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

Good morning, everyone, and welcome to Pendragon's presentation of our full year results. During this session, we'll go through the financial results for full year '22 and update you on the great progress we keep making with our strategy. I'll begin by recapping our vision, explaining why we strongly believe our set of diversified assets creates real competitive advantage, and reminding you of our ongoing strategic priorities. Mark will then walk you through the financial performance, and after that I'll run through a more detailed operational and strategic review for 2022. As always, we'll be glad to take any questions at the end of today's presentation. Our vision is to transform automotive retail through digital innovation and operational excellence. Over the last year, the scale of strategic delivery has once again been substantial and has been a key contributor to the performance announced to the market today. To support our vision, we redefined our purpose and values in 2022. I'm confident that the outputs formed across all divisions of the group will further unify our teams and drive even greater pace of transformational change in 2023 and beyond. The Board and I remain confident in the opportunity that our strategy provides for value creation, and we're well poised in the evolving consumer and competitive landscape.

Pendragon stands out sharply when it comes to its assets and capabilities. And ever since we launched our strategy, the group has moved forward remarkably well in shoring up or building fresh competitive edges. In UK Motor, we run off a much leaner cost base, with efficiency substantially better, and we effectively harness big data drawn from internal and external sources to sharpen decision-making and customer journeys. Features Car Store, our new used car strategy, is landing well with customers, and our new CarStore.com website lists roughly 12,000 used cars — more than any of our new digital disruptors and the second largest overall. UK Motor has widened its portfolio to take in BYD, the world's largest manufacturer of new energy vehicles. I'm delighted that Pendragon is serving as BYD's lead launch partner for the U.K.; 2 stores in Birmingham and Milton Kings are already operational, and 6 more are in build, including a flagship store in London. Pinewood has taken excellent steps forward as well, going further than competitors by developing enhanced digital capabilities, which lets the group push its physical ecosystem ahead at a greater pace than its peers. It has also added to group profitability both in the U.K. and internationally. Pendragon Vehicle Management has diversified OEM representation, is growing well beyond its B2B core into a number of B2C adjacencies, and has a full year service proposition that drives high levels of customer retention.

This slide gives a quick recap of the strategy we announced late in 2020. As we laid out at the close of FY '21, we've made substantial progress on the UK Motor goal of running from a lean and effective cost base, and we keep pursuing tactical opportunities as well. That goal has now been replaced by the enhancement of our new car representation across the U.K. In addition to our existing partnerships with BYD, where we serve as a U.K. lead launch partner, we're in conversation with a number of other brands to respond to the electrification of the U.K. fleet. Turning to Slide 6. The outputs of our strategic initiatives and significant investments across our divisions are driving much improved productivity and gross margin resilience across the group. The relaunch during the year of the market-leading omnichannel Car Store proposition, with a fully transactional website, has contributed to the robust underlying profit before tax announced today, a GBP 57.6 million. This performance was ahead of the Board's expectation at the start of the year. Our PBT performance was in strong light of well publicized and significant headwinds during the year, with operating costs of nearly GBP 34 million year-over-year. The balance sheet of Pendragon continues to improve. At the end of FY '22, net debt stood at approximately GBP 23 million versus nearly GBP 50 million at the end of FY '21.

I'll pass things along to Mark now so he can walk through the figures in greater depth.

Thanks, Bill, and good morning to everyone. I'd like to begin with the slides I presented at our past two results presentations, though I wanted to go over them one more time simply to illustrate how the group's performance has shifted structurally and how efficiency has improved since we launched our strategy in late 2020, measured against pre-pandemic results. During the year, revenue rose 6.7% on a like-for-like basis, reaching GBP 3.6 million. That compares with pre-pandemic 2019, when the group ran more than 200 stores versus only 145 now. As a reminder, several of those stores were loss making. We achieved additional gross profit growth in FY '22, up 5.5% like-for-like against FY '21, at GBP 457 million, which produced a gross margin rate of 12.6%. Our emphasis on pursuing strategic initiatives that improve used car gross profit per unit and on maximizing our new GPUs amid supply constrained conditions, along with like-for-like growth of 6.9% and after sales gross profit, supported this performance. Once more, set against FY '19, gross profit now sits just GBP 15 million, or 3%, below that level, even with revenue lower by nearly GBP 900 million.

When we entered FY '22, my guidance was that underlying operating costs would rise by roughly GBP 30 million across the year. That came about through several factors: the elimination of brakes relief valued at about GBP 12 million, the roughly GBP 10 million we put into marketing, and inflation's effect. All told, costs rose GBP 33.7 million, reaching GBP 358.7 million, and inflation — which peaked and was forecast at the beginning of the year — was the main factor behind that larger cost base. Even so, when measured against the cost base we had before the strategy, costs stayed GBP 87 million lower. Consequently, during the year, notwithstanding growth in gross profit and revenue, those cost movements, combined with higher interest rates, brought underlying profit before tax down from GBP 83 million to GBP 57.6 million. Set against FY '19, that is still GBP 74 million better. When our strategy launched, we said capital allocation would prioritize investing capital to back initiatives, alongside an emphasis on cutting the bank net debt the business held. Over 2022, we achieved a further cut in net debt, from GBP 49.7 million down to GBP 23.3 million.

As of now, that figure has fallen by GBP 96.4 million from when our strategy began. Moving on to Slide 9, we'll examine the summarized group income statement. Continuing from what was said on the prior slide regarding gross profit growth, I'll give a bit more detail on what drove it — and Bill will cover more during the operational review as well — but the gross profit result was supported by robust expansion in new car margins, since certain implied constraints were more than compensated for by improved gross profit reaching GBP 2,719. Used car margins, as anticipated, came down from the exceptional peak levels recorded in the second half of '21, yet the levels reached at GBP 1,607 for the year remained well above what has historically been delivered, thanks to the combined effect of many strategic initiatives, which we'll touch on shortly. The aftersales margin rate held steady year-on-year even with the effect of higher technician labor costs, and that — together with 7.5% like-for-like sales growth — produced an additional GBP 9 million in aftersales gross profit versus FY '21. And as I discussed on the earlier slide, costs rose to GBP 33.7 million.

I'll wrap up on this slide by pointing out the nonunderlying items, which came to GBP 0.4 million in total. And there's a mix of a net gain of GBP 7.9 million on property and business disposals, offset by impairment charges of GBP 4.8 million, being the goodwill impairment on the sale of our DAF truck business. On top of that, movements in the base interest rate produced roughly GBP 8 million of extra interest charges during the year, and the combined effect of these items was the underlying PBT of GBP 57.6 million. Turning to Slide 10, for a look at cash flow. The group had another solid year of cash generation, bringing debt down further, while stepping up capital investment in the business. Cash generated from operations stood at GBP 116.7 million, including a working capital outflow of GBP 5.1 million, driven mainly by the cash fund element of higher used car values. Net capital expenditure of GBP 27.1 million was made up of capital expenditure of GBP 43.7 million, including several major development programs that Bill will mention shortly. Beyond that, almost GBP 6 million of development capital went into Pinewood to back its future growth.

CapEx was offset by inflows from disposing of surplus property — mainly the sale of a vacant site in St. Albans for GBP 10.5 million, plus GBP 2.9 million from the disposal of the DAF truck business. Lease payments and receipts came in GBP 2.8 million lower, as we keep successfully managing the number of vacant properties through our store rationalization program. Our lease regear with our largest landlord let us hand back 12 vacant properties early, and that produced a cash saving of GBP 2 million in FY '22, which will grow to GBP 3.5 million on a full year basis. Over the last 3 years, we've now successfully cut our vacant leasehold property, generating over GBP 7 million in annual rent savings and a further GBP 3 million reduction in rates. And we're pleased with how the group's net debt position keeps coming down. And lastly, on the financial statements, just to cover some key changes on the balance sheet, which has strengthened further: net assets rose by GBP 55.4 million to GBP 281 million. Key movements include a GBP 16.1 million increase in property assets, reflecting the investments we've made into our estate.

Inventory went up 21%, or GBP 107.5 million, and the reasons behind that are a mix of roughly GBP 44 million from more new car inventories as supply loosened somewhat toward the end of the year, plus a GBP 63 million rise in used car stock — GBP 22 million of which comes from a higher volume of those cars at year-end as we got ready for the start of this year, with the other GBP 40 million coming from a higher average value of the cars we held. Payables rose correspondingly by GBP 121 million, mainly because creditors against that inventory went up. Lastly, net liabilities for defined benefit pension scheme obligations fell from GBP 23.6 million to GBP 2.6 million at the close of '22. That improvement is made up of GBP 13.1 million in contributions from the company and a net actuarial gain of GBP 8 million. We also finished the triennial valuation of the company's pension scheme in the year, as at the 31st of December, 2021. That exercise found the funding deficit had come down from GBP 170 million at the last exercise in 2018 to GBP 33 million as at December '21.

The company and the trustees have agreed to keep contributions to the pension scheme at their present level through the end of 2023, and by then the actuarial deficit is expected to be cleared. At that stage, we're shifting to a long-term funding target, though contributions will drop by GBP 10 million, to GBP 3.5 million annually, and we hit that target in 2026. I'll now hand things back to Bill, who will take you through the operational and strategy update.

Thanks, Mark. Moving to Slide 13, we'll examine how the motor vision performed operationally before I go on to cover our strategic initiatives. We've changed the way we view our used car strategy. It now mirrors our group ride omnichannel approach to retailing used cars. As the market kept evolving, we shifted that strategy from a standalone proposition to a group-wide one, making sure we get the most from our entire used car inventory, our physical assets and our digital capabilities. To make that happen, all of our used inventory is now listed on CarStore.com, a fully transactional platform, with more than 12,000 vehicles online at present. We stay focused on getting the most out of the important new car business, and we invested significantly in a number of our premium brands, particularly for 2022, including major remodels at Porsche, BMW, Mercedes-Benz and our new Land Rover location in Mayfair. In addition, and consistent with the plans we announced back in 2020, we have now opened 2 new format Car Store locations in Chesterfield, with the addition of aftersales facilities completed in 2022, and a brand-new site in Warrington. Because of the supply challenges, which hit the whole market and persisted throughout the year, volumes were down 6.1% in new cars and 8.7% in used cars.

New vehicle orders, though, have stayed remarkably robust for us. We entered 2023 with more than 20,000 orders in our Motor division, and we're confident we're well positioned for when supply loosens up. On used cars, for the year we tracked in line with the overall market. That said, after we launched our new used car proposition in May, we beat the used car market by 600 basis points across the second half. Strong new and used GPUs — which I'll get to on the next slide — along with a solid aftersales performance, once again helped by strategic improvements, together drove an overall gross profit improvement of GBP 18.4 million on a year-over-year basis. Mark has gone through the drivers of cost increases, but those cost increases offset the gross profit growth, which left us with an operating profit of GBP 69.1 million. So returning to per unit performance on Slide 14, our strategy of changing how we operate to lift used car gross profits — GPUs — is producing demonstrable results, with a used car GPU of GBP 1,607, well above historical levels. Between 2011 and 2018, our used GPU averaged GBP 947.

For 2022, the GPU stands more than GBP 600 above that figure, and the efforts we've concentrated on from 2020 onward have driven this expansion. Prioritizing the highest possible margins on new cars in a supply-constrained market produced a record new GPU of GBP 2,719 — GBP 808 higher than what we saw for the whole of '21. Moving on now to Slide 15. With respect to our strategic aim of speeding up digital innovation, the group, with Pinewood's support, delivered excellent additional progress in reinforcing omnichannel capabilities during FY '22. Sales Plus is a DMS application letting store associates run a sales process smoothly across both digital and physical channels. Enhancements made to this app over the year include automated inclusion of insurance products and customer offers, which is pushing penetration gains year-over-year; associates and customers working through one system and process, whether in-store or at home, can now modify finance type, deposit, term, annual mileage and insurance products in real time. These greater levels of transparency and optionality have been warmly received. F&I menus displayed on the right-hand side of the slide, along with insurance product sales made outside the point of vehicle purchase, are presently under development and will be rolled out group-wide in FY '23.

We anticipate that these advancements will yield additional penetration gains along with incremental sales. Second, our digital F&I capabilities, which lead the market, were reinforced across FY '22. And variable APRs by balance of finance are being applied for BMW, Mercedes-Benz and JLR on unused vehicles. The dynamic, real-time abilities to compare lender offers along with associated variances and residual values have been scaled group-wide and can maximize customer value. Data capability has been embedded to track the equity position of customers buying used vehicles on finance, plus automated communication tools. We are piloting this capability right now, with encouraging early indicators for customer retention and unit volumes. Together these F&I initiatives have produced a 5 percentage point gain in finance penetration, with approximately GBP 8 million in FY '22. Going forward, rate for risk capability is presently under development, and personalized finance rates based on a soft credit check will be offered to the customer in FY '23. The group wide platform for vehicle acquisition, management and pricing is focused on optimizing both the turn speed and margin of used vehicles. Market-based pricing has been advanced with the addition of internal demand and vehicle supply indicators in 2022. Greater automation and a cloud-based solution have cut manual inputs, driven unit economics and accelerated turn speed.

Pricing revisions contributed roughly GBP 4 million overall during FY '22. Our teams have reworked the part exchange and Sell Your Car experiences, making them seamless for customers whether they're online or in-store. To go alongside those experiences, we've developed Sales Plus further so it now includes proprietary appraisal and valuation capabilities. So as a result, dependence on third-party systems is gone, workflow has been built into customer and associate journeys, and lastly, visibility of expected virtual actual costs and preparation has been delivered to further fine-tune customer evaluations and optimize margin. Going forward, science modeling that applies machine learning is being developed to maximize the cloud-based pricing solution. These market-leading capabilities will partly support the objective of doubling Sell Your Car vehicles, given the favorable metal margin dynamics compared with other used vehicle channels. A program aimed at reconditioning made good progress in FY '22. The right used cars are reaching the right location more quickly. Revised stock allocation frameworks, together with process automation that ends the reliance on vehicles being manually brought into stock, have improved turn speed. The team is now reviewing cosmetic preparation processes and capabilities to find further improvements.

The aftersales results we're reporting today have gotten a lift from several things that happened during the year. Our technicians now work under a redesigned incentive plan, and that has cut churn while also pushing productivity higher. Vehicle health check conversion and performance are up year-over-year, supported by revised local reporting and a dedicated operational focus. We trialled interest-free finance for vehicle health checks in the first half, and in the second half we scaled it out across every UK Motor location. Those VHC gains delivered roughly GBP 4 million of benefit in FY '22. Looking at FY '23, we'll be exploring chances to sharpen service pricing across our channels, lift service plan penetration, and make greater use of our own labeled parts. Record levels of penetration and margin for the group in used vehicle warranty products were achieved in the first half of 2022. I'm delighted to say that this momentum carried into the second half. Since launch, used guarantee penetration has risen by 5 whole percentage points, and about GBP 3 million of benefit has been booked so far. Dynamic pricing for individual cap codes is the next iteration. That will open up Stratstone vehicles that don't qualify for OEM warranties and generate additional upside throughout the business. All of these operational improvements, along with the things and processes behind them, have helped produce the margin gains we've recorded in UK Motors.

Turning now to Slide 18 and BYD. Pendragon serves as BYD's lead launch partner here in the U.K., and I'm both very proud and very pleased about that. BYD ranks as the biggest new energy manufacturer globally. In FY '22 they moved roughly 1.9 million new energy vehicles, with year-over-year growth above 200%. BYD holds substantial plans for the U.K. market, aiming at 5% new vehicle market share over the next several years. ATTO 3 is the first model line coming to the U.K. That vehicle is a C segment SUV featuring a fully electric powertrain and a range exceeding 260 miles. Looking ahead, the product roadmap is impressive, with 3 additional models scheduled to arrive in the U.K. in 2023. Last week we opened our first 2 locations, in Birmingham and Milton Keynes, and initial customer reactions have been positive, showing the vehicles to offer high quality and innovation. Orders for the ATTO 3 are already being taken. Going forward, we have 6 more locations planned for the year, among them BYD's U.K. flagship locations in Mayfair, London. BYD is the first new partner under our objective of enhancing new car representation. We are delighted to partner with BYD in the U.K., the world's largest manufacturer of new energy vehicles.

Our new strategy for used cars. Car Store's mission is to empower customers to buy, sell and take care of their car needs the way that they want. From a traditional walk-in journey to a full online transaction with no associate interaction and everything in between. Car Store's proposition is truly personalized and seamless across digital and physical channels. Further revisions have been made to the proposition in the year. All grew used stock, some 12,000 vehicles currently is now transactional via the CarStore.com website and supported revised image standards. 12,000 new vehicles gives us greater scale than any other digital disruptor and going forward, Car Store will be the used car brand and platform for the group. In the second half of 2022, SellYourCar.com was launched and now is driving incremental used vehicle acquisition for the group. The revisions we have made to your Sell Your Car journeys place us in the forefront of the market and enables us to capture disproportionate share. They have also supported into gross margin resilience across the group versus FY '21 and the unprecedented market tailwinds at that time. All Evans Halshaw locations are enabled with the CarStore.com omnichannel proposition in FY '22, Car Store will be the group's used car platform and brand going forward.

The initial standalone concept store—designed to back the omnichannel proposition and to test and learn—opened in Chesterfield in April. Customers have responded really positively to that store, and it now serves as the model for upcoming expansion. As we mentioned at the first half, Warrington was the next location scheduled to come online in Q4. Warrington sits on roughly a 3-acre lot and showcases around 400 used vehicles. Once again, customers have given the store a warm reception. Going forward, our target is 2 new Car Store sites in FY '23. During the first half of '22, we scaled up the count of small format sites under the CarStore Direct banner. 10 new locations are now operating across the U.K. Those sites underpin the SellYourCar.com proposition while also creating additional points for click and collect and vehicle delivery. A full launch of the proposition, backed by an integrated omnichannel campaign, kicked off in May '22, alongside prime-time TV advertising to build awareness of the repositioned brand. Earlier this year we teamed up with leading touring car team Power Maxed Racing. The proposition launch has had a positive impact. Digital traffic to CarStore.com has risen by over 60% compared with a year earlier. The brand is drawing in new customers, and the full year reputation.com score stands at a market-leading 4.7 out of 5, an increase of 2 basis points year-over-year.

Trustpilot ratings are also robust, at 4.6 out of 5. That helped drive our market outperformance during the second half of FY '22. I showed this slide at the half year to spotlight the market-leading omnichannel capabilities that underpin our omnichannel customer proposition. Through the second half, we've kept up our digital and physical advantages over the competition. Opportunities are larger for us now that others have exited. We have industry-leading Trustpilot scores, and our inventory scale exceeds that of any other digital disruptor. I'm confident the digital and physical changes arriving in 2023 and beyond will keep driving customer satisfaction, scale and differentiation versus the competition. Moving to Slide 23 and Pinewood. Pinewood remains fundamental to the pace and scale of change we are delivering. Pinewood's evolving technology powers our U.K. Motor business and ultimately will benefit Pinewood's external customers, who account for roughly 80% of Pinewood's customer base. Pinewood had a strong second half, with total user growth of 4%, driven by new users added during H2. Pinewood now serves roughly 32,000 users across 19 different countries.

During FY '22, our international user base grew 13%, which lifted the international user count to an all-time high of roughly 6,400 users. In addition, the second half saw Pinewood launch in 2 additional international markets: Singapore and the Middle East. And last, on the international side, customers in Asia Pacific were moved to a direct sales relationship with Pinewood, U.K., which improved the margins we achieve in that market. A robust pipeline remains for international expansion, both directly with retail customers and through engagement via Pinewood's strong OEM relationships. Roughly 90% of Pinewood DMS revenue comes on a reoccurring basis, an important metric for a SaaS business. Alongside this, Pinewood gains from a strong customer retention model, with net user churn under 1% in 2022. To speed up its growth, Pinewood is putting more into development and operational resources, with costs rising by GBP 1.7 million during the year. Consequently, despite the revenue growth, that cost investment produced a reduction in underlying operating profit to GBP 11 million. We are confident this investment will drive returns in the future. Pinewood developed and delivered a number of important strategic enablers to the UK Motor division's performance during FY '22.

I went through these in greater depth in the Motor division review, but to recap, every module I referred to — including open banking payment developments, the Sales Plus enhancement, the progress on our acquisition management and pricing platform, and the strong F&I performance — was powered by Pinewood. The pace at which we've managed to develop, test, and launch these capabilities has been a significant advantage for us. A further robust development pipeline is in place for '23, including insurance menu pricing, stand-alone product sales, capability, plus additional after sales enhancements, and new finance models such as rate for risk are under development. On a stand-alone basis, looking ahead, Pinewood is targeting double-digit percentage growth in total users in 2023 and is making good progress toward this aim, with approximately 200 new users added year-to-date and orders for approximately 1,600 users currently in place. Last, the sales pipeline keeps building strongly, given Pinewood's digital assets and capabilities, which are unrivaled on a global basis. Turning to PVM on Slide 25. Pendragon Vehicle Management, our leasing business, also delivered a very strong performance in the period, with operating profit up 13.7% to GBP 19.9 million from GBP 17.5 million in 2021.

For PVM, growth keeps coming from gains on selling off defleeted cars, and those residual values were locked in 3 to 4 years earlier. So these disposals keep benefiting from the rise in used car prices since late 2021. Fleet size, much like UK Motor retail sales overall, is constrained by supply, yet PVM remains focused on bringing in orders and right now holds an order bank above 2,000 orders — substantially above pre-pandemic run rates. We also see a continuing exciting opportunity for fleets exploring electrification, plus the tax benefits that give their employees, supporting future growth. Our relationship with BYD offers a chance to expand in this area. More than 40% of the current PVM order book is for a hybrid or pure electric vehicle. To sum up, I'm delighted with how much the group delivered in 2022. I regard our omnichannel capabilities as market leading, and we keep achieving a high pace of change. A strong pipeline of strategic opportunity remains, and we are confident in our positioning to capture these opportunities amid an evolving landscape.

We've kept putting money into growing the business. The proof shows up in how UK Motor and Pinewood performed. Pinewood especially is a piece of the business that gets us really excited. So with that in mind, this summer we intend to hold a Capital Markets Day for investors and analysts, and it will feature an update on Pinewood. 2023 is off to a solid start, with healthy volume and solid volume growth during January and February, which pushed operating profit above 2022. Last week we opened our first BYD sites in Birmingham and Milton Keynes. We came into the year with more than 22,000 new car orders combined across the Motor division and PVM. And although we anticipate supply will stay under historic levels, there are a few indications that vehicle supply is improving too. We're staying alert to possible headwinds coming from tough macroeconomic conditions. Even so, we still anticipate that our continuing operational initiatives and growth opportunities will more than offset operating cost inflation in the business this year and beyond. The Board stays confident about the group's prospects in 2023. And finally, on a personal note, I want to thank each of our 5,600 associates for their hard work and dedication.

Thanks. Mark and I are ready to take your questions now.

Mike Allen here from Zeus. So I have a couple of questions, if that's alright. Just regarding goodwill and that small decrease there — should I take it that this relates to JLR?

No — like I mentioned in my comment, the entire goodwill impairment comes from getting rid of the DAF business, so what we're writing off is the goodwill tied to that. Everything else in goodwill remains at carrying value.

So you're confident there won't be any kind of write-downs?