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

Good morning, everyone, and welcome to the Pinewood H1 FY '24 Results Presentation. I'm Bill Berman, and joining me today is the group's CFO and my partner, Ollie Mann. I'll start with a brief summary and a reminder of how the Pinewood business model works. Ollie will then walk you through the financials for the first half of FY '24, and after that I'll take you through an operational review and strategic summary. If there are any questions, we'll be glad to take them at the end of the presentation. In the first half of FY '24, we got off to a great start as a stand-alone SaaS business, delivering double-digit growth in both revenue and gross profit. Our priority during this first 6-month period has been the system rollout across the ex-Jardine Motor Group, Lithia U.K. stores. From what our customers have told us, we're pleased that these rank as best-in-class system implementations. Our teams have truly excelled and gone the extra mile to make the implementations at every Lithia dealer a seamless and positive experience. We expect to wrap up the rollout to Lithia U.K. stores in December of 2024. We're eager to grow our market penetration across the rest of the U.K.

That market. And because of that, we've reorganized the sales teams in the U.K. so we can get the most out of our U.K. market penetration over the short and medium term. We ought to begin seeing those results in FY '25. The biggest opportunity for the group is North America, which our partnership with Lithia Motors has opened up for us. During the first half of FY '24, we began the discovery and planning phase of our North American rollout. We'll share much more of that detail, along with other elements of our long-term strategy, at our upcoming Capital Markets Day on the 24th of October in London. Next, on Slide 5, for anyone who doesn't know Pinewood, we'd like to walk you through an overview of our system and our business. We're a Software-as-a-Service, or SaaS, group, and our product is a 100% cloud-based, Azure-hosted, highly secure automotive retail ecosystem. Dealerships in 21 different countries use our system, and the vast majority of employees in those stores where it's installed use it too. Our system covers every part of the customer journey — the front-of-house reception team, the vehicle sales team, the service technicians and the back-of-house accounting team.

What sets us apart is that our system runs in the cloud, and we've spent more than 20 years putting it into automotive dealerships. No other provider in the automotive ecosystem combines this kind of technical architecture with this depth of automotive experience. Through our omnichannel sales and service offerings, customers can run their operations effectively from one platform. The system is multi-tenanted, every customer uses the same version — no matter which country in the world you're in — and it's language agnostic. Customer retention is very high, and we have partnerships with 50 OEM brands around the world, many of them long-standing. Our system keeps evolving, driven by our product and development teams within a total of 263 people. Every one of our developers sits in the U.K. Our sales and implementation teams are in Sweden and Japan. Partners are located in South Africa, the Netherlands and the Middle East, while the rest of our team is in the U.K. I'll now pass the call to Ollie, who will cover the numbers.

Thanks, Bill. Morning, everyone. I'll begin with the statutory underlying income statement. This is our first half-year results for the stand-alone SaaS business, and there are no discontinued operations. In the comparatives, we do still include the dealers and leasing business that was sold to Lithia within discontinued operations. In the first half of FY '23, since this was before the Lithia transaction closed, there remain intercompany revenue and gross profit amounts that must be stripped out of the numbers on a statutory basis — that's why you see such very large year-on-year increases in continuing operations, statutory revenue and gross profit. For transparency, we've split the plc costs and the legacy U.S. Motor business operating costs out within the underlying operating profit. Moving to the next slide, we include the intercompany revenue and gross profit, which lets us give a much better comparison between the first half of FY '24 and FY '23. On Slide 8, continuing group performance for the first half of FY '24 is compared with the first half of FY '23. As you can see, revenue rose by 11%. The key drivers behind that revenue increase were a 3.6% rise in user numbers for the first half of FY '24, upselling products to existing customers, and the impact of our inflation-linked price rises.

Most of what sits in cost of sales is what we pay for Azure hosting. We've got several efforts underway right now to keep those expenses down, while still making sure we have the hosting capacity the system requires. That ongoing attention to hosting expenses produced better gross margin, and gross profit went up 12.4% against an 11% rise in revenue. As we anticipated, our costs are higher year-on-year, since we've put money into the business in a range of areas so that we're in as strong a position as possible going forward. Also as anticipated, underlying profit before tax fell from GBP 4.6 million to GBP 4 million because of that cost investment. Underlying EBITDA dipped only slightly, by GBP 0.1 million, to GBP 6.9 million. Slide 9 sets out the nonunderlying items for H1 FY '24. We had GBP 1 million of one-off transaction costs during the period. Those were mainly tied to the Lithia transaction, which closed on the 31st of January 2024, and were incurred through the share consolidation and transaction dividends that took place after 31st of January 2024, stock exchange costs for issuing new shares, and adviser costs received after the transaction closed. The share of losses from the JV with Lithia came to GBP 0.3 million.

The GBP 4.3 million of nonunderlying interest receivable came from interest earned on cash that was held while the group was finalizing the GBP 358 million dividend to shareholders tied to the Lithia transaction. If you look at Slide 10, you'll see where the balance sheet stood at the end of July 2024 versus the end of January 2024. Most of the group's assets and liabilities were sold to Lithia at the end of January 2024, and the cash from Lithia came in on the 1st of February '24. That explains the big receivables and shareholders' funds balances at the end of January. The GBP 9.7 million investment represents the GBP 10 million investment in the North American JV with Lithia, minus just under 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 is tied to capitalized development costs. Inside the receivables balance of GBP 16.6 million, the biggest item is GBP 9.9 million receivable from Lithia U.K., which relates to historic tax losses that they'll be able to use and reimburse Pinewood for as those losses get utilized. The payables balance of GBP 9.7 million consists of a mix of trade creditors, accruals and VAT creditors.

By the close of July, cash stood at GBP 13 million. That figure came before we put $4.2 million into Seez, the AI company — roughly GBP 3.1 million. Now I'll pass things back to Bill, who'll walk through the operating highlights and the strategy update.

Thanks, Ollie. Now moving to Slide 12. The operational highlights for H1 FY '24 include double-digit growth in both revenue and gross profit. As of the end of July 2024, roughly 27,000 of our users were in the U.K., while the rest of our 34,300 users were international customers. We continued our international expansion in a selective way, since we're keen to make sure that our international growth is now targeted at areas where we can generate the best return on investment. The Lithia U.K. system rollout is nearing completion, and we're very pleased with how these implementations have gone. Customer feedback matters a great deal to us. And the reaction we've received from the Lithia teams after their system implementations has been very positive. Our U.K. sales team was 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've begun the discovery and planning stages of our system rollout in North America. I'll talk about this in a little more detail shortly. Finally, in September 2024, we made a $4.2 million investment in an automotive AI company, Seez.

Seez offers AI chatbots to automotive retailers, plus a suite of e-commerce and online channel products. Pinewood's product offering will be strengthened by the commercial strategic partnership with Seez as the company gets ready for expansion into the U.S. market alongside Lithia Motors, and it gives Pinewood exclusive distribution rights to the Seez products in the U.S. market as well as with existing customers. Moving to Slide 13 and our strategy. We'll be doing a full strategy update during our Capital Markets Day in London on the 24th of October 2024. That 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.

After we’ve coordinated with several key OEMs regarding technical requirements, we’ll be ready to begin the development work required for the North American market in Q4 of 2024. Following that, we expect to run a pilot of our system in several Lithia stores during the second half of 2025, with the first quarter of ’26 coming before the full North American system rollout gets underway in 2026. One important thing to emphasize is how large the North American opportunity is. Even though Lithia is the biggest automotive retailer in the world, they account for only 1.5% of the North American market. So there’s enormous potential to capture additional market share in North America beyond the Lithia system implementations. Finally, moving to Slide 16. Regarding outlook, we’ve gotten off to a good start in FY ’24, with considerable attention on the system rollout and the ex-Jardine Group, Lithia U.K. stores. Every one of our associates who has been part of this rollout has performed outstandingly, truly going above and beyond and working to make it as smooth as possible. Only a handful of stores remain to be moved onto our system now. We’re in well-advanced discussions with a number of potential new customers from both the U.K.

And internationally as well, and while the broader economic environment presents some challenges, we don't view these as materially affecting trading for our customer base, which is relatively sticky. For FY '24, we expect underlying profit before tax to be in line with our current market expectations. Thank you very much. Ollie and I will now take any questions.

<<operator_script>> Our first question now comes from Damindu Jayaweera at Peel Hunt.

I hope you can hear me. I just wanted to ask about the Seez investment that you made. The more I read about the nature of this deal opportunity and what is going on in the automotive industry, the more it seems to me that gen AI has a part to play when it comes to helping reps achieve better conversion in a sales funnel, or giving people a better experience on the workshop side. Could you sort of explain what this is? What do they do? I mean, you gave a high-level view. And how will that fit into your existing products over the longer duration? And also, just as an aside, am I overthinking the impact that chatbots and GenAI potentially can have? In its current form, obviously, they have been around for a long time now, but in its current form, the impact it can have on the experience and therefore the value dealers will get from their customers.

That covered a lot of ground at once. Let me start — this is Bill speaking. You're not overthinking it, in my view, and you've already hit on several important pieces. So to begin, Seez is a company headquartered in Dubai. As you said, they've existed for quite a while. They work in generative AI — without diving too deep into what they do — and they have a distinctive tech stack they refer to as an Agent in a Rack System, which I'd regard as better than any comparable products currently available, and which we believe will, as time goes on, fit into our systems very smoothly. To return to your earlier point, there's a separate opportunity on the AI chatbot side — enhancing the front-end sales journey, whether that means interacting with a customer online or outside normal hours, and being able to handle a particular portion of the transaction that way, or on the flip side the same applies in after sales, whether that's simply answering initial questions or scheduling. Going forward, we intend to bring some of this Seez-style technology into our systems and perhaps elevate it further, so to speak — for instance, creating equity mining tools and working from one database, using their kind of product to operate in real time, to be able to assess what a customer's potential trade-in is worth, say when the car is in for service or when we have a long-standing relationship with someone, and to weigh that against the current market and any incentives the OEM may be offering, and perhaps then present the customer with a stronger offer on a brand-new vehicle that we couldn't have made without this kind of technology.

We're really optimistic about what we've put into them. That company is expanding quickly. We've begun testing and running pilots of their chatbots with the customers we already have. There will be more for us to share on that later this year and likely in the early part of next year, and at that point we'd be eager to expand our work with them. What you're going to see is an increasing number of systems needing to adopt AI — particularly generative AI, and not the language-based kind but generative AI — in order to take their products further.

Since the phone line has no more questions, I'd like to hand the call back to Henry so he can take any questions from the webcast. Henry, over to you.

Thanks. Yes. We have one coming from Kieran Donnelly at Berenberg. There are 3 questions. Could you give us any color on what you said about talks with new customers in the U.K. and internationally? How far along are they? The second question concerns North America — can you share some insight into how the early conversations with OEMs have gone? Have they been receptive? And finally, how will Pinewood's offering stand apart from the incumbent DMS providers in North America?

Alright, Bill here again. So if we begin by targeting some of the bigger groups in the U.K. and perhaps even into Europe, we're currently in advanced talks with a number of large groups. The upside and downside of a system like ours is that systems tend to be very sticky. These systems don't get swapped out very often, and being able to help with that kind of transition—say, from an older tech stack over to our new tech stack—requires a bit of time to work through the systems, the processes, let the existing contract terms on the current one run their course, and reshape systems and processes inside a large group. So these sales don't happen on the same day, but we are in advanced discussions with several large groups in the U.K. And hopefully, over the weeks and months ahead, we'll be in a position to announce some of the opportunities that exist in that direction. When it comes to North America, we've sort of broken that down along 3 fronts. We've engaged with a number of mid- and large-sized groups on the customer side of the business who are keen to learn more about us and even to follow our pathway.

If you look at what took place last -- earlier this year with CDK and that big outage they experienced, with their systems taken off-line for close to a month, it truly created openings in this marketplace. Talks with the OEMs are at an early stage, but up to now, they've been quite encouraging. We have received zero pushback from any of the OEMs. And at this point we're also working with various third-party layered systems and apps that we'll connect to via APIs so we can enter the market, things such as tax, title, licensing, finance insurance portals that talk to the bank. So, to this point, every one of the conversations has been quite encouraging. I'd say we're extremely pleased with how that is progressing and genuinely look forward to entering the North American market next year.

And just — Ollie here, to add a bit on the difference in proposition between us and others in North America: typically, in North America, you go to a dealership and there are 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 most of the functionality sits within the core system. So the efficiency that brings economies of scale — there are huge benefits there. So that's a key difference for us in terms of us and incumbents in North America, as Bill referenced CDK there, also Reynolds and Reynolds Dealertrack, just as a comparison there. Next. Next one, please, Henry.

Thanks. Our next question comes from Harvey Robinson at Panmure Liberum. Compared with other software and service stocks, your gross margin is high. Could you say more about that?

Yes. I think if you look back, as we mentioned during the call, our cost of sales is basically what we pay to host on Azure, because of how our system has been built up gradually over the years — it's been done in a very efficient manner. The architecture is best-in-class. And that lets us keep those costs down. Our teams invest a lot of time ensuring the systems get the most out of their full potential. If we pushed that cost down too far, it would hurt customer performance, which matters more than anything to us, but I think it's essentially a result of how our systems are set up, 100% hosted on Microsoft Azure, which sets us apart from most others out there. Only 1 or 2 others out there are configured the same way we are. The vast majority of those major incumbents we've discussed that Bill mentioned in the U.S. and the U.K. aren't configured the same way we are. So agreed, if you look at our gross margins, they're significantly different for us. Is there anything more, Henry?

Sure, two more from Andrew Wade at Jefferies. First, what continuing development efforts have been needed for the APAC market, and how big an opportunity is that for the group? Second, as you've been carrying out the Lithia U.K. implementation, have any surprises come up, whether good or bad?

This is Bill, and I'll take these in reverse order. Regarding the Lithia U.K. rollout, unsurprisingly, we encountered essentially no problems. I believe both our own team and the Lithia U.K. group — led by their CEO, Neil Williamson — have done nothing short of an outstanding job helping us. And our team is handling the rollout for them. We've had essentially no problems, just a handful of small items that came up, which are unavoidable, and those were resolved quickly. When we spoke with them, they appeared quite pleased with how things are going and are already beginning to realize advantages from using our system rather than the one they had previously. So that effort went very smoothly as we've expanded there.