Inchcape PLC

LSE:INCH

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Inchcape Q3 Trading Update. [Operator Instructions] Also I must advise that the call is being recorded today, Thursday, the 7th of November 2019. And without any further delay, I would now like to hand over the call to your speaker today, Stefan Bomhard. Thank you. Please, go ahead.

[Stefan Bomhard, Group CEO & Executive Director]

Good morning, everyone, and thank you from me to all of you for joining us on this call on the release plan of our trading update for quarter 3 of the company. And I'm pleased to have with me Sunita Entwisle, our Head of Investor Relationships; and for the first time on one of these updates, our new Chief Financial Officer, Gijsbert de Zoeten. And as you will know, Gijsbert joined Inchcape a couple of months ago. He brings with him a wealth of experience and knowledge from his previous role as CFO of LeasePlan and from his long career at Unilever. And we are excited to have him with us at Inchcape, and I'm looking very much forward to working with Gijsbert together, as we continue to drive the business forward. Gijsbert, who is with me, that -- you want to say a few words?

[Gijsbert de Zoeten, CFO & Executive Director]

Well, thanks for that, Stefan, and good morning, everyone. It's obviously early days for me, but I'm very much enjoying getting into the detail of the Inchcape business. I'm pleased to have joined the organization where there's so much opportunity, as Stefan, I'm sure, has articulated to you in the past. And since joining at the end of August, I've been busy visiting our regions and getting into develop the operations. And so far, I visited country operations in Asia, Africa, Europe and South America. So I've yet to complete my full tour, but I'm very excited what I've seen so far. I also look forward to getting to know many of you in the coming months, but I will now hand back to Stefan to take you through this quarter's results.

[Stefan Bomhard, Group CEO & Executive Director]

Thank you, Gijsbert. In a moment, I will provide you, as usual, with the results. But before I do that, I want to highlight two key areas that provide additional context. The first relates to recent developments in optimizing our portfolio, while the second clarifies how we are managing some particular market conditions. Let's start with the optimization. Strategic optimization of our portfolio is something we've been working hard over the recent months. Since the start of 2019, there has been 4 key developments. We sold our China Retail and U.K. Fleet Solutions businesses, we have meaningfully downsized our Australia Retail business, and we have sold less profitable Retail sites in the United Kingdom. Put together, these actions represent around GBP 700 million of sales and meaningfully reduce our sales exposure to the Retail-only format. In total, they will also raise cash proceeds of GBP 250 million on completion, representing a significant gain on disposal on assets that did not bring us any significant advantage to our core distribution business. In line with this portfolio optimization, we today announced the acquisition of the Daimler Distributor in Uruguay and Ecuador. This is a significant acquisition for us. It represents our first Distribution contract with Daimler brands, following 30 years of Mercedes Retail partnership in the U.K., and it means that we've ended a total of 6 new Latin American markets since 2016 when we started the Ignite strategy, considerably increasing our brand presence in the region. And Latin America is a key distribution market globally, and I'm pleased we've been able to meaningfully enhance Inchcape's presence in the market over the last few years. I should add that Daimler brands actively supported our acquisition of this business, which is a key milestone for the OEM partner of choice strategic pillar and the Ignite. Together, this should demonstrate to you our clear focus on the growth opportunities available to us and where we can best prioritize our efforts. We will come back to you on the use of the remaining proceeds, but we remain focused on disciplined capital allocation. Our latest GBP 100 million buyback program continues. The second key highlight I mentioned concerns trading over the period. You all know that some of our automotive markets have been weaker. And on top of this, the Hong Kong market is facing further challenges. Yet, despite this, we remain on track to deliver a resilient constant currency profit performance, excluding the yen headwind, which is in line with our prior expectations. I think this demonstrates to you the resilience of the Distribution model. So now that I've outlined some important context, let me turn to the group's performance in detail. Revenues have grown 3% over the quarter in constant currency and 5% in actual currency. If we exclude the impact of Retail disposals on turnover, the disposals that we have completed, constant currency revenue grew 5%. Within Distribution, which generated 90% of profits in the first half, we have achieved 5% growth in constant currency. This is a good performance as compared to double-digit decline in half 1 has delivered broadly stable profits, including of the yen headwind. In Asia, we saw a modest decline in sales, driven by a weaker Singapore commercial vehicle market as expected and disruption in Hong Kong. Singapore is on track to see a market decline of 7%, and the Hong Kong market has declined 8% over the quarter compared to the prior year. However, with strong cost controls, growth in aftersales, and the fresh product lineup, we have delivered profit growth across Asia over the period. While commercial vehicles in Hong Kong have been supported by product lineup, the commercial vehicle scrappage scheme has been less of a support than expected, given the political environment, which has hindered the replacement purchases. Australasia, sales improved materially compared to the first half. But with super supply having normalized since May of this year. Also, the market remains weak, declined 7% over the third quarter in comparison to 2018. Again, good cost control and yen mitigation items such as price and product mix have enabled the reach and to drive a resilient profit performance, excluding the Australian dollar-yen headwind. This currency headwind continues to be a pressure point for the year, but closer to GBP 30 million rather than the GBP 35 million that we previously guided and is half 2 weighted. The mitigation actions are starting to have some benefit, but we expect a more substantial offset to yen pressure in 2020. Europe, growth in sales has been very strong across the board with a mixture of market share gains and market growth. Within the region, momentum in Greece improved on the first half, with the market up 25%. And lastly, the emerging markets division has seen sales growth overall. This reflects good growth in South America despite the weak Chilean market. The Central America business that we acquired 18 months ago, has seen a broadly stable revenue and profit performance despite continued market decline. And this is encouraging and reflects the focus in the business on increasing market share. And we've seen moderate profit declines in Ethiopia with greater currency availability to ensure -- to enable importer stocks and parts into the country. Our overall market profit, the merchant market profit, has been stable over the period, and we are on track to deliver 2 large Ethiopian orders in quarter 4. Now let me turn from Distribution to Retail. In Retail, we've seen 1% growth in sales and 6% growth excluding the impact of disposals that have completed. Note that given the timing on completion of different tranches of the announced disposals and their respective profit contributions, there is limited profit impact over the quarter and expect this for the full year. While exact timings depend on completion, you can assume for now the profit impact from disposals is felt from the end of quarter 4. Now returning back to the numbers, moderate sales growth reflects market declines in the United Kingdom and Australia, offset by Ignite led Russia sales growth. However, in the period, the Russian business has felt the impact of new beta margin pressure with competitors discounting driving prices down in the market. While the U.K. market remains challenging, we continue to export the best of broadly stable 2019 profit performance. Australia Retail is also performing as expected, with stable year-on-year losses. Also our announced disposals materially reduce our exposure to Australia's Retail post-transaction completion. So overall, this has been a pleasing third quarter, and we are on track for a resilient constant currency profit performance for 2019. And before I conclude, I would like to turn to some early thoughts on 2020. In Australasia, the transactional headwind next year is likely to be meaningful again at current spot rates. However, through product mix and price actions, we believe that we will likely mitigate around half of the anticipated pressure. So while the current rate suggests a GBP 25 million of headwind, we expect a net impact of around GBP 50 million. In Singapore, to switch over to Asia, with a continued decline in permit availability, we expect a decrease of 20% to 25% for the new car market in 2020. This reflects recent deregistration trends as well as a reduced benefit from the commercial vehicle scrappage schemes compared to 2019. However, we do expect that from 2021, we will be close to stabilization at the bottom of the cycle for Singapore. It is also worth pointing out a couple of things on this. Firstly, it is clear that the COE permit cycle has smoothed. And we've seen a smaller peak through trough in the market. Secondly, against this, the combination of an expanded product offering, improved cost structure and after sales support means we have been able to manage profit performance well. With these dynamics and actions, the negative impact from the Singapore cycle on group profits has materially reduced. The Hong Kong market also remains challenging. And while we continue to expect to manage the situation well, together with Singapore, this will drive a lower Asia underlying profit year-on-year in 2020. We expect some of the market pressures in our other regions to ease, but appreciate that the impact is in the U.K. economy following Brexit is a risk. And finally, you do need to take into account the around GBP 80 million profit contribution from the announced disposals of Retail businesses. So to conclude, I'm pleased that we've been able to show considerable progress over the period and have further demonstrated the attractiveness of the Distribution business model, our core focus. Inchcape's weighting towards markets with greater structural opportunity. This, combined with our focus on optimizing performance, our consolidation activities, our cash generation and a disciplined approach to capital allocation means that we continue to be set to deliver long-term growth and attractive value for our shareholders. So thank you very much to all of you for listening.