Inchcape plc

Good morning everyone and thank you for joining us. I'm here with our CFO Adrian Lewis and our head of investor relations Rob Gerner. I'll give an overview of our strategic progress and operational performance in the quarter and then hand over to Adrian for more detail on the performance across the regions and the outlook which remains unchanged. We'll then take your questions. In a fast moving global automotive environment, Inchcape delivered a resilient performance in the third quarter with revenue growth of 2% in constant currency and we are reiterating our outlook for the year. This reflects the underlying strength, scale and diversification of our business as well as the consistently excellent operational execution by our teams. Our performance also highlights the ongoing strategic progress we have made with recently won distribution contracts supporting the top line performance amid a mixed market backdrop. This progress has continued in 2024 with nine distribution contracts won so far this year, including a further five in the second half. These included two in Australia, Deepal, a Chang'an brand and Photon, as well as three contracts in the Americas, Harley-Davidson in Chile, Peugeot in the Caribbean and Great Wall Motors in Colombia. With the disposal of our UK retail business during the period and a healthy pipeline of bolt-on acquisitions, Inchcape is well placed to further consolidate our position as the world's leading pure play automotive distributor by leveraging our differentiated technology capabilities to support our OEM partners, by continuing to build market share in existing markets, by expanding into new markets and by further developing our OEM partner portfolio. With that, I'll now hand over to Adrian. Thank

you, Duncan, and good morning, everyone. During the period, the group generated £2.2 billion of revenue, up 2% in constant currency, with organic revenue down 1% and a 3% contribution from acquisitions. With translational currency headwinds of 7%, reported revenue was down 5%. Looking at the key trends across our regions, in the Americas, we continued to see markets like Chile and Colombia stabilising. This helped to deliver an improved organic revenue performance in the quarter compared to the first half. In APAC, there were some strong performances in certain markets, in particular Singapore, where we are seeing growth in line with the market, Hong Kong, where we achieved market share gains and a contribution from our acquisitions. However, we saw some market headwinds more recently in Australia, where consumer confidence has weakened. Europe performs strongly, supported by a continuing order bank unwind in certain markets in Europe, including Greece. And we have now seen three consecutive quarters of new order growth in Europe, including Belgium, Romania and Bulgaria, partly from the performance of new contracts won in 2022. And this will help to offset the expected normalisation of growth in the region in the future. Africa, despite currency devaluation in Ethiopia, has seen a stable market and resilient revenues. Let me remind you that our balance sheet remains in good shape following disposal of our UK retail business for an equity value of £346 million in the quarter. And in addition, we maintain good discipline on working capital, which has seen our inventory fall below levels seen at the start of the year. We maintain a disciplined approach to capital allocation, and this is evidenced by the progress made with our £150 million share buyback programme initiated on the 31st of July. And we have already acquired around £83 million in shares, with the programme expected to complete during the first quarter of next year. Acquisitions are a critical part of our growth strategy, and we remain disciplined on valuation. And as Duncan has mentioned, we have a healthy pipeline of bolt on acquisitions. And finally, on to Outlook, we continue to expect to deliver moderated growth for the group for 2024 at constant currency, supported by our ongoing discipline on cost management. Reported profits for this year will be impacted by the translational foreign exchange headwinds during the second half of the year. In particular, the Ethiopian BIR has devalued by around 60% since the 28th of July, when the government unveiled its plan to transition to an exchange based currency regime. In 2023, our Ethiopian business was an immaterial contributor to growth for the group and a low single digit proportion of group PBT, which equated to approximately £23 million. And in considering the full year impact of the currency devaluation in that market, it is worth noting that in line with hyperinflation accounting principles, the income statement for Ethiopia is translated at the closing currency rate rather than the average rate across the period, as you would do under normal accounting principles. Turning to the medium term outlook for Inchcape, we remain confident about returning to higher levels of growth whilst driving returns for our shareholders. This will be driven by a highly cash generative earnings model, the continued diversification and scale of our business, further acquisitions and contract wins, supported by an anticipated recovery across a number of markets. So now let's take your questions and if you could limit your questions to two each please, that would be greatly appreciated. Sergey, over to you.

Thank you so much. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. If you wish to cancel your request, please press star two and please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Again, it is star one to ask a question. The first question comes from Akshad Mathur from JPMorgan. Please go ahead.

Good morning Duncan, Adrian from JPMorgan. I'll keep my questions to two. The first one on market sensibility activity. Could you just give us more details on dealer or website traffic trends and incoming orders across your key markets? I'm specifically interested in what you're seeing in Europe, Hong Kong and Australia please. The second one is on the cost saving initiative. In the release this morning you have specifically talked about ongoing cost action that were probably needed to meet your organic BBT guidance for 2024. Could you give us more colour on that or any specific initiative that you would like to call out like Delco? Would you extract more savings from Delco going into 2025? Thank you.

Good morning Akshad. Thank you very much for the questions. Maybe if I take one and Adrian you could take number two. So you called out three markets in particular which is Hong Kong, Singapore and Australia. Let's step through those. So we're performing well in Hong Kong and if I look at the year so far, the market was very buoyant in Q1 and has been a little quieter in the second and in fact the third quarter. The team is holding share. You know we've diversified our OEM portfolio in Hong Kong. Business is holding share. Teams doing a good job and I'll be with them in January to see how the second half went. In Singapore, look I have to reiterate Akshad, which is that market is definitely on the up cycle regarding the COE availability. We have probably four years of continued growth in that Singapore market. The team is holding share very nicely. We're getting our fair share of the upswing that's going on in Singapore and the new technology we've deployed with our digital experience platform and others is helping with that along with a good portfolio of commercial vehicles also. Then in Australia, look I think I would say we are following the market. Adrian mentioned earlier on that the third quarter in Australia we've seen consumer demand moderate. I would say we are following the market in Australia with order intake slightly down as you would expect in a market that has dropped. But then I would also remind you we have two great contract wins in the period, one with Photon, one with Deepal. You know we're about a three and a half percent market share player in Australia and we would hope those two contract wins over time would enable us to go beyond a five percent number as those contracts ramp. With that let me hand over to the second question to Adrian. Yeah,

thank you Duncan and thank you Akshaya. I'll take you back a little bit to what we said at the first half where you were seeing overhead ratios in proportion to sales fall, particularly in the Americas where the DERCO Synergy Program was beginning to support the earnings in that region. And I think what you should hear us say is that we've continued to do that. We're continuing to see our businesses manage their cost base appropriate to the markets that they operate in. I wouldn't call out one specific initiative. The biggest program we have across the group at the moment is the DERCO Synergy Program which is on track and supporting that region and supporting, will support margins in that region. So I think what you should hear us talk about and what you hear us talk about in the reiteration of our profit guidance is that we're continuing to manage that cost base. I'll say one other thing. Whilst we think about the cost base, the other thing to think about is our balance sheet. And from an inventory perspective, the teams are doing an outstanding job. Just making sure we've got the right level of inventory and we're continuing to see inventory lower at the moment versus where we saw it at the start of the year. So we're doing, I think the teams are doing a great job controlling across the various parts of the business.

Great, thank you.

Thank you, Akshay. Our next question comes from David from Deutsche Nübes. Please go ahead.

Thank you. Two from me as well. Firstly on the Americas, market data seems to suggest to me that Colombia and Chile are back to growth. Are there any regions in the Americas that concern you currently or could hold the business back into next year? That's question one. And then the second question, just on the healthy acquisition pipeline that you reference, just wondering if you can give any more color around that, i.e. the number of opportunities under consideration, how things are progressing through that funnel. I think you said at H1 that we shouldn't expect anything until early 2025, but an update there would be much appreciated.

Thanks. Very good. Thanks, David. I'll cover both of those if I may. So on the Americas, I think you are right. We've called out a stabilization of the major markets in the southern part of Latin America during this year. What you saw in the third quarter is Chile and Colombia return to growth. Let's not get too excited yet, but the indications from both those markets are good. And then Peru is still a little bit in the doldrums. Let's see where it gets to as we move into 2025. But Peru is not yet recovering, and it's a different situation from what we see in Chile and in Colombia. And just one point to note across that business, I'm really pleased with that America's team maintaining share. And you'll have noted a number of contract wins across that America's business, right from Caribbean and Central America through our Latin American operations. In terms of M&A, look, I think the statement says everything. We have a healthy pipeline of bolt-on acquisitions. If anything, since the last time we spoke at the interims, the pipeline has expanded. And I am visiting a number of those potential acquisitions over the next few months and stand by what we said before. You won't hear much from us this year, but as we move into 2025, we'd hope to tell you more about which acquisitions we have landed. And in terms of cash outflow, don't think about the early parts of next year. Think about that more towards the middle or the second half of the year in terms of cash outflow.

Thanks, that's useful.

Thanks, David. Our next question comes from Andy Grubbler from BNP Periva. Please go ahead.

Hi, good morning. Just one from me, if I may. You've talked about the nine contract wins you've had during the year. And there was some commentary about the Australian ones and the quantum of those. But in aggregate, how much could that add to revenues through time? So once those are up and more mature, kind of what level of revenues would you expect from those nine contract wins? Thank you.

Very good. Thank you, Adrian. This must be yours.

Thank you. Thank you, Andy. So, look, I think if we've, as you say, nine contract wins so far this year. And if you look more broadly over the last two years, we've signed over 20 contract wins. Each of them are going to be different in size and scale, but they all have an aspiration to achieve somewhere between one and five percent of their local market operations. These are the sorts of disclosures that we included in the driving seat webinar, which I think was on the 23rd of May. How much will they contribute over time? These will all get to maturity within the three to five year period. And we're starting to see that, actually, if you look at the some of the Belgium stats from a market share, you're starting to see the 2022 win of BYD really contribute to our share performance in aggregate in Belgium. We don't quantify them in totality. We're a business that operates across 40 markets with over 60 different OEMs. And our job is to manage that portfolio to deliver consistent and robust earnings momentum. And that's what you're seeing us do for this year.

Can I just follow up on that? Just going from Duncan's comments earlier about the two Australian, the two wins in Australia, taking you from three and a half to five percent market share in that market. Impassively, that's kind of a hundred and fifty million revenues. Is that about right? Thank you.

So both of those contract wins, I think, are really interesting. So let's just let's just because they're not brands that are perhaps well known to everyone. So Deepal, which is the EV, one of Changan's EV brands, will help us step into the emerging EV segment in Australia, which continues to run below 15 percent of the of the overall market. And then Photon, which is a light commercial vehicle and as it's locally known, the Ute product, which is a big segment that we currently don't play in. So those two brands really talk to our strategy of broadening our portfolio to achieve to attract and participate in segments that we don't currently participate in. So I think I think your your numbers are not not too far off. Each one of those will contribute to our aggregated market share. And Australia is a is a material market for us, as you know. So, yeah, I think you've articulated it pretty well.

Right. Thank you very much.

Thanks, Andy.

As a reminder to ask a question over the phone, please signal by pressing star one. You may also submit your questions on the webcast platform. Our next question comes from Sanjay Vidyarti from Panmur, Liberia. Please go ahead.

Morning. A couple for me. First on Europe. Just to clarify, it seems like that market is surprised on the upside relative to the guidance you've given earlier on in the year. But is that on an organic basis as well? I think you referenced some of the order intake has come from new contract wins. Would you say that on an organic basis, it's it's also surprising on the upside? And given your cautious guidance on it in the past, your your budgets have you actually got enough stock if those markets are surprising to the upside? And then second question is just on the smaller Asian markets. Can you give some color on how those are performing? Thanks.

Very good morning, Sanjay. Thank you very much. Edwin, do you want to take one and I'll do a little bit of two? Yeah, OK, sure.

So I think what we said about Europe, I think we have been positive. Europe has been trading positively. We've seen three consecutive quarters of order take growth in part. That is because of the contract wins that we've had. And I've mentioned Belgium and BYD, which has been performing very well for us. And I think we are and that that features within organic in relation to stock. Look, the fact that we have an order bank tells you we would we would like more stock in some of those markets. And if we had more stock, we could we could supply more sales. And that's what we've been working through with our partners over the last sort of 12 months or so. But I think the more meaningful thing we're trying to provide is that actually the underlying trends of consumer activity, particularly in those southern European regions, together with our strategy of broadening our right, our brand portfolio, is helping to deliver a performance that is slightly better than we perhaps originally anticipated. I think that's what that's what I'd say on Europe and Duncan on

Asia. Thanks very much, Edwin. So in terms of our smaller Asian markets, what we call our South Asia Pacific business, Sanjay, if I go through a few of those markets and the fact I spent a lot of time in Asia in September, Philippines, the acquisition we made in the third quarter of last of last year that continues to perform well for us. And we are, as you know, we mentioned we've launched Changan where we're redesigning the dealer network in country to enable Changan to get more market share, more work to do on that in Indonesia. So the acquisition we made of the Mercedes facility in the third quarter of of twenty three. I'm pleased with the way the team is managing that Mercedes business in country. And we, of course, are launching Great Walls products in the second half. And we're seeing decent traction with with Great Wall. I'll be back in January to see how the team how the team is is doing in detail. In fact, take our board with us for an overseas board visit to Indonesia and Guam Guam Guam Saipan business in terms of passenger car vehicle is a little muted at the minute. I'm very, very pleased with our acquisition. We made of the Morroco construction and machinery business is performing in those islands of Guam, Saipan and Tinian Islands. It's been a great acquisition for us. So that South Asia Pacific business is getting more and more important for the APAC business under Ruslan. OK, that's great. Thank you very much. Thank you, Sanjay.

Thank you. The beers there are currently no other questions in the phone queue. With this, I'd like to hand the call back over to Rob Turner for any webcast questions.

Thanks, Sergei. We've got three questions from Arthur Truslow at City, one on effects, one on Europe and one on working capital. The first is on effects. My understanding is that around 25 million of the effects impact is 15 million for Ethiopia and 10 million across other markets. Can you discuss what drives that additional 10 million from that broader effects impact? Second question on Europe. It looks like volumes have been very strong in Greece and robust in Belgium, Romania. The half year your guidance was that Europe margins should normalize to four to four and a half percent in the second half. How should we think about the likelihood this margin change will take a little bit longer to come down? And the third question on working capital. What do you what is your view on the working capital related cash flows this year? Should we see positive free cash flow?

Adrian, I think you've heard the jackpot.

All of those are for me. Absolutely. So let's take them one by one. So in terms of effects, you're right on the Ethiopian bear. Your your your interpretation of the words I used in the in the the presentation were correct in terms of the 10 million of other. We have operating businesses in multiple markets. As we know, we operate in nearly 30 or 39 or 40 markets. And each of those has obviously a different currency pair in aggregate, the pounds strengthening across US dollar across Australian dollar and across the basket of Latin American and South Asian currencies is the thing that has led to the additional 10 million of translational impacts. It is it is a long tail of small market movements rather than one specific one that I would want to call out. On Europe, from a margin perspective, that this is just a trade. This is only a trading update. So we're not guiding on fully air margins at a regional level at this stage. But the fact that we are reiterating our underlying performance and citing a stronger European business, as you say, Greece and Belgium are probably two of the highlights in that in that region. And the words we said around that will help us in the normalization process. We're seeing a strong Europe is performing well and we'll say more about that in our full year results. And from a working capital perspective and free cash flow that is associated to it, our guidance remains unchanged around 60 to 70 percent operating profit to free cash flow conversion rate. The teams have done a great job in managing inventory across the group. And in the context of the top line, so I think we're in we're in good shape, but the guidance remains unchanged in terms of free cash flow.

Very good. Thank you, Adrian. Thanks, Rob. So and thank you to everyone for joining us this morning. So to summarize, Inchcape continues to deliver and we reiterate our outlook for the year. We remain well placed to further consolidate our position as the world's leading pure play automotive distributor by leveraging our differentiated technology capabilities, by further building market share in existing markets, by expanding into new markets and by continuing to develop our OEM partner portfolio. As a result, we remain confident about the medium term outlook for the group. Finally, just a reminder, we will be hosting a hybrid in the driving seat event on Thursday, the 14th of November at 2 p.m. UK time to provide an update on our evolve strategy and an overview of our business in the APAC region. In the meantime, please feel free to get in touch with Rob if you want to follow up on anything we've discussed on today's call. Thank you for joining.