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

Good morning, everybody, and welcome to the Pinewood Full Year 2023 inaugural results presentation. I'm Bill Berman, CEO. And with me today is the Group CFO, Ollie Mann. I will start with an introduction of Pinewood's first set of results as a stand-alone Software-as-a-Service or SaaS business. Ollie will then take you through the financial performance for FY '23 before I run through an operational review and summary of our current strategy. As always, we'll be happy to take any questions at the end of today's presentation. If you turn to Slide 4. Following the comprehensive strategic review completed in 2023 by the Board and its advisers, the decision was made to dispose of the UK Motor and Leasing divisions and transform the Group into a pure-play Software-as-a-Service business. This has resulted not only in a 24.5p per share dividend for shareholders, which will be paid on the 7th of May, but also unlock Pinewood from being part of an automotive retail group. This has opened up a number of growth opportunities for Pinewood both in the U.K. and abroad. During FY '23, we have grown the business with strong double-digit growth in both revenue and profitability. This has been achieved through growth in our U.K. international users as well as through pricing in our vertical sales channels. Our strategic partnership with Lithia, which has seen both of us invest GBP 10 million in a North American joint venture will create access to the lucrative North American market. We are committed to maximizing growth for our shareholders by utilizing our unique product, growing our market share both in the U.K. and our international markets and by continuing to develop more products in opening up the North American market. Next, on Slide 5. For those of you that are not familiar with Pinewood, we thought it'd be worthwhile giving you an overview of our product and our business model. We are a Software-as-a-Service or SaaS group, and our product is 100% cloud-based, as you're hosted, it's an automotive retail ecosystem. Our system is used in automotive dealership is used by the vast majority of the employees in the stores where our system is installed. This includes all aspects of the customer journey from front of house, reception, the sales teams, service technicians, and back-office accounting. We offer omnichannel sales channels, service products that allow our customers to effectively operate off of a single platform. Our system is multi-tenanted, and the same version is used by all customers worldwide, whichever country the world you are located in, and it is language agnostic. We operate in 21 countries and have a very high levels of customer retention. We have partnerships with 50 OEM brands worldwide, and most of those are long-standing relationships. We are continually evolving our system, which is powered by 118 individuals in our product development teams out of a total of 243 associates. All of our developers are based in the U.K. We have sales implementation teams in Sweden and Japan, and we have partners in South Africa, the Netherlands and the Middle East as well as the rest of our U.K.-based teams. I will now hand over to Ollie to cover the numbers.

Thanks, Bill, and good morning, everyone. I'll start with the statutory income statement, and I'll explain how this has been presented as a result of the UK Motor and Leasing divisions being disposed of to Lithia at the end of January 2024. The UK Motor and Leasing divisions, along with their share of central costs have been presented as discontinued operations. The continuing operations at the Pinewood core business, which is how the Pinewood division was previously reported as well as PLC costs and the wind down costs of our legacy US Motor Business. FY '23 is a 13-month period ended 31st of January 2024, and FY '22 is the year ended 31st December 2022. I will move on to a like-for-like comparison shortly, but just a couple of key points to take away here are the gross margin being broadly maintained at just under 90% and the PLC costs increasing purely as a result of FY '23 being a 13-month period. Looking next at Slide 8. This shows the continuing group performance, including PLC costs and Legacy US Motor costs on a like-for-like basis. The comparative period is the 13 months ended 31st January 2023. You can see that like-for-like revenue increased by 15.5%. Key drivers for the revenue increase were a 4% increase in user numbers in FY '23 as well as the impact of our pricing and vertical sales channels. Our 9% increase in international users was driven by new system implementations in a number of countries, including Denmark and Luxembourg, as well as other countries across Europe and Asia Pacific. This led to a like-for-like EBITDA increase of 25.8% from GBP 12.4 million to GBP 15.6 million with EBITDA margin increasing from 44.8% to 48.8%. Core business EBITDA was GBP 19.4 million in the 13-month period ended 31st January 2024. Slide 9 shows the balance sheet position at the end of January 2024 compared to the end of December 2022. The majority of the group's assets and liabilities were sold to Lithia at the end of January 2024, with the cash being received from Lithia on the 1st of February 2024. This is the reason for the large data at the end of January '24. The GBP 13.8 million of our intangible assets relates to capitalized development costs, and there is GBP 6.5 million of Pinewood deferred income within the payable balance of GBP 28.5 million. Going forward, there will be a GBP 10 million investment in our US joint venture and initially GBP 10 million to GBP 15 million of cash on the balance sheet. We also have a GBP 10 million RCF facility that we're not currently utilizing. I'll now hand back to Bill and will cover the operational and strategic update.

Thanks, Ollie. If you turn to Slide 11, please. Operational highlights for FY '23 include increasing our like-for-like revenue by 15.5%, increasing our like-for-like EBITDA by 25.8%. At the end of FY '23, we had approximately 26,000 users in the U.K. and 7,000 users internationally. Our international users grew by 9% as we continued our international expansion, which was driven by a combination of having strong partnerships with our OEM partners as well as our international sales teams. We had a number of new overseas implementations in FY '23, including systems insulations in Denmark and Luxembourg. In a number of overseas markets, we have been approached by OEMs 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 to our international sales teams, including one team based in Sweden, one based in Japan. Northern Europe and Asia Pacific are 2 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. We are currently focused in making the most of the opportunity we have in the U.K. market. In the past, when we were part of a motor retail group, we understandably had certain customers unwilling to engage with us. Now that barrier has been removed, we're now able to engage with a number of new customers in the U.K. We have demonstrated how our system is a key driver for increasing both our operational performance and cost efficiencies in large U.K. groups via Pendragon. This puts us in a good position to showcase what we can do to enhance performance and reduce costs for our U.K. customers. Our system rollout of the ex-Jardine Motor Group stores that are now part of the Lithia U.K. is starting imminently and will be completed by the end of 2024, adding approximately 2,500 additional users. Our international expansion is continuing at a good pace with particular focus on Northern Europe and Asia Pacific. Our strategic partnership with Lithia, where we both have invested into a U.S. joint venture, where we'll see start our system rollout in the U.S. during 2025. I'll talk through this a little bit more on the next slide. Finally, just to reiterate our FY '27 EBITDA target that we first shared as part of the Lithia transaction -- presentation in September '23 is still GBP 27 million of EBITDA in FY '27. However, this does not include any contribution from the U.S. joint venture. Looking at Slide 13. We are in the early stages of our expansion in North America initially be identifying the key pieces of development work that we need to do to be able to function in the U.S. The Pinewood system itself is the same in whichever country we operate in, but for the North American market, there are 2 key areas of development. First being the OEM integrations and secondly, integrations with the layered apps that are used in U.S. dealerships. We will also need to ensure that our system is integrated with anything else that is specific to the U.S. market, for example, tax title licensing, which varies significantly by state. All development work will be done in the U.K. Following that, we plan on piloting our system in parallel along U.S. systems during the first half of 2025 and then starting our rollout shortly after that. Lastly, on Slide 15. In terms of outlook, we have a good start to FY '24. And although there are some challenges in the broader macroeconomic environment, we do not see these of having a material impact on trading due to our relatively sticky customer base and our nature of our product portfolio. We have a strong order bank and are in dialogue with a number of new customers, both in the U.K. and internationally. Although it's relatively early in the new financial year, the Board is confident in the prospects of the group and expects FY '24 to be in line with current market conditions. Lastly, I'd like to thank all of our associates at our prior group of Pendragon, and look forward to taking the company going forward. Thank you. Ollie and I will take any questions.

Ciaran Donnelly from Berenberg. 3 questions from myself. First, Bill, can you just talk on capital allocation on your strategy and your focus on specifically any kind of M&A, I guess, views going forward? And then secondly, on pricing, what should we expect for pricing in FY '24? And then thirdly, if you could just touch on pipeline ex-Lithia for FY '24.

On the capital allocation front, we've got several different paths currently in progress. So we talked about the expansion in North America. We have already separated or segregated out capital to go down that process. We are looking to go into new markets. So right now, we have some capital being focused towards Japan, for example, to working with the VW Group and Porsche to expand in Japan. And then internally, within the U.K., we're looking at building additional layered apps to be able to sell vertically through our existing sales channels. In addition to that, when you were asking about possible M&A opportunities, everything is on the table. In certain geographies, it might make more sense to partner or acquire arrival for growth opportunities there, but we'll take those on a case-by-case basis. The only other additional opportunities that may exist on the capital allocation side is if we find somebody that's got a functionality that we might not currently have. So a lot of our systems have some AI built into them, but full functioning, stand-alone AI systems really aren't part of our current plan, and it might be beneficial for us to look to partner as we go forward. I think your last question was our current pipeline. We haven't disclosed current pipeline channels, but they are broadly in line with what we've done in the past. Obviously, we have the Lithia U.K. installations ongoing right now. In addition to that, we have a full spectrum of additional customers either signed contracts with install dates this year and rolling into early next year and then a great sales channel to see here and be able to add additional onto that for '25 and '26.

And then maybe just on pricing in FY '24, what should we expect from pricing?

Broadly, our pricing, we try and keep a link to inflation. So historically, if you go back to FY '22, where we had high inflation environment, pricing is higher, it's not a set. But as a general rule for our customer base, we try and link it into inflation. So look, if inflation is lower, it may be there's a link into that. So -- but we normally assess that sort of October, November, at the end of each year. So we'll do that in a normal process, and that will flow into next year.

Yes. And so we have additional revenue streams that are currently in the pipeline where we can sell vertically through our existing sales channels for layered apps or different additional functionalities.

[indiscernible] A couple of questions. Could you talk about U.S. opportunity in terms of what customers are using in terms of their legacy tech stack and the total cost of ownership argument you've got moving and helping them with that.

So currently, the U.S. has 3 primary incumbent DMS providers being CDK, Reynolds & Reynolds, and Dealertrack. Cumulatively, they have approximately 70%, 75% market share. And there's several other smaller ones that are kind of on the periphery. Most of the larger dealer groups really are with one of those primary 3, but in addition to that, the U.S. market has kind of differed from other parts of the world. And as such, is there's a litany of layered apps that support dealerships and the functionality. So while you might use XYZ DMS system, you're using a different system for CRM and a different system for website applications or if you're trying to have something that resembles an omnichannel approach. And the reason I say resembles is, since it's not part of the DMS and it's probably a different CRM and a different system online. All these things are having to be cobbled together, I call it kind of a [ Frankensign ] and trying to work through, so you don't really get that. So in the U.S., the average dealer has anywhere from 5 to 6 of those layered apps, and they're quite expensive. They can go anywhere from $2,000 per rooftop per month as high as [ $5,000 or $6,000 ]. So the average dealer, if you compare it to a U.K. or European model is spending inclusive on their total tech stack, DMS layered apps and as such in the word of 3x to 4x as much as you would see here. So the opportunity for us, I think, is huge. There's approximately just shy of 22,000 new car franchise dealers in Canada and in the U.S. Lithia with 300. Now they have rather large stores, but on a rooftop basis. You can see what their market share penetration is. So the opportunity is huge there. So if we're able to put on just hypothetically, 500 stores a year on at some point in time. That's not a target, just for math. In 10 years, you'd have 5,000 stores and you'd still be in the low 20s as far as market share. So as far as the growth opportunity is huge. And then with the layered apps and/or functionality, our current system has several of those already built into it that are on par and maybe in some cases, even superior to something that's offered in the U.S. And obviously, we have an exceptional team of product and developers to be able to sit here and build some of those other functionalities. So we look at it as kind of a multifront approach where we can grow on the base core system and then be able to sell vertically with our layered apps and functionalities.

Second question, if you don't mind. So you've given guidance to 2027 on those underlying EBITDA, the U.S. JV, what broadly speaking, do you expect to see in terms of the or, I guess, the P&L profile and then the associate income or loss from that? Is there a big loss to come from that? Or is it will be run to breakeven? And what does the GBP 10 million gets spent on?

In terms of the loss -- the majority of the costs for the U.S. JV will be capitalized in the JV. It will be amortized over time. So we're not talking huge losses here. We'll take our share of that, which is currently 49%, which we're equity accounting for. We're not envisaging huge losses, though, in the first couple of years. And as Bill was talking about as we roll out into the back end of FY '25 FY '26, once the income starts to come in, that will quickly offset that. But all the development work done, which will all be done out with the U.K. from our primarily [ Birming ] office and London office, that will be capitalized and charged it potentially a small margin or a cost price. So from a P&L point of view, it should be relatively little impact in the first couple of years.

And final question, if nobody else minds. Cash flow is obviously on a total ops basis. Can you talk briefly through the invoicing model quarterly annual in advance, what we should expect for that?

Sure. So the majority of our customers pay quarterly in advance. Initially, or normally, most customers gone to a 3-year deal to fixed price and then after that it's a rolling 12-month contract. It varies by month. So not all customers are invoiced in the same month is a fairly even spread not perfect, not 1/3, 1/3, 1/3, but you're talking 25%, 40% and the remainder so that it's a fairly even spread. We've generally got about GBP 6.5 million to GBP 7 million of deferred income on our balance sheet, which is what we had at a year-end. So that will be fairly static going forward. It varies by plus or minus GBP 1 million month-to-month, but it's not a huge spread in that from a balance sheet point of view.

It's Carl Smith from Zeus. Just 2 questions, please. First is can you talk about where you've been adding headcount to achieve your growth going forward? So -- and has there been an element of preemptive investment in headcount to hit the numbers for going forward, '25, '26, '27? And the second question is how many of the sort of Chinese OEMs is the software integrated with right now? And do you see that as a growth opportunity going forward?

So if you start off on what we've been doing as far as growing our current staffing model, most of the direction has been on our product and our development teams, especially as it relates to North America and starting to build and write the code for there. So we've started there. Over the last 12 to 18 months, we've also beefed up our international team. So we have a fully stand-alone functioning team in -- based out of Stockholm and then another one based out of Tokyo. So there's been some direction as we go for there. On a go-forward basis, I think most of the growth is going to be product development and then specifically as we start to go into North America and build specific teams, whether it's sales, marketing, implementation teams as we break into the North American market.

Yes. And then just on the Chinese OEMs.

I think currently, we have a half a dozen of those current on there, obviously, MG, Volvo, BYD. I think there's a lot of opportunity there for, obviously, just as they come into it, some of those brands or new brands coming into it, they need a different solution than maybe some of our competitors can provide, whether that's transactional websites or having integrated ecosystem to be able to work on. They're all coming to market in various forms though. Some are trying to do direct sales somewhere have some hybrid model and some are going down the traditional franchise model. So we're in discussions with lots of different, not just Chinese even VinFast and the such and others that are coming into the marketplace, whether it's in North America, Asia or here.

I was just wondering if you could please talk us through the sort of competitive landscape in your key markets, so Europe and Asia Pacific and how you envisage that sort of changing over the next 2 to 3 years if we do think it will change?

So in Europe, it's -- you can kind of bifurcate it out. Within the U.K., our biggest competitor and the leader in the market share in the U.K. is Keyloop -- originally part of CDK International prior to that [ carriage ]. They, I think, approximately 60% and we'll probably end this year in the high 20s as a percentage of market share. As you go into Europe, it is unique by country, but it's fairly fragmented. And there isn't a lot of consistency within Europe as a whole. Asia is a completely fragmented market where you have even in-store providers where they've kind of built their own systems. You have small players out there. Keyloop does have a large international business, but they have different operating systems for different parts of the world, which I think is -- [indiscernible] might be a challenge for them for us. I think provides a unique opportunity with our single source code in single way to operate. I think the opportunity that exists in the European market in Asia, though, is kind of back to the question about the Chinese manufacturers coming in is we can give a different proposition via the OEMs to be able to go to market. So if you go into a market and they've got 22 different vendors trying to provide various forms of a core system or DMS system and then different functionalities and things on here for an OEM to be able to integrate with all of those effectively and be able to have a consistent customer messaging is near impossible. So I think we present to them a unique opportunity to be able to have a state-of-the-art cloud-based SaaS system that works into their systems and they can give them a customer-facing product that they can't get from really anybody else. Andy?

Andy Wade from Jefferies. Just first one, just following on from that. To what extent are changes in DMS driven by OEMs? Or how much of an important part do they have to play in that sort of looking ahead? That's the first one.

Well, the challenge is, first of all, is just even the classification of DMS. For the most part, you talk in Europe, North America, DMS really is more around accounting systems or back-office things here. So we like to look at ourselves more as a kind of an automotive ecosystem. Within that context though, the OEMs are having a lot more influence. They want to be able to engage with customers, whether it's what they're doing with over-the-air and servicing and then being able to communicate back that through the retail network. And a lot of systems inherently can't build that into their products so they've got to go outside or somebody else is facilitating this forum. And once again, you get those clunky connections and you never get the real kind of ecosystem or flow through for a customer. It's the same thing when it comes to the sales side and be able to interact that way with a customer. OEMs are trying to have more communications directly with the customer and be able to start to funnel the transaction through. But through OEM system or website, you can only go so far and then you hit a wall, then you have to go into a dealer website, that will only give you a certain amount of functionality, then you go back into the store process. And we're one of the few out there that can sit here and via an OEM or even outside third-party opportunities, be able to give an end-to-end solution where you operate within one ecosystem don't have any of that clunkiness and can even have a transaction completed online if the customer chooses and/or to be able to go online, in-store and back and forth multiple different times, which is where we're seeing most customers I'm trying to go to. So I think we have a unique proposition when it comes to that.

Looking at the -- a couple of questions on the U.S. The first one, obviously, pretty rare to see a cloud-based solution here, but there is Techion, which are cloud-based solution. They've signed up a couple of names that we're all aware of recently. Can you give us a bit of insight as to how Pinewood differs from Techion and how you view them as a competitor?

I think Techion is a great company. I believe they're originally kind of an offshoot or some of their top people came out of Tesla and they originally worked with General Motors. They have a system very similar to ours. It is cloud-based. Probably, I'll say, I think our code in our operating system is a little bit better than theirs. I think one of the challenges we had in the past is being owned by Pendragon. It prevented us from going into certain groups and being able to get them on the system. But conversely, on the other side, it gave us the ability to develop and incubate off of a real-life transactional basis and be able to modify in real time and be able to go to market with that. And I think that gives us a different way to go to market. I think the other thing that really for us that gives us an advantage is the partnership with Lithia. Because going in and kind of that math example I gave only, if you're trying to sign up hundreds of dealerships a year, there's 22,000 dealers, and it's really spread out. There's probably 15,000, 16,000 different ownership groups within that. The number of calls you're trying to make in the people you're trying to get to, just to get 2 stores, 5 stores, 10 stores -- with us being able to have the partnership with Lithia, that gives us access day 1 to the largest dealer group and probably one of the best dealer groups in all of North America day 1. And it gives us a lot of credit behind it. We make that work, we can make anything work. And then it's just how fast can we grow and add on additional groups and users.

Yes. So actually, that's a perfect segue into the last question I was going to ask, which was to what extent is there the risk that you end up with the Pendragon situation in the U.S. with Lithia -- and is there a scope for that to be sold by co-investment, how open to you are that, how likely is that?

Well, I can't speak for Lithia, but the thesis behind having the controlling stake didn't have anything with them being able to control the JV. It was more around making sure that they had a fair share. They're nearly a 20% shareholder in the PLC and neither one of us intention is to kind of go backwards and go through what happened with Pendragon. So I could see the structure and the investment thesis and the ownership on the JV looking completely different in the near to short term or at least that's my aspirations.

Yes. Maybe just one follow-up. Could you give us some insight into conversations you're having with prospective customers in the U.K., obviously, post now the pure independence from Pendragon and is that resonating with prospective new customers?

I know we've had a lot of -- and the nice thing about it is these aren't us making outbound calls. These are people engaging with us directly looking at the systems and processes. Once again, when you look at being able to have Lithia on our Board as a shareholder and obviously, for the joint venture, that gives us a lot of credibility. There was a lot of different groups looking at us last year, and it wasn't just for the automotive group. So lots of large players, U.K.-based players as well saw the value in our products. And so how that could help them going forward. So we've had a lot of inbound traffic into whether it's been Ollie, myself, Paul Hopkinson, our Managing Director or our sales teams in general, we've had a lot of inbound. [ Loading ] with these types of products, they are sticky when you're talking to large groups, it's a pretty extensive really deep dive into their operating system, how they and then building or customizing a solution for them on a go-forward basis. So we're in pretty far down discussion with several large groups and hopefully be able to announce something in the relatively near future.

Any more questions or so?

Okay. Thank you, everybody. I appreciate it. Thank you.