Inchcape PLC

Q3 23 Trading Update | Audio Webcast

26th of October 2023



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


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.


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


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


Andrew Nussey:

That's great. Thank you.


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.


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


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


Duncan Tait:

Thanks, George.


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


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.


We'll now move to James Zaremba of Barclays. Please go ahead. Your line is

open, sir.


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