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Company: GB Auto

Conference Title: GB Auto 4Q/FY19 Results Presentation

Date: Monday, 2nd March 2020

Conference Time: 16:00 (UTC+02:00)

Operator: Good morning, good afternoon, ladies and gentlemen. Thank you for joining our Fourth Quarter Full Year ‘19 Results Presentation. As a reminder, this call is being recorded. From GB Auto, we have Mr. Nader Ghabbour, Deputy CEO, presenting the fourth quarter full year ’19 Results.

I will now hand over to Mr. Nader for his presentation, and then we will have a Q&A session. Mr. Nader, please go ahead.

Nader Ghabbour: Thank you, operator. Good afternoon, ladies and gentlemen. And thank you for joining our results call for the fourth quarter and full year of 2019.

Overall, 2019 was a challenging year on account of external factors that hindered growth of an otherwise fundamentally strong markets. Throughout the year, we witnessed a pullback on account of regulatory developments that affected both the passenger cars and two and three wheelers lines of business.

Nonetheless, GB Auto was able to leverage its flexible and highly responsive business model to adapt to its environment, recalibrate its offerings and position the Group for continued growth and market leadership. As such, in the final quarter of the year, we managed to reverse the trend of year-on-year decline and quarterly performance at the Group level and continue to deliver quarter-on-quarter growth in revenue in line with the gradual turnaround in our market.

At the auto and auto-related segments, we delivered 1.5% quarter-on-quarter growth in Q4 2019 supported by the segments two and three wheelers, as well as regional operations. Meanwhile, on a full year basis, the segment recorded a 4.8% decline in revenue. We view this as a modest decrease, given the price and stability at the passenger car markets and the regulatory constraints that affected both the consumers and manufacturers at the two and three wheelers markets.

At the passenger car market, we managed to fend off this competition from European, Turkish and Moroccan imports that now enjoy price advantage following the elimination of related customs. This was a result of our successful strategy of increasing the Group’s CKD offerings and a better sales mix, while liquidating our disadvantaged inventory.

The success of the strategy is evident in the improvement of the LoB’s profitability, particularly when witnessing the 1.5% quarter-on-quarter growth in revenues in Q4 2019 against the sharp 64.7% increase and the line of businesses gross profit for the same period.

At the two and three wheelers line of business, revenues were up 10.4% quarter-on-quarter, however continued to be affected year-on-year owing to significant pressure on three-wheeler volumes throughout the year.

We expect an improvement going forward in line with the acceleration and the licensing cycle and the adjustment to the new regulatory environment. Meanwhile, revenue from the commercial vehicles line declined 35.4% year-on-year and 12.2% quarter-on-quarter as management took the strategic decision to focusing on sales or the smoother conversion cycle and different margins.

At the tires line of business, revenues declined 3.5% year-on-year. However, on a full year basis, the line of business recorded a 7% increase in sales on the back of overall volume growth. On the regional front, we were very pleased with the line of business performance where passenger car volumes increased almost two-fold for the full year and two and three wheelers recorded a 47.7% increase in volumes. As such, total regional revenues were up by a strong 79.9% to EGP7.2 billion in 2019.

While we continue to hold the leading markets with our Hyundai representation in Iraq, a 25% as of year-end 2019, I must note that heading into 2020, GB Auto will discontinue its representation. This comes on account of it being less attractive following Hyundai’s decision to adopt the multi-distributive model in the country.

We will thus work to liquidate our remaining inventory during 2020 while introducing new brands to the market and growth them to leading positions just as we did with Hyundai. It is worth mentioning that this line of business was incurring losses in 2015, 2016 and 2017 and has only reached breakeven in 2018 and 2019.

Moving onto GB Capital, the Group’s financing business achieved revenue growth of 14.5% year-on-year and 20.8% quarter-on-quarter to EGP1.6 billion before inter-company eliminations. On a full year basis, GB Capital delivered a 10.1% increase in revenues to EGP5.3 billion, driven by business growth across its subsidiary, with the results exceeding the expectations, given the constraints in the passenger car and two and three wheelers markets.

Our loan portfolio grew 11.9% year-on-year to EGP9.1 billion as of 31st December 2019, or EGP11 billion when factoring out the securitization effect. Growth was delivered while maintaining the quality of the portfolio of non-performing loans standing at only 1.45% or 1.2% before the securitized portfolio.

Ladies and gentlemen, we are heading into 2020 with increased optimism. At the passenger car market, we are already witnessing price stability in the early months of the year as the effect of regulatory changes subsides. We are also confident in the strength of the two and three wheeler markets and working tirelessly with the government to devise a solution for that will allow it to realize its full potential and create long-term sustainable value.

We are also working internally on our organization to increase efficiency and extract more value from our operations to avenues such as better working capital management and increased digitization across our processes. Finally, we continue to explore strategic options for our financing businesses with the aim of maximizing their value.

Our guidance for the auto and auto-related segments for the first quarter of 2020 is to have a revenue of around EGP5 billion or the gross profit margin slightly over 11%. As for GB Capital, we expect that our net profit after tax and minority to exceed EGP150 million for the first quarter of the year. Regarding the recent concerns on the impact of the coronavirus, we are keeping a very close eye on our operations, and in case of any possible impact, we will be informing you through a press release preemptively.

With that, ladies and gentlemen, I would 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 on today’s call, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one at this time to ask a question. We’ll pause for a brief moment to allow everyone an opportunity to signal for questions. We’ll now take our first question from Michael McGaughy from Research Alpha. Please go ahead. Your line is open.

Michael McGaughy: Yeah. What's the – two questions regarding the Hyundai’s decision to use a multi – I guess, the term you use, multi [inaudible] channel model in Iraq. Is that something that they are considering worldwide including Egypt? And then secondly how easy is it to replace Hyundai with somebody else?

Nader Ghabbour: I got the first part of the question. What's the second part?

Michael McGaughy: Second part is how easy or difficult or how much time will it take or you expect it to take to replace Hyundai’s business with another group’s business for several groups business?

Nader Ghabbour: Okay. When – regarding the first part of the question, no. This is not a worldwide strategy of Hyundai. This is specific for the Iraqi market because of the ethnic background of the country itself. They only have this model in one country – in one other country, which is Saudi Arabia, where they have divided the whole country into three territories and they have three operating distributors. And they figured that given Iraq divided into Kurdish background, Sunni and Shia, it could be best to apply the multi-distributor strategy but absolutely not – it’s not a worldwide approach.

Regarding how easy or fast replacement will happen, we are currently – we will take, until the first half of this year, to liquidate all the inventory of the Hyundai while we are currently engaged with two other suppliers, I cannot disclose at this moment who are those suppliers but we expect with a very high degree of confidence that we will conclude with one of them within the first half of this year.

Operator: We’ll now move to our next question. Our next question comes from Mohamed Mounir from ACE. Please go ahead. Your line is open.

Mohamed Mounir: Hello. My question is regarding GB Capital. So you guys have communicated over the past few quarters that you are looking at strategic options to maximize share – value for shareholders. So I’m just wondering where you guys are right now in the process and kind of what transaction or what path are you most leaning towards regarding the future of GB Capital? And also there was a recent, I think, disclosure that you are considering canceling the merger of RG Investments with GB Auto that was cited last August in 2019. I’m just wondering what is the implication of that? Thank you.

Nader Ghabbour: Thank you. Actually we didn’t decide to cancel the merger. We basically postponed it because we are currently in the phase of assessing what is the right strategy for GB Capital, whether split would give the highest value for the shareholders or possibly the scenario of the some of the parts. So until we finalize our strategy, which we are currently coming up with, we will, at some point during the second half of this year, resume possibly the merger of RGI into GB Auto.

Mohamed Mounir: Okay. And just to follow-up on that. I mean, in terms of the businesses in terms of triggers to kind of either do an equity carve out or a split or such, what is the company kind of waiting for in order to determine that it’s the right time?

Nader Ghabbour: When we’re studying the potential of each business and we’re looking at possible potential investors that could add value to the independent operating financial businesses that we have and we are currently crunching in the numbers and checking whether it makes sense for GB Capital to be a standalone or to be split out from GB Auto or possibly resume or like redo some sort of transaction similar to what we have done with our microfinance company back in 2018. So we’re currently assessing all these different options. And again, as I mentioned we will finalize ed our strategy sometime within the middle of this year.

Mohamed Mounir: Okay. Thank you.

Nader Ghabbour: You’re welcome.

Operator: As a reminder, ladies and gentlemen, please press star one on your telephone keypad if you do wish to ask a question. We’ll now take our next question from Ali Elgamal[?] from Azimut Egypt. Please go ahead. Your line is open.

Ali Elgamal: Hi. How are you? I had a couple of questions. The first one was regarding the automotive directives. Is there any update from that? Do you see it happening soon or what kind of structure would it be? And the second question is regarding your motorcycle three-wheeler sales. In 4Q ’19, you actually had an increase in revenue but the gross profit in that line of business was less than the Q before it, so it was like 11.4%. The profit margin then 16.2% in 3Q ‘19 despite revenues actually being slightly above for third quarter. Thank you.

Nader Ghabbour: Thank you. Regarding the first part of the question, the automotive directives, well, as always, we cannot commit to when such directive could come. All our forecast and budgets are built upon the scenario of no automotive directives. While having said that, our personal conviction that the government is very much and very seriously working on it because they finally realized that the current regulatory environment does not make sense for the automotive industry in general and for the economy as well because of the foreign currency such industry consumes in importation of completed units.

So we are – currently the information that we have is that the government is seriously working on this automotive directive. At which point it can come on line, we cannot tell for sure. And regarding how it will look like? Basically without diving into too much detail, they are going to give level-playing field for the different – from the different origin of imports of completed units and provide certain incentives for the local assembly in order to increase the local content and increase the local production.

Regarding the second question, which is the two and three-wheeler revenue, indeed, it has increased in Q4, while margins have not increased due to one-off extraordinary events in the cost of goods sold, which will not recur in 2020.

Ali Elgamal: Okay. Thank you. Perfect.

Nader Ghabbour: Thank you.

Operator: It appears there are no further questions at this time. Mr. Nader, I would like to turn the conference back to yourself for any additional or closing remarks. I do apologize. We have now got one further question queued. We’ll now take our next question from Mohamed Mounir from ACE. Please go ahead. Your line is open.

Mohamed Mounir: Hi again. Just a question on the financials of GB Capital. So I noticed that the – that this quarter in particular if there was a step-up both in SG&A cost relative to previous quarters, and in the taxes paid, the effective tax rate, I think, was 31% this quarter. So just wondering why the step-up in tax cost and SG&A? Is it related to some non-recurring expenses, or is it recurring?

Nader Ghabbour: As for the SG&A, Q4 had some expenses that was not existent in the last – in the first three quarters of the year. And accordingly it had step-up in this cost. It is related to manpower costs actually. As for the taxes, it is related to the additional activity that we have done and the extra profits is up in Q4 versus the other quarters.

Mohamed Mounir: Right. I mean, the ratio kind of the taxes paid to the earnings before taxes was significantly higher this quarter versus previous quarters, like if you look at previous quarters it was like 20% of earnings before tax. This quarter it was like over 30%. So I’m just wondering if there was a reason for that?

Nader Ghabbour: There are some items that is added to the profit and we calculate the tax income tax accordingly the provision in excess of what is regulated by our specified in by [inaudible].

Mohamed Mounir: Okay. Understood. Thank you.

Nader Ghabbour: Thank you.

Operator: Our next question comes from Imran Patel from Tundra. Please go ahead. Your line is open.

Imran Patel: Hi management. So my first question is regarding three-wheeler. You just talked about that in order to get the full potential from this venture you are in talks with the government. So can you highlight what type of proposals are currently being exchanged with the company and between the company and the government right now? And my second question is regarding the Iraqi operations. Can you guide us that how many total number of company-owned dealership or its company-owned dealerships which are rented or company-owned right now in the Iraq? And further if I understand the Iraqi market correctly, so if we look at the market share, the Korean brands dominate around 65% market share and the rest mostly is dominated by the Japanese brands. So if you come up with the new brand, it would take a lot of year, I think, five to seven years to get a decent market share over there. So what's the current company strategies to bring a new complete a new brand in the Iraqi market or to bring an existing brands, which are right now existing in the Iraq?

Nader Ghabbour: Okay. Thank you. First, regarding the three wheelers, we are currently working with the government to introduce or on a proposal, which the government likes so far to introduce an alternative product that they see could be sustainable for the future. So basically this product would – so what the government is currently looking at is the following.

So rather than allow the three-wheeler in all of Egypt, they want to restrict it in certain governorates and certain villages, while in Greater Cairo and Alexandria they want to introduce this alternative product that we presented to them and they like so much. We’re currently in the middle of forming the strategy with the government. As of yet it’s unclear at which point we will be introducing this solution but we believe very much that this alternative product would be very much accepted by the market once we launch it.

Regarding the second question about the network in Iraq. We – for the passenger car company that we have, we have a network of about eight facilities. Most of them are rented. A few of them are owned. So that’s the answer to second question.

Regarding the third question, which is introducing a new brand, as I mentioned, I cannot really mention at this point which brand we are about to finalize with. It is not going to be one of the current market leaders in Iraq but this is not of a concern to us on two fronts. One, although I do agree with you that to reach the same volumes that we have had with Hyundai will take some time not five to seven years as you mentioned. We expect something between three to five years maximum. But we expected with a much better profitability than the business we’ve had with HMC[?] over the past years.

And I would like to bring your attention that when we enter Iraq in February of 2010, Hyundai was selling no more than 4,000 units a year before we enter in 2010. But once we entered, we created the right network, the right after-sale quality, the right branding and marketing activities, which succeeded in pushing the volume and increasing the marketing share of Hyundai in the Iraqi market.

Imran Patel: Just one follow-up question just came into my mind. Can you tell us about the average expenditure, which is incurred on maintaining this distribution network right now?

Nader Ghabbour: The current expenditure on maintaining the distribution network of the current operation?

Imran Patel: Yeah.

Nader Ghabbour: I would say the current total SG&A of the company is around -- I don’t know about – just give me a second. It’s around US$800,000 a month. That’s the current SG&A of the current passenger car operation in Iraq.

Imran Patel: So $800,000 for a month?

Nader Ghabbour: Yes.

Imran Patel: Okay. Thank you very much.

Nader Ghabbour: You’re welcome.

Operator: Mr. Nader, there are no further questions queued on the phone at this time. I would like to turn the call back over to yourself for any additional or closing remarks.

Nader Ghabbour: Well, basically I would like to thank everyone for joining the call. I would like to thank everyone who asked questions. And I would like to assure everyone that the way we see it 2019 was basically the perfect storm on the automotive segment of the Group. We are very confident in the future. We’re very confident in the fundamentals of our business and we expect much better results in 2020 and I hope the same for everyone around the table. Thank you, operator, and thank you everyone for joining our call.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.

Nader Ghabbour: Thank you.

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