Inchcape : Q3 23 Audio Webcast Transcript (153.56 KB)

Inchcape PLC

Q3 23 Trading Update | Audio Webcast

26th of October 2023

Transcript

Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither Inchcape PLC nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

Duncan Tait:	Good morning, everyone, and thank you for joining us. I'm joined on the call
	by our CFO, Adrian Lewis, and our Head of Investor Relations Rob Gurner. I'll
	begin by giving an overview of the group's performance and outlook before
	handing over to Adrian who will give more details. We'll then take your
	questions. Inchcape's strong performance in Q3 was another demonstration
	of the resilience and diversified nature of our business. We delivered
	revenue growth of 35%, including 10% organic growth. Our distribution
	business delivered organic growth of 13%. This was supported by continued
	momentum from APAC with broad-based growth across our markets. Our
	performance in Europe was strong, driven by the continued unwind of our
	order bank, though new consumer demand across Europe remains muted. In
	the Americas, there was growth in the majority of our markets in the region,
	and we are delivering market share gains and accelerating our cost synergy
	program this year to offset softer markets in Chile and Columbia.
	On Derco, we are delighted with the progress made on integration. I want to
	reiterate that Derco is a superb business. It gives us further scale and
	diversification in the Americas and brings us new longstanding OEM
	relationships. Furthermore, we are supporting some of those OEMs in
	markets outside the Americas, as evidenced by our global strategic
	agreement with Great Wall, with whom we are already establishing a market
	presence in Indonesia. On that point, we made excellent strategic progress
	across the group during the period. We won five new distribution contracts
	with leading Chinese OEM, Changan, in the Philippines, and across four
	African markets. This partnership was developed primarily as a result of
	Derco's longstanding relationship with Changan. These wins take us to 16
	contract wins and acquisitions so far this year compared to just 5 in the
	whole of last year. This is further evidence that we are building a global
	market leading distribution platform from which to support our OEM
	partners.
	Importantly, we continue to build a strong pipeline of future potential
	contracts to help support organic growth. Our diversified market footprint,
	strong OEM relationships, and our robust financial position ensure the
	Inchcape will remain the natural consolidator in a fragmented industry. To
	that end, we completed all three previously announced acquisitions in APAC,
	in the Philippines, Indonesia, and New Zealand. We are also continuing to
	invest in our market leading digital and data capabilities to support the
	performance of our distribution business. Our digital and data capabilities

	are helping us to drive the development of our Vehicle Lifecycle Services
	initiatives. In this area, we continue to be agile in adjusting and optimising
	our capacity in bravoauto as we develop a number of business models in
	various markets.
	The development of our Digital Parts Platform in Australia is going extremely
	well and we continue to plan a rollout of the platform in other markets in
	APAC next year. We'll continue to provide a further update on VLS at our full
	year results in March. Moving to Outlook, based on prevailing market
	conditions and considering accelerated cost synergies and the contribution
	from acquisitions, expectations for full year 2023 results remain unchanged.
	These expectations were originally outlined at our interim results in July. I'll
	now hand over to Adrian to take you through the details of our performance
	during the period.
Adrian Lewis:	Thank you, Duncan, and good morning everyone. In Q3, the group generated
	£2.8 billion of revenue, up 35% on a reported basis and up 37% and constant
	currency. On an organic basis, revenue grew by 10%. Distribution revenue
	increased by 47%. The M&A impact largely reflects the consolidation of
	Derco, and on organic basis, Distribution revenue increased 13%. Let me give
	you now more colour on each of the distribution regions. In the Americas, we
	delivered a resilient performance with growth in the majority of our markets,
	market share gains and accelerated cost synergies offsetting softer markets
	in Chile and Columbia. We are especially pleased with our share performance
	in the softer Chile market, where share has been running well ahead of the
	prior year and ahead of half one run rates. In APAC. There was continued
	momentum with broad-based growth across our markets, including Hong
	Kong and Singapore, and there was further positive momentum in Australia
	where our market share with Subaru continues to improve.
	Our APAC region was further supported by the completion of the three
	acquisitions during the quarter. In Europe, there was good growth in key
	markets driven by the continued unwind of our order bank. New consumer
	demand in Europe remains muted. The group's performance in Africa was
	solid and will be further supported by our contract wins in East Africa with
	Changan. On Derco, as mentioned earlier, we have proactively accelerated
	our cost synergy program and we now expect to deliver an in-year benefit of
	up to £20 million from our previous expectations of an in-year benefit of
	around £13 million this year. We remain on track to deliver the full £40
	million of annualised cost synergies in 2024. We continue to expect Derco to
	deliver operating margins at the top end of the 5% to 7% range typical of a
	distribution business this year and that is before synergies, of course.
	In the context of a more challenging operating environment in the likes of
	Chile and Columbia, I'm particularly pleased with the progress we are making
	in improving Derco's working capital position. We have now reduced Derco's

	excess inventory that was £200 million at the start of the year by 50%, an
	improvement from the July position where we had got through 20%. This is
	great progress given the market circumstances.
	Our continued focus on aligning inventory management practices to those
	employed across Inchcape is working well, and importantly, given the market
	conditions, we have continued to work proactively with our OEM partners to
	revise down previously agreed orders for new vehicles as we move towards
	2024. As a result of our progress in this area and with further alignment of
	trading terms, we continue to see a working capital opportunity at Derco to
	be delivered by the end of 2023. Also, as we said earlier this year, this will be
	partially offset by a working capital outflow across the rest of the group as
	we started from a highly optimised position.
	Overall, we are pleased with the progress we've made with the integration of
	Derco and the operational performance of the business to date. Moving to
	Retail, where reported revenue was robust with an increase of c.2%, volume
	growth was mainly in the fleet sector offsetting the change in revenue
	recognition relating to the agency model. Excluding this, revenue growth
	would've been around 12%. This robust performance reflects the strength of
	our retail business amid a challenging consumer sentiment environment.
	Overall, the group delivered another strong performance in Q3 highlighting
	the continued resilience and diversification of our business. That's it from
	me. Duncan, back to you to sum up.
Duncan Tait:	Thank you, Adrian. Inchcape produced another strong performance in the
	third quarter with double-digit organic growth and I'm pleased with our
	ongoing momentum. Given our continued strategic progress, I remain highly
	confident about the medium to long-term future of the group. Adrian and I
	are now ready to take your questions.
Operator:	Thank you very much, sir. Ladies and gentlemen, as a reminder, if you want
	to ask a question, please press star one. Please also ensure your mute
	functions not activated, to allow your signal to reach the equipment. Our
	very first question is coming from Mr. Andrew Nussey calling for Peel Hunt.
	Please go ahead, sir.
Andrew Nussey:	Yep, good morning. A couple of questions from me. First of all, when we look
	at Chile and Columbia, please, can you just update us on the relative scale of
	those markets in the context of Distribution and what industry are suggesting
	for market performance in '23, and any thoughts on what the market
	estimators are saying in terms of '24? Secondly, Duncan, if you could just
	update us around the pipeline, which you alluded to in terms of new
	Distribution contracts and the potential for M&A, please.

Duncan Tait:	Very good. Thanks very much, Andrew. Good morning. Look, let me
	comment on Chile and Columbia to start with. You remember, the largest
	market of the two, clearly, is Chile by some way. The original forecast for that
	from the local motoring organisation, ANAC, was 380,000 units for 2023.
	They've moderated that during the year.
	At the interims, around 360,000 was their forecast. They're now saying
	about 310,000. We based our judgment for the year on a 20% decline. We've
	been clear about that since we mentioned the acquisition over a year ago.
	And this year, yes, it's around 310,000, so about a 30% decline. Colombia is
	also seeing a decline of similar levels in terms of 30% year over year. So one
	of the reasons why I'm pleased with our America's performance, despite
	declines in those two markets, the America's business continues to deliver
	for us.
	Now as you look into 2024, we said at the interims, we didn't envisage
	Colombia improving in 2024, and we are taking a sensible and prudent view
	of how Chile will perform into 2024 also. So we're not expecting a big uptick
	by any means from Chile into 2024, and we will plan our business
	accordingly.
	Look, in terms of the pipeline, you can see this year, we've had a stunning
	year already, 16 deals, 13 contract wins, three pieces of M&A, which have
	now completed. And look, the pipeline for both contract wins, and M&A
	remains strong. I would remind you that the contract wins we're having
	aren't just with Chinese OEMs, although clearly in Asia PAC and in Americas,
	there are, but we're also winning with Subaru and Mercedes at the same
	time. And also, we've added more Stellantis markets, JLR at the same time.
	So, the pipeline remains strong, but we at the same time remain very
	disciplined with valuations of M&A and making sure that we're adding these
	contract wins into markets where we have scale like Changan into the
	Philippines and Great Wall Motors into Indonesia. So, Andrew, hopefully that
	helps.
Andrew Nussey:	That's great. Thank you.
Operator:	Thank you very much. Our next question is going to be coming from Carl
	Smith of Zeus. Please go ahead.
Carl Smith:	Hi. Good morning. Just two questions from me. First of all, it's good to hear
	about the recovery in Singapore and Hong Kong. Would you say that those
	markets are back to normal, or have you got a bit more recovery to come
	from those in 2024? And then the second question was on the impact of the
	agency sales model. I understand what you're saying about if you exclude
	that impact, you'd have a 12% organic growth. Have we seen the full impact
	of that on retail revenues or would we expect more in 2024 as well?

Duncan Tait:	Okay. Thanks very much, Carl. I'll take one on Singapore and Hong Kong, and,
	Adrian, if you could follow up on agency. So look, we took the Board of
	Directors of Inchcape to Hong Kong and in fact the Philippines just a few
	weeks ago. And Adrian and I have also been in Singapore, so we got first-
	hand knowledge on the ground as to what's going on in both markets.
	Singapore has been muted for some time. We're at the trough in Q3 in terms
	of COE availability. We're seeing improved availability in the fourth quarter,
	and the forecasts show an improving Singapore into 2024 so further COE
	availability. Now, it won't get back to its peak in 2024, but we can now see
	people surrendering their COEs and COEs coming back into the market. So
	we are relatively optimistic about Singapore into 2024.
	And Hong Kong, as a result of our broader EV coverage with Great Wall and
	with SAIC's MIFA product and with Toyota bringing more products to market
	for us, we feel optimistic also about 2024 for Hong Kong. And we'll see
	improvements in Q4 as we built a really big order bank for those cross-
	border people carriers that we see. So optimistic about both markets, but
	they're not going to get back to their peak in 2024 but they are improving.
	Adrian, over to you.
Adrian Lewis:	Yeah. Thanks for the question, Carl. So, if I step back a little bit, at the start of
	this year, our relationship and the retail model for one of our brands in the
	UK market changed. It changed to what's called the agency model, and that
	is essentially where we take a commission on the delivery and the sale of a
	new vehicle, which means it's just a bit of an accounting adjustment to
	revenue recognition, which is why we think it's helpful to give you an
	indicator of the performance without that. It gives you an indicator of the
	volume performance and the price mix that is attached to that.
	So yes, for that particular brand, you have seen the full impact of it. We do
	expect other brands to start to shift towards that sort of model, but probably
	not until the end of 2024. And we'll update you as to how to think about
	revenue and operating margins in the retail sector attached to this. I'll
	remind you that what we've said and what we're actually seeing in practice is
	that at a profit perspective, it's broadly neutral. So, whilst we don't get the
	top line, we do get the commission, which is consistent with the gross profit
	per unit that we would've seen prior to the agency model coming in to play.
	And I would just add, at the same time, we have a much lower stock holding
	as a result of that. And a final thing on this, this is retail only, which is
	obviously the UK predominantly. In a distribution market, which is where the
	majority of our business is that this is not an issue and the operating model is
	entirely down to us in partnership with our OEMs to decide how we
	approach and put together our route to market.

Duncan Tait:	Thank you, Carl. Hopefully that was helpful. Thank you.
Carl Smith:	Yeah, yeah, thank you.
Operator:	Thank you so much, sir. We'll now move to Georgios Pilakoutas of Numis.
	Please go ahead.
Georgios Pilakoutas:	Thanks. Morning, team. Changan contract wins. I just wanted to clarify, are
	these new markets for Changan? And if you give us any sense of what kind of
	scale they could be, if they are new markets and maybe short to medium
	term plans of where Changan's aspirations are in terms of market share
	within markets.
	Then one on FX. If you could just update us on the translational headwind for
	next year and then perhaps even touch on how given we're seeing some
	depreciation in some of the America's markets, just a bit of an update on
	how the transactional impact, if at all, is working there and how Derco is
	dealing with some depreciation in those markets.
	And then last one is just given ongoing rise in interest rates and to some
	extent where equity markets in your share prices, just if that changes at all
	your shorter-term ambitions around M&A versus leverage reduction versus
	even buybacks.
Duncan Tait:	Very good. Thank you, George. I'm sure that was three questions.
	So, look, let me comment on Changan and then I'll ask Adrian to give you
	some thoughts about how you might scale it, then FX and rates is coming
	your way, Mr. Lewis. So look, I think if I take a step back, Changan is further
	evidence of the impact that Derco is having on Inchcape. Derco had had long-
	term relationships with Changan. I was in China meeting key Chinese OEM
	partners in the middle of June, of which Changan was one of them. Shortly
	after, we announced a global partnership with Great Wall Motors, but we
	were also talking to Changan about markets at the same time.
	Now, I didn't quite expect the Changan deals to happen quite as quickly, but
	clearly, they have. The four markets in East Africa are new, leveraging our
	cluster approach that we have in East Africa. In the Philippines, they have
	been working with another distributor prior to Inchcape but have now
	switched that distribution contract to Inchcape. Look, that's a big market.
	That's 110 million people with really good GDP growth, low motorisation
	rates. It's a great market for us. And George, we're going to run that through
	the same infrastructure of the CATS business that we've just completed in
	the Philippines during the third quarter. So, in the Philippines, don't forget,
	just a few weeks ago, we had our digital delivery centre with about 700
	people in it but no distribution business. A few weeks later, we have the

	CATS acquisition and now Changan going through the same infrastructure.
	So, look, I think more to come in terms of contract wins, both with our
	traditional OEMs and our Chinese partners, but nice progress in Q3.
Adrian Lewis:	Thank you, Duncan. I think I'll break your question into a few parts in relation
	to FX and rates.
	In terms of Changan, I think, as Duncan has said, it's a super exciting
	opportunity and the opportunity for us to scale those businesses over time,
	but you shouldn't think about this as being a big call on capital. As we step
	into those markets, we'll be leveraging third-party networks and, as Duncan
	has said, leveraging our back-office infrastructure.
	Moving to your point around FX, look, it's a bit early to call FX headwinds and
	tailwinds on a translational basis for 2024. But I would say that for 2023, it's
	broadly neutral for us. In terms of your question around transactional FX
	movements and just to give you a bit of context here. And I'll speak
	specifically just to give you an example about how we've approached this
	with Derco. We have currency pairs of Chilean Peso and the COP in
	Columbia, with USD, Japanese Yen and Renminbi.
	In all of those currencies, one of the first things we did as part of our
	integration planning was to step into some hedging arrangements to make
	sure we protect against short-term FX volatility. That is our hedging
	approach. It's one that we have adopted across Inchcape for a number of
	years.
	What it does, it enables us to create time against FX movements that don't
	leave us either overly advantaged or disadvantaged in the market from a
	retail pricing perspective. And now of course, as FX moves, ultimately that
	has to translate into our commercial operating model, but our hedging policy
	gives us time to do that. And the movements you've seen in those pairs that I
	mentioned has been translated and you've seen today us underwriting and
	reiterating our operating margin expectations for the Derco business, and
	that hedging policy has helped us to do that.
	Your final question was around M&A leverage and buyback. I think our
	position, George, is exactly as it has been. Our capital allocation policy still
	stands. Our first priority is to invest in this business, and we have done that
	this year. Our second priority is our dividend payout ratio, which we are
	committed to. And our third priority is to invest in M&A. You've seen us do
	that in the third quarter of this year. We announced three deals in the first
	half and we've completed them in the third quarter.
	And if after all of the end of that there's cash left over for buybacks, then
	that's how we would deploy that capital. But right now, our pipeline is full.

	We think there's a really exciting M&A opportunity to consolidate this
	business as there is by growing the business through contract wins. Our
	capital allocation policy remains unchanged. Hopefully that covered all your
	questions.
Duncan Tait:	Thanks, George.
Operator:	Thank you very much sir. We'll now move to Arthur Truslove of Citibank.
	Please go ahead. Your line is open.
Arthur Truslove:	Thanks very much and good morning. First question from me, just to clarify a
	couple of points from guidance from earlier in the year related to Derco's. In
	particular, are you still expecting to get rid of all of the £200 million of excess
	inventory this year? And previously you talked about Derco being 15% EPS
	accretive this year. Just wanted to confirm that both of those two pieces of
	guidance are still in play.
	And then secondly, on the synergies, you're obviously expecting to deliver
	£20 million this year. Obviously that must mathematically have accelerated
	materially in Q3. Just to clarify from your statement, does that mean that you
	are now expecting to do £40 million next year? That being £20 million in the
	bridge.
	And then the final question I had on the new acquisitions, obviously you've
	talked about them being around £400 million of revenue. In terms of PBT
	contribution in Q4 and then on a full year basis, are you able to just shed
	some light on that? Thank you.
Duncan Tait:	Very good. Thank you, Arthur. They'll all three questions are going to Adrian.
Adrian Lewis:	Thank you, Duncan, and thank you, Arthur. First one around Derco, and
	there's a couple of pieces in there. The inventory balance that we acquired as
	we had said at the start of the year, was £200 million higher than we had
	originally anticipated. Now you'll also see in the statement that we've
	released today, Arthur, that we have made great progress in that. And so
	we're really pleased, particularly in the context of the marketplace, to be
	around half of the way through that inventory reduction plan.
	We set out at the start of the year, we said we were going to work with our
	OEM partners. We were going to act responsibly in the marketplace to make
	sure we deliver across all of our stakeholders in moderating down that
	inventory balance. And that's exactly what we've done. That's a daily, weekly,
	and monthly conversation with our OEM partners. And as the market
	landscape has changed, particularly in Chile and in Columbia, we've been
	working with them to moderate that down.

	We are on track with that program. We are acting responsibly and we are
	going to get to where we thought we were going to get to. But I think the
	other opportunity, which we note in the release, is around overall working
	capital. The alignment of our trading terms with Derco has been also a
	success for us, which will give us further working capital opportunity. And I'll
	remind you there are some offsets against that with the core groups starting
	from a highly optimised position.
	Around the 15% EPS accretion, I think what you can see in the statement is a
	reiteration of the Derco acquisition being on track, the integration program
	being on track. You can see us accelerating synergies and responding to a
	market situation and reconfirming our profit expectations for the year, which
	is consistent with more than 15% EPS accretion. We see the overall Derco
	acquisition as being firmly on track and stand behind those EPS commitments
	that we made at the start of the year.
	Synergy benefits £20 million this year. Yes. What we have done practically
	and in the market is we've been working really hard to make sure we've got
	the right cost base for the markets that we are presented with in Chile and in
	Colombia, particularly as we bring those businesses together. And we've
	brought forward some of those activities.
	The benefit that you are seeing in this year's P&L as a result of those
	synergies is around £20 million. And you're absolutely right. We are standing
	also behind the overall program of activities adding up to £40 million of cost
	synergies. You are right. Next year's contribution to profit will be £20 million
	above what you've seen this year so £40 million in aggregate.
	In terms of the new acquisitions, PBT contribution in Q4, we are not giving
	specific guidance around those, but you should think about those as being
	low single digits. The APAC region is one that features a number of very
	mature markets, which tend to have higher than average operating margins.
	Whilst it's not going to be accretive to APAC, those businesses will certainly
	be in line with core distribution average margins.
	And we will cover the full year guidance for those acquisitions as part of our
	2024 guidance in our results announcements in March. Hopefully that covers
	your questions, Arthur.
Arthur Truslove:	Thank you very much.
Duncan Tait:	Thanks, Arthur.
Operator:	We'll now move to James Zaremba of Barclays. Please go ahead. Your line is
	open, sir.