Pinewood Technologies Group PLC (PINE) Earnings Call Transcript & Summary

So, is there any shift happening in how staff incentives are structured?

Yeah. I’d rather not go too deep into that, but we’ve made quite a few changes to the incentive programs. We began with upper management, and then the heads of business placed a lot more emphasis on individual performance inside their business units and on pushing toward the targeted number. That number has been set by the company overall, and we’ll keep doing those kinds of things.

All right. Does that also cover anything on the customer service side? Or is that a separate matter?

Certainly. CSI, along with how the customer is looked after, the needs of the factories, the various KPIs, and the balanced scorecards that get used — all of that always factors in as well. If anything, Sanjay, what we've done is, in some areas of the business — customer interactions and things of that nature — we've given the stores more sway and handed them greater autonomy and more control over customer interactions than perhaps they had before. They're the ones accountable — they're the ones customers want to deal with. So we're shifting more of that to them and pulling it away from centralization. And in the same way, we've watched performance improve as a result. But CSI will always remain a major component of that.

The next question comes from Mike Allen at Zeus Capital.

I've got two questions, if that's okay. First, regarding the H1 gross margin for used cars — clearly, residuals are behaving very differently right now, with a strong year-on-year increase. How should we think about the normalized gross margin? Should we assume something roughly midway between last year's figure and this year's? Or do you have a sense of it? And my assumption is that residuals growth accounts for most of that uplift, unless I've got that wrong.

Mike, regarding the first half, residual didn’t really have much to do with it. It was performance-driven above all. We simply didn’t perform well during the first half of last year. So much of our improvement came, again, from how we were able to source inventory, how we stocked it, our turn rates, how we priced, and how we managed our used vehicle inventories overall — the first half was mainly driven by those factors. Looking ahead, you’re probably right. It sits somewhere in the middle, but one thing, Mike — you’re going to hear us discuss not only margin but also PVR and GPU. The particular challenge with used vehicles is that margins don’t carry through entirely. You don’t earn the same margin percentage on a GBP 30,000 car as you do on a GBP 10,000 car. And you can actually earn a higher margin on lower-end vehicles, or lower-priced vehicles, than on a higher one. So you’ll hear us talk about GPUs too, but the systems, the processes, the way we run the business, and the things we’re developing and putting in place are designed to drive volume, drive high margin, and drive a high turn rate.

As a result, our inventory turns quickly with very, very little aging, which produces the greatest sales volume at the best margin we can achieve.

Yeah. And just a second question. I mean, nobody's giving guidance right now. But if I look at the H1 numbers and sort of strip out the lockdown effect from COVID, where we might get GBP 13 million to GBP 15 million of profit in the first half and perhaps the same or a bit more including September, a normalized level of PBT, assuming no lockdown, I appreciate is in the forecast. But just given where you are on cost savings, et cetera, is GBP 35 million, GBP 40 million kind of a good endpoint as a target over the next 12 months, obviously just withstanding any unique factors including the pandemic? Is that a kind of normalized run rate to aim for over the shorter term?

Yeah, I think that's a genuinely interesting question. And of course, we haven't issued guidance, for every reason you just mentioned. With whatever the market does in Q4, things are difficult right now. But definitely, every metric you highlighted regarding where we estimate we were operating before the pandemic — clearly Q3 looks like it will be quite strong, and we know we were profitable in Q4 last year. So when you bring all of that together, I believe consensus pre-pandemic stood at GBP 20 million. We felt comfortable against that figure and maybe even saw ourselves beating it as we traded through the first couple of months and what we observed in June. There's definitely the question Bill has already addressed about how much of Q3 is real. Our take on that is that a great deal of the year-on-year benefit comes from cost reduction. That's somewhat more within our control than the market is, so that pleases us. And when we think about Q4 versus last year, obviously, we've mentioned a GBP 37 million cost saving, which at a run rate of roughly GBP 3 million a month provides GBP 9 million of protection against last year.

So Mike, I'd say overall, the GBP 20 million consensus was something we felt good about. And from that time, we've made some pretty aggressive cost moves because that's the right thing for the business. So I'll let people reach their own conclusions. But certainly, the figures you brought up there would be, all else being equal, how Bill and I will be thinking about the business.

All right, that seems to wrap up the Q&A portion of today’s call. I’ll hand things back over to Bill for any closing remarks.

Thanks, Milly, and thanks to all of you for being with us on this call. Mark and I want to express our appreciation to every one of our associates for the effort they put in throughout lockdown — for everything they managed to accomplish in that period and the way they came through it. Ultimately, having thoughts and ideas is the simple part; making them happen is difficult, and our team has delivered at an extremely high standard. Thanks to all of you.