Zigup Plc (ZIG.L) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for coming. I'm Martin Ward, Chief Executive of Redde Northgate. And joining me today is Philip Vincent, CFO. The agenda is shown on Page 3 and follows a familiar format. I will start with the overview of our results, Philip will cover the financial review, and I will come back and provide a business update before we close with Q&As. So turning to Page 5. This has been a fantastic year for the business with continued top and bottom line growth being delivered through strong demand for our services. These results reflect our position in the market, where our platform delivers large scale efficiencies and price leverage that brings about cost and service benefits. In a busy year, which has included positioning for growth, the financial results have excelled. And it was good to see that ROCE, which is a key measure, further improving, and we have maintained a strong balance sheet with a low debt leverage. The outcome of these results is that we can propose an increase in the final dividend shareholders with a 14% uplift. If we turn to Page 6, please. My first comment is to say that the business feels very different from the stand-alone premerger position. There's a lot more going on, on and our services platform is gaining significant traction. The market is beginning to polarize towards firms that can offer a broader reach across the vehicle life cycle, benefiting from single-source services, leveraging efficiencies and providing a great customer service. And what we are seeing is a lot of positives in what has been a challenging global environment. Against the backdrop of supply scarcity, we grew our fleet and maintained utilization levels. The contract wins previously launched are all live and contributing at or above run rate and reflecting the strength of the pipeline, we have secured a new multiyear services contract with a blue-chip leasing company which commences this year. Margins have broadly been maintained, and we see this continuing based on underlying actions to manage inflation. We have seen more take-up of insurer protocol agreements this year, which means prompted cash settlement and reduced frictional costs. Our additional services across the group are starting to build scale. For example, our EV charging point installations, which number closed to 7,000 this year and 12,000 since we acquired ChargedEV in July '21, is well positioned in a growing market. And if we look at our strategic progress, delivered under our focus, drive and broaden pillars, the integrated mobility platform has grown in capabilities and is now delivering more volume of services. Since the merger in 2020, we have completed 6 acquisitions in the U.K., including FridgeXpress in May this year, and we continue to look for opportunities that create long-term value. We have made good progress on ESG, which is an integral part of our strategic goals. And this year, we have established a new group committee to provide guidance and support for the business to achieve our long and short-term targets, which have been set out in our announcements and reports. And under our Broaden pillar, we have also sought organic growth by developing new propositions with an example being in our Spanish business, which is delivering on the previously announced B2B contracts and building new revenue lines through open workshops. Additionally, supporting our long-term EV plans. Spain has entered into a commercial partnership with Iberdrola, which is a leading -- a global leader in renewable energy, with a customer package offering EV charging points, green energy supply and fleet consulting all included in our rental agreements. My final comment on the overview is to say thank you to all my colleagues supporting the results this year. This has been a real achievement, and as shareholders, they will now benefit from their efforts. So thank you. I will hand you over to Philip.

Thank you, Martin, and good morning, everyone. And I'm pleased to be here this morning to present another set of very good results. If we turn to Page 8, I will start with the headlines. So underlying revenues, excluding vehicle sales of GBP 1.3 billion were 22% higher than the prior year with growth across the businesses. Earnings before interest and tax increased just under 13% to GBP 189.2 million, and with additional interest costs, underlying profit before tax grew just under 10% to a record GBP 165.9 million. Underlying earnings per share increased 9.5% to 55.6p, in line with the increase in PBT and benefiting from the share buyback program, reducing share count by 7%. Return on capital employed increased 20 basis points to 14.1%, benefiting from underlying profitability and disposal profits. And this year, I've moved divisional slides to the appendices, but I will cover the divisional points as we go through the next few slides. So if we can turn to Page 9, we'll look at revenue. So rental revenues grew 8.4% year-on-year. In Spain, had better access to new vehicles, helped average vehicles on hire grow 6.2%, and pricing was carefully managed, resulting in rental revenues growing 14.6% or GBP 32.1 million. In the U.K. and Ireland, vehicle supply remained difficult. And whilst we're announcing some improvements in supply, average VOH for FY '23 reduced 2.6% year-on-year. Product extension and carefully managed pricing still enabled revenues to grow 6.1% or GBP 15.1 million, and vehicle sales revenue of GBP 152.9 million was GBP 3 million higher than the prior year, with growth in Spain as new vehicle supply improved, which enabled replacing of the fleet. This was offset by a reduction in the U.K. and Ireland as the continued restrictions in new vehicle supply and strong rental demand have reduced vehicles available for sale. And claims and services revenue grew 37% or GBP 196 million, with the ramping up of new contract wins contributing around 40% of this growth. And you will see in the prelims that Redde now has a revenue line for vehicle sales. So since March of this year, the cars from Redde and now sold through Van Monster, and this revenue is excluded from underlying revenue and the EBIT margin calculation for Redde. If we turn to Page 10. This chart bridges prior year's underlying PBT of GBP 151.3 million to GBP 165.9 million this year. And group rental volumes across U.K. and Ireland and Spain contributed GBP 9.1 million of additional PBT. We have experienced cost inflation across the businesses, and this has been effectively managed by improving procurement practices and careful management of pricing and extending products and services for customers. And as a result, Spain's rental margin of 18.5% was 1 percentage point higher than last year and rental margin in U.K. and Ireland decreased slightly from 15.3% to 15.1%, in line with our medium-term margin expectations. Disposal profits decreased GBP 7 million in the U.K. and Ireland with the continued restrictions in vehicle supply and increased GBP 8.4 million in Spain, where access to new vehicles has improved significantly in the year. In total, we sold 18,200 vehicles in the year, which is 9.6% higher than prior year. And whilst residual values continue to decrease, they do remain very high. But remember, the relationship between residual values and PPU is not linear as the PPU depends on a number of variables. These include the type, age and condition of the vehicle and how they differ from initial expectations when the depreciation rates are set. The increase in Redde volumes from existing and new contracts contributed an additional GBP 12.3 million of profit. And Redde's EBIT margin at 6.4% was impacted by the mix effect of some new business wins, which continue to bring scale to the platform we've created. And the increase in interest and corporate costs reduced profit by GBP 8.7 million, with interest costs increasing GBP 6.7 million due to a higher average level of debt and increase in rates. Now we've been sheltered significantly by rising interest rates due to 62% of debt being fixed, mostly at 1.3%. And as we grow and draw more debt, this will be at a floating rate, which is currently 6.5%, reflecting the latest rise in the base rate. So our average cost of borrowing will rise in FY '24 and currently would be around 3.5%. Now if we exclude all disposal profits from both periods, underlying profit before tax increased 13%, continuing to demonstrate the underlying growth of the business. So if you turn to Page 11, let's take a look at cash flow. Underlying EBITDA of GBP 412.2 million was GBP 45.5 million higher than prior year, driven by the underlying performance of the business. And steady-state cash generation, while strong at GBP 191.5 million, was GBP 24.9 million lower than the prior year as we have been replacing the fleet as vehicle supply improves. Growth CapEx of GBP 122.6 million reflects the growth in the Redde and the Spanish fleets to meet demand. And we spent GBP 10 million on acquisitions in the year and free cash flow was GBP 4.5 million. Now I want to provide you with a little bit more detail on the fleet and CapEx spend. So due to the disruption in the supply of new vehicles, we have been unable to rotate the fleet as quickly as we have previously. Now we have seen a significant improvement in vehicle supply in Spain in the last year, and we are now starting to see some improvement in the U.K. and Ireland. The average age of the Northgate fleet in the U.K. is now 36 months, which is 10 months higher than 2 years ago. And in Spain, the average age is 33 months, which is 7 months higher than 2 years ago. And as we move into FY '24, we expect the vehicle supply to continue to improve, and this will enable us to rotate the fleet and we would expect fleet aging to decrease. We're not expecting this rotation to happen rapidly, and it will be a different pace in Spain than it is in the U.K. and Ireland. And we do not expect to see a huge increase in CapEx spend as a result of this rotation. Any CapEx spend is going to be subject to the availability of supply vehicles, but everything else being equal, I would expect our CapEx spend to be a single-digit percentages higher in FY '24. I remember that we very tightly controlled the spend, which we demonstrated during COVID when we turned off CapEx in the business generated cash very quickly. And we would now expect this improved supply to significantly impact residual values in the short term, and residual values are likely to remain strong in all our markets. Now if we turn to Page 12. The business remains very well financed with a strong balance sheet to fund growth. In the year, we have extended our core bank facilities by 12 months to 2026, and 62% of our debt at the year-end was fixed, the majority at 1.3%, and our average cost of borrowing at the year-end was 3.1%. We continue to operate with a very comfortable headroom on all of our covenants, and year-end leverage is 1.5x, well within our policy of 1x to 2x. Now the chart on the bottom bridges our net debt as of April last year to April this year, and our net debt closed at GBP 694.4 million with ample headroom of GBP 290 million on our facilities. We generated steady state cash of GBP 256.6 million excluding lease payments, GBP 122.6 million was invested to grow the fleet in Spain and ready to meet demand, GBP 10 million was spent on acquisitions, and we returned GBP 105.2 million to shareholders in the form of dividends and share buyback. And you can see in the top right-hand chart that since the merger, we have now returned GBP 121 million dividends, we've invested GBP 41.5 million acquisitions, extending the products and services of our platform, and returned a further GBP 60 million to shareholders through the share buyback. We've now completed 6 acquisitions since the merger. And during the year, we acquired Blakedale, and just after the year-end, we completed the acquisition of FridgeXpress, extending the range of products and services we offer and broadening the sectors we operate in. And finally, our funding enables us to continue to invest in our fleet and execute on acquisitions as they arise in line with a disciplined approach to our capital allocation model. Now I'm going to hand you back to Martin for the business update.

Thank you, Philip. Okay. If we can turn to Page 14, we'll just have a deeper dive into the sort of the business update. So at the interims, we focused on 3 key areas which defined our market environment. So I'll just touch on them first. So the market, we've said, demand for our services across the market has remained resilient, particularly with larger customers. Telecoms, broadband and infrastructure sectors have remained robust. And as an overall temperature test, any rental availability in the fleet is quickly taken up, and we have seen growing interest in additional value-added services like telematics and onboard cameras our customers are seeking to gain efficiencies running their fleets. As we commented upon at the interims, the logistics sector, particularly the last mile delivery, has seen further weakness through the second half of our year, but this has stabilized more recently. Traffic volumes have plateaued in the 90% to 95% range. And this feels like a new norm when we compare to pre-COVID. Our read around the market is that businesses have tightened up on home working, albeit hybrid work is still the dominant model and doesn't feel like this is going to change in the near term. And that has a relationship with mobility in the market. And there's been a lot of wider commentary on inflation around insurance claims. We see this in terms of repair costs as capacity and supply chain challenges increase the cost of fixing the vehicle. And we don't see this materially changing in the short term. However, the leverage from our platform provides benefits for our customers from our scale and from our capacity. If we look at the fleet, so the market for new suppliers Philip touched upon, is different by geography and by vehicle type. In the U.K. and Ireland, visibility on forward orders for LCV has improved, although certainty on short-term supply is still problematic with right-hand drive vehicles considered a bespoke order for European manufacturers. Cars are generally easier to source and we have no issue satisfying our need for these. In Spain, LCVs and cars are generally available, and that's against the backdrop of strong market demand for new supply. And there's always new pockets of supply that come up from canceled orders or redistribution deals. And as part of our future supply, we are looking further afield as new technology brings about competitive supply. As Philip mentioned, residual values on used vehicles are still high compared to historical data. And this is also the case in Spain despite new supply being available. We expect these to fall back as the year progresses, although as we have commentated before, the undersupply of vehicles through 2020 and 2022 will take some time to catch up. Our EV and hybrid vehicles continue to broadly match the U.K. car park, which is reflective of demand. And if we look at the customers, we've got a diverse nature in the customer base across our mobility platform. And this is a clear strength. We've got broad sector exposure and this provides high level of trading confidence and resilience. On an ongoing basis, there hasn't been any material change to our sector exposures, and we have continued to rotate any fleet returns to higher-margin sectors. If we turn to Page 15. So this infographic shows how our services and capabilities play out to a wide community of end users, and how it caters for a differentiated customer proposition. It follows the COGS chart we showed you at the interim presentation, which illustrated the breadth and connectivity of our service offering. So we wanted to share what we see to be the strength of the platform from the customers' perspective. As a customer, you can access our integrated mobility platform in the most appropriate way with 24/7 digital access in many areas. For example, customers interact by voice through our contact centers, through portals, apps and web services, in our rental branches, at our network of body shops, our mobile service in vans through dedicated account managers or digitally through live chat. Our digital strategic plan is aimed at building the capability for our businesses to connect with each other so that the platform becomes an integrated service, fully digital and accessible, which will offer more processing efficiencies. If we turn to Slide 16, please. So our customers have been very supportive in taking a broader range of products and services from the platform. We developed from a standing start our EV consulting program, which involves running open days in Spain and the U.K. with live demonstrations of EV vans and cars to engage customers with the technology so they can assess the capabilities of an EV fleet and plan their transition. We have made digital a standard when onboarding new customers with embedded technology-driven services formed in part of how we transact. The automotive sector is clearly going through significant innovation and technology transition, whether in the vehicles themselves or how we engage with them. After all, an EV vehicle is a connected, vehicle which can change the supply chain dynamics. We're also reviewing emerging innovations such as urban and micromobility and creating new relationships with emerging supply chains in order to provide more flexibility to customers as they arise. And M&A has clearly augmented our customer base with a broader range of new customers joining the Redde Northgate group. And our focus on people has helped promote a real sense of unity across the group where we share our vision and ambitions. We are building a future talent pool by investing in our apprenticeship scheme that currently numbers over 170 apprentices in the U.K. We have developed a best-in-class L&D program to train our people in a number of areas of technical skills, and we have an accredited training facility to support new EV technologies. Working with our employee engagement forum, we get valuable feedback on what drives and motivates our people. And in what has been a difficult time for many with the cost of living pressures, we have provided 2 special one-off payments to our colleagues most affected. We have seen the benefits of this through strong retention levels in a change in market. And if we turn to Slide 17. As Philip said, it's been a very successful year for our claims businesses, which have seen a more normalized trading period post COVID. These contracts are delivering at or above expected run rates and their multiyear service contracts. And as I mentioned in the overview, the business has won a multiyear service contract with a blue-chip leasing company, which will support a further GBP 100 million to GBP 150 million of contract lifetime revenue. It's one of the biggest fleets in the U.K. and will be going live later this year. Turn to Page 18, please. We've touched on our 2 recent acquisitions which have added specialist capabilities, so I will just deal with this lightly. Blakedale, which you can see a picture of one of their vehicles there on the left, we completed on last summer. It provides a range of specialist traffic management vehicles, including the 18-tonne workforce protection unit which are typically seen on motorways. Since we acquired the business, we've grown the fleet by over 30% to over 450 vehicles and grown the customer base by 28%. The growth has come from a combination of cross-selling and as a result of bringing a strong balance sheet to the business. And just after the period closed, in May, we acquired FridgeXpress, which provides temperature-controlled vehicles to a range of customers, particularly food and pharmaceutical companies. This will add circa 600 vehicles into the fleet, and we see the potential to grow the business further given there is a good pipeline of orders. Both these businesses were earnings-enhancing from ownership and will deliver good upside to Redde Northgate. And more generally, on M&A, we continue to see many opportunities across our desk, and we pursue those that we feel have a good strategic and value fit. And we're not limited to M&A in the U.K. Spain is also in a good position to capitalize on growth opportunities. Turning to Page 19. Our EV transition to support customers is running at high levels for replacement cars, and we offer a wide selection of models. EV vans have some way to go to be able to offer fully utilized workhorse capabilities. The open days that I touched on earlier is a great way for customers to get close up and familiar with an EV fleet, and these are generally well attended with demonstrations of trials offered as part of the transition program. And we are exploring other mobility solutions that are less mainstream but nonetheless relevant to a changing environment, such as urban mobility, which will be required to meet more stringent rules in new layers. An example of driving other revenues is our Spanish workshops, which were opened up to cater for non-Redde Northgate customers who are looking for service, maintenance and repair. And we have seen this revenue line growing. Telematics and onboard cameras for commercial fleets have grown circa 10%, and we now have over 10,000 external live units in operation. And finally, if we look at the outlook on Page 20. The new financial year has got off to a great start. Demand remains strong across our markets and contracted services provide a high level of certainty on revenues. The leasing contract win will provide more impetus to growth, and our healthy pipeline offers more opportunity to build throughout the years. So with the leverage and efficiency gains from our platform, our broad customer base and multiyear service contracts, together with a strong balance sheet, this all supports a very strong and resilient position. Thank you. We'll now take questions.

There's a roaming mic there for Verity. Joe?

Joe Spooner from HSBC. Can you talk a little bit more about Redde? Obviously, it's put off on quite a lot of revenue, GBP 195 million at the revenue line. But profits -- the drop-through to profits, those only increased about GBP 13 million. Obviously, there were moving parts in terms of investment. But can you just kind of flesh that out in terms of why that drop-through wasn't quite as strong as maybe you would have expected?

Yes. I'm not sure I would fully follow that because I think the drop-through probably was in line with what we expected, Joe, in terms of sort of where the EBIT margin is. So I think we said at the interims, and I'll say it again just for clarity as well, the platform offers a broad range of services. So we can't just go like-for-like across everything that the business has had previously. And what we do is we look at a cohort, so who's the partner, who's the customer bringing in the services, what do they want across the platform and how does that play out as you deliver efficiencies, cost benefits and so on. So that's the cohort. We look at the return from the cohort and then it's segmented into the segments that we have to report in. So as I said, the margin drop-through is probably in line with what we would expect from the services that are taken. Because, as I say, there are multi services across the platform, not just the singular services that we might have seen before supporting the historical margins, Joe. Okay. David?

David Brockton from Numis. Can I ask actually 2 as well on the Redde business. Just in terms of the new multiyear contract that you've won in the current year. Can you just talk about how that developed? Was that a sort of natural point in their tender? Was that a sort of an active cross-sell within the business? And then secondly, because it was an existing Northgate customer, can you just talk about the opportunity within the existing Northgate customer base for similar sized opportunities going forward, please?

Okay, David. Yes. So look, the evolution of the leasing contract was it's been -- it hadn't been outsourced previously. So it's been in-house 30 years plus. So it's not something that sort of came out of the market through a tender process in that sense. This is a drive to leverage the benefits of scale and capacity in the market, and we're providing that. The platform is something new. We've developed this platform. And I think when we get more traction in terms of that visibility across the market, we see this type of contract fit in very, very well with what we do. And as I say, it's driving the conversations, it's driving the possible pipeline. So yes, this is a full cross-outsourced into the platform, deliver multiple sets of services. As we look -- and yes, in terms of the sort of relationship with Northgate, it's a different side of the firm had a relationship, a long-standing relationship in Northgate. But it gave familiarity to the group as well. So we're in a strong position to demonstrate our service capability and our culture effectively. So on the Northgate customer base, we've had a lot of cross-sell opportunities that have gone into fleet management, accident management services, replacement vehicle services. So we've seen a good uptake in that. I think it was a significant growth number which -- recalled it off the top of my head, but significant growth number that we've seen. So you do get large customers that want that fleet management, extra management service. But this isn't that type of customer that came from there. It's a completely different service which fitted into the sort of the Redde type of businesses. .

Pre management grew 150% year-on-year.

Andrew?

Andrew Nussey from Peel Hunt. I've actually got 3. If we could start off, can you just remind us around the protocol arrangements within Redde? And does that sort of shift to 60% likely to remain permanent? Secondly, are you facing your own challenges and meeting customer expectations in terms of repair times because of the pressures within the supply chain availability, et cetera? And thirdly, definitely one for Philip, I think. In terms of the CapEx outlook, can you just help us a little bit? You've got an aging fleet, obviously, particularly in the U.K. a requirement to sort of refresh that, obviously, rising new vehicle prices and presumably you're getting less because of older fleet. I was just very mindful if you look out to sort of FY '25, FY '26, there could be a bit of a CapEx bump in the U.K., particularly.

Okay, Andrew. So I'll pick up the first 2 then and flip off the last. So on the sort of protocol shift, so I mean, at the peak -- at our peak, we've been at 75% protocol historically. And these are arrangements with insurance companies which offer a discount effectively. So you take out the frictional cost of dealing with incidents and accidents and you get prompted cash settlement. So it's ticked up, so 60%, as you say, in this period. And we would expect to see more insurers want to come into protocol because it offers them a cost efficiency for efficient, fast prompt settlement. The longer a claim goes on to be settled, the more it costs frictionally for both parties. So we take those benefits. We mutually wrap them up and we divide that in terms of some form of discount. So yes, I would expect it to grow. They do fluctuate in and out, but I think the market environment supports more towards protocol. On sort of customer expectations for repair, I mean, that is a job, to manage customer expectations. Clearly, there has been supply challenges globally around parts and, in some instances, labor shortages. But we manage that expectation. We sort of know what our cycle times look like and insurers have done a very good job with their customer base sort of managing our expectation. Capacity for repair in the market is scarce. There's over 4.2 million repairs undertaken in the U.K. alone. And having trained technical people that can work on sort of the modern vehicles and particularly EV vehicles, getting the parts, getting that sort of capacity booked, has been a challenge. We've got a very large body shop network. We've got an independent network. So we can place a lot of work in the market, we have some good relationships. And we've been able to deal with that. So I think we've fared better than the market more generally.

Can I just add, is there a sort of service level that you have with your major insurers that if you don't reach that service level or a time frame, then you're subject to some form of penalty Or?

We have service levels, absolutely. And what we say is we work in partnership with our partners. If there are any macro challenges that affect the whole market, that's taken into consideration. I mean, we like to perform above what the expectation is, and we like to delight the customers and sort of provide that capacity. And I think when we compare it to benchmark against the wider market, we are repairing vehicles much quicker than the more general market through our own in-sourced body shop network.

And Andrew, going on to your last question on CapEx spend. And I've always said it's quite difficult for us to forecast CapEx spend it is -- it's our biggest spend, obviously, going through from a cash perspective, completely dependent upon the availability of vehicle supply. I mentioned earlier that what we're seeing is vehicle supply is different in Spain and the U.K. So as we start to rotate the fleet and spend on CapEx, we won't be spending in both sectors at the same time at the same speed. It's likely we're going to be spending quicker earlier in Spain and slightly later in the U.K. In Spain, the aging of the fleet, currently, I'd say it's probably at a peak and we would expect that to start to come down this year. U.K. is almost at its peak in terms of aging. It may go up another month or 2 in the year ahead. But we're not expecting a wall of cash at all. I've mentioned earlier, we tightly controlled that CapEx spend. So Martin and I, for example, in the U.K., sign off on every vehicle we purchase every single week. So we have very tight control. We can turn that up or down depending on what we're seeing with vehicle supply. As vehicle supply improves, you have 2 impacts: one, we would expect pricing to get keener and our ability to negotiate pricing better with the OEMs; albeit at the other end, you probably got an impact on residual values. So it's all what happens to our total holding cost in that period. And the other element to that as well, Andrew, is obviously we still have contract hire, which we continue to utilize is 9% of our fleet at the year-end. It's moved up a little bit from the prior year, and that obviously limits the cash outflows. So we've got a number of measures we can use to manage how much cash is going out the door each year on purchasing CapEx.

Okay.