Live Stream CEO Talks met Francis Deprez, CEO D'Ieteren

Good afternoon and thank you for the invitation. Indeed, the group looks very different today than a few years ago. Our mission is to be a family business, listed, but also a family of companies. Our mission is to grow that family of companies with multiple businesses. We now have five or six activities within the D'Ieteren Group. First and foremost, the historical activity of automotive, as we call it. We are celebrating 75 years of cooperation with the Volkswagen Group this year, as we distribute, import, and sell all Volkswagen Group brands in Belgium. So that is our local historical activity. Indeed, everyone in Belgium immediately thinks of cars when they think of D'Ieteren. But the second activity, actually for many years now the larger activity, is Belron, better known as Carglass here in Belgium, but with different brands worldwide, all with the same jingle. Belron is the largest activity within our group and has seen very nice strong growth in recent years, and that will not be different in the coming years. It is the most important branch of the holding in terms of size, profit contribution, and valuation. But we have also gone further. It started in the year I joined the D'Ieteren Group with the arrival of Moleskine, a much smaller company but with a well-known brand, nice notebooks and other products, active worldwide in 120 countries. A very nice company but nothing to do with automotive. And since two years, we have added two substantial activities to our portfolio: TVH Parts, which was a part of the former global TVH, where we own 40% alongside the Termote family, a company based in Waregem but also very global, with a strong presence in the United States, about a third of its turnover in the US. And the latest is PHE Parts Holding Europe, an acquisition we did last year. It sounds English but is actually based in France, active in six Western European countries: France, Italy, Spain, the Benelux. They are also a distributor of parts, but this time of parts for vehicles, mainly trucks. So with those five activities and the sixth activity I forgot to mention, D'Ieteren Immo, where we have brought together all our real estate in Belgium, historically linked to the automotive activity, a few years ago to manage it professionally. So our group is a nice handful of activities, and we are no longer just the automotive holding that people, readers, and viewers may still remember.

We are always looking for good investments. We still have some cash on our balance sheet, and we will also be able to generate cash in the coming years that will allow us to invest further. We naturally invest first and foremost in our existing activities, because they are growing and need resources to grow further. But at the same time, we are indeed still looking. We have a handful of activities, we have big hands, we now have five plus real estate, but that could become a sixth, who knows, maybe a seventh activity. But you will not see us do 10 or 15 investments. For us, it remains important that we can devote enough energy, time, and attention to each investment and each activity. They had the management team to support the development of their ambitions, ultimately their companies, except Moleskine and real estate.

Yes, we are actually sector agnostic. We are not tied to the mobility sector. It is one of the four fishing ponds, as you will, where we look for investments. Mobility is our habitat since the beginning, but we have a second fishing pond that we call Business Services. For example, we would qualify Belron more as a business services company than a pure automotive company. Yes, it touches vehicles, but it is a service of unexpected repair of a car window. It is a business service they offer in cooperation with many insurance companies. So for us, Business Services is a very attractive group of sectors that we look at regularly. We also look more at Lifestyle, Moleskine is ultimately a lifestyle company, so that also gets our attention. And lastly, at least also in manufacturing, we are starting to look more at potential opportunities. And who knows, as I said, we might do one or two investments in the coming years. Which of the four will it be? You have even guessed it yourself. But we keep looking for additional investments.

At the end of December, we had about 600 million cash available, half of which was actual cash and the other half in the form of shareholder loans to various activities. But this year, some cash has already come back, so it will evolve further. But we are not in a hurry; time is not our enemy, it is our friend. We look very systematically and disciplined, and we will see when something happens. It is more coincidence, I would say, that we did two acquisitions in such a short period. That was not planned, but sometimes opportunities arise and sometimes they are less. They came by chance.

So if you look at free cash flow, it is always a snapshot at the end of the year. On December 31, 2022, it indeed did not turn out well for three reasons. The biggest reason is a swing of about 250 million we had at D'Ieteren Automotive because we suddenly received a lot of deliveries of new vehicles. We had hoped in September, October, November to get more deliveries, but the Volkswagen factories could not deliver fast enough. And suddenly from December, clearly more vehicles arrived. That meant that just before the Christmas holidays, we were no longer able to deliver all those vehicles to our concessionaires or from the concessionaires to the end customers. They remained on our parking lot, so to speak, and we could only start delivering to customers in early January. So that was a snapshot that was very unfortunate, but it can make a difference of a few hundred million in free cash flow very quickly. A second reason was the acquisition policy at Belron. Last year, we were able to do about 160 million in acquisitions, 23 acquisitions. They are small, of course, if you do 23 for 160 million, they are not that big, but it is a larger amount than previous years. The year before was 24 million, and typically a year is maybe 40-50 million. So it was a big year, a grand cru for acquisitions at Belron. Those are good investments, not wasted money; on the contrary, they help, but they naturally impact the cash flow snapshot at the end of December. And thirdly, for Belron, PHE, and TVH, there were quite a few supply chain problems last year, with containers stuck in China, in America, or in Europe, long queues at ports, etc. We made a conscious choice to increase average inventory to avoid not having the right inventory. Both Belron and TVH Parts had increased inventory, but that will normalize and be reduced again. So we assume that in 2023 we will be able to generate a more positive free cash flow from the sum of all activities.

Absolutely not. We are a family business, and I can assure you that in a family business, a lot of attention is paid to what debt level is appropriate for each company. In the case of Belron, we have always been on the conservative side. We look at it from all angles to ensure that no unnecessary risks are taken. Now, indeed, the dividend upstream, a special dividend from Belron to its shareholders, is about 1.1 billion, half of which goes to us. But there is 300 million in cash, so that is excess cash at Belron that they currently do not need, and we chose to upstream that. And 800 million in additional debt, but that is fully within the framework. It has nothing to do with recent management changes; it is entirely in agreements we have had since 2018 with the other shareholders of Belron. In 2018, the first private equity player came on board, and at the end of 2021, three new investors came on board: Hellman & Friedman, GIC, and BlackRock. In 2018, we already made a clear agreement among shareholders about what financing policy we wanted to follow for Belron. We put our foot on the brake and said we do not want what private equity sometimes is tempted to do, which is to take on very high debt, 5, 6, 7 times EBITDA. We set a cap of a maximum of 4.5 times debt ratio. And if I look between 2018 and now, we have averaged around 3 times debt ratio, maybe just above. What we typically do is as the debt decreases because Belron very successfully grows its EBITDA and generates a lot of cash, we look at regular intervals to see the debt ratio. When it falls below 3 or 2.5, we can then increase it back to an average or slightly higher level. Since the end of 2021 with the three new shareholders, we have even established a kind of corridor that over the coming years will guide the debt of Belron downwards. The 4.25 I mentioned became 4 last year, 3.75 this year, and will go to a maximum of 3 times. That means that between now and 2025, the debt will slowly decrease. That is important because it gives more flexibility to the financial structure of Belron on the one hand, and on the other hand, it allows us to improve the quality of Belron's balance sheet. And then we also get a higher credit rating. I read that Moody's has just said, knowing that we were going to upstream that 1.1 billion, that they now consider Belron to be investment grade. That is an important and big step. It is first of all a quality label for the balance sheet and the cash flow and EBITDA generation of Belron, but it is also a nice decision that Moody's has made, which will allow us to develop the financing structure in the future. So we feel very comfortable with the debt level of Belron, and it is of course the good development of the company that allows us to pay dividends to the shareholders.

Absolutely. Yes, we can read the interest rate curves published by central banks as well as anyone else. We do very thorough stress tests to ensure that the absolute amount of interest expenses we have to pay remains within our comfort zone. So we stress test from all angles, and we also obtained very good conditions in this last dividend recap two weeks ago, such that we can say these are attractive financing conditions, and we feel comfortable with them.

Nothing concrete, because it is really not a current topic. But it is indeed true that several of the shareholders around the table, the private equity players, it is their business model to sell at some point. We know that now, but we have just started a new chapter since the end of 2021. They came on board less than 18 months ago, so let's give time to time. They are anyway committed for a number of years. We have made a plan with management, we have a new CEO on board, and the intention is to fully work out that chapter. At the end of the chapter, we will see, because a number of shareholders will want to sell. We have set it up so that all options are open. Yes, we could do another institutional investment round like in 2021, where new investors like BlackRock came to the table, or we could do an IPO, or do something else. All options will be on the table at that time. Flexibility is there, and we will see then, but that is not at all on the agenda today.

Yes, it can fluctuate a bit by a percentage point or so, influenced by the climate, among other things. A harsh winter or a hot summer, both are good news for Belron, can move volumes a bit, but it is not a volume-growing market in itself where Belron is active. Indeed, average speed is going down, quality of roads, etc., but no one throws stones on the roads. It is true that on average between 6 and 7 years, the reader has been lucky with 10 years without a chip. But what is very clear at Belron over the past 4-5 years, and will not be different in the next 4-5 years, is that it is not volume growth but real value growth. The average price per intervention is going up, due to three factors. First, the mix of windshields is evolving very quickly. Just look at the design of vehicles coming to market: larger windshields, more curved windshields, all kinds of technology in those windshields, from antennas to wiring for the vehicle's electronics, to the camera that sits on the windshield, and in the future more heads-up displays projecting things on the windshield from inside. So much more technology, so the average price of a windshield goes up. We try to repair a windshield first, but if the chip is too large, we replace it. And each time we replace a windshield, as vehicles become more modern and design-oriented, the average price goes up. That is one driver of revenue growth at Belron. A second driver, which has become more important, is that when we replace a windshield with a camera, we also have to do a second job: recalibrating the angle of that camera relative to the rest of the vehicle. Because you want to drive safely, and if you have to brake in an emergency, the camera angle must be correct, otherwise you misjudge the distance. That is too dangerous. So we have to do a second intervention each time. That costs us time, but we can charge for it. That has been one of the big engines for Belron in recent years. A few years ago, you might have to do that second job on every tenth car. Last year, it was on almost every third car, about 30 percent. That will go to 40, 50, 60, up to 100 percent in the next 10 years. That is a tailwind for Belron. A third factor of growth is that when someone visits the Belron workshop, we also ask if the wiper blades need replacing, or if they want a product to clean the car. There are a few extra services or products we can offer when they happen to visit us for help. That was almost never done before, but we are now more proactive about it, and that also adds growth. So these three factors lead to, despite volumes not really changing much, a very nice value growth, more revenue, and also more margin. And cross-selling: when repairing a chip, there is always coffee, of course.

That is indeed a challenge. Fortunately, the type of technician who does these repairs and replacements comes from a fairly broad pool of skills. It is not like the body shops we know, where you really need people trained as bodywork specialists. That is less the case at Belron. But it remains, especially in certain regions like the United States, where people easily change jobs for a dollar more per hour, it is not always easy to keep the people you have trained. There is a strong and good culture at Belron, but nonetheless, there is a lot of movement. So it remains a challenge every year to have the right technician at the right time, because it is also seasonal, to have them present everywhere in our geographic footprint.

There is plenty of competition. If you look at all the countries where Belron is active, there are always competitors. First of all, often the car dealer themselves. Yes, we know that from the Volkswagen brands themselves at D'Ieteren Automotive, and they are typically a bit more expensive than what Belron offers. But if you take other competitors, there are some that are cheaper and some that are more expensive. I think in terms of service level and quality, we are at the top, we are doing very well at Belron. But competition is good, it forces us to always try to think one, two, or three steps ahead and to improve ourselves further. So Belron has succeeded in recent years in maintaining or further building its market share, and we do not want to see any changes in that in the coming years.

Yes, I think the price cuts were done first in the US, then in Asia, now also in Europe. They probably have more to do with their production capacity and their commercial efforts to try to sell the cars as they had planned in their budgets. So I think it is more of a short-term adjustment on the one hand to their production capacity. At the same time, I think it is also something that is not surprising. Electric vehicles clearly started as a niche product, more for relatively larger and premium models. The market has also shifted at our brands; it started at Audi and Porsche, then the ID series from Volkswagen came, etc. So ultimately, most brands started with larger models.

Electric vehicles as time goes on and electric vehicles become a true mass product, yes, that is very good news for everyone. That is a broader catalog of models that also go under €25,000 and so on. Eventually, the price difference between an electric vehicle in the same category and its brother or sister with an internal combustion engine will also decrease. So as we enter a new phase of more electric vehicles, it doesn't surprise me that price adjustments will happen and that competitors are positioning themselves, whether it's Tesla or other new and existing providers. So in that sense, it's no surprise. And the Volkswagen group fortunately has a very broad palette of electric vehicles. Our market share in Belgium for electric vehicles is higher than our average market share for all classic vehicles. We feel well armed, we have beautiful models and active models in the market, and we will naturally develop further in that function. But that is a very promising electric vehicle market, and I think both for private customers and companies, as well as for us as a company, it offers many opportunities.

And I think both for customers, private customers and companies, as well as for us as a company, it offers many opportunities. Also note that Tesla sells directly to consumers. Are you not afraid that Volkswagen will also do that at some point and thus essentially bypass the dealer? If you start from zero and start something new like Tesla, you can naturally think of things in a different way, and when you are a niche product with very few models, that may have worked well for them in recent years. We are convinced that the model we have built over the past decades, where a customer not only buys a dry product but also wants advice around it, wants to touch and see and test and take a test drive, etc., that the role of the dealers will always remain important. The role may change, the way it is done will change, people are already informed, have already informed themselves online, but...

But proximity to end customers and being able to assist customers. We also see in Belgium in recent years that the choice of which vehicle to buy, with which technology, has become more complicated. So there is a role, but naturally we must further evolve how we set up the dealer network. We have already done that in the past year and will continue to do so in the coming years. So in that sense, it works very well for a multi-brand dealer like us, it fits very well with the breadth of models and brands we offer. And you may have noticed that multiple dealers show the different brands and models in the corporate identity of those brands, but can also create synergies by perhaps combining workshops or reception elements. So you can bring much more efficiency into a market where you might look at other models, and online will naturally become important and more important in the coming years. But we all anticipate that with that pride we must absolutely...

So the longer delivery times that have built up in the last, say, 1.5 years, were mainly driven indeed in the post-COVID period by supply chain problems where factory production capacity was not optimal. We had sold the cars, but they came slower than expected. It has already improved by a few months, but it is still clearly longer than some other brands that perhaps had fewer of those problems. At the same time, we also notice that customers accept that to some extent and assume that deliveries take a bit longer, so they order the new car earlier to avoid the stress of whether it will arrive on time. We see that very clearly. And with that, you can also configure the car as you wish. So in that sense, it is not an immediate reason for us to lose market share. You do have to think differently, I think: when do I start thinking about possibly replacing a vehicle? And how do I do that? But I am sure that in the coming months, delivery times will normalize again. Yes, because ultimately it is due to those supply chain issues that the bottleneck effect has made it even more challenging.

Absolutely. Naturally, every car is worth ordering and worth a good order. What actually happened is that due to the shortage of semiconductors and other components in the industry, manufacturers had too little material to produce the vehicles they wanted, and they artificially prioritized the larger models. So we received an abnormal number of Audis, Porsches, etc., delivered faster, while others were delivered slowly. But that is behind us, so the supply of parts is normalizing. And that means that now, when I look at our order book, we have a normal mix of vehicles from small to large, from city to sports, all categories. So that means we will now deliver and sell a normal profile of cars, and that also means our revenue will reflect that normally. We had that in our forecast this year: our margins were probably artificially high last year due to that, and this year they will be more normal due to a different mix of vehicles. But everyone is welcome to any vehicle, from the smallest.

Model. We also have nice very small models in our range now, with Microlino, not from the Volkswagen group but a true mini micro-mobility vehicle. Sorry. So there is something for everyone, rest assured. And the answer for those with a lower budget, reader Steve asks: How are the activities of Poppy going? Poppy are the car-sharing and step-sharing services. How is that going? So Poppy originally started in Antwerp, then quickly came to Brussels, and is now also available in Ghent and Liège. It has positioned itself from the beginning as a multimodal sharing player, not only car-sharing but also scooter-sharing, step-sharing, and bike-sharing in certain cities, and the combination of the brand Poppy was brought to market. It is and remains not an easy activity. It is an activity that is very interesting for D'Ieteren Automotive because you learn a lot about new customer behavior patterns: when do you need a car? How? People mainly in the city, we are talking about use in and around the city, how people use it and evolve. But it is in itself not an easy business to be in. Why? Because you often have competitors that come and go, that change, and each year has its challenges at Poppy. But it is a model that is part of the future. D'Ieteren Automotive is no longer just about offering cars, but about offering more and more innovative mobility solutions, and Poppy is part of that. We assume that car-sharing could account for a good 10-15% of trips within the city. In itself, it is a very practical and useful way to get around.

Lucien is a very recent activity. We launched it about 1.5 years ago. It has generated money almost from day one, it is not making a loss. But it is a building activity. We are building a chain of stores. The model allows us to make money from day one. In the build-up phase, we had about 13 stores at the end of last year, and more will be added this year. It is naturally something we are building. What is important is that you keep the central structural costs very limited and not make it too big. At the same time, it is important in the commercial policy to make choices about what kind of bikes we offer. Lucien mainly focuses on functional bikes in a total mobility offering, less on leisure bikes (though those are also available), but mainly on functional bikes, cargo bikes, or bikes used for commuting, transporting children, etc. These types of bikes have less variability and are less fashion-sensitive or brand-sensitive than some other bikes. We try to build a stable base, not only for private consumers but also in the context of business lease solutions. So it is a positioning in the market that allows us to make it work.

We are always willing if management comes with a request for extra resources and a good investment case. But currently, that is not needed; it works perfectly with its own financing structure. Last year, it already made about nine acquisitions, financed from its own cash flow. Also, do not forget that in the context of our acquisition of PHE, the competition authorities asked us to sell one activity, which was a glass repair activity in France. We sold that and it brought in about 100 million. We did not bring that money back to D'Ieteren but left it at PHE, and that is a resource they can now use for acquisitions. So the debt of PHE is perfectly under control; it has actually decreased in recent months. They received those extra resources from the 100 million we got from the sale, and with that they can execute their plan, which is very clear. They have targets in various countries, mainly in Europe at the moment, and it is going well. So it is fully under control.

Yes, but it is too early to have a full picture of the impact of the cyber attack. Based on the information we have today, we assume there is no material impact on D'Ieteren Group. At the same time, I want to take the opportunity to say very clearly that no one wants to experience such a cyber attack as TVH had. In the past weeks, it was really impressive how the team at TVH worked with all their might to solve the problem. It was a severe cyber attack, fully resolved. Ultimately, it led to TVH shutting down its own systems to prevent the infection from spreading. Then you have to examine the infections, clean them, restart, etc. That has all been done. So it was a very tough few weeks for TVH, but the speed and dedication with which the French management and all the people involved at TVH worked, I can only say that was very good. You can see along the highway there is a big billboard saying 'It will make a stronger' - I would say yes, it already makes TVH stronger. And I am glad that since about a week, orders and bookings are coming in again, and customers understand the very difficult situation that TVH went through for a few weeks. Certainly not a fiasco.

As I said in Dutch, we are sector agnostic. But Moleskine has its place in our portfolio for a very simple reason: it meets the three criteria we always set for a new investment. We want someone who is a leader in the industry they are active in and who has done something unique. Moleskine notebooks are not sold, or less sold, in the classic stationary channels but more in bookstores. That is where Moleskine's history comes from. And that is a very unique position that Moleskine has built. They always look for their uniqueness to grow, improve, become more patient. They have not only a positive financial impact but also a non-financial impact, because it is a beautiful product that helps many people express their creativity. That meets our investment criteria. So it has its place, and as long as we find and feel that we are the natural owner for that kind of company, there is no reason to question it. So today, that is absolutely not on the agenda. But are we going to invest a lot in luxury? I wouldn't go that far either. Okay, I see time is moving on, we have maybe one more question about real estate.

What maybe the reader is referring to is that we actually already built 35 apartments three years ago for residential use, and they are now fully occupied. On the side of the Ten Bosstraat, one corner is from the city. But there remains the rest of the large site around the Maliestraat, the Prevostraat, and the Americanstraat. And we are indeed working on a project that will be a big project, because it is a beautiful site, a beautiful neighborhood, the Kasteelheerplein neighborhood in Ixelles. In that neighborhood, it makes a lot of sense to do a multifunctional project. We are fully in the process with heritage and building permits, etc. So it will take some time, but once we are through, I am sure we can make a beautiful combination of commercial space for ourselves and also for other commercial purposes, offices, services we want to offer to the neighborhood, maybe also certain logistics services. So it will be a nice project that we will open to the neighborhood.

The fact that we have made a nice development is mainly driven by the fact that we have increased our profitability. When I joined D'Ieteren about six years ago, we were around 200 million profit before tax for the group's share, including all percentages of our investments. Last year we were at 733 million using the same KPI, and this year we have set a target of 900 million. So that in itself is a big evolution, which translates into a share price. Whether the translation into the share price is too high or too low, or there is a discount or premium, I don't really comment on that. I leave it to everyone, let the market make its own calculations. What we focus on as management is helping our management teams in the companies create value and positive development. Everyone then calculates what the value is. The analysts that follow us, where do they land? They land around 219-220 I think at the moment. Is that too much or too little? I really leave that to someone else. I have no opinion on that. Many readers give congratulations via our website for the performance of your shares without asking a question. In this question, yes, are you going to buy back shares again? You now pay a generous dividend. Will there be a buyback program started? There is still a buyback program ongoing. We launched one in 2019 for 150 million, it was put on hold and reactivated. There is still a small 10% left, so that will run its course. After that, we will see. We don't have a long tradition of buyback programs. Let's first finish this one and then we'll see. But the main use of the cash we will receive, including from the Belron sale in recent weeks, will be mainly to pay our dividend, which is also coming, and also to further invest in existing or new companies, as I described earlier.

I'm not going to name any. There are so many beautiful companies both in Belgium and abroad that meet our criteria. It depends too much on the opportunity, the feeling with the management team, the shareholders, etc. So I'm not going to name any.

I am definitely a car enthusiast. I am not a specialist at all, but in terms of pure driving pleasure, I have no problem with that, on the contrary. What do I drive now? I have the luck to be part of the group of people because we have D'Ieteren Automotive, which allows me to be a kind of ambassador for our brands and models. I can drive a different car every four months. Currently, I am driving a hybrid Porsche Panamera. I admit it feels like a very ideal combination because I can drive silently in the city when I go to work in the morning or evening (though I also walk sometimes), but when I take the car for longer distances, I can also enjoy the typical Porsche sound. So I feel good with that. For the next months, we'll see what is available in the pool of cars at our disposal. Yes, driving should also remain a bit fun.