Inchcape PLC Robust Distribution offset by continued Retail market challenges


Inchcape PLC (LON:INCH), today announced results for the year ended 31 December 2018

· Robust Distribution offset by continued Retail market challenges resulting in a 2.6% pre-exceptional PBT decline in constant currency

· Reported PBT of £132.1m, down 64% driven by goodwill impairment, and pre-exceptional PBT decline of 6.5% in actual currency

· Ignite supporting business with four deals during 2018, revenue stream successes and further procurement savings

· Two BMW contract wins in Kenya and Lithuania in 2019

· Good free cash flow conversion with generation of £281m, compared to £314m in 2017. FY18 DPS maintained year-on-year at 26.8p.

“In 2018 we continued to demonstrate the merits of our Distribution business model and the strong cash generation profile of our business. Distribution contributed 93% of Group trading profit, compared to 85% in the prior year, after growing 7% year-on-year in constant currency over the year and 3% excluding our Central America acquisition. Distribution profit was driven by a strong performance across Asia, despite market decline in Singapore. Margins in our Retail channel came under further pressure due to the continued UK market supply and demand imbalance, the incremental impact of the new Worldwide Harmonised Light Vehicle Testing Procedure (WLTP) regulation, and a slowing Australia market. These factors were partially offset by the delivery of near record profit in Russia Retail, as we benefited strongly from Ignite initiatives undertaken in the market. Strategic initiatives, focused on rationalising our cost base, are underway to improve our Retail segment performance in 2019. Given continuation of the market trends that we discussed at the Q3 trading update, we expect a resilient performance in 2019 before the impact of a meaningful transactional currency headwind.

Against this backdrop, our Ignite strategy continues to enable us to manage the changing landscape and take advantage of the opportunities available to a well-capitalised, professional and global operator. Aftersales gross profit grew 7% in constant currency, excluding the Central America acquisition, with particularly encouraging performances in key regions such as South America, whilst Used cars performed very well over the year. Our global F&I strategy delivered an incremental £15m of profit over the year and our cumulative procurement savings ended the year at £32m.

I am very pleased to say that Indumotora, the South America acquisition we have operated for two years and our largest acquisition under Ignite, has achieved its targeted ROIC a year earlier than expected with earnings outperformance compared to plan. Central America, operated since March 2018, has also integrated well albeit against the short-term backdrop of a weaker market. We remain excited by the opportunities that entry into Central America and a larger scale presence with Suzuki present. Today we also announce two new Distribution contracts with BMW, driven by the OEM’s regional consolidation strategies and enabled by our efforts in becoming the OEM’s partner of choice. We will now operate in Lithuania, becoming BMW’s distributor across the Baltics having been awarded BMW in Estonia in 2017, and Kenya following on from our market entry in 2018 with JLR. Whilst there remain uncertainties in many of our markets, we have much in our control and we look forward to continued momentum in our business as we continue to execute on our Ignite strategy. Our capital allocation priorities remain unchanged and we continue to regularly review buybacks, with a prudent view given current macro uncertainties”.


Underlying Strength Delivering Long-Term Value
In many ways the 2018 financial results validate our strategic intent to focus our business on Distribution. Our influence and control of the full value chain in Distribution markets ensured we were able to mitigate market challenges such as the reduced availability of Certificates of Entitlement in Singapore, returning a very positive full year performance in the Asia region as a whole. We continued to face significant pressures in some of our Retail markets, driven by the persistent supply and demand imbalance on diesel vehicles in the UK, but additionally with some temporary supply shortages relating to the introduction of the new WLTP (Worldwide Harmonised Light Vehicle Testing) regulation in the market. In addition, our Australian Retail business was impacted by a significant new car market slowdown, driven by cooling in the property market. Together, these factors have led to a resilient Group profit performance in 2018. We have progressed many strategic objectives during the year and have actions in place to improve our Retail operations in 2019.

The full Operating Review can be found below, but I would like to highlight why Inchcape has the fundamental strength to succeed, to continue to grow and to deliver returns on investment for our shareholders over the long term, despite the headwinds currently faced.

1. A Unique and Sustainable Business Model
The heart of our business, and our core set of competencies, is in automotive distribution; the management of the post-factory value chain for our vehicle manufacturer or ‘OEM’ (original equipment manufacturer) partners. The distribution model allows us to capture a greater portion of the value chain and drive higher margins and returns. We have long-standing strategic distribution partnerships, providing end-to-end routes-to-market for some of the world’s leading and most recognisable vehicle manufacturers; our portfolio of these brands is diverse and includes premium, volume and commercial OEMs, which gives us a balanced segmental representation across our operations.

Within that value chain we also operate as a retailer, giving us true insight into our customers and allowing us to develop world-class customer experience solutions that are globally scalable. Through the full-spectrum distribution value chain Inchcape manages business partner and customer touchpoints from vehicle product planning right through to servicing customers’ cars.

Inchcape is unique – we are the only independent automotive Distributor and Retailer with global scale.

2. Ignite: Our Strategy to Drive Growth
Inchcape’s Ignite strategy is the powertrain that moves our business forward and underpins our ambition to drive growth. Ignite was created to drive operational excellence across our markets; to consolidate select parts of our fragmented industry; to continually innovate to take advantage of our scale and expertise; and to ensure a long-term future for the company.

Through Ignite’s first four objectives – our organic growth drivers – we build a stronger, more sustainable business, as well as the trust of our OEM partners and customers. These are our two key operational stakeholders and the focal points of our vision to become the world’s most trusted automotive distributor and retailer.

Inchcape operates in markets that are subject to changing trends and conditions, and it is through Ignite that we strive to maximise the profit opportunity against that backdrop. In 2018 we have made good progress under each objective:

Lead in Customer Experience – we have focused on our digital capability in this area, developing a new customer-centric omni-channel experience for Distribution, with an initial launch of the operating model taking place later this year in Australia. Digital will become an increasing proportion of our annual capex spend to deliver this. We have also continued the rollout of Salesforce CRM (customer relationship management), Brightedge SEO (search engine optimisation) and the review aggregator, creating a 360 view of the customer journey and enabling us to deliver the experiences that customers are seeking.

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Full Potential on all our Revenue Streams – We have implemented initiatives to reduce the span of performance in Aftersales and Used across the group. During 2018 we benefited from increased service capacity in Singapore and the leveraging of processes across the region in South America has driven good growth in Aftersales gross profit. Used cars initiatives have also driven significant growth in Russia and South America with continued roll-outs in particular brands and markets. Total Group Used gross profit grew double digit over the year. Our international Finance and Insurance programmes are also delivering well with profit growth ahead of vehicle sales through continued rollout of proprietary products, improvements in selling processes and retendering of contracts. We have generated an incremental £15m of profit from F&I activity over the year.

Leveraging Global Scale – Over 2018 we continued to deliver procurement savings driving cumulative savings of £32m to date compared to a target of £50m by 2020. Key initiatives for 2018 included tyres distribution, vehicle storage and transportation, and parts in Singapore. Savings to date have focused on regional savings but through 2018 we also started to rollout our new global procure-to-pay platform which will enable global savings in 2019 and beyond. The expanded rollout of Gardx, an F&I product designed to protect the long-term value of our customers’ vehicles, is a great example of how we are successfully sharing best practices and leveraging our global scale.

Two Ignite objectives combine to drive inorganic growth – Become the OEM’s Partner of Choice and Invest to Accelerate Growth – for which our focus is on entry into and consolidation of small to medium sized markets with high growth potential where we can optimise our unique competitive advantage to establish market leading positions for our OEM partners. The key to this strategy, and one of the successes of the past year, is in establishing regional platforms for growth, using an initial market presence in a given region as a springboard to further consolidation opportunities. This benefits customers, the OEM and our own business as we can leverage our scale across the region adding value through one efficient operation.

Significantly, in March we extended our Latin American platform with a scale acquisition in Costa Rica and Panama. We acquired Grupo Rudelman and with it the distribution contract for Suzuki and a number of emergent Chinese brands. We have now significantly increased our exposure in Latin America, through both long-standing and newer partnerships, in the high-growth potential markets that we see as fundamental to our continuing consolidation of the industry. The Costa Rica and Panama markets have been weak over 2018 but the business contributed good incremental profit to the Group and we believe we have set the foundations to drive operational improvement and extract further synergies in 2019. The Indumotora business in South America, which we have now operated for two years, achieved its target ROIC in 2018, a year early given its outperformance to plan.

We have also been able to consolidate BMW Group’s Baltic operations having recently been awarded the Distribution contract for Lithuania, following on from our Estonia contract win in 2017 and existing Latvia contract. Similarly, over the year we extended our representation with Jaguar Land Rover as we were awarded the Distribution contracts for Colombia and Kenya. Following on from this we have been awarded the Kenya contract by BMW as we look to build upon this and our existing operations in Ethiopia, creating a platform to consolidate Distribution contracts throughout east Africa. In less than a year we have gone from one OEM to three in the Africa region, with a development pipeline of further markets under consideration.

It is important to add that while we have capitalised on a strong set of opportunities recently, we have a highly selective and disciplined approach to the acquisition pipeline and to our allocation of capital. We have the firepower to invest but do so in a way that is consistent with our strategy of long-term, sustainable growth, and shareholder value creation.

Building Structural and People Capability
None of the progress we have made over the past year would have been possible without the expertise and dedication of our people.

We have continued to invest in the skills we need as our industry evolves, managing succession and ensuring long-term viability, and we recognise that the sustainable business of the future must bring new talent in from outside to extend Inchcape’s capabilities where we see a gap. In particular we have expanded our digital teams both at Group and market level, where they are playing a leading role in the continued optimisation of our retail footprint and customer experience. The potential for technological advancement in our industry should not be underestimated and our aim is to keep pace and anticipate wherever possible to maintain a strong competitive edge, both now and in the years ahead.

Long-term Value Creation
The combination of our business model, our strategy and our capability comprise Inchcape’s core strength and provide the basis of our proposition for multi-layered growth: through operations with a weighting towards higher margin distribution contracts; through a balanced exposure to mature and high-growth potential markets; through scale leveraged to build efficiencies across our global operations; through sensible deployment of cash generated through the operations; and through our positive response to the evolving automotive industry.

The automotive industry is undergoing significant change as advances in technology are redefining the value chain and unlocking new profit pools where competition comes from both inside, and outside of, our industry. While we are actively monitoring all aspects of the changing automotive industry, in the near term our focus is on digitising our business and piloting both proprietary and joint venture innovation in customer interface, autonomous mobility, new models of access and ride hailing.

Inchcape is structured to maximise the opportunities for earnings and delivering cash returns for our shareholders and I believe wholeheartedly that the business will continue its long track record of delivering growth.

I believe Inchcape has a strong and sustainable business model which provides an excellent long-term investment proposition. This year has reaffirmed that our Ignite strategy is taking Inchcape in the right direction; it has demonstrated the growth opportunity in Distribution, has enabled us to improve our operations and has enhanced our global footprint. Our diversified and distribution-weighted portfolio will continue to be an engine for growth over the long term.

We also remain focused on ensuring the best possible performance of our Retail businesses against the market headwinds we continue to face. We believe that we have exited 2018 with a stronger Retail strategy and are starting to see benefits from operational improvements that are being implemented.

Looking nearer term, excluding an expected AUDJPY transactional currency headwind we expect our performance in 2019 to remain resilient, in-line with continued market trends already seen towards the latter part of 2018.

Overall, as the automotive industry continues to evolve and with Inchcape’s foundational strengths and stability in the face of change, I am confident that we will capitalise on the opportunities ahead. I believe that the combination of our dedicated people, the Ignite strategy and a sustainable business model means that Inchcape is positioned well to respond to market dynamics.

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