INCHCAPE PLC

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Transcript : Inchcape plc, H1 2022 Earnings Call, Jul 28, 2022

28/07/2022 | 09:30

Presenter Speech
Duncan Tait (Executives)

Good morning, everyone. I hope you've all seen 2 announcements from Inchcape this morning, our 2022 interim results and the announcement of our proposed acquisition of Derco. I'm super excited about this deal. It will provide a step change to our distribution footprint, adding an excess of GBP 2 billion of revenue in the highly attractive and fast growth Americas region. Derco distributes a fantastic group of brands to a number of markets where we already operate and they have a great management team and culture similar to ours. We'll come back to provide more detail about Derco and the transaction shortly.

Before we do, let me thank you for joining us for our 2022 interim results. As usual, I'm joined by our CFO, Gijsbert De Zoeten and our Head of Investor Relations, Raghav Gupta. We'll begin with a short presentation followed by your questions. Today's presentation will be available on the group website and a recording of this call will also be uploaded later today. We've set out the agenda on Slide 4.

I'll begin by running you through the first half highlights and headline financials before handing over to Gijsbert, who will cover the financial performance and outlook in more detail. We'll then provide you with more detail about the proposed acquisition of Derco. After that, we'll open the lines for your questions. So, let's get going.

On this slide, we have summarized the highlights of a great first half of the year. Fantastic execution from our teams across our diversified geographic footprint has driven strong revenue growth and margins and continued high cash generation. We're making excellent progress against the 2 strategic growth opportunities that we set out in our Accelerate strategy.

First, distribution excellence, we've continued to extend our global leadership in the highly cash generative automotive distribution segment, which is our core area of focus. This continued shift of our portfolio towards distribution has been bolstered by 2 compelling acquisitions and through the swift exit of our operations in Russia. We are leading the way in digital and data capabilities, enhancing our capabilities and analytics, while rolling out DXP in more markets. As of today, we are at 31 markets with 12 OEMs.

Secondly, Vehicle Lifecycle Services or VLS, where we have identified a huge opportunity for the group and the profit achieved beyond the first phase of a vehicle's life. In Q4 last year, we launched bravoauto, a digital first used car platform and we are pleased with the progress we have made in the half. And finally, we have made excellent progress against our responsible business ESG strategy, which sits at the heart of everything we do.

At the halfway point of 2022, we've achieved great momentum. I'd like to thank each and every one of our colleagues who fully embraced our Accelerate strategy and through their expertise, dedication and teamwork, they are helping us drive our business to new heights, reflected in our strong results.

Slide 6 shows our headline KPIs for the first half of 2022. Inchcape delivered a great first half performance across all key metrics. Revenue was GBP 3.9 billion, which on an organic basis represents an increase of 12%. Our operating margin came in at 5.2% compared to 3.8% last year. This increase in revenue and operating margins drove the Group's PBT of GBP 184 million, up from GBP 121 million in the prior year. Free cash flow generation was GBP 224 million, improving our net cash position to GBP 439 million post-M&A and cash returns. The group's adjusted EPS was 35 pence, with a proposed interim dividend of 7.5 pence, up from 6.4 pence last year.

Let me now hand over to Gijsbert, who will run through the financial performance in more detail.

Presenter Speech
Gijsbert de Zoeten (Executives)

Thank you, Duncan and good morning, everyone. Let's start with the headline income statement figures on Slide 8. We generated revenue of GBP 3.9 billion in the first half, which is 12% above the prior year on an organic basis. In addition to the broader strength of our existing business, performance was supported by the addition of new distribution businesses. Our operating margin was 5.2%, which is 140 basis points ahead of the prior year.

PBT of GBP 184 million reflects the strong improvement in revenue and operating profit, driven by a combination of robust consumer demand and price mix tailwinds against the backdrop of new vehicle supply shortages, a strong set of results demonstrating the scalability and leverage of our business model, as we continue to expand our distribution portfolio.

This slide shows the absolute revenue and organic trend for the group and for the distribution and retail businesses. The year-on-year growth rates are impacted by the varying degrees of pandemic related disruption in the comparative periods. We have therefore provided the absolute revenue figures, which show the continued solid improvement. The distribution segment delivered sequential improvement both from the second half of the year and also in the second quarter.

In retail, which today is largely a UK business, the first quarter of 2021 was severely disrupted by pandemic restrictions, which explains the variation in growth rates. Absolute revenue grew versus the second half and was stable in the second quarter. This slide shows the regional revenue trend for distribution, where we are seeing strong demand in most of our markets.

In the chart, we've shown our performance across the regions compared to the same period in 2019 with all regions above par Asia, which was expected. The distribution segment saw revenue rise of 16% year-on-year in constant currency and 14% organically with a particularly strong performance in both the Americas and in Europe.

Starting with Asia, revenue declined 11% in light of unfavorable trading conditions in Hong Kong and Singapore. Performance across the rest of Asia was good. In Australasia, while our top line performance was weighed down by lower vehicle supply, this was somewhat offset by improved pricing. In Europe, revenue increased 34%, supported by continued market share gains and certain new model launches.

Americas and Africa revenue grew 47%, with a meaningful contribution from newly added distribution businesses. Organically, it grew 33%, driven by robust consumer demand. The comparative period was impacted by some pandemic-related disruptions.

Turning now to distribution operating profit and margins on Slide 11. The strong top line growth drove operating profit of GBP 172 million and an operating margin of 6.3%. In Asia, operating profit was stable versus the second half. Cost mitigation measures help support margins and our newly acquired commercial vehicle business in Guam and Micronesia contributed positively.

Profitability in Australia was supported by better pricing and growth of our after-sales business which was more robust. We also implemented strict cost control in light of lower vehicle supply. In Europe, the increase in operating profit followed the strong growth of revenue with market mix supporting margins.

Americas and Africa was driven by combination of organic and inorganic growth and an imbalance of supply and demand which supported margins. On Slide 12, we show retail revenue and operating profit from the first half of 2019 through the first half of 2022. Following a significant disposal program, including our remaining Russia business in quarter 2 this year, the retail segment now only includes the results of UK and Poland.

Revenue amounted to GBP 1.2 billion, and operating profit of GBP 30 million resulted in an operating margin of 2.6%. Demand for vehicles both new and used, remained strong which against the backdrop of constrained supply has continued to support vehicle margins. After-sales was solid delivering good growth throughout the period.

Turning now to Slide 13. We thought it would be helpful to share our thinking around current industry and market dynamics. In terms of supply, prior to the pandemic production expanded in line with global demand. In 2020, vehicle production started to be impacted by chip shortages, pandemic-related restrictions and a broader disruption to supply chains. This has created a gap of circa 26 million vehicles through to the end of 2022. And while the situation is improving, we are still below pre-pandemic levels and a shortfall in production since 2020 is not forecast to be filled before 2025.

Against this backdrop of constrained supply, demand has remained very strong and while there are some signs of weakening consumer confidence globally, we are still operating with record order books in many of our markets and have not seen any change to our cancellation rates to date. In terms of inflation, we're seeing high levels of inflation in vehicle cost, in shipping costs and we continue to pass this on in pricing.

While future levels of inflation are uncertain, we closely monitor and react to the different environments in our markets. In terms of Geo, we are very diversified, operating across more than 40 markets with different market dynamics. For UK retail, we expect margins will normalize towards 1.5% as the supply-demand balance changes. Asia, as you know, is at the low points and expected to gradually improve, which will help margins.

Finally and importantly, while market growth rates will vary year-to-year, our exposure to higher growth markets with low motorisation rates will support our growth over the medium and longer term. Fundamentally, we remain confident in the medium term outlook set out at our Capital Markets Day.

Turning now to Slide 14, with a more detailed review of the income statement. In aggregate, we delivered operating profit of GBP 204 million. Our net interest expense of GBP 20 million is above the prior year owing to higher financing cost. Adjusting items were relatively minimal in the period with gain on pensions, largely offset by amortization costs and acquisition-related expenditure. The underlying tax rate for the year was 26%, broadly aligned with the rate anticipated in the medium term, based on the current market mix. Our earnings per share before adjusting items was 35 pence.

Now moving on to Slide 15 and cash. Cash generation continued to be strong reflected of the high cash generative nature of our business model. As per the previous slide, the Group generated operating profit of GBP 204 million. During the period, we benefited from a net working capital inflow of GBP 73 million arising primarily as a result of lower net inventories. This follows an unusually low level of inventory financing at year-end. Net CapEx of GBP 16 million was broadly in line with the prior year.

Total free cash flow amounted to GBP 224 million driven primarily by an improvement in profitability and the change in working capital. Net acquisitions and disposals amounted to an outflow of GBP 110 million, largely related to our acquisitions in the Americas region and we've made a dividend payment of GBP 61 million. During the period, we bought back GBP 59 million worth of shares as part of last year's and this year's share buyback program and we've decided not to continue the remainder of our buyback program in light of the proposed acquisition of Derco.

The group's reporting period with a net cash position of GBP 439 million excluding lease liabilities which compares to GBP 379 million position at the end of December 2021. This brings me to the '22 outlook on Slide 16. As we look ahead to the full year, consumer demand remains robust while supply continues to improve, albeit slowly and while there remains some uncertainty from the pandemic, our diverse geographic footprint helps supports our overall performance. Based on performance to date and our expectation for the second half with an improved outlook for vehicle supply and robust demand, we continue to expect to deliver 2022 PBT between GBP 350 million and GBP 370 million at prevailing exchange rates.

And with that, let me hand back to Duncan.

Presenter Speech
Duncan Tait (Executives)

Thank you, Gijsbert, which brings us to the final section of today's presentation, our proposed acquisition of Derco. At our Capital Markets Day in November last year, we provided you with the details of our ambitious growth plan and launched our strategy, Accelerate. As a reminder, our strategy is focused on capturing 2 enormous growth opportunities in Distribution Excellence and Vehicle Lifecycle Services. Our ambition is supported by 3 key enablers culture and capabilities, digital, data and analytics and efficient scale operations and all this sits on a bedrock of responsible business.

The proposed acquisition of Derco is entirely consistent with our ambitions, that will enable us to capture a greater share of both global distribution and vehicle lifecycle value. Let's move to Slide 19. Let me first say how delighted I am to be able to announce Inchcape's proposed acquisition of Derco. We have long admired Derco and approached them several months ago to explore how together we could better support our OEMs in Latin America and accelerate profitable growth.

The deal will broaden our OEM footprint adding some fantastic brands and extends our market footprint, I'll come back to this shortly. Derco is LATAM's largest independent distributor. It is a family-founded and family-owned private business and a business we have long admired. In 2021, group revenue was GBP 2 billion. Over the last 12 months to the end of June, revenue has been GBP 2.2 billion. We have agreed to purchase it for an enterprise value of GBP 1.3 billion which implies a multiple of circa 6x based upon normalized margins and post-recurring synergies.

The deal is a mixture of cash and equity with the Del Rio family taking a 9.3% stake in Inchcape. We expect the transaction will deliver significant EPS accretion with more than 15% in year 1 and recurring synergies of at least GBP 40 million, will drive EPS accretion above 20%. The deal is subject to Inchcape shareholder approval and merger control.

This acquisition extends Inchcape's global leadership in automotive distribution and on this slide, we have shown how that combination aligns with our Accelerate strategy. The acquisition of Derco, Latin America's largest automotive distributor provides a step change in the scale of our distribution business, in line with our focus on distribution. Similarly, this transaction will give us a significantly expanded position in the attractive and fast growing markets of the Americas.

It reinforces our presence in Chile, Peru and Colombia and at scale presence in Bolivia. Both companies have complementary market footprints and OEM brand portfolios. During the extensive discussions we've had over many months, I've been struck by how culturally aligned Derco and Inchcape are. And I'm very pleased that the Del Rio family will take a significant shareholding in the business and will nominate a family member to join the Inchcape Board following completion.

We expect the deal will enhance growth prospects of Inchcape and deliver meaningful recurring synergies. Fundamentally, it will enable us to accelerate both of our growth pillars, distribution excellence and vehicle lifecycle services. Let me tell you more about Derco on Slide 22.

Like our operations in the Americas, Derco is headquartered in Santiago, in Chile and is the largest independent distributor of passenger cars by volume in Latin America. The business employees around 4,500 colleagues spanning across 4 markets of Chile, Peru, Colombia and Bolivia and has distribution relationships with 11 OEMs. Derco is the #1 by volume in Chile, Peru and Bolivia and #3 in Colombia.

In 2021, Derco distributed 150,000 new vehicles generating revenue of GBP 2 billion and operating profit of GBP 236 million. They have more than 300 locations, 30% of which they operate directly. Derco was a family-owned multi-brand automotive distributor founded by the Del Rio family in Chile in 1959 and today, they continue to own the business. Derco is led by an experienced management team with deep knowledge of their markets and a strong customer experience ethos.

Throughout our discussions, I've been struck by the close cultural and strategic alignment with Inchcape. Derco, like Inchcape is trusted by its OEM partners and has demonstrated an excellent track record of profitable top line growth and delivery for its OEMs. Over more than 60 years, it has grown to become the largest independent distributor by volume across all of Latin America.

Here, we show Derco's track record of delivery since 2014. On the left, you can see the evolution of Derco's aggregate market share across its 4 markets, which has grown from 12% in 2014 to 18% in 2021. This has been supported mainly by volume growth for its existing brands and also by the addition of new brands over that time period.

On the right, you can see the very long-term nature of their OEM relationships. Like Inchcape, with Suzuki approaching its sixth decade and Mazda now in its fifth decade, it also shows the wide range of brands that they distribute, which is complementary with our own brand footprint in the markets we have in common. Derco's strong and growing platform and deep OEM relationships positions it very well for the future.

Now, let me hand over to Gijsbert, who will provide the details of the transaction.

Presenter Speech
Gijsbert de Zoeten (Executives)

We believe that the transaction offers significant value to Inchcape shareholders due to enhanced growth prospects, meaningful opportunities for synergies and an attractive return profile. Firstly, we expect the transaction to enhance Inchcape's medium-term top line growth and to be margin accretive even before the benefit of synergies. Based on our projections, we expect the transaction will deliver EPS accretion of more than 15% in year 1 and more than 20% accretive from year 2.

We expect to generate recurring synergies of at least GBP 40 million and significant revenue synergies. Duncan will cover these shortly in more detail. There will be a one-off cost of up to GBP 60 million over 2 years to achieve these synergies. Furthermore, we expect the transaction will generate a return on invested capital in excess of Inchcape's group cost of capital in the first full year of completion and in excess of the project ROIC in the third full year following completion.

Let me run through the key terms of the transaction, starting with the purchase price. Inchcape has agreed to acquire Derco at an enterprise value of GBP 1.3 billion on a debt-free, cash-free basis. As you know, we maintain a disciplined approach to M&A. The headline EV/EBITDA multiple is 5.5 times based on 2021 profits pre any synergies. Assuming a normalized operating margin of 7%, this implies a circa 6x EV/EBITDA multiple post-recurring synergies which is at the lower end of multiple state in precedent transactions. The transaction will be financed by a combination of cash from our balance sheet of approximately GBP 400 million and we have agreed GBP 600 million of new debt facilities.

In addition, there is GBP 280 million of shares issued to the Del Rio family, representing 9.3% of the enlarged Group's share capital. The family will also have a seat on the Inchcape Board. Following the transaction, we expect Inchcape's leverage will increase to 0.6 times EBITDA, but this will reduce quickly given the highly cash generative nature of the business. As we always say, it takes 3 to tango in automotive distribution deals and we work closely with OEMs to secure their support for any distribution transaction.

Importantly, OEMs on both sides have expressed their support in the conversations we've already had. Looking ahead, we expect the transaction to close in late 2022 or the first quarter of 2023, subject to the necessary shareholder approvals and competition clearance. Let me show you how this transaction transforms Inchcape.

Firstly, it increases the scale of our group adding over GBP 2 billion of margin-accretive revenue. Secondly, it increases the contribution from the Americas. On a pro forma basis, the Americas and Africa region will account for 36% of group revenue compared to 19% previously. It will also increase the scale of our distribution business, which is core to our strategic focus. In 2021, distribution contributed circa 70% of Inchcape revenue. Following the transaction, we expect this will increase to 76% and significantly more on profits.

Back to you, Duncan.

Presenter Speech
Duncan Tait (Executives)

Thank you, Gijsbert, let me now run through the deal rationale in more depth. The acquisition will bring together, the 2 leading automotive distributors in Latin America, both recognized for distribution excellence underpinned by a track record of profitable growth. As we showed you at our recent webinar, the Americas business has increased from a GBP 160 million of revenue in 2016 to GBP 1.2 billion today and Derco will provide a further step change in the scale of our business in the region.

The combination significantly extends the enlarged business' leadership in Latin America, as you can see from the chart on the right, which puts the enlarged Inchcape significantly ahead of the other distributors in the region, with operations spanning 12 markets with a total of 30 OEM brand partners. The Americas region is a hugely attractive and fast growing region and there is significant potential for the market to grow further.

You will recall, Romeo presented a version of this slide at our Americas webinar a few weeks ago, but as a reminder, the region has attractive prospect in terms of GDP growth and significant upside for new vehicle sales, underpinned by low motorization rates. We expect motorization rates will increase substantially over the medium and longer term and this is one of the reasons we are very excited about the future of our business there.

Next, the transaction brings an attractive and complementary brand portfolio which deepens Inchcape's existing key OEM relationships and that's attractive first time distribution partnerships. In the Americas, Inchcape operates in 11 markets. This transaction extends our presence in Chile, Peru and Colombia and adds a highly attractive market, Bolivia, to our footprint. In the Americas, Inchcape distributes to 25 OEMs, the portfolio of brands that we have a highly complementary with Derco's.

The transaction provides an opportunity to deepen relationships with some of Inchcape's key OEMs such as Suzuki and will also drive growth with other brands, some of which are new to Inchcape. The addition of these brands within our market is exciting and will give us exposure across most of the brand types shown on the right. As we showed at the Americas webinar, this is key to driving efficiencies, which brings us to synergies.

The transaction is expected to deliver meaningful recurring synergies projected to be at least GBP 40 million per annum. We expect around 30% will be delivered within the first full year following completion, with significant majority achieved by the end of year 2. This slide sets out the 3 main buckets and some of the levers that will help us achieve the target. Efficiencies across the combined organization, efficiencies in operations and technology efficiencies.

Over the past few years, our Americas team have acquired several new businesses and we have developed a proven track record of integration, which will support us following this transaction. In addition, we also see significant opportunity for revenue synergies. We have not quantified the opportunity publicly at this stage, but this slide shows some examples of how the opportunities link to our Accelerate Strategy.

We see opportunities to enhance distribution excellence, for example, through network benefits, leveraging the expanded infrastructure, leveraging the best practices of both businesses, for example, by maximizing the penetration of finance and insurance products and leveraging Inchcape's digital and data capabilities.

Under our second pillar of Vehicle Lifecycle Services, we will leverage the significantly expanded scale to capture more of a vehicle's lifetime value. For example, using our bravoauto platform, we expect to be able to source good quality used cars and attract vehicle trade-ins by simplifying the buying process and professionalizing the industry.

I mentioned earlier, how struck I've been by the cultural alignment between Derco and Inchcape and I've been impressed by the shared ambition of both companies. Derco has over 60 years of experience operating as an automotive distributor since the Del Rio family began importing automotive vehicles into Chile in 1959. That business has a culture of innovation in its DNA, as exemplified by its Derco centers launched in 2003. Over time, it has also diversified its business by extending its presence to automotive parts and machinery rental space.

While Derco have remained a private family-owned company, over this period, it has been run by independent management and is unique in its ability to achieve high talent integration between business lines and geographies. Both companies have a customer-led approach, with a focus on providing a superior experience to customers and maintaining close relationships with its OEMs. The addition of Inchcape's global scale and digital and data analytics capabilities to Derco's existing strategy is expected to support the accelerated growth of the enlarged business in the Americas region.

Let's look ahead to the next steps. This is a Class 1 transaction and therefore conditional on Inchcape shareholder approval, as well as customary local merger control processes. We expect to publish the shareholder circular in September 2022, followed by the general meeting and shareholder vote in October. We expect that the completion will occur towards the end of 2022 or in the first quarter of 2023.To sum up, the transaction is totally aligned with our Accelerate strategy. It enhances our growth prospects by increasing Inchcape's exposure to higher growth markets and we use the scale of the enlarged business to capture a greater share of our vehicles lifetime value. Derco will be margin accretive for the Group and we are confident that our track record of integration will help support the achievement of the recurring synergies, which will further support margins.

The deal will extend the reach of Inchcape's distribution platform by broadening existing OEM relationships to new markets and add new OEMs and Bolivia, a new market. As a larger business, it will also better position Inchcape to continue to consolidate the global automotive distribution space. The transaction will deliver significant shareholder value and is expected to be more than 20% accretive to EPS from year 2. We expect to generate a return on invested capital in excess of project cost of capital in the third full financial year following completion. We are delighted to be extending Inchcape's leadership in automotive distribution.

Gijsbert and I are now ready to take your questions.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] So our first question comes from Andrew Nussey from Peel Hunt.

Question
Andrew Nussey (Analysts)

A couple of questions from me, please. First of all, you gave some useful insight in terms of new vehicle supply out to FY '25. I wonder if you could just give us some insights what the markets or the OEMs are thinking about in terms of inflation over that period in terms of new vehicles? And secondly on Derco, could you just expand on how the business has grown, has it been largely organic, have they done their own M&A or have they benefited from outsourcing of OEM relationships? And in terms of Bolivia, which looks like a potentially interesting new market for Inchcape if the deal completes, who currently distributes your core OEM brands in that market, I think, particularly Daimler and what have you? And lastly, just you mentioned very briefly, the rental model within Derco. Could you just explain what that is and how significant it is in terms of the overall business please?

Answer
Duncan Tait (Executives)

Andrew, thanks very much for the question. So I'll take these questions and then Gijsbert can add if necessary. Look, in terms of OEM inflation, I think we said publicly before, so far we've seen OEM inflation on average across the group of around 10% over the last year. We know OEMs are continuing to see some inflationary pressure in their supply chains for all sorts of reasons, of which we, I think everyone on the call would know about.

In terms of how we see those going forward, I think it's difficult to say. What I'd say is, where we're seeing inflation from OEMs or employee cost or others, we are actively passing those on to the markets within which we operate in terms of new car sales. So difficult to say much more than that Andrew.

In terms Derco, okay, it's worth going back to the topic before I answer your question, if that's okay? Look, as we said at the Capital Markets Day in 2021, the automotive world is going through substantial change. We've built a leading distribution platform and also what we said at the Capital Markets Day is the market we face into and that 17 million vehicles is highly fragmented and OEMs want strong highly capable partners to deliver distribution services for them in those markets.

Now, as you know, we operate in really attractive markets around the world, the Americas is no different, with low motorization rates and high GDP growth in the medium term, which means we'll get great organic growth in those markets. Now, it's important to say in terms of Derco and I promise I'll come to answer your question in a moment.

During our strategy review, we looked at 1,150 distribution partners in those markets we target, Derco stood out as a unique asset and we proactively contacted Derco over 1 year ago. So Gijsbert and I were talking to the family over 1 year ago and have met them on a number of occasions. And our engagement with them and the people that run their business and the deep due diligence we've done has reinforced what a great asset Derco is.

And I'm super excited what this does for OEMs, what it does for people, what it does for customers and of course what it will do for Inchcape shareholders. Finally, I'd say we have bought the business at a reasonable price when this deal completes and I'm really pleased that the Derco, the Del Rio family will take a 9.3% stake in Inchcape and I think that shows their confidence in the global Inchcape's future.

Now in terms of how they've grown, I think their growth rate has been pretty impressive if you look at the 2014 through to recent times growth rates with having an aggregate share of 18%. They've done it in 2 ways. Yes, they've added more distribution partners into more markets, you'll be familiar with the way we operate, it's one of the reasons the 2 businesses go quite well together. So they've added -- they've grown with our existing OEMs. They've added new OEMs and then the way they run their business, their distribution model is very, very customer-centric, it plays very well to our DXP and DAP investments. And we think by adding our DAP and DXP into Derco, we can get the both to grow faster, so they're impressive and running a really good shop, adding new OEM partners and getting growth.

And you know, an 18% market share, aggregates across those from my perspective is also exciting and where we might see revenue synergies. I need to be very clear, revenue synergies are not in our acquisition case, but I'm excited about them if you think about having an 18% market share plus Inchcape's market share, means that we can build a very meaningful vehicle lifecycle services business and bravoauto for example.

Now in terms of your question on who distributes some of the Inchcape partner brands in Bolivia, my understanding is that with the company used to be called Bergé and now it's called Astara. So it may or may not be difficult to add some of those partners into Bolivia, but fundamentally, Bolivia is a really exciting addition to the group from a geographic perspective, long-term solid GDP growth, low motorization rate, so I think we're going to see exciting growth coming from Bolivia.

Final point on rental, we want to include that for completeness, but the rental business isn't a massive part of their operations. We're interested in understanding those business models, Andrew, because of the far future of automotive and mobility when people might consume vehicles via subscription, it's an opportunity for Inchcape to understand more about how those models work around the world, we have some experiments up and running in Asia Pacific accordingly and Inchcape will learn from what we see in different markets around the world. But fundamentally, super excited about bringing a world-class business inside Inchcape and that is Derco joining in the Inchcape family.

Question and Answer Operator Message
Operator (Operator)

So the next question comes from Georgios Pilakoutas from Numis.

Question
Georgios Pilakoutas (Analysts)

I've got a few, if that's okay, and I might kick off with a couple more strategic and then a couple more on net finance side for Gijsbert, if that's okay. And on the strategic ones, the first one, can you just give a sense on how [ Sunita ] that kind of penetration on kind of non-new car incomes around kind of used car penetration and finance and used penetration and how that benchmarks to Inchcape in LatAm?

Then the second one is you've spoken about 18% aggregate market share. What do you think adding Inchcape -- what would that will take you to in terms of aggregate market share in those markets? Do you then think that there is a correlation between market share and margins? And then finally, I'd like to push you a little bit more on some of the revenue synergies, and let's say you were getting to approaching 30% market share of that new car market. It's quite a unique footprint in that auto ecosystem.

Just interested to understand how this changes the opportunity compared to other markets where you're in where you're only representing a smaller proportion of brands, particularly kind of the flow of used cars and perhaps what opportunity could bravoauto that creates. And then whether this is changing your thinking more broadly going forward about the importance of having multiple brands in certain markets versus being kind of, I guess, more thinly spread across more markets.

Answer
Duncan Tait (Executives)

So, Georgios, let me take those one by one and Gijsbert maybe give a view on scale and multiple brands. So just in terms of the used opportunity, or VLS opportunity in Latin America. So I think you know where we are is earlier than we had planned because we like the way the bravoauto model is playing out in Europe. We are launching bravoauto, yes, several months earlier in Colombia this year. As Romeo said to us on the Americas teaching that we had just a few weeks ago.

Now we are -- I think the used car market in those -- in Latin America is nascent, in many cases it's still in the consumer-to-consumer phase. What we know that as the market matures and professionalizes you get the business to consumer used car market starting and that's where we are now in many of those markets. So the penetration that Derco has and the penetration that Inchcape has is still relatively low from a used car perspective. We think that set the change.

And to your point, if you have market shares of -- Derco is at about 18% and if you look at our market share maybe you could use a number of about 5%. Think about the amount of customer data that gives us. Think about the amount of vehicle data that gives us and it plays absolutely into us working with consumers and customers for their lifetime, and working with vehicles to exploit the lifetime profitability. So I'm genuinely excited about that.

Also, then think about with a further F&I penetration into those marketplaces more used vehicles coming back to us, it gives Inchcape the opportunity, which I'm super, super excited about building out that VLS bravoauto market. Now, we'll do it step by step and we'll do it cautiously as Inchcape operates in everything we do. We like the way the bravoauto model is playing out. The team in Latin America is following the same playbook with some local nuances. But yes, I'm super excited about what that's going to do for us.

Now, in terms of having markets, Georgios, which are then greater market share and multi-OEM compared to some of the markets we have around the world. Look, I think that gives us the opportunity to leverage more revenue across our overhead base. I see opportunities for optimizing real estate and others. So I also think there's an opportunity. Now, will we do this in all of our markets, I think, look, we've been really clear, right, which is we have a 1% market share of the 17 million vehicle opportunity.

The logical conclusion of that means that we, yes, grow with our existing OEM partners, and we're proud of those relationships. But there are also new OEM partners for us to work with emerging groups from China, but also existing Western and Japanese OEMs that we think we can build relationships with to increase market share in all of the markets Inchcape operates in.

Gijsbert, do you want to add some? So yes, I think the model in Latin America could be interesting, Georgios, for Inchcape Group. Georgios, if I answered your questions.

Question
Georgios Pilakoutas (Analysts)

Yes. That's perfect. And then I've got 3 for Gijsbert, if that's okay.

Answer
Duncan Tait (Executives)

Even better.

Question
Georgios Pilakoutas (Analysts)

So the first one is, the margin in Americas and Africa is quite a bit above where it was kind of in 2019. So just interested to hear if you can give a bit more color on what some of the moving parts are there, and I guess, how sustainable that is? And then a couple on the balance sheet. Firstly, inventory still -- it feels kind of [indiscernible] kind of still on the low side. Just wondering what kind of outflow one would expect to get to a more normalized level from kind of an absolute cash position. And then secondly is just how to think about leverage from here. 0.6x, I appreciate that will be paid down fairly quickly, but how do you think about deals in the meantime?

Answer
Gijsbert de Zoeten (Executives)

So let's -- perhaps -- so start with the order that you suggested, right. So -- and perhaps let's just talk more broadly about margins. Also on Derco, I think it's important to sort of understand. It's actually quite hard to look at margins of '19, '20 and '21. In '19, the Latin American region was impacted by, let's say, political upheaval across the continent in quarter 4 and that's impacted top line in margins for both Derco and also for Inchcape. So it's not a really comparable number to start with.

And then of course in 2020, we saw the pandemic hitting. And in '21, I think there's a different dynamic. In Derco, they really benefited from good supply. There is a different OEM portfolio. There's notably more Chinese brands where there was a lot more supply, good pricing, careful cost management led to really good results and elevated margins in 2021. If you look at Inchcape, in our brands, the supply situation is more constrained. And therefore, we didn't really see that spike in '21 specifically, but we have seen an increase in margins as you were sort of referencing in 2022.

Now, importantly, in terms of valuation, we've based our valuation of Derco on the normalized margins over sort of 7%. And that in part answers your question on how to think about margins, a 7% margin, and I should stress this is before synergies is what we have seen is, what we think is a sustainable margin, and this is what we -- over time, I should stress, we'll get to. So if you look at current trading of Derco, we've seen sustained momentum, we've provided you with the last 12 months number. And we see margins that are a bit lower than '21, but are well above still the sort of 7% normalized range. So I think that is how to think about margin in terms of Inchcape, and in terms of this transaction.

In terms of down-to-earth balance sheet, Inchcape today, inventory. I mean, clearly, we have not yet seen a build of inventory given the supply situation. If you look at the cash inflow from full year to the half, we had relatively low levels of inventory financing at year-end. It's now a bit higher than normal. The average inventory finance is around 85%. And I think that's important because that also mitigates the impact of cash outflows as we see inventory going up. So we do expect inventory to go up over time, but really we expect that to go sort of gradually.

Now the important question of leverage, I think you've seen from the deal how it's done, GBP 1.3 billion of EV financed through GBP 400 million of cash on our own balance sheet, GBP 600 million new financing, all secured, lots of flexibility, 2 years commitments from completion. So that's all very good. And then GBP 300 million in terms of -- I'm talking broad numbers here, participation of the Derco, Del Rio family in terms of shares. And that explains why even this very large transaction only gets us to 0.6x EBITDA from the start. And we do expect that to come down quite rapidly because the cash generative model [ and distribution ] of Inchcape is similar in Derco.

So -- and this all implies that in terms of [ other ] M&A and let's say -- let's call a bolt-on M&A, we can continue in parallel. And hopefully, we will continue in parallel to this Derco transaction. We have a rich [ tunnel ] as we said many times, and we look in all parts of the world, in Asia, in Europe, in Africa. So I think there is space for bolt-on deals as of now and continuing. And clearly, over time, once the transaction has completed and we have generated cash again with a lower leverage we have an enormous flexibility, but it's a bit further out.

In terms of how we think about leverage, hasn't changed. We are a conservatively financed company. It's important in these times, you see it even from this transaction. So the max 1x EBITDA that we have out there is unchanged as is, by the way, the rest of our capital allocation policy, the 40% dividends and clearly a critical eye in what we pay in terms of M&A.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] So we have the next question from James Wheatcroft from Jefferies.

Question
James Wheatcroft (Analysts)

Just a couple of follow-ups really. First of all, maybe just thinking around sort of timing and competition authority stuff. Is there anything we should be thinking about there. In terms of around the synergies, you've obviously given us the hard number of the [ customers at GBP 40 million ]? And I can see the sort of [ GBP 60 million to gain those GBP 40 million ], perhaps, it is an indication for the sort of the revenue synergy opportunity. Perhaps you could talk about a little bit more widely around those revenue synergies and your confidence in them? And then lastly, just in terms of sort of management and integration, who's going to run the business, how is that all going to be structured going forward, please?

Answer
Duncan Tait (Executives)

So maybe I cover timing and competition, and I'll let Gijsbert lead off on synergies. So we've given a broad timing that we think this will be completed latest Q1 2023. We have been very aware of course of competition authority clearance having bought a number of businesses in Latin America over the last 6 or 7 years. And I'd remind us all that Inchcape has been operating in Latin America since 1993. So we're very experienced at all this stuff. Our internal and external advice in terms of competition authorities is that we are confident we will gain approval and we'll gain approval in the timeline that we have set out in our presentation this morning, so I think Q1 '23.

Gijsbert, could you take us through synergies [indiscernible].

Answer
Gijsbert de Zoeten (Executives)

So perhaps if you think about synergies, it's important, just to reemphasize, we really understand this asset. We spent quite a long time in getting to the transaction and it's been a private transaction. So it's not been an auction. We've had very good access to the people that manage this business and together with them, management of all countries. So that's for starters. I think the other context is, it's clearly a Class 1 transaction. So the level of scrutiny put on any number and certainly also on synergies. And in terms of comfort that the Board would require ultimately for the circular means that, that GBP 40 million recurring synergies number has had sign-off by auditors for a comfort. So I'd characterize the GBP 40 million as a prudent number. And in terms of phasing, we expect 30% to be realized in year 1, and we expect the significant majority to be realized within 2 years.

Now, for revenue synergies we are -- we've gone through a similar exercise. And we have -- we've done a detailed assessment as well, but we haven't publicly quantified it in terms of, let's say, the cost to achieve. As you say, those are both for the recurring or cost-related synergies. And as you just stress again, that's the GBP 40 million recurring synergies are all cost-related, but they are also to enable the revenue synergies. That's why maybe the number that may strike you as a big number versus the GBP 40 million should actually be seen in the overall context. So the revenue changes is a more -- is a meaningful number. And Duncan, would you give a bit more on that.

Answer
Duncan Tait (Executives)

James, let me just add to what Gijsbert said. So we have taken a very deep look at Derco. And in fact, Gijsbert and I have spent a lot of time in Latin America over the last year as a key members of our leadership team, such as Mark Dearnley from a digital and data perspective and he's run the slide rule across all of their IT and digital operations too. Yes, if you take a step back, our team in the Americas is really strong. It's exemplified by Romeo Lacerda, who is our leader for our Latin America business. As we said, the other week, when he did the Americas teaching with me, and he led most of it, as you know. He's operated in Latin America for over 20 years. He's worked with Western companies like Mondelez. He is experienced in small, medium and large M&A and integration and handily speaks Spanish and is based in Santiago in Chile. And I've got a high degree of confidence in Romeo.

And the other point I've mentioned is, if you think about all those acquisitions we've gone through over the last few years, we've retained 90% of the talent in the organization that have come to Inchcape. So I think we're pretty good at this in terms of synergies. Gijsbert also mentioned, we've spent a lot of time with them and seen their management team. I'd say the management team of Derco is experienced and is genuinely talented and the average experience in automotive is 15 years. The other thing I'd say about that leadership team having spent a lot of time with them, is they're really excited to be joining a global leader in Inchcape, because they can see the platform that we've built.

Now to the topic of synergies, as Gijsbert said, it's been aided by the fact that it's a private business. We've been able to take a deep look inside, inside Derco during our due diligence. The synergies are practical, they're prudent, they're cost-related and they're in markets frankly that we know very, very well, if you think about, Colombia, Peru and Chile.

Now the revenue synergies will come on top, and I'll talk about those in a minute. But let's not forget Inchcape is a very different group, when we were when we completed the last major acquisitions in Latin America. The difference is, since then, #1, we have 2 very capable digital delivery centers with now way over 700 people across those centers, one in Bogota in Colombia, and the other one in the Philippines.

It will be those teams that deploy DXP and DAP into the Derco business and we'll be then that deliver the IT and digital synergies we expect. We've also, since we completed those acquisitions in Latin America, built out our finance shared services centers, which we leverage globally. And clearly, they'll play a big part in how we integrate Derco into Inchcape.

One last topic before I touch on revenue synergies. I mentioned Romeo Lacerda before. The reason I mentioned him and say we have a high degree of confidence in Romeo, is he is the proposed CEO for the new Latin American business, which will be Inchcape plus Derco. And that has been in the open and discussed with the family for a long time. I think his culture and his way of operating will really suit the teams.

Now to the topic of revenue synergies. Well, let's go back to accelerate, 2 growth drivers for us, one around distribution excellence, the other around the vehicle life cycle services. In distribution excellence, we see the opportunity to leverage a broader network to give our OEMs more exposure to the geographies that we operate in. This further opportunity is to enhance F&I penetration, which is additive also for our VLS business, but will also help new car sales. And we will absolutely use DXP and DAP in the way we've been talking about over the last 18 months to enhance performance of the Group and growth.

Now to the final point around VLS. I think I mentioned it quite a bit before to Andrew's comments and to Georgios' comments also. I think this is a big opportunity for us. None of this is baked in. So when you have 20-plus percent market share and you have -- you then have an enormous amount of data about customers and about vehicles and step by step, we will use that to build out our VLS business and particularly bravoauto in the Americas.

James, that was a long answer of long set of answers. I hope that is helpful.

Question and Answer Operator Message
Operator (Operator)

So I see the next question from Michael Allen from Zeus Capital.

Question
Michael Allen (Analysts)

Couple from me, if I may. Just really, I mean, clearly very exciting in terms of what you're doing and what you've done in the LatAm market area. But just given the range of the OEM relationships there, I was just wondering, is it potential for them to encourage you to do what you've done in LatAm in other regions of the world? And is that kind of part -- potentially part of the pipeline going forward. So to just really explore it there. And also, are you done in LatAm now? Or is there still potential for bolt-ons, et cetera in that region where you're clearly well ahead of the competition.

And the second one maybe for Gijsbert, is just from a cost of capital point of view when assessing this acquisition, should we be thinking of this on [ local rates or group rates ]? And what's the difference between the 2 as well, if I may?

Answer
Duncan Tait (Executives)

So look, I'll take the first one, and I think you've already said the second one is heading to Gijsbert. So let's stick with the way you suggested it. So, Gijsbert, often says that it takes 3 to tango in these relationships and these deals. And it is true here also. So we have been engaged with our own OEMs for some time, discussing the possibility of this deal to make sure they were supported. I can confirm they're supportive, both European OEMs and our Japanese OEMs and I don't think it's a big surprise that Gijsbert and I were in Japan during April to have those conversations face-to-face.

And of course, we have new OEMs from Derco, and Derco have been proactively reaching out to their OEMs, some of which enjoined, of course, over the last few months to, including the Chinese OEMs that they represent. Now what would I say? I'd say the OEMs -- we followed up by the way, with the Derco OEM since. What would I say, I'd say the OEMs are supportive of what we are doing. We've engaged with them earlier, and I would say much earlier than you normally do in a deal like this.

And then in terms of expansion to other geographies, look, I think you can see some of the commentary that I've made around Geely would also play into this. We're really proud of what we've done for Geely in Chile, where we've gone from the previous distributors selling just 400 vehicles a year.

And in Chile, this year, we will sell at least 4,000 and you never know the team might deliver 5,000 vehicles sales for Geely this year. Based upon that performance and recognizing the Inchcape distribution platform that we've built, we are actively talking to them about markets in the Americas.

In fact, Romeo mentioned that we've just agreed to have Ecuador as a new market for Geely, and we're talking to them about Africa, or about Europe and about Asia Pacific. I think in that story is how we can work with the new OEM partners to Inchcape to be able to use that distribution platform in those smaller more complex markets that we specialize in.

So I just think this is a big opportunity. But as ever, we have to perform. And Inchcape delivers as one of our core values to our OEM partners and all of our other stakeholders. We have to deliver and I'm convinced the team will.

Then to your point about are we done in Latin America or not. Look, I think the team is going to have a lot on over the coming months post the deal completing to make sure we successfully integrate Derco into Inchcape. Now clearly, if you go further up Latin America and at the Central America, we don't have the type of market share that the combined Inchcape and Derco will have. So over the medium term, I think there is more opportunities for us to expand our business and add new OEMs. But we want to do this in a step-by-step fashion, because the most important thing is to successfully deliver on the integration of Derco and delivering no synergy benefits. That said, as Gijsbert mentioned, our pipeline, and we've said this on a number of calls now, our pipeline in the other distribution regions is strong under a deals of a number of sizes, but I think you should think of us doing more bolt-on acquisitions in Europe, Asia-Pacific and Africa.

So I hope that's helpful, and I'll hand over to Gijsbert for the second question.

Answer
Gijsbert de Zoeten (Executives)

So, Mike, you asked about a WACC rate, in fact. So just to confirm, we -- every project, we -- I mean, larger project, for certain, we calculate specific project WACC in a lot of detail, and we've certainly done this in this transaction. Our corporate WACC is 8.5% as published. And what I would say about the project WACC of this transaction, it is in the low double digits range. And in terms of how it stacks up against that, we will reach corporate WACC in year 1 and we will reach project WACC in year 3 in terms of this transaction.

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] Our next question is from Paul Rossington, HSBC.

Question
Paul Rossington (Analysts)

Well done on the numbers today and congratulations on the deal. Just one very quick follow-up for me. It's more on current trading, or sorry, not specific on current trading, but you talked previously about your order books being quite robust. And you also said the cancellation rates have not moved. Are you able to give a bit more granular detail about how -- what kind of forward visibility those order books actually give you at group level? Is it 6 months, is it 12 months, is it very significantly on a market-by-market basis. And that's my only question.

Answer
Duncan Tait (Executives)

So let me give you some sense about how our order books look. I would say, in most of our markets, our order books are at record highs. They are not particularly growing anymore. They are flat in most of our markets, which is a positive for us. In some markets, we have stopped taking orders and customers for certain models because we just not -- we couldn't give a delivery date with any sense of openness and sincerity in that conversation. So we've stopped taking orders for certain vehicles. But order books remain really strong and that's a topic which would go right around the world.

What might be more useful for you is if I talk to you about what traffic we're seeing coming into our websites and what level of leads we're generating as an indication of how the business is looking a little bit. So first thing I'd say you know we've deployed DXP into our markets right around the world, and it is DXP that's giving us the data around how consumers are behaving. So the first thing up, I'll break it out by region. In the Americas, we are seeing year-over-year increases in traffic to DXP, and we're seeing year-over-year increases in leads.

In Europe, traffic is down somewhat. You could see that immediately after the invasion of Ukraine, but leads are up. So traffic down leads up in Europe, and we've been very much focused on engaged traffic. So I'm not that worried that we're seeing traffic volumes drop because actually, it's leads that we really want. And then in Asia Pacific, we are seeing traffic down leads down. Just in terms of -- give you more color on APAC, why might that be? Our Asia figures are very much skewed by Hong Kong and Singapore.

You know what's happened to Hong Kong because of COVID lockdowns, lower levels of mobility, et cetera. I think all businesses in Hong Kong are seeing lower levels of traffic, though we are seeing that improve. And Singapore is at record low levels of TIV, which -- and I think you know the Singapore story. So that's skewing Asia. But if you look at those smaller markets that we operate in, Guam, Saipan, Brunei, Thailand, et cetera, we are seeing increased leads and increased traffic to those.

And then finally, Australia. Australia is unique for us because it's pretty much single OEM and our supply from that OEM is relatively low, which is we think affecting consumers configuring vehicles because the lead time now is so long. So Paul, by and large, all the books at record high is pretty much static and DXP is helping us to see really what our consumers are doing, and we're pretty buoyed by what we're seeing in terms of leads coming out of DXP for new vehicles. Hope that helps, Paul.

Question
Paul Rossington (Analysts)

Yes, it does actually. And one of the follow-up just checking my list here. When you say the GBP 350 million to GBP 370 million full year PBT guidance is based on constant -- sorry, current FX rates. What is your Japanese yen, Aussie dollar assumption just if you're allowed to disclose that for reference.

Answer
Duncan Tait (Executives)

Well, we're not, but I will let Gijsbert have the question.

Answer
Gijsbert de Zoeten (Executives)

So look, I mean, it's 2 entirely different questions. So they are not linked. So I think we are confident about our GBP 350 million, GBP 370 million range, and the point made on foreign exchange rates has all to do with translational foreign exchange rates. And in that range is an assumption based on current rates, that there is about a GBP 10 million tailwind from translation i.e. the pound weakening versus other currencies around the Group. So that's the way we manage our business. So -- which is the second topic of the Aussie dollar yen, we manage the transactional ForEx risk in all our markets as part of our day-to-day. And you wouldn't, by the way survive for 1 minute, if you would do it differently in Latin America and we are very capable of doing it, but it is clearly something which we know how to do and is embedded in the business.

In Australia, it was -- it has been -- it is now a long time ago, and I don't mind you reminding me, but I do want to say that it's different now. We were going a little bit with the flow of Aussie dollar yen. And what's Duncan and I have been implementing since we sort of took the helm is that we need to look at margins, pricing and costing like in other markets. So the fact that we source largely from Japan for Subaru, which is the main OEM is just an input cost. So you need to take that into account. And if your pricing horizon needs to be adjusted to your hedging period. So we have a much more integral management of margins in Australia, since I'd say the last 18 months or so 2 years. And that's the way we look at it. So if the Aussie dollar yen changes in the short term that has no impact because you're hedged because you link it to your pricing.

And to your very specific question, again, they're not related, but there is no impact of Aussie dollar yen on the GBP 350 million, GBP 370 million range other than the translation of the Australian dollar to the pound. So that's a translation of the results of the Australian business in Australian dollars and how that will translate into the pound. The transactional forex across the group is managed on a country-by-country basis.

Question and Answer Operator Message
Operator (Operator)

There are no further questions at this time. I will now hand over to Inchcape's CEO, Duncan Tait for closing remarks.

Answer
Duncan Tait (Executives)

Well, thank you very much for joining today. A strong set of first half results in a very, very exciting acquisition in Derco. Thank you very much for joining. We appreciate the questions and the engagement. As ever, the recording of this session will be on the Investor Relations website later today. And if you have any further questions, Raghav is your man. Thank you. Bye-bye.

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