the explanation is identical to what has happened in the financials of Dogus Otomotiv, which is the normalization of the gross profitability. But more than that, the monetary loss, which is stemming from the inflation accounting, unfortunately. And in vdf service, this more than 200% deviation is mainly stemming from -- coming from vdf service company, which is vehicle operational rental company. Under which they are unfortunately getting the adverse effects of their residual value provisions. Knowing that in the last 2 years, in the second-hand, in the used car market, the average vehicle prices has decreased considerably in line with the more availability of the new cars. So by the booking of additional residual value provision, their consolidated performance has unfortunately turned out to be negative. But here also, they also have the adverse effects of inflation accounting again on equity as we have in Dogus Otomotiv and in Yuce Auto as well. Coming to the balance sheet. So as you can see, the total size of the balance sheet has decreased 10% to a level of TRY 83 billion. When we just consider the major variances, the decrease in cash and cash equivalents is definitely driven by the payment of our dividends. So we have paid or allocated all the distributable profit of year '23 in April this year. In that respect, our liquidity has decreased to a level of TRY 1.5 billion at the end of third quarter. Our trade receivables are relatively low, which is in line with our turnovers. And our inventories, as you can see in the right -- in the explanation of the right side, the total vehicles has increased from 11,600 to 18,900 units. When you just consider the operational performance of a distributor for a retail company, mainly the level of inventory should at least cover your sales performance of the forthcoming 2 months. So for knowing that we have already sold more than 100,000 units at the end of third quarter of the year, having an inventory level of 11,000 units is less than the requirement of the forthcoming of the 2 months. And as knowing the performance of November as well, I can see that -- I can definitely say that our sales performance is really going very successfully. The other variance is relating to financial investments, which is 22% less than the previous year. Here, we are keeping our share in the Dogus Holding company, which is 3.69%. Also, the book value of it -- is relatively lower than the previous years. And also in the investment property, which is TRY 13.9 million, just for clarification, I must note that these are the real estate ready for rent or sale, which is mainly computed by our buildings in Karatas and in Ankara-Etimesgut region, respectfully. We have paid some portion of our debt in line with the payment schedule -- in payment schemes of our borrowings. Therefore, our total liabilities are 20% lower than the previous year. And at the right side of the page, you can see the breakdown of our financial liabilities, both in terms of currency type or both in terms of their maturity. Coming to financing costs. As you can see, our interest expense on borrowings is only 13% higher than the previous year despite the heavy increase in financing in the Turkish lira-based working capital loans. And the other figures -- in fact, in this page, as I have already said, most of the -- more than half of the foreign currency loss has not occurred this year. So the major saving is coming from the elimination of foreign currency loss out of foreign currency denominated borrowings. In this page, as you can see the variances in our working capital, net cash and the change in our receivable inventory and payable turnovers which is definitely determined by the market conditions. So here, I do not have much to add on that. Coming to our sustainability strategy and policy, I'm not -- we are not going to repeat what we have tried to explain in the last meeting. Under this heading, everything is going as planned. And we have already revealed our Sustainability Report, so on and so forth. In that respect, I'm not going to take your time additionally since we do not have much to add on these headings. Coming to the expectations of this year and what's been planned for next year. As I have said, we are expecting the total market size to reach to 1.2 million units. And we are expecting that our sales performance will be around 125,000 units. We are still continuing our investment expenditures, both in the form of machinery, equipment, test vehicles, digital infrastructure, so on and so forth. And also in the body of D-Charge, we are continuing to make the related investments in the form of electrical vehicle charging stations. Having said so, just a second, please. Sometimes my voice is getting tired out of speaking, I'm sorry. Relating to electrification, the performance of charging stations is also in line with the performance of new vehicle sales for our brands. At the end of this year, we would have sold more than 3,500 cars. And for the next year, we are expecting our new vehicles -- new EV sales to be around 15,000 units. Within which, just to make a quick recap, the EV model of Porsche is already in the market for many years. The EV models, the e-tron of Audi has already been in the market effective from 2023. And this year, last month, we have already revealed the EV of ID. Buzz, which is the light commercial vehicle recently. And in the next month, in the passenger car segment of VW Passenger Cars, the ID.4 will be the new family member. And in the first quarter of next year, at the top of it, ID.7 and ID.3 will come. And respectively, again, in the first quarter of next year, the EV model of CUPRA will be in the market. And as a result of these new launches, all the models of Volkswagen Group of companies in forms of EV cars will be in the market for Turkish citizens. So that's all I have tried to explain to you. And this is the end of the presentation, so we are going to have a Q&A session if you have any additional information you would like to get. Thank you for listening.

[Operator Instructions] We have a question from Mr. [indiscernible].

[Foreign Language]

Let's proceed in English please for our...

Regarding elevated inventories, should we expect more aggressive pricing in the market in the last quarter of 2024?