Q3 2022 Cazoo Group Ltd Earnings Call

Yeah.

Greetings, everyone and welcome to because he was third quarter of fiscal year 2022 earnings call.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note that today's conference is being recorded.

At this time I'll turn the conference over to Robert Berg, <unk>, founder and CEO . Mr. Berke, you may now begin.

Good morning, everyone. Thank you for joining today's call and webcast to discuss could use that culture fiscal year 2022 results. You can find today's press release on our Investor Relations website at investors don't cause you don't cut it U K.

We appreciate everyone joining us today with me on the Cologuard as chairman founder and Chief Executive Officer, Steven <unk>, Chief Financial Officer, Paul Whitehead, Chief operating officer.

When 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.

Further discussion of risks related to our business. Please see the filings of <unk> group limited with the SEC.

Now I'll hand over the course of it.

Thanks, Rob Good morning, everyone and thank you for joining us today.

I'd like to start by discussing our Q3 performance, which despite the very tough macroeconomic backdrop was an extremely positive quarter in all respects and then I'll talk about how this performance leaves us firmly on track to reach profitability without the need for any further funding.

I'll also spend some time discussing why we remain very confident about achieving our medium and long term targets.

Starting with the third quarter.

I'm very proud of our performance during the period, whilst the challenging macroeconomic backdrop for the UK consumer has impacted demand across most retail sectors and all compatible with many businesses reporting declining demand and sales and recent bottom.

We bought the trend I'm seeing record demand with U K retail unit sales growing over a hungry.

Yeah, the 18889 unit as consumers continue to embrace all right.

This led to record U K revenues of 347 million pounds in Q3 up 103% year on year.

As you can see from our growth rates, we're taking significant market share as a market leading proposition continues to resonate strongly with consumers and the shift to online car buying and selling accelerated.

This has and will continue to allow us to grow strongly despite the tough macroeconomic conditions.

In under three years since our launch we've become one of the largest players in the U K used car market, having now sold almost 100000 vehicles to consumers entirely online.

So we've accomplished an enormous amount in terms of all scale in a short period of time.

Our strong growth rate and market outperformance.

Yes, but we're still just at the start of this exciting journey.

Consumers are voting with their orders and their subsequent reviews, but the way that we buy and sell causes the future for the U K used car industry, we're more encouraged than ever about the future opportunity because they're on our ability to capture a 5% or greater market share of the 100 billion.

Sounds play Yeah U K used car market.

Well I'll start growth and scale positions us as one of the fastest growing businesses in the U K with revenues of well over a billion pounds.

The third year of operation, we continue to keep both eyes on the road to profitability.

We remain laser focused on maintaining a strong balance sheet, and we had cash and self bonded inventory of over 450 million pounds at the end of September and have a clear plan to reach profitability without the requirement for any further external funding.

In Q3, we made strong progress on our operating metrics, including our U K retail GPU, which was up 58% compared to Q2 22 at the same time as reducing all U K SG&A per retail unit by 30% since Q2.

G. P. U we continues to make good progress with a further 179 pounds sequential quarterly improvement driven by continued efficiency gains across buying reconditioning and ancillary products dislike despite the inflationary pressures.

As we constantly improve all elements of our operations.

To call out a particular success, we've had with our direct car buying channel, which now represents over 40% of our U K retail sales transaction and has allowed us to benefit from improved pricing and rain. This highlights the strong platform and infrastructure. We now have in place the Baikal.

Iraq me from consumers at Sky.

We also continued to make good progress in improving all reconditioning efficiency of particular note. This quarter, we made some changes to our reconditioning processes, which allow us to lower the cost per vehicle, while ensuring our customer proposition remains market, leading we've also continued to scale all reconditioning tapered.

<unk> to record levels, allowing us to maintain strong inventory levels despite record sales.

Additionally, we've made further progress with our ancillary product sales, we launched monthly payment plans in Q3, where customers can now spread payments for all products over a longer period, whilst it's still early days with very encouraged by the impact. This is having on our attachment rate N. G. P. You I think that's fair.

The positive impact from monthly payments and other ancillary product initiative in the coming quarters.

At the same time that our U K retail GPU is increasing steadily quarter on quarter, we've seen a material decrease in our U K SG&A cost per unit of over 30% in Q3 as our stronger growth combined with our focus on cost control is starting to have a note.

<unk> positive impact on our unit economics.

Having successfully implemented our business realignment plan, we're starting to see the benefits and expect to see continued improvement through the remainder of the year and beyond.

Our solid Q3 momentum and improvement in profitability comes despite the deteriorating macroeconomic climate.

Whilst it's likely that the headwind, but the supply chain issues and weaker consumer confidence have negatively impacted all resolved all strong performance through this area only felt the show the consumers love our proposition, which provides us with even more confident on reaching our medium and long term targets.

As a reminder, we're addressing a massive market in the U K with around 8 million used car transactions and a value of over 100 billion pounds annually digital penetration remains incredibly low and the market remains hugely fragmented, giving us the opportunity to build.

The leading brand in the sector.

Much like we've seen year to date, we expect to continue to rapidly increase our market share towards 5% Unbilled overtime.

As we've said previously the U K market opportunity is so large that with just a 3% market share.

Prudent medium term G P you'd target of 2000 pounds, we would generate gross profit close to half a billion pounds annually and meaningful free cash flows.

With a longtime pocket of a 5% or greater market share and at 3000 pounds GPU the opportunity is even more exciting.

Before I hand over to Stephen who will run through the details of our Q3 performance in a little more detail I just wanted to discuss the strength of our balance sheet, which remains extremely robust with over 450 million pounds of cash and self funded inventory at the end of September we've taken decisive actions.

To increase our G P U and reduce our SG&A costs and are focused on ensuring all business achieve profitability as soon as possible.

All business realignment plan announced in June together with all decision in September to withdraw from mainland Europe has ensured that we have a clear plan to reach profitability without requiring any further external funding.

I'll now pass over to Steven.

Thank you Alex and good morning, everyone.

Before I go through the numbers I just want to highlight that all of the numbers we've discussed in our Q3 release.

I will discuss today relates showed me to our UK segment.

Which as a result of the decision made during the quarter to withdraw from our EU operations will be how we report going forward.

We will report our European segment as discontinued operations in the FY 'twenty two resorts.

For reference we have restated Q1, and Q2 this year as well as Q3 2021 with just hopefully useful to be able to see the UK army trends.

In Q3, 2022, we achieved U K revenues of 347 million pound Sterling, which were up 103% year on year.

Growth was driven primarily by U K retail revenues, which increased over 118% year on year, driven by continued strong uptake of our proposition.

During Q3, we sold 23775 cars in the U K, representing 82% year on year growth, including 18899 retail units.

Presenting 100% year on year growth.

This growth in retail units came despite the challenging macroeconomic climate.

We yet again continue to take significant market share.

Testament to the strength of our offering.

Moving to GPU.

As Alex discussed, we've again seen a strong improvement.

In Q3.

We grew by 58 the center of 179 pounds from 309 pounds in Q2 to 488 pound in Q3.

This improvement came despite ongoing inflationary pressures.

Has been heavy Joseph our improved buying reconditioning them product sales efficiencies, which we are confident will continue into Q4.

As a reminder, Q3 2021 GPU was positively impacted by the strong price appreciation abuse costs seen in the quarter.

We were obviously operating the four European countries as normal until the 18th of September I'm from map to a peak on the close process and carrying some of the anticipated wind down costs this quarter.

Going forward, we expect cash burn to be significantly lower.

Top oil trading and investment activities in the four countries and complete the wind down process. The koran from rates in the U K was less than half of the overall cashback.

I'll now pass back to Alex who will run through our current trading and outlook.

Thanks Steven.

Despite the weak macroeconomic environment affecting growth amongst our peers and across all other retail sectors. We've maintained a very strong Q3 momentum into October where we expect to maintain a growth rate of over 100% year on year and to continue to increase our market share we.

Spect to see continued strong progress through the remainder of Q4.

With U K retail unit sales growth continuing at all but 100% year on year, along with significant further improvements to our U K retail GPU.

We continue to optimize our operations and increase the proportion of calls sourced directly from consumers lower our reconditioning costs and increase all financing and ancillary revenue stream as.

As I've said, many times, but it's worth stressing again, we continue to expect to reach profitability without the need for any additional external funding.

So in summary against the very tough economic backdrop, we've had a very strong quarter of growth achieving record sales level, taking significant market share and we've become one of the biggest players in the market having sold almost the hunger thousand caused entirely online.

Mm three years since our launch.

We've also shown further progress towards breakeven with a marked improvement in our unit economics and the parent.

We remain very well positioned them well funded to capture the huge market opportunity and are delighted that we've maintained our strong Q3 momentum into October .

We're incredibly excited about the future and extremely confident in our ability to reach our market share ambitions.

I'll pass the call back to the operator, who will open up the line for Q&A. Thank you.

Ladies and gentlemen, we will now start the question and answer session and open the call for questions. If you'd like to ask a question. Please press star one from your telephone keypad and confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions once again Thats star one thank you.

Thank you and our first question comes from the line of Rajat Gupta with Jpmorgan. Please proceed with your question.

Hi, Good morning. Good afternoon. Thanks for taking the question maybe just to start off with like just broader you know you know consumer. How then you know just just used car backdrop.

Can you give us a sense of you know your expectations in the industry you know heading into the later part of the our and in GA next year.

You know what Walter who is starting off a small base and you know online penetration is so low.

It should be able to grow volumes and market share even in a declining market, but just curious you guys do your expectations for the overall environment as new Waco supply bruise, but you know.

Just the consumer backdrop, probably.

Speak to further step down before normalizing.

So are you are you concerned at all about pricing power and just you know ability to hit the 2023 GPU targets and I have a follow up.

Thanks, Good morning, Roger So clearly the the UK consumer Hum and beyond the U K Ah is facing a challenging time.

All are very encouraged by the performance in Q3 and the performance so far into Q4.

Given the various challenges in the market. If you look at supply there are supply challenges, obviously driven by the knock on effect of supply chain issues in the new car market, which have gone on for now well over two years at all affecting the supply in the used car market.

Of course, you've got demand challenges have been resolved.

Elevated pricing consumer comfort on the inflationary pressures et cetera, so despite all of that.

Well, we all are growing very significantly Congress does on a year on year, 20% growth quarter on quarter and this isn't a new phenomenon with the consumer this has been going on for some months now so we're already seeing.

Being that we're seeing that in the behavior of consumers.

Gravitating towards a lower priced cars generally a lot less value.

So the opportunity for us are in a in the future in a normalized market with normalized supply normalizes the ball normalized pricing the opportunity is very significant and as we look into Q4 and beyond into next year.

Oh model in all of our budget takes account of the fact that things are unlikely to get back though in the short film in the medium to long term, we expect a superbowl are significantly better than in this difficult market, but we still expect.

Very significant growth in unit numbers and sequential improvement in GPU. Despite those issues going on in me and in the wider market.

Yeah.

Got it and then maybe on the SG&A target you know obviously it was still like Oh, you are away from the 1500, I forget but yeah.

And if you could give us a little more detail around the progress you've made over the last couple of months you know in terms of.

And head count leverage you know, particularly from a driver.

And customer support head count perspective.

And then on advertising are you seeing any drop off and you know.

Versions are pharma metrics I'll give pulled back on brand spend and also curious if you could share any color on benefits of moving to a higher mix of performance marketing. Thanks.

Yeah. So the SG&A per unit our target is one we're very confident because in the simplest terms. If you think about SG&A per unit, if we simply double the volume of units. We have the SG&A costs are per unit. So we've seen a notable decrease oh.

The last couple of quarters in SG&A per unit down from a fully loaded including group costs down from about 5000 pounds to under three and a half thousand pounds. In Q3, we see guessing that to Oh, 1500 pounds or less by the end of next year as a.

All of a combination of things obviously the growth in the unit numbers, but also reduction in a number of costs.

Obviously, there are two actions we've taken in the last six months that was the realignment plan towards the end of Q2.

Actually a lot of those costs carried into Q3, because it takes some time for that to actually take effect and then of course, the remove the withdrawal from Europe .

We're still we have some of those loads you had group costs and that will continue into Q4, but as we go into Q1 next year, we see it.

The full benefits of having completed and got all the costs are from a pre the realignment plan in all the European cost a out of the system and so we're you know we're very confident in our ability to continue to see that number decline.

Got it great. Thanks for the color and pass it on.

Thanks.

Our next question comes from the line of Adam Berlin with UBS. Please proceed with your questions.

Yeah, Hi, just one question from me thanks, Thanks for taking it.

Wanted to confirm Stephen that you said that the cash outflow in Q3, only half of that relates to the UK business day.

I think cash position was 400 at the end of Q2 now so we have Tonight.

Theres not any 2 million cash outflow in Q3 of which he okay with just being half of that so that it's not a good idea of what you know.

Sure.

We thought it would be.

Yeah, I think when you look at it.

Yeah, Yeah, you're not a million miles away without some <expletive>, yeah they'd be looking at cash and cash equivalents and Hawaii dropped just over 100 and kind of thinking on the U K would it be hawk.

So on that basis is the 12000 units a month 1500 pound G. P. A still the right basis for breakeven.

Possibly but I think all of that I think all of that will be looked at over the coming months you know can we get there.

Unless you know how do we look at the SG&A line, how do we get more efficient and more effective so I think that we see.

This assumption, obviously, we'd like to hope that we can break even though.

Are there a lot of volume at a lower GP, but that means you know finding more efficient and effective ways as Alex said, we've done a lot we've built a big infrastructure.

And we've got the Ccc's, we've got with the Liberty processes in place. We feel has the refurb centers. So you know that the marginal costs on sales that are significantly lower.

<unk>.

But we haven't come back yet and unchanged on that but the hope is that we can find faster ways of getting to breakeven or ways of getting that don't need that kind of a G. P. A.

And maybe just one more question on on the marketing side I know in the plant. There was talk of dialing back the UK marketing spending a little bit to help me get down to SG&A.

To pay unit.

Has that happened yet because it doesn't seem to be impacting.

Unit growth.

Is that still to come or actually you're still delivering the unit growth. Despite spending less on marketing a lot of that is still to come because as we started to unwind some of the brand spend that move more towards the balance.

Of a 50 50 performance, Brian next year and actually killed more in favor of performance are beyond that so there's still some further benefits of commonly.

But you don't think that's going to slow down the growth rate is that brand spend comes off but no no in it if anything the opposite is true because Brian spend youre buying future.

Performance spend is more responsive space. So it doesn't really have a an impasse and given the.

The strong brand awareness, we've already built off over the last three years, it's all necessary for us to continue to spend on brown.

Right, so actually you're moving from a less efficient.

Marketing pound and brands are more fiction and performing so therefore it doesn't.

Impact on you.

Massively reduced our absolute spend.

And then that would impact volume, but if you're shifting from nonperformance. The performers actually the opposite is true you drive.

Or more.

So you're going to keep the absolute level of marketing spend.

It won't be wherever it is it's just it's just a shift there's no actually a cotton marketing spent that you need to data.

It's just that there may be other than that there may be a marginal reduction.

Yeah, and overall spend because we don't need to continue spending the same level of brand, but we don't think it is.

Materially impacts volume and if you look at all growth versus the overall market. The overall used car market in Q3 was probably down high single digits low double digits somewhere between.

Eight and 12% are.

From various all the policy sort of reported we grouped 100% year on year. So we're taking very significant share. We will continue to grow I don't think we will grow at 100% year on year, but we will certainly continue to grow at over 50% year on year next year that takes us to over 100.

Thousands of retail units in the U K next year makes us one of the two or three biggest players in the market and as.

We we highlighted I think it is important to remember this is all but yeah. We haven't reached all even all three year anniversary yet.

The.

Scale of the brand and the infrastructure and the volume that we're delivering are I think is.

In time to be able to grow.

Those sorts of rates most off a low base when you look at all the unit volumes this year.

65 to 70000.

Unit that was north of the low base that is.

A top three player in the U K, but.

And so it continues to grow at those levels.

Thanks, so much really helpful.

Our next question is from the line of Sam saved with Sternberg.

To your question.

Uh huh.

Hi, there thanks for taking my questions.

And I guess my first one is just related to something in the 6K.

I think one of them is stocking lines.

It seems to have because of interest rates.

Base rate plus 90% I mean should we just said Jim.

A very small amount.

No. It's representative at all of.

A spokesman.

Hum.

Yes.

I mean.

Sorry I'm.

Any color on that.

And my second one can you maybe provide us an update on way of reconditioning of retail units is right now relative to your longer term target.

600 pounds.

And the longer term target and I might have enough monopoly is D C.

Yeah, so on on the stocking loans that that's normally.

They're materially lower rates to match, our reconditioning costs, we've seen very good progress over the last three or four months with changes to processes are increased efficiency upsides changing shift and there's all sorts of things and of course because.

There is a delay from the time you implement those things two calls being board going through the system being sold actually some of those benefits, but we've implemented over the last three months are all starting to come through in the numbers now.

Now because you sell calls today that you bought a couple of months ago, and recondition a month or so ago. So we are very encouraged by.

Continued improvement.

Improvements that we're making in that area unexpected to see further improvements and that is one of the drivers of the further improvements we expect to see in GPU. If you look at our G. P. You throughout the course of this year, we have grown it by about 100 and AC power.

Hum quarter from Q1 to Q2 Q2 to Q3, so broadly a 60 pounds per month improvement.

N G. P. You throw out the entire yeah. So Paul I'm, we expect that to continue in Q4. So we expect to see a further improvement of 150 to 200 pounds to GPU sequentially from Q3 to Q4 and some of that comes from the improved.

Reconditioning efficiencies, but we still have further to go and we'll start to see more of that again.

As we get into next year.

Got it thanks for that and maybe just finally I think you mentioned that supply is crashed game craving.

They clearly demand environment hasn't been Pedro maybe getting incrementally worse.

We're thinking about pricing for retail unit for the remainder and maybe into early next year I think you've already sort of threats that quote unquote declining cage free one.

So in the last call you said twice as Kent remains flat, let's say should we kind of view. This three percentage and then it gets sort of run rate quote unquote declined meaningful at.

Or is it going to sort of remain at this level.

Along with just anything on that would be quite helpful.

So the supply is not improving.

That's not something we thought I think supply remains constrained and until new calls supply is back to previous levels and until used car pricing is back to a normalized levels. I think that will that will continue on pricing remaining relatively flat and you brought up.

Push pull Oh no.

Balancing out the supply and demand AR issues. There. So shortage of supply is driving a pricing challenge demand is weighing on our pricing and those two things sort of even each other out. So we we we see pricing is remaining.

Suddenly flop over the coming months, but not very much depends on you know what.

What happens in the macro environment doesn't really make a huge difference to us from a GPU perspective.

So you know I think whether pricing is sort of awful down 3% it doesn't make a material difference to all of them.

Yeah.

Okay. Thank you.

Thank you.

Wonder if you'd like to ask a question you May press star one from your telephone keypad.

Our next question comes from the line of Catherine O'neill Citi. Please proceed with your question.

Great. Thank you and actually I have to follow that and on the question.

We're just discussing about.

I think and I'm asking is if I can for the 45 to the mainland and the market.

You don't see any change.

G. P. S. She does that go down 3% I just wondered if you could help me think about that.

To what degree the pricing need to ship, let's say if demand softens that in its class jobs and create that it would be more challenging field G. P. J.

How can you manage that and then the second question I'd call. It on a consensus for EBITDA for the year and I think he's looking for about.

EBITDA for that minus 200 million.

Just wanted you to feel.

That he comfortable with that number given.

But my allowance savings in the U K.

Yeah.

So one on pricing and its impact on GPU.

Cause the wholesale market and the retail market pricing largely moved in tandem there is a slight dip.

Delay effect.

If pricing moves one way or another because youre selling calls your board you know between one and three months ago that there's a you know a month to month impact potentially if pricing moves materially in either direction, but over the over one to two quarters that impacts the <unk>.

Self out.

Doesn't really have a material impact on our G. P or if you look at what happened last year, we saw significant appreciation in pricing in Q3, and then it sort of flattened out but if you average the courses al you you you take that pricing affect Donaldson.

So I I think we we don't expect a material change there in terms of our group adjusted EBITDA for the year.

Age to be significantly better than a H one because of some of the things related to the realignment plan and changed the cost space and about that then.

The number you mentioned I think as Bob said, a lot of thinking about how things will hop out.

Yeah, I mean, obviously the EBITDA consensus is for the group.

We've gone through a process now closing down the groups that you pay out the U K I believe will be will be lower than that and then going forward I think it will just be from a UK perspective. Once we once we go out of Georgia.

Great.

Thank you.

Our next question is a follow up from the line of same Sage with Baird. Please proceed with your questions.

Yeah, sorry, just one other quick question on wholesale units I think its now 20% of the Churchill Ukrainian and makes is that sort of get percentage to think about moving forward.

I think so look our wholesale is north of our core business and its somewhat of a by product of the retail business. You're you end up with wholesale cause that you choose not to retail. So you bought them for a reason other than your core business they either because.

We'll generally into one of two categories. You thought you were going to reach out to them and then you changed your mind for whatever reason that not what you thought they want.

Oh, you bought them through your direct call buying channel because that's the service youre, providing to consumers all through Pos exchange, which is a large drive all the.

The wholesale business. So it's not that we're not trying to drive for maximum volume in the wholesale business those have caused the weak largely inherit.

Through I vote, Pos exchange or or the the call buying channel, but we expect that number to fluctuate between the sort of 20% to 30% range. I think is defensible places to look at it in and the drop in absolute volume is actually a positive for a couple of reasons one.

You know if you look year on year, we have great to reconditioning capabilities now and therefore, we're able to recondition in retail some of those calls, whereas this time last year, we were very constrained on reconditioning, we send caused wholesale that we would've otherwise well wanted to reach.

And the other thing is we are getting much better from a data perspective, I'm getting much better at being selective in the calls that we choose to.

Goodbye from consumers, so we want to effectively whether it's an auction process and it needs to be contacted or if it's a you'll buying directly from the consumer which is an auction process and in fact gonna be to see called attacks.

We're being much more selective about what we choose to win buses trying to buy everything so not absolute numbers North Bay.

It is a it is a positive with anything because it reaffirms that were buying only what we want to buy and we're able to recondition, both when we buy stock.

Great. Thank you.

Thank you.

Ladies and gentlemen. This concludes today's call you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Thanks, everyone.

Yeah.