PDG.L Regulatory News (PDG)

Pendragon PLC("Pendragon" or the "Group")

Strategy update

(Issued 2 September 2020)

Pendragon today announces its strategy to "transform automotive retail through digital innovation and operational excellence" with financial targets intended to restore the Group to sustainable profit growth and deliver attractive returns for stakeholders. The Group is targeting an underlying PBT of £85-90m by FY25.

Covid-19 response

The Group responded swiftly and effectively to the Covid-19 pandemic, underpinned by the actions it took to minimise cash outflows during the enforced closure period, as well as the support received from the government programmes, such as the job retention scheme and rates holidays. The Group also received support from its OEM and funding partners, in particular with regard to stock funding. During the national-lockdown period, the Group actively advanced its digital and fulfilment capabilities, adding both online payment functionality and a home delivery proposition. As the business began to reopen, the Group sought to make permanent efficiency gains, accelerated the right-sizing by both closing-down stores that had no pathway to sustainable profitability and reducing the size of the overall workforce whilst maintaining the capability and capacity to deliver to customer demands. Together, these efficiency gains will deliver c.£37m of annual benefit.

Strategy review and transformation programme

The Group had commenced a strategic review prior to the onset of the Covid-19 pandemic, and over the past few months we have now completed a comprehensive review of both external market dynamics and business performance of our individual divisions. The current landscape for the sector has been assessed, considering the pace at which we expect the market to recover, how we expect consumer habits to evolve across both physical and digital channels, and how best to utilise the core strengths and advantages that the Pendragon model possesses in order to transform the operational and financial performance of the Group.

We believe there is a strong case for change and a significant opportunity for upside in profitability and the Group is well positioned to deliver transformational performance. To fulfil this potential, we have identified three strategic priorities:

1. Unlock value in the franchised UK motor division

2. Grow and diversify Pinewood

3. Disrupt standalone used cars

1. Unlock value in the franchised UK motor Division

There is a material opportunity to improve performance and unlock significant value in the franchised UK Motor division through actions to:

· Accelerate digital innovation

· Drive operational excellence and embed consistent best practice

· Operate from a lean and efficient cost base

These initiatives have been designed to drive improvements in used car margins, aftersales profitability and operating cost efficiency.

Accelerate digital innovation

The pandemic has driven a shift in UK consumption habits with consumers adopting new digital, and low-touch activities. We responded rapidly by strengthening both our digital and home delivery capabilities during lockdown so we could continue to trade. Whilst we fundamentally believe that there will always be a major role for bricks and mortar in vehicle purchasing, we expect these shifts in consumption habits to be permanent and that better digital and fulfilment experiences will be necessary to augment physical retailing. We are focused on delivering a number of initiatives to drive performance through digital innovation.

We will improve the platforms on which the business operates by building internal technology to provide improved and consistent customer relationship management systems (CRM). Improved CRM will allow us to create a single-view of the customer in order to drive targeted performance improvements at customer touch points, such as personal contract purchase (PCP) renewals and aftersales activities, and by providing better resolutions to customer feedback in order to improve satisfaction and long-term retention rates. We will also develop the look, feel and functionality of our digital channels.

We believe that there is material potential to improve used vehicle gross margins through the development and introduction of a used vehicle acquisition and management platform. By utilising the Pinewood DMS system, we will build capability to utilise data to improve the processes for vehicle acquisition, removing manual processes, improving the efficiency and thereby enhancing the margin we achieve from used vehicle inventory. We will also develop automated inventory management capability to reduce, through better use of data, the average number of days vehicles are held in stock, which will also improve margin. Finally, we will develop dynamic used pricing capability by harnessing both internal and external data to optimise the pricing of used vehicle inventory in a timelier manner. Each of these improvements will drive higher margins.

Drive operational excellence and best practice

There is further opportunity for us to improve performance through better operational practice, driving efficiencies. We are developing focussed internal reporting to drive insight into performance into areas such as vehicle preparation efficiency and sales force effectiveness. These improvements will also reduce costs, and improve margin profitability.

In addition, we have identified a series of opportunities and initiatives to drive substantial improvements to aftersales gross margin. These will include improvements to the store process, for example conversion rates of customer vehicle health checks, in order to improve technician productivity. In addition, we will introduce changes to improve cross-business consistency in the application of labour charge-out rates and use new system capabilities to both improve penetration rates on service plans and dealer guarantees, together with the introduction of new ancillary products.

Finally, we believe there is opportunity to deliver improved performance in the sale of finance and insurance products through both improved internal operational systems and increasing product availability through digital, customer facing, channels.

Operate from a lean and efficient cost base

We have made significant changes to our store and regional operating teams in order to right-size the model and to embed the efficiency gains we have delivered during the Covid-19 pandemic, which will deliver c.£37m of annual benefit. In addition, we believe there are further cost base efficiencies we will be able to unlock across the property portfolio, through the replacement of manual process with systemic solutions and through reviewing existing key contracts and services.

2. Grow and diversify Pinewood

Pinewood is an established, market leading 'Software as a Service' provider. It offers a dealer management system (DMS) and customer relationship management tool, and has delivered revenue growth at a compound annual growth rate of c.10% over the past five years, driven by an increasing number of users, and high customer retention rates. Pinewood offers a full suite of omni-channel capability that manages customer leads and enquiries from various digital physical and channels, quickly combines vehicle sales proposals for digital presentation to customers and manages the end-to-end aftersales operation. In addition, the DMS offers a fully compliant accounting module for its customers and the DMS dashboard is integrated with more than 50 OEMs. Pinewood's customer base had historically been UK based, with an increasing number of international customers now being added. We believe that Pinewood has significant further growth potential through:

· Delivering the material existing order pipeline

· Further geographic expansion

· Digital product extension

Deliver on the material existing pipeline of orders

Pinewood has a developed pipeline of customer orders which will be converted over the next 18 months. This will continue the growth in the overseas customer base, with existing orders adding c.80% to the current international customer base and c.10% to the overall customer base.

Geographic expansion

In addition to the existing orders, Pinewood will invest in the capability to develop further orders and deliver subsequent implementation to a wide global customer base. Existing relationships have the potential to unlock further orders from both dealer groups or from OEM backed solutions to be the single in-market DMS operator. We believe Pinewood has material opportunity for growth through these international channels, underpinned by a compelling proposition.

Digital product extension

Digital product extension will initially be an enabler for Pendragon performance across the previously highlighted areas such as CRM improvements, dynamic pricing tools and used vehicle acquisition and management platforms, but it is further envisaged that these products will be available to sell to the existing Pinewood user base, creating a new revenue stream for Pinewood. In addition, we will explore the development of a digital 'turn-key' retail solution for other dealer operators.

3. Disrupt standalone used cars

We believe the UK is the most attractive used vehicle market globally, with a ratio of over three used vehicles sold for every one new. The overall market for used cars is around eight million cars sold per annum. Based on the desired age and mileage profile for the market our target market, we believe there is an addressable market for Pendragon of around three million cars per annum, which is larger than the total new car market.

We also believe that Pendragon is significantly advantaged today against its peers, with an ability to leverage the complementary attributes of the wider Group to provide a steady source of suitable stock, an ability to source parts for preparation at scale advantaged pricing, a high level of brand-referrals within the Group and cross-Group technical ability. In addition, the data capabilities we plan to build will allow us to leverage further scale advantages into a standalone used car proposition and drive higher margins.

To capitalise on this opportunity, we will deliver:

1. Rebranding of the standalone used car proposition

2. Differentiated value proposition

3. A scaled physical estate

Rebrand the standalone used car proposition

Work is currently in progress to develop an appropriate brand identity to reflect a digitally-led product offer, supported by physical outlets. This will replace the existing Car Store brand.

Differentiate the value proposition

In addition, we will determine the revised customer proposition and operating model to underpin the repositioned branding in order to differentiate the proposition from the franchised used car model and to appeal to a broader customer base, both physically and digitally. The used car proposition will benefit from clear operational separation of the business unit from the franchised model and will not be encumbered by the same OEM facility requirements. It will, however continue to benefit from the Group synergies and future digital product development.

Scale the physical estate

During FY19, the Group reviewed the existing proposition and closed a number of Car Store locations that were not viable, and improved the performance of the remaining estate. The next stage of the development of the physical used car proposition will be the creation of larger-footprint, purpose-built facilities in targeted locations to provide both stocking points, customer retail and collection points and fulfilment hubs for home delivery. Over the next five years we are targeting the development of eight physical locations at an approximate capital cost of £7.5m per location. We believe that a combination of a digital proposition and these physical stores will allow us to gain a meaningful share of the target market.

Summary and financial targets

The Group is well positioned to deliver its three strategic priorities for growth and transformation. There is significant opportunity to unlock value in UK motor, to accelerate Pinewood's geographic expansion and diversification into new products and to disrupt standalone used car sales in the UK. We have created a roadmap to deliver our target underlying profit before tax of c.£85-90m by 2025 and a target underlying profit before tax margin of c.2%. We believe this an ambitious plan, but is achievable through the delivery of the initiatives we have set out.

Bill Berman, Chief Executive Officer, said;

"We firmly believe the three strategic priorities set out today will provide a platform to transform the Group's performance, leading to sustainable profit growth and delivering attractive returns for our shareholders. Critically, our strategy is designed to equip the business to react to changing consumer patterns in the years ahead and ensuring, in particular, that we are well positioned to take advantage of digital innovation.

"Pendragon has grown to become a leading motor retail group with a strong network of dealerships. Throughout my years in the automotive industry I have seen, and responded to, major shifts in consumer habits and market dynamics. I am confident we can unlock the full potential of Pendragon by delivering targeted improvements to our people, our systems and our operations. We look forward to executing this strategy and embarking on an exciting new chapter for Pendragon."

A presentation for analysts will be held today at 10:30am.

Please contact pendragon@headlandconsultancy.com to register for the event. A recording of the presentation will be made available for on demand viewing on Pendragon's Investor Relations website once the meeting has concluded.

Pendragon will report its results for the first-half of FY20 on 24 September.