Inchcape Plc Ord

Welcome to the Indicate PLC Q1 Trading Update conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star and 1 on your telephone. I must advise you that this conference is being recorded today on Thursday, the 28th of April, 2022. I'd now like to hand the conference over to your speaker today, Duncan Tate. Please go ahead.

Good morning, everyone, and thank you for joining us. As usual, I am 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, who will give more detail. We'll then be happy to take your questions. Let me first provide you with some details of the sale of our Russian operations, which we announced this morning. Following our decision to exit Russia, we work closely with our OEM partners and have now agreed the sale of our remaining business in Moscow to local management, led by the current CEO and CFO. Payment of the purchase price of 63 million pounds is deferred over a period of five years. And whilst we have no intention to re-enter the market, There is a mechanism in place which would enable Inchcape to benefit from an increase in value of the business over the next seven years in the event of an onward sale. I am pleased with how quickly our team has implemented the decision to exit Russia. Now let's move to our Q1 performance and I will also make some comments on our full year outlook. As mentioned in this morning's announcement, the group made a great start to 2022. with both distribution and retail delivering strong revenue growth and margins. Excluding Russia, revenue increased 13% on an organic basis versus the same period last year. Top-line momentum has continued to build from the fourth quarter of 2021, despite the continuing supply shortages. Our performance was supported by a combination of robust consumer demand and price-mixed tailwinds. order books in many markets continue to be at record levels. In vehicle lifecycle services, VLS, we also made good progress in Q1 with an encouraging performance of Bravo Auto in the UK and implementation progressing into Europe and Asia. In terms of inorganic growth, during the quarter we acquired DTEK. This gives us first-time distribution relationships with premium brands Porsche and Volvo in Chile, a market that we have successfully been operating in many years. It also further broadens our global distribution coverage for Jaguar Land Rover. The acquisition is a good example of the accelerate strategy in action, leveraging the combination of our leading global position and our digital and data capabilities to expand our footprint. We are excited about the growth prospect for Chile and the Americas region overall. With formal approvals now received, we also expect to complete the acquisition of Sensum Notas and ITC, which we announced in December last year, in the next few days. The group continues to see an attractive and healthy pipeline of inorganic opportunities of varying sizes, which we are actively pursuing across all our geographies. And now to the outlook. So far in 2022, we have experienced a continuation of the trends from last year, with demand ahead of supply and high margins. We expect this trend to continue, at least for the remainder of the year, based on our view of the strength of consumer demand in our markets and OEM production plans. Against this backdrop, the Group expects to deliver FY22 profit before tax of at least £300 million excluding any contribution from the Russian business. This represents an improvement of 25% on the prior year and is primarily driven by the further strengthening of our distribution business. Let me now hand over to Heisbert who will run through the regions.

Thank you Duncan and good morning everyone. Please note that all comments made on our Q1 performance exclude the contribution from the Russian business, which will be treated as a discontinued operation in 2022. In Q1, the group generated £1.8 billion of revenue. On an organic basis, revenue increased by 13% versus the same period last year. On a reported basis, revenue increased by 6% year over year. and currency had an adverse 3% impact. Looking at our two segments, in distribution, revenue was ahead of the prior year and above Q4 2021, with aftermarket sales continuing to support performance against the backdrop of low vehicle supply. The performance within the regions was broadly consistent with the second half of 2021, where we grew strongly in the Americas and in Europe. In retail, the strong year-on-year revenue growth can largely be attributed to the impact of pandemic-related restrictions in the UK on the first quarter of 2021 comparator. Let me now provide some further detail. Distribution overall delivered 11% higher organic sales versus the prior year. Starting with Asia and Singapore, New vehicle sales were as we expected below last year when we benefited from more availability of certificates, after sales revenue continued to grow. In Hong Kong, new vehicle sales were impacted by pandemic restrictions and supply, while we made encouraging progress on used cars. Our other markets in Asia performed strongly. In Australasia, whilst we have an exceptionally strong order book, supply constraints continue to impact volumes. Youth and aftermarket sales were robust. And in Europe, we continue to gain share across our key markets, driven by strong execution. And note, in Europe, the prior year was somewhat impacted by COVID restrictions. The Americas region saw a strong performance across all markets, driven by robust demand. And finally, our operations in Africa continued to perform well. Moving to retail, revenue grew 18% year-over-year on an organic basis. We saw good growth in the UK in both new and used vehicles compared to a pandemic-impacted Q1 2021. However, Record low supply continues to impact our business whilst the order book remains very strong. Note that post the sale of Russia, apart from a small retail business in Poland, the UK is now our only retail market. To summarise the quarter, our overall performance in Q1 has been strong and exceeded our expectations. Our globally diversified portfolio and the strengthening momentum of our distribution business underpin these results and our confidence in the outlook for the year as a whole. Let me now hand back to Duncan.

Thank you, Heisbert. Before we open up the questions, let me sum up. Inchcape has delivered a fantastic first quarter performance. The strength and visibility of our order book, combined with continued high levels of consumer demand across our market, and OEM production plans underpin our confidence that we will deliver a profit before tax of at least £300 million in 2022, up 25% on 2021. I'm also pleased with the speed at which we have been able to implement our decision to exit Russia and the support we have had from our OEM partners for the transaction we announced today. We have also made good progress with M&A, bringing on two new OEM partners in Porsche and Volvo, and adding JLR in Chile through the DTEK acquisition. Following completion, all three OEMs will shortly be on our digital experience platform. We continue to see a healthy pipeline of M&A opportunities across all distribution regions, and we are making excellent progress in other areas of our Accelerate strategy, notably VLS. As outlined at our CMD in November last year, I am really excited about the future. Inchcape is well positioned to deliver sustainable long-term value to a powerful combination of organic growth, market consolidation and cash generation. Heisbert and I are now happy to take your questions.

As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced If you wish to cancel your request, please press the hash key. Once again, to ask a question, please press star and 1 on your telephone keypad. Your first question comes from the line of Andrew Nassi from Peel Hunt.

Hi. Good morning, everyone. A couple of questions from me. First of all, I wonder if you just give a little bit more colour around margins, maybe relative to the fourth quarter of last year in in distribution. And I'm thinking particularly the ability to deploy those strategic and technology digital led actions that you highlighted at the Capital Markets Day, Duncan, but also just in terms of the ability to manage underlying cost inflation across the business. And the second question is in relation to Russia, just to be clear, up to the point of sale, you did expect or do expect the business to deliver a contribution, albeit it will be a discontinued activity.

Very good. Andrew, could you just give me a little bit more detail on the second question, please?

Yeah, I just wanted to be clear that up to the point of disposal of the Russian operations, that there will be a positive contribution to profit.

Very good. Okay, understood. So I'll take the first question and ask Heisler to take the second. So in terms of digital assets and what we're seeing, therefore, in terms of margins, so we continue to drive functionality into our digital experience platform and into our digital analytics platform. So we said at the Capital Markets Day we were at 17 or 18 markets. We ended the year at 27. We've continued to deploy markets in the first quarter of 2022. And we're continuing to add functionality also, Andrew. So if I give you an example, we've just been trialing a machine learning algorithm in one of our markets to determine pricing for vehicles and how we position them. That was in Chile, so that's a machine learning algorithm. It has inflation measures built into it. It looks at our competitors' pricing, and it comes out and automatically makes suggestions to the leadership team as to where we should position those vehicles from a pricing perspective. We also continue to deploy automation into our business to improve efficiency. And you know we've been setting up global centers to run a number of our back office functionalities and some of our commodity finance transaction processing. So I think the way I think of Intucate is we are deploying the right tooling to give great consumer experience. It's helping improve performance at the front end of our business. It's impressing OEMs. And at the same time, in our back office, we're driving efficiency through technology also. As ever, we have much more to do, but our capability through those two digital delivery centers we've built, it frankly impresses me more and more each time I talk to the team. We are, you know, we have said to you at the Capital Markets Day, we had approaching 500 people in those centers. There's now more like 600 people across those two centers. And our capability, as I said, is improving by the day. Heisler, did you want to add any more about margins versus Q4?

Yeah. So, Andrew, as we have been saying also in our statement, we see the trends that we saw in the second half in Q4 of demand being ahead of supply, supporting our margins. continuing very clearly into Q1, and we expect that trend to continue at least for the remainder of 2022. And this is due to the demand-supply dynamic that, frankly, is a bit different than we saw at year end. We now see a much slower recovery of supply versus earlier expectations. So we see some better supply in 2022, let me be clear about that. But more significant improvement is now only expected for next year, for 2023. And perhaps even more towards the second half of 2023. And normalization, if that exists, if you like, is perhaps even more 2024. So that demand-supply dynamic does support our margins. at least for the remainder of the year. And the margins in that sense compare to the margins that we did see in the second half of 2021.

Okay.

In terms of Russia accounting and Russia's remaining businesses accounted for as discontinued operations, I can confirm that there will be a small positive contribution from Russia before we will complete the sale in 2022. So no losses from Russia. In fact, in those circumstances, you can sort of understand it when there is a crisis, people flee into assets like us. Actually, we had quite a strong performance of the Russia business before we completed the sale.

Okay, great. Thank you very much.

Thanks, Andrew.

Your next question comes from the line of Georgios Plakoutas from Numis. Please ask your question.

Thanks morning team. One on Australia just so could you expand a little bit on the kind of supply constraints there. It looks like Subaru is slightly underperforming there so just interested for a little bit of additional colour and also whilst we're on Australia just an update on the Aussie dollar yen and the impact and the phasing through this year and perhaps next. And then you've kind of reiterated commentary on the M&A pipeline, but presumably other distributors are also kind of seeing these strong margins or confidence in these stronger margins persisting. So just kind of interested in if there's any change in the view on the multiples that you're potentially having to pay. And then thirdly was just on DITEC, if you could just give a little bit more color on how that deal came about in terms of OEMs, the kind of three parties tangoing.

Okay, so let's cover off Australia first. And good morning, Georgia. So in terms of Australia and supply, so in terms of market dynamic, Australia is very strong in terms of consumer demand. We have very high order books for the OEMs we represent in Australia, and you mentioned Subaru, and that's the case for Subaru. Supply is well below demand. And even though we are clearly getting some supply, I am absolutely not seeing our order book diminish. It's not like we're burning through our order book. The order book continues to grow. And frankly, in Australia, like a number of our markets, if we get more supply, we will absolutely get better performance. We continue to work really, really closely with all of our OEM partners through our S&OP process to make sure we are very aligned in terms of supply. And, you know, as ever with the Inchcape team and the entrepreneurs that run our markets, we fight for every vehicle we can to supply our customers. So our Australian team is doing a super job, not just on managing supply, but also in terms of deploying our digital assets. On FX, I'll ask Mr. De Zooten to give some insight.

Yeah, look, I mean, Australia... I mean, the first point to make on FX is when you think about interest rates, it's only translational exposure. All our markets manage their Forex exposure, the transactional exposure, and we adapt our prices as we see input costs varying as a result of Forex. And that is now also more the case in Australia, where initially there's now About three years ago, we perhaps didn't adapt our pricing when the currency worsened. So that's the holistic approach in Australia that we are taking. We are, by the way, well underway to get Australia back to more historic margins, more the 19 margins, as we have done a number of things in that market, including changing the management, portfolio changes, So that's the big picture in Australia which I think is the most important to bear in mind. Now clearly the short-term impact of Aussie dollar and yen is not unfavorable and we will therefore expect the move to the more historic 19 margins to be a little bit faster than perhaps previously anticipated.

Okay, very good. Let's move on to the, I think, the third part of your question, Woody, George, which is around M&A and multiples. So I have said in the release this morning that our pipeline for M&A across the three distribution regions is strong with deals of all sizes, from adding a few tens of millions of revenue per annum to much more than that. So we are actively pursuing it. You know we've built an M&A team per region, coordinated by a central team, and that pipeline is probably, I would say, the strongest I've seen it since I've been in the company. You are right, in some cases, we are competing against other distribution companies for those assets. I mean, as ever, in terms of setting Inchcape out to be the leading distribution company in the world, we are deploying our digital assets to impress OEMs to want to give us more volumes. You know, I mentioned to you not so long ago, we've taken Minion in Chile from a disappointing performance, as BMW would see it, with the previous distribution company. Under the Inchcape umbrella, within 12 months, we've moved them to number one segment share. So we will continue to deploy our digital assets and great people to impress OEMs. At the same time, convince the independents who really care about their businesses to that if you care about your business, you should sell it to the leader, and the leader and the winner is in shape. So that is my view, and it is based upon that reason why we refuse to overpay. Now, we have had some opportunities recently which we turned down as recently as two weeks ago when Heinsberg and I had an escalation on one particular deal where the partner wanted 15 times EBITDA, and that is way above what we are prepared to pay, so it's a very easy answer to say we are out. But we are not seeing a pattern of increased multiples being required by the sellers in any of our deals, frankly. But just to reassure you, we remain very, very disciplined, and we will absolutely continue to do that, despite the fact that we've said that this year we feel great about our financial performance. Now, just in terms of DTEK, which was the last question, so DTEK and Sebastian, who is the owner of DTEK, in fact, I'll have dinner with him on Sunday evening in Santiago with Heisbert. The three OEMs, we are delighted to have Porsche and Volvo on our OEM list. The first time we've had relationships with both of those companies. They will move straight on to DXP and DAP over the next few weeks. And we see opportunities with both those OEMs to take them into other markets. We just have to prove to that OEM that we can perform. The other thing that I'm pleased about with both Porsche and Volvo, as we set Inchcape up to be the go-to distribution company for introducing EV into developing markets, Of course, both Porsche and Volvo have very, very competitive and well-positioned EV products, and I think they're making all the right investments. So we're already selling EV products into Latin America. I think this positions us to be the leader in how we introduce EV into those markets. In terms of how long it took to get approval through, clearly it's the first time they have They have worked with Inchcape. Volvo approval came through pretty quick, and the process in Porsche was a little slower than that. It took three or four months to get approvals from Porsche, but delighted that we have a partnership with those winning OEMs.

Very clear. Thank you very much.

Did we answer your questions okay?

No, that's perfect. Enjoy Santiago.

Thank you.

Your next question comes from the line of James Aremba. Please ask your question.

Hi, good morning. Yeah, just one for me, please. So I'm hoping if you could talk a bit more about Bravo Auto now that it's been operational in the UK at least for a few months and what you've learned so far.

Morning, James. I knew at some point Bravo Auto would come up. So if I give you the headlines into how am I feeling about Bravo Auto and particularly around The commitment we made to the capital market today to increase used car volumes by 80,000 units per annum over the planning period that we gave you at the capital market today. So in summary, how do I feel? Really good about that number. What we've seen from the UK and our plans across the other markets, I feel really, really positive about it. The consumer proposition is working nicely. The execution and our learnings from the business are coming through. The business model still works. I want to remind everybody that we've built our Bravo Auto plan based upon pre-pandemic levels of margin, so not based upon the rather interesting levels of used car margins that the industry is currently seeing. In the first quarter this year, we further expanded capacity in the U.K., And you'll see us this year deploy further capacity across European business and into Asia Pacific. We are also building up our analytics capabilities. So we've moved that into our two digital delivery centers. We had initially in the trial of the pilots we were running in the UK. had all the analytics run locally. And over time, we're moving those into our two digital delivery centers as we build algorithms which will work in each of our markets around the world. So, net-net, I feel really positive about Bravo Auto and the commitments we made for Capital Market State. And we are on track, step-by-step, and it's a classic intricate business of being less capital-intensive, higher margins, high cash returns, We like what we're seeing. It's not perfect yet, but that's what you get when we're building out a business. But I'm really positive about the progress.

Just a follow-up, please. I guess in the UK, you are the touchpoint to the customer. I guess they're kind of dealing with your employees. I guess in some of your distribution markets, is that the same, or is it the case where actually someone using Grava also might be going through part of your retail network and I guess, you know, how that kind of controlling the customer experience is different perhaps or not.

So the model we're deploying, I mean, clearly we are leveraging distribution and retail assets to enable Bravo Auto to be successful in each of our markets. In terms of the way consumer experience works and what we see as we're looking to open up those markets in Europe and in Asia-Pacific, is the buying journey, the customer buying journey, is very consistent globally. So 94% of all consumers start their journey online. They then hit the dominant aggregator in a country. We're clearly watching very carefully as to how Google is working in this regard, because that could also be additive to our proposition. In Singapore, for instance, where we've been running some tests, 69% of consumers, which was exactly the number we gave you at the capital markets day, come through the dominant aggregator into our omni-channel. In the UK, we're seeing a number between 63% and 73%, depending on the day that we do our measurements about how the consumer journey works. So start online, move to the dominant aggregator, and then from the dominant aggregator, move into the Bravo Auto omni-channel, where then it is we build brands through experience rather than marketing. In terms of cost per lead, James, we're seeing it being very consistent with what we've said before, an average of £65 per lead, whether that happens to be via an aggregator or direct into Bravo Auto, not the £3,000 to £5,000 per lead that some of our competitors are working on. So the model is working, and we're getting good feedback from our consumers.

Perfect. Thank you.

Thanks, James.

Just another reminder to ask a question. Please press star and 1 on your telephone keypad. Your next question comes from the line of Akshat Kakkar from J.P. Morgan. Please ask your question.

Thank you. Morning. Two questions for me, please. The first one on Subaru. There have been announcements that Subaru is suspending certain models, like the Forester and the Outback, for a few months due to engine defects. Just interested in understanding what have your discussions been with the OEM and how does this affect your business in 2022 and what markets specifically? The second question is on financials. Russia and specifically Moscow is a clear example of a business that came back very strongly in 2021 versus what it delivered historically or even to your own expectations. Are there any other markets or pockets within your distribution business where we can expect some kind of normalization in the coming years versus what was delivered in 2021? Thank you.

Morning, Akshay. Thanks very much. So, look, I'll take both questions. Aizu, if you want to add, please go ahead. In terms of Subaru, and I won't comment in too much detail publicly about what we see with any of our OEM partners, but it is true to say that that if I look at demand for Subaru, in each of our markets, whether it happens to be in Latin America, in Chile, Peru, etc., or in Australia and New Zealand, we are seeing the pattern that is consistent across the whole of our business, which is very strong order books, and the order books not being eaten through or winding down, but in fact, in many cases, building upwards, and supply being well below demand. And I would say across all of our OEM partners, we are seeing certain model restrictions due to either semiconductor supply, wiring harness issues because of Ukraine, COVID, or COVID in the supply chain for our OEMs hampering production. I think it's a little bit, actually, as Heisbert said earlier on, which is supply to us in 2022 is better than we saw in the second half of 2021. but is not where we'd expected it, hence you see these continuing very, very high levels of margins, and we're confident, as we said earlier on, about our view for the full year, hence the reason why we gave that floor in our update this morning that we would deliver at least 300 million pounds of PBT for 2022. In terms of your comment around markets coming back and then coming back to 2021 levels and then effectively normalizing, we're not seeing that. In fact, in many of our markets, compared to 2019, of course, I guess at the group level average, and Heisler, please correct me, we are 20% to 25% below the 2019 volume. So global automotive still has a long way to come back. before it gets to 2019, which I think is different from some other industries. And in our markets of Singapore and Hong Kong, which are at historic low levels of PBT, and we see them as tailwinds when they come back for us, the position in those two markets is even further behind. You should think of 30%, 35% below the highs that we've seen previously. So we don't see our markets Coming back to 2019 levels, we still think there's growth in them. And what we see in terms of consumer demand and order book, we are, we've said in the release this morning, very confident about this year. Too early to call 2023. But the final point I would say is that our OEM partners are not indicating they'll get back to any level of normal. And as I've said before, whatever normal means. They're talking more 2024 now rather than 2023.

Very clear. Thank you so much.

Yes, thanks, Akshay.

Your next question comes from the line of Michael Allen from the EU. Please ask your question.

Morning, gents. Morning, Mike. Morning. Two for me, if I may. First, just on the general kind of supply chain, I mean, I think we've seen some evidence of the chip shortage kind of easing, and as you referred to before, know wire harnessing etc being the issue is that something you kind of concur as the is the supply shortage kind of moved on to a different phase or or or globally is still having implications of chip shortages and and still very much kind of still working through that um and then the second question was just just the general updates or any observations on implementation of agency and whether there's any new thinking in any particular market as certain brands seem to be taking that forward quite quickly.

Okay. Okay, Mike. For once, I've turned out to be popular in these questions rather than Heisbert, so I'll take those and Heisbert can add where necessary. So in terms of supply chain, We have seen some news, haven't we, over the last week or so that certain OEMs are saying that chip supply is easing somewhat or getting better. What are our OEMs saying? Our OEMs are saying that newer vehicles are taking four to five times more semiconductor content than what you've seen previously. which is mopping up a lot of chips into, so it doesn't necessarily translate, shall I say, into more vehicle supply as a result, though I think we will see some. But I think you should have in your mind that the latest vehicles are taking way more semiconductors than previously. In terms of the OEMs we speak to, we are not seeing semiconductor supply improve to the point where we're seeing more production and more production coming through to our markets. But I would say it's not just a story of semiconductors, Mike. We've seen the issues in Ukraine around wiring harnesses and other components plays into that. Commodity supply impacted by Russia and Ukraine, I think, will also have some impact into supply chain. And then we're seeing a very busy shipping industry and very congested ports, which all of which is helping to, if I use the word help, moderating supply into global automotive markets. And I think that's no different whether you happen to be in the US, China, or Peru, frankly. So, hence the reason why we've been very confident in our 300 million pounds PBT outlook that we've given this morning, is that very high levels of demand coupled with continued difficulty in terms of supply. But in terms of agency, I mean, just to reiterate to everyone on the call, which is in our distribution markets, of course, it is Inchcape that is running the whole route to market for our OEM partners. And it is Inchcape's ultimate decision as to whether we deploy agency models into those markets. What are we doing? We are determined to make sure that our route to market transformation delivers an exceptional experience for consumers. which should drive better levels of share and satisfaction, and of course then impresses our OEM partners even more, so they give us more markets. We are building out functionality into DXP as ever that would enable us, if we chose to, to deliver agency into those markets. But fundamentally, physical dealerships will still play a part, although a different part over time, as the route to market transforms. And you can see that with EVs. that as you introduce EV into markets, consumers bounce between digital and physical way more than they might do for internal combustion engines, just simply because they don't know how they work, they don't know how charging works, what real range is, and they want to talk to people and experience the vehicle. So we are preparing ourselves and deploying the technology and the people to enable us to deliver exceptional levels of consumer experience. As I mentioned earlier about Chile, we will be the company that is the go-to distribution partner for introducing EV into developing markets. In terms of our retail-only market in the UK, Mike, we are actively collaborating with our OEM partners to introduce agency. You will absolutely not find Inchcape fighting against the move to agency. We think it's the right thing to do in many of these developing markets, including for us now in terms of retail, it's a UK-only discussion, and will help make sure our OEMs are successful in their implementation. And you'll see that, Mike, coming in more and more in 2023 for the first few OEMs and 24 onwards for others.

Yeah, that's great. Thank you.

We have no further questions. Continue.

Very good. Well, thank you very much, everybody, for joining our call this morning. A positive start for INCH-K in 2022. If you have any questions or follow-up, as ever, the lovely Raghav Gupta Chowdhury is the man to talk to, and I hope you have a wonderful day. Thanks so much.