Inchcape PLC

LSE:INCH

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Inchcape Q1 2021 Conference Call. [Operator Instructions] I'd now like to hand over to our host, Duncan Tait, to begin the call. Thank you.

[Duncan Tait, Group CEO & Director]

Thank you very much. Good morning, everyone. Thank you for joining us. As usual, I'm joined by our CFO, Gijsbert de Zoeten; and our Head of Investor Relations, Raghav Gupta. I'll begin by commenting on the group's performance and provide a brief run-through of the key highlights before handing over to Gijsbert, who will give more detail. We will then be happy to take your questions. As mentioned in this morning's announcement, the Q1 results were ahead of our internal expectations, demonstrating the underlying resilience of the group. Revenue increased 2% on an organic basis compared to the first quarter of 2020, a pleasing performance and a testament to the efforts of everyone across the business. In the quarter, a number of our markets continued to face pandemic-related restrictions, although the impacts have been less pronounced than what we experienced in 2020. Our revenue stream showed an improving trend, with new vehicle channels delivering a particularly robust performance. As of today, our business is operational in virtually all markets, although some are operating with restrictions. Inchcape is a geographically diverse business with operations spanning 36 markets across 6 continents. As such, the group benefits in sharing learnings from across the globe. Something that has been particularly effective over the last 12 months and noticeable to our OEM partners. At the full year results, I revealed our strategic priorities with a focus on 2 key growth pillars. First, distribution excellence; and secondly, vehicle life cycle services. During the quarter, we added 2 new distribution agreements, bolstering our global presence. The first of these was a contract win for the distribution of JLR in Indonesia, our tenth market with JLR. Indonesia is a new and exciting market for the group, and one that fits precisely with our strategic focus on markets with high growth potential. The second was the acquisition of a distribution agreement for Daimler in Guatemala, which further raises our profile with the brand in the Americas and represents our fifth new market for Daimler in less than 18 months. As previously announced, we agreed the sale of part of our Russian retail business, further streamlining our retail-only operations. Upon completion, we anticipate the disposal will generate net cash proceeds of GBP 70 million for the group. M&A is an integral -- is integral to our growth ambitions, and we continue to explore value-accretive opportunities to strengthen our distribution footprint with both existing and new OEMs across for all regions. Now moving to vehicle life cycle services. In February, I said we were putting more emphasis on capturing the lifetime value of both customers and vehicles, an area with significant, unrealized potential for the group. In that context, we are pleased to have launched at the end of March, a new platform, enabling our independent dealers to advertise their used cars for all Greek consumers to see. While it is still early days, the initial results are encouraging. We are closely monitoring its progress. And in the meantime, are developing a potential rollout strategy considering the best markets to introduce this new technology platform. We are excited about the opportunities we see to capture more of our vehicles' lifetime value, leveraging both our existing infrastructure and capabilities. We'll keep you updated as we make progress with other initiatives we are currently exploring. Let me now hand over to Gijsbert, who will run through the regions.

[Gijsbert de Zoeten, CFO & Executive Director]

Thank you, Duncan, and good morning, everyone. In Q1, the group generated GBP 1.9 billion of revenue. On an organic basis, revenue increased by 2%, while on a reported basis, it fell by 3%. Aside from currency, the difference is explained by the net impact of distribution acquisitions and retail disposals over the past 12 months. During the quarter, we start to annualize COVID-19 restrictions, which weighed on the comparative period. Nevertheless, the underlying performance of the group improved. Looking at our 2 segments. In distribution, we saw sequential improvement in top line performance across most regions, producing a positive year-on-year result in the quarter. In retail, on the other hand, it was weighed down by a severe lockdown in the U.K., which impacted the entire period. Let me now provide some regional color. Distribution overall delivered 4% higher organic sales in the quarter. Starting with Asia, our sales were up versus the prior year. In Singapore, revenue growth was supported by market share gains. This was particularly apparent in commercial vehicles where an impending change in emissions policy helped our performance during the quarter. In Hong Kong, new vehicle volume grew for the second consecutive quarter for the first time since 2017. However, the market overall remains some 40% below its peak. In Australasia, sales were supported by the launch of the new Subaru Outback, enabling us to outgrow the market in Australia. In Europe, while COVID continues to cause disruption across a number of our markets, our ability to operate remotely to deliver vehicles through click and collect and to continue to provide after-sales services support the performance. In fact, our Q1 performance was in part helped by some pent-up demand following market restrictions in December of late last year. The Americas region overall delivered a sequential improvement in top line trends. In Chile, Colombia and Costa Rica, growth was ahead of our internal expectations, supported by improving demands for vehicles. And in Peru, despite severe restrictions throughout February, the top line trends improved versus Q4. Finally, our operations in Africa performed well in the context of a high prior year comparator. Now moving to retail. Revenue fell 2% in the quarter. This is a resilient performance in the context of the U.K. business, which faced severe restrictions throughout the period. Performance in the U.K. was much better than the lockdown in the first half of 2020, helped by the improvement in our operational capabilities and continuing after-sales services. During the quarter, we significantly outperformed the wider markets. Sales in Russia continued to be solid. To summarize the quarter, our overall performance in Q1 has been better than expected. And we've made further progress in increasing our exposure to the more attractive distribution business. Looking beyond the near-term disruption, we're confident that the combination of our geographical exposure and our ambition for distribution leadership, offers a compelling runway of growth in the mid- and longer term. I now hand back to Duncan.

[Duncan Tait, Group CEO & Director]

Thank you, Gijsbert. Before we open up for questions, let me sum up. We are pleased with how the group navigated the first quarter. While the environment is still uncertain, our resilience has continued to shine through. And the operational improvements made post-COVID have also supported our performance. The pandemic situation nevertheless presents a continued uncertainty. The automotive industry is also being impacted by well-known supply issues. Whilst that does not cause us any material issue to date, but it's something we are working very closely on with our OEM partners. Absent any severe disruptions during the rest of the year, as we said at the full year results, we continue to expect material growth in profits and an improved operating margin in 2021. Looking at the medium term, our ambition is to become the undisputed distributor of choice for OEMs. We will achieve this by further strengthening our OEM relationships and with more emphasis on capturing the lifetime value of both customers and vehicles. We are excited about the future and our role in bringing mobility to the world's communities. Gijsbert and I are now happy to take your questions.

[Operator]

[Operator Instructions] Our first question this morning comes from the line of Sam Bland from JPMorgan.

[Samuel James Bland, Research Analyst]

I've got a couple of questions. They are really on the distribution contracts. I guess the impression from the outside is kind of a growing momentum here of picking up these maybe small, but lots of them distribution contracts. Is that how you see it from your end? And what do you -- I guess what do you think is behind that? Obviously, you talked about becoming the distribution partner of choice, are those sort of things already happening and so OEMs can see that already? Or is there something else? And I guess also from here, do you have some kind of pipeline on when the new potential distribution contract wins or acquisitions could come through? So you've got some visibility on other awards and opportunities coming down the track, I'd just be interested to hear about that.

[Duncan Tait, Group CEO & Director]

Okay. Thanks very much. So I'll take that question then. So we're pleased with these market wins that we've had. They fit exactly the profile that Inchcape is after. They are in markets with an above-world-average GDP growth during the medium and long term. They have low motorization rates. And that really suits the -- and that's below 1 million vehicles a year, which means the OEMs are more likely to look to Inchcape to run those markets for them. If you look at Indonesia, for example, there's 270 million people in Indonesia, over the medium-term forecast to have a population above that of the United States. So it's a great market for Inchcape to be in, small to start with, but then we'd love to introduce other OEM partners into that market as we move forward. So is there an increasing trend? I would say it goes back to what we said at the full year results, markets below 1 million vehicles per annum, where the OEMs find lower volume, more difficult to operate in, very much suits Inchcape. I see Daimler -- that we've added another market with Daimler, another market with JLR. I think they see the value in working with Inchcape. And we hope more OEMs will come along. And I do think -- the last point I would make before I go on to talk a little bit about pipeline, is that the more that our OEM partners see us investing in technology, in data, in digital, in analytics, all about building out our distribution platform, we're hopeful we'll see more markets move our way. In terms of pipeline, we are working on some other markets with all OEMs. And I don't think you should expect us to announce one every time we speak, but I'm hopeful we'll see more distribution agreements during this year, similar to a -- Guatemala or Indonesia. So that was it from my side. Sam, did that work for you?

[Samuel James Bland, Research Analyst]

That was all clear.

[Operator]

We now have a question from the line of Andrew Nussey from Peel Hunt.

[Andrew Nussey, Analyst]

I guess following on from Sam's question a little bit, in terms of Indonesia, was that an award from an incumbent distributor? And in terms of Guatemala, which is -- it was in Daimler, was that a first-time sort of outsourcing. And then sort of allied to that, in terms of the net proceeds of GBP 70 million from the partial disposal of Russia, how much of that will be required to invest in Indonesia and Guatemala?

[Duncan Tait, Group CEO & Director]

Okay. I'll take the first one, Gijsbert do the second one, Andrew. So Indonesia was a win. So there was an existing JLR distribution plan in market. I think JLR thought they should be growing faster with a larger market share. And we have won -- so that's a contract win for us, no goodwill of exchanged hands. Very much like the Jaguar Land Rover deal we did in Poland in the middle of the year last year and something we're really pleased with. Now of course, we will apply the Inchcape way to how we run the market and get better results for both of us this is the intention. In Guatemala, that was a -- so we -- that was an acquisition. So we have exchanged goodwill to buy the Guatemala Daimler business. I think what you see with Daimler is the increasing professionalization of the way they run these smaller distribution markets, which clearly plays very well into what we are doing in Inchcape. And of course, we announced El Salvador within just a few months ago. So we're pleased with our continuing progress with Daimler. We hope there's more markets to come from that. Gijsbert, second question please.

[Gijsbert de Zoeten, CFO & Executive Director]

Yes. So Andrew, as you heard from Duncan, a lot a lot of investments, nil in Indonesia, basically. And as you can imagine, Guatemala was not a big one. So in the context of the [ net percentage ] of Russia, I don't think that's a -- that there is much. Yes, let -- that will be my answer to this question.

[Andrew Nussey, Analyst]

And if I could just follow-up. In terms of -- I appreciate there's only a Q1 update. But can you just give us reassurance that as you're getting that sequential revenue improvement, you're able to sort of hold on to sort of cost efficiencies, as best you can really reassure. So there's no sort of additional cost creep as the revenues start to move forward?

[Gijsbert de Zoeten, CFO & Executive Director]

Look, Andrew, I mean we are very disciplined with this COVID restructuring, right? We -- so the GBP 90 million that we announced is essentially done, and we've said that GBP 45 million would stick, which in itself is quite a significant number, also in the context of our profitability. We see that. And yes, we also see the other GBP 45 million coming back in line with sort of our volumes developing versus '19 is the way the sort of calculation works. But we're quite clear that there should be no cost creep and the GBP 45 million will be retained.

[Operator]

We now have a question from the line of George Pilakoutas from Numis.

[Georgios Alexandre Bela Pilakoutas, Analyst]

The first one was just you mentioned kind of outperformance in kind of market share gains across several of the markets. Just what do you think is driving that? Is that kind of a reverse of trend from this time last year? Or you think that is operational capabilities that you are delivering on? And if it is the latter, how do you communicate that to your OEM partners when it kind of is part of the bidding process? Is that one -- just if you can give us any sense on some of those distribution markets, which looked to be more advanced in the reopening cycle seem to be seeing good progress in new car volumes. Just whether you think that's pent-up demand or whether that's more structural rebound, anything you can share on that front. And then the third one, just whether you can talk about the level of expectations for restrictions in the second quarter relative to the first quarter across your group.

[Duncan Tait, Group CEO & Director]

Okay. George, thank you very much for your question. So look, I'll make comments on both of them and then Gijsbert can add any further color. I think what we've seen during the first quarter -- and it's difficult to distinguish between how much was pent-up demand based upon the restrictions that were in place in Q4 versus genuine new demand. By the way, I'll take whichever way it comes. But it's difficult to get a precise number or even a broad-based number on how much we think there's pent-up demand versus just general market improvement. But what I would say is we see it has been widespread. So it's not just 1 or 2 countries. We've seen it in pretty much all of our distribution markets, which is very big. We've also seen some new model launches. So if you take the example of Subaru in Australia, where we've had a new Outback launch, for instance, which has gone down really well. And we've launched that product in a completely digital, remote, virtual way to our dealer network, to our customers. I think the team have put in some really fantastic digital marketing assets in place to make sure that launch was successful. So we are seeing new model launches help also, but difficult to say, just to sum up, what's pent-up demand versus operational. In terms of restrictions in the second quarter, then -- in general, if I give you a broad-brush view of how we're seeing the world, Asia Pacific is pretty settled. I mean -- I think you can see the reaction to countries in APAC during the whole of the COVID crisis has been pretty draconian, if they have any outbreaks at all. And at the minute, we see COVID pretty much under control in our markets. The U.K., I guess I won't comment on the U.K. too much. I think you know exactly where the U.K. market is, which is an improving situation with an increasing number of people vaccinated and retail reopened. In Europe, we saw more restrictions than we expected in the first quarter, particularly in Eastern and Southern Europe. And of course, we also saw some in Northern Europe and in Russia, which did cause restrictions. If I look at the infection rate data that is coming out over the last week or so, this picture appears to be improving a little, but it's too early to say. What is very clear to me is without vaccinations, you see another wave after wave after wave. So clearly, we need the vaccination program to move really quickly in the -- in our Europe marketplace. And then moving to Africa and Americas. I'm just conscious it's coming into their winter. So -- and particularly in Latin America. We're monitoring the situation very carefully for restrictions, but it feels a little bit like Q2 might be a little better than what we saw in Q1. But as you can see, it is still dynamic. The other thing I've mentioned, George, before -- which we mentioned in my opening remarks, is we're also conscious about supply in the automotive industry because it's based largely upon semiconductor availability to the OEM -- for the OEMs themselves. I am delighted we put in our S&OP global distribution process and digitalized that, then provided analytics to it in the last -- in the second half of 2020 because it's enabled us to very, very closely, more than ever, I would say, closely collaborate with our OEM partners on what we need to land in markets specifically to match demand. So we're keeping our eye very closely on COVID, and we're managing quite nicely through the semiconductor supply issue.

[Georgios Alexandre Bela Pilakoutas, Analyst]

Great. Can I just rephrase my first question a little bit? Just in terms of you've basically -- market share gains quite a lot and benefiting from the operational capabilities in click and collect. [ If you pick ] a market like Peru, which is still, as you said, kind of under quite a bit of restrictions during the quarter, are the distribution partners for the other OEM brands, are they offering similar propositions? Or do you feel like you're ahead of the curve and therefore, the distribution proposition that you're offering has step changed relative to what some of those kind of mom-and-pops might be able to offer?

[Duncan Tait, Group CEO & Director]

Yes. So I would say, from looking at our competition -- and we're clearly looking at it very closely about what's going on with omnichannel and then what sits underneath that in terms of the analytics we've put in place like lead scoring algorithms, for instance, I would say most distribution partners will be putting in some form of omnichannel. I happen to think that our experience end-to-end is where we lead from a consumer experience perspective. And the way we're making use of analytics and machine learning -- for instance, in lead scoring, if you get hundreds of thousands of leads a week, which one should you really focus on to make sure you're getting a sale, I think we're establishing ourselves as a leading player in that regard. So -- and obviously much more pronounced when you move through, what you might say, regional groups into mom-and-pop shops. But the mom-and-pop shops are nowhere near as advanced in their use of technology. Now the other thing, George, I would say is we are continuing to invest at the pace we said we would do at our full year results. So we -- those 2 digital delivery centers we've opened, they are staffing at the right rates. And the more people we get into those centers, the more we'll be able to deliver digital functionality to markets, which will extend our leadership.

[Operator]

We now have a question from the line of Geoff Lowery from Redburn.

[Geoff Lowery, Partner of Non]

Just one joined-up question really. Can you talk a little bit about how gross profit has trended year-to-date? I appreciate there's moving -- many moving parts from country to product to distribution versus retail model but can you share thoughts on gross profit. And joined up with that, given the unusual times we're in with shortages in marketplaces, et cetera, can you talk a little bit about price and how you see the pricing dynamic in some of your bigger markets, please?

[Duncan Tait, Group CEO & Director]

Geoff, thank you for that. Look, in general, I mean it's a trading update. So we haven't said -- clearly, in our RNS, doesn't say much or anything about profitability trends during the quarter. What I would say is we're pleased with how we're trading. And in general, in our markets, the demand is a little bit ahead of supply, which is helpful, frankly. And I'll ask Gijsbert if he wants to add any comments in terms of further color on that.

[Gijsbert de Zoeten, CFO & Executive Director]

No. Not much more to add, Duncan. I mean this is a sales update, right? And I think if it is about sort of overall margin, I would say the second half margin of 2020, which was 3.6% is perhaps a good indicator.

[Operator]

[Operator Instructions] Our next question comes from the line of Mike Allen from Zeus.

[Michael Allen, Head of Research]

A couple from me, if I may. Just on the U.K. in the first quarter, just wondered whether you can give an indication of what capacity you operated in. So I think a number of the retailers said they were able to operate within 70%, 80% normal capacity utilizing the click-and-collect model. I'm just wondering if maybe you could give us a similar feel for that or -- just to allow us to assess how effective that was, obviously, when dealerships were shut. I've also got a question on Singapore, just an update on any competitive pressures and future margin potential. And then the third question is just on -- you said about kind of global supply issues, plenty of evidence out there to suggest that it's kind of coming through at the moment. But what markets do you think it would impact, indicate first, obviously, given where you operate around the world?

[Duncan Tait, Group CEO & Director]

Right. Very good. Thanks very much, Mike. So just let's -- I'll take the 3 questions, then Gijsbert can give a little bit further color if he wishes on those topics. So in terms of the U.K., so -- look, I think we have -- well, I know, we outperformed the market, I would say, in each of our revenue lines, new, used and after-sales. We clearly had introduced a lot of technology for us -- to enable us to perform in that regard. The other important thing I'd say, and there's feedback directly from OEMs about this, which is we haven't had anyone on furlough in Q3 of last year, Q4 of last year or Q1 of this year. So it just means we are better -- in a better position to serve our OEM customers in the U.K. market. And I think that's showing through in the real -- and a pleasing feedback from our OEM partners about the fact that we were -- all of our people in, fully up for it, wanting to make a difference every day. And the technology we introduced has also been incredibly helpful in that regard. And in terms of Singapore, so Singapore is performing pretty much as we expected. So low single-digit growth in Singapore in terms of COE availability and our performance. We see that low single-digit increase in COE continuing for the next couple of -- 3 years. And we're performing well. We've launched EV vehicles from Lexus during the quarter. We continue to do well with the Toyota brand in passenger cars and light commercial vehicles. So Singapore for -- as Singapore -- good Q1 for Singapore as high as I commented early. And then I think in the longer-term context of Singapore and their 2030 Green Plan, I'd tell you working with a company like Toyota, who has got a cracking view of EV and hybrid, is most helpful actually. And we represent an -- incredibly well in that Singaporean market. Now your -- go on, Mike, you were about to say something, I think.

[Gijsbert de Zoeten, CFO & Executive Director]

Sorry. I was just taking it in. That's very useful.

[Duncan Tait, Group CEO & Director]

Okay. Right. And then your final question, which is you said -- just remind me of the third question.

[Michael Allen, Head of Research]

Yes. I mean, obviously, there's a lot of evidence out there of the automotive market feed supply shortages. But in the context of Inchcape, which markets would you see those hit first for you in terms of the global supply chain and shortages? Where will it hit first? Is it Asia? Is it Europe? Australasia?

[Duncan Tait, Group CEO & Director]

Okay. Yes. Right. I understand the question now, Mike. I would say I don't tend to think of it by region, I tend to think of it more by OEM. So we've not seen any impact, particularly in the first quarter. You have the Renesas Semiconductor Manufacturing plant in Japan that had a fire in -- I think it was February. And they've only just restarted with supply. And they're a big volume of global semiconductor supply into the automotive industry. So we're conscious of that. It will mean a little bit of manufacturing -- lower manufacturing levels in the second quarter. But don't forget, we have landed a lot of our products anyway in the second quarter end market. So we're just keeping a close eye on third quarter, no particular geographic differences, but we're looking very closely by OEM. And then the final thing I'd say, which I mentioned earlier on the call, is having that S&OP process in place, where we're using analytics to understand what real demand is in a particular country for model types, colors, features you need to add to that vehicle, using real data and analytics, enables us to be very precise with our OEM partners about what we really need to land in a market. So -- and we're working -- I think they can see a step change difference in the way we work with them in the area of S&OP. So don't think of it by geography, think of it by OEM. And we're using S&OP to really make sure that we get the products we need to land in the market.

[Operator]

Thank you very much for your questions. All questions have now been answered. So I'd like to hand back to our host, Duncan Tait.

[Duncan Tait, Group CEO & Director]

Thank you very much, and thank you, everybody, for joining the call this morning. Thank you for the questions. Our next update will be on the 29th of July, the publication of our half year results. As always, if you have any follow-up questions or queries, please do get in touch with Raghav. Thank you very much, everybody, and have a great day.

[Operator]

Thank you very much for joining today's conference call. You may now disconnect your lines. Speakers, please stay connected.