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spk03: Greetings, everyone. Welcome to Kazoo's third quarter fiscal year 2022 earnings call. At this time, all participants are in listen-only mode. In question and answer session, we'll follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that today's conference is being recorded. At this time, I'll turn the conference over to Robert Berg, OBE founder and CEO. Mr. Berg, you may now begin.
spk06: Good morning, everyone. Thank you for joining today's call and webcast to discuss Kazoo's third quarter fiscal year 2022 results. You'll be able to find today's press release on our investor relations website at investors.kazoo.co.uk. We appreciate everyone joining us today. With me on the call is Alex Chesterman, Founder and Chief Executive Officer, Stephen Marana, Chief Financial Officer, and Paul Whitehead, 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 a 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'd like to start by discussing our Q3 performance, which despite the very tough macroeconomic backdrop, was an extremely positive quarter in all respects. And then I'll talk about how this performance leaves us firmly on track to reach profitability without the need for any further funding. I'll also spend some time discussing why we remain very confident about achieving our medium and long-term targets. Starting with the third quarter, I'm very proud of our performance during the period. Whilst the challenging macroeconomic backdrop for the UK consumer has impacted demand across most retail sectors and our competitors, with many businesses reporting declining demand and sales in recent months, we've bugged the trend and seen record demand with UK retail unit sales growing over 100% year-on-year to 18,889 units as consumers continue to embrace our offering. This led to record UK revenues of £347 million in Q3, up 103% year-on-year. As you can see from our growth rates, we're taking significant market share as our market-leading proposition continues to resonate strongly with consumers, and the shift to online car buying and selling accelerated. This has and will continue to allow us to grow strongly despite the tough macroeconomic conditions. In under three years since our launch, we've become one of the largest players in the UK used car market, having now sold almost 100,000 vehicles to consumers entirely online. Whilst we've accomplished an enormous amount in terms of our scale in a short period of time, our strong growth rate and market outperformance suggests that we're still just at the start of this exciting journey. Consumers are voting with their orders and their subsequent reviews that the way that we buy and sell cars is the future for the UK used car industry. We're more encouraged than ever about the future opportunity for Cazoo and our ability to capture a 5% or greater market share of the 100 billion pounds per year UK used car market. Whilst our growth and scale positions us as one of the fastest growing businesses in the UK, with revenues of well over a billion pounds in just our third year of operation, we continue to keep both eyes on the road to profitability. We remain laser focused on maintaining our strong balance sheet, and we had cash and self-funded inventory of over £450 million at the end of September, and have a clear plan to reach profitability without the requirement for any further external funding. In Q3, we made strong progress on our operating metrics, including our UK retail GPU, which was up 58% compared to Q2 22, at the same time as reducing our UK SG&A per retail unit by 30% versus Q2. On GPU, we continue to make good progress with a further £179 sequential quarterly improvement driven by continued efficiency gains across buying, reconditioning and ancillary products despite the inflationary pressures. As we constantly improve all elements of our operations, I want to call out the particular success we've had with our direct car buying channel, which now represents over 40% of our UK retail sales transactions and has allowed us to benefit from improved pricing and range. This highlights the strong platform and infrastructure we now have in place to buy cars directly from consumers at scale. We also continue to make good progress improving our reconditioning efficiency a particular note this quarter we made some changes to our reconditioning processes which allow us to lower the cost of vehicle whilst ensuring our customer proposition remains market leading we've also continued to scale our reconditioning capabilities to record levels allowing us to maintain strong inventory levels despite record sales additionally we've made further progress with our ancillary product sales. We launched monthly payment plans in Q3 where customers can now spread payments for our products over a longer period. Whilst it's still early days, we're very encouraged by the impact this is having on our attachment rates and GPU and expect further positive impacts from monthly payments and other ancillary product initiatives in the coming quarters. At the same time that our UK retail GPU is increasing steadily quarter on quarter, we've seen a material decrease in our UK SG&A cost per unit of over 30% in Q3, as our strong growth combined with our focus on cost control is starting to have a notable positive impact on our unit economics. Having successfully implemented our business realignment plan, we're starting to see the benefits and expect to see continued improvement through the remainder of this year and beyond. Our solid Q3 momentum and improvement in profitability comes despite the deteriorating macroeconomic climate. Whilst it's likely that headwinds such as supply chain issues and weaker consumer confidence have negatively impacted our results, our strong performance through this period only serves to show that consumers love our proposition which provides us with even more confidence on reaching our medium and long-term targets. As a reminder, we're addressing a massive market in the UK with around 8 million used car transactions and a value of over £100 billion annually. Digital penetration remains incredibly low and the market remains hugely fragmented, giving us the opportunity to build the leading brand in the sector. Much like we've seen year to date, we expect to continue to rapidly increase our market share towards 5% and beyond over time. As we've said previously, the UK market opportunity is so large that with just a 3% market share and a prudent 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-pound GPU, the opportunity is even more exciting. Before I hand over to Stephen, who will run through the details of our Q3 performance in a little more detail, I just want to discuss the strength of our balance sheet, which remains extremely robust with over 450 million pounds of cash and self-funded inventory at the end of September. We've taken decisive actions to increase our GPU and reduce our SCNA costs, and are focused on ensuring our business achieves profitability as soon as possible. Our business realignment plan announced in June, together with our decision in September to withdraw from mainland Europe, has ensured that we have a clear plan to reach profitability without requiring any further external funding. I'll now pass over to Stephen.
spk06: Thank you, Alex, and good morning, everyone. Before I go through the numbers, I just want to highlight that all the numbers we've discussed in our Q3 release and that I will discuss today relate solely to our UK segment, which as a result of the decision made during the quarter to withdraw from our EU operations will be how we report going forward. We will report our European segment as discontinued operations in the FY22 results. For reference, We have restated Q1 and Q2 this year, as well as Q3 2021, which is hopefully useful to be able to see the UK only trends. In Q3 2022, we achieved UK revenues of £347 million sterling, which were up 103% year on year. Growth was driven primarily by UK retail revenues, which increased over 118% year on year. driven by continued strong uptake of our proposition. During Q3, we saw 23,775 cars in the UK, representing 82% year-on-year growth, including 18,889 retail units, representing 100% year-on-year growth. This growth in retail units came despite the challenging macroeconomic climate, as we yet again continue to take significant market share testament to the strength of our offering. Moving to GPU, as Alex discussed, we've again seen a strong improvement in Q3. We grew by 58% or £179 from £309 in Q2 to £488 in Q3. This improvement came despite ongoing inflationary pressures and has been a result of our improved buying, reconditioning and product sales efficiencies, which we are confident will continue into Q4. As a reminder, Q3 2021 GPU was positively impacted by the strong price appreciation of used cars seen in that quarter. We were obviously operating the four European countries as normal until the 8th of September, and from that date began the close process, incurring some of the anticipated wind down costs this quarter. Going forward, we'd expect cash burn to be significantly lower as we stop all trading and investment activities in the four countries and complete the wind down process. The current boom rate of the UK was less than half of the overall cash burn. I'll now pass back to Alex, who will run through our current trading and outlook.
spk04: Thanks, Stephen. Despite the weak macroeconomic environment affecting growth amongst our peers and across all other retail sectors, we've maintained our very strong Q3 momentum into October where we expect to maintain our growth rate of over 100% year-on-year and to continue to increase our market share. We expect to see continued strong progress through the remainder of Q4 with UK retail unit sales growth continuing at over 100% year-on-year along with significant further improvements to our UK retail GPU as we continue to optimize our operations, increase the proportion of cars sourced directly from consumers, lower our reconditioning costs, and increase our financing and ancillary revenue streams. As I've said many times, but it's worth stressing again, we continue to expect to reach profitability without the need for any additional external funding. So in summary, against a very tough economic backdrop, We've had a very strong quarter of growth, achieving record sales levels, taking significant market share, and we've become one of the biggest players in the market, having sold almost 100,000 cars entirely online in less than three years since our launch. We've also shown further progress towards break-even, with a marked improvement in our unit economics in the period. We remain very well positioned and well funded, to capture the huge market opportunity and are delighted that we've maintained our strong Q3 momentum into October. We're incredibly excited about the future and extremely confident in our ability to reach our market share ambitions. I'll now pass the call back to the operator who will open up the line for Q&A. Thank you.
spk03: Ladies and gentlemen, we'll now start the question and answer session and open the call for questions. If you'd like to ask a question, please press star 1 from your telephone keypad and a 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 questions. Once again, that's star 1. Thank you. Thank you. And our first question comes from the line of Rajat Gupta. JP Morgan, please proceed with your question.
spk01: Hi, good morning, good afternoon. Thanks for taking the question. Maybe just to start off with just broader consumer health and just used car backdrop. Could you give us a sense of your expectation of the industry heading into the later part of the year and into early next year? You know, while Kazoo is starting off a small base and, you know, online penetration is still low and should be able to grow volumes in market share, even in declining market, just curious as to your expectations for the overall environment as new vehicle supply improves. But, you know, just the consumer backdrop probably, you know, takes a further step down before normalizing. So are you are you concerned at all about pricing power and just you know ability to hit? You know the 2023 GPU targets.
spk04: Thanks, and I will follow up Thanks good morning Roger so clearly the the UK consumer And beyond the UK is facing a challenging time we are very encouraged by the performance in Q3 and the performance so far into Q4, given the various challenges in the market. If you look at supply, there are supply challenges obviously driven by the knock-on effect of supply chain issues in the new car market, which have gone on for now well over two years and are affecting supply in the used car market. And of course, you've got demand challenges as a result of both elevated pricing, consumer confidence, inflationary pressures, et cetera. So despite all of that, we are growing very significantly, 100% year-on-year, 20% growth quarter-on-quarter. And this isn't a new phenomenon with the consumer. This has been going on for some months now. So we're already seeing that. We're seeing that in the behavior of consumers gravitating towards lower priced cars generally, less value. So the opportunity for us in the future in a normalized market with normalized supply, normalized demand, normalized pricing, the opportunity is very significant. And as we look into Q4 and beyond into next year, Our model and our budget takes account of the fact that things are unlikely to get better in the short term. In the medium to long term, we expect to perform significantly better than in this difficult market. But we still expect very significant growth in unit numbers and sequential improvements in GPU. despite those issues going on in the wider market.
spk01: Got it. And maybe on the SG&A target, you know, obviously we're still like a year away from the 1500 target, but if you could give us a little more detail around the progress you've made over the last couple months, you know, in terms of, you know, improving headcount leverage, you know, particularly from a driver and customer support headcount perspective. And then on advertising, are you seeing any drop-off in conversions or funnel metrics as you pull back on brand spend? And also curious if you could share any color and benefits of moving to a higher mix of performance marketing. Thanks.
spk04: Yeah, so the SG&A per unit target is one we're very confident in because in the simplest terms, if you think about SG&A per unit, If we simply double the volume of units, we halve the SG&A cost per unit. So we've seen a notable decrease over the last couple of quarters in SG&A per unit, down from fully loaded, including group costs, down from about 5,000 pounds to under 3,500 pounds in Q3. We see getting that to 1,500 pounds or less by the end of next year. as a result of a combination of things. Obviously the growth in the unit numbers, but also reduction in a number of costs. And obviously there are two actions we've taken in the last six months. There was the realignment plan towards the end of Q2, where actually a lot of those costs carried into Q3, because it takes some time for that to actually take effect. And then of course the withdrawal from Europe where still we have some of those loaded group costs, and that will continue into Q4. But as we go into Q1 next year, we see the full benefits of having completed and got all the costs from pre the realignment plan and all the European costs out of the system. And so we're very confident in our ability to continue to see that number decline.
spk01: Got it. Chris, thanks for the cover and a pass it on.
spk03: Thanks. Our next question comes from the line of Adam Berlin with UBS. Pleased to see you with your questions.
spk05: Yeah, hi. Just one question from me. Thanks for taking it. I just wanted to confirm, Stephen, that you said that the cash outflow in Q3, only half of that related to the UK business. So is the right math? I think cash position was 400 at the end of Q2. It's now 308. So there's 92 million cash outflow in Q3, of which the UK would just be half of that. So is that a good idea of what, you know, of what the rate cash outside should be?
spk06: I think when you look at, yeah, you're not a million miles away with that assumption yet. Looking at cash and cash equivalents in a way, it's dropped just over 110, I think, and the UK would have been half of that.
spk05: So on that basis, is the 12,000 units a month, 1,500 pound GPU still the right basis for breakeven?
spk06: I think all of that will be looked at over the coming months. Can we get there for less? How do we look at the SG&A line? How do we get more efficient and more effective? So I think that was the base assumption. Obviously, we'd like to hope that we can break even at either a lower volume or a lower GPU, but that means finding more efficient and effective ways. As Alex said, we've done a lot. We've built a big infrastructure now. um you know we've got the ccc's we've got the delivery processes in place we've built out the refurb centers so you know that the marginal costs on sales are significantly lower um but we haven't come back yet and changed on that yeah but the hope is that we can find faster ways of getting to break even all ways of getting there that don't need that kind of gpu
spk05: And maybe just one more question on the marketing side. I know in the plan there was talk of signing back the UK marketing spend a little bit to help you get down the SG&A per unit. Has that happened yet? Because it doesn't seem to be impacting unit growth. So is that still to come or actually still delivering the unit growth despite spending less on marketing?
spk04: A lot of that is still to come because as we start to unwind some of the brand spend and move more towards a balance of... of 50-50 performance brand next year and actually tilt more in favor of performance beyond that. So there's still some further benefit to come in there.
spk05: But you don't think that's going to slow down the growth rate as that brand spend comes off?
spk04: No. If anything, the opposite is true because brand spend, you're buying future. performance spend is more response based so it doesn't really have an impact and given the strong brand awareness we've already built up over the last three years it's unnecessary for us to continue to spend on brand at that rate so actually you're moving from a less efficient marketing pound in brand to more efficient in performance, so therefore you don't see an impact. If you massively reduced absolute spend, then that would impact volume. But if you're shifting from non-performers to performers, actually the opposite is true. You drive more volume.
spk05: So you're going to keep the absolute level of marketing spend broadly where it is. It's just a shift. There's not actually a cut in marketing spend that you need to do to
spk04: There may be a marginal reduction next year in overall spend because we don't need to continue spending the same level on brand, but we don't think it materially impacts volume. And if you look at our growth versus the overall market, the overall used car market in Q3 was probably down high single digits, low double digits, somewhere between 8% and 12% from various other parties who have reported, and we grew 100% year on year. So we're taking very significant share. We will continue to grow. I don't think we'll grow at 100% year on year, but we will certainly continue to grow at over 50% year on year next year. That takes us to over 100,000 retail units in the UK next year. Makes us one of the two or three biggest players in the market. And as we highlight it, I think it's important to remember this is our third year. We haven't reached even our three-year anniversary yet. So the scale of the brand and the infrastructure and the volume that we're delivering I think is important. And to be able to grow at those sorts of rates, not off a low base. If you look at our unit volumes this year, 65,000 to 70,000 units, that's not a low base. That is a top three player in the UK base. And to continue to grow at those levels off that.
spk05: Thanks so much. Really helpful.
spk03: Our next question is from the line of Sam Saeed with Barenburg. This is you with your question.
spk02: Hi there, thanks for taking my questions. I guess my first one is just related to something in the 6K. I think one of your stocking loans seems to have the interest rate of base rate plus 13.9%. I mean, should we just assume this is like a very small amount of your overall stocking loans, not representative at all of, you know, the past bulk of them? I guess my second question... Sorry, if you want to talk about that. OK, cool. My second one, could you maybe provide us an update on where your reconditioning per retail unit is right now, maybe relative to your longer term target? I think it was 600 pounds, the longer term target. And I might have another one after this, if you see.
spk04: Yeah, so on the stocking loans, that's an anomaly. And they're at materially lower rates than that. reconditioning costs we've seen very good progress over the last three or four months with changes to processes increased efficiency of sites changing shift patterns all sorts of things and of course because there is a delay from the time that you implement those things to cars being bought going through the system being sold actually some of those benefits that we've implemented over the last three months are starting to come through in the numbers now because you sell cars today that you bought a couple of months ago and reconditioned a month or so ago. So we are very encouraged by the continued improvements that we're making in that area and expect to see further improvements and that is one of the drivers of the further improvements we expect to see in GPU. If you look at our GPU throughout the course of this year, we have grown it by about 180 pounds per quarter from Q1 to Q2, Q2 to Q3. So broadly, a 60 pounds per month improvement in GPU throughout the entire year so far. And we expect that to continue in Q4, so we expect to see a further improvement of 150 to 200 pounds to GPU sequentially from Q3 to Q4, and some of that comes from the improved reconditioning efficiencies, but we still have further to go, and we'll start to see more of that again as we get into next year.
spk02: Got it. Thanks for that. And maybe just finally, so I think you mentioned that supply is gradually improving, but clearly the demand environment isn't improving, maybe getting incrementally worse. So when we're thinking about pricing for retail units for the remainder and maybe into the early half of next year, I think you've already saw 3% quarter to quarter declining Q3, when I think in the last call you said prices were going to remain flat from then onward. So should we kind of use a 3% as a good sort of run rate, quarter-quarter decline moving forward, or is it going to sort of remain flat from this level onwards? If anything on that would be quite helpful.
spk04: So supply is not improving. That's not something that we said. I think supply remains constrained, and until new car supply is back to previous levels and until used car pricing is back to, normalized levels. I think that will continue. Pricing is remaining relatively flat. You've got the push-pull of balancing out supply and demand issues there. So a shortage of supply is driving up pricing. Challenge demand is weighing on pricing and those two things sort of even each other out. So we see pricing as remaining relatively flat over the coming months, but that very much depends on what happens in the macro environment. It doesn't really make a huge difference to us from a GPU perspective. So I think whether pricing is sort of up or down 3%, doesn't make a material difference to our numbers.
spk02: Okay, thank you.
spk03: Thank you. As a reminder, if you'd like to ask a question, you may press star 1 from your telephone keypad. Our next question comes from the line of Catherine O'Neill with Citi. Please receive your question.
spk07: Great, thank you. Actually, I have a follow-up on the question you were just discussing about pricing um and i think you said pricing sort of broadly flat at the moment in the market um and you don't see anymore you don't expect it to impact gpu if it's sort of settled down three percent i just wondered if you could help us think about to what degree would pricing need to shift let's say if demand softens further until i start to improve that it would be more challenging for your gpu how how can you manage that um and then the second question i've got is on consensus for EBITDA for the year I think is looking for about minus 280 million. I just wondered if you're fairly comfortable with that number given the sort of run rate around savings in the UK.
spk04: So on pricing and its impact on GPU, because the wholesale market and the retail market pricing largely moves in tandem, there is a slight delay effect. If pricing moves one way or another because you're selling cars you bought between one and three months ago, there's a month-to-month impact potentially if pricing moves materially in either direction. But over one to two quarters, that impact smooths itself out and so doesn't really have a material impact on GPU. If you look at what happened last year, we saw significant appreciation on pricing in Q3, and then it sort of flattened out. But if you average the courses out, you take that pricing effect out of the number. So I think we don't expect a material change there. In terms of group adjusted EBITDA for the year, You know, we expect H2 to be significantly better than H1 because of some of the things related to the realignment plan and change the cost base. And the number you mentioned, I think, is for the alignment. Stephen might have time to add that.
spk06: Yeah, I mean, obviously, the EBITDA consensus is for the group, and we're going through a process now of closing down the group so there's UK only. The UK only will be lower than that. And then going forward, everything will just be from a UK perspective once we ground Europe down.
spk07: Great, thank you.
spk03: Thank you. Our next question is a follow-up from the line of same side with Berenberg. Please proceed with your questions.
spk02: Yeah, sorry, just one other quick question on wholesale units. I think it's now 20% of the total UK unit mix. Is that sort of good percentage to think about moving forward?
spk04: I think so. Look, wholesale is not our core business and it's somewhat a byproduct of the retail business. You end up with wholesale cars that you choose not to retail. So you bought them for a reason other than your core business. They either... they fall generally into one of two categories. You thought you were going to retail them and then you changed your mind for whatever reason. They're not what you thought they were. Or you bought them through your direct car buying channel because that's the service you're providing to consumers or through part exchange, which is a large driver of the wholesale business. So we're not trying to drive for maximum volume in the wholesale business. Those are cars that we sell. largely inherit through either part exchange or the car buying channel. But we expect that number to fluctuate between the sort of 20% to 30% range I think is a sensible place to look at it. And the drop in absolute volume is actually a positive for a couple of reasons. One, if you look year on year. we have greater reconditioning capabilities now and therefore are able to recondition and retail some of those cars, whereas at this time last year we were very constrained on reconditioning. We sent cars wholesale that we would have otherwise wanted to retail. And the other thing is we are getting much better from a data perspective and getting much better at being selective in the cars that we choose to buy from consumers. So we want to effectively, whether it's an auction process in a B2B context or if it's a you're buying directly from the consumer, which is an auction process in effect in a B2C context, we're being much more selective about what we choose to win versus trying to buy everything. So that absolute number is not a You know, it's a positive, if anything, because it reaffirms that we're buying only what we want to buy and we're able to recondition more than we were historically.
spk02: Great. Thank you. Thank you.
spk03: Ladies and gentlemen, this concludes today's call. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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