Inchcape PLC

LSE:INCH

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the Q3 2018 trading update. My name is Tanaya, and I will be your coordinator for today's event. [Operator Instructions]I now hand you over to your host, Stefan Bomhard, to begin today's conference.

[Stefan Bomhard, Group Chief Executive & Director]

Good morning to everybody, and thank you for joining us today on this call following the release of our third quarter trading update, which covers the 3 months through September. And with me is Richard Howes, our Chief Financial Officer; and Sunita Entwisle, our Head of Investor Relations.I will personally comment on the group's performance over the period, and Richard will cover our regional performance. I will then share with you the outlook and give you -- and then at the end, we'll be more than happy to take any questions that you might have.So let me start with the summary of our group performance. We are particularly pleased with performance in our distribution business over the quarter. Revenue grew 3% at constant currency and was flat excluding the Central America acquisition. Against some market headwinds, our top line trend has been accompanied by an encouraging constant currency profit performance. Distribution is our core business, a business with strong returns, long-standing relationships and attractive midterm growth opportunities. It accounts for most of our group profits today. And so we are happy with the trends and the real developments we are making.We had expected an easing of market pressure in our retail markets in the second half of this year, but the trends seen over the first half year continued. Sales grew 1% at constant currency over the quarter and margin saw further pressure in the U.K. with an already weak new car market impacted further by brand-specific WLTP supplies.In Australia, key markets where much of Australia's retail sales are focused have seen a decline. Overall, the group has delivered a resilient sales performance over this 3-month period. Revenues were flat year-on-year at reported currency and up 2% at constant currency. Our recent Central American acquisition, which we announced on the 26th of March, contributed 2% to this growth, and its integration is going well.While some market dynamics have not been helpful over the period, our Ignite strategy equips us to match the changing landscape. Ignite remains a key focus for the business globally. We maintain our concentration on leveraging our global scale and managing our long-standing OEM relationships to their full potential. Maximizing the opportunity for all our revenue streams is central to Ignite, in particular, a high-margin after-sales in finance and insurance value drivers and the increased addressable market that used cars represent. I'm especially pleased that in most regions, after-sales outperformed vehicle sales in the period. Our Used car program, continues to roll out in several markets, including Russia and South America, where leveraging Ignite best practices had led to significant increases in revenue.Additionally, we continue to target procurement savings and SME opportunities, rolling out new insurance products in Continental Europe and looking to expand the success of our paint and fabric protection product, GardX, in the Latin American region. Our recent Jaguar Land Rover distribution contract win in Kenya is also integrating well and has reconfirmed our excitement around opportunities in the Africa region.I will now hand it over to Richard, who will go into further detail on our recent performance.

[Richard Howes, CFO & Director]

Thanks, Stefan, and good morning, everyone. All the comments that we will make in the rest of the call will be in constant currency. So starting with Asia, we posted sales decline of 1% over the period. The anticipated downturn in Singapore new car volumes has been broadly consistent with our expectations, around 24% year-on-year over the quarter.We continue to gain market share in key segments over the period, but sales have overall fallen. Within Singapore, after-sales acted as a stabilizer to the vehicle decline. The underlying Hong Kong market had been broadly flat. Our market share gain has improved and our profit performance has been very good. We have also seen strong growth in some of our other Asian markets. Together, this has enabled us to deliver an impressive profit performance over the quarter in Asia in the face of the Singapore headwinds. And we are proud of what the Asia regional team that was installed in 2007 as part of the Ignite strategy has achieved.Moving on to Australasia where we saw an 8% decline. This revenue performance reflects an expected slowdown in distribution sales ahead of the relaunch of the Subaru Forester which happened at the end of September. The Forester is an important product within the Subaru lineup, and so we expect it to be a benefit over the coming quarters. Initial order book is showing a good response to the launch.Distribution margins improved driven by a small transactional yen benefit. As Stefan mentioned, our retail businesses continue to be impacted by weakness in the Sydney market. This has further pressured vehicle margins and lowered retail profits.Turning to the U.K. and Europe where we declined 6% over the period. In the U.K., quarter 3 industry volumes for the new car market declined 10%, driven by a 34% reduction in diesel. This continues trends we have seen since the second half of 2017, but this quarter was also hit by WLTP regulation, with some brands significantly limiting product supply into the U.K. given delays in emissions testing. Our U.K. profit performance has been impacted by the underlying supply and demand imbalance and suffered from further lost sales in September relating to the WLT (sic) [ WLTP ] supply shortages.Our U.K. brand portfolio, which is focused on premium and volume German OEM brands has further emphasized both dynamics. As with all U.K. businesses -- as with all retail businesses, operational leverage has a meaningful effect on profits. We expect the WLT supply constraints to continue into Q4, but to normalize in early 2019. In this weaker trading environment, we have reviewed our capital expenditure spending plans and will be reducing the underlying investment in the U.K. next year. We are also very closely looking at our cost base as well as the level of goodwill relating to the U.K. business.More positively, our U.K. car business -- our used U.K. car business is developing well driven by Ignite, and the underlying gross profit growth grew year-on-year.Moving to our Continental European business. Greece has continued to recover with market growth of 11%. Top line growth has also been good in our Eastern European businesses, although markets have been competitive, which has led to some margin pressure.And lastly, our emerging market segment. We have posted strong revenue growth over the period of 44% and 32%, excluding the Central America acquisition. Russia continues to be a standout performer, with the improvement seen in the first half continuing driven by our focus on Ignite initiatives. Both used, finance insurance and after-sales are up strongly.In South America, revenue performance continues to be good. P&O sales in Colombia have shown good progress post the recent election and subsequent improvement in business sentiment. Our BMW business in Peru was affected by consumption tax increases, but revenue in Chile continued to grow. BMW remains the top premium brand in both markets.Ethiopia continues to be impacted by political decisions which have limited currency supply. As a result, there has been some shortage in stock, mostly related to cars. Underlying demand, however, remains strong.And as Stefan mentioned, we are pleased with continued progress on integrating the Central America business, although the markets themselves continue to decline. From a group tax perspective, given the mix of regional performance that we expect for the full year, we can now guide to an effective 2018 tax rate of around 23.5% compared to our prior guidance of 25.5%. We expect a broadly similar rate for 2019 as well. And turning to the balance sheet. We are on track to end the year with a broadly neutral net debt position, with robust cash generation over the year offsetting the purchase of Grupo Rudelman in Central America in March. We have a disciplined capital allocation process and continually review the best allocation of excess free cash.And with that, I'll hand back to Stefan.

[Stefan Bomhard, Group Chief Executive & Director]

Thank you, Richard. As laid out at our interim results, we expected the second half to be challenging. Given trading over the quarter, we now expect a resilient constant currency performance for the year. I would now like to give you some early thoughts on how we're looking at 2019. In Australasia, the transactional headwind in 2019 is likely to be meaningful. At current rates, we would expect a full-year yen impact of around GBP 25 million. In Singapore, with more limited permit availability, we also anticipate a further define in the market. We expect some of the market pressures in our other businesses to stabilize.With the completion of some additional projects in the U.K., we expect CapEx to fall back to a more normalized level of GBP 75 million in 2019 compared with around GBP 100 million in 2018.Let me end on reminding you why I remain very excited about Inchcape's future opportunities. Distribution is at our core. It is a very strong business model with high barriers to entry, strong cash generation and returns and a significantly greater level of control than for retail. It is an attractive part of the value chain that we focused on. We will also continue to focus on higher growth markets where appropriate, also, of course, some of our more developed markets remain very valuable cash generators.And as I have mentioned, we have initiatives in place under the Ignite strategy to drive organic growth ahead of market performance and providing some self-help benefits.In addition, as we explained at our Capital Markets Day in June, we continue to see distribution consolidation opportunities. The board will continually assess the right approach to capital allocation and shareholder value creation.And finally, we believe we are very well placed to turn future industry trends into positive profit drivers for our business.Thank you very much for the time that you gave us this morning. We would now be all more than happy to take any questions that you have.

[Operator]

Thank you for joining today's call. You may now disconnect your handsets. Sir, please stay connected.