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

Good morning, everyone, and welcome to the Pendragon Full Year 2020 Results Call. This call will cover the results for the year, a performance review, and an update on progress against strategy. I'm Bill Berman, and joining me today is the Group CFO, Mark Willis. First, I'll go over how we handled the impact of COVID-19, the actions we've taken, and the recovery performance we witnessed during the second half of the year. I'll also give a summary of the year for each of our divisions. After that, I'll bring you up to date on progress with our strategy to transform automotive retail through digital innovation and operational excellence, and I'll look ahead to our objectives for 2021. I'll then hand over to Mark, who will run through the financial performance in a little more detail. Finally, I'll summarize and discuss the outlook for the business as we move forward. I'm deeply impressed with how our associates across the business responded 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 to the development of new routes for customers via home delivery and click and collect.

The fact that we managed to discover methods for lessening the effect of continuing restrictions came mostly from digital capabilities that we sped up during 2020, along with steps we took to streamline our operational structure throughout the business, which produced substantial efficiency gains. Given the situation, I'm also happy with the financial results for the year, with a strong underlying profit before tax showing in the second half that more than offset the losses in H1 and led to a full year underlying PBT of GBP 8.2 million. I'll provide further detail on the outlook and current performance at the end of the presentation. To sum up, though, we're cautiously optimistic regarding the outlook, given the ongoing levels of uncertainty, but we are now well positioned to capitalize and stay very confident in our strategy. Car dealerships were required to shut from March 23 to June 1. Protecting the health and wellbeing of our associates and our customers was our first priority. Second, we concentrated on safeguarding our cash position given the unavoidable trading impact. Following that initial phase, we concentrated on COVID-secure reopening, bringing in new working practices under social distancing guidelines that would stay in place to varying degrees across the year.

Management moved quickly on several fronts to safeguard the company's finances. Among these steps were: making use of a wide range of government support programs, such as the Coronavirus Job Retention Scheme, lower business rates throughout our dealership network, and postponement of VAT payments. We also went back over our capital projects and trimmed discretionary spending to lessen the cash hit from the pandemic. Our Board, along with several senior managers, additionally offered to take a pay cut through this period of peak uncertainty. As we set out alongside the interim results, we likewise have strong backing from both OEM and third-party stocking loan providers, which lengthened vehicle creditor payments during the early stages of the pandemic and guaranteed particular bonus levels. All of these steps helped to lessen the pandemic's effects. Yet because of the substantial drop in business, the group posted an underlying loss before tax of GBP 31 million for the first half. Once we came out of the first lockdown, we aimed to get the most from the business while aligning our staffing model carefully with rising demand. We took advantage of the lockdown period to examine our store operating structures and our regional leadership teams.

To lock in the better operational efficiencies that our teams managed to deliver during lockdown, we also finished a review of our store estate, and that review led to 15 stores being closed. The lower headcount is producing yearly equivalent benefits of GBP 35 million, and the store closures tackled combined losses of GBP 2 million per annum before the pandemic. We also focused on building out our digital capabilities, backed by the strength of Pinewood, bringing in omnichannel solutions for both click and collect and home delivery. We launched transactional online payment options and obtained digital signatures. We also started to roll out online sales of finance and insurance products. Finally, we made a number of tactical enhancements to how we source used vehicles, which will drive higher volumes and better margins. Thanks to these capabilities, we were much better placed to weather the second national lockdown in November, greatly reducing the level of losses relative to what we saw in the first lockdown. Driven by the strong operational performance and, in particular, tailwinds from used vehicle residuals, we posted an underlying profit before tax of GBP 39.2 million, which more than offset the losses in the first half.

And lastly, amid this stretch of transformation, we rolled out a fresh strategy for the group as well, and I'll go into that in more depth shortly. Beginning with Franchised UK Motor. As I said, we implemented major adjustments to how we operate: first, so as to give people a safe physical setting; and second, so as to bring down our cost base substantially. Simultaneously, we built up our online capabilities so that we could lessen the hit from lockdowns with a higher level of success as the year unfolded, through new offerings providing home delivery and click and collect. Even so, UK Motor was plainly affected by the pandemic, which shows up in a revenue drop of 26.4% on a like-for-like basis. Inside that, new car revenue fell 26% on a same-store basis, which was stronger than the overall market. Used car sales declined 26.8% on a like-for-like basis, somewhat weaker than the market, since we had lapped the prior year's stock clearance activity. Like-for-like after sales revenue dropped 26.6%, pushed by both the initial closures and afterwards by lower operating capacity to allow social distancing in our workshops. Gross margin rose to 11.2% for the year, powered by a strong second half performance.

The main way we gauge performance is gross profit per unit — that's the net margin, in pounds, on every car sold. For both new and used vehicles, GPU went up, and the drivers were OEM-guaranteed bonuses combined with strong used residuals plus improved operational execution in stock management and pricing. Because of our cost-management focus, the organizational restructure, and access to government support measures, we cut costs by 21% on a like-for-like basis. All told, Franchised UK Motor posted an operating profit of GBP 18.5 million. Turning to Pinewood: its SaaS, Software-as-a-Service model and subscription base revenues gave us a high degree of resilience over the year. Revenue was down by just 4.7%, and 2 factors drove that reduction. First, to support our customers, we offered a 25% discount for 3 months on the reoccurring charges. Second, we saw a reduction stemming from fewer one-off charges for system implementations and training because of lockdowns, both in the U.K. and overseas. Even with the difficulties of selling new products and generating new business during the pandemic, Pinewood managed to grow its international users in its developing markets by approximately 20%. As we'll cover when we get to strategy, Pinewood will be developing new products to support both Pendragon and create new revenue streams.

A few of the improvements we made in 2020 included offering e-learning to help customers who are working from home a great deal. We also rolled out an integrated, secure online payment platform along with electronic signatures. Pinewood posted an operating profit of GBP 12.1 million, which is down from GBP 13.4 million last year, and that was driven by lower revenue and higher costs as the business kept investing in growing its developmental capability. Turning to our stand-alone used car business, Car Store. Even though the pandemic inevitably hit the sales performance of that business, we've made significant progress on Car Store's underlying performance, both through a better approach to stock management and through a reduced operating cost base. The actions we took in the second half of 2019, together with the benefit of the group's enhanced digital trading capabilities, brought about significant improvements in performance. Thanks to the lower cost base and better gross profit per unit, Car Store cut its operating loss substantially, from GBP 25 million in 2019 to GBP 1.2 million in 2020. Importantly, within that, the division recorded a profit of GBP 0.5 million in the second half, which gives us a far more stable platform from which we began to relaunch the stand-alone used car business and shift the model toward a more digitalized solution during 2021.

And lastly, I’m very pleased to have Mark Akbar join us — he’s the new Managing Director for our stand-alone used car proposition. Mark has an excellent background: he was previously Vice President of Sales and F&I operations at AutoNation, a major U.S. automotive retailer. He carries substantial expertise in used car retailing, including helping launch AutoNation USA — AutoNation’s stand-alone used vehicle business unit — and he also has experience taking new digital products to market. PVM’s fleet size fell 10.6% versus 2019, reflecting fewer new business volumes during the pandemic and the choice to leave the body-shop sector, which the pandemic hit hard; vehicle lease extensions and payment holidays for users partly offset that. PVM saw a strong second-half recovery as delayed vehicle disposals sped up, largely offsetting the first-half decline. Together with higher profits on disposal of end-of-lease vehicles — helped in part by higher residual values in the market — and an increase in extension income, that drove an overall operating profit of GBP 13.3 million for the year, up 3.9% on full year ’19.

And to wrap up with US Motor: our U.S. disposal program is nearly finished — we closed on the Los Angeles sale in January of this year. One site is still left, in Santa Monica, and we've agreed to sell it for roughly GBP 12 million, with completion expected within the next few weeks. All told, we'll bring in proceeds before tax totaling GBP 107 million, versus the GBP 100 million we originally set out to achieve. As a reminder, Pendragon's vision is to transform automotive retail, and we'll get there by speeding up digital innovation and pursuing operational excellence throughout the group. To deliver on that vision, we settled on 3 strategic priorities for growth, and each one carries 3 key objectives. Last year, I noted that the digital project extension would at first act as an enabler for Pendragon, before being monetized alongside existing or potentially new Pinewood customers. That journey is already showing early progress. Pinewood has developed several new digital capabilities, which have been rolled out across both the Franchised UK Motor business and the stand-alone used car division. Sales Plus delivers new functionality that lets our store associates manage the vehicle sales process digitally and effectively.

The platform gives customers a clear, hassle-free experience. Beyond that, from a regulatory standpoint, the controls we've built in make sure finance and insurance products are selected to fit what our customers need and require. Used vehicles can now be bought online with finance, and that sits alongside the option to buy with cleared funds, which went live 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. Alongside finance, customers can now buy insurance products via our digital channels. These moves put us at the forefront of the industry. We'll keep iterating the customer journey to make sure we're well-positioned in the key battleground of digital and low-touch experiences. Lastly, the way our customers handle automated valuations, whether for part-exchange or sell-your-car purchases, has been improved. The main benefit is a quicker and more consistent customer journey. Turning to 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.

We've finished a competitive review of our used car warranty products, and several changes have been made. A 3-year product has been introduced to complement the existing 1- and 2-year products. Consistent with the benefits of our proposition, we've raised our product prices. At this early stage, we're pleased with current results, and these changes are showing. A new reporting and analytics capability for the division has been built, leveraging Microsoft's Power BI platform. This new suite has let the business make more informed operational decisions and track benefits, and it will be further iterated over time. Pinewood has an objective to deliver its material existing order pipeline. Over time, I say 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.

Improved OEM integration and third-party data capture are going to be the foundation for this, and it will be enabled through additional products and services for our customers. The finance and insurance journey is going to be more deeply integrated into the DMS so that tracking and conversion improve. It will be harmonized across both the in-store and online journeys, and it will feature soft credit check functionality along with tailored insurance products. Second, the development of an acquisition management and dynamic pricing platform is one of the most important initiatives in our strategy. We will begin developing this product in 2021. By utilizing Pinewood's technologies, we will build the capability to leverage data in order 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.