Inchcape : Q1 2024 Transcript (158.33 KB)

Duncan Tait:

Good morning, everyone, and thank you for joining us. I'm here with our

CFO, Adrian Lewis, and Head of Investor Relations, Rob Gurner. I'll give an

overview of trading in the quarter, our strategic progress and outlook. I'll

then hand over to Adrian, who'll give more detail on our regional

performance, and will take your questions.

First, on strategy, we recently announced an agreement to divest our UK

retail operations to Group 1, the US dealer group, for a cash consideration of

£346 million pounds. This is expected to complete in the third quarter. This

transaction will complete our strategic transformation into a pure play

distribution business, which is capital light, highly cash generative, higher

margin, and globally diversified. When proceeds are received, we intend to

conduct a £100 million pound share buyback. And as a result, UK retail will be

treated as a discontinued operation. And we will focus our comments today

on the performance of the distribution business in the first quarter.

We delivered a positive start to the year, with continued momentum across

APAC, further outperformance across our Europe and Africa region, and key

markets stabilising in the Americas. Reported revenue growth was 5%, and

the organic revenue growth was 6%. This performance is another

demonstration of the resilience and diversified nature of our business. We

made good strategic progress, with several contract wins, to help build

market share in existing markets and develop our OEM partner portfolio

globally. Contract wins included Ford in Estonia and a Chinese commercial

vehicle brand, Forland, in Ecuador. We also made further progress in building

a robust pipeline of additional contracts and there was positive contribution

from recent distribution contract wins. Last year's acquisitions in APAC also

made a positive contribution in the quarter, and we are already seeing good

commercial and operational benefits from the integration of these

businesses.

Finally from me today, onto the outlook, where we are reiterating the

position communicated earlier in the year. From our continuing operations,

we expect a year of moderated growth in 2024 at constant currency. We are

confident about the medium to long-term, and continue to expect a return to

higher levels of growth, supported by recovery in many markets. With our

global market leadership, disciplined approach to capital allocation, digital

and data capabilities to support our OEM partners, and our highly cash

generative characteristics, Inchcape is well positioned for the future.

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. During the period, our

continuing operations delivered a positive performance, particularly against

tough comparators. The group generated £2.3 billion pounds of revenue, up

11% at constant currency, with 6% organic growth, and a 5% contribution

from acquisitions. These factors were partly offset by translational currency

headwinds of 6%, which meant reported growth was 5% for the quarter.

Now, let me give you some colour on each of our regions. In the Americas,

key markets were stabilising in Q1, consistent with the trends of the second

half of last year. And across Central America, we continue to see both market

momentum and outperformance. In Asia-Pac, the strong momentum seen in

2023 was continued, with broad based growth across a number of markets,

including Hong Kong and Singapore. The region also benefited from the

contribution from the acquisitions we made last year. In Europe and Africa,

the region outperformed, with accelerated supply supporting an order bank

unwind in certain markets in Europe against a backdrop of muted new

consumer demand.

And as Duncan mentioned, we have agreed to divest our UK retail business

for a cash consideration of £346 million pounds. And on completion of the

deal, we will initiate a £100 million pound share buyback that we expect to

complete within 12 months. The remaining proceeds, together with organic

cash flows, will continue to pay down debt and reduce leverage as we create

capacity to invest consistent with our capital allocation policy. But,

importantly, we will maintain a disciplined approach to those investments.

So to summarise, our performance in Q1, the group delivered a positive start

to the year, highlighting the resilience and diversified nature of the business.

And I think, George, we're ready to take some questions.

Operator:

Thank you very much, sir. Ladies and gentlemen, as a reminder, if you wish to

ask any audio questions, please do press *1 on your tap on keypad. And just,

again, limit yourself to two questions. Our first question coming in is from

Arthur Truslove, calling from Citi. Please go ahead.

Arthur Truslove:

Hi, Duncan and Adrian. Congratulations on good trading update. So a couple

from me, if I may. So, Adrian, you mentioned in your pitch that the comps

were difficult in Q1. Please could you just run through the key comps that

were tough, and can you tell me, or tell us, when you think some of those are

going to get more straightforward? And second question, obviously the

Japanese yen has been weak, and are you able to talk a little bit about the

potential contribution from transactional foreign exchange as we progress

through the year and what we've seen so far? Thank you.

Duncan Tait:

Good morning. And as you threw those at Adrian, I will hand straight to him.

Adrian Lewis:

Thank you, Duncan, and thank you, Arthur. Difficult comps in Q1. So let me

go around a couple of the different regions where we've seen some difficult

comps in Q1. So let's start in the Americas. We saw Q1, in certain markets in

Southern Latin America, particularly Chile, skewed by a very positive and

inflated market position, largely due to legislative changes that came in the

spring of last year, in about March, and inflated Chile significantly. That was

largely a pull forward and you saw a much weaker Q2.

I think the comments we've made about stabilisation in Americas, and as we

said in our notes, refers really to a stabilisation versus the momentum we

saw in the second half of last year. When you look through the lens of

seasonality, we're seeing those markets continue with the momentum we

saw towards the back end of next year. And I think our position that we've

assumed of a flat year-on-year market is an appropriate one. So I think by

virtue of those comments, you should expect those year-on-year metrics,

given the baseline did bob around a wee bit, particularly in Latin America, to

improve as we move forward.

In terms of the transactional FX movements, look, Arthur, we've talked in the

past about how FX and transactional implications of those are part of how

we think about the cost of vehicles, and about how our hedging position

protects us over time, against adverse movements in those FX. So I wouldn't

call a significant upside, nor would I call a significant downside risk in the

future from FX strengthening or weakening. Because, ultimately, in a free

market world, those things end up in price and our position would be the

same. So the other thing I would say, just from a JPY, just for the sake of

clarity, we don't actually sell anything in JPY. So that it's not part of our

translational headwind that we noted in the top line.

Arthur Truslove:

Thank you. Just to confirm on that, obviously you buy stuff in JPY, don't you?

Adrian Lewis:

Yeah.

Arthur Truslove:

So I guess my point is, for instance, Subaru in Australia, you would think

you're selling in Australian dollar, buying in Japanese, maybe short term

there is a tailwind. I appreciate over the longer term you iron that out, but is

there any reason to think there isn't a short term, relatively small tailwind

there?

Adrian Lewis:

Arthur, again, yes, there is a reason to think there wouldn't be because we

take hedging positions which smooth out those volatilities, both positive and

negative. Because there's a downside to taking a hedging policy, but we think

it's appropriate to give ourselves time. And, look, ultimately, we're not the

only one buying in Japanese yen and selling an Aussie dollar in that market

and it's a free market. And we see those things flowing into the value of

vehicles in the market. So to be very clear, there is not a margin tailwind

from those short-term movements because of the hedging positions we take.

Arthur Truslove:

Thank you, that's very helpful.

Duncan Tait:

Thank you, Arthur.

Operator:

Thank you, sir. Ladies and gentlemen, as a reminder, if you wish to ask any

audio questions, please press *1 on your tap on keypad at this time. We do

have Andrew coming back with a follow-up question, one moment, please.

Mr. Nussey, your line is open, please ask your question.

Andrew Nussey:

Right, okay. Morning, everyone. A couple of questions from me. First of all, if

we look into APAC, can you just give us a little bit more detail around the

Singapore market, and particularly what you're thinking or seeing, in terms of

the certificate entitlements and the impact that that will have on the

performance through the course of the next couple of years? And, secondly,

I'll see two new distribution deals, as you touched on, Duncan. I wonder if

you have any insight to the pipeline on new distribution transactions, and

whether there is any sign in terms of increased outsourcing of national

centres or, equally, whether that's winning share from existing distributors?

Thank you.

Duncan Tait:

Very good, thank you, Andrew. Listen, I'll take those questions. So just, in

Singapore, we saw a 16% sequential increase in COE availability in the fourth

quarter of last year. And I'll remind all of us that Inchcape with Toyota was

the leading market share player in Singapore last year also. So good

momentum towards the end of the year. We've seen that continue into the

first quarter and, in fact, accelerate a little bit. I was very pleased with our

order intake in the first quarter in Singapore. And it looks like, subject to

supply availability for our OEMs, the Singapore market will be slightly better

than we had planned for this year. And we had planned for a reasonable

scaling of that market in 2024.

Now, if you think about that COE cycle, where the bottom end of the market

is about 35,000 units per annum total in the market at the low end to a high

end of above 100,000, we are absolutely on the uptick or the scaling up of

that market in Singapore for us. So we're climbing through the foothills.

Growth is very nice and that will last for a few years yet, I think, towards the

end of this decade before you get to the peak of the COE cycle. But for the

avoidance of doubt, we are definitely on the up cycle in Singapore, and we're

riding it very nicely and I'm pleased with our order intake.

In terms of distribution deals, so, look, a pleasing start to the year with some

new distribution contracts in Europe and the Americas. We have more that

we are in the final stages of negotiation for, both in APAC and Europe and in

the Americas, so a pleasing pipeline. I think I said earlier this year, I don't

expect us to get back to the 15 deals we did last year, but high single digits

would be a nice place for us to be. And we'll have some more news, later in

the year, as to where we are with distribution deals.

And I think there are opportunities to convert national sales companies from

OEM ownership into Inchcape ownership through some contract wins and

others. And if I just give you a sense about it, we are winning some which are

completely new. So Forland in Ecuador is a new deal for us. Ford already

operated in the Baltics, and we've now taken Estonia. So I think there's

opportunities, whichever way I look, in whichever region, there are more

opportunities for contract wins. And subject to valuations, there's also

opportunities, Andrew, for us to continue to consolidate the market through

acquisition.

Andrew Nussey:

Got it. That's great. Thank you.

Operator:

Thank you very much. Mr. Nussey. Ladies and gentlemen, as a final reminder,

if you have any questions, please press *1 at this time. We do not appear to

have any further audio questions at this time. I'd like turn the call over to

Robert Gurner, who will now handle the questions submitted by the web.

Thank you.

Rob Gurner:

Thank you, George. Good morning, everyone. We've only got one question

from an anonymous caller. "Can you explain why £100 million was chosen as

the quantum for the share buyback and not a higher amount? Does this

signal an intent to make further acquisitions?"

Adrian Lewis:

Shall I take that one, Duncan? No, we think... Thank you, Rob. We thought

that £100 million pounds was the most appropriate value to start with the

share buyback. If I take us back to what we said at the full year results, where

we reported a net leverage position of 0.8x in the context of a self-imposed

limit within our capital allocation policy of 1x. We said that we wanted to use

2024 to, through the organic cash flows from the group, create some

capacity in our balance sheet in order to continue to apply our capital

allocation policy. And the UK transaction will serve to accelerate that. On

completion of that transaction, that will, indeed, do that. And will create

capacity and optionality in our balance sheet and in our leverage position in

order to continue to deploy capital allocation. So we felt it was appropriate

to start with £100 million, and we'll start it once the transaction has

completed.

And, look, we've said on the call today, we're going to continue to be value

disciplined around our investments and around our acquisition

opportunities. Where we see synergy benefits, we see quite a lot of value in

acquisitions. But we are also very mindful that our own shares are also

attractive as an investment. So we will have capacity, we will have optionality

through the second half. And we'll continue to apply the disciplines

consistently as we've done in the past.

Rob Gurner:

Thanks, Adrian. There are no other questions from the web. Back to you,

George. I think there's other questions on the phone lines.

Operator:

Yes, sir, we do appear to have two at this time. So right now, we will go to

Akshat Kacker, calling from J.P. Morgan. Please go ahead.

Akshat Kacker:

Morning, Duncan. Morning, Adrian. Just one modelling question on my side.

When you think about net financial expenses for 2024, given that we are in

an environment of higher for longer probably, and the Japanese base rate

has also gone up, could you talk about how has that changed your

expectations around net financial expenses, please? Thank you.

Duncan Tait:

Good morning, Akshat. And that's definitely going to Adrian.

Adrian Lewis:

Thank you, Akshat. Actually, I'll remind just that today as a trading update

where we're talking about the top line only. I think what you should consider

in terms of net financial expenses, in the context of our PBT guidance where

we have reiterated our guidance for the full year, you'll see more about how

the lines within our P&L are revolving over time. I think I'd say one final thing

on JPY particularly. We have been consistent on the way through, that says,

where we see interest costs as part of the structures that we work with as

part of our OEMs. That's just part of the cost of the metal and part of our

pricing structures. So both good and bad news flows through into those

accordingly. So we'll say more, and you'll see more, in the detail of P&L. And

I'll remind you that we're reiterating our bottom-line guidance today.

Akshat Kacker:

Got it. Thank you.

Duncan Tait:

Thanks, Akshat.

Operator:

Thank you, sir. We now have a follow-up question from Arthur Truslove of

Citi. Please go ahead.

Arthur Truslove:

Thanks, everyone. So following on from the previous question, I guess one

question I have is, what are the key reasons why you haven't been able to

talk up consensus today? I guess, taking a high level view, your European

business is performing ahead of expectation. It sounds like APAC is

performing slightly better than you thought. And it sounds like LATAM is

performing broadly aligned with expectation. At the same time, certain

currencies have appreciated against the pound since you reported full year.

So I just wondered if you could talk a little bit as to why you haven't been

able to increase your full year outlook today? Thank you.

Duncan Tait:

Thank you very much. Arthur. Look, I'll try and make some comments to try

and be helpful to your questions. So, look, we're only three months into the

year. And, yes, we are making a positive trading statement today on the top

line. We saw some FX headwinds in the first quarter. And I think it's a bit

early for us to say whether FX will continue at a translational level to be a

benefit or a disbenefit to us during the year. What I can tell you is we're

focused on executing our business across those three distribution regions.

We've made great strategic progress in the first quarter in our move to a

pure play distribution business. And I feel really good about Inchcape, our

OEM relationships, and the markets we're in.

A lot of the markets are still at relatively low levels. We're planning Americas

flat, remember, for the year. And although there's some positive macro data

coming out of the Americas, like another interest rate cut in Chile this month,

it's a bit early to call the market up. And we think consumer demand will lag

the drop in interest rates. So we feel good about our first quarter. The

interims are only a few months away, when we'll give you a better sense of

how we've seen Q2 and the year. But we feel confident about the business.

And we're making really, really good progress. But we're only three months

in.

Arthur Truslove:

Wonderful, thank you very much.

Duncan Tait:

Thanks very much, Arthur.

Operator:

Thank you, sir. We'll now go to James Zaremba, calling from Barclays. Please

go ahead.

James Zaremba:

Good morning. I actually had a question on the retail disposal. Obviously,

there was some strategic rationale in the past for keeping that. Part of that

was the OEM relationships. And I think in the statement you said about how

you were pretty pleased that your OEM partners felt it was a good deal for

them as well. Obviously, I think in the UK, you had some brands which you

didn't represent as broadly in distribution. Should we think that it's a little bit

harder to win maybe distribution with those brands in the future, or is that a

bit unfair?

Duncan Tait:

Hi, James. Good morning. Look, so let me take that. So I think the backdrop

to your comments is exactly right. The UK business gave us the opportunity

to represent brands in our distribution markets. And I think Mercedes is a

great example of that where, just a few years ago, we didn't have Mercedes

distribution relationships. We're now the biggest distributor of Mercedes in

Latin Central America. And you know we're winning business with Mercedes

in APAC, notably, what we've done in Philippines and in Indonesia.

Now, what we have done over the last few years, as you know, is we've sold

£2.6 billion-ish of annual retail revenue, plus now the UK disposal. And at the

same time, we have more than doubled the size of our distribution business

since about 2019. So it is very clear what we've been doing. And during that

period, of course, we're building really solid relationships at market level,

regional level, and headquarters level with our key OEM partners. And I think

it is a testament to the way the company's built our OEM relationships, being

clear about strategy, which just has enabled us to simplify our portfolio and

dispose of the UK business. And by the way, I think the UK business will be in

great hands with Group 1. And our OEMs have been super supportive of

Inchcape's move and, actually, at the same time, from what I can see from

Group 1's move also.

Now, in terms of distribution business, then those OEM relationships,

whenever Inchcape completes a transaction, we want our relationships with

those OEM partners to be better the other side than it was when we started.

And I think the disposal of the UK business is another example of that. So I

expect to get really good support from our OEM partners to further grow our

business, whether that happens to be European, American, Japanese, or

Chinese OEMs as we grow our business.

The final point to note is, yes, you are right, if I look at an OEM like

Volkswagen, say for the Porsche element of that, we don't distribute

Volkswagen around the world. But in terms of that 17 million TAM, yes, it

takes a little bit of a chunk out of that. But there's still a market size for us to

go after globally of about 10 million units per annum in the markets that we

focus on. And you know, we're only about 3% of that target addressable

market. So with our existing OEM partners, and good markets we're in, the

company is well positioned to continue to grow. James, does that answer... Is

that helpful?

James Zaremba:

Yeah, no, very helpful. Thank you.

Duncan Tait:

Thank you.

Operator:

Thank you very much, sir. We appear to have one more question at this time,

and it is coming from Paul Rossington of HSBC. Please go ahead.

Paul Rossington:

Good morning. Well done on the update today. A quick question on the

outlook for LATAM. You're not banking on any particular recovery in Chile,

Colombia just yet. But lower interest rates could stimulate more demand,

but I'm also interested in the relationship between lower interest rates and

your inventory financing costs in LATAM. I presume that if rates come down

in LATAM and Chile, Colombia, that will be beneficial for your inventory

financing costs as well. Just a bit of colour around that would be great. Thank

you.

Duncan Tait:

Good question, Paul. That's going straight to Adrian.

Adrian Lewis:

Yeah, look, Paul, so let's tackle the first one around interest rate cuts. And

you've seen the central banks in a number of our Southern Latin American

markets act swiftly in reducing interest rates over the last six months or so

with a number of steps down. We are relatively prudent about our

expectations, in terms of the lag between those rate cuts, and how quickly

consumer confidence returns, and how quickly we see consumer growth in

terms of TIV. So we continue to maintain our relatively prudent stance of a

flat market, in particular somewhere like Chile. We think that's appropriate.

And, actually, if you look at what the external market commentators have

said more recently, at around our full year results time, those market

commentators were a little bit more optimistic than we were. Those market

commentators have since updated and are more consistent with us around a

flat market, year over year, in Chile in particular. So we think that's

appropriate, and that lag, we don't expect to be a tailwind for 2024.

Although, and look, we can all hope that there is a significant upswing in the

second half, but we're not banking on it.

In terms of interest rate cuts and its implications on our inventory financing,

look, well, I'd say a few things. Firstly, actually, the interest rates that are

associated with inventory financing facilities are typically denominated in the

country of purchase as opposed to the country of the market in which we

operate. The delta, really, is in the hedging costs, and that hedging cost sits

within gross margin. You'll see a bit more colour on this when we do our In

the driving seat about how we manage that. But the big picture is both,

similar to some of the questions I was asked earlier around FX, look,

ultimately, all of this ends up in the way we think about pricing on vehicles.

And, ultimately, the costs of hedging, the cost of inventory financing, all sit

within the price of the vehicle. And all of the distributors and importers in

the market are subject to those same factors. So I think you should ultimately

think about there being an offset of any positive tailwinds in interest costs

elsewhere in the P&L.

Paul Rossington:

Just one more follow up. You talk about having 3% of the addressable market

that you're operating in. Is that in value or in volume terms, when you talk

about that 3%? So is it circa 300K volume sales?

Duncan Tait:

Yeah, yeah. You're right, Paul. Yeah, it's about 300K units of what we think

our TAM is about £10 million-ish. We'll give you more about that later on in

the year as to how we think our TAM is evolving. So you'd have heard me