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

Good morning, everyone, and welcome to the Pinewood H1 FY '24 Results Presentation. I am Bill Berman, and with me today is the group's CFO and my partner, Ollie Mann. I will begin with a short summary and a reminder of the Pinewood business model. Ollie will then take you through the financials for the first half of FY '24 before I run through an operational review and strategic summary. If there are any questions, we'll be happy to take these at the end of the presentation. In the first half of FY '24, we had a great start as a stand-alone SaaS business, achieving double-digit growth in both revenue and gross profit. The priority for us in the first 6-month period has been the system rollout in the ex-Jardine Motor Group, Lithia U.K. stores. Based on our customer feedback, we are happy that these have been best-in-class system implementations. Our teams have really excelled and gone the extra mile trying to make the implementations at every Lithia dealer, a seamless and positive experience. We expect to conclude the rollout to Lithia U.K. stores in December of 2024. We are keen to expand our market penetration throughout the rest of the U.K. market. And as a result of this, we have restructured our U.K. sales teams to allow us to maximize our U.K. market penetration in the short and medium term. We should start to see the results of this in FY '25. Our largest opportunity for the group is the North American market, which has been opened up for us by our partnership with Lithia Motors. In the first half of FY '24, we started the discovery and planning stage of our rollout into North America. We'll share a lot more of this detail as well as our other aspects of our long-term strategy at our upcoming Capital Markets Day on the 24th of October in London. Next on Slide 5, for those of you that do not know Pinewood, we'd like to give you an overview of our system and our business. We are a Software-as-a-Service or SaaS group, and our product is 100% cloud-based, Azure-hosted, highly secure automotive retail ecosystem. Our system is used in automotive dealerships in 21 different countries and is used by the vast majority of the employees in those stores where our system is installed. Our system covers all aspects of the customer journey, the front-of-house reception team, the vehicle sales team, the service technicians and the back-of-house accounting team. Uniquely, we have a cloud-based system and have been installing our system in automotive dealerships for over 20 years. No other automotive ecosystem provider has this combination of technical architecture and automotive experience. We offer omnichannel sales and 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, whichever country in the world you're located in and it's language agnostic. We have very high levels of customer retention and have partnerships with 50 OEM brands worldwide, many of whom are long-standing partners. We're continually evolving our system, which is powered by our product and development teams out of a total of 263 people. All of our developers are based in the U.K. We have sales and implementation teams in Sweden, Japan. We have partners in South Africa, the Netherlands and the Middle East, with the rest of our team based in the U.K. I will now hand the call over to Ollie, to cover the numbers.

Thank you, Bill. Good morning, everyone. I'll start with the statutory underlying income statement. In our first set of half year results of the stand-alone SaaS business, we have no discontinued operations. In our comparatives, we do still have the dealers and leasing business sold to Lithia within discontinued operations. In the first half of FY '23, as this was before the Lithia transaction completed, there are still intercompany revenue and gross profit amounts that have to be stripped out of the numbers on a statutory basis, which is the reason for the very large year-on-year increases in continuing operations, statutory revenue and gross profit. For transparency, we have split the plc costs and legacy U.S. Motor business operating costs out within the underlying operating profit. I'll move on to the next slide, where we include the intercompany revenue and gross profit, which enables us to give a much better comparison between the first half of FY '24 and FY '23. On Slide 8, the continuing group performance for the first half of FY '24 is compared to the first half of FY '23. You can see that revenue increased by 11%. Key drivers for the revenue increase were a 3.6% increase in user numbers for the first half of FY '24, upselling products to existing customers, and the impact of our inflation-linked price rises. The vast majority of our cost of sales are our Azure hosting costs. We have a number of ongoing initiatives to minimize these costs while ensuring that we have the hosting capability we need for the system. This continued focus on hosting costs led to gross margin improvement, with gross profit increasing by 12.4% compared to the 11% revenue increase. As expected, our costs have increased year-on-year as we have invested in the business across a number of areas to ensure we are in a stronger position as possible going forward. Again, as expected, our underlying profit before tax reduced from GBP 4.6 million to GBP 4 million due to this cost investment. Underlying EBITDA marginally decreased by just GBP 0.1 million to GBP 6.9 million. Slide 9 shows the nonunderlying items for H1 FY '24. We have GBP 1 million of one-off transaction costs in the period. These primarily related to the Lithia transaction that completed on the 31st of January 2024 and were costs incurred as a result of the share consolidation and transaction dividends that occurred post 31st of January 2024, stock exchange costs for issuing new shares and adviser costs that were received post-transaction completion. The share of losses from the JV with Lithia was GBP 0.3 million. The GBP 4.3 million of nonunderlying interest receivable was interest earned on cash held while the group was finalizing the GBP 358 million dividend to shareholders that related to the Lithia transaction. On Slide 10, you can see the balance sheet position at the end of July 2024 compared to the end of January 2024. 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 '24. This is the reason for the large receivables and shareholders' funds balances at the end of January. The GBP 9.7 million investment is the GBP 10 million investment in the North American JV with Lithia, less than GBP 0.3 million, which is our share of JV operating losses in H1 FY '24. The GBP 14.9 million of other intangible assets relates to capitalized development costs. Within the receivables balance of GBP 16.6 million, the largest balance is GBP 9.9 million receivable from Lithia U.K., which relates to historic tax losses that they will be able to utilize and reimburse Pinewood as the tax losses are utilized. The payables balance of GBP 9.7 million is made up from a combination of trade creditors, accruals and VAT creditors. There was GBP 13 million of cash at the end of July, which was before our $4.2 million investment in the AI company, Seez, which equates to approximately GBP 3.1 million. I will now hand back to Bill, who will cover the operating highlights and the strategy update.

Thanks, Ollie. Next, turning to Slide 12. Operational highlights for H1 FY '24 include our double-digit growth in both revenue and gross profit. At the end of July 2024, we had approximately 27,000 users in the U.K. with the remainder of our 34,300 users being our international customers. Our international expansion continued in a selective manner as we are keen to ensure that our international growth is now targeted on areas where we can generate the best return on investment. The Lithia U.K. system rollout is approaching completion, and we're very pleased with the way these implementations have gone. Customer feedback is extremely important to us. And the reaction we have received from the Lithia teams following their system implementations has been very positive. Our U.K. sales team has been restructured in the first half of the year to put us in the best possible position to maximize our U.K. market penetration. We should start to see the impact of this as we move into FY '25. We have started the discovery and planning stages of our system rollout in North America. I'll talk about this in a little bit more detail shortly. Finally, in September 2024, we made a $4.2 million investment in an automotive AI company, Seez. Seez provides AI chatbots for automotive retailers as well as suite of e-commerce and online channel products. The commercial strategic partnership with Seez will booster Pinewood's product offering as the company prepares for expansion into the U.S. market alongside Lithia Motors, and it offers Pinewood exclusive distribution rights to the Seez products in the U.S. market as well as with existing customers. On to Slide 13 and our strategy. We're going to do a full strategy update during our Capital Markets Day in London on the 24th of October 2024. This will include running through all the key areas of our long-term strategy out to 2030 as well as the financials associated with this. The strategy update on the Capital Markets Day will include the discovery work done by a subject matter expert consulted on the North American automotive market. Ollie and I are looking forward to sharing all of this with you on the 24th. On to Slide 14. Our strategic partnership with Lithia remains key to creating the access to the extremely lucrative North American market. Following the discovery work that we have undertaken in conjunction with the expert automotive market consultant, we're now starting to engage with North American OEMs. Once we've liaison with a number of key OEMs on technical requirements, we'll be able to start the development work needed for the North American market in Q4 of 2024. We then anticipate piloting our system in a number of Lithia stores in the second half of 2025 with the first quarter of '26 before the full North American system rollout starts during 2026. A key point to highlight is the size of North American opportunity. Although Lithia are the largest automotive retail in the world, they represent just 1.5% of the North American market. So it's a huge potential to claim further market share in North America on top of the Lithia system implementations. Turning lastly to Slide 16. In terms of outlook, we've had a good start to FY '24 with a lot of focus on the system rollout and the ex-Jardine Group, Lithia U.K. stores. All of our associates that have been involved in this rollout have done a superb job, really going the extra mile and trying to make it as smooth as possible. There are only a handful of stores left to go on to our system now. We're in well progressive discussions with a number of potential new customers from both the U.K. and internationally, and although there are some challenges in the broader economic environment, we do not see these as having a material impact on trading to our relatively sticky customer base. We expect underlying profit before tax for FY '24 to be in line with our current market expectations. Thank you very much. Ollie and I will now take any questions.

[Operator Instructions] We will now take our first question from Damindu Jayaweera from Peel Hunt.

Hopefully, you can hear me. I just had a question on the Seez investment that you've done. The more I read about the kind of the deal opportunity and what's happening in the automotive industry, the more I feel like there is a role to be played by gen AI in terms of helping reps do better conversion on a sales funnel or people -- giving people a better experience on the workshop side. Could you kind of explain what this is? What they do? I mean you gave a high-level view. And how that will fit into your existing products over the kind of the longer duration? And also, just kind of as an aside, am I overthinking the impact potentially chatbots and GenAI can have? In its current form, obviously, they've been around for a long time now, but in its current form, can have on the experience and therefore, the value dealers will get from their customers.

That was a lot of questions in one. But first off, I don't think -- this is Bill. I don't think you're overthinking it at all, and you've already touched on some key components. So first off, Seez is Dubai-based company. To your point, they've been around a long time. They are generative AI, not getting too much into their business. They have a unique tech stack that they call an Agent in a Rack System, which is, I would consider superior to any of the other similar type products that are on the market and that we feel will over time, integrate within our systems very well. Initially, to your earlier point, there is a different opportunity when it comes to AI chatbots, improving both the front-end sales journey, whether that is engaging with a customer online or after hours, and being able to facilitate a certain part of the transaction that way or conversely the same thing in after sales, whether it's just initial question answering or scheduling. On a go-forward basis, we look to be able to integrate some of the Seez-type technology into our systems and take them even maybe to a higher level, let's say, whether it is building equity mining tools and using a single database using their type of a product to sit here in real time, be able to value a customer's potential trade-in, say, the car is in for service or somebody that we have a long-term relationship, be able to balance that off of current market, incentives that might be out there from the OEM and maybe be able to give the customer a better offer on a brand-new car that we wouldn't have access to if it wasn't for this type of technology. So we feel highly positive about the investment in them. They're a fast-growing company. We're already starting to test and pilot their chatbots in our existing customer base. And we'll have more to talk about that later in this year and probably the first part of next year, and then we would love to do more with them. But you will see more and more systems having to use AI, especially generative AI, not language-based but generative AI to see further their products.

And as there are no further questions from the phone line. I'd like to turn the call back over to Henry for any webcast questions. Over to you, Henry.

Thanks. Yes. We've got one from Kieran Donnelly of Berenberg. There are 3 questions. Can you provide any color to your comments on the conversations with new customers in the U.K. and internationally? How progressed are they? The second question is with respect to North America, can you give us an insight into how early conversations have gone with OEMs? Have they been receptive? And lastly, how will Pinewood's offering be differentiated relative to the incumbent DMS providers in North America?

Okay. So this is Bill again. So if we start off with going after some of the larger groups within the U.K. and maybe even to Europe, we are in advanced discussions with several large groups. The good and the bad of a system like ours as systems are very sticky. These systems are not changed out often and to be able to facilitate this type of a transition from a, let's say, an older tech stack into our new tech stack takes a little bit of time to be able to work out the systems, the processes, run out the existing contract terms on the existing one, reshape systems and processes within a large group. So these sales aren't made on the same day, but we're in advanced discussions with several large groups within the U.K. And hopefully, in the weeks and months to come, we'll be able to announce some opportunities that exist that way. As far as North America, we've kind of gotten down 3 fronts on that. We've engaged with several mid- and large-sized groups on the customer side of the business that are eager to get more information about us and even to go down our pathway. If you saw what happened last -- earlier this year with CDK and the major outage they had for nearly a month taking the systems off-line, it really opened up opportunities within this marketplace. Conversations with the OEMs are in the early stages, but so far, they have been very positive. We've had absolutely no pushback from any of the OEMs. And now we're also engaging with different third-party layered systems and apps that we will be integrating with through APIs to be able to enter the market, things like tax, title, licensing, finance insurance portals that communicate with the bank. So, so far, all the conversations have been very positive. I would say we're very happy with the way that's going and really look forward to breaking into the North American market next year.

And just -- Ollie here, just to find a bit on the proposition difference between us and others in North America, typically, in North America, you're going to a dealership, there's 5 or 6 -- add-on 6 distant or laid apps they use plus 3 or 4 other systems. So there might be 10 or 12 windows actually open at any one time for a dealer. Our system is completely different and that most of the functionality is within the core system. So the efficiency that brings economies of scale, there's huge benefits there. So that that's a key difference for us in terms of us and incumbents in North America, as Bill reference CDK there, also Reynolds and Reynolds Dealertrack, just a comparison there. Next. Next one, please, Henry.

Great. Next one is from Harvey Robinson, Panmure Liberum. Relative to other software and service stocks, you have a high gross margin. Can you explain more?

Yes. I think historically, we sort of referenced in the call, our cost of sales is essentially our Azure hosting costs because the way we've built our system gradually over the years, it's been built in a very efficient way. The architecture is best-in-class. And that means that we can minimize those costs. Our teams spend a lot of time making sure that the systems maximize its full potential. If we lower that cost too much, it impacts the customer performance, which is paramount to us, but I think it's basically a function of how our systems set up, 100% Microsoft Azure-hosted, which is different than most others out there. There's only 1 or 2 others out there that's set up in the same way as ours. The vast majority in those major incumbents we've talked about that Bill said in the U.S. and the U.K., they're not set up in the same way as us. So agreed, if you look at our gross margins, they're significantly different to us. Is there any more, Henry?

Yes, a couple more. So we've got 2 from Andrew Wade at Jefferies. Firstly, what ongoing development work has been required for the APAC market? How significant is this opportunity for the group? And then secondly, have there been any surprises, good or bad, as you've been executing the Lithia U.K. implementation?

So this is Bill. I'll go in reverse order. On the Lithia U.K. rollout, we're -- not surprisingly, we had virtually no issues. I think both our team as well as the Lithia U.K. team headed up by their CEO, Neil Williamson have done nothing but a spectacular job in supporting us. And our team is putting them in the rollout. We've had virtually no issues, a few minor things that have popped up, which are inherent were quickly addressed. And when talking to them, they seemed very happy with the progress and already starting to see benefits from being on our system versus their incumbent system. So that went extremely well as we've gone out there.

In terms of APAC, look, there's always some development work needed when we go into market. However, we do reference this in the statement saying that what we are doing increasingly is being really targeted to our international expansion. So Japan is a core area for us. There's other core countries out there. What we're doing is we're making sure we get to scale in those countries. What we don't want to do is go into a host of other countries has to do a lot of development work but not a big price. So there's been a bit of development work. It's going well. Japan is the focus of that. We'll share a lot more color on this at the Capital Markets Day in 3 weeks' time.

Next one from Oliver Tipping, Peel Hunt. Costs were higher due to investment for growth, including increasing the head count. How much more cost growth is required to get the business ready for the anticipated growth stage? And then question two, user growth was 3.6%. Is this likely to ramp up alongside the Lithia rollout or is this the peak?

So this is Bill. Let's go in reverse order. No, that's -- the 3.6% is not the peak. Part of this is just starting the Lithia rollout did not begin until May and really didn't get to full runup until July, August and now through September. So we will continue to see additional growth, both on the user count revenue. Going forward, we're going to be talking about revenue a little bit more than just user count because as we build additional products that we could sell vertically through our existing channels, things that will benefit our customers to a great level, whether it is being able to get higher productivity through salespeople, more efficiency to the shop or being able to run a leaner business and still get the throughput, we're going to be focusing more now on revenue growth versus just user growth. We'll still keep user growth out there, but the real driver going forward is going to be on the revenue side.