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

Good morning, and welcome to Pendragon's results presentation, during which we will cover the results for the 2021 financial year, our performance review and a full update on the significant progress we are making against our strategy. I'm Bill Berman, and with me today is the group's CFO, Mark Willis. I will start by reviewing the performance in each of our divisions. Mark will then cover the financial performance in more detail. I will then focus the majority of our time this morning on the progress we are making with our strategy to transform automotive retail through digital innovation and operational excellence. Starting on Slide 4. We look at some of the highlights for the group overall. In summary, I'm excited with the progress we are making with our strategy and the hard work our teams have put in the progress change at pace in a year, which still included plenty of challenges from both the impact of COVID and from constrained supply. Our disciplined strategic delivery has driven productivity improvements and strong margins. Supported by our strategy, we're able to outperform our markets with our new car sales down 2.1% in supply-constrained markets against the franchises that we represent being down 3.5%. And our combined used car volumes up 14.4% against the market up 11.7%. As a result of our new capabilities and the benefit from some well-covered market tailwinds, we achieved a record underlying profit before tax of GBP 83.0 million and delivered like-for-like growth in revenue of 27.1%. This strong financial performance is enabled by the cost and the state restructuring we have completed since 2019, with costs now significantly lower than they were pre-pandemic. As we reopened during the second quarter, we were able to maximize the benefit from unprecedented conditions in the used car market. Our advantages in our vehicle sourcing supply chain allowed us to maintain vehicle inventory levels and challenging supply conditions, meaning we can meet the levels of pent-up demand and maximize our margin opportunity. I will come back and cover our view on the current outlook at the end of the presentation. Next, turning to Slide 6, franchise UK Motor. The key metrics were positive across the board in UK Motor, with our teams delivering an excellent performance in good market conditions. Our revenue grew by 26.7% on a like-for-like basis, with our new digital capabilities underpinning this performance. I'm pleased that we outperformed the market for the franchises we represent as I just covered. Demand was strong throughout the year and in the second half, in particular, but sales were clearly constrained by the well-known chip shortage. Across 2020 and 2021, the market lost approximately 1.5 million car registrations, creating a good pipeline for future demand. In used cars, UK Motor saw like-for-like growth in units of 13.1% against the market up 11.7%. With our digital channels and our supply advantages afforded by our breadth of sourcing, helping us to outperform the overall market. Many of our strategic initiatives are focused on maximizing our gross profit margins across new, used and after sales, and we have seen improvements in each of these areas. Our new gross profit per unit, or GPU increased by GBP 463 per unit to GBP 1,911. And our used car GPUs increased by GBP 530 to GBP 1,730. Finally, our after sales margin improved from 49.1% to 50.7%, I'll talk more about our strategic drivers of these later in the presentation. Overall, as a result of the -- results being born from our strategy in both margin improvement and cost management, together with impetuous for market tailwinds, UK Motor delivered an underlying profit of GBP 85.8 million. Slide 7 demonstrates that Pinewood made further robust progress during full year '21, delivering a 24% increase in international user numbers, in line with our strategy for growth. Pinewood's rapid product development capabilities have been a key enabler of our group performance. The ability to progress change quickly, using the Pendragon Group companies and as the incubator is key to long-term development Pinewood and our car retail businesses. The strength of Pinewood as a DMS system has been recognized by BMW and Renault within the last year, achieving further certification statuses with both. Financially, this performance was reflected by revenue growth of 9.4% to GBP 24.4 million and operating gross profit of 3.3% to GBP 12.5 million. Slide 8 covers the operational performance of Car Store. In summary, we have made significant progress during full year '21 with our used car strategy. Including the relaunch of Car Store brand with a new market-leading proposition for the changes we made have already started to impact the way Car Store operates and how it has performed. Car Store volumes grew by 26%, outperforming the previously mentioned market growth of 11.7% together with the growth in prices of used cars and that led to a 60.4% increase in like-for-like revenue. Gross profit per unit also grew by GBP 356 to GBP 1,221. As a result, Car Store reported an underlying operating profit for the year for the first time of GBP 1.6 million compared to operating loss of GBP 1.2 million in full year '20 and an operating loss of GBP 25.2 million back in full year 2019. Overall, I'm pleased that the established Car Store locations have contributed positively to the group's results, and we're set to deliver on our new proposition. Lastly, for the divisional review, Slide 10 illustrates that our leasing business, PVM also performed very strongly in the period, with a 31.6% increase in operating profit to GBP 17.5 million up from GBP 13.3 million in full year '20. PVM able to growth is operating profit as a level of profit on disposal of defleeted vehicles accelerated as used vehicle prices increased. Residual values for disposal vehicles were set 3 to 4 years prior on average. So as prices increased, profits on disposals of these units improved. I'll now hand the call over to Mark to run through the financial performance for full year '21 before I cover the strategy update.

Thanks, Bill, and good morning, everyone. The first slide I have this morning gives an overview of the key financial metrics and clearly sets out the progress against 2020, which as we know was heavily influenced by COVID-19, but also shows the material changes to the business against the comparable period pre-pandemic in 2019. I'll cover each of the metrics on this slide -- over the next few slides. But the key message from this slide is that whilst the reduced store estate has led to lower revenue when compared to 2019, the improvements the business has delivered in the gross margin rate, together with the material changes to the cost base have combined to more than offset this lower revenue. After adjusting for government support received in 2021, operating costs are GBP 109 million lower than in 2019, whilst GP is down just GBP 31 million despite a reduction in the estate of approximately 60 stores since the start of 2019. As a result of the gross margin rate improvements and our cost restructuring, together with a GBP 9.8 million reduction in net interest charges compared to 2019, the group reported an underlying profit before tax of GBP 83 million, which is GBP 99.4 million higher than FY '19. Turning next to Slide 12 to look at the summary group income statement. Starting with revenue, which is up strongly against last year. In total, revenue grew by 18% and by 27.1% on a like-for-like basis. Gross profit grew by 24.9% with a gross margin rate increasing from 12.1% to 12.8% with improved margins in each of new, used and aftersales. And as Bill outlined, a combination of our new strategic initiatives and the extraordinary market conditions in used car margins during the second half, in particular. The combined used car GPU increased by 43% from GBP 1,169 to GBP 1,675. And during the second half, we saw GPU exceed GBP 2,000 per unit as the market peaked, and our initiatives were rolled out. New car margins were also strong, with weighting again towards the second half as supply restrictions and pent-up demand impact resulted in less discounting and OEM focused on production of higher-margin models. New car GPU increased by GBP 463 to GBP 1,911, again, reaching GBP 2,300 per unit in half 2. Looking at cost next, the success of the implementation of our store estate and the more efficient payroll operating model introduced during the second half of 2020 has driven a significant reduction in operating costs, improving operational leverage compared to pre-pandemic levels. Total underlying operating costs of GBP 325 million were recorded. That included GBP 12.2 million of furlough grants and rates relief in the year and costs were up 5.8% when compared to 2020 with 2020 benefiting from a significantly higher amount of government support, as you'll no doubt recall. Underlying interest costs were GBP 33.4 million or GBP 4.1 million lower year-on-year, and that's principally driven by a reduction of GBP 3.8 million in vehicle stocking plan interest as we've got lower inventories. And the net result of all of these movements is the underlying profit before tax of GBP 83 million. The group also recorded non-underlying costs of GBP 9.7 million, of which GBP 9.6 million is noncash impairments of property right-to-use assets, including impairments on U.S. leases and vacant U.K. property. There were termination and severance costs of GBP 1.8 million, the majority of which relates to our transfer of finance process from dealerships to a centralized shared service center. There were noncash pension interest cost of GBP 1 million, and those costs were all partially offset by gains of GBP 2.7 million on the sale of business and property, plant and equipment. After nonunderlying items, therefore, the group reported profit before tax of GBP 73.3 million, an increase of GBP 103.9 million versus the prior year. Turning to the cash flow on Slide 13. Group's closing adjusted net debt of GBP 49.7 million reflects a cash inflow of GBP 50.7 million compared to the FY '20 closing net debt of GBP 100.4 million. And as a reminder, the FY '20 net debt benefited from approximately GBP 30 million of deferred VAT. We've subsequently repaid that. So adjusting for that in real terms, our net debt reduced by approximately GBP 80 million. Cash generated from operations was an inflow of GBP 99.5 million, much improved operating performance, driving a GBP 70.4 million increase here year-on-year. This improved operational performance was partially offset by a working capital outflow of GBP 41 million, 3 key drivers in that. The first is the payment of the deferred VAT. The second is we had an outflow of approximately GBP 17 million following reduction in new car inventory and the associated loss of that timing benefits we get from that and we had an approximate GBP 70 million outflow relating to the increased cash funding of used vehicles as a result of an approximately 40% increase in used car valuations over the year. Those outflows are offset by a GBP 20 million inflow from higher deposits and lower debtors. We recorded net capital income of GBP 14 million in the year. That was driven by GBP 31.7 million of cash received from business and property disposals, GBP 28.2 million of that coming from the sale of the remaining U.S. businesses. And that was offset by capital expenditure of GBP 17.7 million, which remained at a lower level as we continue to exercise caution with the uncertainty around COVID. And then lastly, some of our big projects were delayed with raw material delays in the second half. Interest was GBP 3 million lower year-on-year, again, driven by stocking financing costs being lower on the lower stock levels and lease payments and receipts were also at GBP 3.1 million down as we continue to successfully manage the exit of vacant properties, with a further 12 leases resolved in FY '21 through either sublet expiry or reassignment. And finally, on this slide, the group concluded successful refinancing in March of this year with a new debt facility of GBP 175 million agreed, which comprises of a 5-year term loan of GBP 100 million and a GBP 75 million RCF on a 3+1+1 year basis, providing the group with the required headroom to continue investing in its strategic games for 2025. And finally, for the financial statements, I've covered the key changes on the balance sheet. In summary, net assets have moved by GBP 98.9 million, increased by GBP 98.9 million to GBP 225.6 million. Key movements to call out, first reduction in plants and equipment. Actually, that's a reclassification of fixed asset vehicles to stock of approximately GBP 9 million. Inventory declined by 15.8% dropping from GBP 608.8 million to GBP 512.8 million, 3 drivers really for that. First, the decrease in new stock value of GBP 210 million as the supply constraints took effect, an increase in new stock value of GBP 110 million and that's driven largely by the approximately 40% increases in average stock prices. And thirdly, the previously mentioned transfer of fixed assets to inventory. There was a reduction of GBP 140.2 million in payables, which is coming from lower vehicle creditors linked to the lower inventory. And finally, the net liability for defined pension scheme obligations has decreased from GBP 75.5 million to GBP 23.6 million at the end of 2021, with that decrease of GBP 51.9 million comprising of contributions of GBP 12.8 million, a net actuarial gain of GBP 40.1 million and a net interest charge of GBP 1 million. And I'll pass back to Bill now to cover the strategy.

Thanks, Mark. By the way of recap at Pendragon, our vision is to transform automotive through digital innovation and operational excellence. To achieve the group's vision, we identified 3 strategic priorities for growth: first, to unlock value in franchised UK Motor, to grow and diversify our software business, Pinewood; and lastly, the disruption of car sales in the U.K., our new used car strategy. The group is progressing extremely well to strengthen existing as well as create new competitive advantages in the evolving U.K. automotive retail landscape. UK Motor operates from a far leaner cost base with substantially improved efficiency, continues to act as a cost advantage source of supply for used vehicles. This was particularly important throughout 2021, given the well-documented supply issues facing this sector, has a greater reliance on internal and external data in order to strengthen our digital capabilities and improve internal decision-making, has a broad portfolio targeting multiple customer segments and significant geographical representation across the U.K. Our physical state both now and in the future will be a critical asset to satisfy the omnichannel demands of consumers. Pinewood has made excellence to forward as well, further surpasses competitors throughout the development of enhanced digital capabilities, has enabled the group to advance its digital and physical ecosystem and has contributed to group profitability both in the U.K. and internationally. And finally, the disruption of used cars or new used car strategy. It is unique to Pendragon, given the vertically integrated assets and capabilities within our group, has no OEM dependency, allowing greater levels of strategic freedom, is resonating well with customers and ultimately will drive margin upside in the group in FY '22 and beyond. Against the objective of accelerating digital innovation, Pinewood has made excellent progress to strengthen our omnichannel capabilities and further digitize the operating model. Our websites now are transactional, enabling customers to purchase used cars online. Our websites are enabled with finance payment functionality. Customers are able to apply online, receiving automated and real-time decisions. In our Evans Halshaw brand, customers have the ability to complement their online vehicle purchase with regulated and nonregulated insurance products. This drives additional margin for the group when transactions are completed 100% online. Next, Sales+. Sales+ is our new functionality by way of layered DMS applications that enable our store associates to effectively and efficiently manage the sales process. The platform provides a transparent and stress-free customer experience. Second, from a regulatory perspective, the built-in control to ensure the selection of finance and insurance products are matched to our customers' needs and requirements. Beyond the initial release of functionality, further releases have enabled remote digital signatures, remote payment requests and driver's license capture. Search capability across all new and used car group stock and the ability to dynamically look across used finance providers to surface the best customer offer. Group profit has also been made with a group-wide vehicle acquisition, management and pricing platform that is focused on optimizing both the turn speed and margins of used vehicles. Finally, there have been 4 further pieces of digital capability delivered in the year. The ability to value vehicles digitally, digital payments, 0% financing for aftersales and addition of Power BI for analytics and insight. Our omnichannel strength places in the forefront of the U.K. automotive retail sector. They enable us to largely mitigate the impact of the third national lockdown at the start of 2021 and supported our market outperformance throughout the rest of the year. The second objective for UK Motor was to drive operational excellence and best practice. A number of enhancements have been made on our used car warranties following an in-depth review. We now offer a 3-year product that complements our 1- and 2-year products. In line with the benefits of our proposition versus our peers, we were able to increase prices. In Q4 2021, we transitioned to offer customers tailored into our products across all channels. Pricing now varies according to age, mileage of the vehicle at the point of sale as well as term. The combination of these changes supported by revised associate training and engagement is driving record levels of penetration and higher margins for the group currently. Secondly, we launched a scale program principally targeting process and procedure improvements to impact preparation speed, quality and the subsequent spend on rectification. Finally, the combination of digital auctions and improved internal process has improved the margins for those vehicles that were sent to trade in 2021. The third objective for UK Motor was to operate on a lean and efficient cost base. But pandemic accelerated our intent to rightsize elements of our business, including the optimization of our staffing model with the reduction of approximately 1,400 roles, closure of 15 nonproductive stores. The restructuring of our senior leadership team, the removal of certain customer call center empowering stores to really direct customers and handle them directly and the transformation of the accounting function within UK Motor on a dealership teams, which has been centralized within our shared service center. These levers have contributed significantly to the previously mentioned circa GBP 110 million reduction in underlying operating costs versus FY '19. There are a number of opportunities within U.K. franchise motors division that will drive further value for full year '22 and beyond. Further release of Sales+ are currently in development by Pinewood. These releases will add new functionality to automatically calculate the initial used car offer, enable real-time systemized registration of insurance products as well as unlock insurance product opportunities. Multiple cosmetic opportunities have been identified as part of the scale program targeting preparation and rectification. Within aftersales, interventions have already been to improve both the quantity and conversion of vehicle health checks performed in our workshops, in addition to 0% financing enabled by Pinewood. Beyond this, there are multiple other levers to maximize retention and value for our workshops. Menu based and dynamic finance and insurance pricing is currently in development by Pinewood. A group-wide strategy to capitalize on the opportunity provided by the electrification of the fleet is also developed. And the team is constantly monitoring the landscape and are explaining new propositions such as subscription and more broadly, mobility as a service. We remain confident in the opportunity that our strategy provides how we are positioned in the evolving consumer and competitive landscape and the opportunity to unlock incremental value. As I outlined earlier, Pinewood has made excellent progress to enable to strengthen the group's omnichannel capabilities and underlying operating model. In addition, a mobile-first approach was adopted by Pinewood to deliver the new website, supporting the highly differentiated omnichannel proposition. On a stand-alone basis, there are 2 objectives for Pinewood. First is to deliver the existing pipeline of international orders and the division has built. International users have grown by 24% over the last year, this is a good step forward in light of the pandemic travel restrictions, prohibiting systems implementation. A strong pipeline opportunities remain and notwithstanding the events in Eastern Europe, growth will accelerate with easing of global travel. Second is to deliver further geographical expansion. Existing relationships have the potential to unlock further orders from both dealer groups and OEMs as a single end-market DMS provider. I'm therefore pleased to announce that both BMW U.K. and Renault have recently awarded Pinewood's certification status. Congratulations to the team for the growth that this will drive over time. Our third strategic priority is the disruption of our used car sales in the U.K. Our first objective was to rebrand the division. A new brand identity and logo has been soft launched across Car Store physical and digital channels. You can see a few examples of the clean and moderate execution on the slide to the right. Finally, a new tone of voice and related training for our associates has been successfully delivered. The second objective was to launch a highly differentiated value proposition. The cross-functional teams have done an excellent job to lend a market-leading omnichannel hybrid customer proposition. Pinewood with a mobile-first approach has created a new and dynamic website, customers can buy, finance, add a part exchange and complement their purchase with both regulated and nonregulated insurance products. All of this can take place remotely with no human interaction, if that is what the customer wants. The customer does, however, want advice our associates are on hand to act as their personal adviser, whether in person or digitally, they are trained to support the end-to-end customer journey. Associates are able to engage with the customer at a point -- at any point in their journey, and this is seamless across both digital and physical channels. Home delivery or same-day collection are enabled across the state. A 14-day no quibble money back guarantee is in place as well for whatever reason the customer decides to return the vehicle. The interest after sales finance as well as other digital initiatives within UK Motor have been implemented within Car Store. Car Store has been used to incubate all digital initiatives before wider implementation within UK Motor. The propertizition is resonating well with customers. Car Store currently has a great 4.6 out of 5 Trustpilot score. The final objective associated with the disruption of used cars is the scale of the physical estate. The first concept store to support the omnichannel proposition is in Chesterfield. We are excited to welcome our customers to the store in April. Going forward, there are 2 further stand-alone stores scheduled for FY '22, Warrington and Borehamwood. We are setting a number of small format locations previously operating at cellular car centers to also include click-and-collect capability. These locations will be branded as Car Store Direct. Group stock is being included on the Car Store website to maximize the inventory levels and the utilization of our existing physical estate. A full launch of the proposition supported by the integrated marketing campaign will begin in April. I'd like to share a short video with you to highlight why we're so excited about Car Store. Car Store mission to empower our customers to buy, sell and take care of their car needs the way they want to. [Presentation]

On Slide 29, it demonstrates why we're so excited about our used car proposition. With what we think are market-leading capabilities versus other disruptors. At Car Store customers can seamlessly switch between digital and physical channels as a result of Pinewood's developments. Our digital capabilities are market-leading. Customers can buy, finance, add a part exchange and complement their purchase with both regulated and nonregulated insurance products. 150 stock group locations in click and collect as well as traditional walk-in journeys. There will always be a role for brick-and-mortar as car purchasing is very tactile. You can touch it, taste it, smell it, hear it, experience it and feel it. Finally, looking ahead into 2022, performance over the first 2 months of 2022 has been good with underlying profit in January and February ahead of 2021. Supply constraints in both new and used cars have continued to support higher gross margins. But as expected, we are already seeing used car margins normalizing from the extraordinary levels achieved in 2021, and we expect to continue -- for that to continue in the coming months. The shortage of new cars is expected to continue for the entirety of 2022 due to continuing raw material shortages, and we're also mindful of the further impact of the conflict in Ukraine may have on supply. The Board are conscious of inflationary pressures, which combined with the impact of business rates reverting to full levels will result in higher costs in 2022. We remain confident we have the right strategy in place, and we expect to make positive progress towards our long-term goals this year and expect to deliver underlying profitability before tax in line with the Board's expectations. In summary, I'm pleased with the scale of delivery across the group, in the first full year since our strategy was announced. Delivery of our strategy has been a key contributor to the record 2021 financial performance. I would like to thank all of our associates for their hard work, dedication and performance throughout the year. The cross-functional team continues to maintain a high pace of change focusing on driving further incremental value in FY '22 and beyond. I remain confident in the opportunity that our strategy provides and how the group is positioned in the evolving consumer and competitive landscape. We continue to target underlying PBT of circa GBP 85 million to GBP 90 million by 2025 and the significant shareholder value creation that this will drive. Thank you again for joining us today. Before we turn to Q&A, I'd like to say a few words about the recent media coverage reporting interest in Pendragon. We have declined to comment on this publicly, and we are unable to provide any further information today. Mark and I will now be happy to take any questions.

3 questions from me, if that's okay. Obviously, you're not reinstated the dividend I wonder the rationale behind that and kind of what fundamentally needs to change to reinstate that, that's...

Yes. So you're right. Based on 2021, we haven't. The board, as you would expect, we continue to keep that under review. What we said back in 2020 when we launched our strategy, we said we were an investment phase of growth. That's where we're at, at the moment. But as I said before, we'll continue to review that decision you would expect as we go forward.

Yes. To us, we look at the best way to deploy any excess capital, whether it's to grow our business, whether it's a few other opportunities in an additional new vehicle franchises to invest in our used car strategy or and continued advancement within Pinewood. So it's kind of like multiple different channels and where is the best way to put cash. But we're looking at everything from potential share repurchases to a dividend potentially in the future, but ultimately really to invest in our strategy and drive the business going forward.

Okay. Great. And then on the Ukraine crisis, how specifically will that impact I know you talked about supply and costs...

So it's hard to say right now. So roughly 7% of wiring harnesses are produced in Western Ukraine. So that's having an impact. And obviously, that varies by franchises. Some Eastern -- Central or Eastern European OEMs are giving effect of that to a greater level. There's been media announcements from portion VW with having to either remove shifts or actually close plants because they're trying to retool their supply chain. Large amounts of Neon are produced out of Ukraine, which is a key contributor into chip manufacturing. So it's -- all that hasn't really worked through the system to really where it ends up or how long the conflict may or may not last. But like anything, the global supply chain is incredibly fragile. First noticed it back, I think it was in 2010, 2011 when you had tsunami in Asia and watch how that happened and then what's happened in the last couple of years because of the pandemic really has put a lot of emphasis on that. So it's yet to be seen, but 7% is a lot in the global supply chain and in just how that passes through. And unfortunately, a lot of these things aren't easily movable to a different provider, one company somewhere in the middle of nowhere that produces a widget and they're the only ones that make that widget, it can make it pretty complicated. But we still feel confident in our forecast for this year and beyond, and we've taken as much of that into consideration, but there definitely will be some impacts.

Yes. I think it's worth bear in mind, we talked about the strength in the margin in half 2 last year. And we also talked about there being 1.5 million registrations lost. Did that be another 0.5 million by the point we get to half year this year. So is this massive pent-up demand for new vehicles, OEM are focusing on producing a higher margin model. So there will be some kind of balance if suppliers constrained margin will stay strong, how strong we don't know and how much supply we construed by -- we don't know as Bill says, but those things will balance that a little bit.

And if you think about it, not trying to put a positive tone on it, but -- every year that you're in a down cycle and specialty one that's driven by noneconomic issues. There's a 1.5 to 2 year upside to it. So if you look at the financial crisis we bottomed out in 2009, it took to 2015 to 2016 to get back to kind of a plateau or peak auto and we bounced around with that. And that was an 18-month down cycle. Really, if you look at the end of 2007 to the bottom out in the middle of 2009, we're going to go 2.5 maybe 3 years in a down cycle, so the potential on the outside of this. So looking into forward, we're going to have a huge amount of pent-up demand and increased pressure on new vehicles, which is great.

Great. And then just the last question from me. Can you just give more detail in terms of your marketing and investment plans for 2022?

Yes. Look, we talked about in some the appendix, but we won't give any details there what we do, we're launching in April, as Bill said. But we're conscious that we're putting out a new brand for Car Store. We therefore have to invest in that. So we'll put that spend in this year, it will be to some degree nonrecurring. So it will be one after launch in proposition and that you'll see more of that as we go through the first half, and we'll talk more about it with our interim results.

And if you think about it, like we referenced our new used car strategy. Ultimately, all of our used vehicles will be under the Car Store website, if you look every month, more and more of our stores are being added on to that platform. Our EH and Stratstone platforms will mimic that site on the used car side of the business. So ultimately, the entirety of our used vehicle inventory will be on there. And we are looking to grow our entirety of our used car business, not just under the Car Store brand. So we'll be getting out into the marketplace and then the sheer number of vehicles that we have available for sale after this new platform, this pure omnichannel approach, which virtually nobody else has anything quite like what we're propositioning out there and you've got to kind of let the market know that to go forward. But to Mark's point, it will be splash over several months, and then we'll get back to kind of a plateauing out a baseline and then be able to maintain a lower cost structure going forward.

If I may. Just going back to the chip shortage points obviously on the wire harnessing et cetera. But I think I've seen stuff with the chips in Asia, the inventory starting to rise again. So would that -- will we see an improvement in that situation that's now being pulled back again, was there any improvement on the Asian side...

Possibly. And I think everyone is going to get affected differently based on their exposure to different OEMs. I think last night I was reading something where General Motors shut down their core VAT plants, the most profitable vehicle they make -- they shut down because of chips. And they're getting different supplier than some of the Asian brands would get and Volvo now is done the same thing has idled some plants and pulled out some shifts. So I think it's going to be ebb and flow, some OEMs are going to have a better supply chain and maybe a better grasp of this and be able to put this through. Others are a little bit more exposed to it. But the one thing is supply constraints that are out here, everyone is talking about chips, but it's much greater than chips. There's a shortage of glass. There's a shortage of steel. And the one big one that no one really talks about is petroleum-based products. So even with the sanctions against Russia on the oil and all that, tires, belts, hoses, oil. All of the products, there's also pressure on that as well. Everyone goes after chip because I think it's an easy one thing to go after. But the supply constraints and the supply channel weakness is a little bit broader than what the media is talking about right now.

Yes. I mean for fund it's got green sheet there, but obviously more of us -- I think just on energy costs, how far are you kind of hedged to and what's the kind approaches that...

Yes, we're reasonably well hedged. We're circa 30% hedged on gas for this year, circa 75% hedged on electricity. So we've got some protection, but there is volatility in that for sure. So that's one thing we're keeping an eye on. I think if the price per firm that it is today, we've maybe got a GBP 1.5 million exposure across the balance of the year. If it goes back to the GBP 6 per firm, it was, it's more like GBP 3 million or GBP 4 million. So it's -- look, it's not our biggest cost, but it's certainly a big cost on our P&L and we -- the unhedged element is subject to volatility.

'22 rolling it into '23 is obviously that could be correct it...

Yes, if things haven't come back to some kind of normal level by then, yes.

Yes. Okay. final one just on Pinewood. I mean, clearly, a lot investments and development in new production. In terms of future growth, should we be thinking of that from a revenue growth point of view? Or is there a margin upside? How are you going to play between revenue and margin based on that business?

So I would maybe break it down a couple of different ways. So traditionally, Pinewood focus on just increasing users. And what we're trying to kind of refocus on is not just user growth the DMS, but also layered apps that can add to it as well. So within the current customer base we have, they have a certain system and a certain suite of products that we provide. Within the current customer base, we want to add additional value products that can sit here and increase revenues, obviously, increased profitability as well as grow internationally and in domestically when it comes to user counts. We're looking to kind of bifurcate from what we've done in the past and find additional revenue streams. You and I have talked in the past about some of the different layered apps that exist in other parts of the world. A lot of the things I talked about today, the new website is something that we're going to be offering to customers pretty soon, and give them the ability to have certain pieces of that. We'll keep some of the special stuff to ourselves, but certain pieces of that will help them integrate into their own site to be transactional to a point. And be able to charge additional for that or the used vehicle tool that we're talking about to help value used car inventory. So here's your base system. Here's an app to control after sales, one is for finance and insurance, one for your website, one for equity mining and how those be additional revenue streams in addition to being able to grow international users as well as domestic users.

Follow-up on that. I mean how are you seeing the development that you're doing for the sort of core business and businesses enabling additional growth there? I mean, is that...

I love the tech side of the business, I've talked about this, it was one of the main attractive that come into the business. I mean selling cars is great. I love it, have been doing it for 30-plus years. The tech side of the business is really the part that really excites me. Pinewood has an advantage that no other tech company has. They literally have an in-house incubator for anything they want to try or come up with. So you get the ability to sit here and have -- retail network, sit here and pull for things that they want and need and ask for certain things. In addition, the brains over at Pinewood were able to come up with an idea and say, okay, we built this, let's go test it, they can test it in the 1 store, 10 stores, premium, luxury, volume brands and as such where anybody else has to build something kind of in a vacuum and then hope that works and they do multiple iterations and see if it gets there, we can test this stuff in real time. And we've probably got 10 different things we're testing right now in different stores. Tweaking here and there and combining, subtracting some things don't work, fail fast, move on to the next thing. So I think the ability to -- for Pinewood to use UK Motor and stand-alone used car business is an incubator is a competitive advantage.

And then on EV, you talked about group wide strategy under development. Any sort of early thoughts you can give us on that?

I can't go into detail, but the market is going to go that way. Whether it's electric or different things with natural gas, hydrogen, Mike and I've talked about this a lot, is definitely something that I think is going to also come out there. we're kind of trying to hedge your bet and be there for everything. We want to sit here and have all of our stores to be fully electric, both not just for the selling of the vehicles, but obviously for after sales as far as using our network as charging stations, I mean units and for growth to look at brands that are pure electric and being able to provide our services that go along with that, whether that's on the DMS side of the business, whether it's on the used car side of it or even on the new car side of the business. So working in conjunction with our current OEM partners possibly looking for new entrants into the marketplace to do business with as well. But we're going in that direction, and we want to be on the front foot of that versus kind of the wait and see what happens side of it.

2 or 3 from me, please. So a lot of initiatives progressed on in 2021 and planned for 2022. I wonder if you could give a flavor of what is your top of your priority list? What you're really excited about in terms of the 2022 initiatives that's going to really move the dime?

I think some of it is just -- the website that I just talked about earlier, the completely transactional website. We've just -- we kind of developed that in the first quarter of last year when we were at full lockdown, have progressively improved upon it. This year is the year where I think we've really started to get a benefit from it. Back to the marketing question and being helped out, we have to let customers know that we have it and we'll be able to go drive that piece to it. The next thing would be kind of the layered apps that we are talking about that add to it, whether it is our used vehicle management tool, whether it's different things we're doing in our aftersales departments once again, a layered app to be able to provide better visibility from service from customers to service advisers to technicians and back, equity mining tools and such. So it is really those layered apps that go over top of it and then build to it. The challenge on the new vehicle side of the business is we have a big representation for -- Ford is a great brand love for it. Ford is going to be hypothetically up 10% this year. Well, we might be up 10%, 11% or 12%, but we're limited on supply. There's only so many revenue streams we can pull off or really pushed to them. But if we have the ability to maximize our margins better because we have better visibility or win more part exchanges, which helps us sell a few more cars or gives us a used car inventory to go out there and apply to the market. If we're able to mine equity money to look at customers and engage with them sooner to bring them into the market a little bit sooner. Those are competitive advantages that can play out over the future and that's where we're looking to go out there and drive it. And then overall, like I said, the nice thing about the used car space that's really attractive, especially within the U.K. is it's much larger than the new car space. You don't have those limitations kind of do right now just because of the overall macroeconomic things but -- or macroeconomic, but you have the ability to sit here and grow that business, and it doesn't have to 100% tie to the new car side of it. So the first next 2 we have out is on the used car side of it. So it's how do you build these things to build additional value into U.K. motors. And the nice thing everything we build that way just puts more value into Pinewood, gives them more tools and more products to sell to outside consumers as well.

And then I guess a 2-part question on kind of just to wrap up from me. So a successful launch in Vietnam and Mauritius, the statement, where is next on your horizon there? And then both the margin has come down over the last couple of years. I wondered if you could talk about the margin on the balance sheet...

I'll have Mark, talk about the margin. Some of that's just increased investment more than anything else. I think in times past, maybe we didn't invest as much as we could have, like I said, this is a core competency of us in a major growth and strategic part of our business. So kind of back to your question about what we do with excess cash and dividends. If I had a choice to do one way or the other. I think there's -- in today's well, there's more value within Pinewood. Really, if you look where we currently are in the world and stuff like that, the things we have in the Nordics and different parts of Mainland Europe, natural progression would be to grow within those markets. I think there's potentially unique opportunities within the U.K. And then we have much bigger plans, both in markets that we currently exist in and then outside of that to look to make a splash in other parts of the world. But the nice thing is it's a really big world and it's a -- DMS is a key enabler for OEMs and retailers so it's something that they have to have. That's why when we talk about like the BMW and Renault certifications, that's huge. We're the only way to have both of those right now. We're in progress of getting all the other major brands gives us a competitive advantage. And as we go into stores. And as OEMs get more involved in the sales process and try to engage with that, they need better systems that go be able to do it. They can't develop their own because most retailers have multiple brands they can't run multiple DMS system, so you need a good strong DMS system to be able to support all that. So we're pretty excited about the opportunities within Pinewood.

Just there's a lot you've been talking about, well, huge amount and if you go through in the statement in terms of systems implementation and processes and efficiencies and so on. But just as a sort of broad brush, is that now focused on driving gross profit and gross profit opportunities? Or are there still cost saving elements to come in that as well?

I think there's always cost saving elements. Mark can definitely jump on that. There's always ways to be more efficient and to lean out. But really, within it -- once again, on the new car side, you're limited based on the growth and availability that happens on that piece of it. So the really only piece you have is when trades find ways to make additional gross profits or be able to do that at a lower cost base, right? So obviously, those are all the working pieces. I kind of look at the 80-20 rule. We had a lot of opportunity, took 20% of that effort to get 80% of that return as we go forward, it's going to take the opposite of that, 80% of the effort to get that remaining 20%. And we're going to continue to drive to that. But there's always going to be opportunities for better cost controls and better and maybe different ways to engage with our customers at a lower cost point. But really, ultimately, how do we maximize our volume opportunities and then how do we maximize the GPs and the gross profit that associated with that. I mean, a perfect example is even what we forecasted and kind of laid out for this year. We know the volumes are going to be compressed. There's a margin opportunity. We're finding ways to make sure and maximize those volume -- or those margin opportunities. 5 years from now, inventory is plentiful, margins kind of get compressed and we're going to have to find ways to be able to outsell the market to be able to offset any margin compression that may exist at that point in time, but constantly having the flexibility and to be agile and nimble enough to be able to adapt. Thanks, everybody. Appreciate your time.

Thanks very much.