Inchcape plc

Good morning, everyone. Thank you for joining us for Inchcape's 2023 full year results. I'm Duncan Tate, Group CEO, and I'm joined by Adrian Lewis, our Group CFO. Here's our agenda for today. I'll give the headlines and our results. Adrian will go into more detail and I'll come back to discuss strategic progress. And after that, we'll take your questions. The presentation is available on our website and a recording of today's session will be available later today. I'll start with the key headlines on our results. We delivered another strong year of financial performance with double digit organic revenue and EPS growth. We made substantial strategic progress driven by Inchcape's ability to deliver for our OEM partners, particularly through our market leading capabilities in digital experience and data analytics. As we look ahead, while we expect moderated growth in the short term, we're confident about the medium to long term outlook for the group. Now, this slide outlines some of our headline KPIs with a strong performance on all fronts. I'll pick out a few key highlights. Group revenue was up 41% to £11.4 billion. Adjusted PBT was up 35% to £502 million. And EPS was up 18% to 84.8 pence. It was another year of strong free cash flow generation and high returns. which supported a total dividend per share of 33.9 pence, in line with our dividend policy, which targets a 40% annual payout ratio of adjusted EPS. We also delivered against our responsible business objectives during the year. On our people pillar, specifically on inclusion and diversity, the percentage of women in senior leadership at Inchcape increased from 28%, increased to 28%, up from 15% in 2020. On planet, we have now reduced our scope one and two emissions by 31% compared to our 2019 baseline. And finally on this slide, our reputation score, our metric for customer satisfaction, increased again to an all-time high of 702 and remains ahead of the industry average of 555. We achieved substantial strategic progress during the year, signing a record 15 distribution contracts as well as three acquisitions. This excellent progress helped us to drive market share gains and ensure continued diversification and scale across our geographic footprint. The integration of Derco is going well and we are delivering on every front. We are delivering some initial revenue synergies with cost synergies ahead of plan, solid margins and a successful reduction of excess inventory. So as a result of our strategic progress, the excellent performance in DRCO and our strong operational performance in 2023, Inchcape remains well positioned for growth. Which brings me to our outlook. We expect 2024 to be another year of growth. albeit moderated. We have prudent expectations for recovery this year in certain markets, which are weaker than previous years. This moderated growth profile will be delivered by an even stronger focus on cost management. Many markets, particularly in the Americas, are expected to recover from what are anticipated to be historical lows in 2024. So beyond this year, we expect to return to higher levels of growth, We are optimistic about our medium to long-term growth, fundamentally driven by the structural characteristics of our markets, supported by further benefits from our stronger focus on costs. Our confidence for the future of Inchcape is based on our global market leadership, our highly cash-generative business model, our diversified geographic footprint and our digital-led approach. Growth will continue to be supported by acquisitions and contract wins. I'll now hand over to Adrian to take you through the details of the financial results. Adrian, over to you.

Thank you, Duncan, and good morning, everyone. So let's start with the headline financials. During the year, we generated revenue of £11.4 billion, which was 41% above the prior year on a total revenue basis and 12% higher on an organic basis. Organic growth in our distribution business was 16%, an outstanding performance, given the headwinds in some of our markets. Operating margins was 5.8% as we benefited from operating leverage and strong revenue growth. Resilient gross margins and the benefits of synergies in the Americas and adjusted PBT was up 35% to £502 million. we delivered another impressive year of free cashflow generation, producing 498 million pounds with a 74% operating profit to free cashflow conversion rate ahead of our midterm guidance of 60 to 70%. Net debt increased to 601 million pounds, resulting in a pro forma net debt to EBITDA ratio of 0.8 times within our self-imposed leverage limit of one times. Adjusted EPS was 84.8 pence, up 18% from the prior year. And today we have announced the total dividend per share of 33.9 pence, also up 18%. So overall, a strong set of results for the year, highlighting the quality and resilience of our business. This slide shows the key revenue drivers, key drivers of our top line performance last year. 2023 saw broad-based strong organic growth of 16% in our distribution business. All distribution regions saw double-digit organic growth. We saw resilient organic growth in our retail business of 3%, reflecting the changes in accounting recognition as we expected. The group then benefited from acquisitions, which added 28% to the group's revenue. This was mostly from Derco, which contributed over £2 billion of revenue and an excellent performance in the face of some market challenges. This slide shows our operating margin performance and the group delivered an impressive 70 basis points growth in adjusted operating margins, supported by an increase in our exposure towards the faster growing higher margin distribution business. Additionally, during the year we sold the property in Australia and as usual we treated this gain within our adjusted operating profit and it accounted for around 15 basis points of the margin growth. Margin performance in the retail business was down due to the fairly well publicized used car price compression seen in the UK market. So I'll now take you through each of the reporting segments, starting with the Americas to give you the highlights and a perspective on how we see the outlook. So this is the Americas, which represented a third of group revenue and 39% of our operating profit. America's revenue grew to just over £3.7 billion, with growth driven by the contribution from Derco, but also from good organic growth of 7%. I'd like to recognise the efforts of the teams in the Americas, where despite challenges in certain markets across the year, Exacerbated by further slowing in a number of markets in the latter part of the year, we continue to perform well and achieve market share gains. This emphasizes the benefit of our diversified business model with multiple brands in each market and a broad geographic footprint. In the context of the market environment, we are pleased with the adjusted operating profit performance, noting the year-over-year growth, which is mostly due to the contribution of DRCO. But I would like to specifically highlight the 7% operating margin, which given key territories such as Chile were towards the historical lows, is in line with our expectation. And this sets us up very well to benefit from scale as those markets return in time. And to that point, looking ahead, we have prudent expectations for short-term growth in the Americas, and our performance will be underpinned by cost reductions and increased synergies. We are confident about the prospects in the Americas over the medium to long term, given the region's strong structural growth drivers, characterized by high GDP growth and low motorization rates. And we will continue to benefit from our highly diversified geographic footprint and brand portfolio across the region. And onto APAC, which represents a quarter of the group's revenue, and we saw organic growth of 16% and 21% growth in total. This is an outstanding performance and reflects the continued focus of our management teams in driving our business forward in a fast-moving and diverse region. Markets that don't typically grab the headlines made a material contribution to growth, and particularly Guam and Brunei. In Hong Kong, where we saw the market show some signs of recovery, we delivered market share gains and gained traction in certain segments where our brands tend to perform better. In Singapore, vehicle license availability improved in the second half, but remains well below peak levels. And we are well set in Singapore to benefit from scale as the cycle shifts positively in the coming years. In Australasia, our strong performance was driven by market momentum and in new vehicle volumes and market share gains. And this was in part due to improved supply against a strong opening order bank. And during the third quarter, we made three bolt-on distribution acquisitions in Asia Pacific, in the Philippines, in Indonesia, and in New Zealand. These deals will add in aggregate circa 400 million in annualized revenue to the region. Adjusted operating profit rose to £235 million with adjusted operating margins of 8.3%. As I mentioned earlier, this included a property transaction which arose as a result of the reorganisation of our physical footprint in Melbourne and with the disposal of a large-scale flagship site in the centre of the city being replaced with smaller, more cost-effective retail facilities across the suburbs. And if you exclude the impact of the property gain, operating margin remains strong at 7.7% well ahead of the prior year. Looking ahead for APAC, we expect growth to continue in many markets with further contribution from acquisitions supported by medium to long-term structural growth across the region. And on this slide, you can see Europe and Africa, which represents 22% of group revenues. In this region, we also produced an excellent performance with organic growth of 21%. This was supported by accelerated supply against the strong order bank built up from previous years. And there were particularly strong performances from the more material businesses in the region, Benelux, Greece, Romania, all of which started the year with a higher than normal order bank and benefited from improved supply through the year. Africa continues to be an exciting long-term growth prospect and has performed well, supported by a resilient aftermarket. Adjusted operating profit grew to £132 million, with elevated levels of adjusted margin of 5.2% as a result of operating leverage. And looking ahead, new consumer demand remains muted in Europe. With the order bank mostly normalised, we expect margins to revert to historical norms. And on this slide, we see our retail business, which accounts for 6% of group operating profit, and it delivered a resilient performance. Organic revenue growth of 3% was despite weaker consumer demand and a challenging macro environment. Our performance was supported by new vehicle growth from a stronger fleet market and a robust after sales business. Adjusted operating profit declined to £40 million, resulting in an adjusted operating margin of 1.7%. And this largely reflects used car headwinds in the UK market, where we are both lapping tough comparisons and have seen price deflation. We expect the headwinds in used cars to continue in the short term, but our retail business is of a high quality and will remain resilient over the medium term. As previously announced, the group is reviewing our strategic options for the UK retail business and we will give a further update on this review as and when the process completes. On this slide, you can see our income statement for the year and the group delivered operating profit of £669 million during the year and I will provide more detail on net finance costs on the next slide. Adjusting items amounted to 89 million pounds, primarily driven by acquisition and integration costs of 50 million pounds, of which 35 million pounds are related to Derco. In addition, adjusting items include the finance component of the deferred dividend payment to Derco of 10 million pounds and non-cash, non-operational losses arising from the impact of hyperinflation accounting in Ethiopia of 29 million pounds. Adjusted tax rate of 27.9% is in line with our guidance of 27 to 28%, and the group's adjusted EPS was up 18% to 84.8 pence. And finally, on this slide, I wanted to touch on costs. As an organization, we have been very focused on maintaining an optimal cost base for the business. However, given the challenging circumstances and conditions in some of our markets, we are placing an even stronger focus on cost management, taking the necessary steps to ensure we have the appropriate overhead structure as we look to a more muted growth environment. And these will serve to deliver a more moderated short-term growth profile. moving on to our finance costs overall net finance costs increased versus 2022 as we transitioned from a group with net cash to a leveraged group at a time when interest rates around the world also increased so whilst interest costs are partly linked to the interest rate environment they are also directly to our directly connected to our growth and success as a company And here are the elements of our net finance costs, which, as I said, totaled £168 million for the year. The first element is net interest of £77 million, which is directly linked to the cost of corporate facilities in the group, and in particular our corporate debt, of which 70% is at fixed rates, excluding our RCF. And during the year, we published our investment-grade credit rating and issued our debut five-year bond, bringing further stability to our liquidity facilities and interest costs. In addition, we renewed and increased the size of our RCF to £900 million, in line with the scale of the group, and extended its term to 2028. Looking ahead, net interest will reduce over time as the natural cash generating capability of the group enables us to deleverage. And we expect this to be half too weighted due to the phasing of dividend payments. The second element of interest relates to leases, which is £22 million, and this is linked to our physical infrastructure across the group. And in line with IFRS 16, this figure will grow as we expand our business. The costs associated with inventory financing was £50 million during the year, and this is generally linked to both floating rates and the scale of our business. As such, we expect this to increase as we grow the business and as we align the commercial operating model of the newly acquired businesses, and will moderate if rates begin to fall. But importantly, this element is part of our operating model, and we should expect to see pass-through at the gross and operating margin level as part of our cost plus operating model. And the final element is £19 million of fees and some FX costs, and these costs are expected to remain relatively flat in the short term as we protect long-term value in our corporate structure. And on this slide, you can see our free cash flow generation and our net debt bridge. Net debt increased from £378 million in the prior period to £601 million, equating to 0.8 times leverage. And as I said earlier, within our self-imposed limit of one times. And just moving left to right, we produced excellent free cash flow performance, highlighting the cash generative nature of our business model with adjusted free cash flow of £498 million, which is an operating profit conversion rate of 74%. This was supported by a strong networking capital inflow of £155 million in the year. In part, this was from DRCO, where we saw £200 million reduction in inventory, which was achieved in the latter part of the year, but was partially offset, as expected, by the normalisation of working capital elsewhere in the group. Using that funds flow, we invested £506 million in growing the economic value of the group, which had two components. payments relating to the completion pre-completion dividends to the del rio family and other minority shareholders of 267 million pounds and 239 million pounds on the purchase and integration of other acquisitions mostly in asia pacific and in line with our capital allocation policy and dividend policy dividend payments were made during the year of 128 million pounds The main items in the other line primarily rates of purchase of shares for our employee trust and currency movements to leave closing debt at around 600 million pounds. Looking ahead on free cash flow, we reiterate our free cash flow conversion guidance of between 60 to 70%. And in respect of leverage, the near-term focus is to de-lever using the cash flows from the group to enhance the strength of an already strong balance sheet. And this will then underpin the continued application of our capital allocation policy. And I will say more on this in my final slide. But before I do that, I wanted to touch on the financial achievements within the DRCO and broader Americas business. We made excellent progress on integration with all OEM relationships maintained or expanded. Key personnel retained and our technology integration is providing us with good insights into the business. Duncan will go into more detail on the revenue synergy shortly. And during the year, we achieved accelerated cost synergies of £21 million, and we are pleased to announce that we now expect to deliver £10 million more annualized cost synergies of at least £50 million by the end of FY24. Our cost synergy program is focused on three areas, organization, operations, and technology. On organization, we are driving significant efficiencies across the combined group. On operations, we are rationalizing service contracts and consolidating our combined infrastructure and continue to see opportunity in this area. And on technology, we are harmonizing our front office systems, our digital customer experience, and implementing best practice and processes from around the Intucate group. One-time integration costs of £70 million will be invested in driving these cost synergies, of which £35 million was invested in 2023. These costs are now expected to be invested over three years as we focus on the short term on the digital customer experience for all of the brands and the operational infrastructure and take a little more time to tackle the very important back-office systems harmonisation. DERCO delivered operating margins towards the top of the 5% to 7% range for a typical distribution business, pre-synergies, and as per our guidance and the context of the markets, we are very pleased with this result. And I've already mentioned the successful working capital performance at DERCO, which is an excellent outcome and reflects very well on the team's proactive approach in moderating the quantity of inventory in the supply chain in collaboration with our OEM partners very early in the DERCO's improved working capital position was also supported by progress in aligning DERCO's supplier trading terms with how the group operates. And all of these impressive achievements were made in the context of a challenging environment in certain markets in the Americas. So overall, we are delighted with DERCO's financial performance and excited about what the future holds for the combined business. And finally, from me, our capital allocation policy, which remains unchanged. Our first priority is to invest in the business and drive organic growth. Our second priority is dividends, where our policy is to pay out 40% of basic EPS. And our third priority is value accretive M&A, which remains a key feature of our policy and our growth strategy. And finally, we consider the appropriateness of share buybacks. subject to the group's leverage limit. And in the short term, our priority is to focus on deleveraging to help provide the capacity for investment in growth. And that's all from me. I'll now hand back to Duncan.

Right. Thank you very much, Adrian. So first, I'd like to remind you why Inchcape is the independent go-to distributor for our OEM partners in our markets. Fundamentally, this is about our consistent performance as a key partner in the automotive distribution value chain. We help our OEM partners to reduce the cost of complexity in smaller and less accessible markets, which tend to have higher growth and lower motorization rates. Our distribution excellence approach is based on our specialist knowledge, robust practices framework, inventory management and channel management supported by global systems and processes, and we continue to lead the industry with the lowest carbon route to market. In practical terms, this means that in our markets we build brands and create and manage the digital and physical network, decide which vehicle models and parts to order, develop pricing structures and arrange importation. And this is underpinned by our digital and data analytics capabilities, which ensure our OEM partners can grow their market position with us. Evidence of our success as the leading global independent distributor in automotive is our long track record of achievement. Our longest OEM relationship currently standing at over 100 years. This is underpinned by a clear and comprehensive responsible business agenda, which is central to our future plans. Now, the next slide shows our success and momentum in building our distribution track record. supported by distribution contract wins and investment in acquisitions. On the left you can see that since 2016 we have increased the number of markets in which we operate from 29 to 41. And we now work with 60 OEMs from just 20 in 2016. The graph on the right hand side shows the annualized distribution revenue brought into the group via acquisition since 2016, with Derco having a particularly significant impact in recent years. We have included the years of initiation of both our Ignite and Accelerate strategies to help you understand the direction of travel, since these were important strategic inflection points. Our success and momentum in recent years has ensured that our profit exposure to distribution has increased from around 70% in 2016 to 94% in 2023. And this is important due to the relatively high return and cash generative dynamics and lower capital intensity of distribution compared to a retail-only model. Now, this slide looks at our commercial success in 2023 in more detail. We won a record 15 distribution contracts last year. And as you can see from this slide, we continue to build stronger partnerships with leading Chinese OEM partners, with a global strategic partnership with Great Wall Motors signed during the year. Inchcape is now the leading independent distributor of Chinese vehicles. with a particularly fast-growing presence in the Americas and APAC, where there is increasing demand for our Chinese OEM partners. Contract wins with existing OEMs included BYD Commercial in Singapore and Belux, Geely in Guatemala and El Salvador, Subaru in Bolivia and Ecuador, Mercedes-Benz in Honduras, Great Wall in Indonesia, and Chang'an in the Philippines, and across a number of markets in East Africa. Contract wins with new OEMs last year included Tata in Thailand and XCMG in Colombia and Peru. And already this year, we have won the likes of Ford in the Baltics, and we continue to build a good pipeline of distribution contract opportunities to support our growth. Now, our record of contract wins was partly a consequence of the acquisition of Derco. with 12 of the agreements we signed last year, either in the Americas with Derco OEMs, or with Derco OEMs in our other regions. In addition, thanks to Derco, we launched Inchcape OEMs into new markets for the group. For example, Subaru, a long-standing Inchcape partner into Bolivia, where we did not have a presence prior to the Derco acquisition. We're also focused on implementing a market-leading approach to financed insurance products for customers across the Americas region. And to that end, we are leveraging our combined scale to achieve more beneficial rates. We're excited about our potential to grow our market share and drive margins across the region as a combined group. And strategically, Derco is a transformational acquisition for Inchcape, which has already significantly increased our market leadership position in the Americas, broadened our geographic footprint, and developed our OEM relationships globally. In summary, Derco is an excellent business with exciting growth prospects, which is transforming Inchcape by enhancing our market leadership positions, delivering margin enhancements, creating substantial strategic benefits and driving value for our shareholders. Vehicle Lifecycle Services, or VLS, is strategically important to us, and we've been running a number of initiatives to unlock value in the subsequent phases of a vehicle's life. VLS drives enhancements to our core distribution business through capabilities which include our growing parts business through our digital parts platform, an OEM extended warranty programs, a used car channel for independent dealers, and further finance and insurance programs. Our digital parts platform in Australia continues to gain traction, and we are now scaling with 12 distributors and 410 after sales workshops using the platform. We're in discussions with several new OEMs who are interested in joining the platform. And additionally, the platform is now live with Toyota in Hong Kong, with further market launches planned in APAC this year. Over the last few years, we have built accretive used car operations such as that in Singapore. However, we are reducing the scale of Bravo Auto to its profitable core, particularly given our continued strategic focus on reducing our retail-only footprint. Our investment in Bravo Auto has remained disciplined, and in light of our review of strategic options for the UK retail business, we are re-evaluating our ambitions for Bravo Auto as part of VLS. I want to reiterate that VLS remains a strategic opportunity for the group, but particularly in light of reducing the scale of Bravo Auto to its profitable core, we are re-evaluating the phasing of our financial objectives for VLS. Now, digital and data remain our key differentiator, enabling us to drive more customers, improve efficiencies, and deliver further growth for our OEM partners. DXP is effectively a fully functional digital showroom and enables us to capture significant customer and vehicle data. Importantly, it's highly scalable across our markets. And to that end, we've continued to roll out an enhanced version of the platform. DXP increases our efficiency and effectiveness in sales and after sales and drives our reputation scores. In sales, DXP drives a 40% increase in salesperson productivity, and in after sales, it delivers a 20% increase in online bookings. DAP, which provides advanced analytics and machine learning, leverages our data and drives smarter, faster, and better business decisions. It uses predictive analytics to facilitate business intelligence, supported by a globally integrated data repository. By the end of 2023, we were running more than 250 machine learning algorithms and over 100 non-AI statistical forecast models across our markets. DAP powers our sales and operation planning and pricing tools, including parts and pricing optimisation. This enables our teams to forecast demand for parts and helps to manage inventory more effectively. This ensures we're more efficient and helps us to cut costs. For example, DAP has helped to reduce expensive air freight volumes of parts by 50% and drive a 30 to 40% reduction in age stock. These data points highlight the enabling power of our digital and data capabilities, which have been designed and developed in-house to support our OEM partners in gaining market share and driving growth. We continue to innovate our capabilities with ongoing development of a range of technology-based applications, and we'll test and develop these applications and handpick the ones that we can drive across our business. All of these elements continue to be supported by our specialists in our digital delivery centers in the Philippines and Colombia, where we now have over 1,400 people. So continued progress in digital and data to support our OEM partners with many more exciting opportunities ahead. Moving to responsible business, we continue to develop our approach through our Driving What Matters framework, which has been designed to bring Inchgate closer to our OEM partners and help us to recruit and engage and retain the best talent. Driving What Matters has four key focus areas, planet, people, places and practices, and we made excellent progress in each of these areas in 2023, and I'll pick out a few key highlights. On planet, we remain on track to meet our 2030 targets for Scope 1 and 2 CO2 emissions. On people, our inclusive leadership programme has successfully engaged over 650 leaders globally since 2021. And on places, we delivered over 30 programs in areas such as improving road safety and mobility for people with disabilities. And on practices, we continue to roll out an enhanced code of conduct across our business, including over 4,000 colleagues who have joined us via acquisitions. Now, finally, onto the Inchcape investment proposition. Inchcape is the global leader in automotive distribution. with a highly compelling offering for our OEM partners based on a differentiated, scaled and diversified business model, which is asset light and digitally enabled. With our ongoing investment in growth opportunities, in particular through organic investment and acquisitions, we'll continue to build on our long track record of delivering revenue and profit growth, high levels of returns and strong free cash flow generation. As evidence of this track record, we now have relationships with over 60 OEMs, and last year we delivered 74% free cash flow conversion and achieved a return on capital employed of 26%. Our investment case is underpinned by consistent execution against clear strategic objectives, combined with a disciplined approach to capital allocation. So to sum up, our excellent operational and financial performance in 2023, supported by continued strategic progress, further built on our strong track record. As we look ahead, we expect 2024 to be another year of growth, albeit moderated. And beyond this year, we expect to return to higher levels of growth driven by structural characteristics of our markets, supported by further benefits from our stronger focus on costs. We are confident in the medium to long-term outlook for Inchcape based upon our global market leadership, our highly cash-generated business model, our diversified geographic footprint, and our digital-led approach. Now, before we take your questions, I wanted to flag that we will be hosting an in the driving seat webinar on Thursday, the 23rd of May at 2 p.m. UK time. This will help build a deeper understanding of our commercial model in distribution. So let's take your questions, firstly from people here in the room, then from the phone lines, and finally on the webcast via our head of IR, Rob. Okay. Can we go to Andrew first? Krishma, he's right behind you.