Inchcape plc (INCH) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our 2021 interim results. As usual, I'm joined by our CFO, Gijsbert de Zoeten; and our Head of Investor Relations, Raghav Gupta. In a moment, there will be 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 3. I'll begin by running through the first half highlights and headline financials before handing over to Gijsbert, who will cover the financial performance in more detail. I'll then spend some time updating you on the group's strategic progress and our 2021 outlook. We will then open the lines for your questions. On Slide 4, we have summarized the highlights of the first half. Firstly, on behalf of the entire Board, I'd like to express my sincere thanks to all of our colleagues across the globe for their ongoing dedication and commitment. Our performance would have been impossible without the efforts of everyone across the group. In the first half, we made encouraging progress with our strategic priorities. In particular, we continue to transform our digital footprint with the rollout of our omnichannel platform now live across 10 OEM markets. We established 2 digital delivery centers in line with our plan, which will be the nucleus of the group's digital and analytical capability. We've also continued to rebalance our portfolio towards a more attractive distribution segment. Since the start of the year, we have secured 3 new distribution businesses, including 2 new markets and 1 new OEM, in addition to our portfolio of brands that we are really excited about. And we have disposed of more nonstrategic retail businesses, the most significant of which was our St. Petersburg operations in Russia. The group's overall financial position has strengthened further, supported by the highly cash-generative nature of our business model and continued effective cash flow management. We are pleased to announce that we will be launching a GBP 100 million share buyback today and that will be completed before our 2021 full year results. Slide 5 shows the first half 2021 headline KPIs. As we mentioned in this morning's announcement, the group performance in the first half was strong and exceeded our expectations. During the period, we saw a good top line performance across the regions, better margins and the benefit of our cost restructuring program. Revenues for the half were GBP 3.9 billion, which on an organic basis represents an increase of 37% versus the pandemic impacted first half of 2020. Our operating margin came in at 4.1%, which is a significant improvement compared to last year's 0.9%. The group's PBT for the period was GBP 143 million. This is a really pleasing result and highlights the sustained top line recovery and the benefits of our overhead reduction. Our free cash flow generation in the period is GBP 184 million, which represents a conversion of 115%, a combination of the strong cash performance. And the disposal proceeds resulted in a closing net cash position of GBP 435 million. The group's EPS was 26.7p and we have today declared an interim dividend of 6.4p. I will now hand over to Gijsbert, 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 7. Duncan has already referenced the figures relating to the first half of this year. The intention of this slide is to highlight the strong business performance compared to both the first half and the second half of last year. Group revenue of GBP 3.9 billion exceeded what we achieved in the second half of 2020 despite a currency headwind and the loss contribution of the disposed retail businesses in the U.K. The organic growth rate of 37% largely reflects the significant disruption caused by the pandemic in the prior year. A combination of the improved top line performance, higher gross margins and overhead savings following our cost restructuring program supported a significantly better operating margin of 4.1%, 50 basis points ahead of the second half and higher than the 3.8% margin in the comparative period in 2019. The improvement in our operating profits flowed through to group PBT, which amounted to GBP 143 million. While we are encouraged by the results, we are mindful that the first half of 2021 was to a degree supported by pent up demand. And remember, since 2019, the group has completed a significant disposal program and faced adverse ForEx movements, which you can see on the next slide. Here, we provide a revenue bridge for the first half of this year from 2019. Group revenue in 2019 was GBP 4.7 billion. This included a meaningful contribution from retail businesses that we have since sold. Partially offsetting the loss revenues from these businesses is the contribution from a number of new distribution businesses such that there is a net negative impact of GBP 0.5 billion. In addition, actual exchange rates resulted in a GBP 0.2 billion headwind. The GBP 3.9 billion of revenue generated in the first half is, therefore, 3% below the underlying level of a comparable 2019. This highlights continuing recovery that we've seen across the business over the past 12 months. We've provided the details of the impact of net disposals in M&A and ForEx on the 2019 full year results on a slide that you can find in the appendix. Now moving to Slide 9. This slide clearly shows the trend of organic growth improvement for the group and for the distribution and retail businesses by comparing the half yearly revenue trend versus 2019. Group organic growth rate has now improved for 4 consecutive quarters compared to '19. Distribution has seen a gradual improvement in organic revenue growth as the impact of the pandemic has been reduced by operational improvements. Revenue in the half, however, was still 6% below '19 levels, which is largely a function of the slower recovery in Asia, which we expected. Performance in retail has remained solid since the end of the first half of 2020. Let's now look at the segmental performance in more detail, starting with the Distribution revenue trends by region on Slide 10. Here, we show a map highlighting our global distribution presence. Starting on the right with Asia, all markets delivered positive growth in the half. Despite the year-on-year improvement, the Singapore vehicle license cycle and general softness in Hong Kong weighed on the performance of the region. Outside of those 2 markets, the others showed an encouraging trend. In Australasia, the top line performance was supported by the launch of the new Subaru Outback, helping the brand gain market share. Europe saw an uptick in demand across several markets following the easing of restrictions imposed in Q4 2020. And we gained market share in a number of markets, supported by some new model launches. We won the distribution business for JLR Poland in the second half of 2020 and the performance to date has been encouraging. The Americas and Africa region saw the strongest year-on-year increase. In Americas, the top line performance has sequentially improved for 4 consecutive quarters. The top line trend in Africa has continued to be robust. On Slide 11, we showed the revenue and operating profit performance by region from 2019 to 2021. Distribution segment revenue came in at GBP 2.4 billion, up 33% on an organic basis. Operating profit was GBP 120 million, with margins recovering to 5.1%, up to 240 basis points versus the prior year. Now taking each region in turn. In Asia, while the margins have recovered strongly, profitability remained low relative to 2019, which we had anticipated given where we are in the volume cycle. We expect profitability will increase more gradually over the next few years. In Australasia, strong top line growth and overhead savings supported our profitability, although there's room to further improve margins. In Europe, the rebound in profitability is also a function of the strong top line and overhead savings. In Americas and Africa, the operating margin of 6.1% was 100 basis points above the equivalent period in 2019, with a meaningful benefit of our cost restructuring efforts. Now moving to retail on Slide 12. Retail revenue amounted to GBP 1.6 billion. This includes some contribution from retail sites that we have now disposed in Russia and in the U.K. The step down in absolute revenue since 2019 reflects significant pruning of our retail exposure. On an underlying basis, the business in the first half of 2021 is above 2019 levels. Revenue rebounded strongly versus the prior year in spite of a prolonged lockdown in the U.K. throughout the first quarter. Our performance was resilient given the solid demand for new and used vehicles and the improvement of our operational capabilities. In terms of profitability, we saw an improved vehicle gross margin, helped by the supply-demand imbalance and also the positive impact from our cost restructuring efforts. Note that around GBP 10 million of the half 1 profit relates to the Russian operations we've now disposed. The operating margin was strong at 2.5%. Now turning to Slide 13 with a more detailed review of the income statement. In the half, we generated operating profit of GBP 159 million, a material increase compared to 2020 and only slightly down versus 2019. Let me point out that on a comparable basis, that is adjusting for disposals and acquisitions since 2019 and correcting for currency, the group is already back to 2019 levels of profitability. Our net interest expense fell to GBP 16 million in the half as we carried less inventory and we benefited from lower interest rates. Exceptional items amounted to a charge of GBP 82 million, the majority of which relates to a GBP 72 million loss on the disposal of our retail operations in Russia, where we realized GBP 110 million of accumulated foreign exchange losses upon disposal. We also booked GBP 13 million of restructuring costs as we concluded our COVID-19 restructuring program. We have successfully delivered on the savings plan and only incurred GBP 53 million of charges compared to the anticipated GBP 70 million. The underlying tax rate for the year was 24.5%, broadly in line with the underlying tax rate we expect in the medium term. Our EPS on a pre-exceptional basis was 26.7p. Now moving on to Slide 14, in cash. Cash generation was strong once again, reflective of the highly cash-generative nature of our business model and the continuing focus on cash flow management. As per the previous slide, the group generated operating profit of GBP 159 million in the half, which was somewhat offset by the outflow relating to interest and tax. We saw a net working capital inflow of GBP 72 million, arising primarily as a result of lower inventory levels, which supports the free cash flow generation. Net CapEx in the period was somewhat lower than expected, in part due to some asset sales. We expect the net CapEx for '21 will be less than the initially guided GBP 70 million. Free cash flow in the half amounted to GBP 184 million, representing a cash conversion of 115%. While the supply situation remains uncertain, we think it's unlikely that the inventory situation will unwind in the second half. And therefore, we expect our free cash flow full year will be above the top end of our more regular 60%, 70% range. We would, however, expect the inventory situation to normalize in time. The disposal of part of our retail businesses in Russia generated GBP 70 million of cash, with some smaller disposals elsewhere, largely offset by the acquisitions in the Americas. The payment in relation to our 2020 dividend amounted to GBP 27 million. Excluding leases, we ended the period with net cash of GBP 435 million compared to GBP 266 million net cash at the end of 2020. This brings me to capital allocation on Slide 15. Inchcape is a very cash-generative business and has a track record of disciplined capital allocation over many years. You can expect the same level of rigor and prudence to continue. Our first priority is to invest in the business. Given our relatively asset-light model focused on the higher-growth Distribution segment and increasing focus on digital, this tends not to be a large call on capital. The second priority is dividends. Our interim dividend of 6.4p represents 1/3 of our anticipated full year dividend, which is based on our policy of a 40% payout ratio and reflects confidence in our profit outlook for the year. The third pillar is via accretive M&A, which remains a key feature of our policy, and Duncan will talk more about this shortly. Finally, after each of the previous 3 priorities have been considered, we review the appropriateness of share buybacks. In light of our strengthened financial position, we are pleased to be launching a 100 million share buyback, which we expect to be completed before our full year results in February. Underpinning all of this is our view that the maximum leverage ratio that we would consider appropriate for the group is 1x EBITDA on the pre-IFRS 16 basis. Now to sum up, our top line continued to recover well with a broad-based improvement across the regions, reflecting some pent up demand. Gross margins were higher, supported to an extent by the supply-demand imbalance, and our results clearly benefited from the significant cost restructuring efforts. Cash management was once again very good, driving an excellent free cash flow. And looking beyond the near term, we are confident that our geographical exposure offers a long runway of growth in the mid and longer term. And with that, let me hand back to Duncan.

Thank you, Gijsbert. Let's now move on to an update on our strategic progress. I'm on Slide 17. In February, we shared our strategic framework, which we show on this slide, following a thorough review of our business and the available opportunities. All of us at Inchcape are excited by the distribution-focused growth strategy and the greater emphasis on capturing more of the lifetime value of both customers and vehicles. We are firmly of the view that with smarter use of technology, we can improve our business for the benefit of our consumers, our network of retail partners, our OEMs and our people. Since the launch of the strategy, we have made encouraging progress on a number of initiatives, which I will run through on the following slides. On Slide 18, we start with our core: Distribution excellence. This is a key focus of what we do today. Going forward, we are determined to accelerate our transformation, so OEMs find it even more compelling to work with us, making us the undisputed #1 choice for OEMs. I'll come back to omnichannel and digitalization on the following slides, but let me first give you an update on where we are with the globalization of our core processes. We are targeting for this to be completed in 3 phases. In Phase 1, we have prioritized product planning, or S&OP and customer life cycle management, and the results to date have been encouraging. Phases 2 and 3 will cover product life cycle management, channel management, logistics and stakeholder relationships. This is a multiyear project, and we are prioritizing those with the most significant opportunity. Let's move to Slide 19 and omnichannel. Having started 2020 with the omnichannel platform live with Subaru in one market, Australia, we accelerated the rollout in the second half of last year, finishing the year with it live in all 5 Subaru markets. In the second half of this year, we have rolled it out to 2 new markets, Singapore and Hong Kong, and added 3 further OEMs in Toyota, Lexus and Suzuki. The platform is now live across 10 OEM markets. As a reminder, the omnichannel platform enables a seamless all-in-one digital buying experience from trade-in to financing quotes through to vehicle purchase. This is a key component of our customer life cycle management, and we have seen tangible benefits from our platform with higher in-market leads and better sales conversion rates. This superior consumer engagement and data collection is relevant for both the vehicle purchase and after sales. Our capability here will enable us to serve consumers throughout their lifetime. We will continue to roll out the omnichannel platform into new markets and with more OEM partners. On to Slide 20 and the launch of our digital delivery centers. As part of our transformation to becoming a more digital and data-focused business, we've set up 2 digital delivery centers, or DDCs, in the first half. The DDCs already contain over 250 new Inchcapers with more than 70 dedicated to our omnichannel platform and more than 80 working on analytics. We have set one up in Manila in the Philippines and another in Bogota, Colombia, which provides the group with solutions and services around the clock. These centers are all about increasing the speed at which we deliver functionality into the markets, twice as fast. We fundamentally believe that with effective and smart use of data, we will become more informed and targeted in our customer interactions, and we'll be able to provide our dealer networks and OEMs with insightful information, and this will drive the right behaviors and get us moving forward fast. It's becoming clear that this will be a key enabler for us to achieve our ambition of becoming the #1 choice for OEMs, enabling us to grow not only within our existing footprint, but also to drive expansion in new markets with existing OEMs and new OEM partners. On Slide 21, we show how fragmented the automotive distribution market is, highlighting the huge opportunity for growth. As a reminder, the global new vehicle market totals some 90 million vehicles per annum. On an annual basis, around 17 million vehicles are sold in distribution markets, which we define as those with less than 1 million vehicles per year. This compares to more than 70 million in retail markets where OEMs typically in-source. Typical distribution markets tend to be smaller and often offer greater growth prospects as motorization levels are low, making them very attractive for us. The markets in which we operate account for 30%, which signifies the opportunity for us to expand our footprint into new territories. In addition, while we are the largest independent global automotive distributor, we distribute just over 200,000 new vehicles per annum. I'll put it another way, a little over 1% of the addressable market, which in itself highlights the size of the opportunity to grow within our existing footprint, potentially with new OEMs and into new markets. Moving to Slide 22. M&A is a key pillar of our growth story, and we have a healthy pipeline for both larger and small scale consolidation opportunities. During the first half, we won 3 new exciting distribution contracts. We secured contracts in 2 new markets, Indonesia with JLR and in Guatemala with Daimler. We're also excited to announce a global strategic partnership with Geely, which will move forward on a country-by-country basis, and is being launched with a distribution agreement for Chile. This broadens our brand exposure in a very attractive market and one where we have significant experience. Geely is a fast-growing Chinese brand. I'd highlight a few key data points. It is a leading brand in China. The Geely brand, which will begin distributing in Chile, sold more than 1.3 million vehicles in 2020. The parent company owns Volvo cars, Lotus and London Electric Vehicle Company, among a number of other brands. We're excited about all 3 contract wins, and we are continuing to review other opportunities. It is fair to say that the M&A landscape has improved compared to what we were seeing just 6 months ago. Turning now to Slide 23 and our second growth pillar, vehicle life cycle services. As we outlined in February, we are focused on building out a segment that is underserved by Inchcape today and one where we see significant room for growth. Here, the emphasis is on capturing more share from the second and subsequent phases of a vehicle's life. Our focus is on 2 areas: parts and used vehicles. We will leverage our local market knowledge and access to digital capability to grow these new businesses. It is still early days, but let me say that we are excited about the opportunities identified and look forward to updating you about our strategy and midterm prospects at our Capital Markets Day on 17th November. On Slide 24, we sized the opportunity through the lens of the revenue and profit pool over the first 12 years of a vehicle's life. Inchcape has historically been predominantly focused on the initial user phase of a vehicle's life. The subsequent phases are currently underserved by us and one where there's much value in the vehicle's life cycle when it was used as when it was brand new, and this is something that our OEM partners are pushing us to go after. We believe we have the right to play in both the initial and subsequent used phases of a vehicle's life. In doing so beyond what we do today, our business performance will improve significantly. To sum up, distribution remains at the core of the business. We see an opportunity to make this growth pillar bigger and better with effective use of technology. And in vehicle life cycle services, we believe there is significant unrealized potential for us to go after. In short, we are setting out to capture more of the lifetime value of both customers and vehicles. This business has a really exciting future ahead. We look forward to sharing more at our Capital Markets Day. Let's move on to the outlook on Slide 26. The strength of our business model and financial position means the group is well placed to continue to grow profits and generate cash. Looking ahead, while there continues to be a high level of uncertainty, both in terms of the pandemic and widely reported issues relating to supply, we expect that the strong first half performance, which in part reflected pent-up demand, will underpin our full year results and expect to deliver FY '21 profit before tax of at least GBP 260 million. Beyond the short term, our ambition is to both strengthen and further broaden our OEM relationships and to continue to expand our geographic reach, enabling us to bring mobility to the world's communities. One final slide before we open for questions. On Slide 27, we outline the investment proposition. With Distribution at the heart of what we do, we continue to be focused on growth and cash returns. Given our geographic footprint with exposure to high-growth markets and our diversified revenue streams, the group should deliver GDP plus organic growth. And the highly fragmented nature of distribution means there is significant scope for expansion opportunities. As the largest independent automotive distributor, we have a unique opportunity to leverage our scale and efficiencies. This is something we are doing today with our digital developments. From a financial perspective, aside from the attractive top line growth prospects, this business is capital-light, with a strong history of delivering a healthy free cash flow conversion in the range of 60% to 70%. Solid cash generation and disciplined approach to capital allocation should enable the group to maintain its long track record of delivering attractive shareholder value. Thank you very much for your attention. Gijsbert and I will now happily take your questions.

Duncan and Gijsbert, thank you very much indeed. And we do now turn to the Q&A part of today's presentation. [Operator Instructions] And the first question comes from Andrew Nussey.

Yes. A couple of questions from me, please. First of all, in terms of the new Geely relationship, is there anticipated road map of rollout to new territories if the Chile distribution arrangement works out as planned? Secondly, in terms of the M&A landscape, which you said Duncan had improved over the last 6 months, could you expand? Is that the sort of the scale of opportunity, the number of opportunities or sort of around the pricing expectations, which I know have been volatile. And last question, probably for Gijsbert. In terms of the GBP 90 million of cost savings, which were established at the beginning of -- all put in at the beginning of the year, now that we've got volumes nearing back to the FY '19 levels, are you -- or is there a chance that more of the savings will be held on to, sort of, greater than 50%, please?

Andrew, thank you very much for the question. So as you guided us, I'll take the first 2 and then Gijsbert can come back on cost savings. So how do I think about Geely? I think of Geely being a winning OEM. They have a wonderful track record in China, they're making all the right investments. We'll take them into Chile initially. And then frankly, we have to perform as 2 companies in Chile together. You should think of us delivering in the low few thousands when that business gets up and running in terms of volumes of cars per annum. And then we have an agreement that we'll look at other countries together. So we're excited about it. And we should also say that the reason Geely chose us was, of course, because we have great automotive distribution knowledge. We really understand the Chilean marketplace and how we can make them successful. We've also noted the fact that our digital capabilities and our omnichannel that we deployed in Chile was another reason why Geely wanted to work with us. So let's see how Chile goes. And then being the only independent global automotive distribution company there is in the world, we'll then look at other continents to take Geely in, including Asia, Africa and the Americas. Then in terms of your comments around or the question around M&A. So yes, I would say the things have improved significantly over the last 6 months. We are seeing a healthier pipeline of opportunities. I think valuations are getting more realistic. And I would remind everyone on the call that both Gijsbert and I are very disciplined in the way we think about M&A. I would say OEMs are also seeing that our investments in data and digital are paying off and giving them an edge in some of our markets. And some of the independents that I talked to, if I think about one just a few weeks ago that I was talking to, recognized that to be successful as a distribution company over the next coming years, you need to be excellent at cyber, at digital, at data and you need to be able to do it at scale. And frankly, they're going to struggle to keep up. So we think it's pretty buoyant for us, and we are seeing opportunities across the spectrum in terms of size. But we're very disciplined. We want to make sure we can do the right levels of due diligence. Not ready to announce anything yet, but the M&A pipeline is much healthier than it was 6 months ago. When as you know, we were doing single market, single OEM deals because that reduced our risk profile, and they worked out quite nicely for us. I'll hand it to Gijsbert for question 3.

Yes. So thank you, Andrew. I mean it was only a year ago that we announced the COVID restructuring in response to the situation and set ourselves a target of delivering GBP 90 million of savings, which is a very significant number. So firstly, I'm very, very pleased to say that the savings are coming in clearly and coming in everywhere. And you've seen from the margin improvement across all the regions that all regions have benefited from the COVID restructuring that we've undertaken. So the -- as you say, the -- we're almost back to the '19 levels. And we've always said, okay, we'll hold on to 50% of the savings of the GBP 90 million, i.e., GBP 45 million. We can confirm that the GBP 45 million, where we are, it's broad-based. We are very focused on stick -- that it sticks and that it doesn't creep up back again. So I think excellent progress, we confirm the GBP 45 million, and that's the level you should think of.

And the next question comes from Georgios Pilakoutas.

First one, organic revenue is down 3% versus 2019 in the first half. Do you have a sense of what the kind of TIV is relative to 2019? I guess what I'm leading to is, it feels like you've outperformed the market a decent amount, if I was to kind of have my own stab at what the market has done. And so I'm interested in you discussing a bit more what you think has driven that market share outperformance? You mentioned some car launches. And then if you can get to the brand mix that you have, but then also interested in how omnichannel has played a route in that. In the 10 markets where you've gone live with the omnichannel capabilities, do you see a noticeable uplift in market share that you can then go back to your OEM partners to kind of build a story there? And you mentioned that profitability is back to 2019 levels kind of adjusted for currency and M&A. I guess that's impressive given that market volumes are potentially still down mid- to high-single digit. Where do you think steady state operating margins will get to? And then final one on M&A, really just -- I think the question on the final one as previously, but it should be more of a steady stream of deals kind of single OEM, single market. Do you think there are bigger deals out there? Or what do you think kind of the small- to medium-sized deals is still kind of where the greatest opportunities sit?

Thank you, Georgios. So if I take 1 and 3, Gijsbert, you could do 2. So in terms of TIV, I think you're right, we have outperformed the market, and we can see that in many of our markets, safer supply and some. We think TIV is probably down 14% or so versus 2019 in the first half. That's a number that comes to mind for me. Why do I think we perform better? I think we're in the right market. So let's not forget, we are in markets which are structurally designed to grow for us because of this low motorization rate we have. The economies in those countries have also bounced back pretty quickly. And you know the investments we've made, not just in digital, but also to support our people, means that we have actually been able to trade. I personally have had feedback from some of our major OEMs that Inchcape concentrated on trading during these difficult times, and we're able to serve their customers better than some of our competition. So that came out of a few of our OEMs. So we are pleased at how we've been able to trade. Yes, we have had some new model launches like the Outback in Australasia, which a great set of digital marketing assets and launches that we did to make sure that was successful. And then you mentioned in omni. Yes, so we're now in 10 OEM markets, where I'm really pleased with how that's going. And that will only build -- our pace will only build in that regard, Georgios. So we're going to -- we want to deploy even more markets in the second half. Now what are we seeing? I think it's too early to say yet, that we can definitely draw a straight line between omnichannel and market share because I think there are many things that affect that. What we can say is we are getting way more digital leads. The cost to generate those leads is obviously way lower than through traditional channels. And then our conversion rate of those leads into closed deals where someone buys a vehicle from us is also improving. So I think it is very promising about how the omnichannel is working for us. And in terms of how the OEMs are feeling about our omnichannel investments, there's been several of our OEMs that we have shown our OEM road map -- our omnichannel road map to and the capability of it. And in our markets, we are pretty confident that they'll use our technology. So pleased with how it's going, frankly. To your -- I'll answer question 3 and then hand over to Gijsbert. So are there bigger deals now are we interested in them? So a little bit like I said to Andrew, I think it's a healthier environment. We have a more vibrant pipeline, and there are frankly deals in there, which are smaller, midsize and some larger ones. But we're only going to do these if we can see how they're accretive to the group, and we're not going to overpay for them. But the environment is changing quite positively. And I would say we are seeing more realistic valuations as people have come through COVID. Gijsbert, I'll hand over to you for question 2, please.

Yes. So in terms of operating margin, I mean, firstly, just acknowledging, again, the encouraging trend and the quick bounce back on the back of both resilient gross margins and clearly the impact of the cost restructuring we spoke about. So the 4.1%, what do I think about it? So if you sort of segment our business, I would say that the margins in distribution are actually sustainable. If anything at the moment, we are held back by the fact that our Asian business is still significantly below 2019. And that part of the distribution business, as you know, has high margins. And also, I would say, in terms of regional, there is upside still in our Australian business. Now when it comes to our retail business, an operating margin of 2.5% is historically very high and has been really helped by the imbalance between supply and demand. So I wouldn't think that, that is a margin that is sustainable over time. And you should perhaps think about a margin more in the region of 1.5% which, by the way, is ahead of what we have historically done, recently at least. So I think those are sort of the underlying trends. Distribution sustainable, perhaps some tailwinds coming and retail margins not sustainable at the current level, but still expected to converge to a higher level in the past.

Great. That's very clear. Just one follow-up. You mentioned the Australian margin recovery. Do you have kind of any numbers that you can provide in terms of transactional tailwind going into the second half and next year?

Yes. Look, you know that we'd like to talk about the Australian business in a holistic way, right? So I'll have to do the bigger picture here, where we're absolutely -- we've got a great product mix now with the Outback. And if we had more of those available, we would have sold more. We've got a new management team in place. We've done restructuring in the business. And yes, there is also the Aussie dollar, right? I don't deny that. So I think margins in the second half on that basis will be helped by where the Aussie dollar is in comparison to 2019.

And the next question comes from James Zaremba.

Yes, 3 questions for me, please. One, just on the gross profit mix. I guess if I look at the aftersales contribution, it seems to recover a little bit less than vehicles. And I was wondering, is this kind of a temporary lag given the lockdown or there are some more kind of medium-term factors such as the lagged impact of having lower FY '20 sales and therefore, you're fleeting slightly smaller than it might have been. The second one, just on the cost savings for Gijsbert. I mean, on my numbers, it looks like you're tracking closer to the GBP 90 million than the GBP 45 million despite volumes as you look at 2019 levels. So I was just wondering if you could help us with what that pro forma cost base you're looking in. I think you had 855 recently, I guess we had the Russian disposal as well, and some acquisitions. And then lastly, just on the working capital and the inventory move, is the kind of relationship between payables and inventory kind of similar in terms of the financing? So I would have thought you might have slightly more of an outflow that was quite strong. Sorry, thanks.

Very good. Thanks very much, James. I'll do one. Gijsbert will probably have some clarification questions to 1 and then Gijsbert, you can do 2 and 3, that would be wonderful. So just on gross margin mix in terms of after sales versus new, yes, clearly, we've seen strong margins in new, largely because demand is a little bit ahead of supply in almost every market we operate in. And then the way you should think about our after sales business is, there's frankly just been lower levels of mobility or people traveling around, fewer miles driven, in pretty much every market we have. And therefore, you see lower aftersales volumes, a little bit because in some places, people can't get into our dealerships. And in other cases, frankly, because they just -- they're driving fewer miles. So what do we think will happen with aftersales over the -- over time, we think it will come back. And we're beginning to see signs that it is as people have higher levels of mobility. Gijsbert over to you.

Yes. So James, on the cost savings basis, you're right, we said GBP 90 million versus a pro forma '19 number, and this is 855. I think in broad terms, if you take out the net disposals and some ForEx, the number is a little north of 800 rather than 855 is the way to think about it. And if you then look at the half 1 run rate, that is how we come to a number which is a little north of GBP 45 million. So I think that would clarify if it's further detail number I can give. But broadly speaking, 855 is updated as like 800, right, on that basis of the portfolio changes and some ForEx. In terms of working capital, yes, I'm aware you can't really see in the receivables, if you like, the element that relates to inventory financing. But fundamentally, the way to think about our working capital is net inventory was lower that has driven the improvement versus the end of 2020, right? So of the GBP 70 million inflow, the vast majority is related to lower inventory -- net inventory financing. And the other debt is in credit, the balances, frankly, are -- had some movements, but that's not the story. So on a sort of go-forward basis, expect some of that to unwind. But given the fact that we expect the supply situation to continue also into '21, we don't expect a full rewind in remainder of '21.

[Operator Instructions] The next question comes from Sam Bland.

I've got 2, please. The first one is on sort of supply visibility into the second half. Could you talk about, I guess, how much of it you have both in Q3 and Q4. And to the extent that there is some uncertainty there, how you then reflect that in the updated full year guidance? And the second question is on -- there's a slide, Slide 30 in the appendix, shows sort of pro forma 2019 operating profit of GBP 336 million. If we're thinking about a time when revenue gets back to that level, should we sort of take that GBP 336 million and roughly add on GBP 45 million for structural cost savings to get an operating profit? Or are there are sort of other nuances and things to be aware of there?

Thanks for the 2 questions. I'll take one. Gijsbert might want to add some clarification to it. And clearly, Gijsbert will be doing number two. So on the topic of supply. So let's be clear, we have seen some supply issues in the first half. And in general, about my comments before, demand in general has been higher than supply. And that's a global comment across our markets, and therefore, that's been pretty good for us in terms of margin. In the second half, you will have seen a lot of commentary from the OEMs that they were seeing factory closures during late Q2 and they expect them during Q3. Now that clearly will impact supply. And we -- as you know, we have this excellent sales and operations planning process, which is digitally enabled, which enables us to understand what each of the markets need. And I think our OEMs are relying increasingly upon us being incredibly accurate about we say -- about how demand is in a particular market. Now our S&OP process runs every month. We have reasonably good visibility for Q3. And we think Q3 will have a genuine number of supply issues across our markets. So Q3, we already know that. The indications from the OEMs is that we'll see a better level of supply in Q4. Now that is not yet locked in. It means about them getting availability to not just semiconductors, but it's right across the board. It's metal, it's plastics, it's leather. It's everything that you go towards manufacturing a vehicle is in somewhat short supply. So good visibility of Q3. We know there are issues in Q3. Q4, the OEMs are hopeful. We're using our S&OP process to manage that. And frankly, I don't think in the way we're planning for 2022, that supply will magically be fixed on the first of January '22. I think we have -- this will run for some time. And OEMs are giving us different views as to when they think supply will come back to more normal levels as to whether that's the end of the year, Q1, some people saying Q2. And I'm conscious the semiconductor market is actually saying 2022 because we have structural supply issues of semiconductors. So I hope that answers the questions in terms of the way we're thinking about supply.

All I would add is that if Q4 is not seeing those disruptions, if that was the case, and I think the uncertainty has been clearly flagged up, then that would provide an upside to the GBP 260 million number that we have put out today basically, without getting carried away, guys, please. So in terms of your other question, basically, when are you back to 2019 if I sort of rephrase it, if you take the GBP 336 million number operating profit we provided in the appendix. So give or take, GBP 35 million, GBP 40 million interest out of that, talking about a PBT number of just shy of GBP 300 million just to get everyone in the room on that page. I think -- and your question was, can we simply add the GBP 45 million of cost saving stick to that as a sort of an expectation? I think there's always more factor, Sam, right? Let's recognize that. But I think perhaps the main thing I would highlight is the Asia recovery. When you look at where we are at the half, but also as we look ahead to the full year, we expect most regions to be back to '19 levels or indeed a little beyond. But Asia is still significantly below. We guided already last year, let's say, that the Asia markets in Singapore will be 25% down on the back of the currency cycle -- sorry, the current cycle, the vehicle certificate cycle. And that was a huge drop that did happen was aggravated by COVID. And we're now on the way back up, but we are on the way back up in the mid-single digit pace. So in terms of margin from that perspective, the overall group margin is really weighed down by the Asia recovery. So it depends on the pace of that recovery, I would say. And there is some of that in Hong Kong as well, where we're still waiting for the border to reopen. As you know, we sell a lot of vehicles that help entrepreneurs traveling in and out of China. Unfortunately, that has not happened yet, but that will clearly be another upside for the future, but we don't know when that's going to happen. But I would -- in simple terms, say, it's really the Asia recovery -- pace of recovery which we expect to be gradual, right? So it will provide a headwind. But that is a main thing in this whole equation when you get back to the 2019 number.

And the next question comes from Paul Rossington.

Two questions, not so much on today's numbers. Can you remind us where you are with the Toyota secondhand kind of online experiment in Greece? I think you were launching of course there. And also, can you remind us in Singapore, where you are with the service agreement. I think you had in place with one of the local ride-hailing businesses there. Both areas of investment that I can't quite remember we've spoken about those recently, but that would be great.

Thanks so much, Paul. So first on Toyota Greece. So as you know, we said when we announced our strategy in February. We were looking at 2 very significant growth opportunities in front of us. One was that we just have 1% market share or so of the distribution business in the markets we face into, so a big opportunity for growth. And as you're taking me down to the Toyota example, we believe that in vehicle life cycle services, the profit pools in the second and third phases of a vehicle's life are approximately equal to the profit pool in Phase I, so a big opportunity for the group. Now we are running a number of, let's call them, tests about our used proposition. And one of them which we are running with Toyota in Greece is the one I mentioned when we spoke in February at our full year results. So it launched on time. We are getting good feedback from our independent dealers. We're getting good feedback from Toyota, and I'm pretty pleased with how it's going on. What we're now looking at is other markets that we could take that into. Now at the same time, we have some other tests that we're running, and we'll -- I'd like to tell you more about those at the Capital Markets Day. But let me leave you with a view that I'm really excited about what we're doing in VLS (sic) [ the Hellas ]. I think our tests are going well. I'm pleased with progress in Greece. And at the Capital Markets Day on the 17th of November, we'll tell you a little bit more about our ambition in that part of our business. In terms of -- in Singapore with Grab, so Singapore is a really innovative place. We have a really good relationship with Grab. Again, good collaboration with our OEM in Toyota, about how -- between us and Toyota, how we were able to optimize servicing for that fleet. And we've really got our eyes on the far future of automotive or mobility, when vehicles are running pretty much 24 hours a day. And our job is to supply those vehicles and keep them operational and therefore, the servicing time to be the absolute minimum. Now we've applied data, digital, robotics, process improvement to enable us to do that. And we'll see -- we might see a little bit more of that going on in some other markets. But for the moment, we're pleased with the way the Grab business has gone in Singapore and my view is, so is Toyota. Paul, did those answer your questions?

Yes it did. Thank you.

And the next question is a follow-up question, I believe, from James Zaremba.

Yes. I just have a follow up really about the Geely agreement. And obviously that's a new one. If you could just talk a little bit more about, more broadly with new OEMs, I guess, how the relationship started, I guess, in terms of the pitch. What kind of data points or demonstrations you were able to give them about your requirements versus maybe their existing suppliers in the market, that would be really helpful.

So we have some wonderful OEMs in our portfolio. So let's all acknowledge that. I think we have some absolute winners, and that's been proven in the marketplace. So we have a great portfolio of OEMs. But clearly, we want to bite even further into those 17 million vehicles that go into the markets that are best suited to Inchcape every year, in which we have, as you know, just 200,000 a year that we distribute today, even though we're the largest and most capable. So we want to add more OEMs, winning OEMs into that portfolio. So we're taking a broad view to try and pick the winners, use external data sources about which OEMs we think are going to win over the medium and longer term. And then you have to build a relationship with them. So it's not -- this isn't just about the science of it. We have to build relationships with those companies, which then gives us the right to put the Inchcape value proposition to them about our global reach, great distribution knowledge and know-how in this company, our investments in data and digital and some of the stats I gave you before that we are seeing way more leads generated digitally. The cost of generation those leads is way lower, and we're seeing higher conversion rates. So our pitch to the OEMs is a lot around what we're -- our investments in data and digital. Also in our analytics. So if we think about the analytics use cases, we're putting in place in our markets around lead scoring, after-sales revenue growth, demand forecasting, we're using machine learning and AI to accelerate our insight. And the OEMs are pretty excited about that, frankly. Our existing OEMs, as you're seeing from our relationship with Daimler going into new markets, with JLR going into new markets and being able to attract companies like Geely, it was a genuine winner. They're making all the right investments both in the SUVs, small and medium SUVs that we're taking into Chile and a sedan, but also in their EV models, and in their smart EV businesses. So we think we're the right company to take them into a number of markets. And of course, they can have one relationship with an Inchcape. We can take them into Latin America, we can take them into Africa, we can take them into Asia, we can take them into Eastern and Southern Europe. So I think they see with us an opportunity to be able to have a relationship with a big British company, you can take them into many markets. So James, we'll be looking for more OEMs to bring on board into the Inchcape portfolio and family, and we'll give you an update on subsequent calls.

And that was, in fact, the final question. So Duncan with that, perhaps I could hand back to you.

Very good. Listen, thank you very much for being on the call with us. Thank you for the questions. Thank you for the engagement. Look forward to speaking to you in the coming months. Don't forget our Capital Markets Day on the 17th of November. We would love to meet you face-to-face, fingers crossed for that. And as always, if you have any further questions, please grab Raghav. Thanks.