Inchcape Plc Ord

Hello and welcome to the Inchcape 3rd Quarter 2021 Trading Update Analyst Conference Call. My name is Molly and I'll be your coordinator for today's event. Please note that this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question at any time. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Duncan Tate, to begin today's conference. Thank you.

Thanks very much, Molly. Good morning, everyone. Thank you for joining us. As usual, I'm joined on the call by our CFO, Heisbert de Zooten, and our Head of Investor Relations, Raghav Gupta. I'll begin by commenting on the group's performance before handing over to Heisbert to who will give you more details. We'll then be happy to take your questions. As mentioned in this morning's announcement, the Q3 results were ahead of our expectations, demonstrating the group's continued strong performance. Revenue increased 10% on an organic basis versus the same period last year. And compared to the third quarter of 2019, group revenue was 2% lower, a really pleasing performance in the context of the backdrop in our markets. While the pandemic continues to cause uncertainty, it had a relatively small impact on the group in Q3. As has been widely reported, supply constraints are continuing to impact the industry. This had a minimal impact on our top line in the first half, but it did start to impact our top line in Q3. To date, the volume loss has been offset by stronger margins for both new and used vehicles, helped by the current supply-demand imbalance. Let me now hand over to Heisbert, who will run you through the regions.

Thank you, Duncan, and good morning, everyone. In Q3, the group generated £1.9 billion of revenue. On an organic basis, revenue increased by 10%. versus the same period last year, and was 2% below Q3 2019. On the reported basis, revenue fell by 2% year over year. Aside from currency, the difference is explained by the impact of retail disposals over the past 12 months. Looking at our two segments, in distribution, the positive year-on-year growth continued, as we were supported by strong performance in the Americas and Africa, and Europe. As Duncan mentioned, the supply issues had a more pronounced impact, particularly towards the end of the quarter, which weighed on sales. Our performance in retail was extremely resilient given the backdrop of limited supply, with both used and after sales performing well. Let me now provide some color. Distribution overall delivered 20% higher organic sales versus the prior year, with the comparator impacted by COVID restrictions, but it was 5% below the equivalent period in 2019. Starting with Asia, where our sales declined versus the prior year, in Singapore, revenue was stable versus Q2, supported by after-sales and used. In Hong Kong, we delivered growth across all revenue streams, new, used and after sales. In Australasia, our volumes were adversely impacted by supply constraints and some localized pandemic-related restrictions. In Europe, all markets delivered organic growth above 19 levels, with lower vehicle availability impacting towards the end of the quarter. This was better than we had anticipated. The Americas region saw a good performance, with revenue above 19, supported by an improving top-line trend across new, used and after-sales. In Chile, Colombia, Costa Rica and Peru, revenues were above the Q2 level, with a strong uptick in new car volumes. Finally, our operations in Africa continue to perform well, supported by strong after-sales business. Moving to retail, revenue fell 2% year-over-year on organic basis, versus a high comparator as showrooms reopened as lockdowns eased in 2020. But it was nevertheless 5% above the equivalent period in 2019. This is a resilient performance in the context of supply constraints, which impacted our businesses in the UK. Revenue in Russia was above 19 levels after adjusting for its St. Petersburg disposal. And while new car volumes were weaker than in Q2, both markets were supported by a solid performance in both used and after sales. To summarize the quarter, our overall performance in Q3 has been better than expected, with revenues ahead of our forecast and stronger new and used vehicle margins. Let me now hand back to Duncan.

Thank you, Heisbeth. Before we open up for questions, let me sum up. We are pleased with how the group navigated the third quarter, with performance exceeding our expectations across all regions. We also continue to make good progress with our use of data and digital. Looking ahead, the group's strong performance to date, supported by robust margins... will underpin a profit before tax for FY21 of at least £290 million. Whilst the widely reported supply issues are not expected to improve until well into 2022, we are confident that margins will remain robust through this period, mitigating the likely impact on our top line. Looking beyond the near term, we are confident that the combination of our geographical exposure And our ambition for distribution leadership offers a compelling runway of growth in the mid and longer term. Our ambition is to become the undisputed distributor of choice for OEMs. We will achieve this by further strengthening our OEM relationships and with more emphasis on capturing the lifetime value of both customers and vehicles. We look forward to seeing you at our Capital Markets Day on the 17th of November 2021. when we'll go into the detail of our strategic priorities. Heisler and I are now happy to take your questions.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Please ensure that your line is unmuted locally. You'll then be advised when to ask your questions. The first question today comes from the line of Andrew Newsey calling from Peel Hunt. Please go ahead.

Yep. Good morning, everyone. Question for Duncan, please. I'm just curious whether, excuse me, whether you think these industry supply issues are likely to change the longer term behaviours of OEMs towards independent distributors? I mean, I'm also guessing, do we think or do you think you'll start to see an acceleration towards using independent distributors? And equally, do you think that could accelerate industry consolidation amongst the independent distributors? And I guess probably allied to that last point, you've often said it takes three to tango, but in terms of your M&A pipeline, Is there a difficulty in executing it because the OEMs are so tied up, obviously, with their own sort of internal issues around supply? Thank you.

Morning, Andrew. What a great set of questions. So to the first point around, do I think that it is the current supply situation that is causing OEMs to think more about consolidation in these lower volume, more complex markets that we specialize in? I think my view would be, I don't think it's that that's causing OEMs to think about consolidation. I think at the very top level, it is the amount of capital, the amount of intellectual capital required to make the shift to EV. And therefore, their focus on the very, and at the same time, the biggest market they have, think China, US, Germany, UK, it is that dynamic that is then accelerating the move towards using well-capitalized, professional distribution companies like Inchcape that are really investing in the future of the industry, and of course I would call out our investments in data, in digital, and those two digital delivery centers we've opened up in Latin America and in the Philippines. So I think it is that that's moving it. Now in terms of the, in terms of of pipeline. We said at the interim that we believe that our M&A pipeline was improving. We also said that the multiples and valuations were becoming more sensible, and I absolutely stand by that. We are certainly seeing more opportunities, and I would say that the OEMs are very supportive of us in this regard. I also like the fact that when we're talking to OEMs about our consolidation agenda, in these smaller, lower volume, more complex markets, we're also moving them on to our digital experience platform or omnichannel, underpinned by our digital analytics platform, which gives us the ability to drive really great performance in those smaller markets for our OEM partners. So, look, overall, just to sum up, I don't think it's a supply imbalance. I think it's a longer-term move in the industry which will drive consolidation. We're well-placed to do it. The OEMs are supportive. And I'm getting more and more pleased with our M&A pipeline, frankly.

Got it. Okay. Thank you very much. Thanks, Andrew.

Thank you. Before we move to the next question, please be reminded, if you would like to ask a question... please press star 1 on your telephone keypads. The next question comes from the line of Sam Bland calling from J.P. Morgan. Please go ahead.

Hiya, morning. Thanks for taking the questions. I've got two, please. The first one is on just trying to understand the improvement in the new and used car margins and sort of the cause of it. Is it kind of like a time lag effect where you bought stock at prices below two or three months ago and now vehicle prices have generally risen and so there's like this sort of timing effect and that's the cause of the strong margins or is it something else and the second question is are the distribution countries also seeing a step up in margins conscious those countries often have got a bit less used car business so that you see this margin progress both in retail countries and in distribution thank you

Thanks, Sam. Good morning. I'll hand it straight over to Heisler for both one and two.

Hi, Sam. So, look, the improvement in margins, basically, I think there's sort of a number of things going on. Firstly, we see after sales as a stabilizer helping us. Secondly, in terms of, let's say, top line, there is simply less discounting going on. And that goes for both our distribution markets, so it goes for both our new and our used cars, and both there for our distribution markets and our retail margins. So the less discounting is really the big driver in the whole supply-demand dynamic. In that sense, distribution markets, and I sort of half-answered it, are equally helped And you're right, there's less used in distribution markets than there is in our two retail markets. And just on that particular point, I would say that the used car margins are at unprecedented levels, frankly, in the retail margins, because the demand-supply dynamic is even more extreme in that regard.

And, Sam, just to add to that, I mean, I completely agree with what Heisbert said. We are, it may not be clear, but we're in Romania today, which is, you know, a really great market for us, very strong leadership team. You can see this in action about how the team is very actively managing margins, managing discount, and at the same time using, you know, analytics to understand what is really going on in the market and how we should behave. So, listen, I think the only thing I'd add, therefore, is our team is actively managing this situation in every last one of our markets. And just another comment on used. Of course, we are seeing a very unusual situation in a number of markets where you buy a used vehicle and it starts appreciating as opposed to starts depreciating. So we don't expect that to carry on, but I stand by everything Heisen said.

Okay, understood. And I should ask a follow-up if I can. Could we just have a comment specifically on Singapore? Obviously, that's quite an important country. I think COVID cases maybe have picked up a little bit. Just any comment on whether Singapore trading has been particularly impacted by recent increases in COVID cases and any restrictions there? Thank you.

Okay, sure. So we did in Q3, we've seen... By and large, by the way, as you know, the technology we've put in place and the processes and our people, we manage these lockdowns really well and we trade pretty well through them, frankly. We've had COVID issues in two countries of note, I guess, during the quarter. The Australian situation has been severe and I think our team there have done incredibly well manage the business during some very very severe lockdowns and I won't comment much further on that because I think that's in the press anyway about how severe the lockdowns have been in Australia and those markets are opening up now. Then to your point about Singapore, Singapore has had restrictions during the third quarter. They are starting to lift now and in fact Singapore has opened up travel channels now between Germany was in place and the UK now which I think shows you that we're beginning to see Singapore come out of it and their vaccination rate is improving. Things are getting pretty strong, as we can see in Australia. Now, has it impacted trading? Of course it will do a bit because people are very restricted in terms of their mobility when those two countries lock down. But now the vaccination programme is in place, we'd expect trading to normalise a little bit more than we saw during the COVID restrictions.

Okay, understood. Thank you very much.

Thanks.

Thank you. Before we move to the next question, please be reminded if you would like to ask a question, please press star one on your telephone keypads. The next question comes from the line of Michael Allen calling from Zeus Capital. Please go ahead.

Morning, gents. Two questions from me if I may. The first question is on How should we be thinking about net cash just given the stronger than expected margins? Should we let that flow through or is there any more working capital dynamics that we need to consider at the year end position? That's my first question. And then second question is on Australia. There's been some noises around the agency model in Australia with some brands and just whether you've got any comments on agency model and how it might be being executed by various brands in some of your markets. Thank you.

Great. Morning, Mike. I'll hand straight to Mr. de Zooten for question one and I'll follow up then on the question about Australia and agency.

Right, Mike, so in terms of net cash, I mean, this is a very cash-generative business, so better results are also resulting in better cash. I guess the bigger impact, if you like, that we could have seen on our cash flow this year would have been normalization of stock levels that I spoke about during the half that could potentially happen in 2021. I think clearly where we are now in the supply dynamics as described, we would not expect that. normalization to stock levels to happen in 21. That could happen in 22. So I would think about our cash performance in those terms. Thank you, Harry. Thank you.

So, Michael, let me cover the point you made about Australia and agency. So, yes, I've clearly seen the commentary that's come out of Australia. I won't comment on the specific OEMs but let me take a step back as to how we really think about this which is for me this is all about the transformation of the route to market with a view to make the consumer experience when people are buying vehicles and in the after sales phase and during use to make that experience just beautiful. That is what we are absolutely doing at Inchcape and that's what our our OEM partners are trusting us to do in those distribution markets. So that's the big game in town for us, is making that whole buying experience and after-sales experience simply beautiful for consumers. Because when we do that, we can see that from where we've deployed our DXP platform. And by the way, we're on track to deploy that into even more of our markets with more OEMs before the end of the year. We'll tell you more about the capital markets today. When we do that, we can see increases in net promoter scores for consumers, and at the same time, we can see that our leading financial metrics improve also. Now, the OEMs have a slightly different game, because they're more about managing margin in a market. Our big game is to really, really impress the OEMs with inch capes capability to drive performance in those distribution markets. And of course, whether we choose to... treat our independent dealers via an agency model or other models is down to inch cape in our distribution market. So that's what our OEMs trust us to do is to manage that route to market. And by the way, this is not an announcement for me to say we're moving to agency in our markets because the big game for us is all about consumer experience and driving performance for OEMs.

That's very clear. Thank you. Thank you both.

Yeah, thanks very much, Mike.

Thank you. We have a follow-up question from the line of Andrew Noosey from Peel Hint. Please go ahead.

Yeah, thanks. I'm just curious, when you speak to the guys on the ground, is there a feeling that the fact there is less discounting going on in the market because of the supply issues? Actually, there's an element of pent-up demand building. So actually, when we do start to see a normalization happening, of supply, hopefully at some point in FY22. Actually, there's going to be a strong demand backdrop behind it.

Now, Andrew, that is an excellent question. Not that the others weren't. So let's give you a sense, we'll give you a little bit more color then on what we're seeing on demand. And I should also balance it with what we're seeing on supply. So in many of our markets, If I look at our order bank, confirmed orders from customers, we have a strong order bank going into next year. So I would say that we are likely to see, from all the data we have, that demand next year will be pretty solid. And we can see then all sorts of on-the-ground data about order bank and other data we look at. So I do think demand is strong into next year. then we have to balance that against what we're seeing from supply. Now, Heisbert and I have been in the headquarters of our European OEMs over the last four weeks or so, and I've been speaking to the headquarter teams in our Japanese OEMs about what are they saying beyond their public statements, what are they seeing, so we can get some colour about how it affects Inchcape. We expect, you know... disrupted supply that we're seeing now to continue during Q4 and frankly into next year. Many of the OEMs are saying they don't expect supply to normalize. And by the way, I'm not sure we have a definition of what normalize means at the minute until midway through 2023. So what we expect in terms of supply next year, what the current data we have would be relatively, we'll see, Production volumes increase in the second half of 2022, and we expect real supply constraints to be in place, certainly as you go through Q4, Q1, Q2 of next year. But there are many opinions on the topic of supply, hence the reasons why we're being incredibly close to our OEM partners. Andrew, does that help a bit more than get anywhere near to answering your question?

No, that's useful. Your crystal ball is a little bit better than mine, Duncan.

Well, it's being polished a lot at the minute because we are in unusual times, Andrew, but I appreciate the question.

Got it. We have a further question from the line of Paul Rossington calling from HSBC. Please go ahead.

Good morning, gents. Well done on the update today. Just, again, thinking somewhat about the wider industry, can you comment at all, if the likes of Kazoo and these various online platforms specializing in used car sales are, if they are impacting your business at all, or how you might be able to take advantage of that trend as well. I know you talked about the launch of your used car platform in Greece, I think, with Toyota. So anything around that piece would be useful as a market dynamic or opportunity or otherwise. Thank you.

Very good. Thank you for your comments as well as your questions. Are we seeing any impact? If you think about our core business of being the world's undisputed leader of distribution in those lower volume, more complex markets, no, we're not seeing any impact at all from those models because of our relationships with our OEM partners. We'll give you a thorough update on how we see vehicle lifecycle services, of which a component, of course, is us exploiting the profit pools in used vehicles. We'll give you a thorough update about that at the Capital Markets Day. But just to your specific question about Greece, the Greece model we're pleased with, so is our OEM partner also in Greece. And we have, I think you may have seen the announcement, we've put a similar model to Greece in place now in Singapore, and we're looking at other Toyota markets in Europe to replicate the model that we saw in Greece. But the big reveal, I guess, as to where our vehicle lifecycle services propositions are and how we see them developing over time, we'll give you the capital markets there, if that's okay.

Understood. Thanks very much.

Thanks very much, Paul.

Thank you. We have no further questions coming through on the phone line, so I'd like to hand the call back over to your host for any concluding remarks.

Thanks very much, Molly. Thank you, everybody, for joining us today. Thanks for your questions. Thank you for your engagement to everyone who's been on the call. You've all hopefully received an invite to our Capital Markets Day, which we're holding in London on Wednesday, the 17th of November. We intend to share more detail on our strategy and on our exciting growth prospects. The team and I are looking forward to meeting as many of you there in person as possible. And as always, if you'd like a follow-up on anything, please do get in touch with Raghav. Thanks very much.

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