Inchcape plc (INCH) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Inchcape plc Q1 Trading Update Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on Thursday, the 28th of April 2022. I would now like to turn the conference over to your speaker today, Duncan Tait. Please, go ahead.

Good morning, everyone, and thank you for joining us. As usual, I am joined on the call by our CFO, Gijsbert de Zoeten and our Head of Investor Relations, Raghav Gupta. I'll begin by commenting on the group's performance before handing over to Gijsbert, who will give more detail. We'll then be happy to take your questions. Let me first provide you with some details of the sale of our Russian operations, which we announced this morning, following our decision to exit Russia, we worked closely with our OEM partners and have now agreed the sale of our remaining business in Moscow to local management, led by the current CEO and CFO. Payment of the purchase price of GBP 63 million is deferred over a period of 5 years. And whilst we have no intention to reenter the market, there is a mechanism in place, which would enable Inchcape to benefit from an increase in value of the business over the next 7 years in the event of an onward sale. I am pleased with how quickly our team has implemented the decision to exit Russia. Now let's move to our Q1 performance, and I will also make some comments on our full year outlook. As mentioned in this morning's announcement, the group made a great start to 2022 with both distribution and retail delivering strong revenue growth and margins. Excluding Russia, revenue increased 13% on an organic basis versus the same period last year. Top-line momentum has continued to build in the fourth quarter of 2021 despite the continuing supply shortages. Our performance was supported by a combination of robust consumer demand and price/mix tailwinds. Order books in many markets continue to be at record levels. In vehicle life cycle services, VLS, we also made good progress in Q1 with an encouraging performance of bravoauto in the U.K. and implementation progressing into Europe and Asia. In terms of inorganic growth, during the quarter, we acquired D Tech. This gives us first-time distribution relationships with premium brands, Porsche and Volvo in Chile, a market that we have successfully been operating in many years. It also further broadens our global distribution coverage for Jaguar Land Rover. The acquisition is a good example of the Accelerate strategy in action, leveraging the combination of our leading global position and our digital and data capabilities to expand our footprint. We are excited about the growth prospects for Chile and the Americas region overall. With formal approvals now received, we also expect to complete the acquisition of Simpson Motors and ITC, which we announced in December last year in the next few days. The group continues to see an attractive and healthy pipeline of inorganic opportunities of varying sizes, which we are actively pursuing across all our geographies. And now to the outlook. So far in 2022, we have experienced a continuation of the trends from last year with demand ahead of supply and high margins. We expect this trend to continue at least for the remainder of the year based on our view of the strength of consumer demand in our markets and OEM production plans. Against this backdrop, the group expects to deliver FY '22 profit before tax of at least GBP 300 million, excluding any contribution from the Russian business. This represents an improvement of 25% on the prior year and is primarily driven by the further strengthening of our distribution business. Let me now hand over to Gijsbert, who will run through the regions.

Thank you, Duncan, and good morning, everyone. Please note that all comments made on our Q1 performance exclude the contribution from the Russian business, which will be treated as a discontinued operation in 2022. In Q1, the group generated GBP 1.8 billion of revenue. On an organic basis, revenue increased by 13% versus the same period last year. On a reported basis, revenue increased by 6% year-over-year and currency had an adverse 3% impact. Looking at our 2 segments. In distribution, revenue was ahead of the prior year and above Q4 2021 with aftermarket sales continuing to support performance against the backdrop of low vehicle supply. Performance within the regions was broadly consistent with the second half of 2021, where we grew strongly in the Americas and in Europe. In retail, the strong year-on-year revenue growth can largely be attributed to the impact of pandemic-related restrictions in the U.K. on the first quarter of 2021 comparator. Let me now provide some further detail. Distribution overall delivered 11% higher organic sales versus the prior year. Starting with Asia and Singapore, new vehicle sales were, as we expected, below last year when we benefited from more availability of certificates. After sales revenue continued to grow. In Hong Kong, new vehicle sales were impacted by pandemic restrictions and supply while we made encouraging progress on used cars. Our other markets in Asia performed strongly. In Australasia, whilst we have an exceptionally strong order book, supply constraints continue to impact volumes. Used and aftermarket sales were robust. And in Europe, we continue to gain share across our key markets, driven by strong execution. And note in Europe, the prior year was somewhat impacted by COVID restrictions. The Americas region saw a strong performance across all markets driven by robust demand. And finally, our operations in Africa continued to perform well. Moving to Retail. Revenue grew 18% year-over-year on an organic basis. We saw good growth in the U.K. in both new and used vehicles compared to a pandemic-impacted Q1 2021. However, record low supply continues to impact our business, whilst the order book remains very strong. Note that post the sale of Russia, apart from a small retail business in Poland, the U.K. is now our only retail market. To summarize the quarter, our overall performance in Q1 has been strong and exceeded our expectations. Our globally diversified portfolio and the strengthening momentum of our distribution business underpin these results and our confidence in the outlook for the year as a whole. Let me now hand back to Duncan.

Thank you, Gijsbert. Before we open up for questions, let me sum up. Inchcape delivered a fantastic first quarter performance. The strength and visibility of our order book, combined with continued high levels of consumer demand across our markets and OEM production plans underpin our confidence that we will deliver a profit before tax of at least GBP 300 million in 2022, up 25% on 2021. I'm also pleased with the speed at which we have been able to implement our decision to exit Russia and the support we have had from our OEM partners for the transaction we announced today. We have also made good progress with M&A, bringing on 2 new OEM partners in Porsche and Volvo and adding JLR in Chile through the D Tech acquisition. Following completion, all 3 OEMs will shortly be on our digital experience platform. We continue to see a healthy pipeline of M&A opportunities across all distribution regions. And we are making excellent progress in other areas of our Accelerate strategy, notably VLS. As outlined at our CMD in November last year, I am really excited about the future. Inchcape is well positioned to deliver sustainable long-term value through a powerful combination of organic growth, market consolidation and cash generation. Gijsbert and I are now happy to take your questions.

[Operator Instructions] Your first question comes from the line of Andrew Nussey from Peel Hunt.

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

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

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

Very good. Okay. Understood. So I'll take the first question and ask Gijsbert take the second. So in terms of digital assets and what we're seeing, therefore, in terms of margins. So we continue to drive functionality into our digital experience platform and into our digital analytics platform. So we said at the Capital Markets Day, we were at 17 or 18 markets. We ended the year at 27. We've continued to deploy markets in the first quarter of 2022. And we're continuing to add functionality also, Andrew. So if I give you an example, we've just been trialing a machine learning algorithm in one of our markets to determine pricing for vehicles and how we position. That was in Chile. So that's a machine learning algorithm. It has inflation measures built into it. It looks at our competitors' pricing, and it comes out and automatically make suggestions to the leadership team as to where we should position those vehicles from a pricing perspective. We also continued to deploy automation into our business to improve efficiency. And you know we've been setting up global centers to run a number of our back office functionalities and some of our commodity finance commodity finance transaction processing. So I think the way I think of Inchcape is we are deploying the right tooling to give great consumer experience. It's helping improve performance at the front end of our business. It's impressing OEMs. And at the same time, in our back office, we're driving efficiency through technology also. As ever, we have much more to do, but our capabilities to the 2 digital delivery centers we've built, frankly, impresses me more and more each time I talk to the team. We are -- we have said to you at the Capital Markets Day we had approaching 500 people in those centers. There's now more like 600 people across those 2 centers. And our capability is, as I said, is improving by the day. Gijsbert, did you want to add any more about margins versus Q4?

Yes. So Andrew, as we have been saying also in our statement, we see the trends that we saw in the second half and in Q4 of demand being ahead of supply supporting our margins continuing very clearly into Q1, and we expect that trend to continue at least for the remainder of 2022. And this is due to demand supply dynamic that, frankly, is a bit different than we thought at year-end. We now see a much slower recovery of supply versus earlier expectations. So we see some better supply in 2022. Let me be clear about that. But the more significant improvement is now only expected for next year for 2023 and perhaps even more towards the second half of 2023 and normalization, if that exists, if you like, is perhaps even more 2024. So that demand supply dynamic does support our margins at least for the remainder of the year. And the margins in that sense compared to the margins that we did see in the second half of '21. In terms of Russia accounting and Russia is the remaining businesses has accounted for us as discontinued operations, I can confirm that there will be a small positive contribution from Russia before we will complete the sale in 2022. So no losses from Russia. In fact, in those circumstances, you can sort of understand it when there is a crisis, people flee into assets like cars. So actually, we had quite a strong performance of the Russia business before we completed the sale.

Your next question comes from Georgios Pilakoutas from Numis.

One on Australia. Just could you expand a little bit on the kind of supply constraints there? It looks like Subarun is slightly underperforming there. So just interested for a little bit of additional color. And also elsewhere in Australia, just an update on the Aussie dollar yen and the impact and the phasing through this year and perhaps next? And then you've kind of reiterated commentary on the M&A pipeline. But presumably other distributors, you're also kind of seeing these strong margins or confidence in the stronger margins persisting. So just kind of interested in if there's any change in the view on the multiples that you're potentially having to pay? And then thirdly was just on Ditec,if you just give a little bit more color on how that deal came about in terms of OEMs, the kind of 3 parties tangoing?

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

Yes. Look, I mean, Australia, I mean, the first point to make on FX is when you think about Inchcape, it's only translational exposure. All our markets manage their ForEx exposure, the transactional exposure, and we adapt our prices as we see input costs varying as a result of ForEx. And that is now also more the case in Australia where initially is now 3 years ago, we perhaps didn't adapt our pricing when the currency worsened. So that's the holistic approach in Australia that we are taking. We are, by the way, well underway to get Australia back to more historic margins, more the '19 margins as we have done a number of things in that market, including changing the management portfolio changes, cost out, et cetera. So that's the big picture in Australia, which I think is the most important to bear in mind. Now clearly, the short-term impact of all the dollar and yen is not unfavorable. And we will, therefore, expect the move to the more historic '19 margins to be a little bit faster than perhaps previously anticipated.

Okay. Very good. Let's move on to the -- I think the third part of your question, really Georgios, which is around M&A and multiples. So I have said in the release this morning that our pipeline for M&A across the 3 distribution regions is strong with deals of all sizes from adding a few tens of millions of revenue per annum to much more than that. So we're actively pursuing it. We've built an M&A team per region coordinated by a central team. And that pipeline is probably, I would say, the strongest I've seen it since I've been in the company. You are right. In some cases, we are competing against other distribution companies for those assets. I mean, as ever, in terms of setting Inchcape out to be the leading distribution company in the world, we are deploying our digital assets to impress OEMs to want to give us more volume. If we -- I mentioned to you not so long ago, we've taken MINI on in Chile. -- from a disappointing performance as BMW would see it for the previous distribution company. Under the Inchcape umbrella within 12 months, we've moved them to #1 segment share. So we will continue to deploy our digital assets and great people to impress OEMs. At the same time, convince the independents who really care about their businesses. But if you care about your business, you should sell it to the leader and the leader in the winner is Inchcape. So that is my view. And it's based upon that reason why we refused to overpay. Now we have had some opportunities recently, which we turned down as recently as 2 weeks ago when Gijsbert and I had an escalation on one particular deal where the partner wanted 15x EBITDA, and that is way above what we are prepared to pay. So it's a very easy answer to say we are out. So -- but we are not seeing a pattern of increased multiples being required by the sellers in any of our deals, frankly. But just to reassure you, we remain very, very disciplined and we will absolutely continue to do that despite the fact that we've said that this year, we feel great about our financial performance. Now just in terms of Ditec, which was the last question. So Ditec and Sebastian, who is the owner of detain back, I'll have dinner with him on Sunday evening in Santiago with Gijsbert. The 3 OEMs, we are delighted to have Porsche and Volvo on our OE analyst. The first time we've had relationships with both of those companies. They will move straight on to DXP and DAP over the next few weeks. And we see opportunities with both those OEMs to take them into other markets. We just have to prove to our OEM that we can perform. The other thing that I'm pleased about with both Porsche and Volvo, as we set Inchcape up to be the go-to distribution company for introducing EV into developing markets. Of course, both Porsche and Volvo have very, very competitive and well-positioned EV products, and I think they're making all the right investments. So we're already selling EV products into Latin America. I think this positions us to be the leader in how we introduce EV into those markets. In terms of how long it took to get approval through -- clearly, it's the first time they have worked with Inchcape. Volvo approval came through pretty quick. And the process in Porsche was a little slower than that took 3 or 4 months to get approvals from Porsche, but delighted that we have a partnership with those winning OEMs. Did we answer your questions? Okay?

Your next question comes from the line of James Zaremba.

Just one for me, please. I'm hoping if you could talk a bit more about bravouuto now it's been operating from the U.K. at least for a few months and what you've learned so far?

I knew some point bravoauto would come up. So if I give you the headlines into how am I feeling about bravoauto and particularly around the commitment we made at the Capital Markets Day to increase used car volumes by 80,000 units per annum over the planning period that we gave you at the Capital Markets Day. So in summary, how do I feel really good about that number. What we've seen from the U.K. and our plans across the other markets, I feel really, really positive about it. The consumer proposition is working nicely. -- the execution and our learnings in the business are coming through. The business model still works. I want to remind everybody that we've built our Bravo auto plan based upon pre-pandemic levels of margin. So not based upon the rather interesting levels of used car margins that the industry is currently seeing. In the first quarter this year, we further expanded capacity in the U.K. And we are -- and you'll see us this year deploy further capacity across our European business and into Asia Pacific. We are also building up our analytics capabilities. So we've moved that into our 2 digital delivery centers. We had initially in the trial of the pilots we were running in the U.K., had all the analytics run locally. And over time, we're moving those into our 2 digital delivery centers as we build algorithms, which will work in each of our markets around the world. So net-net, I feel really positive about bravoauto and the commitments we made at Capital Markets Day, and we are on track, step-by-step, and it's a classic Inchcape business of being lower -- less capital-intensive, higher-margin, high cash returns. We like what we're seeing. It's not perfect yet, but that's what you get when we're building out of business, but I'm really positive about the progress.

And just a follow-up, please. I guess in the U.K., you are the touch point to the customer, I guess, they're kind of dealing with your employees. I guess in some of your distribution markets. Is that the same? Or is it a case where actually someone using bravoauto might be going through one of your -- part of your retail network? And I guess how that kind of controlling the customer experience is different perhaps or not?

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

[Operator Instructions] Your next question comes from the line of Akshat Kacker from JPMorgan.

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

Thanks very much. So look, I'll take both questions and if Gijsbert, you want to add, please go ahead. In terms of Subaru, I won't comment in too much detail publicly about what we've seen with any of our OEM partners, but it is true to say that our -- if I look at demand for Subaru in each of our markets, it happens to be in Latin America, in Chile, Peru, et cetera, or in Australia or in New Zealand. We are seeing the pattern that is consistent across the whole of our business, which is very strong order books and the order book is not being eaten through or winding down, but in fact, in many cases, building upwards and supply being well below demand. And I would say, across all of our OEM partners, we are seeing certain model restrictions due to either semiconductor supply, wiring harness issues because of Ukraine, COVID, or COVID in the supply chain for our OEMs, hampering production. I think it's a little bit, Akshat -- Gijsbert said earlier on, which is supply to us in 2022 is better than we saw in the second half of 2021, but is not where we'd expected it. Hence, you see these continuing very, very high levels of margins, and we're confident, as we said earlier on, about our view for the full year, hence, the reason why we gave that floor in our update this morning that we would deliver at least GBP 300 million of PBT for 2022. In terms of your comments around markets coming back and then coming back to 2021 levels and then effectively normalizing. We're not seeing that. In fact, in many of our markets compared to 2019, of course, I guess, at the group level average, and Gijsbert, please, correct me, we are 20% to 25% below the 2019 volume. So global automotive still has a long way to come back before it gets to 2019, which I think is different from some other industries. And in our markets of Singapore and Hong Kong, which are at historic low levels of PBT, and we see them as tailwinds when they come back for us. The position in those 2 markets is even further behind. You think of 30%, 35% below the highs that we've seen previously. So we don't see our markets coming back to 2019 levels. We still think there's growth in them. And what we see in terms of consumer demand and order book, we are -- we've said in the release this morning, very confident about this year, too early to call 2023. But the final point I would say is that our OEM partners are not indicating they'll get back to any level of normal, and as Gijsbert said before, whatever normal means. They're talking more 2024 now rather than 2023.

Your next question comes from the line of Michael Allen from Zeus.

Two for me, if I may. First, just on the general kind of supply chain. I mean, I think we've seen some evidence of the chip shortage kind of easing and as you referred to before, why harnessing, et cetera, being the issue. Is that something you'd kind of concur? Is the supply shortage kind of moved on to a different phase or globally as they still have an implication to the chip shortages and still very much kind of still working through that? And then the second question was just a general update or any observations on implementation of agency and whether there's any new thinking in any particular market as certain brands seem to be taking that forward quite quickly.

Okay. Mike, for once I've turned out to be popular in these questions rather than Gijsbert. So I'll take those, and Gijsbert add where necessary. So in terms of supply chain, we have seen some news, haven't we, over the last week or so that certain OEMs are saying that chip supply is easing somewhat or getting better. Look, I think what are our OEM saying, our OEMs are saying that newer vehicles are taking 4 to 5x more semiconductor content that you've seen previously, which is mopping up a lot of chips into -- so it doesn't necessarily translate, let's say, into more vehicle supply as a result. So I think we will see some. But I think you should have in your mind that these more latest vehicles are taking way more semiconductors than previously. In terms of the OEMs we speak to, we are not seeing semiconductor supply improve to the point where we're seeing more production and more production coming through to our markets. But I would say it's not just a story of semiconductors, Mike. We've seen the issues in Ukraine around wiring harnesses and other component plays into that. Commodity supply impacted by Russia and Ukraine, I think will also have some impact into supply chain. And then we're seeing a very busy shipping industry and very congested ports, which all of which is helping to -- if you can -- I used the word help, moderating supply into global automotive markets. And I think that's no different byte to be in the U.S., China or Peru frankly. So hence, the reason why we've been very confident in our GBP 300 million PBT outlook that we've given this morning, is that very high levels of demand, coupled with continued difficulty in terms of supply. Then in terms of agency, I mean, just to reiterate to everyone on the call, which is in our distribution markets, of course, it is Inchcape that is running the whole route to market for our OEM partners. And it is Inchcape's ultimate decision as to whether we deploy agency models into those markets. What are we doing? We are determined to make sure there are route-to-market transformation delivers an exceptional experience for consumers, which should drive better levels of share and satisfaction and, of course, then impresses our OEM partners even more so they give us small markets. We are building out functionality into DXP as ever that would enable us if we chose to, to deliver agency into those markets. But fundamentally, physical dealerships will still play a part, although a different part over time as the route to market transforms. And you can see that with EV. But as you introduce EV into markets, consumers bounce between digital and physical way more than they might do for internal combustion engines just simply because they don't know how they work. They don't have charging works, what real range is, and they want to talk to people and experience the vehicle. So we are preparing ourselves and deploy the technology and the people to enable us to deliver exceptional levels of consumer experience. As I mentioned earlier about Chile, we will be the company that is the go-to distribution partner for introducing EV into developing markets. In terms of our retail-only market in the U.K., Mike, we are seeing -- and we are actively collaborating with our OEM partners to introduce agency. You will absolutely not find in fighting against the move to agency. We think it's the right thing to do in many of these developing markets and clearly for us now in terms of retail, it's a U.K.-only discussion and will help make sure our OEMs are successful in their implementation. And you'll see that Mike coming in more and more in 2023 for the first few OEMs and 24 onwards for others.

We have no further questions. Please continue.

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

That does conclude our conference for today. Thank you for participating. You may all disconnect.