Market-leader GB Auto posts a profit for the first quarter of 2009 and points to market developments that suggest that Egypt's automotive industry may be headed for a recovery.
(Cairo, Egypt) -- GB Auto (AUTO.CA on the Egyptian Exchange) announced today its consolidated results for the first quarter of 2009, reporting net income of LE 7.2 million, down 91.5% from the same quarter of 2008 as sales fell 41.8% to LE 642.0 million, in line with our previously disclosed expectations. As with the fourth quarter of 2008, profits dipped in part due to strategic decisions to liquidate high-COGS goods, to absorb higher procurement costs as the Egyptian pound weakened, and to significantly curtail production leading to under-recovered overheads of some LE 15 million. As a consequence, GB Auto's gross profit margin dipped 3.8 percentage points year-on-year to 13.3% in the first quarter.
"Management took decisive action starting in the third quarter of last year to address the challenges presented by a sudden slowdown in sales across Egypt's automotive industry," said GB Auto CEO Dr. Raouf Ghabbour. "As a consequence, we have refrained from pushing new units into an already over-stocked market, given incentives and support to our distribution network, and worked diligently to reduce costs throughout our operations.
"The result: GB Auto has posted a profit in an industry that is under significant pressure. At the same time, our unrivaled dealer and distribution network has reduced inventory to healthy levels even as the market has experienced a double-digit decline in sales year-on-year," Ghabbour noted.
Details of GB Auto's 1Q09 performance, along with management's analysis of factors that suggest the worst of the slowdown in economic growth may now be past, follow below.
Highlights
First Quarter 2009
GB Auto revenue reached LE 642.0 million in 1Q09, a 41.8% decrease from 2008.
Consolidated gross profit stood at LE 85.2 million in 1Q09, representing a 54.8% drop from 1Q08. Gross profit margin fell 3.8 percentage points year-on-year to 13.3%.
Net Income totaled LE 7.2 million in 1Q09, a drop of 91.5% from 1Q08.
Total Passenger Car revenue dropped 51.6% from 1Q08 to LE 366.7 million on the back of a 54.6% drop in sales volumes. Total passenger car gross profits are down 68.4% year-on-year to LE 40.8 million, with gross margins at 11.1%, a 5.9 percentage point drop from 1Q08.
Total Commercial Vehicle revenue fell 37.6% from 1Q08 to LE 120.9 million. Total commercial vehicle gross profits dropped 53.8% to LE 17.9 million, while margins contracted 5.2 percentage points to 14.8%.
Total Motorcycles and Three-Wheelers revenue grew 24.1% to LE 122.5 million. Total motorcycle and three-wheeler gross profits climbed 43.5% to LE 25.4 million, while margins improved 2.8 percentage points to 20.7%.
Message from the CEO
The real story of the first quarter of 2009 lies not in our headline earnings figures, but in eight details which together paint a picture suggesting that the worst effects of the slowdown in economic growth may be behind us. Heading into 2009, we expected a challenging first quarter. Fellow shareholders, I am pleased to report that we have risen to that challenge thanks to decisive action by senior management, the fundamental strength of our business model, and the unrivaled breadth of our product offering.
In a departure from my customary style, I would like this quarter to elaborate on the eight factors that see us more optimistic about the balance of 2009 than we have been at any time since last September:
1) Consumer resistance is no longer a significant factor. From August 2008 onward, sales were sapped more by consumer expectations of price cuts than by the effects of slower economic growth. Ill-considered statements from government created these expectations, but consumers now understand that the drop we saw in January and early February represent the maximum extent to which distributors will lower prices. As of April 2009, we believe consumer resistance is no longer a significant factor in sales.
2) Passenger car inventories are falling. Throughout the first quarter, GB Auto continued to refrain from pushing sales to dealers, who had been struggling with overstock since early 4Q08, allowing them to reduce their inventories to normal levels. As I write this, Completely Built Up (CBU) inventory is at a very healthy level in the market and in our warehouses; Completely Knocked Down (CKD) inventory levels are also healthy in the market, although we have some residual overstock at the GB Auto level. Our sales figures do not reflect units moved in the market to consumers, only our sales to distributors.
3) We are counting sales differently. Amid challenging economic times, we have opted to tighten our policies on what counts as a sale as of 1 January 2009. Today, GB Auto does not book a sale until the check is collected and the product delivered; previously, we counted a sale if we possessed a due check regardless of whether the vehicle was delivered. The impact of this decision is particularly noticeable in the Commercial Vehicles line of business as the first quarter includes the effective return of some sales booked in the final quarter of 2008.
4) Unexploited manufacturing overheads have sapped 1Q09 profitability. We curtailed production in a move to reduce inventories and as a result booked unrecovered overheads of nearly LE 15 million in 1Q09. We expect to see this figure fall to zero in increments throughout the year as we reap the benefits of our cost-cutting program and as production levels gradually ramp up.
5) The cost reductions implemented in 1Q09 will pay off throughout 2009. Overhead levels in the first quarter do not fully reflect the benefits of our manpower reduction or of several other cost-cutting measures as these were implemented during the first quarter. This exercise is ongoing and GB Auto is already seeing significant benefits from this in the second quarter.
6) We have liquidated high-COGS inventory at prices based on current, lower procurement costs. This effect has been particularly sharp in the Tires and Passenger Cars lines of business. This move, necessary to clear inventory and help stimulate market demand, has contributed to the depression of margins in the short term. While we expect margins to recover later in the year as goods acquired at a lower cost enter our sales pipeline, it is unlikely that we will see for some time a return to 2008-level margins, where we benefited both from currency appreciation and supply shortage. We look forward to continued support from our network of global suppliers in all lines of business as we aim to maintain healthy margins.
7) Finance charges are up. This is largely because high levels of inventory have forced the company to increasingly use bank facilities at higher interest rates. We expect this to ease as the year progresses and as inventories return to lower levels. We are also closely following signals from the Central Bank of Egypt which suggest that interest rates could again be reduced.
8) The Egyptian pound is down, particularly against the US dollar; moreover, the yen has lost ground against the dollar. This is happening in an environment that prevents management from passing all of the resulting cost rises on to consumers. This has had a particular effect on both Commercial Vehicles and Passenger Cars -- both above the line (on purchasing) and below the line (on payment).
While we obviously cannot rule out an external shock sufficient to impact either consumer sentiment in specific or the economy at large, we are cautiously optimistic that our efforts will begin to pay off in the second quarter, when we expect stronger sales to combine with lower overheads and lower interest charges to produce a healthier gross profit margin. We have, in essence, invested in 1Q09 to create the conditions for healthier growth and stronger margins throughout the remainder of 2009.
Here at home, our sales in a still-undermotorized market will be supported by the effects of the taxi replacement program, the banning of drawbar trailers, stepped-up state spending on infrastructure programs and continued economic growth. With a robust balance sheet and a comprehensive regional vision, we also look forward to the start of operations at both GB-Polo (our export-oriented joint venture with Marcopolo in Suez) and to GB-Allab Remorque, our Algerian trailer joint venture. In that context, we remain open to appropriate acquisitions of both new representations and of regional assets that would extend our lead as the Middle East and North Africa's top automotive assembler and distributor.
Dr. Raouf Ghabbour, CEO
Press Release 2009
