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 2007.

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 111 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.

Ownership

Bilia had 25,282 shareholders at the end of 2007, compared with 26,497 a year earlier. The proportion of institutional ownership amounted to 15.4 per cent (18.3), while the proportion of foreign ownership amounted to 14.7 per cent (12.5).

In 2007 Bilia bought back a total of 1,000,000 shares (1,669,900), equivalent to 4.7 per cent of the share capital, for a total of SEK 115 M. As of 31 December 2007, the company’s holding of its own shares amounted to 1,000,000 shares (1,669,900).

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 OMX Nordiska Börs and can be transferred freely there, subject to the rules of the exchange.

Board members Mats Qviberg and Sven Hagströmer control, directly and indirectly via Investment AB Öresund, approximately 39 per cent of the shares in the company, and the Chairman of the Board, Mats Qviberg, holds together with his family an additional 5 per cent or so of the company’s shares.

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

There are no special rules in the Articles of Association concerning their amendment or the appointment/dismissal of Board members. The 2007 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. A new authorisation will be proposed at the coming AGM.

In the event of significant changes in the company’s ownership structure that affect the premises 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.

Market trend

Overall demand for new cars and service in Bilia’s market areas was at a good level. The market for new cars increased in Sweden by 8 per cent, in Norway by 18 per cent and in Denmark by 4 per cent.

Notable events during the year

  • Bilia’s facility in Kista in northern Stockholm stopped selling Kia in March.

  • Bilia started a joint venture in March with DnB NOR in Norway under the name Bilia Lease.

  • Bilia acquired all the trading subsidiaries of Hans Persson Bil AB. The purchase price was SEK 329 M and these operations have been part of the Bilia Group since May.

  • Bilia acquired the business in Bilgruppen i Enköping Sala AB and Bilgruppen i Kungsängen AB. The purchase price was SEK 28 M and these operations have been part of the Bilia Group since June.

  • In accordance with the decision of the AGM, the share capital was reduced in July by SEK 16,699,000 by the withdrawal of 1,669,900 own shares. The number of registered shares after the withdrawal amounts to 21,459,255.

  • Acting on the authorisation of the AGM, the Board of Directors resolved to buy back Bilia shares. As of 31 December 2007, Bilia’s holding of its own shares amounted to 1,000,000 shares, with an average price of SEK 115 per share. The An-nual General Meeting has authorised the Board to acquire a total of 2,145,925 Bilia shares.

  • In September, Investment AB Öresund issued share options for 210,000 shares in Bilia AB to Board members, members of the Group Management and a number of key employees. The options have a term of three years and the exercise price is SEK 120 per share.

  • The main proceedings in the dispute between Bilia’s subsidiary Säfveån and Pacta opened in the District Court of Gothenburg in October. The dispute stems from the business operations conducted by AB Probo (now Säfveån AB) in 1987. Säfveån insists that Pacta’s claim is largely unfounded and the company contests any tort liability both on formal grounds, on the merits of the case and with regard to the amount claimed. In a judgement handed down on 20 February 2008, theDistrict Court of Gothenburg completely dismissed Pacta’s claim against Säfveån AB. Säfveån was awarded compensation for litigation costs amounting to SEK 14 M.

  • Bilia’s Board of Directors decided to sell properties in Denmark and Sweden. The sale is expected to be concluded by the end of the first quarter of 2008.

  • Bilia concluded an agreement with Bilforum Holding AS on the acquisition of all shares in Bilforum AS and Bilforum Finans AS. Bilforum is a well renowned and profitable car retailer that represents Volvo, Renault and Land Rover in the Stavanger area in Norway. The purchase price was SEK 65 M and the operation will be consolidated in the Bilia Group as of 1 January 2008.

Sales and earnings

Net turnover amounted to SEK 15,405 M (14,056). Adjusted for exchange rate changes and comparable operations, net turnover increased by about SEK 190 M or 1 per cent. The increase is mainly attributable to increased sales of new cars.

Operating profit amounted to SEK 168 M (109). Items affecting comparability reduced the profit by SEK 8 M (reduction: 21). The improvement compared with last year, excluding items affecting comparability, was SEK 46 M. Operations acquired during the year, Hans Persson and Bilgruppen, are included in the profit in the amount of SEK 9 M after acquisition costs. The Car Business reported a better profit than last year, mainly due to a higher margin in car sales. The Service Business reported slightly lower earnings due to implemented restructurings in Norway, which had a negative impact on the service operation.

The result from customer financing, excluding gross profit attributable to rental income for long-term leasing of cars sold with repurchase agreements, amounted to SEK 97 M (95).

Items affecting comparability amounted to a net of SEK –8 M (–21) and consist of SEK –18 M (–11) in restructuring costs in Sweden and Norway and SEK –12 M (–9 M) in costs for disputes, mainly with the Swedish Competition Authority and Pacta. Furthermore, Bilia’s Norwegian operation changed its pension plan from a defined-benefit to a defined-contribution plan for employees under 52 years of age, which increased the profit by SEK 22 M (—). Last year includes disposals in the amount of SEK –1 M.

Net financial items amounted to SEK –26 M (9). This includes a profit share of SEK 22 M (17) from the indirect shareholding in AB Volvofinans. Last year’s net financial items included gain from the sale of the shares in Viking Redningstjeneste in the amount of SEK 7 M. Higher net debt and interest level resulted in higher interest expenses compared with last year.

Net profit for the year amounted to SEK 100 M (93) and earnings per share to SEK 4.75 (4.15). Exchange rate changes only affected the profit marginally.

Investments and disposals

Investments and disposals amounted to SEK –64 M (275). Replacement investments represented SEK 52 M (22), expansion investments SEK 48 M (45), environmental investments SEK 4 M (4) and investments in new construction and additions to properties SEK 31 M (3).

Net investments in leased vehicles and finance leases amounted to SEK
–199 M (201).

Financial position

Total assets amounted to SEK 7,043 M (6,064). The acquisitions of Hans Persson and Bilgruppen increased total assets by about SEK 900 M. Interest-bearing assets decreased by about SEK 250 M, while operating assets increased by about SEK 330 M.

Cash flow from operating activities amounted to SEK –305 M (446). Cash flow after net investments amounted to SEK –590 M (48). Net debt increased by SEK 1,253 M during the year, amounting to SEK 1,222 M at year-end.

Equity amounted to SEK 1,507 M (1,684). Equity was affected during the quarter by a cash dividend to the shareholders of SEK 172 M and a buy-back of own shares amounting to SEK 115 M. The proposed dividend of SEK 8.00 per share makes use of SEK 164 M of equity.

The equity/assets ratio amounted to 21 per cent (28) 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 3,536 (3,063), of whom 2,287 (1,852) work in Sweden. The number of employees at 31 December 2007 was 3,961 (3,458).

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 2007 has decided on the following guidelines for compensation.

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 proportions of basic salary and variable salary should be commensurate with the individual’s powers and responsibilities. The Managing Director’s variable remuneration should not exceed 53 per cent of his basic salary. The variable remuneration of other senior officers should not exceed 26–41 per cent of their basic salary. The variable remuneration is based on performance goals and individual goals.

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 2008 AGM that the above compensation principles should apply for 2008.

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, interest rates and fuel prices.

The positioning of Bilia as a service company stabilises earnings. The Service Business is less cyclical than the Car Business, since cars require service and repairs regardless of the state of the economy.

Increased competition

The EU’s former Block Exemption for the motor vehicle industry was abolished as of 30 September 2003, after a transition period of one year. On 1 October 2005, the so-called location clause that had enabled the manufacturers to decide where the distributors could be established was also abolished. The new rules influence competition conditions in the industry and enable the manufacturers to appoint additional distributors in the locations where Bilia is established. Given its size and strong position on the market, Bilia is confident that this will give the Group new opportunities to develop its operations. Bilia’s size will take on added importance, for example in connection with purchasing. Multi-brand capacity and having an own strong brand will also increase in importance.

Competitiveness of the products

Bilia is dependent on the ability of the Group’s business partners to develop competitive products. Bilia’s business partners have launched a number of new products in recent years. Volvo, the most important single business partner, will launch a new model in 2008, the XC60. Ford will launch a new Fiesta, a new Focus and a new model, the Kuga. BMW will launch five new models, including a new model, the X6, and a new car in the 7 series. Renault will launch seven new models, Hyundai will launch two new models, one of which is the new i10 green car, which is particularly important for the Stockholm market. This, together with other brands in the Group, means that Bilia has access to an attractive product range.

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.

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, 55 facilities are obligated to submit notification to the authorities due to petrol sales where no emissions may occur, 14 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.

Disclosure of acquisition, transfer and holding of own shares

During 2006, Bilia acquired 1,669,900 of its own shares for a total of SEK 164 M, equivalent to a shareholding of 7.2 per cent. Bilia’s own shareholding at the time of the AGM was 1,669,900 shares. The 2007 AGM decided to reduce the share capital by SEK 16,669,000 by withdrawal of 1,669,900 own shares.

The purpose of the reduction was to free restricted capital for the benefit of non-restricted funds. The reduction was implemented during the summer, leaving Bilia with no holding of its own shares.

The 2007 AGM also gave the Board of Directors a new authorisation to buy back no more than 10 per cent of the company’s own shares.

A new share buy-back programme was initiated in August 2007, and since then Bilia has acquired 1,000,000 for a total of SEK 115 M. Bilia’s holding of own shares as of 31 December 2007 amounted to 1,000,000 shares, 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 2007. In addition to the above meetings, the Board also met 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, property, acquisitions and follow-up of a dispute with the Swedish Competition Authority and Pacta.

During the year the Board decided to acquire Hans Persson, Bilgruppen and Bilforum.

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 50 M (loss: 60). Last year’s operating loss includes SEK 2 M in costs for disputes.

Future outlook

Bilia predicts that the total market in Sweden, Norway and Denmark during 2008 will decrease compared with the relatively high level in 2007. 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

Bilia sold a property in Västerås to Aspholmen Fastigheter AB. The capital gain after tax is estimated at about SEK 5 M and total assets are reduced by about SEK 50 M.

A judgement in the dispute between Bilia’s subsidiary Säfveån and Pacta was announced on 20 February 2008. The District Court of Gothenburg completely dismissed Pacta’s claim for damages against Säfveån. Säfveån was awarded compensation for litigation costs amounting to SEK 14 M.

Proposed treatment of unappropriated earnings

The Board of Directors proposes that the earnings available for distribution, SEK 886 M, be disposed of as follows:

SEK M  
Cash dividend, SEK 8.00 per share 164
To be carried forward 722
Total 886

Statement of Board of Directors regarding proposed distribution of profits

The Group’s equity has been calculated according to the accounting rules set forth in the International Financial Reporting Standards (IFRSs). The Parent Company’s equity has been calculated according to the Swedish Financial Accounting Standards Council’s recommendation RR 32:06, "Accounting for Legal Entities".

The proposed dividend consists of a cash dividend of SEK 8.00 per share, totalling SEK 164 M. The Group’s equity/assets ratio amounts to about 20 per cent after the proposed dividend totalling SEK 164 M.

The proposed cash dividend is consistent with Bilia’s dividend policy, which states that at least 50 per cent of the net profit for the year should be distributed to the shareholders, and that Bilia should have an optimal capital structure at any given time.

It is the judgment of the Board of Directors that the company’s and the Group’s equity after the proposed distribution of profits and shares will be sufficiently large in relation to the nature, scope and risks of the business and the terms of the lenders. The Board has also taken into account the Group’s history and investment plans and the general economic situation.

The financial statements were approved for publication by the Parent Company’s Board of Directors on 27 February 2008. For further details concerning the company’s results and financial position, please refer to the following financial statements with accompanying notes.