Inchcape plc

Good morning, everyone, and thank you for joining us for Inchcape's 2023 half-year results. I'm Duncan Tate, Group CEO, and I'm joined by our CFO, Adrian Lewis, and our Americas CEO, Romeo Lacerda. We'll run through our presentation and then take your questions. The presentation is available on our website, and a recording will follow later today. I will start with the key highlights of our first half year results. Inchcape produced another excellent performance, driven by acquisitions and strong organic revenue growth. Revenue grew 45% and PBT grew 35%. We saw substantial strategic progress, signing eight distribution deals and three acquisitions. This helped us to further consolidate our position as the global market leader and to drive continued diversification of our geographic footprint. We have been particularly pleased with DRCO, which has transformed our market position in the Americas and is already having a positive impact on the wider group by helping us deliver strategic benefits such as deepening relationships with our key OEM partners. As an example of this, we recently signed a global agreement with Great Wall Motors, a key OEM partner for Derco. We are on track with the integration of Derco. The business is performing in line with our expectations and we continue to expect to deliver on our cost synergy targets. Inchcape remains extremely well positioned for growth. Our business in the Americas is performing well and remains resilient. We are producing strong momentum across APAC, where we made strategic investments during the period. Our business in Europe also performed well in H1 2023, but consumer demand remains weak in a number of markets. On the outlook, against this backdrop and based on prevailing market conditions, we expect full year results for FY 2023 to be towards the top end of the range of published market consensus. This is an upgrade on our guidance from the Q1 trading update in April. Let's move on to look at the overall global macro environment. Global supply is improving, but the demand picture is mixed. starting with our major markets where we are not present. China remains a growing and competitive automotive market, with Chinese manufacturers increasingly looking for global market opportunities to drive growth. China is also leading the way globally on the manufacture of electric vehicles or EV, producing around 50% of the world's EVs and accounting for almost 70% of the world's battery capacity. Importantly, we have strong relationships with a range of Chinese OEMs to support them with their global EV ambitions. In the US, again where Inchcape is not present, supply is recovering and inventories have grown. However, consumer demand remains constrained. Now, looking at our regions, in the Americas, supply is normalising and we continue to see substantial long-term growth opportunities across our 12 markets. Supply has been improving in Europe, but consumer demand remains weak in a number of markets. And across APAC, we are seeing better supply and resilient consumer confidence. Now, here's our agenda for the day. Adrian will shortly take you through our results in detail, and then Romeo will provide an update on DERCO and our overall performance in the Americas. I'll then discuss our strategic progress, and after that, we'll take your questions. So, let's get going. Adrian, over to you.

Thank you, Duncan, and good morning, everyone. So let's start with the headline financials. During the period, we generated revenue of £5.6 billion, which is 45% above the prior year on a total revenue basis and 13% on an organic basis. Our operating margins were 5.8%, reflecting the strong revenue growth and our continued shift towards distribution. We had another impressive period of free cash flow generation, generating £202 million. Net debt increased to £564 million, resulting in a pro forma net debt to EBITDA ratio of 0.8 times. Adjusted EPS was 42.2 pence, up 21% on the prior year. And in line with the group's dividend policy, we announced an interim dividend per share of 9.6 pence, 28% up on the prior year. So overall, a robust set of results for the period, particularly given the macro context as articulated by Duncan. This slide shows the key lines of the income statement with comparisons against the full year and both halves of 2022. Organic growth of 13% was an outstanding performance and we benefited from a fast-growing distribution business. Supported by our strong top-line performance, operating margins were well ahead of historic levels and above both halves of 2022. Our improvement in operating profit resulted in an excellent PBT performance of £249 million. This slide shows distribution revenue performance split by region and emphasises our overall progression from both halves of last year. Our distribution business delivered an outstanding performance during the period, with revenue up 62% on a reported basis to £4.4 billion, reflecting the contribution of Derco. Organic growth in distribution was also strong, at 17%, with all regions growing at double digits. In the Americas, revenue grew by over 190% year on year, driven by Derco and an organic growth rate of 16%. With a highly diversified geographic footprint across the region, we delivered growth in 10 of our 12 markets. Our businesses in Peru, Bolivia, Uruguay, Ecuador, across Central America and the Caribbean all performed well. Industry volumes in Chile and Colombia were down significantly on the prior year, but our businesses in those markets remained resilient, with our market share growing in Chile and remaining stable in passenger vehicles in Colombia. We remain confident about our markets in the Americas over the medium term, given the high GDP growth prospects and low motorization rates. Europe and Africa also produced very strong results with organic revenue growth of 20% to 1.3 billion pounds. In Europe, accelerated supply helped to drive growth while new consumer demand was weak in a number of our markets. Our elevated order bank is moderating but will provide an underpin in the short term subject to the continuation of supply. And finally, we saw our business build momentum across the APAC region with robust organic growth of 15%. Our performance was supported by strong consumer demand across Asia, with particularly good performances from Brunei, Thailand and Indonesia. Hong Kong is showing signs of early market recovery, and we are building momentum and a strong order bank, while in Singapore, the market remains impacted by a low level of vehicle license availability. In Australasia, we delivered market share gains supported by an improving supply situation and a resilient consumer environment. During the first half, we agreed to acquire three businesses across APAC, all of which are expected to close during the second half of this year. These acquisitions are Mercedes-Benz Distribution Operations in Indonesia, CATS, a leading distributor of luxury vehicles in the Philippines, and the recently signed Great Lake Motors Distribution, which distributes SAKE EV brand Maxus in New Zealand. The strong top-line growth in distribution drove a 74% increase in operating profit to £302 million, with operating margins growing by 50 basis points to 6.8%, with excellent margin performances in each of our regions. In APAC, adjusted operating profit grew to £90 million, with stable operating margins of 7.1%. Looking ahead, we expect market-mixed tailwinds to be partially offset by our strategic investments in new businesses. We also delivered a strong margin performance across the board in the Americas. Adjusted operating profit grew to £143 million, including Derco, with adjusted operating margins of 7.5%, illustrating the strength of our business in the Americas, building on a broad range of brands and markets. Looking ahead in the Americas cost synergies realized from the Derco acquisition will help to support margins. Europe and Africa did a strong margin performance compared to previous periods due to the dynamics mentioned earlier in Europe, which drove elevated margins across the region of five and a half percent and adjusted operating profit up to 70 million pounds. Given the ongoing supply and demand trends in Europe, margins are expected to normalise over time towards the levels we saw in half two last year. Overall, we are very pleased with the performance of our distribution business. It validates our strategy to continue to increase our exposure to this attractive segment. Our retail business on slide 11 delivered organic growth of 4% to £1.2 billion and adjusted operating profit of £24 million, resulting in an adjusted operating margin of 2%. Volume growth in new vehicles was supported by improving vehicle supply and used car growth from our Bravo Auto business. At the start of the year in the UK, certain brands started to sell directly to consumers via dealer groups. And that means that Inchcape only recognises revenue as a handling fee and not the selling price of the vehicle. This change in operating model is not happening in our distribution markets where we decide on the most effective route to market. Excluding the impact of this agency model, organic growth would have been 17% and adjusted operating margins would have been 20 basis points lower. I'll remind you that in a half one 2022, we saw very strong trading and we are now lapping the peak of vehicle pricing growth. And looking ahead, our retail business is expected to remain resilient despite some of the market challenges. Now let's look further down the income statement. The group delivered operating profit of £327 million and I'll discuss net finance costs on the next slide. Adjusting items amounted to 45 million pounds, and as expected, this was driven by the Derco acquisition and integration costs of 21 million pounds. A non-cash, non-operational charge arising from hyperinflation accounting in Ethiopia of 14 million pounds, and the finance component of the deferred dividend in relation to Derco of 10 million pounds. The adjusted tax rate of 27% is in line with our guidance of 27 to 28%. And the group's adjusted EPS was 42.2 pence. On a reported basis, group PBT was 204 million pounds, which reflects the adjusting items I mentioned. And moving to our finance costs. Overall, net finance costs are in part linked to the interest rate environment, but also linked to our growth as a company. And with that in mind, I wanted to give you some granularity on the key elements of our net finance costs, which totaled £79 million for the period. This disclosure is a summarised version of notes four and five in the interim financial statements. First element is net interest of £36 million, which is directly linked to the cost of debt of the group, both our corporate debt and in half one, the acquired debt with Derco, which we have phased down during the course of the period. In June, we made public our investment grade credit rating and successfully issued our debut £350 million corporate bond to refinance the bridge facility. This move will bring more stability to this line, with 70% of our corporate debt now being fixed, and we expect the net interest number to moderate in the second half. The second element is leases and this was 10 million pounds and is the interest component of our property leases and linked to the physical infrastructure across the group and in line with IFRS 16. This figure will grow as we grow and expand this business. The costs associated with inventory financing were 21 million pounds and during the period. This is generally linked to floating rates and the scale of our business. As such, we expect this to increase as we grow the business and as we make further progress in aligning the commercial operating model with Derco. Importantly, this element is part of our operating model and will therefore be positively offset over time by a pass-through at gross margin level as we see these costs as part of the cost of a vehicle. And the final element is the £12 million of currency, fees and transitional costs. These are expected to remain relatively flat in the short term as we protect long-term shareholder value. We expect adjusted net interest expense to moderate in the second half, but with the full year outlook will be higher than our guidance in March due to the higher interest rate environment. However, today we have updated our PBT guidance, which is towards the top end of consensus and incorporates the above factors for the full year. The next slide covers our working capital performance during the period where we saw an improvement of £35 million, which was fundamentally driven by an excellent working capital performance in Derco. And as expected, this has been partially offset by a normalisation elsewhere in the group as supply has further eased. The big picture in respect of inventory is that the group now distributes some two and a half times the number of vehicles we were distributing in 2016. So clearly, inventory is going to be higher and will grow as we grow. In respect of DERCA, we have improved the working capital position in two ways. Firstly, we have reduced excess inventory by around 20%, and secondly, through the alignment of supplier terms with certain OEMs. And in the context of the market situation, a reduction in inventory is a pleasing outcome and will be further supported in half two as we benefit from a moderation to the quantity of inventory in the supply chain as a result of the steps we have taken in collaboration with our OEMs immediately post acquisition. Onto the alignment of supplier terms, these can take a number of forms, either directly from the manufacturers or through third party finance providers. These are common industry practices, and to that end, we are making steady progress and aligning Derco's supplier trading terms with the group during the first half. This was facilitated by our long-standing relationships with OEM partners, which has ensured forward-looking discussions in this area. And looking ahead, we continue to see our working capital opportunity at Derco, and we stand by the £200 million commitment by the end of this year. This will be driven by our continued progress in reducing Derco's inventory levels and the further alignment of supplier tabs. And we expect this to continue to be offset by further normalisation in the core Inchcape group, as we have seen in half one, as supply and inventory cover levels return to normal. The group produced another robust free cash flow performance during the period, highlighting the cash generative nature of our business model. Overall, we delivered free cash flows of just over £200 million, which is an operating profit conversion rate of 62%. Outside of free cash flow, we made payments relating to the pre-completion dividends of the Del Rio family and other minority shareholders of £212 million and ordinary dividend payments of £70 million. The main items in the other line is a mix of the cash associated with adjusting items, foreign exchange movements on cash balances and some purchases for our employee trust. As a result of these cash flows, net debt increased to £564 million, equating to group leverage of 0.8 times at the end of the period, and well within our one times leverage guide rail. We expect leverage to reduce by the end of the year, given our expectations for strong free cash flow in half two, but also considering the cash outflows relating to acquisitions announced to date and the remaining payment of the pre-completion dividend to the Del Rio family. As I mentioned earlier during the period, we issued our debut five-year bond and published our credit rating and as a result of which over 70% of our corporate debt is now at fixed rates. And in addition, we have lengthened the tenure of our debt profile with 490 million pounds of our debt maturing from 2027. And finally, from me, our capital allocation policy remains unchanged. Our first priority is to invest in this business. As a capital light business, our capex guidance remains at less than 1% of sales. And as you can see from our capital investment in the first half, we are tracking below this rate. The second priority is dividends, where our policy, which is formulaic, is to pay out 40% of basic EPS. And for the period, we have declared an interim dividend of 9.6 pence, which is 28% above the prior year. Our third priority is value accretive M&A, which remains a key feature of our policy and our strategy. And finally, after each of these three priorities, we consider the appropriateness of share buybacks. All of this is within our leverage ratio of one times. That is all from me. I will now hand over to Romeo.

Thank you, Adrian, and good morning, everyone. For those who don't know me, I joined the group 16 months before the completion of the DERCO deal, having held a number of global leadership positions at Mondelez International, the $100 billion multinational FMCG company. As CEO of our American region and being based in Santiago, Chile, I have overseen the integration of DERCO, which I'm pleased to say is going extremely well, as I will outline in the following slides. I wanted to remind you of our substantial progress in the Americas over the last few years. This has been a real journey for Inchcape, as we have diversified our footprint and brand portfolio and scaled our business. As a result, we have driven operational leverage and deepened our relationships with OEMs. We have grown from a business with revenues of 160 million pounds and two OEM brands in two markets in 2016, to an organization with nearly four billion pounds in revenues, working with roughly 40 OEM brands across 12 markets. Derco was obviously a significant driver here, but we have also made a number of other acquisitions in the region which have made substantial contributions, including Indomotora in 2016, Rudelman in 2018, and DTEK and Simpsons last year. So we have a successful track record of acquiring and integrating businesses, which has helped to drive our development across the region. Let's look at the outlook for the region and our market position. Overall, we are seeing strong economic growth and positive market conditions in the majority of the 12 markets in which we have a presence. For example, in Peru, where we have one of our largest businesses, the market is seeing high single-digit growth, while in the Caribbean and in Central America, the market is growing by strong double digits. In Chile and Colombia, two of our largest operations, market weakness continues in the short term. In the medium to long term, we remain very positive about the region's prospects. The long-term economic growth forecasts and the low motorization rates across the region support this view and validate our strategic rationale in growing our business across the region. Against this market background, our business remains highly resilient, supported by the diversified nature of our geographic and brand footprint. In addition, our long-standing relationships with a growing network of OEM partners ensures we continue to develop our already broad portfolio of compelling brands from premium to value products for the diverse and wide-ranging base of consumers in each market. The resilience of our performance is highlighted by the fact that we have gained share in many of our markets following the DERCO acquisition. This is even the case in Chile, despite the market weakness there, and it is a crucial performance metric for our EM partners. We are also extremely proud of Derco's overall operating performance as part of the group, in particular, the delivery of margins at the top end of our expectations. This highlights that we have experienced and talented people within the region who can manage margins appropriately, even as we integrate acquired businesses. In addition, we have worked very, very hard to deliver the working capital performance that Adrian just mentioned. In particular, the 20% reduction in excess inventory in the face of challenging markets. A large element here was the strong and trusted relationships we have with our OEM partners. I wanted to point out here that the whole industry has been very disciplined around inventory levels across the region. For example, in Chile, according to latest industry analysis, there is only an additional two weeks worth of stocks across the industry. This compares to two to three months of additional inventory, which is what would usually be seen during a market downturn. This shows that the industry is being very sensible about inventory levels. So I feel confident that we are not at risk of any significant industry oversupply issues. To sum up here, the integration of Derco is on track, and we are very pleased with progress to date. but there is a lot more to come. On this slide, you can see the four areas of strategic rationale we outlined last year when we announced the deal. I wanted to update you on our progress in each of these areas. Firstly, DERCO has significantly contributed to our top-line performance during the period, with 43% of our distribution revenues coming from the Americas, compared to 24% in the prior year period. We have already identified a number of achievable and sizable revenue synergies opportunities, which I will discuss shortly. Derko's margin contribution during the first half was in line with our expectations with successful delivery of operating margin at the top end of the 5% to 7% range of a typical distribution business, Press Synergist. We continue to expect Derko to be margin accretive to the group as we further scale the business and successfully deliver on our Synergist plan. To that end, we remain on track to deliver the majority of the cost synergies of at least 40 million pounds by the end of next year, with around 30% of these cost synergies to be delivered this year. As we said last year, one-time costs of 60 million pounds will be invested to drive these synergies. From a strategic perspective, Derco is a transformational acquisition for Inchcape. It has significantly increased our market leadership position in the Americas, broadened our geographic footprint, and is already helping to develop our OEM relationships in the region, as well as driving major strategic benefits globally. We expect DERCO to further accelerate the group's growth profile as we deliver more strategic benefits. as evidence of our increased clout in the Americas is the fact that we signed six additional contracts in the first half of 2023. Duncan is going to talk more about it later. Finally, we continue to expect that DERCO will be over 15% accretive to Inchcape's earnings per share, excluding implementation costs this year and over 20% accretive next year. and we remain on track to deliver a return on invested capital above our projected walk in 2025. This slide covers the progress we have made on integrating the acquisition. We have made excellent progress on all fronts. We have retained key personnel and have maintained consistent internal communication about the acquisition and our progress on it. This has ensured that everyone understands our objectives and they are clear on their roles and responsibilities as part of the combined group. Of our top two levels of senior management, comprising of around 100 people, only two people have left the business since last year. Fundamentally, the integration program has been enabled by a best-of-both approach across the group, and driven by our energized team working in close collaboration together as one combined group. We have successfully initiated the integration of the Inchcape technology stack, incorporating the group's tools and systems across the Derco business. This will be rolled out over the next two years as we take advantage of the combined scale of the group. We have also ensured that all our OEM partners remain supportive without any loss. Let's look at cost synergies in more detail. We are looking at three areas here, organization, operations, and technology. From an organizational perspective, we are driving significant efficiencies across the combined organization, including reducing the overall headcount in activities where inefficiencies and duplication were identified. We are also driving back-office efficiencies, including leveraging our global and regional platforms into DERCO. On operations, we have made great progress in rationalizing service contracts and consolidating our combined infrastructure. This includes looking at areas such as ocean freight, where we can use our combined scale to drive efficiencies and warehousing facilities, where we are merging our distribution centers to deliver cost savings. Finally, on technology, we have made good headway in harmonizing our systems and implementing best practices and processes. We expect to deliver substantial revenue synergies from the integration of Derco. We have already made excellent progress in this regard, with a number of distribution contract wins across the region, most of which would not have been possible without Derco as part of the group. For example, we have one Subaru, a long-standing Inchcape OEM partner in Bolivia, where we did not have presence prior to the Derco acquisition. Derco has also helped to extend our in-market footprint in certain markets, for example, by broadening our presence in southern and northern Chile, where Inchcape was previously not present. In distribution excellence, we are focused on mutually developing our OEM relationships, driving improvements with the deployment of DXP and DAP at Derco, and through implementing a market-leading approach to finance and insurance products for customers. To that end, we are leveraging our combined scale with finance brokers to achieve more beneficial rates. In VLS, we are also leveraging our combined scale to capture more of a vehicle's lifetime value. And by the end of the year, we'll have 12 Bravo Alto sites across the region, including Chile, Colombia, and Peru. While it is too early to externally quantify these revenue synergies, we are extremely excited about the growth potential that comes from being a larger combined group in the region. So just to sum up for me, Derco is positively transforming our business. It is further advancing our market leadership positions across the region as we work with more OEM brands in more markets. The business is already delivering margin enhancements and is creating substantial strategic benefits for the group. And it is driving substantial value for our shareholders. In short, Derko is an excellent business with extremely exciting growth prospects. That's all from me. I'll now hand over to Duncan.