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spk07: Greetings and welcome to the GAZOO second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Robert Berg, Director of Investor Relations and Corporate Finance. Thank you. You may begin.
spk05: Good morning, everyone. Thank you for joining today's call and webcast to discuss our second quarter and first half fiscal year 2022 results. You'll be able to find today's press release and accompanying presentation on our investor relations website at investors.kazu.co.uk. We appreciate everyone joining us today. With me on the call is Alex Chesterman, Founder and Chief Executive Officer, Stephen Murana, Chief Financial Officer, and Paul Whitehead, our Chief Operating Officer. Before we get started, I would like to remind you of the company's safe harbor language, which I'm sure you're all familiar with. Management may make forward looking statements, including guidance and underlying assumptions. Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, please see the filings of Kazoo Group Limited with the SEC. Now, I'll hand over the call to Alex.
spk04: Thanks Rob. Good morning, everyone, and thank you for joining us today. I'm extremely proud of what we've accomplished so far in 2022 as we continue to transform the car buying and selling experience for consumers. Against the tough macroeconomic backdrop, and whilst many businesses across all retail sectors are witnessing declining demand, we continue to see record sales. It's becoming very clear that our market-leading brand and fully digital world-class proposition is continuing to resonate strongly with consumers and that the shift to online car buying and selling is accelerating. Whilst our growth remains very robust, we remain laser-focused on maintaining our strong balance sheet where we have cash of over 400 million pounds and self-financed inventory of over 175 million pounds. Our primary focus is on preserving cash and materially reducing the need for further external funding as we drive towards profitability. We've successfully implemented our recently announced business realignment plan, and we're starting to see the early benefits, which we expect to continue into H2 and beyond. Given our focus on cash preservation, we're also currently undertaking a full strategic review of our business in mainland Europe with a view to further reducing cash burn and reducing the requirement for any further external funding. Whilst we've accomplished an enormous amount in just two and a half years, we're still just at the start of this exciting journey. We're more encouraged than ever about the future opportunities for Kazoo and our ability to capture a 5% or greater market share of the huge addressable market that we operate in. Before we discuss recent trends, I'd just like to recap the significant progress we've made. We spoke about this in detail on our last call, so I'll just summarize the key points today. Since our launch, Kazoo has been one of the fastest growing businesses globally. I'm very proud of the world-class platform, team, brand, and infrastructure network that we've built. As you'll see on slide four, we've now sold over 80,000 cars to consumers, with over 30,000 of those in the first half of this year alone, making us one of the largest used car retailers in the UK. We've proven that we can buy and sell cars at significant scale with a market-leading consumer experience. Despite significantly growing our sales, we continue to source over 30% of our retail units directly from consumers, highlighting the infrastructure we now have in place to buy cars of scale whilst achieving exceptional consumer feedback. The strength of our brand and customer experience remains a key differentiator, and we now have over 80% national brand awareness across the U.K., We're also incredibly proud of the exceptional feedback that we continue to receive from our customers, giving us one of the highest feedback ratings globally in our sector. Looking specifically now at the most recent period, we continue to make strong progress. You can see on slide five that we achieved record revenues of £333 million in Q2, up 145% year-on-year. with retail unit sales of over 17,000, as we grew our market share significantly despite the macroeconomic backdrop. Whilst our growth remains very strong, we are laser-focused on preserving cash and materially reducing any need for further funding as we drive towards profitability, and I'll talk more about this shortly. We saw a very positive trajectory in our UK retail GPU in Q2, which was up notably by 150% compared to Q1 of this year. Despite our record sales, we've also grown our UK website inventory to record levels of over 7,500 cars, highlighting the progress we've made with our reconditioning capabilities, which, as you'll remember, was the key bottleneck for us at the back end of last year. In more recent weeks, I'm particularly pleased that despite the weak economic environment affecting growth in many other businesses and sectors, we've maintained our strong momentum in Q3 with record retail unit sales and revenues in July, whilst continuing to also grow our website inventory further. Whilst our growth remains strong, we are not immune to the rapidly shifting external factors in the global economy, which include deterioration in consumer confidence, volatility in the stock market, and the possibility of a recession in the coming months. And whilst we have a very strong balance sheet with over 575 million pounds of cash and self-financed inventory, we've already acted decisively to right-size the business to ensure that we are well positioned to achieve our long-term ambitions. Our business realignment plan focused on cash preservation, sustainable growth margins, and reduced SG&A costs, while still expecting to grow over 100% year-on-year in 2022. As I mentioned earlier, we're also now conducting a full strategic review of our business in mainland Europe. with the aim of further reducing our cash burn and ensuring that the company has an executable plan to reach cash flow break even without the need for any additional external funding. In times like these, businesses like ours need to be laser focused on what's most important. Our number one priority is to reach cash flow break even without the need for further capital and our realignment plan combined with our current review of our business in Europe, will be recognized significantly. On slide seven, you can see all the building plots that we've put in place to achieve success in our core market, the UK, which is by far the biggest used car market in Europe. We now have eight in-house reconditioning sites, which have increased their output significantly since the turn of the year. We operate 21 customer centers for collection, distribution, storage, and servicing, and have a fleet of around 250 delivery transporters. The investment we've made in our infrastructure will be pivotal to our ability to grow materially over the coming years. And as you can see on slide eight, we're addressing a massive market opportunity in the UK, which has a used car market of around 8 million transactions annually with a value of over 100 billion pounds. Digital penetration remains extremely low and the market remains hugely fragmented, giving us the opportunity to build the leading brand in the sector. Customers love our proposition and we expect to continue to rapidly increase our market share towards 5% and beyond over time. The UK market opportunity is so large that with just a low single-digit market share and a proven medium-term GPU target of £2,000, we would generate gross profits of close to half a billion pounds annually and meaningful free cash flows. With our long-term target of a 5% or greater market share and a £3,000 GPU, the growth opportunity is even more exciting. I'll now pass over to Stephen, who will run through the details of our Q2 and H1 performance and future guidance in more detail.
spk06: Thank you, Alex, and good morning, everyone. As you can see on slide nine, in Q2 2022, we achieved group revenues of £333 million, which were up 145% year-on-year. Growth was driven primarily by UK retail revenues, which increased over 140% year on year and supported by ancillary revenue sales. During Q2, we sold 23,955 cars, 124% year on year growth, including 17,033 retail units at 94% year on year growth. This growth in retail units came despite the challenging macroeconomic climate and implies that we continue to take significant market share testament to the strength of our proposition. Looking at slide 10, as we highlighted at the Q1 stage, we've seen a strong improvement in our GPU in Q2, as investments we made during the second half of 2021 work their way out of our numbers. We've started to see the benefit to our GPU, which grew by 150% from £124 in Q1 to £309 in Q2, and also the impact our reconditioning efficiency improvements have had on our sales. Our increased productivity has led to a material increase to our website inventory, which, as Alex said, is at record levels and has been a key driver of the sequential growth in our sales of 30% quarter-on-quarter. Turning to slide 11, we have no change in overall guidance, which was set at the time of our business realignment plan. We're targeting total retail sales of between 70,000 to 80,000 units for 2022, which, when combined with the ancillary sales and wholesale business, we believe should drive total revenues of between 1.4 to 1.5 billion, with year-on-year growth well over 100%. We continue to expect our UK retail GPU for 2022 to be in the region of £500 to £600, as we continue to build on the progress made in Q2. With regard to reconditioning, we continue to believe that between now and the end of the year, we can make hundreds of pounds of GPU savings, some of which have started to flow through in Q2, but expected to be more H2 weighted. In addition, as we've detailed in previous calls, we've already put in place further improvements, which we expect will also continue to drive GPU growth during the year, such as further optimizing our pricing decisions. increasing the proportion of cars sourced directly from consumers, and increasing finance and ancillary revenue streams. We've stated that we see a path to £2,000 retail GPU in the medium term, and we remain confident of reaching this level and beyond, given the building blocks we've put in place. Turning to slide 12, and as a reminder of what we're expecting for 2023, we're targeting the UK getting towards cash flow break-even by the end of the year, as we approach 12,000 monthly sales and a GPU of £1,500. We believe at these levels of sales, the reductions that we're making to our fixed cost base will mean that we reach cash flow break-even in the UK, and the required capital to get us to the position that our UK business will be self-funding. With regard to Europe, while the outcome of the strategic review of our business in mainland Europe has the potential to impact the contribution from those markets going forward. The aim of this review is to further reduce our cash burn and ensure that we have a plan which materially reduces the requirement for raising any additional external funding. Finally, I just wanted to take a moment to highlight our sound balance sheet. We have cash of over 400 million pounds at the end of June and cash financed inventory of over 175 million pounds. We're taking decisive action to improve our GPU and reduce our overall SG&A costs. We're focused on ensuring our business achieves break-even as soon as possible and that we can execute on our plans with a material reduction in any requirement for any additional external funding. Alex.
spk04: Thanks, Stephen. As you would all have seen in today's release, we've appointed Paul Wolfe as Chief Financial Officer who will join and succeed Stephen later this year. I'd like to thank Stephen for his significant contributions over the past two years and wish him all the best in the future. He'll be remaining with the business until Paul joins to ensure a smooth transition. So in summary, against a very tough macroeconomic backdrop, we've accomplished an incredible amount this year, continuing to grow strongly and achieving record sales levels. However, despite our strong growth, we remain very mindful of the challenging economic climate and remain laser focused on cash preservation and our path to profitability. We'll continue to be decisive to de-risk the company's path to break-even and execute with a material reduction in the need for further external funding. We believe that we remain very well positioned and well-funded to capture the huge market opportunity and are very pleased with both our performance year to date and our strong start to Q3. The addressable market is huge. We've put all the building blocks in place to continue to rapidly take share and reach our long-term ambitions. We've seen great momentum so far in 2022, which we expect to continue throughout the rest of the year and beyond. I will now pass the call back to the operator who will open the line up for Q&A. Thank you.
spk07: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Rajat Gupta with JPMorgan. Please proceed with your questions.
spk03: Great. Thanks for taking the questions, and best of luck. Maybe, you know, if we could start with like the strategic review options for Europe. What prompted this review in recent months, you know, since the plan was, since the new alignment plan was announced in June? Also, could you elaborate on the options you're exploring? And lastly, just for modeling purposes, could you confirm the current EBITDA loss run rate in Europe? I have it at roughly $30 to $35 million per quarter, but if you could confirm that, it would be helpful. Thanks.
spk04: Thanks. Good morning. This is Alex. I'll take those first and then see if Stephen wants to add anything. In terms of the strategic review... and what's changed since we announced the realignment plan. At that time, we stated very clearly that our overriding goal was to reduce our cash burn, but that we would need additional capital at some point to continue. We now believe that the single biggest priority is to ensure that we have a plan that does not involve further capital raising. And so we said at the time of the realignment plan that we would remain very fluid, look at what was going on in the market and take further decisive action if we needed to. So we don't know and I don't want to preempt what the outcome of the review will be. The range of options include everything from business as usual and doing nothing to to a smaller investment in those markets to withdrawing from some or both markets. We don't know where we'll end up. We expect the review to be completed relatively quickly over the course of the next few weeks and have something to announce in terms of the conclusion of that review in early September. In terms of EBITDA, and again, I'll let Stephen add to this, but about one-third of the EBITDA loss is attributable to Europe and in terms of the EBITDA balance between H1 and H2, we expect the EBITDA irrespective of the strategic review, we expect the EBITDA loss in H2 to be lower than H1 because obviously as a result of implementing the realignment plan at the back end of H1, we didn't see any of the benefits of that. which we will see as we get into H2O. Hopefully that answers the question, Stephen. Feel free to add.
spk06: Yeah, yeah. European EBITDA is roughly around 25 to 30 a quarter at the moment.
spk03: Got it. That's helpful. Just maybe one follow-up. It looks like your June volumes were roughly 6,000 units. You mentioned July was another strong month. So curious, like, in terms of portfolio guidance, is there still some conservatism baked in in terms of how the economy shapes up in the second half? Just curious as to, like, what's embedded in the guide versus, you know, what you're actually seeing on the ground in terms of demand. If you could just, like, help elaborate that a little bit, it would be helpful.
spk04: Yes, so as Stephen said, one of the key drivers has always been the availability of inventory, and we've made a lot of strides in improving inventory availability through improving our reconditioning, and we expect that to continue. Our run rate in June was strong. July, as we mentioned, we've had a very good start to Q3. July was a record in both retail units and in revenues, and in fact, going into August. We even saw a record day yesterday. So in terms of what we're seeing on the ground is very positive relative to what we're hearing from peers in our space and also other retail categories. So is there some conservatism in those numbers? I think we are being cautious based on the likely worsening macro environment in H2 that I think most people broadly agree that things are not going to get better and so there's an element of that and we stick by the numbers that we've provided.
spk06: It's pretty hard. It's a good question. It's hard to model in a way when you are predicting growth rates of 50% to 80% year on year in a market that's potentially in decline, 10% to 15% at the moment because of kind of economic challenges out there. So I think you're right, there's an element of conservatism, but it's hard to do. It's a bit unprecedented, the level of growth we're seeing compared to any other dealer out there.
spk03: Understood. Got it. Thanks for the call.
spk07: Thank you. Our next questions come from the line of David Reynolds with Davey. Please proceed with your questions.
spk01: Morning, team. Hey, I wonder if I could just ask one question, please. Clearly strong progress in the United Kingdom. I wonder perhaps if you could comment on how you see the competitive backdrop there, as obviously you continue to take market share. And then also, you know, whether you see a future for subscription-style products as the UK market evolves? Thank you.
spk04: Thanks, David. The competitive backdrop has not changed materially over the last few months. We've seen one pure play online player that was the number three player, Kazam, went out of business. The two pure play players remain us and Cinch, a number of players Traditional players are starting to offer more digital services, which we think is an endorsement of our business model, of course, and also helps familiarize the consumer with pure online buying. So the more people who start to offer our types of services, the more reinforcing it is and the more helpful. We continue to believe that online will go from its current 2% or 3% market share to 20% or 30% market share over the course of the next five years or so. We continue to believe that that will get split between pure play players and traditional players as it has in every other retail market. And that's why we are incredibly confident about our ability to get to a 5% or greater market share, because actually it doesn't require us putting anybody else out of business or fundamentally changing consumer behavior. When we talk about even in five years, 20% being online, that means 80% of people carry on doing exactly what they've been doing for the last 20, 30 years. So we think that online will continue to grow. And as Stephen said, you know, we're growing 100% plus year on year this year in a market that will be at best flat and probably down 10 to 15%. So what you're seeing is an acceleration in the shift to digital and it'll go from, you know, it'll be a steady climb from its current low single digit market share. On the second question, David, on subscription, as you know, we withdrew from that market because it was highly capital intensive. We always viewed it as niche. It remains very niche. I think there is a market for it. There will always be consumers who want to do short-term rentals, longer-term rentals, purchases, etc., but our core business and focus now, and again, in these type of economic climates where you are single-mindedly focused on past the profitability, proving the model, delivering the best consumer experience you can, then simplifying the business model, being the best at what we do, which is buying and selling cars directly online, means that that's a space that we're not going to play in for the foreseeable future. I think there will always be customers who want to do it, but it's relatively small in nature and it doesn't have a material impact on our numbers, whether we're in it or not.
spk01: That's great. Thanks, Alex.
spk07: Thank you. Our next question has come from the line of Syed with Barenburg. Please proceed with your questions.
spk02: Hi there. Thanks for taking my question. My first one's just on other revenue. On a per-retail unit basis, it looks to have fallen a fair bit sequentially from Q1. I was just wondering, is this, you know, the sort of impact on cost of living? Is this just, you know, different type of consumers buying your cars? Any color of that would be helpful. and maybe just somewhat related to that in terms of retail average selling price, that's also fallen, I believe, a fair bit sequentially from Q1. Is that due to your mix of Europe, lower-priced vehicles from there, or are you seeing consumers trading down quite significantly? And maybe just how we can expect that to progress over the rest of the year.
spk04: I'll take the second one, and then I'll throw the first one to Stephen. In terms of the average selling price, it's a factor of, mix that we're choosing to stock, looking at the overall market environment and the fact that consumers are feeling the pinch and are generally looking to save. We've shaped our inventory slightly differently combined with obviously consumers wanting to spend less and a bit of depreciation, price depreciation that we've seen in the market over the last So all three of those factors combined have led to that. I don't think we're expecting to see a material either decrease or increase in the average selling price over the rest of the year from where it was in Q2. In terms of the other revenue, I'll throw that to Stephen.
spk06: Yeah, the other revenues, no, that's really the mix. So we had a chunk of remarketing revenue in there, which was the B2B revenue we inherited. And as part of our plan, we transitioned away from that as the refurb centers focused more and more on doing our own work. So that was always planned and built in. That isn't consumer spend at all.
spk04: And I think I may be wrong, but there may also be an element of the fact that we turned off subscription, which... Mail may not be another revenue line. I don't have the numbers in front of me.
spk06: Yeah, that was just towards the end, so not really an impact. But going forward, obviously, subscription revenue, Alex is right, will lessen out of that. But now in terms of the ancillary products that we sell to customers as part of the car buying process, that remains very robust. We're very pleased with that.
spk02: And just maybe a quick follow-up. Could you provide an indication of what Europe's contribution was in your four-year guidance? and maybe its contribution in Q2 as well.
spk04: Europe accounts for less than 10% of unit sales and revenues in Q2 and for the rest of the year.
spk02: Thanks very much.
spk07: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. We did have some questions come in via the webcast. The next two questions are from Catherine O'Neill of Citi. Question one was, what were the main areas of cost inflation in 1H, and how do you expect this trend? How should we think about the facing of adjusted EBITDA losses this year, as it looks like there needs to be a material improvement in 2H to come in line with where the consensus is this year? And two, can you provide more detail on how you will deliver on $250 million plus cash a year, given the level of cash burns seen in the last quarter?
spk04: Yeah, so in terms of cost inflation, I think we're seeing it across the board in labor materials, and it was a dampener on GPU growth in Q2, despite the fact that GPU went up by 150%. I think absent inflation, we would have seen a greater number there, which we're obviously seeing as every other business is in all the same areas. So, you know, people paying parts, all of those type of things. In terms of the cash, if you look at the burn rate over the next six months, combined with the fact that we will We expect to reduce the amount of self-financed inventory, which currently sits at 177 million pounds. We expect to reduce that. Some of that will reduce naturally by being out of the subscription business because half of that is subscription cars. So as every car comes back because we don't have more going out, that adds to that. absolute cash number, together with increased finance facilities that we have. Plus, we also talked on our last call about the fact that we own some assets, property assets that we may look to do sale and leasebacks on, et cetera. So we continue to be comfortable with that number. That may change as a result of whatever the outcome of the strategic review in Europe is. But as of now, we're comfortable with that figure.
spk07: Thank you. And our next web questions come from the line of Adam Berlin with UBS. Question one is regarding mainland Europe strategic review. If you are unable to find a willing buyer, would you be willing to close European operations And what would be the cash cost of doing so? Number two, can you share UK retail GPU for July? Is it on track for the 500 to 600 target range?
spk04: Thanks, Adam. So in Europe, you know, we are, as I said, looking at a full range of options. The overriding aim of the review is to ensure that we reduce cash burn and that we have a plan for that materially reduces our need to raise further capital next year. So again, I don't want to jump the gun on what the outcome of that review would be. If we were to shut some markets, there would obviously be some costs associated with that, but they would obviously reduce be significantly lower than the investment that is required over the next 12 to 18 months in those markets. In terms of UK retail GPU for July, we're not sharing that figure at this stage, but Stephen reiterated that we are reaffirming our guidance of £500 to £600 for the year. at this stage. And we're seeing a lot of the initiatives that impact GPU are ones that take one or two quarters to actually come through. So what you saw at the beginning of this year in Q1 was an effect of things that had happened in Q3, Q4 last year. What we expect to see in Q3, Q4 this year are some of the benefits of the improvements we've we put in place. So we expect to continue to see a positive trajectory on GPU, and that's a significant focus.
spk07: Thank you. Now we will jump back to the phone lines. Our next question has come from the line of Sayem Saeed with Barenburg. Please proceed with your questions.
spk02: Hi, Em. Thanks. Just another quick follow-up on marketing sense. Can you maybe just disclose a bit on brand versus performance marketing during H1 and maybe how we expect to progress into H2 in 2023?
spk04: I'm not sure if we're sharing the specific split between brand and performance. I'll let Stephen tell us whether we are or aren't. But in terms of general trend from H1 into H2 and certainly into 2023, we should expect to see the balance shift much more in favor of performance. And if I think about a sort of more longer term, in 2021, we were at about two-thirds brand, one-third performance. I expect it to be the reverse in 2023 and sort of a progression between those two this year.
spk06: Yeah, yeah, we'd still be weighted more towards brand at the moment than performance. So we, you know, again, as we focus more on capital preservation, cash management, moving towards profitability, performance-based will become a significantly larger part of our ongoing spend.
spk02: Great. And maybe just in terms of cash, have you seen this decrease quite significantly in line with your expectations from the analyst presentation during the original SPAC presentation? Or is that sort of a different trajectory from that?
spk04: No, we are seeing a positive improvement in CAC as, obviously, unit volumes go up and as we reduce absolute spend on brands. So, in the U.K., CAC is improving.
spk02: Great. Thank you.
spk07: Thank you. There are no further questions at this time. I'd like to turn the call back over to management for any closing comments.
spk04: Thank you very much. I appreciate your time, everybody, and obviously happy to follow up as is Stephen and Rob with any further questions. Thank you for your time.
spk07: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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