Inchcape Regulatory News (INCH)

Inchcape plc, the leading global automotive distributor, announces its interim results for the six months to 30 June 2023

A strong performance, driving further positive momentum

Duncan Tait, Group CEO, commented:

"Inchcape has produced another excellent performance during the first half of 2023, driven by growth from acquisitions and by consistently strong organic growth. In particular, the acqusition of Derco has transformed our market position in the Americas and is already having a positive impact on the Group. This first half performance highlights Inchcape's continued commercial momentum, supported by our global scale and long-standing OEM relationships, underpinned by a highly differentiated technology platform. Our business in the Americas is performing well, while we are producing strong momentum across the APAC region. In Europe, our business also performed well, despite challenges in certain markets.

Inchcape continues to build its position as the global leader in automotive distribution thanks to the combination of our people, who bring industry-leading expertise, our diversified geographic footprint and our digital and data capabilities. We are uniquely placed to deliver outstanding performance for our OEM partners and drive consolidation in a highly fragmented market, supporting sustainable growth and value for our stakeholders. As a result, we remain confident in our medium-term outlook."

1. Organic growth is defined as revenue growth in operations that have been open for at least a year at constant foreign exchange rates

2. These measures are Alternative Performance Measures, see 'Our financial metrics'

3. Including discontinued operations

4. XCMG: Xuzhou Construction Machinery Co. - one of China's largest heavy machinery manufacturing companies and the third largest in the world

5. The current range of 2023 Adjusted PBT analysts' consensus estimates is between £470m and £506m, as at 12 May 2023

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This announcement contains inside information.

Results presentation today

A presentation for analysts and investors will be held today, Thursday 27th July 2023, at 08:30 (UK time). The presentation will be held at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS.

To register for the webcast of the event please follow this link, or to register for conference call access please follow this link.

A replay of the presentation will be available via the Company's website, www.inchcape.com later today.

Financial calendar

Contacts

About Inchcape

Inchcape is the leading global automotive distributor, with operations across six continents.

By combining our in-market expertise with our unique technology and advanced data analytics, we create innovative customer experiences that deliver outstanding performance for our partners - building stronger automotive brands and creating sustainable growth.

Our distribution platform connects the products of mobility companies with customers, and our responsibilities span product planning and pricing, import and logistics, brand and marketing to operating digital sales, managing physical sales and aftermarket service channels.

Delivering for our partners, our customers and our people - so they can realise their ambitions in the new world of mobility.

The Group is headquartered in London and employs over 20,000 people globally.

www.inchcape.com

Our results are stated at actual exchange rates. However, to enhance comparability we also present year-on-year changes in sales and adjusted operating profit in constant currency, thereby isolating the impact of translational exchange rate effects. Unless otherwise stated, changes are expressed in constant currency and figures are stated before adjusting items. Following the disposal of our remaining Retail-only business in Russia (Moscow), all figures quoted in the 'Operational' and 'Operating and financial' reviews are on a 'continuing operations' basis and therefore exclude any contribution from Russia in 2022.

Operational review

Key performance indicators

1. See note 16 for definition of Key Performance Indicators and other Alternative Performance Measures.

2. Organic growth is defined as revenue growth in operations that have been open for at least a year at constant foreign exchange rates

H1 2023 results - performance review

The Group delivered an excellent operational performance in H1 2023, driven by organic revenue growth, and growth from acquisitions, with strong margins well ahead of historic levels, as the profile of the business continues to shift towards Distribution. This performance was supported by volume growth, as well as pricing, in new and used vehicles in each region of our Distribution business, and a robust performance from our Retail business. Our performance was supported by an easing supply environment.

Group revenue of £5.6bn rose 45% year-on-year reported and 42% in constant currency, supported by organic growth and the acquisition of Derco. On an organic basis, excluding currency effects and net M&A, revenue increased by 13%, with strong performances across our diversified geographic footprint.

The Group delivered an adjusted operating profit of £327m, up 61% year-on-year reported and 56% in constant currency, reflecting organic topline growth, the contribution of Derco and enhanced margins.

Adjusted profit before tax (PBT) of £249m (1H22: £184m) as a result of the improvement in revenue and operating profit.

This profit performance more than offsets an increase in adjusted net interest expense to £79m (1H22: £20m). This increase is due to the shift in the Group's capital structure from Net Cash to a Net Debt profile over the last 12 months, following the transformational acquisition of Derco. The increase in adjusted net interest expense was driven by this change in Net Debt profile, increasing interest rate environment and inflated further in H1 2023 from transitional costs and acquired debt in Derco.  As the Group's capital structure continues to transition, with reduced exposure to floating interest rates following the successful issue of a 5 year £350m bond, at a 6.5% fixed interest rate coupon during the period, we expect adjusted net interest expense to moderate in H2 2023.

During the period pre-tax adjusting items amounted to an expense of £45m (1H22: £3m credit). As expected, this was primarily driven by acquisition and integration costs (£21m), the finance component of the deferred dividend payment (£10m) and non-cash, non-operational losses arising from the adoption of hyperinflation accounting relating to Ethiopia (£14m).

The highly cash-generative nature of our business model drove strong free cash flow generation of £202m (1H22: £224m), representing a conversion of adjusted operating profit of 62% (1H22: 110%). Net interest payments in the period increased to £62m (1H22: £12m), excluding payment for leases and currency in both periods, for the reasons outlined above. There was a net working capital inflow of £35m (1H22: inflow £80m) driven by an alignment of supplier trading terms (in particular around inventory financing) and a c.20% reduction in excess inventory at Derco, offset by a normalising of working capital elsewhere across the Group, as previously highlighted. Outside of free cash flow, there was a payment of a pre-completion dividend to the Del Rio family and the settlement of a liability to acquire the interests of minority shareholders of £212m. Ordinary dividend payments were £88m.

The Group closed the period with adjusted net debt of £564m (excluding lease liabilities), compared to adjusted net debt of £378m at the end of December 2022. On an IFRS 16 basis (including lease liabilities), the Group ended the period with net debt of £1,044m (December 2022: net debt of £877m). Group leverage on a proforma basis was approximately 0.8x at 30 June 2023. By the end of FY 2023, Group leverage is expected to reduce, benefiting from a strong profit and cash flow performance during H2 2023, partially offset by acquisitions and dividend cash outflows.

In June 2023, the Group successfully issued a £350m public bond, with 6.5% coupon and a five-year maturity. The proceeds from the bond were used to re-finance the bridge facility put in place to fund the acquisition of Derco, the initial term for which was due to expire at the end of FY 2023.

Return on capital employed over the period was 30%, compared to 35% for the equivalent period last year.

Q2 2023

Group revenue for the second quarter was £2.9bn, up 40% reported, reflecting the contribution of Derco and organic growth of 13%, in line with Q1 2023. In Distribution, revenue increased 18% organically, compared to +15% in Q1. The sequential step-up in organic growth was driven strong performances in each region. In Retail, revenue increased 1% organically, compared to +8% in Q1 2023, as a result of the growing impact of the agency model.

Update on Derco - strong progress made during H1 2023

Our business in the Americas region remains resilient and we are confident about the medium to long-term outlook for our business in the region, despite a challenging environment in certain markets. Our confidence is supported by the high quality of the Derco business, with its leading market positions and exciting growth prospects in a region with high GDP growth and low motorisation rates.

Derco is a transformational acquisition for Inchcape - it has significantly increased our market leadership position in the Americas and is already helping to develop our OEM relationships in the region, as well as driving major strategic benefits globally, for example helping to deliver the global strategic agreement with Great Wall Motors. With this in mind, we expect Derco to accelerate the Group's growth profile and to drive margin accretion over the medium and long term.

During H1 2023, Derco's revenue and profit contribution was in line with our expectations, with successful delivery of operating margin at the top end of the 5% -7% range of a typical distribution business, pre-synergies, as anticipated. We made excellent progress in integrating the business, maintaining all OEM relationships, retaining key personnel,and successfully initiating the integration of Inchcape's tools and systems across the Derco business.

Our integration progress included the initial alignment of Derco's inventory management practices and supplier terms with those employed across the Group. We achieved substantial traction in normalising Derco's working capital position during the period, driven by the alignment of trading terms with certain OEM's. We also made good headway in reducing Derco's excess inventory, by around 20%, during the period. In addition, adjustments to the quantity of inventory in the supply chain were made to ensure we achieve a normalised level of inventory by the end of FY 2023, with most of the benefit expected to impact H2 2023.

As a result of the progress made in each of these areas, we continue to expect to deliver a £200m working capital inflow in Derco by the end of 2023, which will be partially offset by a working capital outflow across the rest of the Group, as previously outlined.

We remain on track to deliver the majority of the annualised cost synergies of at least £40m by the end of FY 2024, with around 30% of these cost synergies to be delivered during FY 2023. As previously stated, one-time costs of £60m will be invested in driving these synergies. We also expect to deliver substantial revenue synergies from the integration of Derco, through mutually developing our OEM relationships, driving improvements in aftersales processes at Derco and through implementing a market-leading approach to finance and insurance products for customers.

In line with our previous guidance, we expect Derco to be 15+% accretive to Inchcape's earnings per share (excluding implementation costs) in FY 2023 and 20+% accretive in FY 2024.

From the announcement of our FY 2023 results, Derco's performance will be reported within our disclosure for the Americas region.

Strategic priorities

Our Accelerate strategy is focused on two growth opportunities: Distribution Excellence and Vehicle Lifecycle Services, supported by our Responsible Business plan: 'Driving What Matters'.

Developing our approach to Responsible Business is central to our future plans. It will bring Inchcape closer to our customers, ensure we further strengthen our position as a trusted partner to OEMs and help us recruit, engage and retain the best talent. All of these elements are fundamental to the successful delivery of our Accelerate strategy and to ensuring Inchcape's sustainability for the long-term. Driving What Matters has four key focus areas: Planet, People, Places and Practices. We made good progress in each of these areas in H1 2023:

(1) Distribution Excellence: extending our leadership in automotive distribution (new vehicles and original parts)

In the Group's core operations, we create the vital link between the OEM and the end-customer, with our full-spectrum distribution capability. This includes deciding which vehicle models and parts to order, developing the pricing structure in a market, arranging the importation of new vehicles and parts, building the brand including marketing and the provision of finance and insurance products, the creation and management of the digital and physical network, in-market distribution of new vehicles and parts for the aftermarket, and finally, when we choose to operate dealerships ourselves, we perform retail and aftersales services.

During H1 2023, we have made further progress in this area:

(2) Vehicle Lifecycle Services: capturing more lifetime value - of customers and vehicles

We see significant opportunity for the Group to unlock value in the subsequent phases of the vehicle's lifecycle, through new and complementary products and services. Over the past 18 months we have made solid progress in Vehicle Lifecycle Services:

Capital allocation

Supported by a strong balance sheet, our capital allocation policy remains unchanged: 1) to invest in the business to strongly position it for the future; 2) to make dividend payments; 3) to conduct value-accretive M&A; and, in the absence of inorganic opportunities, 4) consider share buybacks.

Our dividend policy targets a 40% annual payout ratio of basic adjusted EPS, and as such based on the 2022 dividend of 28.8p, the Board has declared an interim dividend of 9.6p (1H22: 7.5p).

Investment proposition

Inchcape is the leading global automotive distributor. Combining our exposure to higher growth markets and diversified revenue streams, with our market leadership positions and our history of market outperformance, we expect to deliver strong organic growth. By leveraging our scale, operational improvements and focus on higher margin activities, we can drive margin expansion. The highly fragmented nature of distribution, and our strong financial position, also provides significant consolidation opportunities.

In addition to the attractive growth prospects, the business is asset-light with excellent financial characteristics: high returns and cash conversion. Combined with a disciplined approach to capital allocation we believe these should enable the Group to maintain its long track record of delivering significant value through organic growth, consolidation and attractive shareholder returns.

Outlook

Inchcape remains extremely well positioned for growth, supported by the Group's global scale and market leadership, resilient business model, our digital-led approach and the excellent progress already made on the integration of Derco.

Across our diversified geographic footprint, our business in the Americas is performing well, remains resilient and has been further strengthened by the acquisition of Derco, while we are producing strong commercial and operational momentum across the APAC region. Our business in Europe also performed well in H1 2023, but consumer demand remains weak in a number of markets across the region.

Against this backdrop, and based on prevailing market conditions, we expect full year results for FY 2023 to be towards the top end of the range of published market consensus1.

1. The current range of 2023 Adjusted PBT analysts' consensus estimates is between £470m and £506m, as at 12 May 2023 

Operating and financial review

Distribution

The Distribution segment reported revenue of £4.4bn, increasing 62% year-on-year on a reported basis, reflecting the contribution of Derco as well as organic growth, which was up 17%. The combination of an excellent topline performance and higher margins drove adjusted operating profit1 of £302m (1H22: £174m). Adjusted operating margin1 rose 50bps to 6.8%.

APAC revenue was up 17% year-on-year with adjusted operating profit1 rising 25%. Adjusted operating margin was stable at 7.1%, with market mix tailwinds expected to be partially offset by strategic investments in the short term. During the period, there were particularly strong performances from Brunei, Thailand and Indonesia. Hong Kong is showing some early signs of market recovery, highlighted by a growing order bank and improving demand for premium passenger vehicles. In Singapore, the market remains impacted by a low level of vehicle licence availability, down significantly from peak levels, with licence availability expected to improve in 2024. In Australasia, performance has been strong for new vehicles, with market share gains achieved, supported by an improving supply situation and resilient demand. We signed deals to acquire three businesses across APAC, all of which are expected to complete during H2 2023. These acquisitions, which are expected to contribute a combined annualised revenue of around £400m, are Mercedes-Benz's distribution operations in Indonesia, CATS, a leading distributor of luxury vehicles in the Philippines and Great Lake Motor Distributors, which distributes SAIC's Maxus brand in New Zealand.

Europe & Africa revenue was up 24% year-on-year with adjusted operating profit1 rising 48%, with elevated levels of adjusted operating margin at 5.5%. In Europe, accelerated supply helped to drive this top line growth and margin performance, while new consumer demand was weak in a number of markets. Our relatively high order bank is expected to moderate, with margins expected to normalise. Africa continues to be an exciting long term growth prospect for the Group and has performed in line with the market, particularly in the aftermarket. 

Americas revenue grew 192% year-on-year, as a result of the contribution from Derco and a strong organic growth performance of 16%. Adjusted operating profit1 grew 160%, with adjusted operating margin of 7.5%, ahead of the more normal levels of 6.7% delivered in H2 2022. The region's future margin performance will be underpinned by the delivery of cost synergies at Derco and from a highly diversified geographic footprint across the region, we benefited from growth in 10 of the 12 markets where we have a presence. Our businesses in Peru, Bolivia, Uruguay, Ecuador, across Central America and in the Caribbean performed particularly well, with market share gains in a number of these markets. Industry volumes in Chile and Colombia were down on the prior year but our businesses in those markets remain resilient, with our market share growing in Chile and remaining stable in Colombia. We remain confident about our position in the Americas over the medium to long term, given the relatively high GDP growth and low motorisation rates being exhibited in the region.

Retail

Our Retail segment includes the results of our UK and Poland franchise dealerships and our bravoauto business in these markets.

From the start of 2023, in the UK, certain manufacturers changed the way they sell new vehicles (choosing to sell directly to consumers via dealer groups), and as such the Group recognises a handling-fee (not the selling price of the vehicle). This transition to an "agency model" has adversely impacted reported revenue growth but supported margins.

Retail delivered organic revenue growth of 4% and adjusted operating profit1 declined (20)%, resulting in an adjusted operating margin of 2.0%. Excluding the impact of the "agency model", organic revenue growth is estimated to have been 17% and adjusted operating margin is estimated to have been 0.2% lower. The reduction in operating profit reflects margin normalisation as we lap the peak of vehicle pricing in the prior year driven by supply shortages, as well as on-going investment in the development of bravoauto, which continued to support growth in our used car business. Volume growth in new vehicles was supported by improving vehicle supply.

1: Operating profit and operating margin stated before adjusting items

2. Organic growth is defined as revenue growth in operations that have been open for at least a year at constant foreign exchange rates

Value drivers

We provide disclosure on the value drivers behind our gross profit. This includes:

We operate across the automotive value chain, and during the year we generated 31% of gross profit through Aftersales (1H22: 33%). This reflects greater gross profit contribution from vehicles as volumes improved and higher vehicle gross margins.

Other financial items

Adjusting items: In the first half of the year, we have reported a pre-tax charge of £45m (1H22: £3m credit) in respect of adjusting items. This was primarily driven by one-off costs related to acquisition and integration costs (£21m), non-cash, non-operational losses arising from the adoption of hyperinflation accounting relating to Ethiopia (£14m), and a component of the deferred dividend payment for the Derco acquisition recognised as a financing cost (£10m). Further details can be found in note 3 of the interim financial statements.

Net financing costs: Reported net finance costs were £103m (1H22: £20m). This includes approximately £24m of adjusting items relating to hyperinflationary accounting in Ethiopia and interest on a component of the deferred dividend payment for the Derco acquisition recognised as a financing cost. Adjusted net finance costs increased to £79m (1H22: £20m) which was driven by higher interest rates, a phased reduction in acquired local debt and transitional costs relating to the Derco acquisition.

Tax: The effective tax rate on adjusted profit is 27.2% (1H22: 26.1%), within the Group's guidance range of between 27% and 28%, and on a statutory basis is 31.7% (1H22: 25.0%). The increase in the effective tax rate on adjusted profit includes the impact of unrecognised deferred tax on losses across the group, principally in the UK and Americas. The effective tax rate on a statutory basis for the period is not comparable to the same period in FY22 since the current period includes the impact of IAS 29 Financial Reporting for Hyperinflationary Economies in relation to the financial position of Ethiopia.

Non-controlling interests: Profits attributable to our non-controlling interests increased to £7m (1H22: £4m). The Group's non-controlling interests comprise a 40% holding in PT JLM Auto Indonesia, a 33% share in UAB Vitvela in Lithuania, a 30% share in NBT Brunei, a 30% share in Inchcape JLR Europe, a 30% share in Ditec in Chile, a 10% share of Subaru Australia and 6% of the Motor Engineering Company of Ethiopia.

Dividend: The Board has declared an interim dividend of 9.6p per ordinary share which will be paid on 1 September 2023 to shareholders on the register at close of business on 4 August 2023. The Dividend Reinvestment Plan is available to ordinary shareholders and the final date for receipt of elections to participate is 10 August 2023.

Capital expenditure: During the first half of 2023, the Group incurred net capital expenditure of £35m (1H22: £18m), consisting of £36m of capital expenditure (1H22: £26m) and £1m of proceeds from the sale of property (1H22: £8m). In 2023, we continue to expect net capital expenditure of less than 1% of Group sales.

Financing: As at 30 June 2023, the funding structure of the Group is comprised of a committed syndicated revolving credit facility of £700m (1H22: £700m), sterling Private Placement Loan Notes totalling £210m (2022: £210m), a 5 year bond of £350m, at a fixed coupon of 6.5%, replacing the bridge facility of £350m (2022: £350m), a term facility of £250m (2022: £250m) and Derco debt on acquisition £52m (2022: £617m). As at 30 June 2023 the syndicated revolving credit facility was drawn £120m (2022: undrawn). For our corporate debt, excluding our Revolving Credit Facility, around 70% is at fixed rates and over 50% has a maturity of at least 3 years. The Group remains well within its debt covenants.

Pensions: As at 30 June 2023, the IAS 19 net post-retirement surplus was £77m (2022: £93m), with the decrease driven largely by lower than expected returns on scheme assets partially offset by movements in corporate bond yields affecting the discount rate assumption used to determine the value of scheme liabilities. In line with the funding programme agreed with the Trustees, the Group did not make any additional cash contributions to the UK pension schemes (2022: £2m).

Acquisitions: In H1 2023 the Group continued to further expand its distribution footprint, signing 3 acquisitions during the period. These deals are expected to complete during H2 2023.

PRINCIPAL BUSINESS RISKS

The Board has reassessed the principal business risks which could impact the performance of the Group. These include:

Strategic risks, including:

Material operational risks, including:

The materialisation of these risks could have an adverse effect on the Group's results or financial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded. The Group faces many other risks which, although important and subject to regular review, have been assessed as less significant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain financial risks.

The Group has defined and implemented systems of risk management and internal control designed to address these risks. These systems can offer reasonable, but not absolute assurance, regarding the management of these risks to an acceptable level. In particular, the effectiveness of these systems may change over time, for example with acquisitions or disposals or as the business implements major change programmes. The effectiveness of these systems are reviewed annually by the Audit Committee and improvements are made as required.

DISTRIBUTION

1. Distribution agreements for these brands across a range of Caribbean islands, centred on Barbados

2. Distribution agreements for these brands across a range of Pacific islands, centred on Guam

3. Following scale disposal of retail businesses in Australia, retail is no longer reported as a separate segment in APAC.

See note 16 on page 37 for further details of alternative performance measures.The notes on pages 20 to 39 are an integral part of these condensed consolidated interim financial statements.

The notes on pages 20 to 39 are an integral part of these condensed consolidated interim financial statements.

The notes on pages 20 to 39 are an integral part of these condensed consolidated interim financial statements.

The notes on pages 20 to 39 are an integral part of these condensed consolidated interim financial statements.

Share-based payments include a deferred tax charge of £nil (30 June 2022: deferred tax charge of £1.8m; 31 December 2022: net tax credit of £nil).