Inchcape : Q1 23 Audio Webcast Transcript (255.35 KB)

Inchcape

Q1 Results Conference Call

Duncan Tait

Group CEO

Good morning, everyone, and thank you for joining us. With me on the call is our Acting CFO, Adrian Lewis and our Head of Investor Relations, Raghav Gupta. I'll begin by commenting on the Group's performance and outlook, before handing over to Adrian who will give more detail. We'll then take your questions.

As detailed in this morning's announcement, the Group's Q1 performance has been excellent, with continued strong business momentum reflected in our strategic, operational and financial progress. In the first quarter, we reported revenue of £2.7 billion, with growth of 50% on a reported basis, reflecting the benefit of M&A, including Derco. On an organic basis, revenue grew 13%, with a continuation of the trends experienced at the end of last year and growth across all regions.

The M&A contribution was primarily driven by the consolidation of Derco, which has made an encouraging start in its first quarter within the Inchcape Group, while our other recent acquisitions, Morrico in Guam, Simpson Motors in the Caribbean and Ditec in Chile, all continue to perform well.

On Derco, I am especially pleased with the progress to date in integrating the business into our Group and we remain firmly on track with our strategic and financial plans. We reiterated our confidence in our margin expectations for Derco at our full year results and we stand by our expectation of delivering operating margin towards the top end of the 5% to 7% range that is typical for a distribution business before the impact of synergies.

Adrian will touch on inventory shortly, but from my perspective the team have done a great job in aligning inventory management practices in Derco with those employed across Inchcape. I was in the Americas visiting the operations a few weeks ago and I'm confident about the working capital opportunities we have quantified for 2023.

Finally, in relation to EPS accretion from the deal, we continue to expect at least 15% accretion in 2023 and at least 20% in 2024. This reflects the additional profit contribution and the dilution from the Inchcape shares issues to Derco's former owners.

Over the past few years, we have continued to shift the Group's portfolio towards distribution and during the first quarter we have further extended our distribution footprint. I'm delighted with the speed at which our team has expanded our presence in the APAC region, firstly with the agreement to acquire CATS, giving us access to the Philippines, adding another exciting and high growth market to the Group.

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And more recently, the agreement reached with Mercedes-Benz for us to purchase their operations in Indonesia, a business the OEM has been operating since 1970 and has now decided to handover to Inchcape to manage and drive further growth. The two acquisitions will collectively add over £320 million of annualised revenue and we anticipate completion during the second half of 2023.

We were also pleased to be appointed the distributor of Tata commercial vehicles in Thailand, broadening our footprint in a market where we already distribute JLR. This expansion is a great example of our accelerated strategy and actions delivering on the Group's growth ambitions.

The combination of our broad market footprint, strong OEM relationships, our digital and data capabilities and our robust financial position continues to make Inchcape the natural consolidator in a highly fragmented industry.

During the quarter, we continued to progress with our ambition to capture more of a vehicle's lifetime value by our bravoauto and our digital paths platform. In these early days, our teams are focused on execution and we are pleased with the progress so far.

Now moving to outlook, following an excellent start to 2023 and based on prevailing market conditions, we expect to make strategic, operational and financial progress, underpinned by the integration of Derco, with full year results expected to be in line with published market consensus. Adrian, over to you.

Adrian Lewis

Acting CFO

Thank you, Duncan, and good morning, everyone. In Q1, the Group generated revenue of £2.7 billion. On an organic basis revenue grew 13% with growth across all regions. Duncan references the significant M&A contribution driven primarily by Derco and currency also provided a small tailwind. Overall, on a reported basis, revenue increased 50% year-over-year.

Looking at our two segments, in distribution revenue increased 70%. The M&A impact largely reflects the consolidation of Derco, although Simpson Motors and Ditec, both acquired in Q2 2022, also supported growth. On an organic basis, distribution revenue increased 15%, supported by improving new vehicle supply and aftermarket growth.

In retail, revenue grew by 8%, with performance also supported by improved supply. The growth rate was stronger on an underlying basis, with the headline impacted by the switch to agency for certain brands at the start of 2023. Now let me provide you with some further detail.

Starting with the Americas, we saw good performance despite several markets lapping challenging comparators, where share gains for several brands that were supply constrained during 2022. Elsewhere, the aftermarket continued to grow, with the bravoauto rollout in the second half of 2022 driving greater used vehicle revenue in Q1.

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Moving to APAC, performance in both Singapore and Hong Kong was in line with our plan, with an improvement expected in late 2023. The reopening of the border with China has led to increased order books in Hong Kong. Our other markets in Asia continue to see strong trading, with a continuation of the trend seen over recent time. In Australasia we continued to see a strong momentum, underpinned by improving vehicle supply and a long order book and our bravoauto business is gaining traction.

In Europe and Africa, in Europe we saw double-digit growth in both new and used vehicles, supported by better vehicle supply and a particularly strong performance from Romania, Greece and Bulgaria. Whilst it's early days for bravoauto, the business is progressing well. In Africa, our performance was underpinned by a robust aftermarket.

Before we move to retail, I'll provide you with an update on Derco. Derco's first quarter revenue and profit performance was in line with our expectations. In terms of market performance, the new vehicle volumes in both Chile and Colombia declined versus the prior year following a strong 2022, but Peru and Bolivia saw strong growth.

In terms of brands, we saw strong performance for certain brands across both Derco and core Inchcape following improved supply and this was offset by normalising market share elsewhere, following a very strong performance in 2021 and 2022. The aftermarket business was also performing well.

As part of our integration plan, we have prioritised the alignment of our inventory management practices with those employed across Inchcape and we've been working in collaboration with our OEM partners to revise down previously agreed orders for vehicles and parts and I am pleased with the progress the team has made so far.

At completion, Derco's inventory balance was £200 million higher than we had anticipated and as we have said at our full year results, we have identified this as a working capital opportunity that we will deliver on through 2023. This will be partially offset by a working capital outflow across to the rest of the Group, as that part of the business normalises. Overall, as Duncan said, we are pleased with the progress we have made with the integration and performance to date.

Moving to retail, revenue grew 8% year-over-year on an organic basis, with the underlying performance much stronger after the adjusting for the impact of the agency model. That change in business model will have a negligible impact on profit and as a reminder, the shift to the agency model will not impact our distribution business.

Performance has been driven by growth across all our revenue streams, with higher new and used vehicle volumes and aftersales growth. New vehicles underpinned by higher volumes, used vehicles supported by a more established bravoauto business. So overall, the Group has made an excellent start to 2023 with a strong Q1 performance, demonstrating continued business momentum. Duncan, back to you.

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Duncan Tait

Group CEO

Thank you, Adrian. Inchcape is a business with great momentum and an exciting future. With a clear and proven strategy, we are well positioned to capitalise on further opportunities for organic growth and market consolidation and I am confident we'll continue to deliver sustainable growth and long-term value for all our stakeholders. Adrian and I are now ready to take your questions.

Q&A Session

Andrew Nussey - Peel Hunt

Two questions from me please, really aimed more at the medium-term outlook. I guess first of all, in terms of the Americas and specifically Chile and Colombia where obviously you referenced weaker market volumes in the first quarter, really just looking, Duncan, for perhaps a little bit more comfort around your medium-term thoughts on those markets and if they have changed at all, given the current market dynamics.

Then secondly, in terms of distribution excellence, as you're beginning to see improved vehicle supply, maybe some better insight on order book dynamics, where there's your confidence again in that medium-term objective of high-single-digit organic profit growth over the medium term, please.

Duncan Tait

Good morning, Andrew. Okay, thank you for those two questions. Adrian will take the first one and I'll come back in for a view on our order book for the medium term.

Adrian Lewis

Thank you, Andrew, so on your question around the attractiveness of the markets that we are increasingly exposed to with the acquisition of Derco. The Latin America business across Chile, Colombia, Peru, Bolivia, Costa Rica, Panama, they are all very strategically attractive. They all have the characteristics of GDP growth, low motorisation rates, which means the opportunity to grow the number of vehicles in the market over time is very attractive.

Whilst we like the vehicle business, don't forget we also sell parts and servicing facilities and we have a VLS, vehicle lifecycle services strategy which will increase our exposure to the used car business. So all of those streams of business remain attractive to us. So I don't think we've seen anything that changes our investment thesis behind Derco from a market perspective, they remain very attractive over time.

If you take Chile as an example, it's a 400,000 car market roughly speaking. If you look at the local automotive intelligence agency, ANAC, they talk to a 500,000 vehicle market towards the end of the decade and that's replicated across LATAM as well when you go through the other markets.

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Of course, it's not going to be a straight line and you mentioned some of the short- term market dynamics, particularly in Chile and Colombia. Chile was 17% down in Q1, you've got to remember we are lapping a really strong Q1 in 2022, fiscal stimulus in Chile and also a bit of a post-COVID tailwind giving the market a very strong comparator.

The external market - and we agree with them - looks to see the full year Chile market somewhere towards minus 10, so minus 17 will be the low point and we expect a stronger growth rate as we go through the course of the year.

Duncan Tait

A couple of things, it's just worth standing back for a moment and think about what we committed at the Capital Markets Day, which we stand by. So mid-high single- digit profit CAGR in our distribution business, plus M&A, plus VLS at £50 million around an incremental profit contribution towards the end of the planning period. I think our Q1 results in terms of revenue growth reinforce some of that proposition that we've made and the way to think of the growth of our business.

Also in terms of M&A, since the Capital Markets Day let's not forget we completed on the Morrico deal in Guam, our Simpson's business in the Caribbean, Ditec in Chile and Derco, with two more acquisitions announced in the first quarter and more contract wins. It's not just Tata, but it's BYD, it's Great Wall, ORA, it's Geely and others.

Now in terms of your specific question, Andrew then, in terms of how we're seeing order banks and market performance, it's worth going through the regions one by one to give you a little bit more colour. For the Americas, 10 of our 12 markets we're seeing high single-digit, low double-digit order intake. Those markets continue to perform really well for us and we're seeing some supply come back from brands that were supply constrained over the last year or so.

As Adrian said, in Chile we are seeing better news in the second half, according to our intelligence on the ground. Africa is steady as she goes, no concerns about that Africa business. Then into Europe and I don't think this should be a big surprise for us, is that we are seeing lower levels of order intake in Europe.

So what I would say is the order bank in Europe from hitting an all-time high in the second half of 2022, is down a little bit, as of now it's down about 10%. So it's the slow unwinding of the order bank and we see that order bank taking us through the vast majority of 2023 and we are actually, as we review the Europe business, we're already taking orders into 2024 in the business now.

Then in APAC, let's split it into three. The Asia developing markets, Guam, Brunei, Thailand, Indonesia, we've just announced the entry into the Philippines, those businesses remain pretty hot for us. Good order intake, good growth year-over-year and frankly if we had more vehicles, we'd be even happier.

Hong Kong and Singapore showing signs of recovery. I wouldn't put anything in a model for this year but think 2024. Finally, in terms of Australasia, we're seeing strong demand, good order intake, good growth in that business and our supply is coming back a little stronger than we expected. So by and large, Andrew, if I think about our medium-term guidance, we remain committed to that and if you look at how

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