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

Good morning, everyone, and welcome to Pinewood's Full Year 2023 Inaugural Results Presentation. I'm Bill Berman, CEO, and joining me is Group CFO Ollie Mann. I'll begin by introducing Pinewood's first results since becoming a standalone software as a service, or SaaS, business. Ollie will then walk you through the financial performance for FY23, after which I'll provide an operational review and a summary of our current strategy. As usual, we'll be glad to take questions at the close of today's presentation. Please turn to slide 4: after the board and its advisors finished a comprehensive strategic review in 2023, the decision was taken to dispose of the UK Motor and Leasing divisions and transform the group into a pure-play software as a service business. That has not only delivered a GBP 0.245 per share dividend to shareholders, payable on the 7th of May, but also freed Pinewood from being part of an automotive retail group. It has opened up a number of growth opportunities for Pinewood, both within the UK and overseas. Across FY23, we grew the business, with strong double-digit growth in revenue and in profitability.

We’ve gotten there by expanding our UK international user base, and also through pricing and through our vertical sales channels. Through our strategic partnership with Lithia — where each side has put GBP 10 million into a North American joint venture — we’ll gain access to the lucrative North American market. Our commitment is to maximize growth for shareholders by leveraging our unique product, increasing our market share in the UK and in our international markets, and by continuing to build more products and opening up the North American market. Moving to slide five, for those of you who aren’t familiar with Pinewood, we thought it would be worthwhile to give you an overview of our product and our business model. We’re a software as a service, or SaaS, group, and our product is 100% cloud-based, Azure-hosted, and it’s an automotive retail ecosystem. Our system is used in automotive dealerships, and it’s used by the vast majority of employees in the stores where our system is installed. That covers all aspects of the customer journey, from front of house, reception, the sales teams, service technicians, and back office accounting. We offer omni-channel sales channels, service products that allow our customers to effectively operate off of a single platform.

The platform we run is multi-tenant, so every customer around the globe uses the identical version—no matter which nation you're in—and it doesn't depend on language. We're active across 21 countries, and customer retention is extremely strong. Worldwide, we've got partnerships with 50 OEM brands, and the majority of those ties go back a long way. Our system keeps advancing, driven by 118 people on our product development teams, out of 243 associates in total. Every one of our developers sits in the U.K. Sales implementation teams are located in Sweden and Japan, and we have partners in South Africa, the Netherlands, and the Middle East, along with the remainder of our teams, which are U.K.-based. Now I'll pass things to Ollie, who will walk through the numbers.

Thanks, Bill, and good morning, everyone. I'll begin with the statutory income statement and explain how it has been presented following the disposal of the UK Motor and Leasing divisions to Lithia at the end of January 2024. Those UK Motor and Leasing divisions, together with their portion of central costs, appear as discontinued operations. Continuing operations comprise the Pinewood core business — the same way the Pinewood division was reported before — plus PLC costs and the wind-down costs of our legacy US motor business. FY23 covers the 13-month period ended 31st January 2024, while FY22 is the year ended 31st December 2022. I'll turn to a like-for-like comparison shortly, but a couple of key takeaways here are that gross margin was broadly maintained at just under 90%, and PLC costs rose purely because FY23 is a 13-month period. Moving next to slide 8, this presents the continuing group performance, including PLC costs and legacy U.S. motor costs, on a like-for-like basis. The comparative period is the 13 months ended 31st January 2023. As you can see, like-for-like revenue rose by 15.5%.

Revenue growth was primarily attributable to a 4% rise in user count during FY23, alongside contributions from our pricing strategy and vertical sales channels. International users grew 9%, propelled by fresh system deployments across multiple nations such as Denmark and Luxembourg, plus additional markets throughout Europe and Asia-Pacific. As a result, like-for-like EBITDA climbed 25.8%, moving from GBP 12.4 million to GBP 15.6 million, while the EBITDA margin improved from 44.8% to 48.8%. Over the 13-month stretch concluding 31st January 2024, core business EBITDA stood at GBP 19.4 million. Slide nine illustrates where the balance sheet stood at January 2024's close versus December 2022's end. Most of the group's assets and liabilities were divested to Lithia at the close of January 2024, with cash from Lithia arriving on the 1st of February 2024. That explains the sizable debtor recorded at the end of January 2024. The GBP 13.8 million in other intangible assets corresponds to capitalized development costs, and GBP 6.5 million of Pinewood deferred income sits inside the GBP 28.5 million payable balance. Looking ahead, a GBP 10 million investment will go into our US joint venture, with GBP 10 million-GBP 15 million of cash initially held on the balance sheet.

On top of that, there's a GBP 10 million RCF facility available to us, and at present we aren't drawing on it. At this point I'll turn things back over to Bill, who'll walk through the operational and strategic updates.

Thanks, Ollie. Could you go to slide 11, please? The operational highlights for FY23 include a 15.5% rise in like-for-like revenue and a 25.8% rise in like-for-like EBITDA. At the close of FY23, we had roughly 26,000 users in the U.K. and 7,000 users internationally. Our international users grew by 9% as we kept expanding internationally, which was driven by a combination of strong partnerships with our OEM partners and our international sales teams. We had a number of new overseas implementations in FY23, including systems installations in Denmark and Luxembourg. In a number of overseas markets, OEMs have approached us to implement the Pinewood system across all of their locations in a geography. We have particularly strong relationships with Volkswagen Group and Porsche. Our other route to market internationally is through our international sales teams, including one team based in Sweden and one based in Japan. Northern Europe and Asia-Pacific are two of our most important international growth areas. Our current customer retention continues to be extremely strong, with a net new user churn of circa 2%. On slide 12, you can see our strategy. We are going to do a full strategic update as part of our Capital Markets Day in October of this year.

Right now, our main focus is capitalizing on the opportunity that exists for us in the UK market. Previously, back when we belonged to a motor retail group, it was understandable that some customers were unwilling to work with us. That obstacle is now gone, so we can engage with a number of new UK customers. Through Pendragon, we have shown how our system serves as a key driver for boosting both operational performance and cost efficiencies at large UK groups. That leaves us well positioned to demonstrate what we can deliver when it comes to improving performance and cutting costs for our UK customers. Our rollout of the system across the Jardine Motor Group stores that are now part of Lithia UK begins imminently and will wrap up by the end of 2024, bringing roughly 2,500 additional users on board. International expansion keeps progressing at a solid pace, with particular emphasis on Northern Europe and Asia-Pacific. Our strategic partnership with Lithia, in which both sides have invested into a U.S. joint venture, will see our system rollout in the U.S. get underway during 2025. I'll go into this a bit more on the next slide. Lastly, to repeat, our FY27 EBITDA target, first shared as part of the Lithia transaction presentation in September of 2023, remains GBP 27 million of EBITDA in FY27.

That said, none of this includes any contribution from the U.S. joint venture. If you turn to slide 13, our expansion in North America is at an early stage. To begin with, we'll be pinpointing the key pieces of development work that need doing so we can operate in the U.S. The Pinewood system is identical no matter which country we run it in, but in the North American market there are two main development areas. The first is OEM integrations, and the second is integrations with the layered apps that U.S. dealerships use. We'll also have to make sure our system is integrated with everything else specific to the U.S. market — tax title licensing, for instance, which differs considerably from state to state. All of the development work will take place in the U.K. After that, we intend to pilot our system in parallel alongside US systems during the first half of 2025, and then begin our rollout soon afterward. Finally, on slide 15, regarding outlook, we've had a good start to FY24, and while the broader macroeconomic environment presents some challenges, we don't expect these to have a material impact on trading, given our relatively sticky customer base and the nature of our product portfolio.

Our order bank is solid, and we're talking with several new customers, both within the UK and abroad. Even though we're fairly early in the new financial year, the board has confidence in what lies ahead for the group and anticipates that FY24 will match current market conditions. Finally, I want to express my thanks to all of our associates at our former Pendragon group, and I'm looking forward to leading the company from here. Thank you — Ollie and I will now take any questions.

Okay, thank you. This is Kieran Darling calling from Berenberg. I have three items to raise. First of all, Bill, would you mind speaking about how you're allocating capital and where your investment emphasis sits as we move ahead? Any sense you can give us there, and in particular your thinking on M&A going forward? Second, regarding pricing, what ought we to anticipate for pricing in FY24? And third, I'd appreciate a few words on the pipeline excluding Lithia for FY24. Thanks.

Great. When it comes to capital allocation, we currently have a number of different paths underway. We discussed the North American expansion. Capital has already been set aside, or segregated, for pursuing that process. We're aiming to enter new markets. At the moment, some capital is being directed toward Japan, for instance, through work with the VW Group and Porsche to grow there. And then, internally in the UK, we're considering building extra layered apps so we can sell vertically through the sales channels we already have. Beyond that, regarding your question about possible M&A opportunities, all options remain open. In some geographies, partnering with or acquiring a competitor could make more sense for growth prospects there, though we'll evaluate those individually, case by case. The only other opportunities that might exist when it comes to capital allocation would be if we come across someone with a functionality we don't currently possess. Many of our systems include some AI, but fully functioning standalone AI systems aren't really part of our plan right now, and partnering could prove beneficial for us going forward. I believe your final question concerned our current pipeline.

We haven’t shared the current pipeline channels, though they’re generally consistent with our historical performance. Clearly, the Lithia UK installations are underway at the moment. Beyond that, we have a wide range of other customers—either contracts already signed with installation dates this year that roll into early next year—and then a strong sales channel visible here that lets us add more for 2025 and 2026.

So just regarding pricing in FY24, what should we be expecting on that front?

On the whole, when it comes to pricing, we aim to maintain a connection with inflation. So if you look back historically to FY22, when we were in a high inflation environment, prices were higher. It isn't a fixed rule, but as a general principle for our customer base, we attempt to tie it to inflation. So look, if inflation comes down, there may be a connection to that. But we usually make that assessment around October, November at the end of each year. So we'll carry that out through our normal process, and that will carry through into next year.

Yes. And on top of that, there are definitely other revenue streams in the pipeline right now that let us sell vertically through the sales channels we already have, for layered apps or other extra functionalities.

Thanks. Raising the mic a bit. A couple of things I'd like to ask. Could you speak to the U.S. opportunity — specifically, what customers are running in their legacy tech stack, and the total cost of ownership case you make when moving them and assisting them through that?

Right now, in the US there are three main incumbent DMS providers: CDK, Reynolds & Reynolds, and Dealertrack. Together they hold roughly 70%-75% of the market, and a number of other smaller players sit sort of on the periphery. The majority of the bigger dealer groups are indeed with one of those top three. Beyond that, though, the US market differs somewhat from other regions in that there's a whole litany of layered apps that help dealerships with their functionality. So even though you may be on XYZ DMS system, you're on a separate system for CRM and a separate one for website applications. Or if you're attempting to get something resembling an omni-channel approach — and I say resembling because, since it isn't part of the DMS and it's likely a different CRM and a different system online, all of it has to be cobbled together, which I call a bit of a Frankenstein to work through — so you don't truly get that. In the US, then, the typical dealer has somewhere between 5 and 6 of those layered apps, and they're pretty pricey. They can range anywhere from $2,000 per rooftop per month up to as much as $5,000 or $6,000.

If you look at the typical dealer and compare them with a UK or European counterpart, they're spending — including their entire tech stack, DMS, and layered apps — anywhere from 3 to 4 times what you'd see here. So I think the opportunity in front of us is huge. There are roughly just under 22,000 new car franchise dealers across Canada and the US, and Lithia has 300. Sure, those are rather large stores, but on a rooftop basis, you can see what their market share penetration looks like. So the opportunity there is huge. If we were able to add, just hypothetically, 500 stores a year at some point, that's not a target — it's just for the math. Over 10 years, you'd have 5,000 stores, and you'd still be in the low 20s as far as market share. So the growth opportunity is huge. And then with layered apps and/or functionality, our current system already has several of those built in that are on par with, and maybe in some cases even superior to, something offered in the US. Obviously, we have an exceptional team of product and developers who can sit here and build some of those other functionalities.

Our view is that this is a multi-front strategy: grow on top of the core base system, and then sell vertically using our layered applications and capabilities.

Alright, thanks. And a second question, if that's okay. So you've provided guidance through 2027 on underlying EBITDA. For the US JV, broadly speaking, what do you anticipate seeing in terms of the, well, I suppose, the P&L profile, and then the associate income or loss coming from it? Is there a substantial loss ahead from that, or will it operate at break even? And what is the GBP 10 million spent on?

Regarding the loss, most of the US JV costs are going to be capitalized within the JV itself. Those will be amortized over time. So we aren't discussing massive losses here. We'll absorb our portion of it, which currently sits at 49%, and we're equity accounting for that. That said, we don't expect significant losses during the first couple of years. And as Bill mentioned, as we ramp up toward the back end of FY25 and into FY26, once income begins flowing in, it will offset that quickly. But look, all the development work being done — which will all happen out of the UK, primarily from our Birmingham office and London office — will be capitalized and charged at potentially a small margin or at cost price. So from a P&L standpoint, the impact should be relatively minor during the first couple of years.

All right, last question, if no one has any objections. Cash flow is clearly measured on a total ops basis. Could you walk us quickly through the invoicing model — quarterly and annually in advance — and what we ought to expect there?