D’Ieteren Group SA (OTCPK:SIETY) Q4 2023 Results Conference Call March 5, 2024 12:30 PM ET
Company Participants
Édouard Janssen – Chief Financial Officer
Francis Deprez – Chief Executive Officer
Nicolas Saillez – Chief Investment Officer
Conference Call Participants
Michiel Declercq – KBC Securities
David Vagman – ING Belgium
Jeremy Kincaid – Lanschot Kempen
Alexander Craeymeersch – Kepler Cheuvreux
Pallav Mittal – Barclays
Kris Kippers – Degroof Petercam
Unidentified Company Representative
[Call Started Abruptly] …so we’re a good €10 million above that, and that’s an increase of 28.1% versus last year. We’ve also generated over €600 million, €605.4 million to be precise, of free cash flow group share and that’s about 12 times more than in ‘22. And that comes amongst others also from D’Ieteren Automotive, which you may recall last year did not have a positive free cash flow that is now definitely is the case. And then third key message is that our guidance for 2024 is to continue to grow our PBT group share and we anticipate a mid to high single digit growth in that KPI. So these are the three key messages I would say of today.
And let me give you a little bit of flavor more on how we got to those results. It’s really been driven by a strong operational performance of several of our businesses, and also the full year scope effect of PHE which we, as you recall, only had five months of in ‘22 and now had 12 months in 2023. At Belron, the adjusted PBT group share improved with over 17.5%. Actually we ended up with a margin improvement of 226 basis points. You’ll recall we guided for 200 basis points at least and so we’re a bit above that. And so we passed the 20% margin mark landing at 20.5% to be precise in 2023. At D’Ieteren Auto, we had of course a lot more car deliveries coming in, which allowed us to invoice them and to gain market shares. And so we posted the record adjusted PBT group share that grew 36.6% compared to the year before. We also reached a return on sales of 4.2%, which is actually slightly better than the year before. We had guided for a slightly lower one but we delivered a slightly better one than 2022. In PHE, we have a contribution of about €138 million in our PBT group share. So a sizable number for this first four year, I would say, and that was a solid level of activity at PHE with both price evolution and also good cost control. TVH recorded an adjusted PBT group share of around €75 million, it’s 24% less than the year before and it’s of course the result of the cyber attack on the one hand, because that had a temporary interruption for a number of weeks but we also had some adverse foreign exchange effect, and we had some softer sales in the months afterwards and we fully took out Russia by the way as well now in 2023.
And then last but not least, Moleskine, the story similar to what we had been telling already at the half year destocking policies at the retailers and e-commerce platforms and restricted corporate gifting budgets have continued to weigh on Moleskine,but they improved their margins. And so we landed with a PBT group share of €2.2 million but at a higher operating margin of about 18%. Maybe also important to note is the gross dividend that we will recommend to the general assembly at the end of May is going to be €3.75. So that’s about 25% more than the €3 of last year. And when I was guiding mid to high single digit growth for the PBT group share for 2024, it’s also important to note that we will be calculating that starting from a number where we have aligned to different foreign exchange rates to the rate of the 31st of December 2023. And so the starting number will not be the €970.8 but it will be €962.4 to be precise. I think Stephanie asked me to clarify that number from the start, so they don’t forget to mention that.
So a little bit more flavor to some of the numbers in terms of top line growth you see on Page 4, plus 43%, the bigger growth contributors, the biggest one is clearly D’Ieteren Automotive with almost 47% growth. Both Belron and PHE had attractive growth rates as well, 13.1% for PHE, 8.5% for Belron. TVH has a flat revenue development and Moleskine a slight decline of 9%. The translation of that in bottom line was also close to 40% increase, so plus 37.6% to be precise. We now land at over billion, €1.184 billion as adjusted operating result group share in total. Belron, of course, being the biggest contributor, they increased their profit with 22%, Auto increased it even more than the top line with 52%. PHE has now a nice contribution of €232 million.TVH did suffer given this flat sales and we continue to invest in this future growth, a somewhat slower margin and so we have a 16% lower adjusted operating result. And Moleskine could actually really, despite the minus 9% in the top line, almost hold its absolute profitability number, so it’s only a 1.7% decline there. The adjusted PBT, €917.8 that I mentioned before, you can see the decomposition on Page 6. We have three sizable contributions beyond Belron. Belron, of course, remaining the biggest one with over €0.5 billion but three sizable ones with Auto 211 with PHE 138 and almost 75 for PBH, the other two being more minor. For free cash flow and net debt, I hand over to Édouard who wants to maybe give a little bit of flavor on Page 7 and 8.
Édouard Janssen
Definitely. So strong free cash flow generation in 2023, roughly 12x on 2022 cash flow generation and strong contribution from all our activities in the sense that all of them are positive. D’Ieteren Automotive, probably we should flag that it’s the third year that they are fully autonomous and they have done a significant effort to remember that they were negative in 2022, so €139 million of positive free cash flow generation. Belron remains, of course, a strong cash contributor with strong cash conversion and we see that with €350 million for us. And to be flagged as well, PHE, TVH and Moleskine have also contributed to this number of €605 million of positive free cash flow. And let’s again highlight that working capital improvements at Belron, Auto and TVH were significant, were allowed to deliver that number.
Now if we move to Slide 8 on the Group’s debt structure. Most of our entities had stable levels of net debt and leverage. Hence, let me focus on the corporate and allocated cash position. Of course, we finished the year with a net cash position close to €1.2 billion and this is mainly thanks to the dividend received from Belron. You remember a dividend recap in April and an interim ordinary dividend in December, but as well as dividends from Auto and interest paid from Moleskine on their shareholder [loan], so €1.2 billion in total. This amount includes €272.4 million of shareholder loan to Moleskine and the position of €94.8 million of investment reclassified in non-current assets being invested in the Credit Suisse Supply Chain Finance Fund. That fund has been put in liquidation and we wrote €19.6 million off of that position in order to reflect the provisions taken within the fund for the liquidation process as well as a discounting due to uncertainty on the timing of recuperation. Hence at the end of ‘23, a position of €94.8 million. To give a little bit of background here, we actually invested in that fund in a period of negative interest rates. This €95 million represent some 7% of our treasury position. The rest being placed besides the shareholder or loan to Moleskine, mainly in bank deposits and rated commercial [indiscernible] [pay], which are [yield] in decent short term returns at low risk. More broadly, we use part of the cash received to pay a dividend to our shareholders to acquire treasury shares, notably, as part of our share buyback programs. The first one, as you know which ended in May ‘23 and the second one of €100 million, which started at the end of 2023. Finally, to be highlighted in May, we acquired some additional Belron shares from the Employee Benefits Trust, which brought our fully diluted stake in Belron to 50.3%.
Now if we move to our ESG progress, important to flag that the group and its businesses made solid progress in that field in 2023. Very recently, at the end of February, D’Ieteren Group had its own objective validated by the SBTi, and this implies that on top of reducing the emissions of the holding by 30% in 2027. We are asking all our activities to get a validated SBT targets by that year as well, 2027. The activities are working with that aim in mind. With regards to CSRD, the European directive on sustainability and reporting, our preparation is ongoing and businesses have all proceeded with a double [maturity] analysis involving of course, the stakeholders throughout their value chain. This has enabled the thorough identification of material ESG aspects for each of them, which will help them to refine their respective sustainability strategy. Important to flag as well our three ESG ratings. The new one this year was a carbon disclosure project where we obtained a B score, which is good for a first time and we maintained our AA rating from MSCI and 11.5 from Sustainalytics. I will now hand over to Francis, who will talk about the Belron [performance].
Francis Deprez
Thank you, Édouard. And so on Belron, I suggest I go right away to Page 12, it’s a little bit of detail on the sales evolution and the growth drivers. As you can see on the table on the right, the 8.5% that we have in top line growth was not really helped by foreign exchange, because we have minus 2.4%. It was a little bit held by acquisitions, 1.9%, but the main portion, of course, has been 9% organic growth. That organic growth has been across the board. If you look at the geographical splits, it has been particularly strong in what we call the rest of the world, that’s UK, Australia, the Nordics, and a couple of countries like that, 16.4%. The Eurozone, close to 14% and it’s actually mainly been in North America where the top line sales has been the least with a 5.1 organic growth. You may recall that we somehow had a lesser winter early 2023 and that actually had some impact on the overall organic growth level in North America. There was overall a volume growth of 2% as a combined number, I would say, you may recall it was about 1% in H1, it was about 3% in H2. So on average we ended up with 2.1%. We’ve continued to do recalibration, of course. We are now at 36.4% penetration of windscreen replacement jobs that also require a second recalibration job, so 6% higher than a year before. In VAPS, we did not make much progress. To be honest, we remain at 22.1%, slightly below the 22.3% from before, mainly because actually the US, as you may recall, had lots of issues on technician retention, on building the right capacity, on training the right amount of people. And so they deprioritized a little bit to the VAPS attachment rates and that’s the main reason why we didn’t make progress there, but they’ll definitely pick that up again in 2024.
Now the adjusted operating profit on Page 13 for Belron, that’s how you can see the evolution from 18.2% to 20.5% margin. And so good fall through that we had, it’s linked to good cost mitigation, to good pricing mitigation against inflationary pressures, which of course, is still very present in 2023. We have continued to invest in the transformation program, it was about €124 million spent, of which €57 million has been classified as adjusting items. And so an amount which is similar to 2022, a little bit lower, I would say. And so beyond the margin improvement of 226 basis points, we of course, also had some additional finance costs. And so given the new debt issuance in April, you can see that the adjusted net finance costs reached about €222 million in 2023. All that leading to the 50%-odd that we have of the €1 billion adjusted PBT of Belron, so €511 million, which is 17.5% higher.
In terms of adjusting items at Belron, the usual suspects, so we have some amortizations of customer contracts, we have a bit of numbers on the restricted share units of the long term incentive program that we have to all the employees in the company that we had last couple of years as well. And in the other adjusting items, the main component of the €93.5 million are the fees to systems integrators, which were exactly the €57 million that I mentioned for next to couple of other items. The free cash flow and the debt at Belron, well, a significant increase in free cash flow from 300 to 700 plus, thanks to EBITDA, of course, but also thanks to a very positive working capital development. The extra stock levels they had held on in 2022 when there were some supply chain issues, they’ve actually brought it back to more normalized levels and that really helped a bit about €135 million. They spent a bit less on acquisitions. You recall the high number of €160 million in 2022, well, it was closer to €56 million in 2023, still about 17 acquisitions but smaller acquisitions. And then some other, of course, lower cash outflow items linked to the transformation program.
The net debt in itself is, of course, linked to the additional financing that was done in April 2023. so now we landed about €4.6 billion, €4.7 billion net debt at the end of December, which brings us and keeps us despite all these dividend payments below the 3 times leverage ratio. So we’re at 2.95 to be precise at the end of December for Belron. In ESG, I’ll highlight a couple of points. Glass recycling, very important of course for someone who repairs and replaces glass. We are at 97% now, a very good number, very happy with that. We have now validated SPTi targets at Belron, a year ahead of what they actually tried to achieve. We have a very ambitious program and safety and health going on in the organization with a consistent set of standards and which where we have lots of hopes on to continue to reduce the number of work related injuries and therefore, wel lbeing of our people. We’ve done 39 procurement audits as well last year. And in the good to Belron tradition giving back to society, they have continued to do that with almost €9 million. They have great people engagement scores above 89%, they have great NPS scores above 84.7%. The CO2 emission numbers, we’re still waiting for, we’ll get those in April, but I’m sure they will also be developing in a good direction.
Brito has been around for almost a year, actually for a year, as we speak, because we have already passed March 1 this year. He spent a lot of time in the field, multiple times in almost all the countries around the world and has really driven a new level of energy across the organization. Maybe a couple of points to mention as well is the investment grade rating. So we had already S&P. We now also have Fitch that puts Belron investment grade rating. So one to go. We have bolt-on acquisitions, I talked about that. Transformation program is progressing well. I talked about that as well. Maybe a bit on the outlook for 2024. What is our outlook there? Well, we are guiding for a mid to high single digit sales growth number, of course, driven by continued price mix, continued recalibration, normalized pricing and normalized inflation rates and a bit of volume of course as well. We continue to improve our margin, so we want to continue where we guide on a margin improvement, which is very much on track to reach our ambition of 2025. The 2023 percent objective we mentioned in April, 2022. So we hold very much onto that and that’s where we’re on track to do that. In transformation, there will still be some spend, less than in the last couple of years, but still around to €90 million with a couple — with about a third in adjusting items of that. And we do anticipate a free cash flow that will — is expected to remain at high levels.
For D’Ieteren Automotive, I will still continue to talk a bit before handing over to my colleagues for the other activities. Again, I will immediately go to Page 20, where you see the markets. The car market in Belgium has, of course, a fantastic year last year with plus 30% in [indiscernible] [matriculations]. D’Ieteren Automotive have been very happy to be able to grow our market share in that better markets to 24.2%, so an increase of 170 basis points. Very nice. And so the year you can compare 2023 almost to the years 2012, ‘13, ‘14, so a more normal year, I would say, since last three years that were quite abnormal. In terms of mix of cars sold or registered, we are at almost 50%, to be precise 49% of new energy vehicles, not surprisingly, hybrid still being the highest, all driven of course by orders that were done before the 30th of June, because they had a fiscal change at the 30th of June last year. So lots of orders in H1, a lot less in H2. However, the fully electric vehicles have taken over. And so we are now for the entire year at a 20% share of full electric. And so hybrid [indiscernible] electric together is bigger than petrol, I would say, for the first time in 2023. It’s still very much and even more so than ever a B2B market in Belgium, 69% that we have reached last year. And it’s also more than ever an SUV driven market where we’re now at 54%, but of course, many electric vehicles are also seen as SUVs.
Our specific market shares for D’Ieteren Automotive brands, you can find on Page 22, I’m not going to talk too much about it, it’s basically an increase with all brands and then [Indiscernible] a little bit down, but that was an abnormally high number in 2022. We are very happy with our overall electric car market share, which is 28.1%. So that makes us the largest in Belgium if you take the combination of all our brands. And so we have quite some brands — quite some models with our brands that did very well. In terms of margins and profits on Page 23, you can see that we did slightly improve for 4.1% return on sales to 4.2% return on sales. We delivered close to 125,000 cars ourselves, which led to a sales increase of close to 47%, a profit increase of 52%. There are, of course, some adjusting items as well. But when you look at the overall PBT number, of course, also very nice increase of 36.6% overall. There was a little bit less contribution of [Indiscernible] by the way, because with the increasing interest rates, not surprisingly, their contribution has been lesser and that is something you see also including the PBT, which you may not have necessarily seen in the EBIT as such. And then on free cash flow for Automotive, I already told you it’s a positive development. Now the higher EBITDA helps but at the same time the change in working capital from minus 155 to plus 24.4 is of course a very significant contributor to this. There was some CapEx similar to the year before. There were a bit more acquisitions for €28 million, a bit more taxes paid, a bit more interest paid of course, because they have a little bit of debt at Auto as well for €40 million. And the sum of all that together led first well to €139 million as a free cash flow number for D’Ieteren Automotive.
What was worth mentioning in latest developments? We started the year or ended the previous year with 58,000 in our order book, that’s still a high number, by the way. That’s more or less double what we have in a normal year, but of course, lower than the 100,000 or so we had the year before. We are working a lot on [Indiscernible] [cross], a big IT program in Auto that’s being rolled out to all our different dealerships, it’s a dealer management system. We’ve been working on that for a couple of years and now it’s going live. And we expect some increased efficiency from that, which I think is always good in times where the downstream, let’s say, the off car distribution needs to be as efficient as possible. And as you also may recall, we have acquired one more dealer in Belgium, it’s called [Indiscernible] in the Leuven area between Brussels and Leuven and completes more or less our Brussels to sort of access of dealerships where we have an ownership ourselves. The market outlook is about the same as the number of last year, so about 480,000 new registrations expected in the market. What do we guide in terms of top line? Well, not a specific guidance, I would say. We have a gosod view on H1, thanks to our high order backlog. We have less visibility on H2. So no overall guidance there. We do guide, however, that the overall margin is expected to slightly erode. I thought we had guided already last year but we did better. This year, we do anticipate, given that we go to a more normal mix of cars and we have some of those IT projects to have a slight erosion in the margin. But we do anticipate the free cash flow to continue to improve beyond the number that we’ve delivered at the end of 2023.
And with that — and I have some ESG developments at Auto as well. 22% of sales were electric cars, more than 8,000 charging stations installed, more than 200,000 square meters of solar panels installed at people’s homes and at companies. Our bicycle operation has now 19 stores in total, so it’s becoming a little bit of a national network, not entirely yet. So some white spaces still, but a nice development. And we’ve done over a million trips with Poppy, so the car sharing activity that we have in Brussels and Antwerp, et cetera, that we have worked on them. So add to that, good people engagement scores of 83%, a bit lesser customer satisfaction scores, given that delivery times had been long and were quite unpredictable last year, people have given us that feedback. We didn’t like that that much. So sales and after sales, customer satisfaction was a little bit down compared to the year before. And CO2 emissions has gone a little bit up because we had a lot more activity, of course, but we’re on track to improve on that in the year as well. And with that, I can hand over to Nicolas for PHE, Parts Holding Europe.
Nicolas Saillez
So PHE, as a reminder, we are consolidating PHE since August 2022. So the first year we have it fully consolidated for the entire year. Very strong year at PHE. The company had revenue increase of 13.1% versus 2022, driven by 5.9% organic growth and 3.6% from M&A from acquisitions. We’ve seen both France and international growing by more than 9%, plus 9.7% for France and plus 9.4% for international. On the back of favorable pricing environment, certainly in the first part of 2023 and again market share, which is something that the company has been able to do in almost all geographies throughout 2022. The adjusted operating profit margin was record high at 9.1%, again, driven by this favorable pricing environment and then — and cost control. Adjusting items are at €65 million, €65.2 million, mainly coming from amortization of intangibles, that’s a technical element following the purchase price allocation finalized by Auto, by D’Ieteren Group. And also some expenses relating to the LTI provisions, that we already discussed, I think at our semi-annual results. So adjusted operating result we’re at €231.6 million and adjusted PBT group share at €137.6 million. Just mentioning that because it’s also something Stephanie insisted upon. There are non-controlling interests in some of the subsidiaries of PHE. When they did several acquisitions, they only acquired 75% in order to leave a local anchor, a local flavor, culture and motivation. And that’s what you find in the non-controlling in this small amount of €8.9 million of non-controlling interest.
In terms of free cash flow. Free cash flow with the strict definition was €36.9 million, trading cash flow was €101 million really. And I just remind everyone that the free cash flow was impacted by a negative working capital requirement of €104.5 million. That comes from a conscious decision of the company to save on interest costs and not draw on non-recourse factoring and rather use the cash they had in hands from the divestment of [Indiscernible] in order to do that. Capital — CapEx was at €1.8 million, so quite reasonable as they have shown over the past years. Net debt declined slightly. Net debt to EBITDA ratio to lenders is at 3.6 times. The latest developments, I mean, I’ll just again remind everyone that the company is on track to consolidate more of the market already present specifically in Spain, they did three acquisitions in 2023 and they are looking at other acquisition today. In terms of financial leverage, we had the very positive news of an upgrade from S&P to BB- and Moody’s also confirmed its positive outlook with a B2 rating. On the back of that, in early 2024, we decided to refinance — actually, we did refinance the entire — so the entirety of existing TLBs, which had two different maturities. And so we had a very good and strong execution, a good book and we were able to refinance the entire debt structure with a new TLB of seven years, €960 million at repo plus 375 bps, so quite happy. And we also took the opportunity to increase the FCF, which is today at €242.5 million.
In terms of outlook, PHE expects this year mid single digit organic revenue growth, again driven by this constant ability to take market share and a more normalized pricing environment. We expect adjusted operating result margin to be similar in line with their record high that they achieved in 2023 at 9.1%. And again, the non-controlling interest that I just mentioned are expected to be around €10 million approximately. In terms of ESG, sad to say that the company is not the most advanced among the portfolio companies, specific — or certainly not in terms of beliefs and mindset, but more in terms of processes. But we are working in close collaboration with them and they’re really eager to catch-up with the rest. So we are completing a double materiality assessment as we speak, which is, as you know, the first step to get CSRD approval. And then we also like to mention that the company very recently hired a young promising group environmental director, which certainly is going to help us and our teams to accelerate the efforts in ESG. Customer satisfaction. It’s not an NPS because they measure it differently. But let’s say that both goes on the total of 5 came at 4.56 for B2B and 4.61 of B2C, which are deemed to be quite strong and on the people engagement front, 90%, which again is quite strong.
Francis Deprez
Let’s move to TVH, Édouard?
Édouard Janssen
Yes, absolutely. So as an introduction, let’s remember, of course, that 2023 was a tough year for TVH with the cyber attack, which incurred on March 19. Operations were down until April 5 and fully operational again on April 17. So it was communicated earlier around four weeks of downtime and €85 million of lost sales. Important as well to flag that in 2023 TVH stopped its operations in Russia, which if we compare to 2022 generated a lost sales of up to €15 million. So all of that led to a sale zero — near decline of minus 0.96%. If we move to the next slide with the P&L, we see that this minus 0.9% is composed of flat organic growth, 0.7% of external and acquisitions, actually two acquisitions were made by TVH in construction equipment parts, which together with the full year 2022 acquisition contributed to 0.7% of top line growth. And finally, there was a negative FX translation effect of 1.6% leading to this negative 0.9%. It is important to flag that one of the consequence of the cyber attack was the fact that TVH didn’t really lose any client, but lost some share of wallet at some clients. Logically, this clients wanted to diversify the supplier base from a risk perspective. And we then entered into a lower volume growth environment in some areas, notably in materials handling in which TVH is of course a very strong player, and we ended the year with flat organic sales. As we said, some small acquisitions were done and throughout that year, TVH continued to invest in future growth and advances were made throughout the year on several IT tools aiming at better operational efficiency, mainly in e-commerce, in HR management or in enterprise performance management. As we said, we impaired the activity in Russia and these activities were suspended. And this is why, of course, the adjusted operating result of €217.9 million experienced a 16.1% decline year-on-year with a margin of only 13.6%, because like we said, TVH continued to invest both in increased personnel and of course through SG&A cost, including the transformation program.
If we move to the next slide, the cash flow and the debt situation, we can flag a nice improvement on the free cash flow of TVH with — which was negative in 2022 and was positive at €85.6 million in 2023. This is mainly due to working capital improvement and focus. You might remember that in 2022, we were facing supply chain disruption and TVH voluntarily increased its inventory levels. That situation has since been normalized and hence we had a positive working capital reduction in 2023. As we said, lower EBITDA generation driven by the cyber attacks and also partially driven by higher cash interests due to higher interest rates in 2023 versus 2022. Capital expenditures have remained significant and broadly stable at 5.9% of sales. These CapEx were mainly related to the transformation program, notably, as we said on e-commerce and also on various logistics project, including in Waregem, the new [WB3], which is an impressive automated warehouse. And finally, to be flagged on the free cash flow and net situation and debt situation is to be said that TVH has reimbursed the shareholder loan of €100 million at the end of 2023, out of which €40 million for D’Ieteren Group shares. If we look at the latest developments and the outlook, so given the perspective that was given, you can — we guide towards restored volume growth in 2024 versus 2023 of around 10%. This will be of course in a normalized inflation environment with a restored growth — volume growth. From a margin perspective, we expect an improvement of around 100 basis points versus the 13.6% level recorded in 2023. On the free cash flow, we expect free cash flow to remain good, although, somewhat lower than 2023, mainly because TVH continues to invest for its medium to long term growth, as we said, on working capital and on various types of capital expenditures.
On the ESG side, TVH has made significant progress. It has performed its CSRD double materiality analysis. And there is progress or close to stable, or progress on all three of its group ESG KPIs, nice improvement on people engagement. This has to be flagged in an environment with the cyber attack. The fact that the people engagemenr increased, definitely there was there strong which can be — they can be congratulated with this very strong positive reaction of the organization. It’s probably a reflection of the strong culture as well that they were really all together, let’s say, fighting against this cyber attack and it reinforced the people engagement. And on customer satisfaction and CO2 emissions, we see stability over small progress.
Francis Deprez
Let’s move to Moleskine. Nicolas?
Nicolas Saillez
So Moleskine had a contrasting year. On one side, we had a revenue decline but we had a strong improvement in margin. So revenue declined by 9.1% year-on-year or minus 7.5% in constant constant currency. The two underlying explanation were really driven by the [basic] uncertain economic conditions that we observed throughout 2023 on one side. Destocking at retailer that we’ve seen in the US that has affected many other consumer companies and among them, Moleskine. And another effect was the restriction on corporate gifting that we’ve seen across the board in all geographies. Despite this negative sales evolution with the company, it was able to increase its adjusted operating results margin to 18% from 16.6% and benefit also from a very high cash conversion. The company was able to pay €20.1 million of interest to the D’Ieteren Group as interest to our shareholder loan. So the net debt declined slightly at Moleskine to €269.3 million and that’s the shareholder loan from D’Ieteren Group. There is not much change in terms of breakdown per channel. The only thing I’d like to mention is that we’ve seen it throughout 2023 and at the end of the year quite strong development in direct channels, which are retail and e-commerce. Our adjusted operating result, as I said, was €23.4 million, so 18% margin. There were some adjusting items amounting to €3.5 million reflecting from one side a full provision reversal of the LTI and on the other side an provision for an next exceptional cash bonus that has been granted to management and the team for their efforts this past year.
In terms of latest development, we continue to work together with our management teams to reinforce the brand. We also — we have been — Moleskine has opened six permanent stores and multiple supply stores throughout 2023. This is a strategy that we intend to continue specifically in the geographies like the US, China and Japan. The important milestone we also reached in terms of supply chain nearshoring to organize alternatives to agent sourcing around Turkey for Europe and Ecuador for the US market. In terms of outlook, the sales are expected to grow by low double digits compared to 2023. Again, as we mentioned, seasonality of Moleskine is heavily tipped towards the second part of the year and we think this is going to be — we are going to have the same pattern in 2024. And the adjusted operating reserve margins should again improve by at least 150 bps, reflecting this strong supply trends and the cost control of the management. In terms of ESG, so Moleskine, their emission reduction plan has been validated by this SBTi. So the main tools that will drive these carbon emissions down are renewable energy, indirect stores, strategic sourcing, logistics and quality [Indiscernible] [innovation]. In terms of [circular] economy, the company recycled 250 tons of products, so much higher than last year and representing 36% of in salable stuff, which is quite a high level and their FSC certification was again renewed for five years. In terms of people engagement, the company reached 71% roughly stable, and I already commented on CO2 emissions.
Édouard Janssen
Thank you very much, Nicolas. Corporate and allocated briefly. So corporate and allocated mainly the corporate and real estate activities of D’Ieteren Group. We already touched upon one adjusting item in the net finance costs with €19.6 million impairment charge recognized on our outstanding investment in the supply chain finance and managed by Credit Suisse and Nicolas also touched upon the fact that Moleskine repaid an interest segment — financing interest of €20.1 million, which explains the increase.
Francis Deprez
Before opening up to Q&A. Closing remarks, 2023 was another strong year for us at D’Ieteren Group, we made progress on many, many fronts, and we anticipate further growth in our group’s KPI in 2024. We’re very comfortable on track to reach the ambitions that we set in April 2023 at the Investor Day. And we continue to be very committed on the ESG front to also do our contributions on that front. And with that, I open up the floor for any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Michiel Declercq from KBC Securities.
Michiel Declercq
I have two questions, both on Belron. Francis, you already mentioned for the volumes that there was some pressure in the US because of the seasonality and a bad winter. I was just wondering, is there anything more to it besides the volumes? Because if I look at the second half, it was only up about 3% organic. But if I look at the group volumes, they were actually quite good. And then also in Europe, you see a bit the opposite effect. So just a bit more color on that, on both the US and Europe, just if there is anything more than a soft winter. And then my second question would be on the outlook for Belron. I was maybe, yes, expecting a bit more detail on the margin improvement. I was just wondering, is there any reason why you’re not a bit more specific in terms of margin improvement? And maybe if you could — can you already give some comments on a potential positive impact from the transformation plan that you expect this year, so it was 200 basis points by next year. And if I recall correctly, you already expected some basis points positive this year. So I was just wondering can you give a bit of rough idea on this? And if we look at your €90 million transformation costs for this year, will this be offset by potential positives? Those would be my two questions.
Francis Deprez
Well, on the US, Europe in H2, well, in US, as you recall, the capacity of technicians have continued to be something they’ve been working on throughout the year. So you say is there anything else than volume? Well, they were a bit volume constrained because they didn’t necessarily have always all the technicians, that’s one of the reasons why they, by the way, kept a bit more technicians toward the end of the year. I think we’ve talked about that before as well. But there are no other specific things that happened in the US that somehow — what did play out in H2 and I think this is something we have been telling already since six months is that the pricing true effects that we had had after the cost inflation, of course, started to reduce in effect after the summer of 2023. And so when you have — and that is an effect that you clearly saw in the US as well. But I think this is nothing new, we have set that before and that has been behind what we saw in H2 versus in H1. On your second question, for the outlook of Belron, well, we’re now at 20.5% in the year 2023. We want to reach at least the 23% in 2025, that gives us two years to go and we’re on track to work towards that. So I think that is relatively specific without being a specific number, it’s I think specific enough to give you an idea what we’re talking about. And on the transformation benefits, yes, we are starting to see more and more transformation benefits, of course. First you see operational KPIs improving, then you see financial results improving. [Indiscernible] asking what’s the specific bottom line effect is of the €90 million spend, but of the previous spends and will they compensate the benefits? Well, in the margin improvement, you will somehow see the transformation effect, of course, but it’s not something that you can certainly add or use to kind of sink away the €90 million. The €90 million is something we will spend and so this is something we will spend.
Michiel Declercq
But in the past you did say that you have 200 basis points positive by ‘25…
Francis Deprez
You see that those effects, part of the margin improvement of 2023 is already attributable to transformation and part of the margin improvement in 2024 will also be attributable to our transformation. But to put this precise number on how much of the margin improvement is business as usual and how much is transformation, to be honest, that ends up being a theoretical exercise that we regularly have with the finance teams of Belron but you end up in a theoretical debate. So for me, what counts is that the margin goes up and that we reach our medium term targets.
Operator
And the next question comes from the line of David Vagman from ING.
David Vagman
I have got two question on Belron and one on Auto. And so first on Belron and I’ll come back on the margin guidance and just about on the wording, and maybe I’m just being a bit picky in the press release, you say you are reaching or you’re on track to reach the 23% EBIT margin. I thought it was at least 23%. And I think you also made clear during the call that you are comfortably on track or very comfortably on track to reach this guidance. So just to be sure that we are not missing anything here. Then secondly, on the US, if we can zoom on indeed on this lower organic growth and the tactical move you did to keep technician on board. Could you quantify the negative impact this had? So keeping the technician on board, while actually the volume was not that great, the winter was not that supportive and vice versa, what it could mean in 2024? If you could give us some early indication of how the winter has been in the US and whether Belron has this technician on board is helping in terms of productivity and volume constraint, et cetera. And last question then on Auto. And I know that there is no revenue guidance, let’s say, for 2024, but still I’m trying to, let’s say, put together a bit the pieces of the puzzle. So we’ve got this budget market, which is flat. Then I think you clearly, you want to gain share, that’s the objective of unveiled at the time of the CMD in 2022 and EVs are helping. Now I think you also want to go clearly outside of auto and also used cars, et cetera. So it could help us a bit, let’s say, to understand where — especially looking at the very, very strong sales in 2023, how we should think about the revenue level of 2024, also taking of course into account the price mix with maybe some more rebate or discount. But on the other end the easy mix progressing very positively.
Francis Deprez
Welll, on the wording of Belron, yes, it is what it says in the text and I think there’s no, let’s say, divergence between what we say and what we write. So both are valid. Technicians on board at the US, we’re talking about a couple of 100 people here that they basically kept on board that are in other situations that may have not kept on board. And some of them, of course, are also taking some holiday during the winter break because we know there are less volumes and so on. So again, I don’t have a specific number to quote on what the impact is. I think you may have noted that also in H2 2023 the margin of Belron has continued to improve compared to H2 of 2022. So in that sense, it has been not in such a nature that it has had a negative impact on the margin. Margins can continue to improve. But again, I don’t have a specific number to give you on that today unless [Multiple Speakers] has something to add…
Édouard Janssen
Yes, maybe let me give a little perspective on the US technicians is that the turnover has been high recently. And so turnover has declined to 34.7% compared to 42.2% in 2022, lowest it has been in two years, which is a positive result of course and implies sufficient capacity going into 2024. And so that strategy had a known cost in terms of productivity and wages, of course, but it was clearly a conscious choice to limit additional costs of hiring, training and lower productivity ahead of the high season. And yes, so maybe I’m saying something you already know, but I just wanted to highlight it, because it’s clearly a conscious choice taken also by [Indiscernible].
Francis Deprez
To say much about the winter, it’s too early days to really say much about 2024. And so there have been winter storms, of course, in the US and then during the storm, people can’t move that much. And when the storm is over, they get out and they start repairing their things. So it’s a bit early to give you a flavor of the winter to-date. You’ll hear more about that when we give our Q1 updates in May. And then also the top line revenue level, well, the drivers that you mentioned are of course correct ones. So price mix, we have seen a beginning of a normalization already last year compared to 2022 where not only the premium models and the premium brands, it’s a more normal mix. What we have continued to see is the lesser discounts. So I would say that in the order book that we started the year with we also don’t have any major discounts yet. And I think it’s more the competitive dynamics of the months to come that will determine to what degree there would be more honest discount. But you have to keep in mind that even if there were to be a bit more discounts on particular models of particular cars that doesn’t necessarily affect our margin directly, because these are typically programs that we of course align with the factories of the different brands and to the degree that they want to push certain models, we pass it along to the customer. So it’s not necessarily something that eats directly into our margins. So these are the drivers behind that. The volume that’s I guess where we have a little bit of the lack of visibility for the full year. We have a good visibility for the first year and a half given that we have a good order book and it will depend a bit on — like in a normal year, by the way, we don’t have that visibility entirely. And so that’s why we have refrained from giving the top line guidance also.
David Vagman
Maybe one just very quick follow up on Belros. Any negative element we should have in mind this year in terms of cost inflation or any other headwinds?
Francis Deprez
So nothing particular to note. It’s a relatively normal year, again, in terms of inflation dynamics.
Operator
The next question comes from the line of Jeremy Kincaid from Lanschot Kempen.
Jeremy Kincaid
I have three questions as well. Just the first one on Belron free cash flow. With your guidance statement, you’re saying free cash flow is expected to remain at higher levels, which is obviously slightly different from some of the other statements like around Auto where you say you expect it to improve, that’s against the backdrop of widening margins and improving revenue growth. I was just hoping if you could talk to the moving parts between EBIT and free cash flow that we should think about. My second question is just on TVH. Could you also just provide a bit of a update on demand or activity levels in each of the key end markets there? And then just finally, on the €95 million Credit Suisse supply chain fund. Could you just give some guidance on when you expect that to turn from an asset into cash again?
Francis Deprez
Maybe I’ll take the second question, and then ask for the first and the third question, I don’t know whether that’s something Édouard comfortable to talk about. But on TVH demand and the different verticals, I think, we had mentioned that before in the fall that as of the summer we had a more differentiated picture in terms of overall demand in the different subs, so vertical/regions. And that has actually continued to play out until the end of 2023, I would say, where we already saw a couple of European markets, for instance, in the construction industry where you saw demand being impacted. Now, fortunately, TVH is still a relatively small player in the construction equipment market. And so was not actually suffering much from that. But you really did sense that the demand overall and the utilization of equipment in the construction industry was lesser. We have also seen that in some of the forklifts MPA markets, the online activity and the warehousing activity somehow drives a little bit the use of these types of equipment, of course. And these have also seen in the US, for instance, a little bit of lesser activity there. And in MPA we are of course a little bit of a stronger player. And so there we have a bit more cyclical effect depending on what happens in the demand side.
In the agricultural verticals, I think it was not a lack of demand, it was more about price sensitivity. So people have been more price sensitive. And that in some instances helps by the way TVH, because we have some, let’s say, I wouldn’t say generic, but similar in quality to the OEMs, but not OEMs. And so to the degree that agricultural people, which typically are very loyal to the OEM brands are willing to try a cheaper component that can help us. But to the degree that they stick to the brand, of course it doesn’t necessarily help us. And so that has been some of the demand dynamics we’ve seen in several of the verticals at TVH. For the CS funds…
Nicolas Saillez
For the CS fund, it’s about the timing. So in our impairment, we took a hypothesis of a three year discount, meaning that it is possible within that timeframe. However, it’s important to flag that Francis has talked over 2031 deadline in some of their communication, so which would be significantly longer, of course. So basically, this has been moved to non-current assets, because we lack clarity on the timing. But we could say that we took three years in our time value of money discount. And so yes — so I’m not very precise because honestly, we don’t know very precisely.
Francis Deprez
And then on the free cash flow, Belron remaining high, there’s actually nothing particular to note.
Nicolas Saillez
No, I mean, if you — the acquisition level, if you want a simple example, acquisition level of Belron in 2022 versus 2023 has been very significant. So we don’t have specific elements. The cash conversion has been strong in 2023. But of course, that level may depend on acquisition opportunity. Eventually, we could add an element also on the interest charges. And I mean, I don’t want to make hypothesis on, but you know the history of dividend recaps. And yes — so that could have an impact potentially on interest charges year-on-year as well and on [free cash].
Francis Deprez
We have included the debt of Belron in 2023, right, at some point. So it was in May. And so you will have the full effect of that debt being geared up, so slightly higher interest expenses.
Nicolas Saillez
I mean — and you have seen the leverage ratio at the end of 2023, right…
Operator
The next question comes from the line of Alexander Craeymeersch from Kepler Cheuvreux.
Alexander Craeymeersch
Alexander Craeymeersch from Kepler Cheuvreux here. So first off, congrats on the nice set of good results to the team. Yes, just picking up on that last item that you were discussing. So yes, leverage for Belron, I think, the target leverage was 3.5 times for year end 2024. Right now you’re at 2.95 times, so you’ll probably arrive around 2.3 times, 2.5 times by year end 2024 actually. So that does give some potential for more upstream at Belron. Is this really on the table, because you’ve been discussing already some interest charges impact. And so I assume that maybe that you are already in discussion or given the higher rate environment you might opt to not go for additional upstreams? Then second question from my side would be on TVH, because I’m trying to square that guidance that you gave. So you expect 100 bps margin increase versus 2023, but I think on the midyear figures you mentioned that the cyber attack costed direct cost €35 million alone. And if we add back this to the results of last year in the first half, you’ll quickly arrive at a 17% margin versus for the first half and that is excluding the operating leverage coming from restored volumes that you mentioned. So could you please explain us and help us to square this guidance a bit? And then the third question would be on PHE. You guide for a stable margin but I thought from the past you expected efficiency gains from the inorganic growth activities, such as coming from areas such as procurement, et cetera. So are those efficiency gains now not expected anymore or how do we need to look at this?
Francis Deprez
On the leverage with Belron, I mean, really nothing special. So all the transitions have to be there for us to either do something or not do something like in all the previous years. And so at some point in time throughout the year, we may sit around the table with the different shareholders, look at the cash needs of Belron and the plans that they have, look at the market situations, look at the ratio, which is, as you rightly point out, is 3.5 in 2024 and then either do something or not do something. And so in that sense nothing special to note. This may or may not happen but we will definitely sit at the table at some point in time throughout the year as we have done in all the previous years. TVH, 100 bps and the 35% effect of the volume. To be honest, I don’t have a particular point of view on that. I think, yes, of course we will recuperate parts of the losses linked at that we have. Now there have been some continued cost inflation, of course, here or there at TVH. We will continue to invest in different programs at TVH. But what you don’t have anymore in ‘24, at least less in 2024 than you had in 2023, is the effect of price through. And of course price through works into the bottom line right away, whereas other elements don’t work in a fall through right away. And so part of the margin that you may read in our guidance or our caution of guidance on the margin is that it’s less a top line price driven growth and a bit more of a volume driven growth. So it comes with a certain variable cost. And so that should help to hopefully triangulate your calculations. And on the stable margins or PHE…
Nicolas Saillez
And on PHE, well, it’s true that we still expect some improvement in the future years. What is also true is that the [Indiscernible] that they were built — that they were able to achieve in 2023 was quite strong. And so from that basis, because of the slightly inflated cost basis that the company is facing today within 2024 is probably going to be evolving sideways in terms of adjusted operating margin. But I think the comment that we had at the time of the acquisition, I think, that we would expect a gradual — slight improve and margin still holds for future years.
Operator
The next question comes from the line of Pallav Mittal from Barclays.
Pallav Mittal
This is Pallav Mittal on behalf of Gaurav Jain from Barclays. I have two questions. Can you talk about the long term impact on your Auto business from the rise of Chinese EV companies? And you have said that margins are expected to erode slightly in the business in 2024. Can you give some more color on that? And the second question is on TVH, the free cash flow is expected to decline in 2024 due to growth related investments. Can you please outline these investments?
Francis Deprez
The long term impact also of Chinese EVs, yes, is of course one of the newer forms of competition in Europe. I think the competition of Chinese EVs for the moment in Europe has still been relatively limited. If I look at the market shares in 2023, they are really still single digit, I would say. Now of course, in the years to come that may clearly change and it will partly depend on — at when the EVs are becoming more of a mass market phenomenon, we will of course also have more mass market models of EVs, which so far we had less of, we have more premium models of EVs. Now as mass market models of EVs come in, I’m sure the Chinese brands or several of the Chinese brands will try and position themselves on that very much as well. And then it will be a matter of at what price will they offer and then how competitive will, let’s say, the European brands, which of course we have for the Volkswagen Group, we’ll be able to offer that. There may or there may not be some impact of tariffs. We don’t know that, of course. We’ll see how that plays out. But I also don’t make myself any illusions. Chinese manufacturers will of course also open plants in Europe and some are already working on it. And so some of those cars will be produced locally and so they will then also have the input factors that we know here in Europe as well.
And so in that sense, I would say, we always welcome competition. We also welcome Chinese competition and we’ll do our best that the Volkswagen Group has models in place at attractive enough prices to keep defending or growing our market share that we have. In the very long term impact, honestly, it’s a pure speculation, I would say, where this will fundamentally change the dynamics between what are today the larger groups in the world versus what may be the larger groups in the world tomorrow, that is really for me difficult to project. We know the Volkswagen Group has some collaborations with one of the Chinese players in China for the moment, who knows that may take on different dimensions going forward. At the same time, we at D’Ieteren, we are in a very strong partnership with the Volkswagen Group, but we’re not married with the Volkswagen Group to see, if there are certain models that the Volkswagen Group is not offering, certain categories, certain segments, we can actually try and import those from other manufacturers as well. And we’re already doing this in micro mobility today where we have an Italian produced Swiss branded Microlino. Well, maybe in the future, we could have other segments that are not well covered by the Volkswagen Group and say, well, those we can source them for instance in China or for instance in other parts of the world. So that is not to exclude for us as an importer either.
So the long answer to that first question. You then asked the question about the margin erosion at Auto that we anticipate. It’s really driven by a normalization of the mix of vehicles that we will be offering, that we will be delivering, so to say. And the fact that we have some IT projects going on, for instance, a dealer management system that we talked about that is being rolled out to all the dealers that cost a bit of money. Now we will also charge for that a little bit, so it’s not a pure increase cost. But I think — we had always said that if Auto can bypass the 4% return on sales, that would be a nice medium term target. Well, they’ve actually bypassed it last year and they’ve even increased it slightly this year with 4.2%. So in that sense, we are not necessarily anticipating that they will keep being able to keep growing that margin every single year, and that’s why we’ve highlighted guidance of a slightly lower margin. There are also as they’ve been very successful in 2023 and we hope to continue to assess in 2024 some long term incentive plan charges that may also have an impact at some point in time. But this is really not at the ROS level that’s more at the adjusted level below the line. And then the third question on TVH, free cash flow growth?
Édouard Janssen
So on TVH, simply two main buckets, right, working capital and CapEx. If you take 2023 as an example, on the CapEx side, two main types of CapEx that are likely, one on the transformation side the other one on warehouses and development, automation, et cetera. And on the working capital side, if we take a step back, remember that TVH is — we guide towards around 10% of growth. And before that, in ‘21 and ‘22, they were experiencing strong growth. So the goal is for them to go back to strong growth. And there is an element of cautiousness there as well. Where will they finish in terms of working capital? That’s why just we are guiding towards a slightly more prudent free cash flow in 2024 to say that the goal is to generate growth in 2024 and in the coming years through working capital and CapEx.
Operator
The next question comes from the line of Kris Kippers from Degroof Petercam.
Kris Kippers
A couple of small ones remaining. First one, looking at your solid free cash flow in 2023 and given the guidance of the different units, it does seem that your cash position is going to increase much further in ‘24. So how will you spend it? Because, we’ve seen a nice dividend increase but it won’t save the day. Would you consider, again, ongoing M&A capital reductions or buybacks, because that would be helpful, of course? Second question, a bit on Belron sensor parts. If you look at ADAS penetration, there recently has been a launch of Volvo’s electric EX 90, which has — seems to have a sensors outside the window. But personally, I don’t think it’s a nice solution for the time being, but is there a risk this would become more of a standard? And then third question would be working capital, it had quite an improvement in ‘23. What is a normal level for ‘24? I mean, generally speaking, are there still hiccups to be expected or should we anticipate a further normalization given the fact that raw material flows or logistical hiccups are less and things like that?
Francis Deprez
Logistical flow hiccups, there have been some of course this year around the Red Sea again. So I would be prudent to say that everything is normalized all the time. And I know that Belros, for instance, has of course been in very close contact with its overseas suppliers to make sure that that doesn’t lead to much delay or problems of providing glass at the right moment at the right time. So you never know what happens with supply chains these days. On the ADAS penetration, outside of the windscreen, no, this is really not a trend that we see pervasive. I won’t talk about the aesthetics of it anyway. But apart from the aesthetics, I also don’t necessarily think it’s a practical solution. So no, we don’t anticipate that in all our discussions with the OEMs, the glass OEMs and the car OEMs, it’s really such building on the type of fitting that we know and that we see today. On the free cash, how to spend, that’s a capital allocation question. So maybe perfect question for…
Édouard Janssen
The dividend that we announced, the share buy back, the program is on and the rest we are always looking for new investment opportunities. Actually, we also look for investment opportunities within our portfolio companies, always eager to reinforce if it’s possible their capacity to do potentially larger transactions. And we also look at different investment opportunities at group level. We’ve been doing so for quite some years. We’re still doing it today,we’ll do it tomorrow. And so we have a very strict and well structured governance and investment process. And who knows, in the next future, we might indeed make several new acquisitions. Yes, it’s possible.
Operator
[Operator Instructions] The next question comes from the line of David Vagman from ING.
David Vagman
One follow-up on the Moleskine payment of inter segment financing interest, the 20 million, it seems quite high. Could you explain the logic and the accounting rationale?
Francis Deprez
It’s a standard shareholder loan with actually market based conditions and they have some cash. And you the shareholder loan is quite significant, right, it’s 380 million. So you do the math and you will quickly estimate the interest that they paid is actually quite standard. And they had cash, their free cash flow generation was really strong in 2023 and so we decided to ask them to pay the interest in cash.
Édouard Janssen
And earlier, they had repaid their bank debt, and so they had cash indeed.
Operator
Since we have no further questions, I’ll hand the conference back to you, speakers.
Francis Deprez
Well, then thank you very much, I would say, and have a great evening. And so if you have any follow on questions later on you know where to find us. So wishing you a peaceful evening to all of you.
Operator
Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.
Credit: Source link
