Inchcape plc (INCH) Earnings Call Transcript & Summary

Hello, and welcome to Inchcape's 2026 Q3 Results. We are joined today by Adrian Lewis, Group Chief Financial Officer; and Rob Gurner, Head of Investor Relations. I would now like to hand the call over to Adrian. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. I'm Adrian Lewis, Group CFO at Inchcape. Today, I'll give an overview of our Q3 trading with details of our regional performance. I'll then update you on our outlook for the year, after which I will take your questions. So let's begin. Inchcape delivered a resilient performance during the third quarter, supported by continued strong momentum in the Americas and Europe and Africa and despite a challenging situation in Australia. Our performance reflects the benefits of our scaled and diversified business model and highlights the success of our delivery against the Accelerate+ strategy. We delivered reported revenue growth of 7% to GBP 2.5 billion, with revenue up in constant currency terms by 5%, including 1% organic revenue growth. Our volumes increased by 3% compared to our TIV growth of 9%. Our growth was supported by our diversified OEM portfolio with particularly good growth from our Chinese OEM partners who represented around 25% of our volumes in Q3. Our performance in the third quarter reflects a continuation of many of the trends that we saw in the first half of this year. We continue to see strong growth in the Americas and Europe and Africa. In addition, we made progress with our management action plan to support our business in Asia. However, we saw further underperformance in Australia, which I'll come on to in more detail shortly. Our organic revenue growth in the quarter was helped by the contribution and growth seen in the distribution contracts recently won, which in aggregate more than offset the impact of the Australia decline. Looking at our regional performance, starting with the Americas. Our volumes were up 10%, lower than TIV growth of 24%, the shortfall mainly due to the disruption to supply noted in our July statements. This has had a short-term impact on our market share in certain markets. Approximately 36% of our volumes in the region were with Chinese OEMs during the period. And as a reminder, our Chinese OEM relationships in the Americas are well established, going back more than 20 years, and these relationships enable us to present customers with a broad product portfolio across a range of powertrains. Against supportive market conditions, our performance and market position in the Americas reflects how our Accelerate+ strategy with the strategic pillars of scale and optimize supports profitable growth with a range of acquisitions and contract wins delivering a diversified brand portfolio. For the remainder of this year, as we noted in July and as evidenced in Q3, we expect our usual second half seasonal revenue and profit weighting in the region. Next on to APAC, where our performance is mixed. Our volumes across APAC were down 37% during the quarter against TIV growth of 5%. We made progress with our management action plan to support our business in Asia. This included cost actions, closer collaboration with our OEM partners and further optimization of our contract portfolio. On that last point, we have agreed to mutually exit 15 contracts so far this year, including DPA in Australia announced earlier this week. There is more to come on our management action plan with the full benefits of these actions expected to take time to filter through. Australia, remains challenging. Our volumes there were down by around 50% in a dynamic but flat market. As we flagged earlier in the year, the Australian market has evolved rapidly, and this has continued during Q3. The market has seen fuel-related disruption and a rapid shift in customer demand towards new energy vehicle products. The growth in EV penetration this year has accelerated from 8% at the start of the year to around 24% today. Our performance has been impacted by a deterioration in the competitiveness of our key OEM partners brand. This has exacerbated our underperformance and led to margin pressure in our Australian business. We are taking further decisive action to address this alongside existing restructuring activity, including a comprehensive review of product range and positioning in collaboration with our OEM partner. This is an important part of being a good distributor, helping our OEMs understand what it is going to take to win in a market such as Australia. And while we are confident that our actions will improve our business in Australia over time, this process will take time, and we expect the current challenges in Australia to continue to impact our performance in that market. On to Europe and Africa, where we delivered another strong performance. Our volumes increased 21%, including organic volume growth of 16% compared to a TIV, which grew 2%. We saw broad-based growth across our core brands in Europe with market share gains in a number of markets. and our performance also benefiting from recently won contracts, mostly with Chinese OEMs. In fact, we have won 17 new contracts in the region over the last 4 years, of which approximately 80% have been with Chinese OEMs. On exits, we have mutually agreed with BYD that their contract with us in Belgium and Luxembourg will end at the end of this year, slightly earlier than planned. This exit and transition is being efficiently managed, and we remain on good terms with that OEM. The contract is financially immaterial, representing less than 3% of group revenue and remains margin dilutive. Our recent acquisitions in the region are also performing well in Iceland, and we have seen a good start in Bulgaria. In short, our business in Europe and Africa is delivering against our Accelerate+ strategy with strong momentum and good performance from our long-standing brand partners growth from the contracts we have won and from acquisitions. Now on to capital allocation, where we remain disciplined, allocating capital across acquisitions and share buybacks where we see value for shareholders. This is supported by our strong cash flow dynamics and strong balance sheet. We continue to make progress with the scale part of our strategy and recently signed and completed on a number of value-enhancing bolt-on acquisitions. During the quarter, we announced a bolt-on acquisition primarily with Volvo in 2 markets and as well as Jaguar Land Rover in 1 market in the Americas, which strengthens our product and brand portfolio across a range of customer segments. This follows our acquisition of Silverstar, the Mercedes-Benz distributor in Bulgaria, which completed at the start of the quarter. On acquisitions more broadly, we continue to see them as an important component of driving long-term shareholder value, together with the value we see in our share buyback program. And on that point, we have made further progress with the current GBP 250 million share buyback program, having repurchased approximately GBP 170 million of shares so far this year. In just over 2 years, we have repurchased approximately 18.5% of the company. Finally, on to the outlook for the year. We expect organic volume growth to be at the top end of the 3% to 5% guidance range. We also expect strong cash generation with free cash flow to profit after tax conversion of more than 100%. These guidance metrics are unchanged. Due to the performance of our Australian business, a market which is now expected to be dilutive to group margins, we expect to deliver adjusted operating margins of circa 5.5% in FY 2026. On our underlying effective tax rate for this year, we expect to see some one-off benefits from corporate reorganization in certain parts of the group, and we also expect currency translation tailwinds at prevailing exchange rates. So taking all of those factors together, we expect adjusted EPS growth of approximately 10% for FY '26. This is underpinned by our ongoing execution across our business with strong momentum in the Americas and Europe and Africa, together with our strong cash generation and disciplined approach to capital allocation. And finally, I'd like to reiterate that our diversified market and OEM portfolio remains an important strength for Inchcape. This is powered by the commitment, hard work and focus of our people in each of our 40 markets. So I'd like to thank them for their ongoing dedication and support this year. We will continue to manage the business in an agile and disciplined way, working closely with our OEM partners and maintaining our focus on sustainable growth and shareholder returns. This will support our continued confidence in the medium-term ambition of delivering more than 10% EPS compound growth rate to the end of 2030. That's it from me. Let's take your questions.

And our first question is from Andrew Nussey from Peel Hunt.

A couple of questions from me. First of all, you've maintained your free cash flow guidance for the group. But when we look into movements around inventory and perhaps specifically around Australia, are there any issues that we should be aware of there? And secondly, a more general question. When you look across your portfolio, are there any product lineups where you're slightly wary where the OEM is not positioned to adapt to rapidly evolving markets and clearly referencing what we've seen in Australia and whether that could be replicated elsewhere?

Thank you, Andrew. I might take the second one first, and then I'll address your free cash flow and inventory point second. I think if you think about our Accelerate+ strategy and the work we have been doing over the last 3, 4, 5 years around expanding and diversifying the group with a broader brand portfolio and a broader set of market presence in different markets, that is all about building diversification into the group, diversification so we can adapt in market as customer choices change, as customer preferences change across powertrains and across taxation landscapes as well as driving efficiency through a scaled operation. And we know go back to strategy, when we see greater than 10% market share, that can be really, really good for how margins show up in a particular market. That strategy is really coming to bear. You can see that happening in Europe and Africa. You can see that happening in the numbers we're printing in the Americas as well. So I think when I think about those 2 regions and I think about the performance we have seen across that portfolio, I don't sit here worrying at all about a particular OEM in isolation. They're all going to -- each OEM has its strengths, and we will play to those strengths in how we present the products in each of our market. But our strategy is all about building a diversified business. And you can see us doing that in Europe and Africa and the work we're doing as well in Asia is going to support that over time. On free cash flow and inventory connected to matters in Australia, look, we're a demand-led organization. Our S&OP processes, we've spoken about at length in the past around how we think about using technology and AI and really clear governance frameworks to ensure we buy the right amount of stock for demand as we see it in the market. And so please don't connect share position and some of the margin challenges that we've got with an impending inventory issue in Australia. We're working on a demand-led process with our OEM partner to buy the right amount of stock for the demand profile that we see. There's always peaks and troughs. That's part of managing the business and different supply chains, but no issue for you to think about in terms of our free cash flow, which is why we've reiterated the greater than 100% free cash flow conversion for this year.

We'll now move to our next question from Tim Ramskill from Bank of America.

Maybe 3, if that's okay. So just in terms of APAC overall as a region, so a bit of Australia as well as elsewhere. I mean, is your sense that the sort of footprint in the business as a consequence of the 15 contract exits that you talked about plus your thought process around the Aussie business, sort of maybe just some sense as to sort of where you think you might end up versus where we were a couple of years ago, taking all of those factors into account scaling the overall revenues? And then a couple of materially less interesting questions, but you talked about the tax rate helping to get to the 10% earnings growth. Can you just be a little bit more explicit on how you expect that to play out in terms of an effective tax rate? And then also in an environment of funding costs rising. Can you just remind us around your vehicle funding arrangements with your OEMs and the sensitivity there to prevailing interest rates, please?

Very good. Three big questions there, Tim. Thank you. So let's start with the one at the top of the order, APAC and how we think the footprint will evolve and where that business will get back to. Yes, you're absolutely right. We've had to do an awful lot of work this year. Firstly, on how we structure our businesses around the volumes we are seeing, how we are looking at our contract portfolio, and you've seen us act with discipline around those contracts where we feel like we can build a mutually acceptable and sustainable business for us and for our OEM partner. You've seen us talk firstly in Asia and now today around how we're working in Australia with our key brand partners around that deep and close collaboration to make sure we've got the right products that set ourselves up to address the consumer trends that are evident in those markets. We've seen those trends evolve. Hong Kong, Singapore and Australia. They've all moved very, very quickly in different directions. Look, in the medium term, those businesses will still remain very attractive. In the medium term, we continue to see us being able to build sustainable and attractive businesses. I don't think they'll get back to the scale that they were several years ago. particularly when you think about the participation of Chinese brands in certain markets in those areas. So -- but certainly, we can see a margin recovery profile as we work on the product ranges that we're offering in those markets. We know that the impact that Australia has had on margins for this year, specifically, that will come back over time. The contract exits we've been clear about were dilutive to profitability. They will support an improved margin position as we look out as well as I said earlier in the conversation around the work we've been doing about adjusting our cost base to make sure we're set up to address the market that we're in. On tax, if I can, look, this is the work that kind of often goes unseen and unnoticed as you -- post acquisition, as you look at the landscape across, particularly in Latin America, where we look at our legal entity structures and how they are best optimized. We're doing some really, really good work, and thank you to the team in that part of the world leading it, where we're bringing legal entities together that have come together through acquisition into a more simplified corporate structure. And sometimes that unlocks tax benefits that have been otherwise unaccessible to us. So that's what it will support this year's EPS position by a low single-digit percentage year-on-year. And then in terms of working capital, the consequence of higher levels of interest rates and how our vehicle funding arrangements work, absolutely. Look, we work with -- in 3-way agreements typically with OEMs to make sure we can run a really efficient working capital cycle across the group, firstly, managing inventory to the right level of supply, but also seeing those funding arrangements. They typically are pegged to variable cost or to variable rates and typically variable rates in the major currencies of the world, euro, USD, renminbi, JPY. So there will be the indexes -- and we always think about those as an input cost as we think about our margin structures and how we set up our products as they go into the market. So an overall rising interest rate environment, naturally, that has to be thought about as part of the overall value proposition. But I would add the work we've been doing about driving a really efficient working capital structure in the group lessens the need for those inventory financing structures because if you hold a lower level of cover, you need lower levels of inventory financing. And those 2 are clearly linked. I hope that covers your questions, Tim.

Just really quickly, maybe just on Aussie because you talked in the statement about -- said in your preprepared remarks about it's going to continue to be challenging. Just some sense as to how you think this plays out into 2027. Do you think you can get to a better position by the second half, but it will be a challenging first half? Just interested...

Sorry, Tim, I didn't catch the early part of that question. Is that in relation to...

With regards to Australia. specific to Australia. You talked about it continuing to be...

Sorry, I missed the part...

The shape of it.

Yes. Look, it's too early for us to guide specifically on the shape of 2027. I think what we would say is, look, we're going to -- we're talking in the statements about a comprehensive review with our OEM partner led at very senior levels in the organization. Duncan and I and other members of the group executive team were in Japan earlier this quarter. We'll be back there during the course of this year. And we've kicked off a very, very senior level led conversation around how we set that brand up in Australia to address the market as it has shifted and set it up as a business that is acceptable to both parties. That will take time because it will undoubtedly involve deep changes to how the products are set up, how they are configured, what powertrains we bring into the market and how we position those products. They will take time to come through. Hence, our position around, look, this is unlikely to be a sharp bounce back in the near term.

We will now take our next question from Eddy Bell from UBS.