Inchcape plc (INCH) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today on this call following the release of our trading update for the first 4 months of calendar year 2020. Joining me here is Gijsbert de Zoeten, our Chief Financial Officer; and Raghav Gupta, our Head of Investor Relations. I will comment on the group's performance, as usual, and provide some insights on the various actions we have taken to support the business in the light of the disruption caused by COVID-19. Gijsbert will cover the regional performance and the group financial position. We'll then be more than happy to answer any questions that you might have. Before I start on the group's performance, I would like to express my thanks to all our colleagues at Inchcape for their dedication during these unprecedented time. The positive attitude and hardworking evident across all our markets has driven these results in difficult circumstances, and it is a testament to the resilient Inchcape spirit which will enable the group to navigate the challenges of the months ahead. At the headline level, group revenues during the 4 months were down 32% or 25% on a like-for-like basis. This masks the solid business performance prior to the imposition of lockdowns. In the 2 months to end of February, our revenues were ahead of internal expectations with a solid performance both in Distribution and Retail. Following the enforced shutdowns in many of our markets, the performance in March and in particular in April weighted heavily on our results. Sales in our Aftersales business has unsurprisingly been more resilient than Vehicles sales, both in markets that remained open throughout and in those markets that have reopened following a period of shutdown. As of today, we are now open in 25 markets, and 8 remain shut. That compares to 14 markets open and 19 shut on the 7th of April when we last provided you with an update. Following the onset of the virus, the group quickly adjusted working practice to maintain a safe environment for our colleagues and customers as well as maintaining a robust route to market for our OEM partners and enabling us to serve our customers. Given the high level of uncertainty around the impact of COVID-19 beyond the first half of 2020 and how long-lasting the effect will be on the economies in our markets, the group is conducting a full review of its cost base. We'll share more detail of this at the interim results. Having started the period well, the disruption caused by COVID-19 had a material impact on our performance. In spite of this, the group did make further progress in reducing its retail portfolio with the disposal of 3 more U.K. retail sites. We also importantly completed the previously announced acquisition of the Daimler Colombia distribution business, complementing our Daimler distribution businesses in the Uruguay and Ecuador acquired end last year, making us the second largest distribution group for Daimler-Benz in Latin America in the space of a few months. As we look forward, we expect the fallout from COVID-19 will drive further industry consolidation, and our M&A team are assessing all potential opportunities. As per the Ignite strategy, our strengthened OEM relationships during the last 5 months should be an enabler. Let me now hand over to Gijsbert, who'll go into further detail on the regional performance and the group's financial performance.

Thank you, Stefan, and good morning, everyone. Let me go a bit deeper into the results. As Stefan mentioned, group revenues over the period decreased 32% year-over-year on a reported basis, whilst in constant currency, the decline was 30%. On a like-for-like basis, which adjusts for the retail disposals and the Daimler acquisitions in Americas, revenue fell 25%. And until the spread of COVID-19 starts to have an impact on our operations, our performance had been robust and ahead of internal expectations. Coronavirus lockdown measures started in mid-March, and the market closures peaked in April when 19 out of our 33 markets have been forced to shut. The markets that have remained open have operated at a much reduced level of around 50%. In April, group revenues were down 76% on a like-for-like basis. And as you would expect, the impact of closures and profitability will be pronounced and result in a drop-through to operating profits of approximately 10% of group revenues. Let me now provide some regional color, starting with Distribution, which saw a like-for-like revenue decline of 22% over the period. In Asia, our like-for-like performance was considerably negative, weighed down by the closure in Singapore from early April and subdued demand in Hong Kong. The trend in Hong Kong in January and February exhibited a consistent pattern with what we saw during the protest period in the second half of 2019 but deteriorated in March and April. In both markets, we observed the trend of weaker Commercial Vehicle sales as businesses delayed purchasing decisions in light of the economic uncertainty. In Australasia, while our operations in New Zealand closed in late March, the business in Australia continued to trade. Last year's supply constraints with Subaru, which you may remember, depressed the base, contributing to Australia's double-digit growth in the first quarter. The April month was much reduced, although the performance over the 4 months was still robust. Europe contributed to the Distribution growth in the first 2 months but deteriorated thereafter as it was impacted by closures in March. While Romania and Bulgaria remained open throughout the period, we experienced a more resilient performance in Aftersales compared to Vehicle sales, a theme we've seen more broadly across the group. Our operations in some markets resumed last week, and the demand for Aftersales business has been good. However, it's too early to say whether this trend will persist or if it's a catch-up of activity after nearly 2 months of closure. In Americas, closures happened relatively early on as governments acted quickly and applied strict curfews. Performance in the first 2 months was solid, but the lockdowns in Chile, Colombia and Peru, 3 of our largest markets in the region, had a material impact on our sales development in March and April. Finally, our operation in Africa, where Ethiopia is the largest contributor, experienced growth versus prior year, where we were limited by currency availability. Our business in Ethiopia remained open throughout, and its skew towards Aftersales also provided resilience. Now moving to Retail. In Retail, revenues declined 28% on a like-for-like basis over the 4 months, and we made a good start in 2020 with Retail performing ahead of our internal expectations. The closures in the U.K. effective from the 24th of March resulted in the effective cancellation of one of the biggest weeks of the year for new car volumes. And in April, with the U.K. market closed, we generated less than 1% of what we had originally expected with a small amount of Aftersales business for emergency services. Our performance in both Russia and Poland was good in January and February, but then also Russia closed in late March. Now moving to the group financial position. You will recall from our statement on the 7th of April that we were comfortable that we have sufficient financial resources to navigate an extended period of uncertainty. This follows an assessment of various conservative scenarios including the prolonged period of shutdowns and materially reduced activity. I can confirm that remains the case today. Nevertheless, given the high level of uncertainty around the duration and impact of COVID-19, we considered it prudent to explore other debt options to further increase our flexibility, and we have been confirmed as an eligible issuer to the U.K. CCFF scheme. In addition to the flexibility provided by the CCFF, we have GBP 245 million of available cash and GBP 420 million of headroom on our RCF. Our net debt currently stands at GBP 210 million. Both our trading and our cash flow outflows related to stocks has been in line with what we had forecast when we published our update on the 7th of April. And as Stefan said, we have been collaborating with our OEM partners to manage our inventory levels and financing terms. We have renegotiated our terms across many of our markets, not just those that have been forced into lockdown. And the situation has been helped by the fact that OEMs stopped production, and those that have since resumed are doing so at a lower rate. In the coming months, we expect our inventory levels will rise as we take delivery of new stock, albeit to a lesser extent than we had anticipated on the 7th of April. And in the light of the uncertainty, we have meaningfully adjusted our orders for the second half. Now before handing back to Stefan, I would like to say that the situation remains dynamic. And as restrictions ease and some markets reopen, we expect that the increase in business activities will be gradual. We announced on the 20th of March that we were putting on hold any future guidance until the overall impact of COVID-19 on Inchcape became clearer. Today, it's still too early to provide a forward-looking view of the company performance in 2020.

Thank you, Gijsbert. In this challenging environment, I am pleased with how quickly the group has reacted. And I'm convinced that as the remaining closed markets become operational again, the strong cash generation and high returns that emanate from our primarily distribution business model would come to the fore. The months ahead still present a high level of uncertainty, and it is for that reason that the Board has taken the decision to preserve cash, and the group is undertaking a detailed review of the cost structure. All of these steps will lead to a leaner and more resilient group, ready to continue on its path to be the world's most trusted automotive distributor and retailer. I'm absolutely convinced about this. As most of you will know, this is my last results call as CEO before I will leave Inchcape at the 30th of June and take on my role at Imperial Brands on the 1st of July. I've thoroughly enjoyed my 5-plus years at Inchcape, and it has been a privilege to work alongside such a committed and passionate team. I wish all my colleagues and Duncan Tait, as my successor, the best for the future. I feel with the transformation of Inchcape towards a distribution-focused business model and the strengthening of our OEM relationships driven by the Ignite strategy, Inchcape is better placed to weather the COVID-19 disruption and to afterwards resume its growth story as a consolidator in the higher-margin distribution business. Gijsbert and me will now be more than happy to take any of your questions. Thank you.

[Operator Instructions] And the first question comes from the line of Sam Bland.

Two questions, please. The first question is you mentioned that 10% drop-through approximately in April. Do you think, in the months ahead, that kind of circa 10% drop-through level is a fair assumption for the drop-through in any future months of revenue decline? And the second question is I just wondered if you could give some details on the change in net debt you've seen over the last few weeks as the lockdown has come into force maybe since that sort of circa 7th of April time frame.

I will take the first question. Gijsbert will take the second one. On the drop-through, clearly, we want to provide you the guidance, which kind of goes back to our Capital Markets Day where we talked about how our business model works. Yes. As you recognize, this is a mixture between a Retail business and a Distribution business, which now are more skewed towards Distribution. I think it is providing a good guidance overall. At the same time, you can rest assured that we are now -- that the situation is becoming clearer. Yes, we are also taking additional cost actions in order to adjust our cost structure, yes, because the drop-through rate, it was primarily something related to a sudden disruption in the business. That clearly we have seen especially in the month of April. So you should expect things to improve from here because we are actually now taking the cost action that we talked about earlier.

Sam, Gijsbert here. So in terms of net debt, yes, that's certainly an important data point for us. You've seen the strong liquidity. But also in terms of net debt, there was hardly any movement in net debt between the 7th of April and the 20th of May, and that's really a testament to the impact of the collaboration with our OEM partners in terms of extending credit terms and in terms of reducing stock orders. So it's actually better that -- cash position than we expected at the beginning of April.

And the next question comes from the line of Georgios Pilakoutas.

Stefan, thanks to you over the past few years, and then best of luck in the new role. Three questions from myself. The first, could you comment at all on how markets have been performing as you reopen? Is there any indication of pent-up demand, or are you kind of seeing a more gradual build? How does that vary by different regions? Second one, there was a comment on you expect more consolidation in the market. Could you kind of comment where -- if there are any regions you think -- that kind of you see consolidation perhaps being more likely to be happening? And also if you could comment on kind of how comfortable you feel with the kind of financial headroom and at what point kind of you start to feel -- I appreciate you've got kind of the -- you've given some -- an update on the facility headwinds. At what point you might want to consider them sources of capital? And then, finally, just a small one. The U.K. disposals, could you confirm what the proceeds from those are?

Thank you for your best wishes for the future. Much appreciate it. Yes, on your question, yes, on trading of markets that have come out of the lockdown, yes, actually, most of these markets have virtually come out in the last 2 weeks, yes. So it is really early days. I think the one thing that I feel confident with, you can clearly see that the Aftersales business is more resilient. You see that come back faster, yes. That we'll see quite broadly across the market. On the new car sales side, it is clearly much -- it's too early to tell at this point in time. What we can clearly see, we have seen new car sales in all markets, yes. So that's an important piece to recognize. But it's far too early to really read a trend into it. All what we've seen is clearly business has actually started to resume, yes. On the question of consolidation, it is very clear in our discussions with the OEMs that Gijsbert mentioned, yes. Clearly, we are seeing a really -- I mean, OEM partners being very supportive to Inchcape and really appreciating, yes, our financial strength in this unprecedented disrupted market, yes. Georgios, I think we're hearing you kind of typing in. You might have to go a bit on mute.

Sorry. Yes, sorry.

No problem. Yes, no problem. So on the -- so when you look at it, that we clearly see an opportunity for consolidation because, to a certain extent, it is very clear not all operators in this industry are as prudently financed as Inchcape, yes. And this is exactly a period of time where OEMs get reminded about how important it is to be financially solid in a world like this and to be able to deal with challenges like COVID-19, yes. And I wouldn't say there's one specific region. We see that picture emerging across the world. We clearly also -- I would say, the OEM partners appreciate strong partners across the world, and Inchcape is the only global distributor with a presence on every single continent, so that definitely should help us. On your question on financial headroom and I think the inherent question here about capital rates, we -- at this point in time, given the cash generation of this business, yes, when business returns to slightly more normal terms, yes, and also given the very low leverage this company has before, it wouldn't be one of the things that we would consider at this point in time, yes. And you will have seen that all our acquisitions in the last couple of years have been financed out of the cash flow this business has generated. And we feel very strongly and is inherent in the business model of distribution that this is a highly cash-generative business model. Okay?

Yes, great. And sorry, just one final one on the proceeds from the U.K. disposals.

Sorry. Yes.

Yes. I mean it's a small -- there were small disposals. It was more in there as a data point view to see that we continue to progress our strategy just to the move towards the distribution.

And the next question comes from the line of Mike Allen.

Just a quick one from me on working capital. If I look back at the last downturn in 2010, I think we saw a huge working capital reduction of about GBP 176 million. And I think that kind of stopped that cover target that was in place at the time. We've achieved about 7 months ahead of plan as well. And I just note, would be interested at your comments with OEM collaboration, extending our payment terms, et cetera. I just wanted to get a feel for the level of working capital reduction that we might see. And given the business has become more distribution focused since the last time as well, might we expect a bigger kind of bounce back in working capital? I just wanted to get a feel for the dynamics there which may well further enhance balance sheet liquidity that you've got.

Mike, Gijsbert here. Look, I think we're taking a slightly different approach versus where we were in 2010 in terms of it's a bit more collaborative approach that we are taking this time around with our OEMs. So we are clearly working on reducing working capital. We have importantly reduced stock orders materially, even committed stock orders during Q2 that were quite -- anything that was not on the boat, basically, we were able to cancel all those. And I think the way to look at this is that there is going to be an increase in working capital until June, July when there's still stock coming in and we're not selling all that much. And after that, working capital should start to come down, of course, depending on the uptake of sales, which we do not know. So I think we manage it mostly from a liquidity perspective, where we are in a very strong position. We manage it from a collaborative position, where also, as opposed to 2010, the OEMs have stopped production so that there are less cars in the system. And I think also even the demand situation is such that people realize that really, there isn't much point in pushing a lot of cars out, and that's also not what we're seeing. So there are a lot of differences, I think, between where we are then and where we are now, but we think working capital management is still working very well.

Mike, I would like to add one point because I think if you bring up the reference over to global financial crisis, I think it's a good point -- home point to make. I think the company today is in a very different place. And the company in the global financial crisis, as you will recall, have just made some very large retail acquisitions before, primarily the Russian business. So at that point in time we were at a very different level of leverage. So therefore, the company was much more in the need to aggressively reduce its working capital and, as we've talked in the past, in the process, damaged its OEM relationships by shutting down sites and other things in an aggressive manner. I think we have to -- we have worked very hard now of being in a very different position. Yes, we've been now focused on Distribution, not on Retail, with a business that is clearly significantly more cash generative and clearly coming into this crisis with a very different debt levels versus where the company was in the global financial crisis. So we actually have, I would call it, the luxury and the privilege to actually think through our relationship with the OEMs because we have that financial capability that the company clearly did not have in 2009. And it is absolutely an element our OEM partners see. And that bodes well for Inchcape in the future in the world of distribution and retail and as a partner of choice for the OEMs. So Inchcape is behaving in a very different way versus the last global financial crisis, and that is appreciated by all our partners.

And the next question comes from the line of Geoff Lowery.

Three questions, if I may. First of all, just coming back to the 10% drop-through number, is that after the benefit of various government schemes in terms of wage support, business rates relief and so on? I'm just trying to understand the up and downside sensitivities around the 10% number. Second, and I appreciate this is very early, how are you thinking about your sensitivity to finance provision in terms of how customers buy cars, both new and used? There were some pressure points around that during the great financial crisis. And third, a big picture one for you, Stefan. When you look back at your time at Inchcape, what would you have done differently?

Okay. I'll let Gijsbert deal with the first 2, so I get some time to think about the third.

Yes. So I mean we've provided the 10% drop-through as a sort of a rule of thumb that you can provide doing some scenario analysis on a go-forward basis is the first answer. I mean -- so it is -- our cost base is changing, so it does include the benefit that we have around the world from any government support schemes. That's unlikely to decrease clearly. At the same time, it includes cost savings that are going to increase. So it's sort of a net number of those factors playing around. And as Stefan said also, we are -- we will be working on that percentage on our cost base, and we'll come back on that at our interims to tell you about our message in that space. I think in terms of our -- of financing issues of our customers, I mean, we -- I mean, first of all, we're not seeing much as yet, but it's not -- in fact, it can be quite a reverse. If you take the U.K. as an example, where you have the B2B programs, that actually is a helpful way for consumers to continue to buy cars as they preserve some equity during the period of owning the car. So at this stage, it's not a major concern we have. We're not seeing a big impact, also not from the banks -- on the bank side in terms of availability of financing. They're generally very attractive products, and we act, in many cases, as you know, just as in you get a commission for being in between the customer and the banks. And there's no signs at this stage that, that has changed.

Geoff, on your last question, for me, what is interesting reflection of these 5 years, number one, what actually is quite fascinating, when you look at Ignite, where we launched Ignite now 4.5 years ago, I have these 5 components to it. To a certain extent, as a CEO, you always think one of them is not going to work as much as you expect it to work. What works for me personally amazing and fascinating, and I have maybe 30 years of professional career, that actually all 5 worked, yes, and actually have delivered very significant benefits to the business, yes, and partly because they hang together, but if that was for me one of the wild things, fascinating things. As you asked about what I'd done different, interesting, one of the things which surprises me as you asked me, as I reflect on the last 5 years, typically, a strategy when you're in business kind of tends to you have done the things after 5 years and there's little left to be done behind the strategy. What I find fascinating, what I would -- is there is still on every single 1 of the 5 so much more to be done, yes, so there's still a lot of gas left in the tank. And that is, for me, probably the biggest thing that I feel about it. So it will be down to Duncan to reflect on the strategy, but I think that is the big surprise to me as I reflect on the last 5 years. And there is so much more opportunity. That tells you something about the richness of the business and the opportunity that is clearly there.

And the next question comes from the line of James Zaremba.

Yes, 3 questions from me, again, please. One, just a follow-up on the drop-through. I mean, clearly, you have quite different gross margin of your Aftersales versus, I guess, new vehicle sales. So I was wondering whether the kind of sensitivity around that, on your point around the Aftersales resilience and if, let's say, Aftersales decline is much less than new vehicle decline. A second one, just on -- again, on the U.K. Retail sales, I know it's very small, but just what freehold property sold with that and then in terms of where the disposals sold at the net book value, profit or loss. And then I guess the last one would be in terms of, I'd say, online sales. Obviously, the lockdown has changed kind of consumer behavior in your markets which have reopened in, I guess, the reopen period. Have you seen a material change in the mix of online to, I'd say, at-site sales? I mean how you're thinking about how you change, I suppose, practice going forward on the back of that.

Sure. Jim, on your first question about drop-through, you're absolutely right, there are different levels of drop-throughs between the different lines of business, yes. And what we've provided you with is more the general. Actually, you rightly point out there are different drop-through rates for different lines of business, yes. And to a certain extent, logically, the Aftersales is the most resilient one, though there you see pre-release reduction, and it's the one that flows mostly to the bottom line, yes. But I think the overall guidance is still the right one. And I think it's honestly too early to say how it will look down the road. I think what I feel very confident about, we talked about adjusting the cost structures of the business to a new lower level of activity across the world in our automotive. And we have a long track record of adjusting, especially in our Distribution business but also in our Retail businesses, our cost structures to the level of sales. That's one of the benefits of operating in the automotive sector who has -- who sees swings over time, yes. So I wouldn't be too hung up about what happen in the next couple of months if you look for the longer-term profitability of the business because this business can adjust to different levels of sales, yes, relatively quickly. Yes. On your second question, on U.K. properties and so on, now one of the benefits that Inchcape definitely still has, we still have quite a high share of owned properties in the U.K., yes. And you've seen that partly that we captured more than GBP 100 million of cash out of our U.K. business with the disposals last year, yes. So in principle, there is some value here. But at the same time, we've always said about U.K. plays an important part of our OEM partner of choice global strategy, yes. And we also believe there's a role to be played for a large retail market in the Inchcape portfolio. At the same time, the 3 disposals that we told you about this morning that happened still in the first 4 months gives you an idea. So we constantly will look at our exposure to the U.K., yes, and what sites do make sense to keep ourselves and which sites make more sense for somebody else to offer. Yes. On your final question on online sales, now I think it's honestly too early to tell what would be a new normal between online sales and physical sales in our industry, yes. You would have seen a lot of things being written up. Seeing it across 33 countries, I think we'll really need to see what the new normal looks like. However, I think what is truly exciting is that Inchcape has behind the Ignite strategy about being the #1 for our customers. We've invested a lot in our digital capabilities, to our best knowledge, ahead of many other players in our industry. We're among the largest users of Salesforce.com in the world in our sector, yes. We've invested, as we've told you before, in online -- complete online selling capabilities in our Australian market with our partner, Subaru. And therefore, I think these investments that Inchcape has made globally well before the COVID-19 crisis, as we could see customers switching more to an online digital buying and even aftersales act, these investments we've placed in the market for the last 2 years will serve us extremely well in the years to come, yes. And as a distributor, primarily as a distributor way, we're much more in control of the online experience, where we have the database for all people searching for a certain car from a certain brand in a certain country, puts us actually in an extremely good position to benefit as the market might be switching more to online sales in new, used and aftersales.

[Operator Instructions] And the next question comes from the line of Andrew Nussey.

A couple of questions from me, if I may. Looking slightly towards recovery time. First of all, do you foresee any supply issues given the global hiatus in manufacturing, and that is both in relation to new vehicles as well as some aftermarket? And secondly, whether you're sort of getting any indication from discussions with governments or OEMs around what there might be in terms of potential stimulus to consumer demand for vehicles.

Yes. The -- on the question of supply, overall, I mean, the benefit of being in 33 different countries and working with virtually all the key OEMs in the world gives us quite a good picture. Overall, none of our major OEMs have flagged any major supply disruptions, yes. That doesn't mean there is not one model not available in the short term, but we are not observing that the recovery of the industry will be in a major way impacted by supply shortages. I think one of the benefits, and Gijsbert touched upon it before, was what's different to the global financial crisis this time around, you have also seen a meaningful reduction in supply from the OEMs, yes. But the -- everything we can see, that cars that Inchcape wants to sell to our customers across our 33 countries overall should be available to us, yes. I don't think this is going to be -- it's more a consumer demand question that I think the industry will have to work with, which brings me to your second question about stimulus from governments. Now it's pretty important to remind ourselves, Inchcape being a distributor, we are typically specialized in small and medium-sized overseas markets, yes, where you're dealing with smaller countries, so we -- as you will know, we're not typically in the Germanys, Frances and so on and U.S., where you can only be a retailer. What we would observe that in these smaller markets, for the time being, there is -- governments are still dealing with the economic -- with the overall management of the COVID-19 crisis, so it's probably a bit too early, yes. I think the only thing what -- if you look back at history, in a crisis like this, automotive has always been one of the major sectors that governments have used to stimulate the economy, and that would have included a number of the Inchcape markets. And the most prominent examples would always be Hong Kong and Singapore, where you will know the commercial scrappage schemes that have been going on in these markets for an extended period of time were partly motivated by environmental concerns but always have been also motivated by economic stimulus concerns. So if you ask me to look ahead, I would expect to see across some of our markets governments actually providing economic stimulus via the car sector because that's what they've done in the past. But it's far too early to say where that would happen and to what extent.

There are no further questions at this point. [Operator Instructions]

Okay. Well, if there are no further questions, and Raghav, as you know, is always there to answer any questions that you might have, thank you very much for spending the time with us this morning.

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.