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Company: GB Auto

Conference Title: GB Auto 1Q19 Results Presentation

Moderator: Sarah Maged

Date: Wednesday, 15th May 2019

Time: 14.00 (UTC+02.00)

Operator: Ladies and gentlemen, good morning and good afternoon. Thank you for joining our First Quarter 2019 Results Presentation Conference Call. From GB Auto, we have Dr Raouf Ghabbour, CEO, presenting the First Quarter 2019 Results. I will now hand over to Dr Ghabbour for his presentation and then we will have a Q&A session. Dr Ghabbour, you may begin, sir.

Raouf Ghabbour: Thank you. Good afternoon, ladies and gentlemen, and thank you for joining our results call for the first quarter of 2019. Ladies and gentlemen, I’d like to start today’s call with an overview of the changes in the market and the regulatory [inaudible]

These have affected our auto and auto-related segments during the quarter. In Egypt, the market demand for the passenger cars has been impacted by the transitory effects of the changing regulatory and the import tax environment. The phase-out of custom duties on passenger car imports from the European Union, and the Let it Rust campaign and the appreciation of the Egyptian pound have caused consumers to adopt the wait-and-see approach. We have seen car prices change during Q1 and consumers will need reassurance as to what are new stable levels. This effect has been in addition to the typically low seasonal demand for passenger cars that we usually see in the first quarter of the year.

On the other hand, passenger car suppliers are also changing their product offering and recalibrating their inventory to reflect the new reality. These ripple effects are, of course, exacerbated by the dislocation in government policy as regards to different markets, with European suppliers operating today at a significant price advantage over their Asian and American counterparts.

For three-wheelers, the regulatory regime has also changed. Government is currently setting a policy to guarantee the licensing of any three-wheeler assembled in factories. This has created an artificial pressure on the demand for a necessary product for many customers. The three-wheelers fill a gap in the transportation infrastructure in Egypt and provide benefits and employments to millions of people.

However, I remain confident in GB Auto and the management team we have in place. Our business faced similar challenges in the past. The management, working as a team, has proven, on many occasions its ability to leverage the agile and flexible nature of our business model to navigate these headwinds. This is evident in our results for this quarter. Despite the artificial challenges created at the demand level, our auto and auto-related segments recorded a 23% growth in top line to approximately LE5 billion. Overall, the group recorded a consolidated top line of LE5.9 billion, up 23.5% over the same quarter last year.

Flattish performance in Egypt in the passenger car and the two and three-wheeler segments was offset by growth at GB’s commercial vehicle tire after-sales and most significantly, the increase of our lines of business in Iraq. Our commercial vehicle and construction equipment line of business recorded a solid 22.8% increase in revenue due to an improved pricing strategy. Our tires line of business continues to gain ground with its competitive product portfolio recording revenue growth of approximately 60% year-on-year.

I’d also like to highlight to you our operations in Iraq. These delivered an impressive 88% increase in revenue. During Q1 2019, increased stability and security are driving demand for passenger cars where volumes grew some 70% year-on-year. Demand was equally strong for motorcycle and three-wheelers with volumes surging 77.8% during the quarter.

Meanwhile, GB Auto’s financing business, GB Capital, continued its track record of consistent growth and value creation. Revenues were up over 18% year-on-year, reaching LE1.2 billion before intercompany eliminations. Our microfinance business has outperformed budgets and our consumer finance companies drive – delivered solid results despite the slow automotive market in Egypt.

We are also launching new financing ventures, having recently taken strategic steps to partner with leading real estate developer Talaat Moustafa Group, and the investment bank, EFG Hermes, to create a mortgage finance joint venture. The JV will allow us to access the new growth market of Egypt’s growing population of homebuyers. We believe that as we have proven in other areas that our newest business will provide attractive financing options that will meet with strong demand from customers.

Ladies and gentlemen, I remain optimistic as to growth prospects of our businesses. Despite the regulatory shocks in our home market, our view is that these effects are transitory in nature and that market trends will begin to normalize during the second half of the year. We are also hopeful that government will adopt a proactive approach to policy sooner rather than later, pushing through a new regulation that is more aligned with the unfolding realities on the ground, and ones that safeguard our national industry and knowhow. Our strategy will rely on our flexible business model and ability to adapt to and capitalize on market trends in whichever form. Our business is driven by strong fundamentals and demand for our product is real and growing. I’m confident in our ability to serve this demand and to create long-term value for our shareholders.

With that, ladies and gentlemen, I’ll conclude my remarks and open the call up to your questions. Operator, please?

Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad now. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. And we’ll pause for just a moment to give everyone an opportunity to signal for questions.

Dr Ghabbour, we have our first question from Ahmed Hesham with Beltone Financial.

Mohamed Zein: Hi, this is Mohamed Zein from Beltone Financial. Thank you for the call, Dr Raouf. I understand the exogenous factors affecting the PCs and the two and three-wheelers in Egypt. But can you tell us what can the country do – in terms of product mix recalibration, in terms of repositioning, what can the country do to limit the damage in terms of what’s happening [inaudible]?

Raouf Ghabbour: Yeah, okay. For – let’s start with the simpler one, the three-wheeler. We have no issue with the two-wheeler. It’s the three-wheeler. What the government wants is to guarantee – as I said in the presentation – to guarantee that the factory will not release a single unit without it being registered and licensed with plates in the name of the end-user. So, this is meeting resistance, number one, with the end-users, because they were not accustomed to that, and number two, with the dealers, because the dealers are scared, it’s something new for them and those guys are very simple-minded, so, any change takes time for them to be accepted, and as well from our management.

So, what we have decided to do, in coordination with the traffic department, which we start to understand that they are really sincere in trying just to license the products, not to affect the business, what we have reached with them is that something like 40% of the business currently is done through – is retailed through Mashroey, which is our credit finance company, and through our own retail network. So, I am currently licensing 2,000 units, half of them in the name of Mashroey and half of them in the name of ITAMCO, which is our company.

And the moment it is sold – a unit is sold to an end-user, we are immediately transferring the plate – the license from our name to his name. So, with that, I foresee that we – we are starting this from next week. I foresee that this will start – will start facing hiccups in the process. Sometimes hiccups from the traffic department because we are handling the business with over 100 traffic departments. So, in some traffic departments, there are handicaps or blockages. We are handling with the central traffic department to solve problems as and when it happens. Then it will take a while for consumer to accept the fact that it is not anymore possible to drive a three-wheeler without a license. So, I believe that because of the huge demand of the three-wheeler, whatever resistance, mental resistance at the consumer side, it will be finally overcome and it will happen.

So, my personal belief is that the second quarter is going to be really damaged in the three- wheeler. The third quarter will be partially recovering and you will start seeing normal business or even booming business from the fourth quarter because all this, first, second and third quarter will be pent up demands which will be compensated in the fourth quarter and in 2020. So, I see third quarter coming back to not normal but much better than the second quarter.

As for the passenger cars, for the passenger cars, in Hyundai Motor, we have almost 50% of the volume from Europe. Basically, it’s Tucson. We are importing it from Czech Republic and we have absolutely no problem with it. What we are doing now is we have re-negotiated the prices of Korean-made models and Indian-made models, and we have succeeded to – I wouldn’t say get good prices, but according to my knowledge, being the distributor of Hyundai in Iraq as well and having – and knowing what are the prices of Hyundai elsewhere, those are, by far, the best possible prices anybody can get from Hyundai Motor. So, it will allow us to maintain some market shares but at a reduced level without making losses.

In the meantime, we are negotiating now with Hyundai Motor – so already this has happened, but we are also negotiating now with Hyundai Motor two models to be imported from Turkey, basically i10 and i20. Turkey has the same custom treatment as Europe, so this will help as well. In the meantime, we are now starting with Hyundai two CKD models. One of them in the B segment, a replacement for Verna, which we believe will be a very competitive model because at the end of the – their production cost-efficiency is much better than European and we will not be paying custom duty because, by the way, the Egyptian Government is waiving the custom duty on imported components in CKD. So, we are going to be on – at par with the European imports and we have the benefit of the much better cost-efficiency in Fari[?].

All this, especially the CKD, will not happen before 2020, because until we reach a final agreement, which I’ll expect to happen in the third quarter, it will take us then nine months for the project to kick off and start producing gains[?]. But I see that our facilities will be fully utilized starting from second or third quarter of next year.

On the other hand, for Chery, I have analyzed already four CKD models. And I think that Chery is going to be a very important part of passenger car business in Egypt for GB Auto. Four CKD models, one of them is in the B segment, or actually I will say B – it’s between B and C segment. The other two are big SUV, one in five-seater form and the other one is seven-seater form, extremely competitive prices. We will launch the first model sometime during this summer and the other two models will be launched at the end of the year. There is a fourth model which is facelift which we have already launched and which is doing very well. So, I believe we will be able to see volume of no less than 1,500 cars monthly from Chery CKD.

Our issue is Mazda because Mazda does not offer any European products and Mazda does not have any CKD possibility. So, for Mazda, unfortunately, it’s a very difficult situation which we will not be able to recover unless the regulations change.

For Geely, we are currently, again, cutting two new CKD models, but I have nothing yet confirmed or concrete to talk about.

Mohamed Zein: That’s very clear. I do have a follow-up unless you’re not done. I do have a follow-up question on the three-wheelers. What’s the added cost for end users to register their vehicle over and above the price of the –

Raouf Ghabbour: In the first year, it’s anywhere between LE 2,500 to maximum LE 3,000. This is including terminus [inaudible], social insurance, with tariba[?] and the taxes, and the registration fees and the plate fees.

Mohamed Zein: Sure. So that’s not very drastic. I mean, it – the issue is not –

Raouf Ghabbour: No, no. When you know – when you learn that the payback of the three-wheeler is less than ten months, LE 3,000 is nothing.

Mohamed Zein: Sure, sure, sure. Alright, that’s – I’m done. Thank you very much.

Raouf Ghabbour: Thank you.

Operator: Thank you. Again, if you’d like to ask a question, press star zero . Our next question comes from Raefe Gross with Frontaura.

Raefe Gross: Hey. Thanks for the question. So, my question’s mainly just more around PC demand. Because I thought the story was that we were kind of looking at an April recovery. So, I guess just an update on that side of things because I mean, being down, I mean, 50% of volumes thus far to the year makes it look like an April recovery kind of a stretch. And, I guess, from your standpoint, I get that on market share that the burden is not in there anymore, and you talked about ways to kind of mitigate that and there’s been other issues. But I guess – so, what’s the assumption for stability and volume growth here going forward? Is April still the recovery month, or where are we going to see that sort of come through?

Raouf Ghabbour: As a matter of fact, demand was – as we – as I mentioned, usually first quarter is by far the slowest. It’s seasonal. It’s the [inaudible] demand.

Raefe Gross: Okay, right. But year-on-year I guess is what I’m talking about more than sequentially. I mean, the seasonality shouldn’t show up there as much.

Raouf Ghabbour: Yeah, yeah. Let me just tell you that people were – starting from November last year, people were waiting for cuts and reduction on European and Turkish cars to happen in January, so everybody or there was a big percentage of postponement in the buying decision. When January happened and prices actually reduced, people made a campaign on social media called Let it Rust. And this campaign took a lot of vibe. I recall that at some point there were 2 million followers for this campaign on social media. And even the state media in TV and the newspaper were actually blowing in the fire and encouraging people not to buy cars. So, as a matter of fact, demand was artificially depressed until, I would say, the first half of April. Starting from the first – from the second half of April, I saw the demand coming back because I have over 50 retail outlets and I immediately feel when the customer come back.

As a matter of fact, when I looked at the inventory level of my dealers end of April, they sold much bigger volume than the volume they had bought from me during April. So, all those are very positive signals which confirm my opinion that whatever postponement has happened in the first three months of this year and the last two months of last year is a pent-up demand which will be recovered going forward. As a matter of fact, we are in the first ten days of Ramadan. Today is the tenth day of Ramadan. This is typically, again, a very slow season in car business. And as a matter of fact, what we see in terms of walk-in in our showrooms and what we see in terms of applications for credit approvals in our consumer finance company price tells us that it is a booming ten days.

So, I believe that, going forward, the inventories which we are all suffering from today and which cost us a lot of finance costs are going to be wiped out in no time and the market is going to shift into a new shortage, market – starting maximum from July. That’s my personal assessment and I’m pushing my people here to replenish whatever is the situation. The people do not see what I see. But this is what I see very clearly.

Raefe Gross: That’s helpful. Thank you.

Raouf Ghabbour: Thank you.

Operator: Thank you. Dr Ghabbour, at this time, we have no other questioners in the queue.

Raouf Ghabbour: Okay. Thank you, guys, and I really hope I’ll be able to give you better results in the next quarter. Thanks a lot.

Operator: Thank you. Ladies and gentlemen, that concludes this morning’s presentation. You may disconnect your phone lines and thank you for joining us today.

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