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

Good afternoon, and welcome to the ZIGUP plc Investor Update. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself; however, the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Ross Hawley. Good afternoon to you, sir.

Thank you very much, Alexander, and welcome, everybody. So this is ZIGUP's FY '25 results, which we announced in the middle of last week, and we are currently on the road show. And so I'm here with Martin Ward, Chief Executive; and Richard Clay, who is our Interim CFO at the moment. So welcome to you both. We've done this a number of times before as a fireside chat, and it seems to be a format which works quite well. And what that does mean is that we're very encouraging of questions, which will come up. My laptop is here, so I can see all the questions coming through. And I'll try and weave those in so we don't have just kind of the conversation and then trying to follow up questions. So please do ask questions, and we'll try and get as many of those done as possible. So with that, I think really wanted to kind of kick off by saying, Martin, maybe you'd want to give some context to the -- overview to the results, maybe using the first couple of slides of the presentation, and then we'll just kind of take it from there.

Okay, Ross, and good afternoon, everyone. Yes, so look, just first thing, stepping back, we beat market expectations with these set of results. We had a very strong second half, which improved our position from what we reported in H1. So that's the first takeaway. I started the presentation for the analysts and our investors with an operational slide this year, which is very unusual. I wanted to do that simply because I think it captures what really has been the heavy lifting in the business this year with a number of things on the go. So to give a little bit of context to that, we had the new brand with ZIGUP. So that was introduced into the business and the strategic narrative that fitted around that. Big one for me was the organizational restructure and the formation of a single management team in the UK&I. When we brought the businesses together previously in the merger in 2020, we did some organizational restructuring then to see how we wanted to face-off to the markets. And then as our business has learned up each of our customer profiles and understanding of the products and services we offer in the integrated mobility platform, then it made sense for us to have one touch or one road or one way to market where all of our team were well-versed in what we were offering out to our customers. And that's worked really, really well since we've done that of organizational change. Also from customer side, simplifying that journey, that's important to us. So we talk about the platform of services, but how easy is it to access those platform of services and what response do we give as an organization when that cuts across our businesses across the group. So we've simplified that to make sure that we've got some easy touch points using technology as well to enable that. And clearly, we've done a lot of customer wins and contract renewals this year as well. So it's been a year where we solidified, extended our position in the market, not only with our existing customers, but also with new customers. So that's been great. And then what does that all look like? Well, we grew our fleet. So we've been investing quite heavily in that profitable growth. We grew our fleet just over 2%, demonstrably more in Spain than in the U.K., and we'll come on to the details on that. It was good to be recognized as well for the King's Award for Enterprise for the investment in people. I mean we're a mobility business. We provide a lot of on-the-ground services. And the thing that we were recognized here for is mainly our apprenticeship scheme and social mobility. So we have over 400 apprenticeships in the group and a good retention rate when we put those apprenticeships through the training course. And that's been really successful for us as a business in terms of where we get our future stars to do our services. And then also in our facilities, we've been expanding our facilities and renewing facilities, and by facilities, I mean property, I mean, our infrastructure on the ground, providing services into facilities that are, what I call, fit and proper for FTSE 250 business, getting the right size, types of premises that we want to operate from, getting the right workflow and productivity out of those premises and having a really good working environment for our colleagues. And that has proved that we can increase productivity, capacity and efficiency.

So I think that there's kind of words at the top, which you put, a year of operational heavy lifting. That really was actually, I think, when we kind of talked about that together. That was really quite a good characterization of the year.

It is. It's a phrase I use a lot when you have to do a lot in the business. Don't get me wrong, the outputs and results, the financial measures and all the KPIs have been fantastic. But it's not by accident, as I say, we have to put a lot of work in to get there, to make sure that we're future-proof for what we see further down the line and how we set ourselves up for success. We're expecting growth, and we'll come on to talk about that as well in terms of where that's emanating from. But you have to do the hard yards to make sure that you are fit and proper for the next phase of your delivery. So yes, heavy lifting is what I call it. And ultimately, investors on this call, our shareholders, say, "Okay, what does that all mean?" Well, I suppose the financial outputs and the KPIs are the outputs from that. So I mean, if I can just give a brief summary on that, I think that would be helpful. Richard will go into detail, but I'll take it investors have seen our slides, they can see the numbers. But firstly, just some context to these numbers. As I said, we beat market expectations. When you look at the results on Page 1, it looks like we've gone backwards. So the context of that is clearly, I've talked about this: Post pandemic, we've had some tailwinds, which have benefited the business, things like residual values on our fleet. So as we've been defleeting, the price that we've been able to achieve when we're selling our vehicles into the market has been elevated. We've signaled that. We've talked about that a lot. It's not a main feature of our business. But if you hold those assets and they're worth more, of course, we're going to benefit from that. And the second thing was in our Claims and Services division. We saw that when supply chains were constrained for repairing vehicles and getting parts through, it took longer to repair vehicles. And consequently, we had some longer lengths, which benefit the P&L. So those have now come off in this year, but they were a feature of the past. So when you look at those tailwinds going away, effectively, you get what I call the underlying performance of a normalized business. And I think that's what we've seen mainly in this year's results. So as I said, contextualizing that against why we've got so many things in brackets that go backwards in some ways.

So in many ways, kind of tailwinds, headwinds, which we've been impacted by, we're almost feeling that actually when we look forward, which I think we'll come on too shortly, is something whereby actually things are much more stable and actually there's a clearer line of sight there as well.

Indeed. Look, the biggie is the investment in the fleet. So we've been putting a lot of CapEx into the fleet this year to replenish the fleet to support the growth. The new vehicles that we've been buying have been a lot more expensive than the vehicles that we used to buy. So we have to take that into account in terms of how we price that out and how we maintain our margins or grow our margins as the case may be. So a lot of investment doing that this year, and Richard will come on to a slide that talks about what the shape of that looks like. So yes, quite a lot ongoing. But when that all moderates and you get your fleet to where you want it to be, bear in mind, we've got quite a young fleet now and there's not much further to go, then obviously, everything just normalizes and you get a steady picture of where the business is going and how that underlying growth is coming through.

Yes. And maybe just before we move on to the next slide, GBP 1.5 billion of fleet assets, that's a substantial fleet. That's a lot of tangible asset values there.

It is. I mean, we've grown our net book value of our fleet by over GBP 200 million this year. We haven't increased the debt by that much, so obviously, the assets are growing. And just a reminder to everybody, we bring assets on board that we rent out on the rates that we've talked about. And we get the benefit of that over the life cycle of that asset. So if we buy a car or a van and we keep it on the books for 3 or 4 years, we're getting the future cash flows, the future profitability from renting that asset over time. So when you've done a lot of lift -- a lot of investing and growing the fleet, as I said, it releases the benefits. And that is why our confidence is underpinned in terms of where we see the growth going forward.

And maybe just a final slide, if we can, on this part. I think one of the things which people have noted was a real sense of confidence, I think, in terms of the statement, in terms of the outlook and how we talk to it around the market. Actually, that's been a notable view with that kind of line of sight. Do you want to just kind of summarize that, your kind of feelings on that?

Yes. Look, I mean, we've given a lot more detail in our presentation this year. We take feedback from the market, we take feedback from investors what they like to see. We don't want to overload people. It should be a fairly simple story in terms of what we do. And I think the last 5 years, we've gone through great pains to make sure that our investment case is understood. But when we look through that model and we look forward, we can see where those touch points are, where the delivery is, where that extra growth comes from, what our profile looks like and what we can basically bake into our position. And I think when having done this now for some time, we are very confident in terms of what we've been able to put out there in terms of guidance. So I think it is the first time where we've given some real guidance on where we expect EBIT growth and all rest of it. But that confidence is underpinned by what we can see in the investments that we've made in the business and all the actions that we've taken over the last few years, and that is supported now in terms of what we're seeing.

Yes. And I think at the analyst presentation, we had Jorge and Harvey there as well. And when -- and I know it's an intention of yours to allow people to have a little bit more insight into kind of how the businesses were working, but equally how kind of the market environment was in both of those. Maybe if we just kind of drill down a little bit. Can we start with Spain because I mean, it's a lovely one to talk about?

Indeed, yes. I mean, look, as you say, we had Jorge, I brought him across to present to the Spanish numbers. It was a fantastic set of numbers. Spain has achieved a lot in the last 5 years. The Spanish team have outgrown the market in terms of, if you think about the market has grown 5% for flexible rental in Spain, we grew 11%, so more than double what the market growth there. And then if I look at sort of how we're executing on the ground there, we have grown our margin. So although we've grown our fleet, we've grown our customer base, we've grown our profits, we've done that on a differentiated business model. It's not a price-driven strategic position to buy market share. We've done it whilst improving our margins. And if you think of the Spanish market as a whole, there's only 3% penetration of rental in the market. Compare that to the U.K., there's 12% penetration. So it's still quite an immature market. There's a lot to go for. And we're very well-positioned with the services and the products that we have in Spain and customers are polarizing to what we offer. So again, that gives us the confidence to talk about where we see that Spain going and what that can deliver for the group.

Absolutely. And then maybe just thinking about the U.K., we don't like sort of dividing it up into business. Actually, we've done an awful lot of work this year bringing the two capabilities together. But having talked about the Spanish rental market, just your thoughts on how the U.K., we've said the most, the highest in terms of new business wins this year, very strong retention, et cetera, clearly doing all the right things here as well.

Indeed, yes. And as I said, that sort of organizational structure change was mainly about the U.K. in terms of how we bring our products and services and our management team together to look at that sort of singular proposition across the integrated mobility platform and how we can have those conversations with our customers. And that is bearing fruit. That's the strategy that we laid down. And that is bearing fruit because we're getting multiple sales into a customer who's taking different parts of our services across the platform, and they can do that through a single point of contact with our accounts and development team. So it has been a really good year because, obviously, when you're doing that with a customer and you're drilling down and sort of looking at all those products and services you're providing, what it's showing to us through our feedback and our data is that we've got some very sticky propositions here that customers like. For me, that plays to quality of your earnings. It's not a case of it's a business that you just rent an asset, it's a piece of metal, it's a race to the bottom and it's a short-term transaction. We've got customers who have been with us a long time, a large majority of customers have been with us a long time. And the fact that they're taking more products and services from us just solidifies for me the strength of the relationship, the strength of the service offering and as I said, that overall quality of earnings. And there's more aspects of the UK&I than just rental, of course, all the Claims and Services. And that's a business that has been growing its position in terms of taking on new customers. Yes, it's going to manifest itself through on a normalized basis, we're seeing that EBIT growth and everything else, and we expect to see that, as Richard will come on to talk about. But we're a major provider of services for insurance companies and brokers, automotive dealerships, these cos. So when you look at the trajectory of what those companies want, they want to outsource their back-office functions and claims and services and replacement vehicles and repairs. And we're a national operator with good infrastructure on the ground, good technical skills, good people and more importantly, fantastic NPS and Trustpilot feedback. So we're getting it right more times than we're not. So all of that bodes well for me in terms of the investments that we've made and what we're seeing. So as I said, so what it all translates to something which we will call growth.

Yes. And just before I hand over to Richard, and I'll talk about this a bit in the Q&A. The U.K. market environment, we always timed our results at the time when the government came out with sort of more infrastructure spend, et cetera. And we've got a lot of our end markets really with critical infrastructure, critical end markets, et cetera. We are very thoughtful about where we place our vehicles as well, aren't we?

We are. I mean it's important that we get the right returns for our assets. So I said we came out with results on Wednesday, the 9th of July. The government announced on Tuesday, the 8th of July, a reconfirmation of a GBP 92 billion infrastructure spend. So it was agreed last year. It went on pause for the spending review. It's been through the spending review and it's reaffirmed. So we'll see major infrastructure upgrades, things like the A66 Scotch Corner to the Lake District, M54 and M6 links. So we've got -- you're right, we've got customers in those segments that we support and are well-supported. And we've seen that sort of confidence on the basis that they're going to need to be well equipped to do those projects and where we can support them with our sort of mobility platform. So look, there's a lot of good things there that give us confidence then about choosing the sectors, choosing the customers and the markets that we will invest in. And equally, as you say, being selective about the ones that we don't invest in because it's about getting the right returns for our assets and growing sensibly, not just growing for the sake of growing. That's important. And I think that's a differentiator probably to where the business was in the distant past. It is about quality of growth.

So I'm going to take a pause there and bring Richard in. I think we should talk about fleet a little bit later, [indiscernible]. But just, Richard, maybe give a bit more of a context or rather talk us through some of the financial metrics, maybe the profit bridge as well, just to kind of give a little bit more views on that. And I worry that I'm slightly out of view here, so I'm going to not having a look at that. Also, -- sorry, yes, please just carry on with that while I'm looking to see if I can encourage people to ask some questions.

Great. So I'm going to start on Slide 8 of the presentation. So the first key point is that our results were ahead of expectations, and Martin talked to that earlier. But just to bring that out in the numbers on this slide. So first of all, revenue was 2.3% ahead of prior year at GBP 1.555 billion. Profit before tax was at GBP 166.9 million. That was 3% ahead of consensus, and that was the main driver of our statement around ahead of expectations. And then within that, you can see also the growth in the cash profits of EBITDA, up GBP 18.2 million and also the confidence of the Board in these results and the growth in the dividend per share going up 2.3% as well to 26.4p for the year. What I also then talk to just before I move on to the next slide would be net debt and leverage. So our net debt was up GBP 95 million. Leverage closed at 1.8x, as we've signaled many times to the market. And importantly, that GBP 95 million of increase in net debt, what does that fund? Well, the fixed assets, the net book value of the fleet went up by GBP 211 million. So that's an important stat to link those two numbers together to see how well-funded the group is. Talking then to the profit bridge, which was Slide 10, as a two on, you can see a bit more about where did the growth come from, but why did the underlying numbers go backwards year-on-year. And the first key point, I'd point out on this slide is rental profits were up GBP 10 million year-on-year. That's a really strong performance. And that's not only margin growth, but also volume growth. So you can see the split on that slide. Then disposal profits came down year-on-year. But as I said, we've signaled that. They're normalizing. The residual values that went up during COVID are coming off. They're now largely normalized. H2 was stable. And so that's a key component of the walk. And then two elements in Claims and Services. So one, the cyber incident that we talked about in H1 and then some other claims and services dynamics, which there's a slide on later, but basically come down to another normalizing factor that Martin referenced, which was higher durations. So our vehicles, replacement vehicles out with customers being repaired quicker year-on-year, and that led to a reduction in profits year-on-year. But the good news there is that they've stabilized. And so across H2, we saw no further degradation. We feel this is the position for the future. And actually, from here, we can see growth. So into next year, hopefully, we won't have another cyber incident, and we'll see growth across the other parts of the Claims and Services business. So that would be my key points on that.

Okay. Good. And almost keeping with you, thank you very much. I can see a good number of questions. So if I'm kind of leaning off screen, it wasn't meant to be off screen, it's because I'm pairing up my Q&A, and I will bring some in, in a moment. But Richard, if we move on to the margin slide, in terms of the medium-term view, there's been a couple of questions sort of are margins peaking or otherwise, maybe for both of you to handle. But actually, in terms of our medium-term view, that was -- again, Martin, you said something new for us to kind of get more to that market. In the first instance, I'm going to risk say, Richard, do you just want to give a couple of comments on that slide and then maybe Martin a bit of an overview? Maybe that's one-way around...

Yes. First of all, absolutely not peaking. And what we did here on the medium-term view slide is really give a lot more detail than we've done before. So we used to say rental margins of 15%-plus. Here, we're saying 15% to 16% in UK&I and 17.5% to 19.5% in Spain. So a lot more clarity on the next few years of rental margins. And yes, they're higher than they were previously. In Claims and Services, the margin of 5%-plus compares to this year's margin of 4.3%. When you add back the cyber incident, you get into the high 4s, showing our confidence, we're showing that we expect 5%-plus. The reason that that's moved at, around over the last 5 years is actually the change of mix of business between higher-margin styles of business like Credit Hire and Credit Repair and lower-margin styles of business like Direct Hire and Direct Repair. And then we gave more detail also on disposal profits, but I think your question was mainly about margin.

Yes, it was. And I think -- thank you very much on that. And obviously, we'll come through because there's some more questions on this. But Martin, Claims and Services -- I want to talk about fleet, but Claims and Services, there's a couple of questions coming in. You sort of indicated earlier quite positive about that business, but also there is this element of business mix change that isn't there. And the margin is actually not reflecting that the business is. It's more reflecting that there's a change in the kind of business we're doing with the major insurance companies, isn't?

Yes, I think that's an important thing. Again, look, and I appreciate investors see 200 companies a year and all the rest of it, but we've got to contextualize is that where Claims and Services came from it was more pure-play with Credit Hire, Credit Repair, which is sort of a higher-margin type of product. And then when we merged, we said we were going to use -- this is part of the reasons for the merger, we're going to use that operational leverage. Northgate and Redde merge their branches that give you a bigger footprint infrastructure-wise. And the consequence of that is that you had a lot closer reach to customers and through your branch network and so on. So what that gave us is operational leverage, as I say, to enter into what I call Direct Hires. So where we're providing services across that platform, mobility for insurers, we can get to customers quicker; therefore, we can price in different products and different services, which enable us to grow our position. So look, in absolute terms, we want to be a main provider of mobility services in the markets that we serve and being selective around sort of doing the Direct Hires or Credit Hires and all rest of it, all forms of replacement vehicle. Yes, the margin will change because you've got that different mix, you've got the different characteristics. And we're comfortable with that. That's something that if we win a big contract and we say, okay, this contract is a Direct Hire-type contract, yes, it could look like it's dilutive on the margin. But actually, Richard would want to tell you, the ROCE is on -- yes, the ROCE and the capital investment from that is actually very strong. It's sometimes in excess of 20%. So it's a good place to be. And we want to use that leverage. We want to use that operational leverage to do that. So yes, we shouldn't get too hung up on the actual EBIT margin itself, it's what does the overall look like when you stand back.

So the competitive environment, there's lots of questions. I've got a feeling I know who Richard L is in this because you talked about [indiscernible]. The competitive environment within the Claims and Services space is actually very much kind of moving in our favor in terms of the structural trends, but also technology, so there is profitable growth there with this contract?

Indeed, look, I mean, for those of you that are not familiar, I mean, the Claims and Services is working in the arena with the large insurance companies that I mentioned earlier, leasing companies and so forth. And we've seen some consolidation in that sort of personal motor space very recently with two listed businesses. And as I said, if you have a -- I haven't said it yet, but if you've got GBP 1 of investment in your insurance company, do you want to spend that on your marketing and your brand or do you want to spend that building your administrative capability? Well, the answer is, actually, you want to spend it on your brand and you want to work with a partner that is very efficient, that can use the tools necessary to be able to process transactions and customers through an event. And that's what we specialize in. So this trend to outsourcing, we're just low 20% of the market in terms of our market share when we measure all of the market. And therefore, there's a lot further to go in terms of what we can do. And we're a national provider of scale with good credibility. We talked about the NPS scores, Trustpilot scores, excellent credibility, I should say, not good. And we're a trusted partner that can deliver those services. So there's more to go for. So that's where we see growth.