Q4 2022 Cazoo Group Ltd Earnings Call
Speaker 1: The.
Speaker 2: Hello and welcome to the KAZOO 4th Quarter and Fiscal Year 2022 Earnings Call and Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
Speaker 2: It's now my pleasure to turn the call over to Anna Gaborova. Anna, please go ahead.
Speaker 3: Good morning everyone. Thank you for joining today's call and webcast to discuss our fourth quarter and fiscal year 2022 results.
Speaker 3: You will be able to find today's press release and accompanying presentation on our investor relations website at investors.kazoo.co.uk
Speaker 3: We appreciate everyone joining us today. With me on the call is Alex Chestman, Founder and Chief Executive Officer.
Speaker 3: Paul Whitehead, Chief Operating Officer, and Paul Wolf, Chief Financial Officer.
Speaker 3: 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.
Speaker 3: Management may make forward-looking statements including guidance and underlying assumptions.
Speaker 3: Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
Speaker 3: For a further discussion of risks related to our business, please see the filings of Kazoo Group Limited with the FCC.
Speaker 3: Now I will hand the call over to Alex.
Speaker 4: Thanks Anna. Good morning everyone and thank you for joining us today. Firstly, I wanted to note how incredibly proud I am of everything the team at Kazoo has achieved since our launch in December 2019. Our growth over the past three years has been a huge success.
Speaker 4: has shown that the kazoo proposition is resonating very strongly with consumers and that there is a significant appetite for buying and selling cars entirely online.
Speaker 4: We've now sold over 120,000 cars entirely online in the UK since launch, and achieved around a 1% market share last year, something many people doubted was possible when we launched just three years ago.
Speaker 4: Our focus is now entirely on the UK market.
Speaker 4: The largest used car market in Europe with approximately 7 million transactions a year worth around a hundred billion pounds annually.
Speaker 4: We've built a world-class platform, team, brand, and infrastructure network over the past three years.
Speaker 4: and have developed a powerful brand enjoying over 80% awareness nationwide, together with a great consumer experience as evidenced by our sector-leading Trustpilot rating, where 87% of consumers have given us a 5-star rating.
Speaker 4: Whilst we've achieved significant growth and scale over the past three years, in the current economic climate, our focus is now fully on improving our unit economics.
Speaker 4: To drive efficiency in our operations, we have consolidated our operational footprint and reduced the number of vehicle reconditioning and customer centres we currently operate.
Speaker 4: Fast execution against our revised 2023 plan has already started to contribute to significant quarter on quarter improvement in our retail gross profit per unit, which we expect to be at a record of around £950 per unit in the first quarter.
Speaker 4: materially up on previous quarters.
Speaker 4: 2022 was a very strong year in terms of revenue growth and scaling our operations.
Speaker 4: Revenue grew approximately 91% to a record one and a quarter billion pounds despite the challenging macroeconomic environment.
Speaker 4: We've also driven retail GPU improvement in every quarter since Q1 last year.
Speaker 4: At the same time, we continue to invest in our in-house reconditioning capabilities and growing our direct.
Speaker 4: car buying channel
Speaker 4: Our in-house reconditioning capabilities enable end-to-end refurbishment of the cars we sell, driving efficiency and speed of operations.
Speaker 4: Last year, we achieved record retail sales of over 65,000 units, an increase of 88% year-on-year. The launch of our direct car buying channel in 2021 has proven incredibly successful, and now around half of all the cars we retail come from this in-house buying channel.
Speaker 4: This allows us to both diversify our mix.
Speaker 4: and support our retail GPU growth. We're pleased with the operational improvements delivered last year.
Speaker 4: 2022 was also a year when we made a number of important strategic decisions. In today's tough economic climate, as is only prudent, we are prioritizing improving our unit economics, reducing our fixed cost base, and extending our cash runway.
Speaker 4: We therefore announce the change in focus from fast-paced growth to focusing on unit economics.
Speaker 4: We reset our expectations for units and revenue in 2023 and announced several actions in January to right-size our headcount and operational footprint.
Speaker 4: These changes have been completed at pace.
Speaker 4: And we're already seeing the benefits in an improving gross profit per unit.
Speaker 4: In 2022 we also made the decision to exit mainland Europe , which we've now largely completed. The UK used car market is huge and the penetration of online car buying and selling is still materially below most other retail sectors.
Speaker 4: We continue to lead disruption in the sector where over 50% of UK consumers are now open to buying their next car entirely online, a very encouraging statistic given the current low digital penetration rate in the sector. For 2023 we have...
Speaker 4: three key priorities.
Speaker 4: which are to further improve our unit economics, to optimize our fixed cost base, and to maximize our cash runway.
Speaker 4: The market opportunity for Kazoo remains enormous with a goal of growing from around a 1% market share last year to achieving a 5% or greater share of the £100 billion UK market over time. As an illustration, with medium to long-term expectations, the market is a global market.
Speaker 4: on market share and retail GPU, the gross profit potential for kazoo is very significant.
Speaker 4: Over the past three years, we've laid the foundations to capture
Speaker 4: profitable growth in the future.
Speaker 4: I will now hand over to Paul Whitehead who has been with me on this journey from day one and will take over from me as CEO from the beginning of April .
Speaker 4: He'll walk you through the operational results in more detail.
Speaker 5: Thank you Alex. Good morning and thank you for joining us on this call.
Speaker 5: I'll summarize performance highlights, revenue, retail units, and retail GPU for full year 2022 and Q4 2022.
Speaker 5: I also would like to highlight the performance of ancillary products.
Speaker 5: as this is one of the important building blocks towards our goal of achieving profitability.
Speaker 5: During 2022, we generated revenues of £1.25 billion sterling.
Speaker 5: A 91% increase year on year.
Speaker 5: We sold over 65,000 cars to retail consumers.
Speaker 5: an 88% increase over the comparable period.
Speaker 5: We also sold just under 20,000 cars via our wholesale channel.
Speaker 5: This is a strong result given the challenging economic environment. The resale GPU for the year was 403 pounds, down from 427 pounds in 2021 due to several factors that Paul Wolf will describe in his financial slides.
Speaker 5: In Q4 2022, total revenues were £318 million.
Speaker 5: an increase of 39% year on year. We sold over 17,800 retail cars in the quarter, more than double the number sold in the comparable period in 2021. Total revenue growth.
Speaker 5: was lower than retail unit growth due to decline in wholesale revenue in the quarter. Retail GPU reached 596 pounds.
Speaker 5: an increase of 156% year on year.
Speaker 5: From the first quarter of last year, we have seen sequential improvements in Retail GPU every quarter.
with its positive momentum continuing into 2023.
Year to date, we reiterate, in line with the most recent business update, that January and February 2023, retail unit volumes and revenues are in line with expectations.
and we continue to notably improve our retail GPU.
which was around £900 in the first two months of the year.
Up 50% from £596 in Q4 2022.
Ancillary revenue is an important component of Retail GPU.
We receive commission on contracts or finance through our platform and earn an attractive margin on associated products.
Last year we made £14 million from ancillary products, an increase of 159% year on year.
which equated to £605 per retail unit in revenue. The finance attachment rate shows that 46.5% of consumers who bought a car on our website,
also entered into a contract with finance through our platform.
In Q4 2022, this rate reached 51.5%.
As Alex mentioned earlier, we made an important strategic decision to focus on unit economics in 2023.
replacing our previous focus on retail sales growth. This decision and its consequent changes as a result of us making them quickly.
have already started to bear fruit, as can be seen in the higher retail GPUs we are expecting in Q1 this year and beyond.
I wanted to explain some of the changes we have made and how we are driving better unit economics.
Starting with our direct car buying channel, which we grew significantly in 2022 and now about half of all cars we retail today come through this channel.
which was a much smaller source a year ago.
This allows us to improve the selection of cards for sale.
choosing what to buy based on desirability and popularity of vehicles.
resulting in faster turning inventory. It also allows us to improve the purchasing channel mix by reducing the number of cars we buy at auction and through fleet feeding through to higher margins.
The ability to generate additional ancillary revenue around the vehicle purchase is a key component of Retail GPU and an important building block to improving unit economics.
We will continue to use our data and technology focused approach to car retailing to launch new products and increase our amphibian revenue opportunities.
This includes initiatives to drive higher attachment rates for finance and other ancillary revenue products thereby increasing customer life time value.
In Q4 2022 we achieved a greater than 50% finance attachment rate.
testament to the strength of our offering and we have seen that continue to grow this year
Driving these elements, as well as efficiencies in reconditioning and logistics, we expect to exit 2023, approaching £1,500 gross profit per unit.
up from 596 pounds in the last quarter of 2022.
In the past three years since December 2019, consumers have gone through a period of phenomenal growth.
from launching a website servicing its first customer.
to becoming one of the largest players in the UK market and selling over 65,000 retail vehicles.
entirely online.
Our costs increase to support this growth and beyond.
Now, we are right sizing the fixed cost base to an optimized level commensurate with our targets for 2023 and appropriate for profitable growth in the future. We have consolidated our retail vehicle preparation centres from 8 down to 3.
That's one whole cell tonight.
The retail refurbishment capacity of the site is over 85,000 cars annually and it can be expanded if we turn on a mothball site.
Our customer centres have been consolidated from 21 down to 7.
We have a customer services site in Southampton and a single head office in London.
Our customer centres are in the most geographical, optimal locations in order to maximise the number of customers.
who can come to a centre to pick up or drop off their car.
and to make our logistics network more efficient.
This also captures the areas where we believe the interest in our fully online offering is the strongest and most profitable.
based on the 100,000 plus sales we have seen to date. We operate a transport fleet of around 190.
With both multi-car vehicle transporters and move cars between our vehicle preparation and customer centers,
and single car transporters to deliver and collect cars and consumers.
Through all of these changes we are driving efficiency and speed in our operations, our vehicle reconditioning site and in logistics. We were able to select reconditioning sites and customer centres in the most efficient locations supported by our own logistics infrastructure and fleet.
Through all of these changes we are driving efficiency and speed in our operation, our vehicle reconditioning site and in logistics. We were able to select reconditioning sites and customer centres in the most efficient locations supported by our own logistics infrastructure and fleet. Please listen to the provided URL to Julie's video slides.
comes the reduction in headcounts, which also took place in corporate functions and in Europe as we wound down business there.
Overall, since announcing the revised 2020 tweet plan on January 18th, the
we have reduced our headcounts by about half.
With these changes...
we expect to see quarterly reduction in SG&A expenses of over £25 million in Q4 this year versus 2022, or over £100 million of annual life savings going into 2024. In terms of market
We now solely focus on Europe's largest used car market, the UK.
We have sold our businesses in Italy and Spain. We announced the sale of Pluno, which is due to complete shortly, and will conclude our withdrawal from Germany.
And in France, we have lastly wound down our remaining operations.
On slide 10, the chart looks at the key building blocks to keep increasing retail GPU in 2023.
starting from a better car selection, channel mix, efficient refurbishment, quicker inventory turn, greater finance attachment rates, and more.
Starting from a better car selection, channel mix, efficient refurbishment, quicker inventory turn, greater finance attachment rates, through to higher ancillary revenues.
All of these elements, when done better, faster, more efficiently, contribute positively to the profitability of our business.
And as we have mentioned, we are already starting to see the benefits of these.
We finished 2022 with retail GPU of £596 in the last quarter and we expect to approach £1200 retail GPU.
for the full year 2023 through gains in each building block on this chart.
who gained in each building block on this chart. We have a lot to deliver.
So we have a market leading platform, fantastic brand recognition.
a great team and their now established infrastructure for online car retailing.
to continue progress towards my goal of reaching profitability. I will now hand over to Paul Wolf who will take you through the financial results. Thank you Paul. I'm now going to talk through the financial performance in 2022.
The numbers are UK only as we have moved the mainland European results into discontinued operations.
Whilst 2022 was a year of strong growth in units and revenue, it was clearly disappointing from a margin and profitability perspective. Hence, the change of strategic direction set out in our revised 2023 plan announcement which we are now executing against.
Versus 2021, retail units grew by 88% and total revenue increased by 91%.
However, the gross margin dropped by 2 percentage points to 1.6%. This drop can be attributed to a number of factors. Inflated 2021 gross margins due to a period of used car price inflation rather than more normal depreciation. A higher than planned opening 2022 inventory position that required clearing.
A period of integration and development of reconditioning capacity at the vehicle prep centres, which pushed up reconditioning costs, and a weaker performance in wholesale, which dragged down the overall gross margin. These factors result in retail gross profit per unit.
dropping from £427 to £403. As previously described, we did manage to deliver sequential quarter-on-quarter improvement in the retail GPU up to a Q4 exit rate of £596 per unit.
SG&A increased by 45%, showing good scaling against the 91% increase in revenue. The increase was driven by ongoing investment into logistics, after sales and headcount to drive growth.
Adjusted EBITDA loss increased to 254 million compared to a loss of 168 million in 2021.
As you will see in the guidance slide, we are dramatically changing our trajectory in 2023 as we look to prioritise unit economics and profitability over growth.
Looking now at the cash flow, total loss for the year ended December 31st 2022 including discontinued operations was $704 million. Adjustments including amortization, impairment and share based payment expense totaled $329 million.
Working capital was a net inflow of around 122 million as we ran down inventory in mainland Europe , started to wind down subscription vehicles and improved the UK retail business inventory turn. The UK retail industry is a net inflow of around 122 million as we ran down subscription vehicles
Tax credits and interest received amounted to around $3 million.
This results in a net operating cash outflow of 250 million compared to an outflow of 556 million in 2021.
Net CapEx was a 43 million outflow. Business acquisitions and disposals as well as sale and lease back and modifications were a net outflow of 32 million.
Within financing activities we receive proceeds from the convertible note issue of 460 million pounds that's 630 million dollars.
partly offset by various items including an inventory finance reduction reflecting the reduction in inventory of 33 million and interest and lease payments of 48 million.
Net cash inflow for the year, including FX differences, was $65 million against an outflow in 2021 of $51 million. At December 31, 2022, we had cash and cash equivalents of $258 million.
self-funded inventory of approximately 75 million. Looking now at 2023 we are reiterating our guidance and updating our year-end cash forecast.
Paul and Alex have already described the steps we're taking to make our business more profitable. We have our retail GPU levers, we have halved the headcount and mothballed all non-operational facilities. We have our retail GPU levers, we have halved the headcount and mothballed all non-operational
SG&A run rates will reduce by over 25 million per quarter by Q4 2023, representing over 100 million of annualised savings going into 2024.
and our quarterly cash burn will be down to around 30 million per quarter by the end of the year. Once the dust has settled from our current restructuring we will be looking again at all costs to see what else we can do.
In terms of 2023 guidance, we are setting out the following. Sales of 40,000 to 50,000 units.
Retail GPU for the year approaching £1200 a unit, about three times the level we achieved in 2022, with an exit retail GPU of around £1500 a unit.
EBITDA loss of between 100 and 120 million pounds.
year-end cash of between a hundred and ten million and a hundred and thirty million pounds plus self-funded inventory of between fifteen and twenty five million pounds.
With cash burn down to around 30 million per quarter by the end of the year, we reiterate our previous guidance that we do not expect to need to raise further external funding until H2 2024. I will now pass back to Alex.
With cash burn down to around 30 million per quarter by the end of the year, we reiterate our previous guidance that we do not expect to need to raise further external funding until H2 2024. I will now pass back to Alex. Thank you Paul.
So in summary, the team has accomplished an enormous amount in the three years since launch, establishing a market leading platform, brand, team, and infrastructure in the UK. Against today's challenging economic backdrop, our near-term focus is on improving our unit economics, optimizing our fixed cost base, and improving our
extending our cash runway.
I'm very encouraged by the pace of delivery of the changes we've implemented since the beginning of the year and we're already seeing significant improvement in our retail GPU and have all the elements in place to drive profitability in our business and underpin future profitable growth.
I'll now pass the call back to the operator who will open up the line for Q&A. Thank you. Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment please while we poll for questions.
And once again that's star one to be placed into question Q. Once again that's star one to be placed into question Q. Our first question is coming from Catherine O'Neill from Citi. Your line is now live.
Great, thank you.
I just had a question on I guess your plan beyond 2023 which is probably hard to think about now.
Clearly you're in cash preservation mode, which the paper has been pretty impressive with right sizing. But I think you have been talking about returning to growth in 2024 in terms of units. So I just wondered how we should think about that return to growth and
what kind of investment or what the margin might look like as you pivot back towards growth.
Thanks Catherine. So as you rightly point out in 2023 we're focusing entirely on unit economics, that's a reduction in the total unit numbers from 2022 and then we expect in 2024 to return to growth.
reconditioning and collection and delivery logistics to scale back up to 2022 volume levels and beyond. So, you know, if we look at 2022, we demonstrated very clearly the ability to...
get to become one of the largest players. We did well over a billion pounds of revenue, 65,000 units makes us one of the top volume players in the UK. With unit economics that were not as good as we'd hoped, we will demonstrate this year those unit economics and return to growth in 2024 combined.
Okay, thank you. I just had a couple of other questions. One is actually just generally on the market backdrop and what you're seeing at the moment in the UK in terms of supply and demand and pricing and increasingly we've been getting asked about if there's been any change
post-recent news go around, banks and concerns about typing credit conditions. And then the other question was on the cash burn where you talk about a quarterly 30 million, a quarter of cash burn. I just wanted to understand a bit more about how you think about the cash burn sort of fading through the year. So with that, 30 million...
exit rate or yeah that's what I'm going to understand is how we should think about it if we progress through the year. So the market remains challenging although you know there's the two sides there's the supply side which remains challenging as a result of all of the
supply chain issues and new car issues that we talked about previously that they are still not back to normal improving slightly but not back to normal. Pricing remains elevated which we've always said is a dampener on our business because it acts as a constraint on demand.
and volume so pricing remains much higher than pre-pandemic levels. Consumer demand remains strong despite the challenging economic environment for consumers and again as Paul Whitehead noted with regards to finance attachment rate in Q4 last year we've seen that continue in Q1 and continue to see record levels.
of consumer financing despite the increase in interest rates which is positive. On cash flow that is the X-ray, but I will pass over to Paul Wolf to address that in a bit more detail in terms of where we see.
cash burn going as we head into 2024. Yeah, thanks. Thanks, Alex.
going as we head into 2024. Yes, thanks. So that's...
So in terms of cash burn, you're absolutely right. The 30 million we describe is the exit rate and it's sort of the average Q3, Q4, 2023 rate. I mean, there's small swings in working capital. So with the first quarter, Q1 will be a slightly heavier burn.
because we've been carrying out our restructuring and we still carry the majority of the costs of last year into Q1 of this year, then that drops away into Q2 and the rest of the year. So it's a little bit higher in Q2 still as we carry some of those costs, but Q3, Q4 are the sort of steady state, if you like. And then what we're doing now, so obviously we want to make that better.
but that's what we're setting out today. As we're looking to exit our multiple sites, which is going well at the moment, we haven't banked any of that in the plans we're setting out. As I described in my commentary, we will certainly be looking again at having sort of done this exercise now, we're going to be looking again at all our costs, making sure there are pros and cons.
and we've mentioned the 1500 exit rate, clearly that is we're looking at how we can continue to build on that, both in this year and into next year. So we'd like to, you know, so that our plan will be to get that 30 down pretty quickly, either at the back end of this year or into next year, but at the moment we're saying.
at the moment, eggs in rate 30. Great, thank you. Thank you, we've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Thank you all, thanks for joining us, and if you have any further questions, don't hesitate to reach out to either myself or either of the pools. Thank you very much.