Inchcape plc

Good afternoon and welcome to the Inducate PLC investor presentation. Throughout this recorded meeting, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen. Just click Q&A, type your question, press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to the team at Inducate.

Good morning, everyone, and thank you for joining us. I'm Duncan Tate, Group CEO, and I'm joined by our Group CFO, Adrian Lewis. Here's our agenda for today. I'll give an overview of our interim results for 2024, and Adrian will then go into more detail on the financials, and I'll come back to discuss strategic progress and the outlook, 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 highlights of the first half of the year. The major news during the period was the divestment of our UK retail business to Group 1 for £346 million. I am very pleased the FCA approved the transaction yesterday evening, and as a result, the deal will complete on the 1st of August. This is a major strategic inflection point for Inchcape as we become a pure play operator in automotive distribution. Proceeds from the disposal will provide additional balance sheet capacity for us to invest in future growth, to support our capital allocation policy in the context of a healthy pipeline of bolt-on acquisitions. During the first half, we continue to execute against our strategic objectives, delivering a resilient operational and financial performance with 8% revenue growth in constant currency, 4% organic growth, PBT of £226 million and a reduction in leverage to 0.7 times. This performance is evidence of our diversified and scaled business, which helped us to win share in key markets across our regions. In addition, and taking into account our excellent free cash flow performance in the first half and the strength of our balance sheet, we are accelerating the timetable of our share buyback and increasing the amount from £100 million to £150 million. The share buyback will commence on the 1st of August 2024 and is expected to complete during Q1 2025. Looking ahead, in the near term, we are maintaining our expectations for moderated growth in 2024 at constant currency. And over the medium to long term, we expect to return to higher levels of growth. And this will be driven by recovery across a number of markets, the increasing contribution from recently won distribution contracts, bolt-on acquisitions, the development of our technology capabilities, and our continued focus on cost management. I joined Inchcape in 2020 and I'm even more excited today than I was four years ago about the potential for Inchcape in a fast-moving and dynamic industry. The business is in excellent shape and extremely well positioned for the future. Our success over the last four years owes much to the quality of our 18,000 highly talented people around the world. I'm on the road approximately one week in three, meeting our teams across the regions, and I'm always impressed by the enthusiasm, commitment and innovative mindset of our people. We have built a collaborative, entrepreneurial and high-performing culture that provides the bedrock from which we can deliver future success at Inchcape. This culture has also been the driver of our strategic transformation from a retail and distribution business to a pure play distribution company, as you can see from this slide. Since 2016, we have tripled the number of OEM partnerships and doubled the number of markets in which we operate. Our annualized distribution revenues have tripled, and we have more than doubled the new vehicle volumes we distribute. Our performance in the first half is evidence of the strength of being a pure play distribution business. With capex at less than 1% of revenue, return on capital employed of 28%, and free cash flow conversion of operating profit of 76%. We are already delivering in distribution. which is capital light, attracts higher margins, is more cash generative, and delivers higher returns than retail only. Let's now look at the macro backdrop and outlook across our regions. As you know, we are focused on small to medium sized, more complex, but attractive markets, which are higher GDP growth and have low motorization rates. In the Americas, industry volumes are at historic lows in a number of markets, driven by geopolitical and macroeconomic factors. We are seeing some key markets stabilizing, although it's too early to say whether this is the start of a recovery. Certain subregions, like Central America, have performed well. And overall for the Americas, we remain positive about the region's structural growth prospects over the medium to long term. In Europe, we are seeing some improvement in order intake in certain markets, although there is mixed demand outlook across the region, with Southern Europe remaining strong, with some markets in Northern Europe more challenging. Finally, in APAC, a growth engine for Inchcape with robust volume growth and a positive growth outlook in most markets. To highlight the quality and diversity of our business and its prospect in APAC, we will be holding an in-the-driving-seat seminar with a deep dive on the region in November. So overall, a positive growth outlook in our regions against a mixed set of trends. With that in context, I'll now hand over to Adrian to take you through the details of the financial results.

Thank you, Duncan, and good morning, everyone. With the disposal of the UK retail business expected to complete later this week, As Duncan mentioned, it has been treated as a discontinued operation, which means the 2023 comparators in the income statement have been restated to exclude the UK and we have provided in the appendix of today's presentation our income statement on a continuing operations basis for the full and half years of 2023 and a standalone balance sheet for the UK business and hopefully this will help to inform your modelling of the continuing operations of the group. So let's start with the headline financials and during the period we generated revenues of 4.7 billion pounds up eight percent in constant currency with organic growth of four percent and a contribution of four percent from acquisitions and this was partly offset by currency translation headwinds. Operating margins were 6.3%, reflecting organic revenue growth with some regional mix and price headwinds impacting gross margins, mostly offset by cost control driving operating leverage and adjusted PBT of £226 million, which on a constant currency basis was 7% above the prior year. We delivered another excellent period of free cash flow generation, producing £226 million, with a 76% operating profit to free cash flow conversion rate, and our return on capital employed was 28%. Net debt reduced to £524 million, driven by a strong working capital performance, and this resulted in a net debt to EBITDA ratio of 0.7 times. Adjusted EPS was 34.7 pence, and today we announced our interim dividend per share, 11.3 pence. And to remind you, this is set at one third of the 2023 full year dividend. And so in summary, our performance during the period is evidence of our strategic progress. The next slide shows the key drivers of our top line performance and we grew 8% in constant currency with 4% organic growth and a 4% benefit from the acquisitions we made in Asia Pacific last year. APAC delivered strong organic growth of 9% while Europe and Africa again outperformed the market with 18% organic growth. in the Americas revenue declined 9% organically with our volumes down 7% against the 9% fall in industry volumes in intercape markets. These growth drivers were offset by a 4% impact from translational currency headwinds driven by the strength of the pound. This slide shows our operating margin performance and operating margins were down 10 basis points in constant currency with overhead leverage offsetting gross margin pressure during the period. Gross margin pressure arose as a consequence of regional mix, a faster growing vehicle business, but also some pricing pressures in the Americas, which is a consequence of lower industry volumes. On overheads, we continue to be proactive on cost management, supported by DRCO cost synergies and more broadly in the Americas and across the group to drive operating leverage. So let's now look at our regional performance in APAC. Revenue grew 24% in constant currency, including organic revenue growth of 9%. And this was supported by market share gains in key markets and a contribution from acquisitions and with new brands in early stages of development. Operating profit was up 41% with operating margins up 90 basis points to 7.8%. And this was driven by operating leverage and the mix effect of faster growing, higher margin businesses. Looking ahead, we anticipate continued growth in many markets with margin growth expected to be partially offset by recently won distribution contracts, including Great Wall Motors in Indonesia and Changgan in the Philippines. Onto Europe and Africa next, where revenue grew 18% in constant currency. And this was driven by outperformance against the market in Europe, a continuation of order bank normalization, market share growth, and new contract wins growing quickly. Performance in Africa remained resilient. Operating profit was up 25% with continued elevated adjusted operating margins of 5.2% despite some dilution of accelerating contract winds. Looking ahead, growth is expected to be supported by some improvement in order take, which will partly offset the effect of order bank normalisation over the last 18 months, with operating margins in Europe expected to moderate towards historic levels. And now let's look at the Americas where revenue fell 9% in constant currencies. And the story for this region is that we are proactively managing the business in the context of lower industry volumes. Our market share across the region remained resilient with key markets stabilizing and Central America seeing growth. Industry volumes across the region were below last year by 9% and while our volumes fell 7%, demonstrating our outperformance. And we also saw a degree of pricing pressure as a number of key markets, which are at historical lows. Operating profit was down 24% with adjusted operating margins down 110 basis points from half 1.23, but broadly consistent with the half 2.23 run rate. Derco synergies and the wider cost programs have proved to be an underpin to operate in margin and has mostly mitigated the deleveraging effect of reduced volumes. Derco continues to be transformative for our business in the region, helping us scale across the Americas. And this is highlighted by three distribution contracts, one in the Americas in half 1.24. Looking ahead, we have prudent expectations for short term volume recovery, but margins are expected to improve in the second half, building on an improved margin exit rate at the end of half 1.24. This slide shows our income statement for the period. The group delivered operating profit of 299 million pounds and PBT was 226 million pounds, including a currency headwind during the half. Adjusting items amounted to £31 million, and this was primarily driven by acquisition and integration costs of £23 million, and non-cash, non-operational losses arising from hyperinflation accounting in Ethiopia of £8 million. And we also note that on the 28th of July, the Ethiopian government announced a change in the way that it manages its currency to an exchange-based regime. And as at the 30th of June, the net assets in our Ethiopian business was 155 million, including cash of 94 million. Ethiopia was an immaterial contributor to growth in the first half, both in constant and actual currency terms, and in absolute terms, a low single digit proportion of group profit. And we will continue to monitor the impact of this change, working with our local teams and banking partners. The effective tax rate increased to 32.7%, partly due to the impact of mix and a Pillar 2 tax cost. We expect our effective tax rate to decline over time with structural improvements following the UK disposal. We maintain a strong focus on cost management and we reduced overheads despite the increased scale of the business with a ratio of adjusted overheads as a percentage of revenue reducing to 10.9% from 11.4%. And now moving on to our finance costs. Overall net finance costs were slightly higher than the prior period, but lower sequentially. And while interest costs are partly linked, to the interest rate environment, they are also directly connected to our growth and success as a company. And our net finance costs total of £74 million for the period. The first element here is net interest of £34 million, which is directly linked to the cost of corporate facilities in the group, and in particular, our corporate debt. This element declined due to a reduction in average debt, which offset some short-term cash-funded inventory flows during the period. Looking ahead, net interest will reduce as the organic cash generating capability of the group and the proceeds from the UK retail disposal enables us to deleverage. And the second element of interest relates to leases, which is £9 million, and this is linked to our physical infrastructure and will grow as we grow and expand our business. The costs associated with inventory finance were £26 million during the period. We expect this to increase as we grow the business and as we align the commercial operating models of acquired businesses and will reduce if interest rates begin to fall. The final element is the £5 million of fees and FX costs which have been reducing as we drive structural efficiency. We produced another excellent free cash flow performance, highlighting the cash-generated nature of our business model, with adjusted free cash flow of £226 million, which is an operating profit conversion rate of 76%. This was supported by a strong working capital inflow of £82 million, driven by disciplined inventory management, particularly in the Americas. Inventory fell to £2 billion from the £2.7 billion at the end of 2023 due to an improvement in inventory efficiency across the group and the exclusion of UK retail inventory. And as a consequence of our strong free cash flow performance, net debt reduced from £601 million at the end of last year to £524 million, equating to leverage of 0.7 times. after dividend payments were made during the period of over £100 million. Looking ahead, we expect leverage to continue to reduce, supported by further strong underlying free cash flow performance and the cash to be received from the UK transaction. This provides us with the capacity to continue to follow our capital allocation policy, as you have seen today with the expansion and acceleration of our buyback programme. And this slide serves as a reminder to how we allocate capital in priority order, focused on organic investment, dividend payments of 40% of adjusted EPS and value accretive acquisitions with a healthy pipeline of Bolton acquisitions at the current time. The fourth element of our capital allocation policy is share buybacks. And taking into account the excellent underlying free cash flow performance in the first half of the year and the group's strong balance sheet, we are accelerating our share buyback and increasing the amount from £100 million to £150 million. And the buyback will commence on the 1st of August and is expected to complete during the first quarter of 2025. So you can see that our excellent free cash flow performance continues to support capital allocation. And that's all from me. I'll now hand back to Duncan.