Inchcape PLC

LSE:INCH

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and welcome to the Inchcape Third Quarter 2021 Trading Update Analyst Conference Call. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Duncan Tait, to begin today's conference. Thank you. .

[Duncan Tait, Group CEO & Director]

Thanks very much, Molly. Good morning, everyone. Thank you for joining us. As usual, I'm joined on the call by our CFO, Gijsbert de Zoeten, and our Head of Investor Relations, Raghav Gupta. I'll begin by commenting on the group's performance before handing over to Gijsbert, who will give you more details. We'll then be happy to take your questions. As mentioned in this morning's announcement, the Q3 results were ahead of our expectations, demonstrating the group's continued strong performance. Revenue increased 10% on an organic basis versus the same period last year. When compared to the third quarter of 2019, group revenue was 2% lower, a really pleasing performance in the context of the backdrop in our markets. While the pandemic continues to cause uncertainty, it had a relatively small impact on the group in Q3. As has been widely reported, supply constraints are continuing to impact the industry. This had a minimal impact on our top line in the first half, but it did start to impact our top line in Q3. To date, the volume loss has been offset by stronger margins for both new and used vehicles, helped by the current supply demand imbalance. Let me now hand over to Gijsbert, who will run you through the regions.

[Gijsbert de Zoeten, CFO & Executive Director]

Thank you, Duncan, and good morning, everyone. In Q3, the group generated GBP 1.9 billion of revenue. On an organic basis, revenue increased by 10% versus the same period last year and was 2% below Q3 2019. On a reported basis, revenue fell by 2% year-over-year. Besides from currency, the difference is explained by the impact of retail disposals over the past 12 months. Looking at our 2 segments. In distribution, the positive year-on-year growth continued as we were supported by strong performance in the Americas and Africa and Europe. As Duncan mentioned, the supply issues had a more pronounced impact, particularly towards the end of the quarter, which weighed on sales. Our performance in retail was extremely resilient, given the backdrop of limited supply with both used and aftersales performing well. Let me now provide some color. Distribution overall delivered 20% higher organic sales versus the prior year, with the comparison impacted by COVID restrictions, but it was 5% below the equivalent period in '19. Starting with Asia, where our sales declined versus the prior year. In Singapore, revenue was stable versus Q2, supported by aftersales and used. In Hong Kong, we delivered growth across all revenue streams, new, used and aftersales. In Australia, our volumes were adversely impacted by supply constraints and some localized pandemic-related restrictions. In Europe, all markets delivered organic growth above '19 levels with lower vehicle availability impacting towards the end of the quarter. This was better than we had anticipated. The Americas region saw a good performance with revenue above '19 supported by improving top line trends across new, used and aftersales. In Chile, Colombia, Costa Rica and Peru, revenues were above the Q2 level, with a strong uptick in new car volumes. Finally, our operations in Africa continued to perform well, supported by strong aftersales business. Moving to Retail. Revenue fell 2% year-over-year on an organic basis versus a high comparator as showrooms reopened as lockdown ease in 2020. But it was nevertheless 5% above the equivalent period in '19. This is a resilient performance in the context of supply constraints, which impacted our businesses in the U.K. Revenue in Russia was above '19 levels after adjusting for St. Petersburg disposal. And while new car volumes were weaker than in Q2, both markets were supported by a solid performance in both used and aftersales. To summarize the quarter, our overall performance in Q3 has been better than expected with revenues ahead of our forecast and stronger new and used vehicle margins. Let me 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 third quarter with performance exceeding our expectations across all regions. We also continue to make good progress with our use of data and digital. Looking ahead, the group's strong performance to date, supported by robust margins will underpin a profit before tax for FY '21 of at least GBP 290 million. Whilst the widely reported supply issues are not expected to improve until well into 2022, we are confident the margins will remain robust through this period, mitigating the likely impact on our top line. Looking beyond the near term, we are 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. 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 look forward to seeing you at our Capital Markets Day on the 17th of November, when we'll go into the detail of our strategic priorities. Gijsbert and I are now happy to take your questions.

[Operator]

[Operator Instructions] The first question today comes from the line of Andrew Nussey from Peel Hunt.

[Andrew Nussey, Analyst]

Yes. A question for Duncan, please. I'm just curious whether you think these industry supply issues are likely to change the longer-term behaviors of OEMs towards independent distributors. I mean I was also guessing, do we think -- or do you think you'll start to see an acceleration towards using independent distributors. And equally, do you think that could accelerate industry consolidation amongst independent distributors. And I guess, probably allied to that last point, you've often said it takes 3 to tango, but in terms of your M&A pipeline, is there a difficulty in executing it because the OEMs are so tied up obviously with their own sort of internal issues around supply?

[Duncan Tait, Group CEO & Director]

Andrew. What a great set of questions. So to the first point around, do I think that it is the current supply situation that is causing OEMs to think more about consolidation in these lower volume, more complex markets that we specialize in. I think my view would be I don't think it's that that's causing OEMs to think about consolidation. I think at the very top level, it is the amount of invest capital, the amount of intellectual capital required to make the shift to EV. And therefore, their focus on the very -- the biggest markets they have, I think, China, U.S., Germany, U.K., there is -- it is that dynamic that is then accelerating the move towards using well-capitalized professional distribution companies like Inchcape that are really investing in the future of the industry. And of course, I would call out our investments in data, in digital and those 2 digital delivery centers we've opened up in in Latin America and in the Philippines. So I think it is that that's moving it. Now in terms of pipeline, we said at the interims that we believe that our M&A pipeline was improving. We also said that the multiples and valuations are becoming more sensible. And I absolutely stand by that. We are certainly seeing more opportunities. And now we would say that the OEMs are very supportive of us in this regard. I also like the fact that when we're talking to our OEMs about our consolidation agenda in the smaller, lower volume, more complex markets, we're also moving them on to our digital experience platform or omnichannel, underpinned by our digital analytics platform, which gives us the ability to drive really great performance in those smaller markets for our OEM partners. So I said, look, I'll just to sum up. I don't think it's a supply imbalance. I think it's a longer-term move in the industry, which will drive consolidation. We're well placed to do it. The OEMs are supportive. And I'm getting more and more pleased with our M&A pipeline, frankly.

[Operator]

[Operator Instructions] The next question comes from the line of Sam Bland calling from JPMorgan.

[Samuel James Bland, Research Analyst]

I've got 2, please. The first 1 is on just trying to understand the improvement in the new and used car margins and sort of the cause of it. Is it kind of like a time lag effect where you bought stock at prices 2 or 3 months ago and now vehicle prices have Germany resin and so there's like this sort of timing effect, and that's the cause of the strong margins? Or is it something else? And the second question is, are the distribution countries also seeing a step-up in margins compared to those countries often have got a bit less used car business. So you see this margin progress both in retail countries and in distribution.

[Duncan Tait, Group CEO & Director]

Thanks. Sam. I'll hand them straight over to Gijsbert for both 1 and 2.

[Gijsbert de Zoeten, CFO & Executive Director]

Sam, so look, the improvement in margins, basically, I think there's sort of a number of things going on. Firstly, we see aftersales as a stabilizer helping us. Secondly, in terms of, let's say, top line, there is simply less discounting going on. And that goes for both our distribution markets. So it goes for both our new and used cars, and both there for our distribution markets and our retail markets. So the less discounting is really the big driver in the whole supply-demand dynamic. In that sense, distribution market in a sort of half answered it, are equally helped. And you're right, there's less used in distribution markets in our 2 retail markets. And just on that particular point, I would say that the used car margins are at unprecedented levels, frankly, in the retail margins because the demand supply dynamic is even more extreme in that regard.

[Duncan Tait, Group CEO & Director]

And Sam, just to add to that. I mean, I completely agree with what Gijsbert said, we are may not be clear, but we're in Romania today, which is a really great market for us, very strong leadership team. You can see this in action about how the team is very actively managing margins, managing discount and at the same time, using analytics to understand what is really going into the market and how we should behave. So listen, I think the only thing I'd add there for is our team is actively managing the situation in every last 1 of our markets. Just another comment on used. Of course, we are seeing a very unusual situation in a number of markets where you buy a used vehicle and it starts appreciating as opposed to start depreciating. So we don't expect that to carry on, but I stand by everything at Gijsbert said.

[Samuel James Bland, Research Analyst]

Okay. Understood. And I actually ask a follow-up if I can. Could you just have a comment specifically on Singapore, so that's quite an important country. I think COVID cases maybe picked up a little bit. Just any comment on whether Singapore trading has been particularly impacted by recent increases in COVID cases and any restrictions there?

[Duncan Tait, Group CEO & Director]

Okay, sure. So we did in Q3, we've seen bylaws by the way, as you know, the technology we've put in place and the processes and our people, we manage these lockdowns really well, and we trade pretty well through them, frankly. We had COVID issues in 2 countries of note, I guess, during the quarter. The Australian situation has been severe. And I think our team there have done incredibly well to manage the business during some very, very severe lockdowns. And I won't comment much further on that because I think that's in the press anyway about how severe the lockdowns have been in Australia and those markets are opening up now. Then to your point about Singapore, Singapore has had restrictions during the third quarter. They are starting to lift now. And in fact, Singapore has opened up travel channels now between -- Germany was in place and the U.K. now, which I think shows you that we're beginning to see Singapore come out of it, and their vaccination rate is improving, and becoming pretty strong out as we can see in Australia. So -- now has it impacted trading? Of course, it will do a bit because people are very restricted in terms of their mobility when those 2 countries lockdown. But now the vaccination program is in place, we'd expect trading to normalize a little bit more than we saw you on the COVID restrictions.

[Operator]

[Operator Instructions] The next question comes from the line of Michael Allen calling from Zeus Capital.

[Michael Allen, Head of Research]

Two questions from me, if I may. The first question is on -- How should we be thinking about net cash just given the stronger-than-expected margins? Should we let that flow through? Or is there any more working capital dynamics that we need to consider at the year-end position? That's my first question. And then second question is on Australia. There's been some noises around the agency model in Australia with some brands. And just wondering if you've got any comments on agency model and how it might be being executed by various brands in some of your markets?

[Duncan Tait, Group CEO & Director]

Mike. I'll hand straight to Mr. Gijsbert for a question one, and I'll follow up then on the question about Australia and agency.

[Gijsbert de Zoeten, CFO & Executive Director]

Right, Mike. So in terms of net cash, I mean, this is a very cash-generative business. So better results are also resulting in better cash. I guess, the bigger impact, if you like, that we could have seen on our cash flow this year would have been normalization of stock levels that I spoke about during the half that could potentially happen in 2021. And I think clearly, where we are now in the supply dynamics as described, that we would not expect that normalization to stock levels to happen in '21, that could happen in '22. So I would think about our cash performance in those terms.

[Duncan Tait, Group CEO & Director]

So Michael, let me cover the point you made about Australia and agency. So yes, I've seen clearly seen the commentary that's come out of Australia. I won't comment on the specific OEMs. But let me take a step back as to how we really think about this, which is, for me, this is all about the transformation of the route to market with a view to make the consumer experience when people are buying vehicles and in the app sales phase and during use to make that experience just beautiful. That is what we are absolutely doing at Inchcape, and that's what our OEM partners are trusting us to do in those distribution markets. So that's the big game in town for us is making that whole buying experience and aftersales experience simply beautiful for consumers. Because when we do that, we can see that where we've deployed our DXP platform. And by the way, we're on track to deploy that into even more of our markets with more OEMs before the end of the year, and we'll tell you more about the Capital Markets Day. When we do that, we can see increases in Net Promoter Scores for consumers. And at the same time, we can see that our leading financial metrics improve also. Now the OEMs have a slightly different game because they're more about managing margin in a market. Our big game is to really, really impress the OEMs with Inchcape's capability to drive performance in those distribution markets. And of course, whether we choose to treat our independent dealers via an agency model or other models is down to Inchcape in our distribution market. So that's what our OEMs trust us to do is to manage that route to market. And by the way, this is not an announcement for me to say we're moving to agency in our markets because the big game for us is all about consumer experience and driving performance for OEMs.

[Operator]

We have a follow-up question from the line of Andrew Nussey from Peel Hunt.

[Andrew Nussey, Analyst]

Yes. I'm just curious, when you speak to the guys on the ground, is there a feeling that the fact there is less discounting going on in the market because of the supply issues. Actually, there's an element of pent-up demand building. So actually, when we do start to see a normalization of supply, hopefully, at some point in FY '22, actually, there's going to be a strong demand backdrop behind it?

[Duncan Tait, Group CEO & Director]

Andrew, that is an excellent question. Not that the others weren't. See, So let's give you a sense -- we'll give you a little bit more color then on what we're seeing on demand. And I should also balance it with what we're seeing on supply. So in many of our markets, we are -- if I look at our order bank, confirmed orders from customers, we have a strong order bank going into next year. So I would say that we are likely to see from all the data we have, the demand next year will be pretty solid. And we can see that all sort of on the ground data about for the bank and other data we look at. So I do think demand is strong into next year. Then we have to balance that against the supply -- against what we're seeing from supply. Now Gijsbert and I have been in the headquarters of our European OEMs over the last 4 weeks or so. And I've been speaking to the headquarter teams in our Japanese OEMs about what are they saying beyond their public statements, what are they seeing? So we can get some color about how it affects Inchcape. We expect disrupted supply that we're seeing now to continue during Q4 and, frankly, into next year. Many of the OEMs are saying they don't expect supply to normalize. And by the way, I'm not sure we have a definition of what normalized means of M&A until midway through 2023. So what we expect in terms of supply next year, but the current data we have would be relatively -- we'll see production volumes increase in the second half of '22 and we expect real supply constraints to be put in place, certainly, as you go through Q4, Q1, Q2 of next year. So -- but there are many opinions on the topic of supply, hence the reason why we're being incredibly close to our OEM partners. Andrew, does that help a bit more than get anyway here to answer your questions?

[Andrew Nussey, Analyst]

No, that's useful. Your crystal ball is a little bit better than mine, Duncan.

[Duncan Tait, Group CEO & Director]

Well, but it's been polished a lot to the meanings we are in unusual times, under, but I appreciate the question.

[Operator]

We have a further question from the line of Paul Rossington calling from HSBC.

[Paul Rossington, Analyst]

Well done on the update today. Just again, thinking some more about the wider industry. Can you comment at all if the likes of Cazoo and these various online platform specializing in used car sales if they are impacting your business at all or how you might be able to take advantage of that trend as well? I know you talked about the launch of your used car platform in Greece, I think, with Toyota. So anything around that piece would be useful in terms of market dynamics or opportunity or otherwise.

[Duncan Tait, Group CEO & Director]

Thank you for your comments as well as your question. So are we seeing any impact because of course, look at the both -- if you look at our core business, of being the world's undisputed leader of distribution in those lower volume, more complex markets. No, we're not seeing any impact at all from those models because of our relationships with our OEM partners. We'll give you a thorough update on what -- how we see vehicle life cycle services, of which a component, of course, is us exploiting the profit pools in used vehicles. We'll give you a thorough update about that at the Capital Markets Day. But just to your specific question about Greece, the Greece model we're pleased with. So is our OEM partner also in Greece. And we have -- I think you may have seen the announcement, we've put a similar model to Greece in place now in Singapore, and we're looking at other Toyota markets in Europe to replicate the model that we saw in Greece. But the big reveal, I guess, as to where our vehicle life cycle services propositions are and how we see them developing over time, we'll give you the Capital Markets Day, if that's okay.

[Operator]

We have no further questions coming through on the phone line. So I'd like to hand the call back over to your host for any concluding remarks.

[Duncan Tait, Group CEO & Director]

Thanks very much, Molly. Thank you, everybody, for joining us today. Thanks for your questions. Thank you for your engagement to everyone who's been on the call. You've all hopefully received an invite to our Capital Markets Day, which we're holding in London on Wednesday, the 17th of November. We intend to share more detail on our strategy and on our exciting growth prospects. The team and I are looking forward to meeting as many of you there in person as possible. And as always, if you'd like a follow-up on anything, please do get in touch with Raghav. Thanks very much.

[Operator]

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