Q1 2022 Cazoo Group Ltd Earnings Call
Greetings and welcome to the <unk> first quarter 2022 earnings call.
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I would now like to turn the call over to Robert Berg Director of Investor Relations and corporate finance. Thank you you may begin.
Good morning, everyone. Thank you for joining today's call and webcast to discuss our first quarter 2022 results you'll be able to find today's press release on our Investor Relations website at investors don't because they don't come to U K. We appreciate everyone. Joining us today with me on the call is Alex Chesterman, founder and Chief Executive Officer.
Steven Membrana, Chief Financial Officer.
Before we get started I would like to remind you of the company's safe Harbor language, which I'm sure you're all familiar with.
Management may make forward looking statements, including guidance and underlying assumptions forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
For further discussion of the risks related to our business. Please see the filings of <unk> Group limited with the SEC.
Now I will hand over the quotes Alex.
It's Rob.
Good morning, everyone and thank you for joining us today.
I'd like to start by discussing our Q1 performance, which was a very encouraging quarter in many respects and why we continue to expect strong sequential quarterly growth throughout the rest of the year. Despite.
Macroeconomic bagful.
Then I'll spend some time discussing why we remain highly confident in achieving our long term targets.
Starting with the first quarter I'm extremely pleased with our record Q1 revenues and unit sales.
In boots UK reconditioning in house during the second half of last year.
We are now really starting to see the benefits of this strategic decision, which has a material long term operational and financial advantages.
Despite a rapidly changing macroeconomic climate, we achieved over 50% sequential quarterly growth in retail units sold during the period driven by increased inventory available on our website and strongly supporting our thesis that increased reconditioning output and.
Inventory needs the great the sale.
We believe that all U K retail unit growth going forward will be primarily driven by our ability to continue to ramp up our reconditioning capacity. We now have an in house vehicle preparation sites in the UK, which can recondition over 120000 calls, but yet currently.
With the potential to double that capacity overtime.
In October we had just over 2000 vehicles available for sale of our UK website and despite record sales in Q1 with vantage not only to replace the inventory sold over the period, but also more than treble our available inventory to over 6000 vehicles.
As a result of having around pulp all reconditioning output.
We've always stated that the principal constraint to our growth is the ability to recondition cars quickly at all as opposed to consumer demand.
Our customers loved the kazoo proposition and this is reflected in consistent customer feedback on our market leading trust pilot rate of 4.8 ball and gives us increased high confidence in all right.
All of this opportunity.
In Q1, we saw the clear benefit of having more inventory available for sale selling over 50% more calls than in the previous quarter.
As we advance through this year, we aim to continue to ramp up our reconditioning capabilities by adding incremental resources and continuing to improve all of our processes.
We expect these initiatives to lead to further growth and allow us to continue our progress towards our long term market share ambitions.
Our growth in 2022, however will not just come from the U K, we continue to make good progress in mainland Europe .
Launches in France, and Germany late last year.
Unexpected to see a positive impact to our unit sales in those markets. Once we begin all brand marketing campaigns.
In the coming week.
We also expect to launch in Spain in Italy in the coming months and have strong local teams infrastructure and partnerships in place already in those market.
This will see off Gras president from one country of this thought that Q4 last year to five countries by Q4 at the end of this year with a combined addressable market of over 300 billion pounds annually.
We expect these markets to contribute to our growth in unit sales and revenues over the remainder of this year and to become a key contributor to our long term growth target.
Before I remind you of our long term ambitions I think it's important to touch on the macro economic backdrop, a markets and industry are facing.
Our solid Q1 momentum comes despite a rapidly changing macro or macroeconomic climate.
As we navigate our way through a number of headwinds such as supply chain issues and weaker consumer confidence while.
We're very mindful of the wider macro environment.
Continues to keep a close eye on any potential impact.
We remain laser focused on the execution of our strategy as we continue to make progress against our previously detailed expectations for the year.
What is most important however is that we expect any macro uncertainty could be transitory in nature, and having little bearing on the huge market opportunity unexciting structural growth in front of us.
The confidence we have in achieving our long term growth and margin targets, which I'll remind you all know.
As I said, a few weeks ago at our full year result.
Whilst we have accomplished a huge amount and a little over two years since launch we're still just at the start of this very exciting journey.
We're addressing a massive market opportunity with the U K market work over 100 billion pounds annually and the big sport in your markets with more than 200 billion on top.
Our addressable market is now over 26 million used car transactions Andre.
The market opportunity is so large that with just low single digit market shares prudent medium term GPU targets of 1500 to 2000 pounds.
We would have an enormous business, which we expect to generate meaningful free cash flows all the time.
Our long term target is to capture a 5% or greater market share with a 3000 pounds GPU, which is why we're so excited by all future growth opportunities.
I'll now pass over to Steven who run through the details of our Q1 performance in more detail.
Thank you Alex good morning, everyone.
During the quarter, our revenues increased 169% year on year to 295 million styling.
Our Q1 growth was driven primarily by retail revenues, which increased 38% year on year.
But also by strong performances from our wholesale and other revenue streams sequentially. We show retail revenue growth of 47% from Q4 of last year.
We reached sales units up 53%.
During Q1, we sold 19713 vehicles, what plus one 2% year on year, including 13353 retail units up 72% year on year.
As Alex said this growth in retail units came following our initiatives with respect to our in house reconditioning process, which had a positive impact on our available inventory and hadn't sales.
Okay.
As previously mentioned, bringing reconditioning in house is a huge strategic benefit and.
We believe well what the short term pain, we've experienced during the transition.
In Q1, we started to see the benefits of this investment on our sales numbers without available inventory numbers grabbing to over 6000 cars.
From a low of around 2000 in October last year.
As flagged at our full year results.
U K retail GPU was down from the tuned to be 33, we reported in Q4 224, a pound in Q1.
As a reminder, our Q1 2022 and our Q4 2021 U K retail Gpus were heavily impacted by the two big steps. We've made in the second half of last year.
To recondition, all all cars in house and to show Us a large proportion of the cars, we sell directly from consumers.
These are the two key strategic pillars, we needed to put in place to be able to deliver on the long term G. P. Your targets.
I won't go into all the details again.
This index at our recent full year results.
While we're pleased with the progress we're making in these areas.
Liberty if these two key strategic goals, how does involve some short term cost of the business much of which flows through opex costs by a G. P. A.
We expect the impact from investments in the car buying channel and higher reconditioning costs will be highest in Q1.
Looking to Q2 and beyond we have a clear visibility on the Moe recently purchased them reconditioned inventory should be.
Expect to see a notable increase in GPU for Q2 and beyond.
More specifically, we believe the impact from the launch of all consumer buying channel. It was in the region of 200 pump a car in Q1.
I'm looking forward, we expect only to see a minimal impact to mix in Q2.
The majority of the effect of cohorts of cars being sold.
With regards to reconditioning, while investments are set to continue as we further ramp our reconditioning outputs.
We expect between now and the end of the year, we can make hundreds of pounds of GPU savings some of which will start to flow through in Q2.
But are likely to be through H two weighted.
In addition, as.
We detailed in previous calls we've already put in place further improvements, which we expect will also continue to drive GPU growth during the year.
Just further optimizing our pricing decisions, increasing the proportion of costs. So it's directly from consumers and increasing finance and ancillary revenue streams.
We stated we see a path to 2000 pounds retail GPU in the medium term and we remain confident of reaching this level and beyond given the steps we've taken in 2021.
Turning to our near term outlook, we continue to make solid progress.
It's clear that there is a rapidly changing macro economic backdrop in all markets, which creates some uncertainty.
We're obviously managing through all of that based on a day to day basis, as we head through the coming periods.
As we said at our previous results were well aware of the inflationary pressures and the subsequent impact on consumer confidence facing the U K and EU market places at the moment.
And whilst we do not believe they should impact retail unit sales.
Sure there are.
Obvious risks the Showtime GPU, if we do see cost inflation and pressure on the high value car sales.
Internally, we remain laser focused on the execution of our strategy and expect any macro headwinds if they arise to be transitory in nature and remain confident in achieving our long term growth and margin targets.
We remain well funded to continue to capitalize on this huge opportunity to.
To execute on our ambitious growth strategy over the next 18 to 24 months by which stage, we expect our U K business to be reaching profitability.
Alex.
Thanks Steven.
So in summary, we are very encouraged by the progress we've made in Q1 and whilst there are macroeconomic uncertainties in all markets. We continue to put in place all the building blocks to enable us to execute on our ambitious growth plan was creating significant moat around our business.
In the U K, we've established a market leading platform brand team and infrastructure. We now have a presence in the biggest markets in mainland Europe . We believe that we're now very well placed and well funded to capture the huge opportunity across both U K and in Europe .
We've seen strong momentum so far in 2022 I believe.
Expect that to continue throughout the year and beyond.
I'll now pass the call back to the operator, who will open the line up for Q&A. Thank you.
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A moment, please while we poll for your questions.
Our first questions come from the line of Roger <unk> with J P. Morgan. Please proceed with your questions.
Oh, great. Thanks for taking the question.
I had a question on the on the full year.
A month ago, you had reiterated before your guidance.
If I input correctly from your comment you know you seem a little bit more cautious on the near term.
So just curious are you still reiterating the full year guide of 100000 retail units in the 900 pound retail GPU.
And if not like is there anything that's changed in the last three or four weeks.
You know that youre seeing in the business already.
A follow up.
Thanks, Good morning Rajiv.
So I think.
We suddenly in terms of the things that we can control internally in the business. We've seen a great momentum in Q1 are we on track for the guidance.
But we gave a recently.
Subject to the caveat of the external unknowns that are that are affecting all businesses. So you know we are not yet seeing any direct impact, but we have concerns about what may happen.
In terms of consumer confidence and how that might impact <unk>.
Top line inflation pressures and how that 10 has the potential so we're flagging a sort of a cautionary note, but remain a hopeful and suddenly all or on track in terms of delivering on all the internal objectives that we've set to to hit those targets, but the one thing that I would.
That's right, which we.
Just said is that we.
We see these macro issues as being sort of somewhat short term.
Months or a couple of quarters and not having any impact at all on the long term medium to long term opportunity which remains.
Exactly the same.
Understood.
And you know.
Could you you mentioned that you expect the weak LNG to you in this.
The press release, you mentioned that you expect that to bounce back.
In the second quarter and beyond.
And can you give us a sense of improvement you've already seen through the course of two two so far in or maybe it.
If you could give us a sense of how that retail GPU progress through you know January February March you know just to give us.
Some comfort around like no.
The recovery in the second quarter and beyond.
Yeah, we're expecting a significant uplift in me and in the second quarter.
So you know we would expect that to be two or three acts what it was in the first quarter G. P M, where suddenly saying that so far.
In the courtroom and with.
As Stephen mentioned, they were very specific reasons.
Relating to specific cohorts of a cause inefficiencies in our in the transition of the bringing the reconditioning in house all of these things that are sort of washing through the <unk>.
And as those things get washed through then you start to see that number Ah Ah bounce back relatively strongly. So we are you know we're confident of our Q2 G. P. A number that's materially higher than Q1.
Got it got it and then just one last one maybe you know.
Is it possible to provide a rough sense of from a range of you know what the EBITDA was for the quarter or.
Or and or the ending cash balance at the end of one here that'll be all from my end.
I'll leave that one to Steve and obviously, we don't guide specifically ill talk specifically about about EBITDA on a quarterly basis, so Steve over to you on that one.
Yeah, So I mean.
As Alex said, we don't guide cash would be.
You know not far off where we were you know what we see less of the Q1 losses Q1 losses, you kind of extrapolate over the year, you would expect them to be coming down over the course of the game for them.
As we continue to move towards profitability in the UK. So show Q1, and kind of teach your losses will be higher than.
That's been kind of a.
Some did cool it's a blip.
Exactly kind of inline with expectations Randy.
And our cash runway remains up 18 months plus you know based on our where we all currently.
Got it great. Thanks for all the color and good luck.
Thanks Roger.
Thank you. Our next question is coming from the line of Adam Berlin with UBS. Please proceed with your questions.
Yeah, Hi, good morning, everyone three questions for me if I if I can.
First thing I'm talking about units she talks about higher inventory on site driving quarterly improvements in the number of units you're selling so.
Is that a pretty linear.
Equation say, if they were 30% more units at the beginning of Q2 and the beginning of Q1 should we expect 40, 30% higher units sold in Q2 and Q1, that's the first question.
Second question just to carry on up on this discussion around GPU. It sounds like that in the Q2 G. P was still going to be below the 900 pound target for the year for the U K retail.
Well, we see it above that in Q3 or is it all kind of going to be a big.
The improvement in Q4, and some sense of the timing, that's particularly the second half would be helpful.
And then just a question Steve I think you mentioned and I missed what you said something about some timing around when you expect the U K business to breakeven can you just clarify the timing you gave on that and can you say something about how many cars do you think you need to sell in the U K to get to breakeven point.
Thanks.
I'll pick up the first two and then Steve you can pick up are the thoughts in terms of our unit sales relative to inventory, it's not it's not linear.
But there is a very very strong correlation the propensity of our customers to find what they're looking for the more inventory you have and it should over time become more linear in other words the target is to hold the.
The right amount of inventory that equates to about six to eight weeks of <unk> sales.
Sales so as we continue to ramp up.
Inventory, we should see sales.
Increased somewhat in line.
With that of course as sales are growing we have to run fast to not just grow the inventory on the website, but you have to replenish just to stand still so that's why I think you've seen a real step change in Q1, because we've gone beyond the replenish months are at the highest level.
Sales that we've ever had but also being able to add inventory and stuff. We can continue to do that one eight months of the basis, where we can replenish the sold stock and grow inventory then we'll start to see a significant growth rate.
So in terms of the GPU in Q2, no it won't be anywhere near the 900.
900 is a target average for the year, we will be selling more units on a quarterly basis sequentially throughout the year and so on a volume weighted basis, you would expect to see Burger GPU and unit sales go up throughout the year. So Q1 should be a low point.
In terms of unit sales volumes and GPU and therefore, we will see that Oh.
Go up progressively on a monthly and quarterly.
Basic throbbing yeah. So we expect you know the first half of the year could be a and an average of probably sub 500 pounds in the second half of the year will be at an average Uh huh, that's much higher as we see the benefit and also you know a lot of this is driven not just by.
Movements in efficiencies in the processes, both barring reconditioning.
Logistics, but it's also you know about the the scale efficiencies, which is the more volume we're doing the more benefit we get and you'll see that in times of a G. P O and tons of UK breakeven all parts of the season.
Yeah. So what we said was we saw about 24 months away from the UK breaking even so towards the end of 'twenty three.
On kind of a monthly rolling basis, it would move towards and into a.
Positive territory.
Oh.
Yeah.
Okay. Thank.
Thank you very much.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of same site with Bahrenburg. Please proceed with your questions.
Hi afternoon, everyone. Thank you very much for taking my question.
And I guess my first one is just maybe getting a sense of why.
The capacity will be at the end of the year.
You had 120000 now would we be correct in expecting that seemed meaningfully higher by the end of the Oh, well that's based on land around that and maybe if you could give us any indication itself. We expect to see for next year as well that would also be quite helpful.
And I guess my second one is about 35% more generally I know in the U K you have made it fully in house.
But I can I just ask some of your peers. They obtain retain some flexibility between first party and third party with establishment.
And if you are sort of aiming to gain as much market share and you know the recipe may slow pace.
Are you completely unwilling to do and even that's not even establishment potential about flexibility I E. If you say like how do you first party to gain market share.
It's just been Tani first hot tea fashion meaningful it.
And I guess my final one is just talking about wholesale average selling price it seems to have fallen quite significantly quarter on quarter from Q4, and not just seems slightly all its kevin.
So it's another high propulsion vehicles direct from consumers, which I would've thought a typically high quality.
Vehicles to an explanation behind that would also be very useful. Thank you.
Right. Thanks for the questions. So first of all in times of a capacity. This is a gradual improvement month on month, but we've been we expect to see we are comfortable with we will have a the capabilities. This year to recondition enough cost to meet the targets we've talked.
It's about 100000 this year. So we're confident in that and we're seeing a amongst the improvement in our ability to do that and so we would expect by the end of next year. It could be at the run rate, but is almost double where we come out at the end of this year in tons.
And the second question bus policy of US the third party I'm, absolutely not incomes of having a problem with using third party to to bolster our internal capability.
Our preference to do as much as we count ourselves, but you're absolutely right, but you know market share sales is are the most important if we can get the quality and cost from third parties. So we are open to that and in fact, we all are beginning to have discussions in the U K as to how we.
Can both through our own in house capability with the policies that are beginning to start those relationships are.
In the U K to add to that and we're also already doing that in the EU, where we have a mix of our own in house capability, which is in Italy, and third party partners in France, Germany, and Spain. So we're not close to the the opportunity and we will as long as we can.
Got the the quality.
One of them of course, we will use whatever.
There are opportunities there all to maximize our capability and cause the third question on wholesale was very straightforward answer to that which is as a result of.
The issues in the backlog that we had.
In Q4 of last year in reconditioning, we sold through wholesale a number of calls that would otherwise have been recast so higher value calls in Q4 now that we've sold the backlog of the bottleneck within the week conditioning, we no longer need to sell those calls.
We can now put them into a reconditioning to when they become retail calls. So that's what you saw happen in Q4, we sold calls than we originally thought we were going to keep for retail, but because we were sitting on all of them for too long, we sold them by a wholesale we're no longer in that position, where we are forced to.
So let them buy wholesale all of them and things that fall outside of all.
Zero to six years 60000 miles so anything that we buy now with a view to it being a retail car is now a retail car and go into it goes into refurbishment, whereas in Q4. Some of the calls we bought with the intention of being retail ended up in wholesale.
Great. Thank you and then maybe just one quick follow up.
Can you provide any guidance on your capex spend for this year and when exactly this game.
We're in it.
That would be around there.
Sure.
Like we said around 50 to 60 million for the year at predominantly refurbishment.
So just continuing to build out with a solid set there isn't just one peak.
Kind of problem that you do hey, this is constant song Domingo upgrades. So we have some refurbishment centers in the U K, obviously, one in Europe and its continuously upgrading improving then I think more capacity capability machinery awesome when you need them.
And Youtube to improve you'll refurbishment capability.
Alright, Thank you very much.
Thank you there are no further questions at this time.
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Enjoy the rest of your day.
I think so.