INCHCAPE PLC

INCH
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Transcript : Inchcape plc, Q3 2022 Sales/ Trading Statement Call, Oct 27, 2022

27/10/2022 | 09:30

Presentation Operator Message
Operator (Operator)

Good morning, all, and welcome to Inchcape's Q3 2022 Trading Update Conference Call. [Operator Instructions] I will now hand over to the Group Chief Executive of Inchcape, Duncan Tait, to open the presentation. Duncan, please go ahead.

Presenter Speech
Duncan Tait (Executives)

Good morning, everyone, and thank you for joining us. As usual, I am 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 more detail. We'll then be happy to take your questions.

As mentioned in this morning's announcement, the group continued to perform strongly in Q3. In the quarter, we delivered organic revenue growth of 16% versus the same period last year, with double-digit growth in both distribution and retail and growth across all our regions. On top of this, our recent distribution acquisitions contributed nicely with 4% of additional growth. Having launched the Accelerate strategy a year ago, I am delighted with the substantial progress the group has made so far. We have extended our global leadership in automotive distribution, leveraging our digital and data investments and continue to move forward with our ambition to capture more of the vehicles' lifetime value with bravoauto, our digital-first, multi-brand, used car platform.

During the quarter, we have further expanded our OEM footprint with exciting electric vehicle brands, adding Great Wall's ORA in Hong Kong and Macau, and BYD in Belgium and Luxembourg. This expansion is a great example of our Accelerate strategy in action, delivering on the group's growth ambitions.

As regards our proposed acquisition of Derco, the process is progressing well, and we expect the transaction will complete at the end of 2022 or in Q1 2023, subject to necessary shareholder approvals and merger control clearance.

Let me now hand over to Gijsbert who will run through the regions.

Presenter Speech
Gijsbert de Zoeten (Executives)

Thank you, Duncan, and good morning, everyone. In Q3, the group generated GBP 2.1 billion of revenue. On an organic basis, revenue increased by 16% versus the same period last year. M&A added 4% of revenue, while currency also had a favorable 4% impact. As such, on a reported basis, revenue increased by 24% year-over-year.

Looking at our 2 segments, in distribution, revenue was supported by strong growth in both new and used vehicles and in aftermarket. We posted growth in all regions with revenue in Asia and Australasia, reaching its highest quarterly level since early 2021 and the Americas posting another record quarter. In retail, vehicles revenue grew with pricing and growth of used vehicle volume offsetting new vehicle supply constraints. Aftersales performance continues to be solid.

Let me provide some further detail. Distribution, overall, delivered 18% higher organic sales versus the prior year. Starting with Asia and Hong Kong, we saw sequential top line improvement across all revenue streams, new, used and aftersales. While in Singapore, revenue was stable. Our other markets in Asia continue to see strong trend. In Australasia, we returned to growth, supported by new car volumes and higher used vehicles and aftermarket revenue.

In Europe, we saw continued growth in both vehicles and aftermarket, underpinned by volume growth in both new and used vehicles. The Americas region continued strong performance across all major markets, including Chile, Colombia, Costa Rica and Peru, driven by consumer demand. Our most recent acquisitions, Ditec and Simpson Motors are both performing well. And finally, our operations in Africa continued to perform well.

Moving to Retail. Revenue grew 11% year-over-year on an organic basis. While supply of new vehicles was constrained, pricing continued to be robust. In used vehicles, our rollout of bravoauto is supporting performance and enabled us to deliver good volume growth. Aftersales performance continued to be solid.

So overall, a strong Q3, which supports our upgraded outlook for 2022. In light of the strong performance to date and our expectation for the fourth quarter, we now expect to deliver full year '22 adjusted PBT from continuing operations towards the top end or slightly above the previously guided range between GBP 350 million to GBP 370 million at prevailing exchange rates.

Duncan?

Presenter Speech
Duncan Tait (Executives)

Thank you, Gijsbert. Before we open up for questions, I'd like to remind you a number of factors impacting our industry and markets. In terms of supply, as a result of the pandemic and broader disruption to supply chains, the automotive industry has underproduced circa 26 million vehicles over the past 3 years relative to history. And while the supply situation is gradually improving, we are still below pre-pandemic levels, and the shortfall in production is not forecast to be filled before 2025. Against this backdrop of constrained supply, demand has remained very strong. While there are some signs of weakening consumer confidence, we are still operating with record order books in many of our markets and have not yet seen any change to cancellation rates to date.

In terms of inflation, it is important to note that rates vary across our markets. And where we are seeing high levels of inflation, in vehicle and shipping costs, we continue to pass this all in pricing. We are closely monitoring inflation in our different markets, and we'll react quickly to changes in rates. And in terms of our geographic footprint, we are very diversified, operating across more than 40 markets, each with its own dynamics. While growth rates will vary year-to-year, our exposure to higher growth markets with low motorization rates will support our growth over the medium and longer term.

Fundamentally, the combination of our globally diversified portfolio and the progress we are making with our strategic growth pillars, distribution excellence and Vehicle Lifecycle Services gives us confidence about the group's future prospects. Inchcape is well positioned to deliver sustainable, long-term value to a powerful combination of organic growth, market consolidation and cash generation. Gijsbert and I are now happy to take your questions.

Question and Answer Operator Message
Operator (Operator)

And the first question is coming from Andrew Nussey from Peel Hunt.

Question
Andrew Nussey (Analysts)

Okay. A few questions from me, please. First of all, I was just wondering if you could share or able to share any insights on the Derco performance since you announced the acquisition back -- or the proposed acquisition back in July. Obviously, conscious that your own business has performed particularly well in South America. That's sort of the first one.

Secondly, just in terms of ORA and BYD, just can you give us any feel for the level of investments in those 2 -- or the additions of those new brands? And thirdly, just in terms of Hong Kong, what are the guys on the ground saying in terms of potential demand as border restrictions hopefully ease in the short/medium term?

Answer
Duncan Tait (Executives)

Thanks very much for the questions. Much appreciated. So I think those first 3 are probably aimed in my direction and Gijsbert will add anything as necessary. So in terms of Derco, we can't see inside Derco's performance because of competition regulation, because of the size of the transaction. So we don't have inside information as to how they're performing. But if we look at externally available data in terms of market share performance, they've built up market share over the last few years from -- I think we said in the RNS in July from about 14 points to north of 20% aggregate across their markets over the last few years. And then from the external data that we can see, they are maintaining market share, which we think is positive from our side. And then, of course, you referenced our business.

And our business, as we've said this morning, continues to perform well and performs well in the countries where Derco is operating also. So I can't say much more about it because, frankly, I don't know and don't have the information, but they're maintaining market share, and we know where the Inchcape business is performing.

In terms of the new deals that we have with ORA and BYD in Hong Kong, Macau and in BeLux, so they're a little bit like what we did with Geely when we opened up Geely earlier this year in Chile, which is the -- there's no -- we have not to buy a business, so there's no goodwill exchanged. And there's some working capital to set those businesses up, and there's some people we need to recruit, but think of that being pretty small, and we think the volumes will ramp up relatively quickly.

One thing we haven't made it on in our announcement today is further expansion with Geely in Latin America, so we'll open Ecuador in the next few months. I was in Santiago just a few weeks ago to meet GE's overseas -- Head of Overseas Sales. We opened up the new Geely facility in Santiago, and we were discussing further expansion together. So that -- what we've seen in -- with Geely in Santiago, we continue to have a good relationship. We're going to expand that business.

Then in terms of Hong Kong, so just to repeat I guess, Hong Kong and Singapore, in case we go there at some point on the call, remain pretty much at historic low levels of PBT generation for us. We've seen this tailwinds for the group. We've seen a little bit better performance over the last few weeks and months compared to before as the situation stabilizes and the border into Hong Kong is open. So we are seeing more economic activity. We're seeing more footfall into that market. So I'm not going to -- I'm not saying it's going to bounce back, but we do think it will steadily improve.

Then of course, what we are looking for is the border with Mainland China to open up. Still no sign of that, if I'm honest. And I think, frankly, if you look at the fact that Hong Kong has opened its border, I think it's more likely that order with China will remain closed for an extended period because of the Chinese government's worry about COVID going across the border. The fundamental of that business is improving. We'll put order in place, which is a tailwind for us. And we've opened up a used car facility also in Hong Kong, which we think will be a tailwind for that business. But no big news in Hong Kong yet.

Question and Answer Operator Message
Operator (Operator)

And our next question is coming from Georgios Pilakoutas from Numis.

Question
Georgios Pilakoutas (Analysts)

First one, it sounds like used and aftersales is performing well. I'm just wondering if you could talk a little bit more about what is driving that? How much of that is market versus some of the VLS initiatives?

And second one, I guess, with aftersales in particular being strong, just wondering if you could provide any color on the margin in the third quarter and perhaps you've referenced to the first half? And then if you could talk on the M&A pipeline and kind of -- I guess we've had the 2 new EV brands. Maybe if you could add a little bit of color of how meaningful do you expect those brands to be?

We can look at Geely's definitely positively surprised at how quickly that has ramped up. Is that potential for new EV partnerships to be similar? And looking forwards, is it more of these types of goodwill? Or are you kind of still seeing healthy M&A pipeline? If you can provide any color there, that would be great.

Answer
Duncan Tait (Executives)

Very good. Thanks very much. So I'll do 1 and 3, and then I suspect we'll have a short answer on [indiscernible] in terms of margins. So let's try to cover 1 and 3 first and hand over to Gijsbert. So you are right. We are seeing strong performance in aftersales and our used portfolio continues to grow. Frankly, it's a combination of more of a focus inside the group in terms of franchise used that we're seeing some benefit from, but also the expansion of bravoauto. So bravoauto, if I take a position at the end of this year, bravoauto, we will have expanded capacity in the U.K. and in Europe and in Asia Pacific and ahead of what we thought we would do will open up in Latin America earlier with Colombia. And in Europe, we're now in the Baltics and the Balkans. And in APAC, we're opening up in Australia, and we've already opened up Thailand. And then Colombia and Latin America opens up shortly.

So we are pleasantly pleased with the way bravoauto is working out for us. Now nothing big to say yet, but we're expanding capacity in line with what we said to you at the Capital Markets Day, and I remain very confident. But in terms of that incremental 80,000 units we spoke about just under a year ago when we had our capital markets conversation, I remain very confident about the incremental GBP 80,000 per annum and the greater than GBP 50 million of PBT per annum -- or profit per annum that we said then.

Moving on to your third question, Georgios, around M&A and these contract wins as opposed to classic M&A, I guess, look, we're really pleased with the way Geely has worked out and I think Geely is also. And we do see further expansion opportunities with Geely, particularly in Latin America, and we're talking to them in other regions also. In terms of BYD and Great Walls' ORA brand, look, there are 2 really, really great OEMs to have on board. We are very confident in their product portfolio. But a little bit like Geely, we need to make sure that it works for them and works for us before we talk about more expansion with them. But I think both of those markets are very ready to take EV propositions, and we think we've got 2 cracking OEMs to work with.

In terms of the broader M&A pipeline, I'm exactly where I was just a few months ago when we announced the Derco deal, that was the end of July, which is the pipeline across our 3 distribution regions remains strong. And I remain in the same place that I was, which is probably the strongest that I've seen since I've been in the company. And we have opportunities in Asia Pacific and in Europe and some also in Latin America, but don't expect those to happen anytime soon. So I am very positive about our ability to continue to do bolt-on M&A and really pleased by the way -- and the set of results we've given you this morning that we've seen not just 16% organic growth, but those -- the M&A that we've done so far this year, giving us 4% revenue growth at the group level in Q3. So that was pretty much it on my 2 questions. I'll hand over to Gijsbert for the second one.

Answer
Gijsbert de Zoeten (Executives)

So Georgios, as Duncan sort of alluded to, you're going to get a short answer as this is just a trading update. So the short answer is that the margins in Q3 are broadly stable, and the whole dynamics that we see in the first half continues into Q3. So no fundamental change. Just to take the opportunity to comment a little on the upgraded profit outlook for the year. I would say that, that is driven by a broadly better volume performance across many of our regions and the Americas, in particular, as well as some higher ForEx tailwind increasing from 10 to 15.

Question and Answer Operator Message
Operator (Operator)

And the next one is coming from Carl Smith from Zeus.

Question
Carl Smith (Analysts)

So you said the supply shortfall globally won't be filled until 2025. But should we be expecting a sort of meaningful improvement in 2023 sort of next year? And then the second question is, is there any more detail you can give on the drivers of the stabilization in Singapore?

Should we be expecting a sort of more stable growth pattern from now on? And then finally, you touched on this a bit already, but could you talk a bit about the growth opportunities you're seeing from the Chinese EV brands? Is there any other brands you might be introducing at any point? That's it.

Answer
Duncan Tait (Executives)

So look, let's take those step-by-step, and I think they're kind of aimed in my direction. So you're right, we've said we don't see supply eating into that GBP 26 million shortfall that we've seen over the last 3 years compared to historic averages. We don't see that being filled any time before 2025. So you have still a relatively low level of supply versus demand, which is relatively strong compared to that. And we've said also in some of our other comments that our order banks remain at very high levels in many of our markets around the world.

In terms of 2023, the way I think of it would go as follows. So the OEMs are getting better semiconductor supply, but we shouldn't draw a straight line between better semiconductor supply and more vehicle supply. It's certainly not a one-for-one relationship because new vehicles are taking, in some cases, up to 9 or 10x more semiconductor content than previous generations of vehicles. So what are we expecting? And I don't think this will be in a straight line, by the way, because it's not been in a straight line this year.

We do expect a steady quarterly improvement in supply during '23. We are not expecting a step change bounce back in supply. And I think if you listen to some of the OEM commentary, they're pretty much in a similar place in terms of Japanese, European and American OEMs. The Chinese OEMs, as you know, performed slightly differently in terms of supply and seem to have still a very, very buoyant level of supply into our markets.

In terms of Singapore, so don't forget we're not just a new car business in Singapore. We also have -- we have taxis. We have commercial vehicles. We have aftersales, and yes, of course, we have new vehicle sales with Toyota in Singapore. What we have seen, both in terms of after sales, we've opened our used car proposition as well, which you'd have seen somewhere on LinkedIn over the last few months, and that's performing pretty well for us. So it is stabilizing.

And the COE pricing has come down a little bit over the last few weeks, then it popped back up again. In terms of the way we're thinking about it, we don't think anything substantially is going to happen in Singapore probably until 2024. So we expect steady, stable position from our Singaporean colleagues and then maybe we start to see a tick up in 2024 as that COE cycle comes back and COE pricing per category A and category B vehicles drops from what is at the moment, pretty much a historic high in terms of the price of those certificates of entitlement.

Final point in terms of EV brands. Look, yes, so we're excited about BYD. I'm excited the fact that, frankly, about -- if you look at the stable of our brands, full stop, not just Chinese brands, I think the people that we're working with are making great strides in front of EV. Yes, we'd like some to move slightly faster, but I think they're all making the right investments, and we have a high degree of confidence in our OEM portfolio. But there's no doubt that those Chinese OEMs are making substantial progress in terms of EV and they have something like 60% of the battery supply in the world that happens to be in China. So we're talking to the ones we've already spoken about on this call but also others. Let's not discount Geely in that.

We have relationships with Changan also. And we've opened up an office in Mainland China, so we can have more direct face-to-face contact inside China with those OEMs. So we'll continue to work out those that we can really, really work with from a long-term relationship perspective and financial perspective and market share perspective with those Chinese brands. But I think we're making good progress in terms of our relationships with them, but I'm also excited about our existing OEM partners, too. So Carl, hopefully, that was helpful.

Question and Answer Operator Message
Operator (Operator)

And the next one is coming from James Bayliss from Berenberg.

Question
James Bayliss (Analysts)

If I just think about the macro environment and, I guess, the backdrop of rising interest rates, how are you seeing changes in consumer appetites for car financing across your markets? I guess, both on the distribution side and then looking a bit closer to home at the U.K. retail operations?

And then if we take that kind of one step further on interest rates and think about the Derco deal, I think you said the debt finance is on similar terms to your existing RCF. Are you just able to remind us what we should be thinking about there in terms of exposure to rate rises? And then also what currency these -- that's being paid in?

Answer
Duncan Tait (Executives)

Well, James, thank you very much. Look, I'll take one, Gijsbert will do 2. So in terms of car financing -- and yes, you're right, obviously, we are subject to interest rate rises across our markets. As Gijsbert reminds me, in some of our markets, we've seen a traveling of interest rates if you look at base rates; and in other markets, you've seen a slight increase because of the exposure we have to over 40 markets around the world. So it's not a consistent picture globally. You need to look at it by market.

In general, we continue to add finance and insurance products to our vehicles and our penetration rates remain strong and consumers also, of course, taking up finance to buy their vehicles. So I don't see a huge amount of change. If I look at our -- and I would remind us all, by the way, we have been expanding our PCP or guaranteed future value finance products into more markets to cover more of our volume, having moved into Belgium last year, we've also moved into Australia last year, which is a big volume market for us. You'll see -- we're doing similar things in Hong Kong. And in Latin America, we're opening up in other markets, including Colombia, and we see it as a strategic initiative for us to drive not just distribution but also to drive our VLS business as we can then control more of the used vehicles that come back to us for us to resell again.

Now if I go closer to home, as you've said and talk about our retail markets in the U.K., so we are seeing an increase, obviously, in interest rates. And what does that mean? So if I give you an example, if you're taking a high-end vehicle, your monthly costs might be going up around GBP 100 per month. With some of the more mass brands, in some cases, financing costs year-over-year have dropped a little bit. And in some cases, in mass brands, financing costs per month might have gone up around GBP 20 or GBP 30. So we're not seeing huge increases in the monthly payment term for people as they come back to renew their vehicles. And we're not seeing a huge difference in consumer behavior either in trade downs or extending their PCP terms. So no huge changes yet.

And I should also reemphasize that it's not necessarily for your question, but just for everyone on the call, we're also not seeing an increase in cancellation rates from customers in our markets around the world. So we understand there's price increases coming through in terms of finance. We're really vigilant to it, not seeing a huge amount of changes yet. And hopefully, that little bit of detail around what we're seeing in terms of increase in monthly payments for consumers in our retail markets give you some indication of that.

Answer
Gijsbert de Zoeten (Executives)

Right. So in terms of financing the Derco transaction, perhaps good to remind us of the big picture, so it's a GBP 1.3 billion price we've agreed. We will be paying GBP 400 million of our own cash on the balance sheet, and we are issuing shares to approximately GBP 300 million. So it leaves you with GBP 600 million of debt to finance the transaction it will take on. So that's a fundamental exposure, if you like, and likely going to be funded in sterling.

I would however say that clearly, we'll be generating a lot of cash as this business is very cash generative. So expect that amount as we've indicated, that leverage to come down relatively quickly. But out of the box you're talking about an exposure of about GBP 600 million of additional debts. I would also say that if you take it from a sort of accretion perspective, that also with current increased interest rates versus where we were in July, we are comfortable with our statements that we would see above 15% EPS accretion in year 1 and above 20% in year 2. So that is unchanged. Was that helpful, James?

Question
James Bayliss (Analysts)

Perfect. Thanks very much.

Question and Answer Operator Message
Operator (Operator)

And there are no further questions on the conference line. So I will now hand over to Duncan Tait for closing remarks.

Answer
Duncan Tait (Executives)

Thank you very much, Matt. So let's close the call. First of all, thank you very much, everybody, for joining today. We've delivered a strong Q3, and I hope you share our excitement about Inchcape strategic progress and our growth opportunities we are intent on capturing. You've hopefully seen we're hosting another "In the driving seat" webinar to follow up on the one we did on the Americas at the back end of June. This time, it's done data and digital. It's on the 24th of November. Please join us for that with our Chief Digital Officer, Mark Dearnley and I.

In the meantime, as always, if there's any further follow-up you require, please get in touch with the lovely Raghav. Thanks, everyone. Have a good day.

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