Autorama UK Ltd (AUTO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to a short presentation to announce our acquisition of Autorama (UK) Limited, which operates under the brand Vanarama. I'm joined on the call today by Jamie and Catherine, who'll participate in the Q&A. This presentation has been arranged at short notice, so we do thank you for making the time to join us. As you all know, Auto Trader's strategy is to bring more of the car buying journey online. To date, our focus has been on our used car marketplace where we have launched Guaranteed Part-Exchange, a trial of reservations and have just commenced a trial with a handful of customers where a buyer can apply for finance on Auto Trader, which we said would be live before the end of this financial year. We're now working hard to bring these 3 products and experiences together in an integrated end-to-end buying journey for both car buyers and retailers on Auto Trader. While this is not the shortest route to enabling a transaction online, we believe it leverages our competitive strengths and capabilities, enabling us to scale so we can have the greatest choice of cars available to buy online. This approach also allows us to remain asset-light while driving significant efficiencies and transparency for both our customers and car buyers. This acquisition in no way lessens our commitment or belief in what we're doing on used cars but simply opens up a significant strategically coherent and complementary opportunity alongside it. Auto Trader is the largest automotive marketplace in the U.K. where we see very strong network effects, with the largest volume of in-market car buyers generating the most effective response for our customers who, in turn, provide consumers with the most extensive choice of new and used vehicles. The launch of our new car listings product in late 2018 has shown that we have a large number of new car buyers on our platform. In calendar year 2021, we saw an average of 1.5 million unique users each and every month viewing a new car or van on our platform and who generated over 0.5 million leads for our customers. However, despite this success, used cars continues to represent 95% of our revenue. Our strategy applies equally to new as it does to used and equally to whether the purchase is funded with cash or finance, including PCP and PCH or leasing. The acquisition of Autorama goes a meaningful way to filling these gaps that would otherwise sit behind our current priorities. Furthermore, we are very confident there is intellectual property, capability and experience in Autorama that will complement what we ultimately end up doing on used cars. The drivers of change in the sale and distribution of new cars has never been stronger, which presents opportunity but also risk to our current new car stock model. These changes have given rise to unprecedented levels of investment across the automotive ecosystem. Penetration of new electric vehicles will grow and grow quickly as the business case for electric becomes increasingly economic and as we approach the ban on ICE vehicles in 2030. Given the speed of technological change and the resulting uncertainty around residual values, we are already seeing buyers prove more likely to lease these vehicles than they were their ICE counterparts. Personal leasing, otherwise known as personal contract hire, or PCH, involves regular monthly payments, typically over a 2- to 3-year period, where at the end of the agreement, the vehicle is returned to the leasing company and cannot be purchased by the consumer. The fast growth in this product has not only been fueled by the growth in electric vehicles but also to move away from company car schemes, driving companies and individuals towards car allowances where employees source cars on their own. Some of these companies have looked to create separate brands to target consumers directly but have had limited success, which has seen growth in consumer-facing leasing intermediaries. Existing manufacturers are also increasingly looking to move towards an agency model where they sell new cars direct to consumers in partnership with retailers as they compete with new OEMs that are heavily focused on digital channels and are not investing in a conventional franchise network. Whilst this trend is likely to take some time to play out and the implications are not all clear, what is clear is that a direct and more meaningful partnership with both OEMs and funders will be important if we are to enable them to reach the U.K.'s largest car buying audience. Finally, it would be remiss not to mention the supply side shortages experienced in the new car market over the past 18 months, which will only be compounded by the war in Ukraine. The war in Ukraine is first and foremost a terrible humanitarian crisis, and our thoughts are with all those affected. The impact on new car supply will have an impact on both our own business and the business of Autorama. However, we believe it is only a matter of when, not if, supply will return to historical levels, not least due to the significant new market entrants coming to the U.K. in the years ahead. The acquisition of Autorama complements our strategy by adding digital retailing on new cars and a capability to transact vehicles from order to delivery through a retailer. Auto Trader is focused on developing an end-to-end digital platform for all its customers, enabling car buyers to do more or all of the transaction online. The acquisition of Autorama strengthens those digital retailing ambitions as it has built a scalable end-to-end digital platform, which enables buyers to transact online and choose from a wide range of new vehicles bought on a lease. Autorama has existing partnerships with OEMs, funders and retailers. Combining Auto Trader's brand and scale with this platform presents clear opportunities to expand these partnerships and create new ones, enabling the sale of new lease vehicles on Auto Trader. The acquisition moves us into a transactional model on new car quicker than we would otherwise achieve organically. Autorama has moved beyond customer origination to offer the full transaction, including ancillary products such as insurance and service plans, with delivery fulfilled through a network of approved franchise retailers. By the end of 2021, 50% of buyers completed the full journey online. As we progress our plans on used vehicle and begin to understand the level of support we need to provide car buyers, Autorama's experience, capabilities and solutions will only become more relevant to our own efforts. Finally, personal leasing is growing its share of new car sales, and this transaction enables us to evolve our current leasing proposition to meet the demands of the growing number of consumers choosing this option. In tandem with our used car digital retailing ambitions, this is a key step in creating a comprehensive online journey for car buyers, offering the best choice of vehicles, a wide range of payment options and certain ancillary products. Now for an overview of Autorama (UK) Limited. Autorama, which trades under the Vanarama brand, was established in 2004 as an online lead-generation business for light commercial vehicles. In 2017 and 2019, the business took on venture capital funding to invest in technology and marketing and to enter into the car market to capitalize on the opportunity arising from the industry trends I spoke about earlier. As a result, the business has successfully evolved into an online data-driven e-commerce business that has recently started selling new cars, alongside vans and pickups, through both personal and business leasing. They've created a scalable end-to-end digital platform, which enables buyers to transact online across a wide range of vehicles. Through an optimized front-end journey, the platform facilitates a frictionless, self-serve customer experience, providing a one-stop shop solution for leasing new vehicles in the U.K. Autorama offers coverage across a wide selection of new leased vehicles where leasing deals are supplied either from leasing companies or directly from OEMs in which the deal is funded by a comprehensive panel of leasing providers to ensure the best value for car buyers. Autorama has become one of the leading platforms for aggregating leasing deals from multiple funders and OEMs. There were 2 million new cars and light commercial vehicles sold in 2021. And pre-COVID, this was around 2.7 million. Over half of these vehicles are sold through the fleet channel, of which 0.5 million was sold on an operating lease and 150,000 of those on a personal lease. Leasing deals often referred to as contract hire are effectively long-term rentals. The customer agreement exists between the buyer and the funder with the transaction being fulfilled by a franchise retailer who delivers the vehicle directly to the customer. Customers pay a fixed monthly fee to use the car for an agreed time period and number of miles and for any additional services they may opt for. However, the customer never owns the car as the registered keeper remains the leasing company. The business is very focused on differentiating itself based on a quality customer experience, which can be seen in reviews on platforms such as Trustpilot. Historically, consumers looking to take a personal lease will have experienced a highly fragmented and telephone-based buying experience. Autorama support not only the sale, but also customers in live queries, which when combined with high levels of customer satisfaction has led to market-leading renewal rates, which underpins their potential to grow. And now for the key terms of the deal. Auto Trader will pay initial consideration of GBP 150 million in cash, with a further GBP 50 million of deferred consideration to be settled in shares subject to customary performance conditions 12 months after the completion date. Once issued, the shares will vest over a period of 2 years in 2 12-month installments. Completion of the transaction will be subject to applicable regulatory approvals, which we expect to take 3 to 4 months. Moving now to some financial details. Total revenue of GBP 59 million was generated in calendar year 2021. Of the vehicles Autorama deliver, they pay for around 10% of them, which are taken on to the balance sheet for a short period of time between paying the OEM and having the vehicles funded by the leasing company. As the business continues to grow, we expect this to remain a small part of the business as it relates primarily to the van channel and is done to secure inventory, increase the speed with which those vehicles can be offered for sale and enables those vehicles to attract the most competitive funding from their leasing panel. This accounts for the majority of the difference between total and net revenue. Net revenue of GBP 26 million was generated in 2021. Revenue is largely generated from commission payments and volume rebates from funders and OEMs. Earnings before interest, tax, depreciation and amortization in 2021 was a GBP 6 million loss. There has been significant investment in technology and marketing, the latter of which was GBP 9 million in the year. Other notable costs are salaries with approximately 250 employees, which are largely in sales and operations. 14,500 vehicles were delivered in 2021. Of that 6,800 were vans, 5,500 were cars and 2,200 were pickups. Historically, Autorama was predominantly focused on the van leasing market, which accounted for around 60% of transactions in 2019 and 2020. Autorama entered the car leasing marketing in 2018, and new car sales accounted for around 20% of total delivery in 2019 and 2020. Subsequently, cars has grown to around 40% of total deliveries in 2021 in spite of well-documented supply constraints. The average net revenue per unit delivered in 2021 was GBP 1,800. Average net revenue per unit varies across each channel, with pickups being GBP 2,600, vans GBP 2,000, and cars GBP 1,100. This is relevant when contrasting the unit economics with our core business. On Auto Trader, we generate around GBP 100 to GBP 120 per vehicle sold. Whereas on a car on Autorama in exchange for doing more work generates GBP 1,100. Whilst our focus in the near term is very much on growing volumes, it doesn't take Auto Trader like margins to generate a meaningful profit per vehicle sold relative to our own marketplace business. Needless to say, we're excited at the prospect of Autorama and their team joining Auto Trader. It fast tracks us to transacting cars online, which is consistent with our long-standing strategy. And the new car focus and capabilities they have built complement well the activities we already have underway on used cars. Finally, this opens a new meaningful relationship with OEMs and leasing companies who are set to become increasingly relevant in the new car market as the industry continues to evolve. That concludes the presentation. We'll now move to Q&A with analysts on the call.

[Operator Instructions] We have first questions coming from the line of William Packer from BNP Paribas.

Three for me, please. Firstly, in terms of the profit outlook for the business, could you help us think perhaps on a margin as a percentage of net revenue when will we breakeven and what the long-term margin aspirations are? Clearly, quite different to your core business, but some kind of color on that would be helpful. Secondly, could you talk more about the circumstances in which you put the car on your balance sheet? Thanks for the number, the 10%, put on the balance sheet. Why do they go on the balance sheet versus not? What's the kind of driver of that? And is 10% the right number going forward? And then finally, should we think of this as a read-across for the capital intensity of your used business? Are you more willing to become owners of the vehicle to facilitate the transaction or is this a new car specific dynamic?

Okay. Thanks, Will. Jamie, perhaps you take the first question. I'm happy to take the second and third.

Yes. No problem. So I think on the kind of profit outlook, people have noticed in the release that there's regulatory approvals pending. So I think 3 to 4 months, we think, likely until we're able to complete the transaction. And at that point, we can give clearer forward-looking guidance. I think clearly, we're looking to, near-term focus is around driving volume. I do think the cost per acquisition is clearly going to be lower if we're able to originate deals from someone that's on Auto Trader. So in terms of getting breakeven, we do want to drive volume, but I would hope that, that is not a significant distance away to be able to achieve that. And then I think when you think long term about the business, 20% to 30% margins is long term what we're targeting. And we think we can drive those kind of efficiencies through, clearly, synergies around margin, but also leveraging the platform that they've built and the efficiencies that are driven through that online journey.

Yes. And in answer to the circumstances where they put a car on the balance sheet, it's really a matter of convenience for the OEM and the funder. So I mentioned in the presentation that sometimes Vanarama or Autorama will get deals directly from a leasing company. In which case, a car would not go on a balance sheet. But sometimes an OEM will say, we've got these cars that we'd like to sell. Would you be able to help sell them? In that situation, Autorama might prefer to take that deal and then place it with leasing companies after that fact. It might just be a matter of a few days, but it allows them to not only take that deal on but also choose the most competitive leasing company for those. Alternatively, they could do those, kind of structure those leasing deals together in a tripartite agreement between the leasing company, manufacturer and themselves. In which case, there would be no balance sheet risk at all, and the business could operate on that basis. It just allows them a level of flexibility. And just to put it into...

Ladies and gentlemen, please continue to stand by. The conference will resume shortly.

I can fill in the, so I think Nathan has dropped off. I think he's going to say, just to put it in...

Yes. And sorry, just moving forward is, we definitely acquired the business on the basis we expect it to grow, and we certainly wouldn't see doing these deals as being any bigger part. If anything, there'll be a lesser part of how we operate moving forward as we look to scale up. And as to the third question, the read-across to used and our views on capital intensity. Now I said in the presentation for exactly this reason, Will. I think our approach to moving cars online is definitely to do that as an enabler of other people to sell cars and not to look to become a retailer ourselves or have loads and loads of cars on our balance sheet. So there certainly is no read-across. I think it's a small part of their business. I don't really see us doing this on used. What we might do and what we might learn from Autorama over time is in order to get people to transact online, you sometimes do need to have that human level of support, which is the systems behind that, the people behind that, the capabilities behind that are something that Autorama has. So there might be some read-across there in terms of what, in order to get people to transact online, what tools we need to make available, what experience do we need to make available to get them to do that on Auto Trader. And I think that's more where the learnings will be.

Very useful. Just to clarify Jamie's comment, should we think of the 20% to 30% margin as a percentage of revenue or net revenue?

Sorry. That's net revenue.

We have the next question coming from the line of Adam Berlin from UBS.

Adam Berlin from UBS. Just a couple on the market, first of all, just to understand it. Sorry for my ignorance, but can you just explain what funder is versus a leasing company and an OEM? I haven't heard that term before. So just helpful to understand what you mean by that as you're talking about the leasing market. And the second question I had on the market itself is, so what happens to the Vanarama car at the end of the lease? Will you as Auto Trader then kind of own that car or does it go back to the OEM or the leasing company? What's the relationship between you and that car at the end of the lease period? And how does that work? And then I had a question on growth. I know obviously, there's supply constraints in the new car market at the moment. But in a kind of more normalized market, is there any constraint on how many new cars you could sell in this model, i.e., has the constraint on Vanarama's growth been not having your audience, and therefore, there's not enough demand leads? Or is it really difficult to get the supply of cars even in a normal market because there's just not that many cars being made available in this model? So that would be helpful to understand kind of what the constraints are. And then just the third question is on your reporting. I think you may have just answered it, but just to clarify. Are you going to report net or gross revenue in your financials once this is completed? And in which line in your P&L do you think the revenues would appear?

Perfect. Thanks, Adam. I'll let Jamie take the last one. I'll tackle the first 3. And by all means, we're actually in different locations. So Jamie, Catherine, if you do want to add anything, by all means, chime in. I apologize for the language there, Adam, around funders and leasing companies. I think the simple view is that there are, typically, there are finance houses that stand behind PCP deals, and there are leasing companies which are what we're referring to when we say funders that stand behind the leasing transactions. What those leasing companies do is quite different to a normal bank or PCP funder because they take the vehicle on their balance sheet. They are the registered owner of the vehicle, and it's their responsibility to manage that vehicle. So these leasing companies are essentially doing 2 things. They're financing vehicles, which they typically syndicate out, and they're also managing a fleet of vehicles. And when we talk, so when we're talking about funders, we're using that interchangeably with leasing companies. They're the 2 different providers that we would typically talk to. In terms of, and it links to the point that you've just made. Because it's a lease, what happens at the end of the lease is that car is returned to the leasing company, is not returned to Vanarama. Now interestingly, Vanarama has a very good renewal rate, but the process of having that car inspected and having it picked up and then its ultimate disposal is a matter for the leasing company who has that vehicle on their balance sheet. Vanarama don't have that at all. That being said, Vanarama is obviously there and does a market-leading job of helping people with their next lease vehicle because they do have that kind of continuing contact for that reason. You said 3 questions. I got 4, Adam. So the third question that was in there is, what's the constraint to their growth? Well, I think the truth is, and this partly goes to the point on value and volumes, they couldn't be more constrained than they are at the moment because of the very well-documented supply constraints in the new car market. Typically, businesses like Vanarama, cars will go first to retailers. Manufacturers will try and get rid of their allocation through those channels, and then they cascade down coming to a business like Vanarama after that. So supply definitely is somewhat of a constraint, but we're seeing it at its very worst at the moment. And it's worth saying that there's around 150,000 cars sold like this today, of which Vanarama has a very small amount, but has a very strong competitive advantage. So even within that, they have quite a bit of space to grow. And that's before you take into account the fact that, that personal lease market is structurally growing for some of the reasons that I mentioned. Audience, I mean, is a constraint in any one of these businesses. And in fact, in any automated businesses, the cost to acquire can typically reach eye-watering levels, and that's no different for the Autorama business historically. I'd like to think that with 1.5 million people looking at new cars on Auto Trader, we're in a good position to help them lower that cost per acquisition over time and access the volume of audience they need to satisfy supply, and we're reasonably comfortable that we should be able to do that over time. And Jamie, did you want to take the question on reporting?

Yes. So I think, I mean, at a group consolidated level, we will report revenue and operating profit. But I think below that, we want to make it very clear to people how the existing business that you all know today is performing, what the revenues, what the growth rates, what the margins look like, and then we will report or make it very clear how the Autorama business is reporting. And the focus there will be around net revenue, units delivered and what the profit is for that business unit. So I think when you're thinking about trade, consumer services, manufacturer and agency, I would probably create its own line because we're certainly going to pull it out for people to hopefully make it easy.

We have the next question coming from Andrew Ross from Barclays.

I've got 3 as well. The first one is a big picture one to kind of compare and contrast the Autorama business model with fully integrated digital propositions for new car leasing like MeinAuto in Europe who are kind of fully taking the car on the balance sheet for the length of the lease. Can you just talk a bit about how the delivery works? Are you in control of that process to consumers? And also talk about the pricing that consumers get for these cars because, I guess, if you're keeping the cars on balance sheet going to OEMs, getting big discounts, you should be able to pass that on to customers. So is the balance sheet line model the best way to solve the customer problem here? That's the first question. The second one, can you just talk a bit about the reaction of franchise retailers to this? And then the third one is, just to be clear, so the 90% of cars that are not on the balance sheet, the revenue there is purely commission and volume rebates. There's no assumption on leasing income or kind of residual pass-through on that. Is that correct?

Okay. How about I take the first one. We'll bring Catherine in to take the second one. And Jamie, if you take the third one. So on your question about Autorama's business model versus a fully integrated model, just to make the difference, the very clear difference is apart from in 10% of the cases, Autorama, well, and actually, in all cases, Autorama are not selling their own cars. They're selling a car on behalf of an OEM and a leasing company. Ultimately, the leasing company is the person that has the car on their balance sheet and has the need to sell it. So as I said, there is a timing difference with some of these cars that flow to Vanarama and then out to the leasing companies, which we've talked a bit about. As to your question as to which model is better, I mean, I think our view is that the model that Autorama has where you are essentially aggregating audience and enabling other sellers, in this case, leasing companies to sell vehicles is, by some distance, the most scalable model. If you get into retailing cars, as we've seen in many cases, actually your instant constraint becomes how many vehicles you can buy, hold or fund. In this case, we have around 14 leasing companies. We can sell all of the vehicles that they have to sell. So we can get to choice, which is our goal, and we do it by not playing in their space and actually just enabling the sale. So I think that the asset-light going to [ intermediary ] model is definitely more scalable. I think what you're getting at with your question is, well, yes, but how much do you control the consumer experience? And interestingly, in the case of Autorama, I think you have a greater level of control over the entire consumer experience, mainly because you're doing it. You might wonder, well, what are those 250 people in the business doing? A lot of that is all the front end, getting consumers through the buying process. So you have a lot of control over the consumer experience certainly during the sales piece. When it comes to delivering the vehicle, as I said, that is organized through a franchise retailer, which is part of the franchise agreement with the OEM. So you could argue that, well, you lose a little bit of control over the customer experience at that point, but it's a relatively small point. It's the handover of a vehicle. And secondly, you can choose the network of retailers that you work with based on service level agreements and the like. So actually, you have a greater degree of control over that whole customer experience from start to finish than what we would ordinarily have in used cars. Catherine, did you want to talk about, I mean, it's obviously very early days in terms of the deal, but talk about franchise dealers and their reactions.

Sure. And I think the first thing I'd say on our customers and reaction is that there will be some because its Auto Trader and also because the level of change that we're seeing in the market at the moment and disruption more generally. Whether it's the OEMs looking to move to agency or some of the other moves or acquisitions in the marketplace, I think generally for retailers at the moment they're all setting up looking out, thinking about their strategy and the future role that they will play. And this will be in that mix of their thinking at the moment. Overall, we're confident that retailers will see and understand this transaction. When we think about the level of new car demand that we see on Auto Trader, Nathan talked about the 1.5 million or so unique visitors that are engaged in new cars on our marketplace. We see plenty of demand there, and we believe that we're able to support retailers, manufacturers, leasing companies. Whoever will be selling those vehicles in the future, there's plenty of demand there for us to support and enable all of those players to fulfill and be effective distribution channels for the OEMs. So I'm confident that given the role we're playing here as a marketplace, as an aggregator and given that level of demand that we have, that we can still deliver a very compelling value proposition for our retailer customer base as well.

And the last question, just on the revenue for the 90% that don't go on the balance sheet. I can confirm it's all commission and volume rebates and revenue or commission from the sale of ancillary products. There's nothing that comes from the residual value. There's nothing that comes at the end of the lease.

We have the next question coming from Giles Thorne from Jefferies.

First question is just on capital allocation and a very direct question about your intentions for the dividend and buybacks since the close and completion of this deal. And indeed, any additional color you can provide around returns on capital employed as you said from this particular acquisition will be useful too. Second thing is touching on customer lifetime value there and the implications of using Auto Trader as an acquisition channel. Would you care to comment on how big an uplift you expect to see in customer lifetime values, both on acquisition and on other things you can do around renewal rates? And then finally, and it's incredibly boring big-picture question, but there seems to be a confluence of many tectonic plates shifting going on in this deal, be it combustion engines and electric, be it leases versus ownership, et cetera, et cetera. So I'm just wondering, Nathan, for you, what is the single most important change going on in the relationship between consumer and car that has driven you towards this acquisition, if there is just one thing?

Thanks, Giles. Jamie, do you want to take the first one? I'm not sure whether you want to take the second one as well or I'm happy to take it, and then I can talk to the third one.

Why don't I take the first one. So I mean, the capital policy, we've said that we'll pay 1/3 of net income in dividends. I think that is largely unchanged. We said that we'll invest in the business. That this clearly is that investment, and then surplus cash through share buybacks. We will still, that's still the policy. I think how we fund this acquisition, I would expect most of it to come through cash, but we will drawdown some of the debt facility to fund that initial part of consideration. And the results in May, I think, will give us a feel in terms of how long we hold that debt position for. In the scheme of the facility, it's relatively small.

And in terms of customer lifetime value, I'm not sure I've got a handle on your question perfectly, Giles, but I'll give it a go and feel free to follow on. Yes. I mean, the value that Autorama generates from a car buyer is much, much higher than the value on Auto Trader. They also do a lot more work for it. I think there are opportunities or I wouldn't say it's the primary reason for doing the deal to look across from the Autorama. So I think that high customer lifetime value is something that we'll continue to build. It's based on really looking after the consumer, really providing a lot of the car buying experience. But it also includes ancillary products, something that we don't go near to today, things like warranty, things like service plans. And I think there's areas like that where, over time, as I said, won't necessarily be the priority day 1. But over time, we'll be able to look at are there some of those services that we can move into our own digital retailing product on used cars, supporting retailers to enabling them to have an option to sell to a consumer something that they might not otherwise have, which would increase potentially customer lifetime value for Auto Trader, but I wouldn't necessarily be building that into the model day 1. And what's the single most important change from a consumer perspective? A good question, I think it's always one of those questions where the answer is almost inevitably, no, there's not one single change. And this is true in this case. I think it is really the confluence of a number of things coming together at the same time. From a consumer perspective, it is definitely about higher expectations around the car buying experience driven by a lot of the big brand marketing that we've seen by many of the digital players, also due to what we've seen through COVID. So they expect a very customer-centric experience. They expect a lot of that. Not all of it necessarily, but they expect to be able to do a lot more than they can today online. So digital is one of those elements. Then you've got an element that is impacting both the consumer and the industry, and that's the move to electric vehicles, which, as I said, I think, is coming much quicker than maybe we all thought even 12 months ago. As I said, that has a specific implication for the industry and a very different implication for consumers as well. And then you've got the move towards agency, which you've written about yourself, Giles, which is very much an industry factor. And consumers don't really care about it at all, but it does kind of interact with those other 2 channels. So agency very often is playing out in electric vehicles, and the purchase process for electric vehicles is very different, which is where kind of leasing comes into it. So I think it is really about those 3 things coming about in force at the same time that's driving a lot of our strategy, including this acquisition, which is just one part of fulfilling a strategy we already had.

We have the next question coming from the line of Joe Barnet-Lamb from Credit Suisse.

Just a couple left on sort of the structure of the market. So firstly, from sort of the leasing vendor perspective, what does the competitive landscape and the level of fragmentation in that industry look like at present? And then secondarily, over on sort of the leasing marketplace side, I think there's 150,000 cars sold by lease currently, and we can see the volumes of Autorama. What proportion of those 150,000 are flowing through marketplace type of businesses and what is the competition within that space looking like at present?

So I would say on your first question, Joe, the leasing landscape is, I would say, probably not dissimilar to the automotive finance landscape. So we know and they also work with the vast majority of leasing partners, not all, but they have 14. So there are kind of 14 bigger leasing companies. In terms of the competitive landscape, I think the main, some of them do all vehicles. They all focus mainly on company cars. So competitive advantage comes down to your ability to be able to be get into company car schemes. Now that doesn't necessarily, that is very much a B2B business, and most of these businesses have been B2B businesses. That's why this consumer channel is somewhat of a new thing and a bit of a beast that they're not necessarily used to. So I think in the future, to the extent that personal leases become more important and business leases become less important, which is what we said, then a channel to market to access consumers is going to be a big competitive advantage. The other element within leasing is certain leasing companies have very tight affiliations even to the extent of ownership with certain manufacturers. So they are going to be in the prime position to be able to offer the leases on certain vehicles. So I wouldn't say highly, it's not a highly fragmented marketplace. That all changes when we get to the intermediaries. And unless Jamie can add in, I'm not sure what proportion of the 150,000 vehicles would be done through businesses like Vanarama, but we know Vanarama is one of the largest, and it's probably only 2, 3 that are of equal size facilitating the whole transaction. There are aggregators, the likes of leasing.com and some of those websites, but they're not doing the same thing. They're not enabling the transaction. They're basically collecting up leasing deals that come from what we estimate to be at least 300 different leasing intermediaries, if you like, or brokers in some cases, who kind of get the deals from manufacturers and just put the deal up on one of these aggregators and the chance of being able to get a consumer to make a phone call. So it is very highly fragmented. We think the competitive advantage in that space, which only, in our mind, really exists with Vanarama is going to be access to audience and the ability to scale because, historically, many of those businesses are very, very telephone-based deal-by-deal based. Whereas what Vanarama or Autorama have built here is very much a system and a process that can scale, which is what gives us confidence in them being able to kind of make progress in that market and potentially beyond it.

I think just to add some color on the numbers. So it's 150,000 personal contract hire leases that are written, about 65,000 of those are done through intermediaries like Autorama. It's worth bearing in mind, though, that whilst that personal contract hire, business contract hire is still, there's still some opportunity there. So that's actually the bigger part of the operating lease market, about 350,000 operating leases. Obviously, there's a lot of company car schemes in there, but this Autorama-type segment also do about 50,000 of those. So there's 110,000, 115,000 market of these kind of intermediaries of which Vanarama did -- Autorama, sorry, did 14,500.

We have the next question coming from Sarah Simon from Berenberg.

I've got a couple. I appreciate this is not really a very fair question, but we did a bit of googling, and we came up with an article, which appears to be about Vanarama or Autorama. And the CEO was suggesting that, this is in May 2021, that the company would be doing GBP 6.5 million of positive EBITDA [Technical Difficulty] turnover in the region of GBP 150 million. Now I'm guessing turnover is probably something like a kind of GMV type metric, but can you give us a sense of whether the company has performed per, let's say, business plans or if you're actually buying it with it having kind of gone a bit off track? That's the first question. Second one is just so I'm clear, the gap between gross and net revenue, that's essentially the cost of buying the car when you take it on balance sheet. Is that right? And then the third one, in terms of revenue recognition, when a car gets leased, do you reflect 100% of the commission upfront or is the revenue recognized over the period of the lease? And so you kind of have a lag between revenue generation and volumes of cars.

I'll take the first one there, the unfair question, Sarah, and I'll let Jamie take the second and third. I mean, I can't speak for the specific article or words that Andy said at the time. But what I can say is, the way that this transaction came about is the business was very much I wouldn't say off track at all. It was about to go into a funding round where it was going to raise capital to really put its foot down having spent the past 2 years really building out the brand and also building out those digital systems because prior to that the business was a very different business. So I think those levels of aspiration, I would guess, are very much about what they would achieve with the right level of, with the fundraising they were looking to do. Obviously, they've not done that fundraising because they've entered into this agreement with us. But once they're part of the family, then we will obviously, they'll have the funds to be able to go out there and market their vehicles and also go and access supply. So I think it would be more about when they get the funds to put their foot down on the business plan, which is really the plan that we're backing. Jamie, did you want to take the second and third question?

Yes. So your interpretation of the gap between gross and net revenue is exactly that. So the value of the vehicle that's acquired and then the associated cost of sale is actually the cost that the vehicle takes in on that. In terms of revenue recognition, so there are deals that are going on all the time, but revenue is only recognized at the point at which the vehicle is delivered because that's the point at which the commission is realized. The vast majority of the revenue, the commission is recognized upfront or at the end of the quarter in which the sale occurred. There's a very small amount of ancillary revenue that runs through the life of the lease, but it's very much a minority versus the overall sort of fee per vehicle that Nathan gave.

Okay. And on the gross to net, do you make any spread on that transaction? As and when you take it on balance sheet, you buy at a certain price, make a profit in that or is it entirely pass-through?

No. So the business model is just to have it as pass-through. I mean, clearly, there are small variations on individual vehicles, but the goal is to be relatively flat. If you're trying to make margin, you can end up holding on the balance sheet for longer. It is very much trying to keep that as short term as possible.

We might just need to make this one the last question if there is another one in the queue.

We have the next one coming from Catherine O'Neill from Citi.

I've got a couple of questions. I'll try and keep them brief. Firstly, I just wondered if we could get your perspective on new car production and when you think that might start to improve and what signs you're seeing? I know you mentioned the situation in Ukraine is obviously having an impact as well. And as and when that does improve, what kind of lag should we expect for Autorama if they're getting units after retail? The second question is on the revenue per unit. Are you able to split out roughly what the commission and volume rebate is? And on the volume rebate side, I was just wondering if we don't get back to a market where there's oversupply, is there a risk to volume rebates going forward. And then the final question is in terms of, I think you said you have 14 leasing companies that you work with. Are you able to provide some detail on the concentration around those leasing companies and OEM providers?

Thanks, Catherine. I will pass you over to Catherine, perhaps to give her thoughts on new car production, although it's a very difficult question to answer, and perhaps the lag through to, well, I think the lag through to Autorama is very, very short in truth, but I'm happy to add to that if Catherine is unable to. And Jamie, perhaps if you can answer the second and third question.

Sure. So on new car production, I think we were feeling a month or so ago reasonably positive actually about where new car supply was going to trend this year. We've already seen new car stock stabilize on Auto Trader and actually begin to grow as some brands were beginning to see some supply return. And we were hopeful in the second half of this year from the manufacturer conversations we were having that we would begin to gradually get back closer to what we would consider to be a more normal supply of vehicles. The last 4 to 6 weeks has clearly added another layer of significant uncertainty around that. I'm sure you've all read about the proportion of mesh wiring components, particularly for some of the German brands that come from Ukraine and Russia, and also some of the inputs into semiconductor components. That has added another layer of uncertainty over supply volumes for the second half of this year. We're actually still seeing vehicles come through reasonably encouragingly now because these are ones that would have been built up until a month or so ago. But there is now, I guess, another layer of uncertainty that we are trying to get as much visibility on as we possibly can, but we're not getting a huge amount of clarity direct from the OEMs. When we look beyond the current, clearly, quite severe implications of the conflict in Ukraine, when we spend time with the manufacturers and listen and talk to them and look at some of the projections from their Capital Markets Day, when you add up in aggregate where the existing players and some of the new entrants are all planning to get to in terms of supply levels, you actually get back to a new car market that arguably could be bigger than the market we saw prior to the pandemic. A combination of the big push towards electric vehicles and new brands entering as well as those existing players looking to ramp up market share again. So I think mid to longer term, we feel positive about where the sort of supply dynamics will trend. Short term, still pretty uncertain. In terms of what that means for the Autorama business, encouragingly, because of the structural headwinds that we see, shift to EVs and manufacturers and consumers seeing leasing as a compelling distribution channel for manufacturers and for consumers a compelling way to buy or purchase their next new electric car, those structural factors mean that supply for this segment has continued to grow despite the fact that we've now had a shrinking new car market for the last 2 to 3 years. So even with those headwinds, we're confident that the segment overall and Vanarama within it can continue to gain share.

And just on the second and third question. So the volume rebates, I think, to use kind of wording in your question, they're suppressed at current levels because the volumes are not necessarily there because of the supply that Catherine just alluded to. I mean, I think from the kind of OEM perspective, they work with a very large cross-section of OEMs, I think 36 OEMs they worked with or brands that they sold a vehicle of in 2021. It is more concentrated around those brands that have a van and pickup in their channel, as you might expect. But across cars, it is reasonably well distributed. And similarly, on the funders, they work with 14. There is a concentration if you look at the kind of volume of vehicles that funder has on their balance sheet. There's a list called the FN50 that ranks leasing companies by volume. And you can see there is a concentration around the top 5 or 6 in the 14 that they work with. You do see the same kind of distribution as you might expect when you look at those FN50 volumes.

Okay. Well, I think that brings us to the end of the call. Thank you, everyone, for your questions, and thanks for making the time at late notice to join us to talk about the acquisition of Autorama. We hope you all have a good rest of the day and look forward to speaking to you, no doubt, sometime soon. Thanks a lot.