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

Good morning, and welcome to the Pendragon Full Year 2020 Results Call, which will cover the results for the year, a performance review and the update on progress against strategy. I am Bill Berman, and with me today is the Group CFO, Mark Willis. I will start by reviewing how we managed the impact of COVID-19, the actions we have taken, and the recovery performance we saw through the second half of the year. I will also summarize the year for each of our divisions. I will then update you on the progress with our strategy to transform automotive retail through digital innovation and operational excellence as well as look ahead to our objectives for 2021. I will then pass over to Mark to run through the financial performance in a little more detail. Finally, I will summarize and talk about the outlook for the business as we progress forward. I'm deeply impressed with the response of our associates across the business throughout the different phases of the pandemic. The business adapted extremely well to the changing restrictions from the initial government actions taken during the first lockdown, through the development of new routes for customers via home delivery and click and collect. The fact that we've been able to find ways to mitigate the impact of ongoing restrictions were driven in large part by the digital capabilities we accelerated in 2020, and the actions we took to streamline our operational structure across the business, driving material efficiency gains. I'm also pleased given the circumstances with the financial results for the year with a strong underlying profit before tax performance in the second half, more than offsetting the losses of H1 and resulting in a full year underlying PBT of GBP 8.2 million. I will give more detail on the outlook and current performance at the end of the presentation. But in summary, we are cautiously optimistic about the outlook, given the levels of ongoing uncertainty, but are now well positioned to capitalize and remain very confident in our strategy. Car dealerships were mandated to close from March 23 to June 1. Our first priority was to protect the health and wellbeing of both our associates and our customers. Secondly, we focused on protecting our cash position given the inevitable impact of trading. After this initial phase, we focused on COVID-secure reopening, introducing new working practices within social distancing guidelines that would remain in place to varying degrees throughout the year. The group took a number of rapid actions to protect the financial position of the group. These included: the utilization of a broad suite of government measures, including the Coronavirus Job Retention Scheme, reduced business rates across our dealership network and deferral of VAT payments. In addition, we reviewed capital projects and cut discretionary spend to mitigate the cash impact of the pandemic. Our Board and a number of our senior management staff also volunteered to reduce their pay during this peak period of uncertainty. As we outlined with interim results, we are also well supported by both OEM and third-party stocking loan providers, who extended vehicle creditor payments in the early parts of the pandemic as well as guaranteeing certain bonus levels. These measures all helped to minimize the impact of the pandemic. But as a result of the significant loss of business, the group reported an underlying loss before tax in the first half of GBP 31 million. As we emerged from the first lockdown, we thought to maximize the performance of the business while carefully matching our staffing model as demand grew. We used the time in lockdown to review our store operating structures and our regional leadership teams. In order to crystallize the improved operational efficiencies, our teams have been able to deliver during lockdown. We also completed a review of our store estate, which resulted in the closure of 15 stores. The reduced headcount is delivering annual equivalent benefits of GBP 35 million, and the store closures addressed combined losses of GBP 2 million per annum prior to the pandemic. We also worked on developing our digital capabilities supported by the strength of Pinewood, introducing omnichannel solutions to both click and collect and home delivery. We introduced transactional online payment options and secured digital signatures. We also began to introduce online finance and insurance product sales. Lastly, we've made a number of tactical improvements to the way we acquire used vehicles, which will lead to increased volumes and improved margins. As a result of these capabilities, we were far better equipped to withstand the second national lockdown in November, substantially mitigating the level of losses when compared to the experience of the first lockdown. As a result of the strong operational performance and tailwinds from used vehicle residuals, in particular, we recorded an underlying profit before tax of GBP 39.2 million, more than offsetting the losses in the first half. And finally, in the midst of this period of change, we also launched a new strategy for the group, which I'll cover in more detail a little later. Starting with Franchised UK Motor. As I mentioned, we made significant changes to our operating model: first, to provide a safe physical environment; and secondly, to significantly reduce our cost base. At the same time, we developed our online capabilities to allow us to mitigate the impact of lockdowns with a greater degree of success as we went through the year via new propositions to offer home delivery and click and collect. Despite this, UK Motor was clearly impacted by the pandemic, which can be seen in the revenue decline of 26.4% on a like-for-like basis. Within this, new car revenue was down 26% on a same-store basis, stronger than the overall market. Sales of used cars were down 26.8% on a like-for-like basis, a little weaker than the market as we anniversaried the prior year stock clearance activity. Like-for-like after sales revenue was down 26.6%, driven by both the initial closures and then reduced operating capacity to facilitate social distancing in our workshops. Gross margin improved to 11.2% in the year, driven by strong second half performance. Our key measure of performance is gross profit per unit, the net margin we make in pounds per car we sell. The GPU in both new and used cars improved with a combination of OEM-guaranteed bonuses, strong used residuals and better operational execution of stock management and pricing, driving the increases. Our focus on cost management, the organizational restructure and access to government support measures meant we were able to reduce costs by 21% on a like-for-like basis. Overall, Franchised UK Motor delivered an operating profit of GBP 18.5 million. Moving to Pinewood, where the SaaS, Software-as-a-Service model and a subscription base revenues provided a high degree of resilience during the year. Revenue declined by just 4.7%, with the reduction driven by 2 factors: First, in order to support our customers, a 25% discount was offered for 3 months on the reoccurring charges. And second, we experienced a reduction due to reduced one-off charges for system implementations and training as a result of lockdowns, both in the U.K. and overseas. Despite the challenges in selling new products and generating new business during the pandemic, Pinewood was able to increase its international users in its developing markets by approximately 20%. As we will discuss when we cover strategy, Pinewood will be developing new products to support both Pendragon and create new revenue streams. Some of the enhances made in 2020 include provision of e-learning to support customers with high levels of homeworking. It also introduced an integrated secure online payment platform and electronic signatures. Pinewood delivered an operating profit at GBP 12.1 million, down from GBP 13.4 million last year, driven by the impact of a lower revenue and higher costs as the business continued to invest in expanding its developmental capability. Looking at our stand-alone used car business, Car Store. Despite the inevitable impact of the pandemic on the sales performance of the business, we have made significant progress with Car Store's underlying performance through both the improved stock management approach and a reduced operating cost base. The actions that we took in the second half of 2019, combined with the benefit of enhanced digital trading capabilities of the group, delivered significant improvements to performance. As a result of the lower cost base and improvements to the gross profit per unit, Car Store materially reduced the operating loss from GBP 25 million in 2019 to GBP 1.2 million in 2020. Importantly, within this, the division recorded a profit in the second half of GBP 0.5 million, providing us with a far more stable platform from which we started to relaunch the stand-alone used car business and transition the model to a more digitalized solution during 2021. Finally, I'm delighted to welcome Mark Akbar to the business, our new Managing Director of our stand-alone used car proposition. Mark comes with a great pedigree, having previously held the role of Vice President of Sales and F&I operations with AutoNation, a major U.S. automotive retailer. Mark brings huge experience of used car retailing, including supporting the launch of AutoNation USA, AutoNation's stand-alone used vehicle business unit as well as experience in bringing new digital products to the market. PVM saw a reduction to its fleet size of 10.6% compared to 2019, coming as a result of lower levels of new business during the pandemic and the decision to exit the body-shop sector, which was heavily impacted by the pandemic, partially mitigated by vehicle lease extensions and payment holidays for users. PVM experienced a strong recovery in the second half with an acceleration in delayed vehicle disposals, largely offsetting the decline seen during the first half. This combined with higher profits on disposal of end of lease vehicles, driven in part by higher residual values in the market and an increase in extension income drove an overall operating profit for the year of GBP 13.3 million, an increase of 3.9% on full year '19. Finally, US Motor. We are now close to the completion of our U.S. disposal program, having completed the sale of the Los Angeles in January of this year. There is 1 location remaining in Santa Monica, which we have agreed to sell for approximately GBP 12 million and should complete in the coming weeks. In total, we will realize total proceeds before tax of GBP 107 million against original ambition of GBP 100 million. As a reminder, at Pendragon, our vision is to transform automotive retail. We'll achieve this by accelerating digital innovation and driving operational excellence across the group. To achieve our vision, we identified 3 strategic priorities for growth, and against each of our strategic priorities, there are 3 key objectives. Last year, I said that the digital project extension would initially be an enabler for Pendragon before being monetized with the existing or potentially new Pinewood customers. We have made early progress with that journey. Pinewood has built a number of new pieces of digital capability that have been rolled out in both the Franchised UK Motor as well as the stand-alone used car division. Sales Plus provides new functionality that enables our store associates to effectively manage the vehicle sales process digitally. The platform provides a transparent and stress-free customer experience. In addition, from a regulatory perspective, the built-in controls ensure the selection of finance and insurance products are matched to our customers' needs and requirements. Customers can now purchase used vehicles with finance online, which complements the capability to purchase with cleared funds, which came online in the first half of 2020. This capability is fully enabled in [ EH ] the stand-alone used division, and we'll look to add this to stress on the near future. In addition to finance, customers now can purchase insurance products through our digital channels. These developments place us in the forefront of the industry. We will continue to iterate the customer journey ensuring we will be well-positioned in the key battleground of digital and low-touch experiences. Finally, the way which our customers handle automated valuations, either for part-exchange or sell-your-car purchases has been improved. The main benefit being a quicker and more consistent customer journey. Looking at our strategic priority for unlocking value in a Franchised UK Motor, we have achieved a number of objectives: First, as I already covered, we restructured the organization to deliver an annual net benefit of GBP 37 million from store closures and rightsizing our staffing model. A competitive review of our used car warranty products has been completed, and we've made a number of changes. A 3-year product to complement the existing 1- and 2-year products have been introduced. In line with the benefits of our proposition, we have increased our product prices. At this early stage, we're happy with our current results, these changes are showing. In new reporting and analytics capability for the division has been built, leveraging Microsoft's Power BI platform. This new suite has enabled the business to make more informed operational decisions, track benefits and will be further iterated over time. Pinewood has an objective to deliver its material existing order pipeline. Over time, I say that this will add approximately 80% growth to the international user base. The Pinewood team are delivering and have grown the international base by circa 20% so far. This is the first of 2 slides outlining the strategic milestones of 2021. Again, I'll start with the growth and diversification of Pinewood and the objective of digital product extension. There are further phases as planned for both Sales Plus as well as the digital finance and insurance journeys in 2021. Sales Plus will have improved dealer optimization functionality. It will be underpinned by improved OEM integration and third-party data capture and will be enabled with additional products and services for our customers. The finance and insurance journey will be further integrated into the DMS to improve tracking and conversion. It'll be harmonized across both in-store and online journeys and will feature soft credit check functionality and tailored insurance products. Second, one of the most important initiatives in our strategy, is the development of an acquisition management and dynamic pricing platform. We will start developing this product in 2021. By utilizing Pinewood's technologies, we will build capability to leverage data to improve the processes for vehicle acquisition, automate inventory management, remove manual processes, improve efficiency and thereby enhance both volume and margin. In addition, we will develop dynamic use pricing capability by harnessing both internal and external data to optimize the pricing of used vehicles inventory in a timelier manner. Finally, our existing warranty products are fixed products that do not vary by vehicle. We will iterate over time to allow customers to purchase used car warranties that are personal to them, varying by make, model, mileage, type of vehicle and subsequently be able to use differential pricing to drive better returns. The strengthened existing or new capabilities will again be rolled out to both Franchised UK Motor as well as stand-alone used car divisions. Turning to our plans for Franchised UK Motor for 2021, the key objective is to drive operational excellence and best practice across 3 key areas: We will drive greater consistency, improve cost and time to prepare vehicles for sale across our store estate through process revision. A continued focus on driving best-in-class penetration of finance and insurance product sales. And there are a series of actions to drive substantial improvements to after sales growth margin. Improvements can be made to the store process to increase both the volume and subsequent conversion of service opportunities. Changes will be made to improve cross-business consistency and the application of labor charge-out rates. And finally, a new systematic capabilities will be utilized to improve penetration rates of service plans. Pinewood will continue the great progress it has made thus far and deliver on its existing order pipeline as well as generating new orders. Finally, we will develop our stand-alone used car proposition in a number of areas during 2021. Work is progressing well to develop an appropriate brand identity to reflect a digitally-led proposition supported by physical outlets. The new brand will launch in 2021. Changes will be made to the look, feel and functionality of the stand-alone used digital channel. The stand-alone used car division will benefit from clear operational separation from the franchise model. But will continue to benefit from group synergies. Finally, we will complete the first new physical location in 2021. This location will act as a stocking point, customer retail and collection point as well as a fulfillment hub for home delivery. Continued delivery of our revised strategy strengthens our existing as well as creates new competitive advantages, which I have previously outlined and are set out as a reminder on this slide. Our strategy aims to restore and improve underlying profitability and put in place a foundation for sustainable profit growth. We believe this line will deliver attractive returns for stakeholders. We have made substantial headway year-on-year, underlying PBT has improved by circa GBP 25 million to GBP 8.2 million in fiscal year 2020. Looking further ahead, we are targeting to achieve underlying profit before tax of circa GBP 85 million to GBP 90 million by FY 2025. I am pleased with the progress made thus far in delivering our revised strategy. I will provide further updates on 2021 strategic milestones as we continue to accelerate digital innovation and drive operational excellence across the group. I will now hand the call to Mark to take us through the full year 2020 financial performance in a little more detail.

Thanks, Bill, and good morning, everyone. This first slide summarizes the key financial metrics shown by half and for the full year for FY '20. As Bill has said, we are pleased with the recovery and performance in H2, following a very challenging first half. The second half underlying profit before tax of GBP 39.2 million overcoming the GBP 31 million loss in the first half, such that we were able to report a significant improvement on last year's loss of GBP 16.4 million, with a full year underlying profit of GBP 8.2 million in FY '20. I will cover each of these metrics in a little more detail as we move through the next few slides. As usual, I'll start with the income statement and starting with revenue, which was undoubtedly materially impacted by the pandemic, with revenue down 35.1% in total and down 25.5% on a like-for-like basis after adjusting to exclude the impact of store closures. Gross profit was 16% lower on a like-for-like basis as the lower sales flowed through to gross profit; however, there was 160 basis point improvement in the gross margin rate from 10.5% to 12.1%, meant that the gross margin did not decline at the same rate as the revenue. As Bill covered in the operational review, the higher gross profit per units achieved in both new and used cars for the year underpin this performance. Operating costs were down by 31.1%, with 12% of the reduction driven by the reduced store portfolio and the remaining 19.1% on a like-for-like basis. The material adjustments we've made to the cost base and the actions to reduce expenditure during the first half, in particular, contributed to this performance. It was also helped by the benefit of the GBP 52 million of government support we received by the furlough scheme and rates holiday. Underlying interest costs were 12.5% lower year-on-year, largely as a result of the GBP 5.7 million reduction in stocking interest associated with the lower stock holding from a lower store count and the impact of improved stock controls in place. This reduction was partially offset by a small increase in bank interest charges as a result of the revised terms agreed in the extension to our RCF last year. The net result of all these movements is a year-on-year improvement in underlying profit before tax of GBP 24.6 million, up [ GBP 12.2 million ]. The group recorded non-underlying costs of GBP 37.8 million in the year, driven by the following factors: Losses on disposal, GBP 6.8 million, which were largely a result of the loss on disposal at the U.S. Puente Hills Chevrolet dealership of GBP 6.5 million, together with a number of some other small items. There were total impairment charges of GBP 16.5 million in the year, principally comprised of a GBP 12.5 million impairment of goodwill arising in the first half of FY '20, combined with the impairment of GBP 4 million of property assets relating to closed stores. There were pension costs of GBP 5.4 million, which included a charge for increased pension liabilities following the extension of the scope of the guaranteed minimum pensions equalization exercise in 2020, together with interest charges and pension scheme obligations. And finally, closure and redundancy costs of GBP 9.1 million were incurred from the combination of the group organization restructuring and the store closure program. After nonunderlying items, the group recorded an overall loss before tax of GBP 29.6 million versus a prior year loss of GBP 114.1 million. The purpose of this next slide is to illustrate the quarterly volatility on underlying profitability seen through 2020 as we progress through the phases of the pandemic. As we covered back at the time of our interim results, we were pleased with the start to the year in January and February, with the underlying performance ahead of 2019 by GBP 5.1 million and trading ahead of our plans at that time. March became the first month impacted by the pandemic with a reduction of GBP 4.6 million versus 2019 as we lost 10 days of peak trading. As the chart shows, despite this, performance improved year-on-year in Q1, we still delivered a loss of GBP 2.3 million. The most severe impact from COVID-19 on the results came in Q2 where the group lost further GBP 28.7 million as a result of the near total loss of revenue in the first national lockdown in April and May, ahead of a gradual reopening in June. As outlined with our Q3 trading update, performance was very strong from July through to September, with underlying PBT of GBP 27.3 million, with higher new car margins, the strength in used car residual values and a reduced cost base, all contributing to a vastly improved performance when compared to 2019. Finally, in Q4, the group recorded an underlying PBT of GBP 11.9 million despite the slower trading caused by the second national lockdown in November and the impact of various geographic tiering restrictions in October and December. As Bill has already covered, the improvements to our ability to transact online and offer click and collect or home delivery were critical to that success. Looking next to the cash flow for the year. The group's closing net debt of GBP 100.4 million is GBP 19.3 million lower than FY '19 but continues to benefit from the deferral of VAT of around GBP 30 million. Cash generated from operations was GBP 67.5 million in FY '20 compared to GBP 64.1 million in FY '19. With a GBP 19.2 million increase in underlying operating profit coming from the strong second half trading performance, being mostly offset by higher non-underlying cash outflows relating to the restructuring of the organization and store estate and an increase in pension deficit contributions. The working capital outflow of GBP 0.7 million was principally driven by the deferred VAT payment timing benefit of GBP 30 million, largely offset by similar underlying outflow related to a reduction in our levels of new cost stock. We expect the deferred VAT timing benefit to unwind over the period to February 2022. The GBP 20.5 million outflow associated with interest payments was GBP 6.3 million lower than FY '19, largely as a result of the movements in stocking interest as I covered with the income statement. And the group saw a net capital inflow of GBP 18 million in the year, which was driven by GBP 36.7 million received from business and property disposals, which more than offset the reduced level of capital expenditure of GBP 18.7 million in 2020. The GBP 36.7 million disposal proceeds consisted of GBP 16.6 million from the disposal of Puente Hills Chevrolet in the U.S., GBP 10.4 million from the sale and leaseback of our new Porsche dealership in Stockport and GBP 9.6 million from the disposal of vacant property. The level of capital expenditure is lower than FY '19, largely in order to provide mitigation against the ongoing uncertainty caused by the pandemic. And finally, on this slide, lease payments were broadly flat year-on-year. With the timing benefit from the temporary move to monthly rent payments during the first half unwound by the end of the year as we reverted to normal payment profiles. The impact of rent increases and the addition of rents for Porsche Stockport were largely offset by rent reductions from the removal of 15 leases that were successfully reassigned, sublet or expired during the year, and which will result in an annual equivalent rent reduction of GBP 1.3 million. Finally, an overview of movements on the balance sheet. Property balances reduced by GBP 15 million, which reflects the sale and leaseback of the Porsche facility, combined with the disposal of a further 5 vacant freehold properties, partially offset by capital investments. The reduction in goodwill and intangibles reflects the previously covered impairment of GBP 12.5 million. Inventory has reduced materially by over 27% or GBP 230 million, coming as a result of the combined impact of store closures, the ongoing focus on managing our vehicle stock and a reduced level of new cars as OEMs experienced production challenges in 2020. Approximately GBP 70 million of this reduction was driven by used inventory and approximately GBP 150 million from new inventory reductions. Receivables declined by GBP 16.7 million to GBP 113.2 million, with reduction largely driven by a softer market for new car sales in Q4, resulting in lower payments due from manufacturers, combined with corresponding lower finance and insurance receivables. Reduction in payables of GBP 282 million, principally relates to the lower vehicle creditors as a result of the reduction in vehicle inventory, combined with a lower lease liability associated with reduced right-of-use assets as a result of the previously described lease disposals. As a result of these movements, net assets have reduced from GBP 168.9 million at December 2019 to GBP 126.7 million at December 31, 2020. I'll now hand back over to Bill to close with a quick view on the outlook.

Thanks, Mark. As Mark said, I will conclude today's presentation with a brief look at the outlook for full year 2021. Firstly, I'm very pleased with how we performed through January and February of the new financial year. Despite the ongoing impact of the restrictions in place, our improved operational performance and new capabilities have allowed us to get over 20,000 vehicles delivered to customers through click and collect and home delivery despite our stores being closed. Over these 2 months, the group's underlying result is GBP 3.4 million better than the same 2-month period last year. As I said earlier, I'm cautiously optimistic about the economic outlook. But it's very difficult to predict what will happen as government support is withdrawn. I believe the business is now well-positioned to respond to any opportunities or challenges that may present themselves for the remainder of the year. I remain very confident in our strategy and believe we have the right plans in place to continue to make further progress in 2021. Thank you for listening.