Inchcape Plc Ord

Good morning, everyone. I hope you've all seen two announcements from Inchcape this morning. Our 2022 interim results and the announcement of our proposed acquisition of Durco. I am super excited about this deal. It'll provide a step change to our distribution footprint, adding in excess of two billion pounds of revenue in the highly attractive and fast growth America's region. Durco distributes a fantastic group of brands to a number of markets. markets where we already operate, and they have a great management team and culture similar to ours. We'll come back to provide more detail about Derco and the transaction shortly. Before we do, let me thank you for joining us for our 2022 interim results. As usual, I'm joined by our CFO, Heisbert de Zooten, and our Head of Investor Relations, Raghav Gupta. We'll begin with a short presentation, followed by your questions. Today's presentation will be available on the Group website and a recording of this call will also be uploaded later today. We've set out the agenda on slide 4. I'll begin by running through the first half highlights and headline financials before handing over to Hysburt who will cover the financial performance and outlook in more detail. We'll then provide you with more detail about the proposed acquisition of Derco. After that, we'll open the lines for your questions. So let's get going. On this slide, we have summarised the highlights of a great first half of the year. Fantastic execution from our teams across our diversified geographic footprint has driven strong revenue growth and margins and continued high cash generation. We're making excellent progress against the two strategic growth opportunities that we set out in our Accelerate strategy. First, distribution excellence. We have continued to extend our global leadership in the highly cash-generative automotive distribution segment, which is our core area of focus. This continued shift of our portfolio towards distribution has been bolstered by two compelling acquisitions and through the swift exit of our operations in Russia. We are leading the way in digital and data capabilities, enhancing our capabilities and analytics, while rolling out DXP in more markets. As of today, we are at 31 markets with 12 OEMs. Secondly, Vehicle Lifecycle Services, or VLS, where we have identified a huge opportunity for the group in the profit achieved beyond the first phase of a vehicle's life. In Q4 last year, we launched Bravo Auto, a digital-first used car platform, and we are pleased with the progress we have made in the half. And finally, we have made excellent progress against our responsible business ESG strategy, which sits at the heart of everything we do. At the halfway point of 2022, we have achieved great momentum. I'd like to thank each and every one of our colleagues who have fully embraced our Accelerate strategy, and through their expertise, dedication and teamwork, they are helping us drive our business to new heights, reflected in our strong results. Slide 6 shows our headline KPIs for the first half of 2022. Inchcape delivered a great first half performance across all key metrics. Revenue was £3.9 billion, which on an organic basis represents an increase of 12%. Our operating margin came in at 5.2% compared to 3.8% last year. This increase in revenue and operating margins drove the group's PBT of £184 million up from £121 million in the prior year. Free cash flow generation was £224 million, improving our net cash position to £439 million post M&A and cash returns. The group's adjusted EPS was 35 pence, with a proposed interim dividend of 7.5 pence, up from 6.4 pence last year. Let me now hand over to Heisblatt, who will run through the financial performance in more detail.

Thank you, Duncan, and good morning, everyone. Let's start with the headline income statement figures on slide eight. We generated revenue of £3.9 billion in the first half, which is 12% above the prior year on an organic basis. In addition to the broader strengths of our existing business, performance was supported by the addition of new distribution businesses. Our operating margin was 5.2%, which is 140 basis points ahead of the prior year. PBT of £184 million reflects the strong improvement in revenue and operating profits, driven by a combination of robust consumer demands and price-mixed tailwinds against the backdrop of new vehicle supply shortages. A strong set of results demonstrating the scalability and leverage of our business model as we continue to expand our distribution portfolio. This slide shows the absolute revenue and organic trend for the group and for the distribution and retail businesses. The year-on-year growth rates are impacted by the varying degrees of pandemic-related disruption in the comparative periods. We have therefore provided the absolute revenue figures, which show the continued solid improvement. The distribution segment delivered sequential improvement, both from the second half of the year and also in the second quarter. In retail, which today is largely a UK business, the first quarter of 2021 was severely disrupted by pandemic restrictions, which explains the variation in growth rates. Absolute revenue grew versus the second half and was stable in the second quarter. This slide shows the regional revenue trend for distribution, where we are seeing strong demand in most of our markets. In the chart we have shown how performance across the regions compares to the same period in 2019, with all regions above bar Asia, which was expected. The distribution segment saw revenue rise of 16% year-on-year in constant currency and 14% organically, with a particularly strong performance in both the Americas and in Europe. Starting with Asia, revenue declined 11% in light of unfavorable trading conditions in Hong Kong and Singapore. Performance across the rest of Asia was good. In Australasia, while our top line performance was weighed down by lower vehicle supply, this was somewhat offset by improved pricing. In Europe, revenue increased 34%, supported by continued market share gains and certain new model launches. Americas and Africa revenue grew 47%, with a meaningful contribution from newly added distribution businesses. Organically, it grew 33% driven by robust consumer demand. The comparative period was impacted by some pandemic related disruptions. Turning now to distribution operating profit and margins on slide 11. The strong top line growth growth operating profit of 172 million pounds and an operating margin of 6.3%. In Asia, operating profit was stable versus the second half. Cost mitigation measures helped support margins and our newly acquired commercial vehicle business in Guam and Micronesia contributed positively. Profitability in Australia was supported by better pricing and growth of our after-sales business, which was more robust. We also implemented strict cost control in light of lower vehicle supply. In Europe, the increase in operating profit followed a strong growth of revenue with market mix supporting margins. Americas and Africa was driven by a combination of organic and inorganic growth and an imbalance of supply and demand, which supported margins. On slide 12, we show retail revenue and operating profit from the first half of 2019 to the first half of 2022. Following its significant disposal programme, including our remaining Russia business in Q2 this year, the retail segment now only includes the results of the UK and Poland. Revenue amounted to £1.2 billion and operating profit of £30 million resulted in an operating margin of 2.6%. Demand for vehicles, both new and used, remained strong, which against the backdrop of constrained supply has continued to support vehicle margins. Aftersales was solid, delivering good growth throughout the period. Turning now to slide 13. We thought it would be helpful to share our thinking around current industry and market dynamics. In terms of supply, prior to the pandemic, production expanded in line with global demand. In 2020, vehicle production started to be impacted by chip shortages, pandemic-related restrictions, and a broader disruption to supply chains. This has created a gap of circa 26 million vehicles through to the end of 2022. And while the situation is improving, we are still below pre-pandemic levels and the shortfall in production since 2020 is not forecast to be filled before 2025. Against this backdrop of constrained supply, demand has remained very strong. And while there are some signs of weakening consumer confidence globally, we are still operating with record order books in many of our markets and have not seen any change to our cancellation rates to date. In terms of inflation, we're seeing high levels of inflation in vehicle cost, in shipping cost, and we continue to pass this on in pricing. While future levels of inflation are uncertain, we closely monitor and react to the different environments in our markets. In terms of geo, we are very diversified, operating across more than 40 markets with different market dynamics. For UK retail, we expect margins will normalize towards 1.5% as the supply-demand balance changes. Asia, as you know, is at the low point and expected to gradually improve, which will help margins. Finally and importantly, while market growth rates will vary year to year, our exposure to higher growth markets with low motorization rates will support our growth over the medium and longer term. Fundamentally, we remain confident in the medium-term outlook set out at our Capital Markets Day. Turning now to slide 14, with a more detailed review of the income statement. In aggregate, we delivered operating profit of 204 million pounds. Our net interest expense of 20 million pounds is above the prior year, owing to higher financing costs. Adjusting items were relatively minimal in the period, with the gain on pensions largely offset by amortization costs and acquisition-related expenditure. The underlying tax rate for the year was 26%, broadly aligned with the rate anticipated in the median term based on the current market mix. Our earnings per share before adjusting items was 35 pence. Now moving on to slide 15 and cash. Cash generation continued to be strong, reflected of the high cash generative nature of our business model. As per the previous slide, the group generated operating profit of 204 million pounds. During the period, we benefited from a net working capital inflow of 73 million pounds arising primarily as a result of lower net inventories. This follows an unusually low level of inventory financing at year end. Net capex of 16 million pounds was broadly in line with the prior year. Total free cash flow amounted to £224 million, driven primarily by an improvement in profitability and a change in working capital. Net acquisitions and disposals amounted to an outflow of £110 million, largely related to our acquisitions in the Americas region. And we've made a dividend payment of £61 million. During the period, we bought back 59 million pounds worth of shares as part of last year's and this year's share buyback programme, and we've decided not to continue the remainder of our buyback programme in light of the proposed acquisition of Derco. The group closed the reporting period with a net cash position of 439 million pounds, excluding lease liabilities, which compares to a 379 million pounds position at the end of December 2021. This brings me to the 2022 outlook on slide 16. As we look ahead to the full year, consumer demand remains robust while supply continues to improve, albeit slowly. And while there remains some uncertainty from the pandemic, our diverse geographic footprint helps support our overall performance. Based on performance to date and our expectation for the second half, with an improved outlook for vehicle supply and robust demand, we continue to expect to deliver 2022 PBT between 350 and 370 million pounds at prevailing exchange rates.

And with that, let me hand back to Duncan. Thank you, Huisbert. Which brings us to the final section of today's presentation. our proposed acquisition of Derco. At our Capital Markets Day in November last year, we provided you with the details of our ambitious growth plan and launched our strategy Accelerate. As a reminder, our strategy is focused on capturing two enormous growth opportunities in distribution excellence and vehicle lifecycle services. Our ambition is supported by three key enablers, culture and capabilities, digital, data and analytics, and efficient scale operations. And all this sits on a bedrock of responsible business. The proposed acquisition of Derco is entirely consistent with our ambitions and will enable us to capture a greater share of both global distribution and vehicle lifecycle value. Let's move to slide 19. Let me first say how delighted I am to be able to announce Inchcape's proposed acquisition of Derco. We have long admired Derco and approached them several months ago to explore how together we could better support our OEMs in Latin America and accelerate profitable growth. The deal will broaden our OEM footprint, adding some fantastic brands, and extends our market footprint. I'll come back to this shortly. Derco is LATAM's largest independent distributor. It is a family-founded and family-owned private business and a business we have long admired. In 2021, group revenue was £2 billion. Over the last 12 months to the end of June, revenue has been £2.2 billion. We've agreed to purchase it for an enterprise value of £1.3 billion, which implies a multiple of circa six times based upon normalised margins and post-recurring synergies. The deal is a mixture of cash and equity, with the Del Rio family taking a 9.3% stake in Inchcape. We expect the transaction will deliver significant EPS accretion, with more than 15% in year one, and recurring synergies of at least £40 million will drive EPS accretion above 20%. The deal is subject to Inchcape's shareholder approval and merger control. This acquisition extends Inchcape's global leadership in automotive distribution. and on this slide we have shown how the combination aligns with our accelerate strategy. The acquisition of Derco, Latin America's largest automotive distributor, provides a step change in the scale of our distribution business. In line with our focus on distribution, Similarly, this transaction will give us a significantly expanded position in the attractive and fast-growing markets of the Americas. It reinforces our presence in Chile, Peru and Colombia, and adds scale presence in Bolivia. Both companies have complementary market footprints and OEM brand portfolios. During the extensive discussions we've had over many months, I've been struck by how culturally aligned Derco and Inchcape are, and I am very pleased that the Del Rio family will take a significant shareholding in the business and will nominate a family member to join the Inchcape board following completion. We expect the deal will enhance growth prospects of Inchcape and deliver meaningful recurring synergies. Fundamentally, it will enable us to accelerate both of our growth pillars, distribution excellence and vehicle lifecycle services. Let me tell you more about Derco on slide 22. Like our operations in the Americas, Derco is headquartered in Santiago, Chile, and is the largest independent distributor of passenger cars by volume in Latin America. The business employs around 4,500 colleagues, spanning across four markets of Chile, Peru, Colombia and Bolivia, and has distribution relationships with 11 OEMs. Durco is the number one by volume in Chile, Peru and Bolivia, and number three in Colombia. In 2021, Durco distributed 150,000 new vehicles, generating revenue of £2 billion and operating profit of £236 million. They have more than 300 locations, 30% of which they operate directly. Durco is a family-owned, multi-brand automotive distributor founded by the Del Rio family in Chile in 1959. And today they continue to own the business. Durco is led by an experienced management team with deep knowledge of their markets and a strong customer experience ethos. Throughout our discussions, I have been struck by the close cultural and strategic alignment with Inchcape. Derco, like Inchcape, is trusted by its OEM partners and has demonstrated an excellent track record of profitable top-line growth and delivery for its OEMs. Over more than 60 years, it has grown to become the largest independent distributor by volume across all of Latin America. Here we show Derco's track record of delivery since 2014. On the left you can see the evolution of Derco's aggregate market share across its four markets, which has grown from 12% in 2014 to 18% in 2021. This has been supported mainly by volume growth for its existing brands and also by the addition of new brands over that time period. On the right, you can see the very long-term nature of their OEM relationships, like Inchcape, with Suzuki approaching its sixth decade and Mazda now in its fifth decade. It also shows the wide range of brands that they distribute, which is complementary with our own brand footprint in the markets we have in common. Derco's strong and growing platform and deep OEM relationships positions it very well for the future. Now let me hand over to Heisbert, who will provide the details of the transaction.

We believe that the transaction offers significant value to Inchcape shareholders due to enhanced growth prospects, meaningful opportunities for synergies and an attractive returns profile. Firstly, we expect the transaction to enhance Inchcape's medium term top line growth and to be margin accretive even before the benefit of synergies. Based on our projections, we expect the transaction will deliver EPS accretion of more than 15% in year one and more than 20% accretive from year two. We expect to generate recurring synergies of at least 40 million and significant revenue synergies. Duncan will cover these shortly in more detail. There will be a one-off cost of up to 60 million pounds over two years to achieve these synergies. Furthermore, we expect the transaction will generate the return on invested capital in excess of Inchcape's group cost of capital in the first full year following completion, and in excess of the project WACT in the third full year following completion. Now let me run through the key terms of the transaction. Starting with the purchase price, Inchcape has agreed to acquire Derco at an enterprise value of 1.3 billion pounds on a debt-free, cash-free basis. As you know, we maintain a disciplined approach to M&A. The headline EV EBITDA multiple is 5.5 times based on 2021 profits, pre any synergies. assuming a normalized operating margin of 7%. This implies a circa six times EV EBITDA multiple post-recurring synergies, which is at the lower end of multiples paid in precedent transactions. The transaction will be financed via a combination of cash from our balance sheet of approximately 400 million, and we have agreed 600 million pounds of new debt facilities. In addition, there is 280 million pounds of shares issued to the Del Rio family, representing 9.3% of the enlarged group's share capital. The family will also have a seat on the Inkscape board. Following the transaction, we expect Inkscape's leverage will increase to 0.6 times EBITDA, but this will reduce quickly given the highly cash generative nature of the business. As we always say, it takes three to tango in automotive distribution deals, and we work closely with OEMs to secure their support for any distribution transaction. Importantly, OEMs on both sides have expressed their support in the conversations we've already had. Looking ahead, we expect the transaction to close in late 2022 or the first quarter of 2023, subject to the necessary shareholder approvals and competition clearance. Let me show you how this transaction transforms Inchcape. Firstly, it increases the scale of our group, adding over 2 billion pounds of margin accretive revenue. Secondly, it increases the contribution from the Americas. On a pro forma basis, the Americas and Africa region will account for 36% of group revenue compared to 19% previously. It will also increase the scale of our distribution business, which is core to our strategic focus. In 2021, distribution contributed circa 70% of Inchcape revenue. Following the transaction, we expect this increase to 76% and significantly more on profits. Back to you, Duncan.

Thank you, Heisbert. Let me now run through the deal rationale in more depth. The acquisition will bring together the two leading automotive distributors in Latin America, both recognised for distribution excellence underpinned by a track record of profitable growth. As we showed you at our recent webinar, the Americas business has increased from a £160 million of revenue in 2016 to £1.2 billion today, and Derco will provide a further step change in the scale of our business in the region. The combination significantly extends the enlarged business's leadership in Latin America, as you can see from the chart on the right, which puts the enlarged Inchcape significantly ahead of the other distributors in the region, with operations spanning 12 markets with a total of 30 OEM brand partners. The Americas region is a hugely attractive and fast-growing region, and there is significant potential for the market to grow further. You will recall Romeo presented a version of this slide at our Americas webinar a few weeks ago, but as a reminder... The region has attractive prospects in terms of GDP growth and significant upside for new vehicle sales underpinned by low motorisation rates. We expect motorisation rates will increase substantially over the medium and longer term and this is one of the reasons we are very excited about the future of our business there. Next, the transaction brings an attractive and complementary brand portfolio, which deepens Inchcape's existing key OEM relationships and adds attractive first-time distribution partnerships. In the Americas, Inchcape operates in 11 markets. This transaction extends our presence in Chile, Peru and Colombia and adds the highly attractive market of Bolivia to our footprint. In the Americas, Inchcape distributes for 25 OEMs, the portfolio of brands that we have are highly complementary with Durco's. The transaction provides an opportunity to deepen relationships with some of Inchcape's key OEMs, such as Suzuki, and will also drive growth with other brands, some of which are new to Inchcape. The addition of these brands within our markets is exciting and will give us exposure across most of the brand types shown on the right. As we showed at the Americas webinar, this is key to driving efficiencies, which brings us to synergies. The transaction is expected to deliver meaningful recurring synergies, projected to be at least £40 million per annum. We expect around 30% will be delivered within the first full year following completion, with significant majority achieved by the end of year two. This slide sets out the three main buckets and some of the levers that will help us achieve the target. Efficiencies across the combined organisation, efficiencies in operations and technology efficiencies. Over the past few years, our Americas team have acquired several new businesses and we have developed a proven track record of integration which will support us following this transaction. In addition, we also see significant opportunity for revenue synergies. We have not quantified the opportunity publicly at this stage, but this slide shows some examples of how the opportunities link to our accelerate strategy. We see opportunities to enhance distribution excellence, for example, through network benefits, leveraging the expanded infrastructure, leveraging the best practices of both businesses, for example, by maximizing the penetration of finance and insurance products. and leveraging Inchcape's digital and data capabilities. Under our second pillar of vehicle lifecycle services, we will leverage the significantly expanded scale to capture more of a vehicle's lifetime value. For example, using our Bravo Auto platform, we expect to be able to source good quality used cars and attract vehicle trade-ins by simplifying the buying process and professionalizing the industry. I mentioned earlier how struck I've been by the cultural alignment between Derco and Inchcape, and I've been impressed by the shared ambition of both companies. Derco has over 60 years of experience operating as an automotive distributor since the Del Rio family began importing automotive vehicles into Chile in 1959. Their business has a culture of innovation in its DNA, as exemplified by its Derco Centres launched in 2003. Over time, it has also diversified its business by extending its presence to automotive parts and machinery rental space. While Derco has remained a private family-owned company, over this period it has been run by independent management and is unique in its ability to achieve high talent integration between business lines and geographies. Both companies have a customer-led approach with a focus on providing a superior experience to customers and maintaining close relationships with its OEMs. The addition of Inchcape's global scale and digital and data analytics capabilities to Derco's existing strategy is expected to support the accelerated growth of the enlarged business in the Americas region. Let's look ahead to the next steps. This is a Class 1 transaction and therefore conditional on Inchcape shareholder approval as well as customary local merger control processes. We expect to publish the shareholder circular in September 2022, followed by the general meeting and shareholder vote in October. We expect that the completion will occur towards the end of 2022 or in the first quarter of 2023. To sum up, the transaction is totally aligned with our accelerate strategy. It enhances our growth prospects by increasing Inchcape's exposure to higher growth markets, and will use the scale of the enlarged business to capture a greater share of a vehicle's lifetime value. Derco will be margin accretive for the group, and we are confident that our track record of integration will help support the achievement of the recurring synergies, which will further support margins. The deal will extend the reach of Inchcape's distribution platform by broadening existing OEM relationships to new markets, and add new OEMs and Bolivia a new market. As a larger business, it will also better position Inchcape to continue to consolidate the global automotive distribution space. The transaction will deliver significant shareholder value and is expected to be more than 20% accretive to EPS from year two. We expect to generate a return on invested capital in excess of project cost of capital in the third full financial year following completion. We are delighted to be extending Inchcape's leadership in automotive distribution. Heisbeth and I are now ready to take your questions.

We will now begin the Q&A session. Please note that this call has been recorded. If you have joined via Zoom application, please use the raise hand functionality to ask a question. If you have joined via audio line, please press star nine. We will now pause a moment to assemble the queue. So our first question comes from Andrew Nersi from Peel Hunt. Please unmute yourself to ask your question.

Yeah, morning everyone. A couple of questions from me, please. First of all, you gave some useful insights in terms of new vehicle supply out to FY25. I wonder if you just give some insights what the market or the OEMs are thinking about in terms of inflation over that period in terms of new vehicles. And secondly, on Derco, could you just expand on how the business has grown Has it been largely organic? Have they done their own M&A or have they benefited from outsourcing of OEM relationships? In terms of Bolivia, which looks like a potentially interesting new market for Intercap if the deal completes, who currently distributes your core OEM brands in that market? I think particularly Daimler and what have you. And lastly, you mentioned very briefly the rental model within Derco. Could you just explain what that is and how significant it is in terms of the overall business, please?

Thank you. Good morning, Andrew. Thanks very much for the question. So I'll take these questions and then Heisberg can add if necessary. Look, in terms of OEM inflation, I think we've said publicly before so far we've seen OEM inflation on average across the group of around 10% over the last year. We know OEMs are continuing to see some inflationary pressure in their supply chains for all sorts of reasons of which we, you know, I think everyone on the call would know about. In terms of how we see those going forward, I think it's difficult to say. What I would say is where we're seeing inflation from OEMs or employee costs or others, we are actively passing those on to the markets within which we operate in terms of new car sales. So difficult to say much more than that, Andrew. In terms of Durco, look, it's worth going back to the top before I answer your question, if that's okay. You know, look, as we said at the Capital Markets Day in 2021, The automotive world is going through substantial change. We've built a leading distribution platform. And also what we said at the Capital Markets Day is the markets we face into in that 17 million vehicles is highly fragmented. And OEMs want strong, highly capable partners to deliver distribution services for them in those markets. Now, as you know, we operate in really attractive markets around the world. The Americas is no different. with low motorization rates and high GDP growth in the medium term, which means we'll get great organic growth in those markets. Now, it's important to say in terms of DRCO, and I promise I'll come to answer your question in a moment, During our strategy review, we looked at 1,150 distribution partners in those markets we target. Derco stood out as a unique asset and we proactively contacted Derco over one year ago. So Heisbert and I were talking to the family over one year ago and have met them on a number of occasions. And our engagement with them and the people that run their business and the deep due diligence we've done has reinforced what a great asset Durco is. And I'm super excited about what this does for OEMs, what it does for people, what it does for customers, and of course, what it will do for Inchcape shareholders. Finally, I'd say we have bought the business at a reasonable price when this deal completes. And I'm really pleased that the Del Rio family will take a 9.3% stake in Inchcape. And I think that shows their confidence in the global Inchcape future. Now, in terms of how they've grown, I think their growth rate's been pretty impressive. If you look at the 2014 through to recent times growth rates with having an aggregate share of 18%, they've done it in two ways. Yes, they've added more distribution partners into more markets. You'll be familiar with the way we operate. It's one of the reasons the two businesses go quite well together. So they've added, they've grown with their existing OEMs. They've added new OEMs. And then in the way they run their business, their distribution model is very, very customer centric. It plays very well to our DXP and DAP investments. And we think by adding our DAP and DXP into Durco, we can get the boat to grow faster. So they've been impressive in running a really good shop. adding new oem partners and getting growth and you know an 18 market share aggregate across those from my perspective is also exciting in where we might see revenue synergies I need to be very clear, revenue synergies are not in our acquisition case, but I'm excited about them. And if you think about having an 18% market share plus Inchcape's market share means that we can build a very meaningful vehicle lifecycle services business and Bravo Auto, for example. Now, in terms of your question around who distributes some of the Inchcape partner brands in Bolivia, uh my understanding is that with a company that used to be called berger and now it's called astara so it may or may not be difficult to add some of those partners into bolivia but fundamentally bolivia is a really exciting addition to the group from a geographic perspective uh long-term solid gdp growth low motorization rate so i think we're going to see exciting growth coming from from bolivia final point on rental um we want to include that for completeness But the rental business isn't a massive part of their operations. We're interested in understanding those business models, Andrew, because of the far future of automotive and mobility, where people might consume vehicles via subscription. It's an opportunity for Inchcape to understand more about how those models work around the world. We have some experiments up and running in Asia Pacific accordingly. And Inchcape will learn from what we see in different markets around the world. But fundamentally, super excited about bringing a world-class business inside Inchcape. And that is Durko joining the Inchcape family.

That's great. Thank you very much. Thanks, Andrew.

So this is for attendees. Please use raise hand functionality to ask a question. And if you have joined via audio line, press star nine. So the next question comes from Georgius Pilakotis from Numis.

Thanks, morning team.

I've got a question. a few, if that's okay. I might kick off with a couple more strategic and then a couple more on the finance side for Heisbeth, if that's okay. On the strategic ones, the first one, can you just give a sense on how some of their penetration on non-new car incomes around used car penetration, finance and used penetration, and how that benchmarks to Inchcape and LATAM? Then the second one is you've spoken about 18% aggregate market share. What do you think adding Inchcape, what that will take you to in terms of aggregate market share in those markets? Do you then think that there's a correlation between market share and margins? And then finally, I'd like to push you a little bit more on some of the revenue synergies. Let's say you were getting to approaching 30% market share of that new car market. It's quite a unique footprint in that auto ecosystem. It's just interesting to understand how this changes the opportunity compared to other markets where you're in, where you're only representing a smaller proportion of brands, particularly kind of the flow of used cars and perhaps what opportunity for Bravo Auto that creates. And then whether this is changing your thinking process more broadly going forward about the importance of having multiple brands in certain markets versus being kind of, I guess, more thinly spread across more markets.

OK, very good. So, George, let me let me let me take those one by one and Heisman, maybe give a view on on scale and multiple brands. So just in terms of the used opportunity or VLS opportunity in Latin America. So I think you know where we are is earlier than we had planned because we like the way the Bravo Auto model is playing out in Europe. We are launching Bravo Auto several months earlier in Colombia this year, as Romeo said to us on the America's teaching that we had just a few weeks ago. Now, we are, I think the used car market in those in Latin America is nascent. In many cases, it's still in the consumer to consumer phase. What we know that as the market matures and professionalizes, you get the business to consumer used car market starting. And that's where we are now in many of those markets. So the penetration that Durco has and the penetration that Inchcape has is still relatively low from a used car perspective. We think that's set to change. And to your point, if you have market shares of, you know, Durco's at about 18%. And if you look at our market share, you know, maybe you could use a number of about 5%. Think about the amount of customer data that gives us. Think about the amount of vehicle data that gives us. And it plays absolutely into us working with consumers and customers for their lifetime and working with vehicles to exploit the lifetime profitability. So I'm genuinely excited about that. Also, then think about with a further F&I penetration into those marketplaces, more used vehicles coming back to us. It gives Intricate the opportunity, which I'm super, super excited about, about building out that VLS Bravo auto market. Now, we'll do it step by step and we'll do it cautiously as Inchcape operates in everything we do. We like the way the Bravo Auto model is playing out. The team in Latin America is following the same playbook with some local nuances. But yeah, I'm super excited about what that's going to do for us. Now, in terms of having markets, George, which are then greater market share and multi-OEM compared to some of the markets we have around the world. Look, I think that gives us the opportunity to leverage more revenue across our overhead base. I see opportunities for optimizing real estate and others. So I also think there's an opportunity. Now, will we do this in all of our markets? I think we've been really clear, right? Which is we have a 1% market share of a 17 million vehicle opportunity. The logical conclusion of that means that we, yes, grow with our existing OEM partners and we're proud of those relationships. But there are also new OEM partners for us to work with, emerging groups from China, but also existing Western and Japanese OEMs that we think we can build relationships with to increase market share in all of the markets that Inchcape operates in. Heisman, do you want to add something? OK, fine. So I think the model in Latin America could be interesting, Georgios, for Inchcape Group. Georgios, have I answered your questions?

Yeah, that's perfect. And then I've got three for Heisbert, if that's okay.

Even better.

So first one is the margin in Americas and Africa is quite a bit above where it was kind of in 2019. So just interested to hear if you can give a bit more colour on what some of the moving parts are there and I guess how sustainable that is. And then a couple on the balance sheet. Firstly, inventory still, it feels kind of Stockton's kind of still on the low side, just wondering what kind of outflow one would expect to get to a more normalised level from kind of an absolute cash position. And then secondly, is just how to think about leverage from here. 0.6 times, appreciate that will be paid down fairly quickly, but how you think about deals in the meantime.

Thank you, George.

So so let's perhaps start with the order that you suggested. Right. So perhaps let's just talk more broadly about margins. Also on Durkheim, I think it's important to sort of understand. It's actually quite hard to look at margins 19, 20 and 21. In 19, the Latin American region was impacted by, let's say, political upheaval across the continent in quarter four. And that's impacted top line and margins for both Durkheim and also for Inchcape. So it's not a really... comparable number to start with. And then, of course, in 2020, we saw the pandemic hitting. And in 21, I think there's a different dynamic. In Durco, they really benefited from good supply. There is a different OEM portfolio with notably more Chinese brands where there was a lot more supply, good pricing. careful cost management led to really good results and elevated margins in 2021. If you look at Inkscape, in our brands, the supply situation was more constrained and therefore we didn't really see that spike in 2021 specifically, but we have seen an increase in margins as you as you were sort of referencing in 2022. Now, importantly, in terms of valuation, we've based our valuation of Derco on the normalized margins of a sort of 7%. And that in part answers your question on how to think about margins. A 7% margin, and I should stress, this is before synergies, is what we have seen, is what we think is a sustainable margin. And this is what we, over time, I should stress, will get to. So if you look at current trading of Derco, we've seen sustained momentum. We've provided you with a last 12 months number. And we see margins that are a bit lower than 21, but are well above still the sort of 7% normalized range. So I think that is how to think about margin in terms of Inkscape and in terms of this transaction. In terms of down-to-earth balance sheet Inkscape today inventory, I mean, clearly we have not yet seen a build of inventory given the supply situation. If you look at the cash inflow from full year to the half, we had relatively low levels of inventory financing. At year ends, it's now at a bit higher than normal. The average inventory finance is around 85%. And I think that's important because that also mitigates the impact of cash outflows as we see in inventory going up. So we do expect inventory to go up over time, but really we expect it to go sort of gradually. Now, the important question of leverage, I think you've seen from the deal how it's done. 1.3 billion of EV financed through 400 million of cash on our own balance sheet, 600 million new financing, all secured, lots of flexibility, two years commitments from completion. So that's all very good. And then 300 million in terms of, I'm talking broad numbers here, participation of the Derco, the Rio family in terms of shares. And that explains why even this very large transaction only gets us 2.6 times EBITDA from the start. And we do expect that to come down quite rapidly because the cash generated model distribution of Inkscape is similar in Derko. And this all implies that in terms of other M&A, and let's call it bought-on M&A, we can continue in parallel, and hopefully we will continue in parallel to this Durko transaction. We have a rich funnel, as we've said many times, and we look in all parts of the world, in Asia, in Europe, in Africa. So I think there is space for bought-on deals as of now and continuing. And clearly, over time, once the transaction has completed and we have generated cash again with a lower leverage, we have an enormous flexibility. But that's a bit further out. In terms of how we think about leverage, it hasn't changed. We are a conservatively financed company. It's important in these times. You see it even from this transaction. So the max one times EBITDA that we have out there is unchanged, as is, by the way, the rest of our capital allocation policy, the 40% dividends, and clearly a critical eye on what we pay in terms of M&A.

Super, thank you. Thanks, Ojos.

Just a reminder, if you have joined via Zoom application, please use raise hand functionality to ask a question. And if you have joined via audio line, press star nine. So we have a next question from James Wheatcroft from Jefferies.

Good morning to you both. Just a couple of follow ups really. First of all, maybe just thinking around sort of timing and competition authority stuff. Is there anything we should be thinking about there? In terms of around the synergies, obviously given us the hard number of the cost synergies of 40. And I can see that sort of 60 to gain those 40. Perhaps is that an indication for the sort of the revenue synergy opportunity? Perhaps you could talk about a little bit more widely around those sort of those those revenue synergies and your confidence in them. And then lastly, just in terms of sort of management and integration, who's going to run the business? How's that all going to be structured going forward, please?

Very good morning, James. So maybe I cover timing and competition. I'll let Heisman lead off on synergies. So we've given a broad timing that we think this will be completed latest Q1 2023. We have been very aware, of course, of competition authority clearance, having bought a number of businesses in Latin America over the last six or seven years. And I'd remind us all that, you know, Inchcape has been operating in Latin America since 1993. So we're very experienced at all this stuff. Our internal and external advice in terms of competition authorities is that we are confident we will gain approval. And we'll gain approval in the timeline that we have set out in our presentation this morning. So I think Q1 23. Heidbeth, could you take us through synergies now at the end?

So perhaps if you think about synergies, it's important just to re-emphasize, we really understand this asset. We spent quite a long time in getting to the transaction and it's been a private transaction. So it's not been an auction. We've had very good access to the people that manage this business. been together with them, management of all countries. So that's for starters. I think the other context is clearly a class one transaction. So the level of scrutiny put on any number and certainly also on synergies and in terms of comfort that the board would require ultimately for the circular means that that 40 million recurring synergies number has had sign-off by auditors. For their comfort. So I would characterize the 40 million as a prudent number. And in terms of phasing, we expect 30% to be realized in year one, and we expect the significant majority to be realized within two years. Now, for revenue synergies, we've gone through a similar exercise and we've done a detailed assessment as well, but we haven't publicly quantified it. And in terms of, let's say, the cost to achieve, as you say, those are both for the recurring or cost-related synergies. And I should just stress again that the 14 million recurring synergies are all cost-related. But they're also to enable the revenue synergies. That's why maybe the number that may strike you as a big number versus the 40 should actually be seen in the overall context. So the revenue synergies is a meaningful number. And Duncan, would you give a bit more on that?

Sure. Thanks very much, Heisman. James, let me just add to what Heisbert said. So we have taken a very deep look at Durco. And in fact, Heisbert and I have spent a lot of time in Latin America over the last year as a key members of our leadership team, such as Mark Durnley from a digital and data perspective. And he's run the slide rule across all of their IT and digital operations too. If you take a step back, Our team in the Americas is really strong. It's exemplified by Romeo Lacerda, who's our leader for our Latin America business. As we said the other week when he did the Americas teaching with me, and he led most of it, as you know. You know, he's operated in Latin America for over 20 years. He's worked with Western companies like Mondelez. He is experienced in small, medium and large M&A and integration and handily speaks Spanish and is based in Santiago in Chile. And I've got a high degree of confidence in Romeo. And the other point I've mentioned is, if you think about all those acquisitions we've gone through over the last few years, we've retained 90% of the talent in the organizations that have come to Inchcape. So I think they're pretty good at this in terms of synergies. Heisberg also mentioned we'd spent a lot of time with them and seen their management team. I would say the management team of Durco is experienced and is genuinely talented. And the average experience in automotive is 15 years. The other thing I'd say about that leadership team having spent a lot of time with them is they're really excited to be joining a global leader in Inchcape because they can see the platform that we've built. Now to the topic of synergies, As Heisbert said, it's been aided by the fact that it's a private business. We've been able to take a deep look inside Durco during our due diligence. The synergies are practical, they're prudent, they're cost-related, and they're in markets, frankly, that we know very, very well, if you think about Colombia, Peru, and Chile. Now, the revenue synergies will come on top, and I'll talk about those in a minute. But let's not forget, Inchcape is a very different group than we were when we completed the last major acquisitions in Latin America. The difference is since then, number one, we have two very capable digital delivery centers with now way over 700 people across those centers, one in Bogota in Colombia and the other one in the Philippines. It will be those teams that deploy DXP and DAP into the Durco business. And it will be them that deliver the IT and digital synergies we expect. We've also, since we completed those acquisitions in Latin America, built out our finance shared services centers, which we leverage globally. And clearly they'll play a big part in how we integrate Durco into Inchcape. One last topic before I touch on revenue synergies. I mentioned Romeo Lacerda before. The reason I mentioned him and say we have a high degree of confidence in Romeo is he is the proposed CEO for the new Latin American business, which will be Inchcape plus Durco. And that has been in the open and discussed with the family for a long time. I think his culture and his way of operating will really suit the teams. Now, to the topic of revenue synergies, well, let's go back to Accelerate. Two growth drivers for us, one around distribution excellence, the other around vehicle lifecycle services. In distribution excellence, we see the opportunity to leverage a broader network to give our OEMs more exposure to the geographies that we operate in. There's further opportunities to enhance F&I penetration, which is additive also for our VLS business, but will also help new car sales. And we will absolutely use DXP and DAP in the way we've been talking about over the last 18 months to enhance performance of the group and growth. Now, to the final point around VLS, I think I mentioned it quite a bit before to Andrew's comments and to Georgios' comments also. I think this is a big opportunity for us. None of this is baked in. But when you have 20 plus percent market share and you then have an enormous amount of data about customers and about vehicles and step by step, we will use that to build out our VLS business and particularly Bravo Auto in the Americas. James, that was a long set of answers. I hope that is helpful.

Very helpful background. Thank you.

So I see the next question from Michael Allen from Jewish Capital.

Morning, can you hear me okay?

Got your mic, yeah, good morning. Great. Couple for me of a May. Just really, I mean, clear... very exciting in terms of what you're doing and what you've done in the LATAM market area. But just given the range of the OEM relationships there, I was just wondering, you know, is the potential for them to encourage you to do what you've done in LATAM in other regions of the world? And is that kind of potentially part of the pipeline going forward so just really exploring there and also are you done in LATAM now or is there still potential for bolt-ons etc in that region where you're clearly well ahead of the competition. And then the second one, maybe for Heisbert, is just from a cost of capital point of view when assessing this acquisition, should we be thinking of this on local rates or group rates? And what's the difference between the two as well?

Thank you, Mike. So look, I'll take the first one. And I think you've already said the second one is heading to Heisbert. So let's stick with the way you suggested it. Heisberg often says that it takes three to tango in these relationships and these deals, and it is true here also. So we have been engaged with our own OEMs for some time discussing the possibility of this deal to make sure they were supportive. I can confirm they're supportive. both European OEMs and our Japanese OEMs. And I don't think it's a big surprise that Heisbert and I were in Japan during April to have those conversations face-to-face. And of course, we have new OEMs from Derco, and Derco have been proactively reaching out to their OEMs, some of which are joint, of course, over the last few months too, including the Chinese OEMs that they represent. Now, what would I say? I would say the OEMs, and we've followed up, by the way, with the DERCO OEMs since. What would I say? I'd say the OEMs are supportive of what we are doing. We've engaged with them earlier, and I would say much earlier than you normally do in a deal like this. And then in terms of expansion to other geographies, look, I think you can see some of the commentary that I've made around Geely would also play into this. We're really proud of what we've done for Geely in Chile, where we've gone from the previous distributors selling just 400 vehicles a year. And in Chile this year, we will sell at least 4,000. And you never know, the team might deliver 5,000 vehicles sales for Geely this year. Based upon that performance and recognizing the intricate distribution platform that we've built, We are actively talking to them about markets in the Americas. In fact, Romeo mentioned that we've just agreed to have Ecuador as a new market for Geely. And we're talking to them about Africa, about Europe and about Asia Pacific. I think in that story is how we can work with the new OEM partners to indicate to be able to use that distribution platform in those smaller, more complex markets that we specialize in. So I think this is a big opportunity. But as ever, we have to perform. And Inchcape delivers as one of our core values to our OEM partners and all of our other stakeholders. We have to deliver and I'm convinced the team will. Then to your point about are we done in Latin America or not? Look, I think the team's going to have a lot on over the coming months post the deal completing to make sure we successfully integrate Durco into Inchcape. Now, clearly, if you go further up Latin America, into Central America, we don't have the type of market share that the combined Inchcape and Derco will have. So over the medium term, I think there's more opportunities for us to expand our business and add new OEMs. We want to do this in a step-by-step fashion because the most important thing is to successfully deliver on the integration of Derco and delivering those synergy benefits. That said, as I mentioned, our pipeline, and we've said this on a number of calls now, our pipeline in the other distribution regions is strong and there are deals of a number of sizes. But I think you should think of us doing more bolt on acquisitions in Europe, Asia Pacific and Africa. So I hope that's helpful, and I'll hand over to Heisler for the second question.

So, Mike, thank you, Duncan. You ask about a WAC, right, in fact. So just to confirm, every project, every larger project for certain, we calculate specific project WAC in a lot of detail, and we've certainly done this in this transaction. Our corporate WAC is 8.5% as published. And what I would say about the project WAC of this transaction, it is in the low double digit range. And in terms of how it stacks up against that, we'll reach corporate WAC in year one and we'll reach project WAC in year three in terms of this transaction.

That's very clear. Thank you.

Thanks very much, Mike.

Just as a reminder, if you have joined via Zoom application, please use the raise hand functionality to ask a question. And if you have joined via audio line, press star nine. So our next question is from Paul Rossington, HSBC.

Good morning, gents. Can you hear me? Morning, Paul.

Got you loud and clear.

Thank you. Well done on the numbers today and congratulations on the deal. Just one very quick follow up for me. It's more on current trading. Sorry, not specifically on current trading, but you talked previously about your order books being quite robust. And you also said that cancellation rates have not moved. Are you able to give a bit more granular detail about what kind of forward visibility those order books actually give you at group level? Is it six months? Is it 12 months? Does it vary?

significantly on a market by market basis and and that's my only question thank you okay thanks paul so let me let me give you some a sense about how it how how our order books look um i would say in most of our markets our order books are at record highs They are not particularly growing anymore. They are flat in most of our markets, which is a positive for us. In some markets, we have stopped taking orders from customers for certain models because we couldn't give a delivery date with any sense of openness and sincerity in that conversation. So we've stopped taking orders for certain vehicles. But order books remain really strong. And that's a topic which would go right around the world. What might be more useful for you is if I talk to you about what traffic we're seeing coming into our websites and what level of leads we're generating as an indication of how the business is looking a little bit. So first thing I'd say, you know we've deployed DXP into our markets right around the world, and it is DXP that's giving us the data around how consumers are behaving. So the first thing, if I break it out by region, in the Americas, we are seeing year-over-year increases in traffic to DXP, and we're seeing year-over-year increases in leads. In Europe, traffic is down somewhat. You could see that immediately after the invasion of Ukraine. But leads are up. So traffic down leads up in Europe. And we've been very much focused on engaged traffic. So I'm not that worried that we're seeing traffic volumes drop because actually it's leads that we really want. And then in Asia Pacific, we are seeing traffic down, leads down. Just in terms of give you more color on APAC, why might that be? Our Asia figures are very much skewed by Hong Kong and Singapore. You know what's happened to Hong Kong because of COVID lockdowns, lower levels of mobility, etc. I think all businesses in Hong Kong are seeing lower levels of traffic, though we are seeing that improve. And Singapore is at record low levels of TIV, which, and I think you know the Singapore story, so that's skewing Asia. But if you look at those smaller markets that we operate in, Guam, Saipan, Brunei, Thailand, etc., we are seeing increased leads and increased traffic to those. And then finally, Australia. Australia is unique for us because it's pretty much single OEM. And our supply from that OEM is relatively low, which is, we think, affecting consumers configuring vehicles because the lead time now is so long. So, Paul, by and large, order books at record highs, pretty much static. And DXP is helping us to see really what our consumers are doing. And we're pretty buoyed by what we're seeing in terms of leads coming out of DXP for new vehicles.

Hope that helps, Paul.

Yes, it does. Actually, and one other follow up, just checking my list here. When you say the 350 to 370 mil four-year PBT guidance is based on constant, sorry, current FX rates. What is your Japanese yen, Aussie dollar assumption, just if you're allowed to disclose that for reference?

Well, we're not, but I will let Heisbert have the question.

So, look, I mean, it's two entirely different questions. So they are not linked. So I think we are confident about our 350, 370 range. And the point made on foreign exchange rates has all to do with translational foreign exchange rates. And in that range is an assumption based on current rates that there is about a 10 million tailwind for translation, i.e. the pound weakening versus other currencies around the group. So that's the way we manage our business, which is the second topic of the Aussie dollar-yen. We manage the transactional forex risk in all our markets as part of our day-to-day. And you wouldn't, by the way, survive for one minute if you would do it differently in Latin America. And we are very capable of doing it, but it is clearly something which we know how to do and is embedded in the business. Australia was it has been it is now a long time ago and I don't mind you reminding me but I do I want to say that it's different now we were going a little bit with the flow of Aussie dollar yen and what Duncan and I have been implementing since we sort of took the helm is that we need to look at margins pricing and costing like in other markets so the fact that we source largely from Japan for Subaru, which is the main OEM, is just an input cost. So you need to take that into account. And if your pricing horizon needs to be adjusted to your hedging period. So we have a much more integral management of margins in Australia since, I'd say, the last 18 months or so, two years. And that's the way we look at it. So if the Aussie dollar yen changes in the short term, that has no impact because, you know, you're hatched because you link it to your pricing. And to a very specific question, again, they're not related, but there is no impact of Aussie dollar yen on the 350, 370 range. Other than a translation of the Australian dollar to the pound. So that's a translation of the results of the Australian business in Australian dollars and how that would translate into the pound. The transactional forex across the group is managed on a country by country basis.

Brilliant. Thank you, James. Thanks very much, Paul.

There are no further questions at this time. I will now hand over to Inchcape CEO, Duncan Tate, for closing remarks.

Well, thank you very much for joining today. A strong set of first half results and a very, very exciting acquisition in Durco. Thank you very much for joining. We appreciate the questions and the engagement. As ever, the recording of this session will be on the Investor Relations website later today. And if you have any further questions, Raghav is your man. Thank you. Bye.