DIRECTORS' REPORT

Group and Parent Company

The Board of Directors and Managing Director of Bilia AB (publ), Corp. ID no. 556112-5690, hereby submit their annual report and consolidated financial statements for financial year 2008.

Operations – general

Bilia is Scandinavia’s largest car chain, with a leading position in servicing and sales of cars and transport vehicles plus supplementary services. The Group has 101 facilities in Sweden, Norway and Denmark plus an online auction site, Netbil.

Bilia’s vision is to be the best service company in the business with the goal of having the most satisfied customers in our showrooms, our stores and our workshops. The customer should find dealing with Bilia a pleasant experience. Bilia has a well-developed range of services and products in the Service Business, which includes workshop services, spare parts, store sales and fuel sales. Bilia is constantly developing new services and service concepts to simplify car ownership for our customers. Our Car Business includes sales of new and used cars, transport vehicles, customer financing and supplementary ser­vices. Bilia sells cars from Volvo, Renault, Ford, Land Rover, Hyundai, Nissan, Honda, BMW and Mini as well as transport vehicles from Renault, Ford, Hyundai and Nissan. Bilia will cease selling Land Rover and Mini during 2009.

Ownership

Bilia had 22,144 shareholders at the end of 2008, compared with 25,282 a year earlier. The proportion of institutional ownership amounted to 19.2 per cent (15.4), while the proportion of foreign ownership amounted to 10.0 per cent (14.7).

In 2007 Bilia bought back a total of 1,000,000 shares, equivalent to 4.7 per cent of the share capital, for a total of SEK 115 M. As of 31 December 2008, the company’s holding of its own shares amounted to 1,000,000 shares (1,000,000).

The Bilia share

The total number of shares in the company is 21,459,255. All issued shares are of Series A. It is also possible to issue B shares according to the Articles of Association, but this has not been done. All issued shares have equal rights in the company and are entitled to one vote at the Annual General Meeting (AGM). Bilia’s shares are listed on NASDAQ OMX Stockholm and can be transferred freely there, subject to the rules of the exchange.

Board members Mats Qviberg and Sven Hagströmer and their close family members control, directly and indirectly via Investment AB Öresund, approximately 41 per cent (39) of the shares in the company.

Bilia has no knowledge of any shareholders’ agreements be­tween Bilia’s shareholders.

There are no special rules in the Articles of Association concerning amendment of the same or appointment/dismissal of Board members. The 2008 AGM authorised the Board of Directors to buy back Bilia shares equivalent to no more than 10 per cent of the total number of shares.

In the event of significant changes in the company’s ownership structure that affect the conditions or content of their jobs, the MD and certain top executives are entitled to terminate their own employment and obtain 24 months’ salary, less any salary received by the employee from other service during the last 12 months. The same right to compensation also exists in the event of termination by the company. Bilia’s service and distribution agreements all contain clauses entailing that the agreement will be terminated if the company is transferred to a new owner who is not an authorised dealer or workshop for the same brand; however, the clauses cannot be applied as long as Bilia is listed on the stock exchange.

Notable events during the year

• Bilia sold a property in Västerås.
• Bilia acquired all shares in Bilforum AS and Bilforum Finans AS, which represent Volvo, Renault and Land Rover in the Stavanger area.
• On 20 February, Bilia’s subsidiary Säfveån won a longstand­ing dispute in the District Court of Gothenburg. The opposite party, Pacta, appealed the judgement on 11 March to the Court of Appeal for western Sweden.
• Bilia concluded an agreement on the sale of properties in Sweden to a subsidiary of Corem Property Group.
• Bilia acquired the real estate company A/S Selandia Ejendomsselskab. At the same time one of the properties, Lyngby, was sold.
• Bilia concluded an agreement on the sale of four properties in Copenhagen to a subsidiary of Corem Property Group.
• The Market Court convicted Bilia and seven other Volvo dealers in Skåne and Blekinge of violating the competition rules. Bilia was ordered to pay a restraint-of-trade fine of SEK 6 M, which was just under 5 per cent of the Swedish Competition Authority’s original fine of SEK 122 M.
• An extraordinary shareholders’ meeting resolved to issue subordinated debentures in an amount of no more than SEK 107.3 M with an associated issue of no more than 5,364,813 warrants. The issue is secured up to an amount of SEK 100 M by a subscription commitment and guarantee from Investment AB Öresund.
• The outcome of the new issue as per 31 December 2008 was to bring in SEK 87 M to Bilia, before issue expenses of SEK 6 M, by the issuance of subordinated debentures in an amount of SEK 87 M and an associated issue of 4,352,284 warrants. The warrants entitle holders to subscribe to an equal number of Series A Bilia shares for SEK 20 each.

Sales and earnings

Net turnover amounted to SEK 14,280 M (15,402). Adjusted for exchange rate changes and comparable operations, net turn­over decreased by SEK 2,158 million or 14 per cent. The decline is mainly attributable to lower sales of new cars.

Operating loss amounted to SEK 57 M (profit: 169). Items affecting comparability affected the loss by a net of SEK –41 M (–8). The difference compared with last year, excluding items affecting comparability, was SEK –193 M.

The result from customer financing, excluding gross profit attributable to rental income from long-term leasing of cars sold with repurchase agreements, amounted to SEK 87 M (97).

Items affecting comparability amounted to SEK –41 M (–8) and consist of SEK 124 M (–) from the sale of property, SEK –124 M (–18) in costs for action programmes, SEK –29 M (–) in impairment of acquired surplus values, mainly goodwill, and SEK –12 M (–12) in costs for disputes. Last year includes a changed pension plan in Bilia’s Norwegian operation, which increased the profit by SEK 22 M.

Net financial items amounted to SEK –82 M (–19). The de­terioration is mainly attributable to increased net debt and a higher interest rate level. Net financial items for the year have been charged with costs of SEK 10 M in connection with the signing of a new bank agreement and issue expenses of SEK 6 M. This includes a profit share of SEK 22 M (22) from the indirect shareholding in Volvofinans Bank AB.

Net loss for the year was SEK 110 M (profit: 100) and loss per share SEK 5.35 (EPS: 4.75). Exchange rate changes reduced the profit by SEK 5 M.

Investments and disposals

Investments and disposals amounted to SEK 49 M (–64). Re­placement investments represented SEK 39 M (52), expansion investments SEK 54 M (48), environmental investments SEK 5 M (4) and investments in new construction and additions to properties SEK 14 M (31). Net investments in leased vehicles and finance leases amounted to SEK –63 M (–199).

Financial position

Total assets decreased by SEK 1,629 M to SEK 5,414 M (7,043). The decline is mainly attributable to sales of properties, fewer cars with guaranteed residual values (leased vehicles), lower inventories and trade receivables.

Cash flow from operating activities amounted to SEK 383 M (–305). Cash flow after net investments amounted to SEK 581 M (–590). The cash flow for the year comes mainly from lower working capital (SEK 309 M) and sale of property (net about SEK 345 M). Net debt decreased by SEK 402 M to SEK 820 M.

Equity amounted to SEK 1,229 M (1,507).

The equity/assets ratio amounted to 23 per cent (21) at the end of the year.

Personnel

Skilled and motivated employees who are prepared to develop and step in when needed are a prerequisite for keeping Bilia’s customers satisfied and loyal, which is crucial for Bilia’s continued success.

The basis for the professional development of the employees is the performance appraisal interview they have at least once a year with their immediate superior. The point of departure for the employee interview is the individual’s existing knowledge, skills and needs. Together, the employee and his superior arrive at a plan that will promote personal development, job satisfaction and efficiency in the day-to-day work.

Bilia Academy is the name of the Group’s internal training unit, which was started in 2001. Bilia Academy conducts regular surveys of the training need. Tailored trainings are then put together aimed at target groups with different duties in Bilia. The training is aimed at enhancing competencies within specific areas, strengthening the corporate culture with Bilia’s vision and core values, and at the same time contributing to an experience exchange and a broadened contact network for Bilia’s employees.

Bilia works continuously to improve the working environment at the Group’s facilities. A good working environment is a prerequisite for healthy, happy and motivated employees.

The ambition in the workshops is to create environments that are light, airy, clean and quiet.

The average number of employees in the Group during the year amounted to 3,304 (3,536), of whom 2,026 (2,287) work in Sweden. The number of employees at 31 December 2008 was 3,553 (3,961).

Guidelines for remuneration to senior officers

A fee decided on by the Annual General Meeting is paid to the Chairman and members of the Board.

The AGM for 2008 has decided on the following guidelines for compensation to the management.

Remuneration to the Managing Director and other senior officers consists of basic salary, variable remuneration, other benefits and pension. By “other senior officers” is meant the five persons who, together with the Managing Director, make up the Group Management. For the composition of the Group Management, see Note 9, “Employees and personnel costs”.

The distribution between basic salary and variable salary should be commensurate with the individual’s powers and responsibilities. The Managing Director’s variable remuneration may not exceed 52 per cent of his basic salary. The variable remuneration of other senior officers should not exceed 38–43 per cent of their basic salary. The variable remuneration is based on performance goals and individual goals.

Premium-based pension benefits and other benefits for the Managing Director and other senior officers are payable as a part of the total remuneration.

The Board of Directors will propose to the 2009 AGM that the above compensation principles should apply for 2009.

Risks

Bilia’s business operations are associated with risks. Bilia can influence certain factors, while others are beyond the Group’s control. But the ambition is to identify threats and possibilities at an early stage so that steps can be taken quickly to avoid problems.

Market trend

Demand for Bilia’s products and services is influenced by fluctuations in the business cycle. In recessionary periods, some customers choose to put off their car purchases. Factors that influence the market trend include the labour market situation, stock market performance, the ability of the customers to obtain financing, interest rates and fuel prices. The positioning of Bilia as a service company stabilises earnings. Collaboration with Volvofinans Bank AB and similar car financing companies is positive for Bilia, even though the prevailing turbulence on the financial market and the accelerating economic downturn are having a great impact on the car industry. The Service Business is less cyclical than the Car Business, since cars require service and repairs regardless of the state of the economy. However, a deep recession will also affect the Service Business to some extent.

Representation

Bilia’s core business consists of distribution and servicing of cars and transport vehicles in Sweden, Norway and Denmark. Contractual terms with the manufacturers who have authorised Bilia as their representative are based on the EU’s Block Exemption for the motor vehicle industry and equivalent national regulations. The current rules, which entered into force on 1 October 2003, have been aimed at putting the consumer first and encouraging greater competition in the distribution and aftermarket segment. This has been favourable for Bilia, which has, within the framework of applicable agreements with the manufacturers, systematically looked for ways to exploit its size and strong market position to gain business advantages, for example in purchasing and by seeking multi-brand representation. The European Commission has initiated an evaluation of the market effects of the current Block Exemption. If it is not extended when it expires on 31 May 2010, or if it is replaced by a different kind of regulation, this may change the competitive situation for Bilia. There is always a risk that a manufacturer or a general agent will decide to revoke the authorisation and cancel the agreements, or, in the prevailing tough market situation, even become insolvent, creating uncertainties on the market.

Competitiveness of the products

Bilia is dependent on the ability of the Group’s business partners to develop competitive products. Volvo, the single most important business partner for Bilia, launched a new model during the year, the XC60. All suppliers have developed and will develop new products with an environmental profile and fuel-efficient engines. Volvo has launched a new series of green cars designated DRIVe. The cars feature both low emissions and low fuel consumption.

Ford recently launched both a new Fiesta and a new Ka. Ford has been a pioneer in the ethanol car sector in Sweden. A new Focus is coming next year.

Renault is the only brand that has a light transport vehicle that is ethanol-powered: the new Renault Kangoo. A new Megane was launched in 2008 to positive reviews from the world’s motor press.

Hyundai is coming out with a brand new model, the i20, which will complement the smaller i10 green car.

BMW’s EfficientDynamics range has attracted great attention, and BMW has succeeded in combining a premium brand strategy with an environmental profile.

Development of own services

To maintain and strengthen its competitiveness, Bilia must develop services that appeal to the customers. Bilia’s ability to develop new services also helps strengthen the suppliers’ brands. This development work requires resources. Bilia is confident that the Group has the size, structure and financial strength that are required to remain in the forefront of service development.

Key persons

In order to continue developing as a service company and thereby achieve growth and profitability, Bilia must be able to attract and develop skilled employees, both management and other staff. Bilia is an employer that encourages personal advancement by offering employees interesting work duties, individualised training programmes, bonus programmes and personal involvement in the development of the Group. There is no guarantee that Bilia will succeed in the future in recruiting or keeping the people they need to run and develop the company.

For financial risks see Note 30 “Financial risks and finance policies”.

Environment

Bilia’s environmental policy states that the Group’s services and products should have as little impact on nature as possible and thereby contribute to sustainable development. The envir­onmental work should be pursued within the framework of the business concept and be governed by a holistic approach in which technology, economics and ecology are weighed together.

Waste separation is another priority. Environmentally hazardous waste is managed in accordance with carefully planned procedures. Bilia also has systems, both proprietary and devel­oped together with its partners, for managing and recycling waste from service and residual products from repairs. Bilia’s employees are given training in environmental issues and receive environmental information regularly. All of Bilia’s Swedish and Norwegian companies and most of the facilities in Denmark are environmentally certified to ISO 14001.

The Group conducts activities that are subject to notification in accordance with the Environmental Code. In Sweden, 47 facilities are obligated to submit notification to the authorities due to petrol sales where no emissions may occur, 12 car wash­­es due to effluents, and 9 facilities due to solvent emissions to the atmosphere. Activities requiring notification represent a small portion of Bilia’s total operations.

Private placements

As of 31 December 2008 the new issue had brought in SEK 87 M to Bilia before issue expenses. The final result of the new issue which was concluded in January 2009 was to bring in SEK 100 M to Bilia, before issue expenses of SEK 6 M, by the issuance of subordinated debentures in an amount of SEK 100 M and an associated issue of 5,000,000 warrants entitling the bearer to subscribe for an equal number of Series A Bilia shares at SEK 20 per share. Notification of subscription of shares can be made up to and including 5 January 2016. If the warrants are fully exercised, the company’s share capital will increase by SEK 50 M to SEK 265 M. For further information see Note 1, “Key accounting principles”.

Disclosure of acquisition, transfer and holding of own shares

The 2008 AGM also gave the Board of Directors a new authorisation to buy back the company’s own shares. Bilia’s holding of own shares as of 31 December 2008 amounted to 1,000,000 shares, repurchased during 2007, equivalent to a shareholding of 4.7 per cent. Bilia’s shares have a quotient value of SEK 10. The purpose of all buy-backs has been to optimise the company’s capital structure.

The work of the Board

One post-election meeting and five ordinary Board meetings were held during 2008. In addition to the above meetings, the Board also met once by telephone and once by correspond­ence. An agenda, along with in-depth information on important matters, is sent to each Board member in good time before each Board meeting. The Board dealt with such items of business as strategy, financial goals, follow-up of results, investments, acquisitions and follow-up of disputes with the Swedish Competition Authority and Pacta.

During the year the Board decided to sell property in Sweden and Denmark.

Corporate Governance

Information on corporate governance in Bilia is provided in the Corporate governance report.

Parent Company

Bilia AB is responsible for the Group’s management, strategic planning, financing, accounting, public relations and business development. Furthermore, Bilia AB conducts training and IT activities, mainly for companies in the Group. The Parent Company’s operating loss amounted to SEK 49 M (loss: 50).

Future outlook

With great uncertainty in the financial markets and layoffs being announced by many large employers, Bilia does not expect the economy to turn around in 2009. Bilia predicts that the total market in Sweden, Norway and Denmark during 2009 will decrease compared with 2008. Owing to the fact that Bilia’s earnings are affected by various factors beyond the company’s control, no earnings forecast is made. A review of the most important earnings-impacting factors is provided in the sensitivity analysis in note 30, “Financial risks and finance policies”.

Events after the balance sheet date

The new issue was concluded in January.

Proposed treatment of unappropriated earnings

The Board of Directors proposes that the earnings available for distribution, SEK 681 M, be disposed of as follows:

SEK M
To be carried forward	681
Total	681

Approval of the financial statements

The financial statements were approved for publication by the Parent Company’s Board of Directors on 26 February 2009. For further details concerning the company’s results and financial position, please refer to the following financial statements with accompanying comments.