Dear Shareholders,

You often ask about the risk related to the business of Inter Cars. You often ask about the risk related to the penetration of the Polish market by foreign spare parts distributors. Since we are not afraid to address difficult issues, we have decided to present our point of view on this one.


In addition, we present the financial result of our Company after the first six months, and describe the situation on the market during this period.

We would also like to draw your attention to the involvement of Inter Cars in the development of the automotive industry in Poland. We have recently created another training centre for the Young HR programme, whose aim is to help young mechanics start their professional careers.

Enjoy reading,


Robert Kierzek
President of the Management Board of Inter Cars S.A.



Inter Cars S.A. Financial results

Summary of the 1st six months of 2013

A 14.5% revenue increase of Inter Cars Capital Group

In the first half of 2013, the consolidated sales revenues of the Inter Cars Group increased by 14.5%, compared to the same period of 2012. The sales of goods in the domestic market increased by app. 11% during this period.

The consolidated net profit amounted to PLN 61.5 m, accounting for a 27.2% growth, compared to the same period of last year.

Main financial data [‘000] after the first six months of 2013

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An exchange rate constituting the average National Bank of Poland exchange rate announced on the last day of each month of the first 6 months of 2013 and 2012, respectively: 1 EUR = PLN 4.2140 and 1 EUR = PLN 4.2246.



The sales generated by Inter Cars’s overseas subsidiaries in the first half of 2013 were PLN 408 m, and accounted for a 25 % growth.

The biggest foreign subsidiaries by revenue:

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Also worth knowing:

  • In 1H Inter Cars’s revenues on the Polish market accounted for about 64% of the total revenue of the entire Capital Group (compared to 67% after 1H 2012).
  • In 1H the consolidated margin on the sale of goods increased by 0.2%, i.e. from 31.3% to 31.5%
  • In 1H the Group’s stock turnover was 136 days, an improvement of 5 days compared to the same period of 2012.




Situation in the market in the 1st half of 2013

Unique 6 months on the spare parts market – a summary by MotoFocus

2013 saw a quite unique situation on the market - the demand for automotive goods was driven by weather conditions more than ever before. In addition, the distributors’ sales were significantly impacted by the slump in Fota S.A.

What shapes the demand for automotive goods?

Broadly speaking, factors impacting the growth or fall in the sales of automotive goods can be divided into three categories:

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  • Number of cars in use – each time the number of cars on the market increases, the demand for spare parts and accessories follows suit. In this case, the market growth is natural and organic.
  • Seasonality and weather – the weather impacts the demand for particular product groups.
    In as much as the distributors can to a certain degree protect themselves against seasonality (by offering typically “summer” or “winter” products), there’s no escaping market slowdown caused by extreme weather conditions, i.e. situations when drivers give up servicing their vehicles altogether, for example as a result of a prolonged winter.
  • Other untypical factors – i.e. other events having special influence on the current market situation.



In 1H 2012 three groups of factors had equal impact on the demand on the spare parts and services market. By contrast, in the first six months of 2013, the market was mostly impacted by untypical factors and weather conditions, as well as more optimistic attitudes among consumers resulting from the fact that the negative forecasts we were fed by the media in 2012 never came true.

A decrease in the demand caused by a long winter

The first quarter of 2013 saw a stagnation on the market. The prolonged winter resulted in decrease in the number of drivers visiting garages, which in turn caused a fall in the demand for spare parts.

The long-awaited change in weather came in the second quarter. The drivers who had kept postponing repairs suddenly flooded garages. In many cases postponing maintenance and small repairs resulted in the necessity to carry out more complex and thus more expensive repairs (e.g. instead of replacing CV joint boot in winter, many drivers faced replacement of entire CV joints in spring).

Communicating vessels – distributors take Fota’s market share



The bad situation of Fota S.A. and the delay in the filing of the bankruptcy motion had impact on the availability of spare parts from this distributor. In order to continue their operations, Fota’s customers were forced to find new distributors.

According to a survey conducted by MotoFocus, independent garages choose spare parts suppliers mainly on the basis of the following factors: availability of goods, speed of delivery and range of products. This means that Fota’s market has been taken over by companies capable of fast delivery of a wide range of products.
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Record-breaking Q2 2013 – the result of coincidence of three factors

For some distribution companies 2013 proved a record-breaking year in terms of revenues. This may have resulted from a coincidence of the three factors mentioned above:

  • organic market growth resulting from an increase in the number of cars on the market,
  • optimistic attitudes among consumers, who increased their car maintenance and repair spending in spring,
  • bankruptcy of Fota S.A. – a major market player – as a result of which its customers were forced to turn to other distributors.



Moderate optimism recommended

When a market is shaped by factors difficult to foresee, it is very hard to come forth with forecasts for the coming months, as they carry a significant risk of error.

 

Nevertheless, the positive sales results generated by the distributors in July and August are a reason to believe that the third quarter and the remaining six months of 2013 will bring a sales increase, resulting e.g. from further loss of market share by Fota S.A. Currently Fota S.A. is selling out its products, often with big discounts, which has a negative influence on margins.

However, when the company runs out of such discounted goods, the distributors will probably record better results.


Forecast and plans

Krzysztof Oleksowicz sums up the first 6 months of Inter Cars


Krzysztof Oleksowicz gave an interview to TVN CNBC, summing up the first six months of Inter Cars activity in 2013. According to his estimates, In Q2 2013 the Polish spare parts distribution market recorded a 10-12% increase. During this period, the sales of Inter Cars were two times higher than the value of the market, which means the company is increasing its competitive advantage.
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Krzysztof Oleksowicz believes that the two-digit sales should continue until the end of the year, and that Inter Cars’s total revenue in 2013 will exceed PLN 3.4 b. Click here to watch the interview. 


Record-high revenues in July

The beginning of Q3 2013 was very promising for our company. In July 2013 the revenues of Inter Cars S.A. amounted to PLN 289 m (a 24.9% growth) – the highest monthly sales revenues in the Company’s history.

The July sales on the Polish market grew by 23% - to PLN 208.9 m. After seven months of 2013, the Polish sales revenues of the company amount to PLN 1 240 m (a 13.2% growth).


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Risk assessment

Assessment of the risk related to the penetration of the Polish market by foreign spare parts distributors

The Polish spare parts distribution market continues to develop and is becoming increasingly mature. Its value keeps growing. All this makes it more and more attractive to foreign investors, at least theoretically.

 

Will foreign distributors attempt to enter the Polish market in the near future? What are the chances they will take over most of the market and become a threat to Inter Cars? We try to find answers to these questions in the following article.

The nature of the Polish spare parts distribution market

The Polish spare parts distribution market is currently dominated by domestic companies. Naturally, foreign companies or companies with foreign capital are also present in Poland.

One of them – a company with foreign capital holding a significant share in the passenger cars spare parts distribution market is AD Polska Aftermarket – purchased and managed by the French branch of Autodistribution. In November 2009, the Warsaw-based company Inter Team sold 50% of its shares to the Nordic Forum group, owned by Hella KGa Hueck&Co, as a result of which the company began to grow (the Hella group is known mostly for its vehicle lighting systems). Two foreign companies are present on the truck parts market, Skuba Polska – a subsidiary of the Lithuanian Skuba UAB, and EuroPart.

The major players on the market are Polish companies, which began as small family businesses and have grown with the market. Many of them continue to be managed by their founders. Inter Cars is an exception. Once a sole trader company, it is now run by a management board (Krzysztof Oleksowicz, the founder of Inter Cars, stepped down as the President of the Management Board in 2010).

The Polish spare parts distribution market is controlled by many companies, with Inter Cars holding the biggest share (app. 25%).

High entry costs

It should be stressed that running a spare parts distribution company in such a competitive market is quite an enterprise. Its success depends on a large number of factors, such as effective logistics, a wide range of goods of varied quality and at varied prices, or an effective sales chain. The knowledge of the local market is also of great importance.

Many of these important factors require significant financial resources, know-how and time. All this is making entering the business more and more difficult.

Obstacles impossible to overcome?

The Polish market is very specific in many respects. There are certain barriers which may impede expansion by potential foreign companies. The biggest of these obstacles are:

  • A large number of companies – in the most likely scenario, a foreign company will enter the Polish market by acquiring the already existing entities. This task will be very difficult considering the fact that there are no market leaders other than Inter Cars. A consolidation of several smaller companies would still not create an entity big enough to threaten Inter Cars’s position. Hence such a scenario seems unlikely.
  • Aggressive competition – Polish companies compete for clients in a very aggressive manner. Active sales are a standard nowadays. The results of Inter Cars’s foreign subsidiaries prove the “Polish” sales standards very effective.
  • Good organization of the existing distributors – the companies operating in the Polish market boast very good organization structures and logistics, which is another barrier for potential newcomers.
  • The level of costs – due to the relatively low level of margins, the companies operating in the Polish market are doing everything to minimize costs, which may also be a significant obstacle for foreign companies.
  • The necessity to keep a stock of a broad range of products -- there is a big variety of cars in Poland. Polish roads are filled with German, French and Asian cars of different age. This makes the Polish market stand out from other European markets, and forces distributors to keep stocks of a very broad assortment of goods, which translates into high costs and logistics difficulties.



As history shows, capital is not enough…

We already know that capital alone is not enough. For example, companies such as Confex AB or Auto-Art went bankrupt despite having obtained significant funding from investment funds. The company Elit, a subsidiary of the RHIAG group, has withdrawn from Poland.

There will be attempts, but…

We will undoubtedly witness attempts by foreign companies at entering the Polish market in the near future. However, given the above-mentioned reasons, they are unlikely to gain a significant market share and pose a threat to Inter Cars. Appearance of a new player will only make the competition fiercer.

The spare parts distribution market is developing and becoming more and more demanding, creating new challenges for distribution companies. Inter Cars, well-managed and enjoying a secure position of the market leader, can afford to invest in the future and develop projects such as Motointegrator – a internet front desk of a garage, through which customers may purchase parts and their installation online.

The distribution companies which have given up developing sales through e-channels may be taken by surprise in the future. . Another obstacle that smaller Polish distribution companies growing with the market must face is that their founders will eventually have to step down, which is an obviously difficult and risky process.


What’s new in Inter Cars Group?

New warehouse in Sosnowiec

Sosnowiec.jpg

ILS, a logistics company of the Inter Cars Capital Group has hired Goodman Poland to build a 25,000m2 warehouse in Sosnowiec. Additional 1,000 sqm will be for offices.

New premises will be located in Maczki Bór town, 10 km away from Sosnowiec, very close to a well developed road infrastructure, including S1 road and A4 highway.



Our new premises in Sosnowec, thanks to perfect location, will be a key point in development of our logistic chain in this region - comments Wojciech Aleksandrowicz, ILS CEO.

Interesting thing is that the whole warehouse will be equipped with LED lighting system.


New Member of the Board of Inter Cars S.A.


In July this year, Wojciech Twaróg became a Member of Inter Cars Board of Managers, and will be responsible for the Company’s sales. We take this opportunity to write a few words about the management board’s newcomer and his career.

Since the beginning of his professional career, Mr Wojciech Twaróg has been involved with the independent automotive aftermarket industry. . In 1996–2006, he worked as Managing Director for JC Auto S.C. – Jadwiga Turbiarz, the largest distributor of JC Auto S.A.'s products. Next in 2006, when his employer was taken over by JC Auto S.A. he became a Sales Manager in JC Auto Group.

After the 2008 merger of JC Auto S.A. and Inter Cars S.A., he was appointed Head of Passenger Car Market at the surviving company, to finally progress to the position of Chief Officer responsible for the entire domestic passenger car aftermarket business in 2011.
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Actions aimed at the development of the sector

Young HR in Nowy Dwór Mazowiecki

It is a pleasure for us to inform that within further development of Young HR programme, in July, in cooperation with our Partners, we have opened a new training centre. This time we have supported a school from Nowy Dwór Mazowiecki, that is very close to Inter Cars.

mlode_kadry.jpg We know exactly that employer will prefer to choose such a student, who has up to date technical knowledge combined with practical experience. The help that we get in the form of technical devices is priceless. As a school we would never be able to buy such devices for such amount of money.” - said during programme inauguration Mrs Ewa Malasiewicz – Head-teacher of Vocational School no 1 in Nowy Dwór Mazowiecki.


“I am very happy that we can support schools and let young people be closer to the most modern devices, so that they can feel as they were working in a garage and they can see how it is to be a mechanic, that it is fun and you can do it with pleasure for the rest of your life.” - commented Robert Kierzek - President of the Board of Inter Cars SA. 

You can see the video from the opening ceremony here.

Milestones
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