Q2 2022 Cazoo Group Ltd Earnings Call
The and.
Greetings, and welcome to the Gazoo second quarter 2022 earnings call. At this time, all participants are in a listen-only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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 second quarter and first half fiscal year 2022 results. You'll be able to find today's press release and accompanying presentation on our investor relations website at investors.cozoo.co.uk. We appreciate everyone joining us today. With me on the call is Alex Chesterman, founder and chief executive officer, Steven Morana, chief financial officer, and Paul Whitehead, our chief operating officer. And Paul Whitehead, our chief operating officer.
Before we get started, I would like to remind you of a 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 a further discussion of risks related to our business, please see the filings of Kuzu Group Limited with the FCC. Now, I'll hand over the code to Alex.
Thanks for all.
Good morning everyone and thank you for joining us today. I'm extremely proud of what we've accomplished so far in 2022 as we continue to transform the car buying with selling experience for consumers.
Against the tough macroeconomic backdrop, and whilst many businesses across all retail sectors are witnessing declining demand, we continue to see record sales.
It's becoming very clear that our market leading brand and fully digital world-class proposition is continuing to resonate strongly with consumers and that the shift to online car buying and selling is a color icon.
Whilst our growth remains very robust, we remain laser focused on maintaining our strong balance sheet where we have cash of over 400 million pounds and self-finance inventory of over 175 million pounds.
Our primary focus is on preserving cash and materially reducing the need for further external funding as we drive towards profitability.
We've successfully implemented our recently announced Business Realignment Plan and we're starting to see the early benefits which we expect to continue into H2 and beyond.
Given our focus on cash preservation,
We are also currently undertaking a full strategic review of our business in mainland Europe with a view to further reducing cash burn and reducing the requirement for any further external funding.
What we've accomplished in a normal amount in just two and a half years, we're still just at the start of this exciting journey.
We're more encouraged than ever about the future opportunities for KZoo and our ability to capture a 5% or greater market share of the huge addressable market that we operate in.
Before we discuss recent trends, I'd just like to recap the significant progress we've made. We spoke about this in detail on our last call, so I'll just summarize the key points today.
Thank you.
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Because it has been one of the fastest growing businesses globally. I'm very proud of the World Class Platform, Team, Brand, and Infrastructure Network that we built.
As you'll see on slide 4, we've now sold over 80,000 cars to consumers, with over 30,000 of those in the first half of this year alone, making us one of the largest used car retailers in the UK.
We've proven that we can buy and sell cars from a significant scale with a market leading consumer experience. A significant scale with a market leading consumer experience.
despite significantly growing our cells.
We continue to sort over 30% of our retailers directly from consumer.
highlighting the infrastructure we now have in place the by-cars of scale was achieving exceptional to achieve a feedback.
The strength of our brand and customer experience remains a key differentiator.
And we now have over 80% national brand awareness across the UK. The course to you can.
We're also incredibly proud of the exceptional feedback that we continue to receive from our customers, giving us one of the highest feedback ratings globally in our customers.
Looking specifically now at the most recent period, we continue to make strong progress.
You can see on slide 5 that we achieved record revenues of 333 million pounds in Q2, up 145% year on year, with retail unit sales of over 17,000, as we grew our market share significantly despite the macroeconomic backdrop.
Whilst our growth remains very strong,
We are laser focused on preserving cash and materially reducing any needs for further funding as we drive towards profitability. And I'll talk more about this shortly.
We saw a very positive trajectory in our UK research, which was up notably by 150% compared to Q1 of this year.
Despite our record sales, we've also grown our UK website inventory to record levels of over 7500 cars, highlighting the progress we've made with our reconditioning capability, which as you'll remember was the key bottleneck for us at the back end of last year.
In more recent weeks, I'm particularly pleased that despite the weak economic environment affecting growth in many other businesses and sectors, we've maintained our strong momentum in 623 with record retail unit sales and revenues in July .
was continuing to also grow our website in the toy car.
Whilst our growth remains strong, we are not immune to the rapidly shifting external factors in the global economy, which include deterioration in consumer confidence, volatility in the stock market, and the possibility of a recession in the coming months.
And whilst we have a very strong balance sheet with over 575 million pounds of cash and self-finance that it means better not to buy 475 million pounds of cash and self-finance
We've already acted decisively to right-by the business to ensure that we are well positioned to achieve our long-term ambition. Our business realignment plan focused on cash preservation, sustainable growth margins, and reduced FGNA costs, was still expecting to grow over 100% year-on-year in 2022.
As I mentioned earlier,
We're also now conducting a full strategic review of our business in mainland Europe .
with the aim of further reducing our cash burn and ensuring that the company has an executable plan to reach cash flow breakeven without the need for any additional external funding.
In times like these, businesses like ours need to be laser focused on what's most important.
Our number one priority is to reach cash flow breakeven without the need for further capital and our realignment plan combined with our current review of our business in Europe will be worth the significant amount.
On slide 7,
You can see all the building plots that we've put in place to achieve success in our core market in the UK, which is by far the biggest used car market in the world.
We now have eight in-house reconditioning sites, which have increased their output significantly to the time of the year. We are now in the process of creating a new system for the time of the year. We are now in the process of creating a new system for the time of the year. We are now in the process of creating a new system for the time of the year.
We operate 21 custom incentives to collect in distribution storage and further things, and have a fleet of around 250 delivery transporting. And have a fleet of around 250 delivery transporting.
The investment we've made in our infrastructure will be pivotal to our ability to grow materially throughout the economy.
And as you can see on slide eight, we're addressing a massive market opportunity in the U.K. which has a youth power market of around eight million transactions annually with a value of over a hundred billion dollars.
Digital penetration remains extremely low and the market remains hugely fragmented, giving us the opportunity to build the leading brand in the sector.
Customers love our proposition and we expect to continue to rapidly increase our market share towards 5% on beyond over time.
The UK market opportunity is so large that we've just a low single-digit market share and a proven medium-term GPU target of 2,000 pounds. We would generate growth profits of close to half a billion pounds annually a meaningful free cash flow. The UK market is a low single-digit market share and a proven medium-term GPU target
With our long-term target of a 5% or greater market share and a 3,000-pound GPU, the growth opportunity is even more exciting.
I'll now pass over to Stephen who will run through the details of our Q2 and H1.
performance and future guidance in more detail.
Thank you, Alex, and good morning, everyone. As you can see on slide nine, in Q2 2022, we achieved group revenues of £333 million. We achieved group revenues of £333 million.
which were up 145% year on year.
Growth was driven primarily by UK retail revenues, which increased over 140% year on year, and supported by uncillary revenue sales.
During Q2 we sold 23,955 cars, 124% year-on-year growth, including 17,033 retail units at 94% year-on-year growth.
This growth in retail units came despite the challenging macroeconomic climate.
and implies that we continue to take significant market share to the strength of our proposition.
Looking at slide 10.
As we highlighted at the Q1 stage, we've seen a strong improvement in our GPU in Q2, as investments we made during the second half of 2021 work their way out of our numbers.
We've started to see the benefit to our GPU which grew by 150% from £124 in Q1 to £309 in Q2 and also the impact our reconditioning efficiency improvements have had on our sales.
Our increased productivity has led to a material increase to our website inventory, which as Alex said is at record levels.
and there's been a key driver of the sequential growth in our sales, 30% quarter on quarter.
Turning to slide 11.
We have no change in overall guidance.
which was set at the time of all business realignment plan.
We're targeting total retail sales of between 70,000 to 80,000 units for 2022, which, when combined with the ancillary sales and wholesale business, are
we believe should drive total revenues of between 1.4 to 1.5 billion.
with year-on-year growth well over 100%.
We continue to expect our UK retail GPU for 2022 to be in the region of £500 to £600.
as we continue to build on the progress made in Q2.
With regard to reconditioning, we continue to believe that between now and the end of the year, we can make hundreds of pounds of GPU savings.
some of which have started to flow through in Q2, but expect there to be more H2 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 such as further optimizing our pricing decisions increasing the proportion of cars sourced directly from consumers and increasing finance and not severe revenue streams.
We've stated that we see a path to 2000lb retail GPU in the medium term, and we remain confident of reaching this level and beyond given the building blocks we put in place.
Turning to slide 12, and as a reminder of what we're expecting for 2023.
We're targeting the UK getting towards cash flow break even by the end of the year as we approach 12,000 monthly sales and a GPU of £1500.
We believe at these levels of sales
The reductions that we're making to our fixed cost base will mean that we reach cash flow break even in the UK.
and we've the required capital to get us to the position that our UK business will be self funding.
With regard to Europe , while the outcome of the strategic review of our business in mainland Europe has the potential to impact the contribution from those markets going forward, we are looking
The aim of this review is to further reduce our cash burn and ensure that we have a plan which materially reduces the requirement for raising any additional external funding.
Finally, I just wanted to take a moment to highlight our sound balance sheet.
We have cash over 400 million pound at the end of June and cash finance in the entry of over 175 million pounds. A cash finance in the entry of over 175 million pounds.
We're taking decisive action to improve our GPU and reduce our overall SGNA costs.
We're focused on ensuring our business achieve break even as soon as possible. And that we can execute on our plans for the material reduction in any requirement for any additional external funding. For any additional external funding.
Alex.
Thanks, Steven.
As you would all have seen in today's release, we've appointed two wolves as chief financial officer who will join and succeed Steven later this year. I'd like to thank Steven for his significant contribution over the past two years and wish him all the best in the future. He'll be remaining with the business on a helpful join to ensure a smooth transition.
So in summary, against a very tough macroeconomic backdrop, we've accomplished an incredible amount this year, continuing to grow strongly and achieving record sales levels.
However, despite our strong growth, we remain very mindful of the challenging economic climate and remain laser focused on cash preservation and our path to profitability.
will continue to be decisive to de-risk the company's path to break even and execute with a material reduction in the need for further external funding.
We believe that we remain very well positioned and well funded to capture the huge market opportunity and are very pleased with both our performance year to date and our strong start to Q3.
The addressable market is huge. We've put all the building blocks in place to continue to rapidly picture and reach our long-term ambitions. More information and be part of our promo plan based on Privacy and others' requests. In the beginning of 2017 we see a possible Thanksgiving. For now, while returning to Turkey throughout so many lives, we will bear the peace of mind and confrontorhood with all of the people noses on the issue. Please support ourENTIM Earns celebrating economic and economic development diverting all politicians from North Korea and all Thank you.
We've seen great momentum so far in 2022, which we expect to continue throughout the rest of the year and beyond.
I will now pass the call back to the operator who will open the line up for Q&A. Thank you.
Thank you. We will now be conducting the question and answer session.
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One moment please while we pull for your questions.
Our first questions come from the line of Rajat Gupta with JP Morgan. Please proceed with your questions.
Great, thanks for taking the question and to keep the best of luck.
Maybe, you know, if you could start with like the strategic review options for Europe . So what prompted this review in recent months, you know, since the plan was, uh, since the new alignment plan was announced in June .
Could you elaborate on the options you're exploring? And lastly, just for modeling purposes, could you confirm the current EBITDA loss run rate in Europe ?
I have it at roughly 30 to 35 million per quarter, but if you can confirm that, it would be helpful. I'm sure you're going to be able to do that. I'm sure you're going to be able to do that.
Thanks. Good morning. This is Alex. I'll take those first and then see if Stephen wants to add anything. In terms of the strategic review and what's changed since we announced the realignment plan at that time, we stated very clearly that our overriding goal was to reduce our cash fund.
but that we would need additional capital at some point to continue. We now believe that the single biggest priority is to ensure that we have a plan that does not involve further capital raising. And so we said at the time of the realignment plan that we would remain very fluid, look at what was going on in the market. And...
take further decisive action if we needed to. So we don't know and I don't want to preempt what the outcome of the review will be, the range of options.
include everything from business as usual and doing nothing to a smaller investment in those markets to withdrawing from some or both markets. We don't know where we'll end up. We expect the review to be completed relatively quickly over the course of the next few weeks and have something to announce in terms of the conclusion of that review in early September . In terms of EBITDA, and again, I'll let Stephen.
add to this but about one third of the E-bit-DAR losses is attributable to Europe . And in terms of the E-bit-DAR balance between H1 and H2, we expect the E-bit-DAR, irrespective of the strategic review, we expect the E-bit-DAR loss in H2 to be lower than H1 because of this year's result of implementing this.
We align them plan at the back end of age one. We didn't see any of the benefits of that Which we will see as we get into Inflate shows hopefully that answers the questions Steven still pretty bad. Yeah, yeah European European EBITDA is roughly around 25 to 30 of course.
Guys, that's a couple. Just maybe one follow up. Looks like your June volumes.
Over roughly 6000 units, you mentioned in July was another strong month.
So curious like in terms of a full year guidance, is there a filter of conservatism baked in in terms of?
how the economy shapes up in the second half. But you're just curious after what embedded in the guide forces, what you're actually seeing on the ground in terms of demand. If you could just help, I would add a little bit. It would be helpful.
Yes, so as Steven said, you know, one of the key drivers has always been the availability of inventory, and we've done, we've made a lot of strides in improving inventory availability through improving our reconditioning, and we expect that to continue. Our run rate in June was strong. July , as we mentioned, we've had a very good start to Q3, July was a record in both retail units, and in revenues.
And in fact, going into August , we even saw a record day yesterday. So in terms of what we're seeing on the ground is very positive relative to what we're hearing from peers in our space and also other retail categories. So is there some conservatism in those numbers? I think we are.
being cautious based on the likely worsening macro environment in H2 that I think is most people are broadly agreed that things are not going to get better and so there's an element of that and you know we stick by the numbers that we provided
It's really hard, it's a good question. It's hard to model in a way when you are predicting growth rates of 50 to 80% a year on year in a market, which potentially declined 10 to 16% at the moment because it's...
of economic challenges out there. So I think you're right, there's an element of conservatism, but it's for the chart to do. You know, it's a bit unprecedented to the level of growth we're seeing compared to any of the killer out there.
understood, got it thanks to the car.
Thank you. Our next question is come from the line of David Reynolds with Davey. Please proceed with your questions.
Morning, team. Hey, I wonder if I could just ask one question, please. Clearly strong progress in the United Kingdom. I wonder perhaps if you could comment on how you see the competitive backdrop there, as obviously you continue to take market share. And then also, whether you see a future for subscription, style products as the UK market evolves. Thank you.
Thanks, David.
The competitive backdrop has not changed materially over the last few months. We've seen one pure play online player. There was a number three player, Kazam, went out of business. The two pure play players remain us and cinch a number of traditional players are starting to offer more digital services, which we think is an endorsement of our business model, of course, and also helps familiarize the consumer.
with pure online buying. So the more people who start to offer our types of services, the more reinforcing it is and the more helpful. We continue to believe the online will go from its current to a three percent market share to 20 or 30 percent market share over the course of the next five years or so. We continue to believe that that will get split between pure play players and traditional players as it has in every other retail market. I'm done.
So we think that online will continue to grow. And as Steven said, we're growing 100% plus year on year this year in a market that will be at that this flat and probably down 10 to 15%. So what you're seeing is an acceleration in the shift to digital. And it'll go from a steady climb from a current low single digit market shaft.
On the second question, David, on subscription, as you know, we withdrew from that market because it was highly capital intensive. We always viewed it as niche. It remains very niche. I think there is a market for it. There will always be consumers who want to do short-term rentals, longer-term rentals, purchases, etc., but all cool business.
and focused now. And again, in these type of economic climate where you are single-mindedly focused on past the profitability, improving the model, delivering the best consumer experience you can, then simplifying the business model, being the best at what we do which is buying and selling cars directly online means that that's the place.
the space that we're not going to play in for the foreseeable future, I think, but there will always be customers who want to do it, but it's relatively small and interesting. Oh, I'm really... If you can fly at us, we will put a lot of work across the deck to make sure that the system is controlled to move free from the leadership of the imposed abuser which causes trafficCRE even if notwill. I feel that it's about the fact that I turned the flag. I will put into my list that I can't find myself in time so we have to ???? how that's going to go. Targeting which means there is a given
That's great. Thanks, Alex.
Thank you. Our next questions come from the line of science, Said with Baronberg. Please proceed with your questions.
Hi there, thanks for taking my question. My first one is just on other revenue. On a per retail unit basis, it looks to fall in a fair bit sequentially from Q1. I was just wondering is this, you know, the sort of impact on cost of living? Is this, you know, different type of consumers buying your cars? Any colour of that would be helpful. And maybe just somewhat related to that in terms of retail average selling price. That's also fallen, I believe a fair bit sequentially from Q1.
Is that, you know, due to your mix of the spirit, low price vehicles from there, or are you seeing consumers shredding down quite significantly? And maybe just how we're going to expect to be able to get over the last few years.
I'll take the second one and then I'll throw the first one to Steve. And in terms of the average selling price, it's a factor of mix that we're choosing to stock looking at the overall market environment and the fact that consumers are feeling the pinch. And generally looking to save, we are, we've shaped our inventory slightly differently to combine with all the seat consumers.
wanting to spend less and a bit of depreciation, the price depreciation that we've seen in the market over the last a few months. So all three of those factors combined have led to that. I think I don't think we're expecting to see a material either decrease or increase in the average selling price over the rest of the year from where it was in Q2. In terms of the revenue, I'll throw it.
Yeah, hi, the other revenues, no, that's really the mix. So we had a chunk of remarketing revenue in there, which was the B2B revenue we inherited. And as part of our plan, we transitioned away from that as the refurb sentence focused more and more on doing our own work. So that was always planned and built in. That isn't consumer spend at all.
And I think that may, I may be wrong, but there may also be an element of the fact that we turned off subscription, which may or may not be another revenue line. I don't have the numbers in front of me.
Yeah, that was just towards the end, so not really an impact, but going forward obviously subscription revenue analysis, right? We'll lessen out of that, but now in terms of the ancillary products that we sell to customers as part of the car buying process, that remains very robust. We're very pleased with that.
Just maybe a quick follow up, could you provide an indication of what Europe's contribution was in your four year guidance and maybe its contribution in Q2 as well?
It Europe accounts for less than 10% of unit sales and revenues.
Thank you, Ted.
And for us to be at the end.
Thanks very much.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We did have some questions come in via the webcast. The next two questions are from Catherine O'Neill of Citi. Question one was, what were the main areas of cost inflation in 1H and how do you expect this trend? How should we think about the phasing of adjusted EBITDA losses this year as it looks like there needs to be a material improvement in 2H to come in line?
with where the consensus is this year? And two, can you provide more detail on how you will deliver on 250 million plus cash at year given the level of cash burn seen in the last quarter?
Yes, so in terms of cost inflation, I think we're seeing it across the board in labor materials, and it was a dampener on GPU growth in Q2, despite the fact that GPU went up by 150%. I think absent inflation, we would have seen a greater number there, which we're obviously seeing as every other business is in all the same areas. Socl
people paying parts, all of those type of things. In terms of the cash, if you look at the burn rate over the next 6 months, combined with the fact that we expect to reduce the amount of self-finance inventory which currently sits at 177 million pounds.
We expect to reduce that. Some of that will reduce naturally by paying out of the subscription business because half of that is subscription. Because as every car comes back because we don't have more going out, that adds to that absolute cash number together with increased finance facilities that we have plus we also talked on our last call about the fact that we own.
some assets, property assets that we may look to do sale and lease backs on, etc. So we continue to be comfortable with that number. That may change as a result of whatever the outcome of the strategic review in Europe is, but as of now we're comfortable with that figure.
Thank you, and our next web questions come from the line of Adam Berlin with UBS. Question one is regarding mainland your strategic review. If you are unable to find a willing buyer, would you be willing to close European operations? And what would be the cash cost of doing so? And what would be the cash cost of doing so?
Number two, can you share UK retail GPU for July ? It is an on track for the 500 to 600 target range. Number two, can you share UK retail GPU for July ?
Thanks Adam. So in Europe , you know, we are, as I said, looking at a full range of options, the overriding aim of the review is to ensure that we reduce cash burn and that we have a plan that materially reduces our need to raise further capital next year. So again, I don't want to to jump the gun on what the outcome of that review.
would be. If we were to shut some markets, there would obviously be some costs associated with that, but they would obviously be significantly lower than the investment that is required over the next 12 to 18 months in those markets.
In terms of UK retail GPU for July , we're not sharing that figure at this stage, but Stephen reiterated that we are reaffirming our guidance of £500 to £600 for the year at this stage. And we're seeing a number – a lot of the initiatives that impact GPU are ones that take one or two quarters to actually...
come through. So what you saw at the beginning of this year in Q1 was an effect of things that had happened in Q3 through four last year. What we expect to see in Q3, Q4 this year are some of the benefits of the improvements we've put in place. So we expect to continue to see a positive trajectory on GBO and that's a significant positive.
Thank you, now we will jump back to the phone lines.
Our next question has come from the line of Sayyid with Barenberg. Please proceed with your questions.
Thanks, that's another quick follow up for the marketing trend. You may be just disclosed a bit on brand-vests performance marketing during H1 and maybe how we expect to progress at the H2 in 2023.
I'm not sure if we're sharing the specific split between brand and performance. I'll let Stephen tell us whether we are or aren't. But in terms of general trend from H1 into H2 and certainly into 2023, we should expect to see the balance shift much more in favor of performance. And if I think about a sort of more longer term, in 2021 we were at
about two-thirds brand, one-third performance. I expected to be the first in 2023 of a progression between those two this year. could be the first.??? Startedoh from the start. Indate course. Sorry about that. Editor Damit can study Meinst of repositories color here.
Yeah, yeah, which still be weighted more towards brand at the moment than performance. So we, you know, again, as we focus more on...
on capital preservation cash management moving towards profitability, performance will become significantly larger parts of our ongoing spend.
And maybe just on the terms of cats, have you seen this decrease quite significantly in line with your expectations on this presentation?
during the original SPARC presentation? or is that sort of, you know, qualitative interjectory from that?
No, we are seeing a positive improvement in CAC as obviously unit volumes go up and as we reduce absolute spend on brand. So in the UK CAC is improving.
All right, thank you.
Thank you. There are no further questions at this time. I'd like to turn the call back over to management for any closing comments.
Thank you very much. Appreciate your time, everybody. And obviously happy to follow up as a Stephen and Rob with any further questions. Thank you for your time.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.