Q3 2023 Cazoo Group Ltd Earnings Call

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Greetings and welcome to the <unk> third quarter 2023 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 call. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded at.

This time I would like to hand, the call over to Ana Kapor logo head of Investor Relations. Thank you you may begin.

Good morning, everyone.

Thank you for joining today's call to discuss our results for the third quarter of 'twenty to 'twenty three.

We'll be able to find todays press release, well now Investor Relations website at investors the kazoo Pepco the U K.

We appreciate everyone joining us today.

With me on the call, Alex just men founder and executive Chairman.

Paul Whitehead, Chief Executive Officer, and 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 underlying assumption.

Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results differ materially.

For a further discussion of risks related to tell the business. Please see the filings of <unk> Group limited.

The U S Securities and Exchange Commission.

Today's call will not be recorded and will not be available for replay we kindly ask you not to record it to transcribe it.

I will now hand, the call over to Paul Whitehead.

Thanks Dennis.

Morning, everyone and thanks, a lot for joining us today.

I'm very pleased with the results we are reporting each site and then we have delivered another quarter of meaningful improvement in our profitability.

We have achieved a lot over the first nine months of this year, we restructured our operational footprint and head counts to better match the scale of our business.

And at the same time, we've consistently been driving improvements in our unit economics or strong quarter against the backdrop of a deteriorating economic environment.

Interest rates are much higher than a year ago and inflation is assisting pop up the 2% target set by the bank of England.

High cost of living and cost of credit are causing volatility in demand that you'd call.

At the same time the supply of new cars has been rising towards level seen before the COVID-19 pandemic.

This is happy thanks, if I can.

They seem to miss alignment of supply and demand in the used car market and.

Daily depreciation stock selection, it's been higher than normal market condition.

Despite all of that we've continued to focus on unit economics, and we managed to maintain quarter on quarter improvement in retail GPU.

Reaching a new can do record 1470 pounds of unit.

The improvement was achieved across several areas.

We took a number of steps, which helped to partially mitigate the impact of higher interest rates and customer demand.

Significantly we focused our web platform optimization efforts on enhancing customers' digital finance journey without find them.

Approach.

Despite these improvements that finance attachment rate declined to 49, 8% from our record performance of 53, 2% in the previous quarter.

And we are implementing a range of actions to target areas, such as pre eligibility I'm preapproval with the goal of enhancing our future performance in this area.

We also initiated a program to enable our delivery specialists and a kazoo customer fences to sell ancillary products offline when we handover the purchase cost of the customer.

This has proved to be a growing source of ancillary revenue for us helping to increase attachment rates for the products we offer.

And we've made further progress in reducing our reconditioning costs as we focus on the efficiency of our operation.

And we continue to work on optimizing our call acquisition pricing by combining our own proprietary data with third party sources.

And there is still further scope to sustain and grow our retail GPU by targeting opportunity across all these areas with particular focus on faster Stockton as well as further efficiencies in our operations through Digitization.

In the third quarter, we sold 9525 retail cost.

Fully online proposition continues to resonate with customers and we generated revenues of 173 million pounds.

These results were in line with our focus on unit economics.

<unk> GPU at 1400, 70 pounds increased by 14% quarter on quarter and by 201% year on year.

Average retail GPU for the first nine months of 2023 with 1215 pounds.

Gross profit of 11 million pounds increased by a million pounds a year on year, driven primarily by higher retail GPU to lower volume of unit.

Gross margin improved by 350 basis points to six 5%.

Ancillary revenue per retail unit sold at 735 pounds increased by 29% year on year on the finance attachment rates of 49, 8% represented a $6 seven percentage points improvement year on year.

Both metrics however, it declined quarter on quarter due to factors related to higher interest rates.

We continue to reduce fixed and variable costs in line with expectations to extend our cash runway.

Our cash position remains strong with 151 million pounds of cash and cash equivalents, plus approximately 35 million pounds of self funded inventory.

Some of the associated 2023.

We announced in September that we had entered into a transaction support degree certain note holders and shareholders in connection with the contemplated transaction.

We are updating our cash balance guidance for 2023 yearend to take into account such transaction related costs, which were incurred in the third quarter and will be incurred in the fourth quarter. We now expect to finish the year with between $100 million and 115 million pounds of cash and cash equivalents.

Tween 20 million 30 million pounds of self finance inventory.

Higher interest rate I used car prices rising insurance premiums and the recent spikes in fuel prices driven by geopolitical conflicts means higher costs in Colorado shipping customers.

Demand for used cars will remain volatile and against this backdrop, our priority is to continue to deliver better unit economics.

Economics of units sold.

And we expect retail unit sales in Q4 2023 to be around 8500, and the full year retail sales to be between 40040 2000 units.

Total unit sales, including both retail and wholesale.

Are expected to amount to be to be between 50052 thousands unit.

Given that we have average 1200 15 pounds retail GPU for the first nine months of this year, we expect the average retail GPU the full year to be higher than previous guidance and we now expect to end the year with average retail GPU approaching 12, 50 pounds and the exit rate is expected to be around.

<unk> 1400 pounds, which reflects normal market seasonality on the challenging economic environment.

We are maintaining our adjusted EBITDA forecast of between negative 100 million a negative 120 million pounds.

Our top priorities remain to further improve unit economics.

Reduce our fixed cost base and extend our cash runway as.

As we work towards our goal of reaching profitability.

Thank you very much and we will now take any questions you might have.

Thank you we will now be conducting a question and answer session.

Like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. He.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of Rajat Gupta with JP Morgan. Please proceed with your questions.

Oh, great. Thanks for taking the question.

First question just on you know the profitability cadence going forward.

Oh curious to know if there are more cost savings or on the SG&A side or more GPU opportunity.

At the current level of units.

That you can capture before the company can decide to return to growth again.

And when can we expect the business to return to growth or target to return to growth.

And I'll do it.

Scaling the fixed cost eventually.

And then relatedly, what kind of macro or company specific factors, we should be watching to determine that timing effects I have a quick follow up.

Yes.

So I would say Paul will have thanks, so much for the question.

Hum.

Is it more to do as we said and referred to in the announcement on Gpus.

And I think.

Yeah. There's a number of you know there are a number of levers across multiple areas.

The two that are sort of full front of our mind one is to reduce the days to sale in.

In the business.

Obviously, the past two weeks kind of a vehicle.

Vehicles, no not particularly on the website, but that is the taking on refurbishment gassy onto our site and that eventually the fulfillment the faster we do that.

Yeah, the the the lesser vehicles depreciate.

During our ownership so that that still remains a significant lever.

Finance and ancillary that's been it's been a success story all the way through pool just describe how.

It has taken a step back.

That's an attachment rate levels from finance fashion that is in Q3, but mind you that's been largely offset in terms of overall finance income or ancillary income by eight other products. So we continue to evaluate new product and we continue to drive attachment through opening up new channels to drive attachment and improving our.

Our digital journey.

Which which is which is good again, we referred to it in the commentary just that really were a lot of our technical team is spending that time at the moment and we describe it as finance first.

And then there's a question also so GPU, yes, you would expect that continues to go up, albeit we've I think we've called out in the announcement that Q4 will take hold we expect it to take a small step back from the Q3 numbers due to the market and seasonality. So those two things are against us in Q.

But Q1, we'd expect to be sort of back on the right track again, and then in terms of fixed cost than there is more to come out I think the big the main numbers around now so it's smaller it's smaller slices, but we continue to reduce fixed costs really every quarter. We're not we're not shouting about it because the numbers are ready.

The smaller but you know that.

The big chunks of them, but they're all they're all definitely sending the numbers aren't going to go up in terms of fixed cost or expense generally go down you know notwithstanding inflation and everything else.

And there's a question.

And the final question was around <unk>, which is the great question around growth. What we've consistently said is once we establish the right foundations for unit economics, we would we would.

We wished it pushed the gross Boston again, but when we do that we're not going to be we're not going to be we wouldn't expect to be growing at sort of 50 or 100% you know as we are.

<unk> 2023, where.

Where the price of putting together our plans for next year and we'll be talking about that in due course, but with that in may at the <unk>.

Levels of profitability now how unit, which as you rightly point out means that we by doing more units we will be.

Better all built into the fixed cost better.

Got it got it that's really helpful color and thanks for all the detail.

One follow up just on bad good.

Could you help us give us an update.

As it stands today on what the the fixed voice was granted both makes sense, we're dealing with them within your SG&A.

That'll be all from here.

Okay.

Yes sure.

The fixed versus variable mix I mean, it hasnt really changed it is sort of 50% to 60% fixed within SG&A.

Understood.

That's helpful. Thanks, a lot.

Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Ana graph Gaba Lowe for closing comments.

Thank you very much everyone for joining us today, well stick to you next time. Thank you.

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.

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Yes.

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Operator: Greetings. Welcome to the Cazoo Third Quarter 2023 earnings call. At this time, all participants are in a listen only mode.

Operator: The question and answer session will follow the formal presentation. If anyone wants to require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Anna Gavrilova: At this time, I would like to hand the call over to Anna Gavrilova, head of investor relations. Thank you.

Anna Gavrilova: You may begin. Good morning, everyone. Thank you for joining today's call to discuss our results for the third quarter of 2023. You will be able to find today's press release on our investor relations website at investors.cazoo.co.uk. We appreciate everyone joining us today.

Anna Gavrilova: With me on the call, Alex Jusserman, founder and executive chairman, Paul Whitehead, chief executive officer, and Paul Woolf, 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 familiar with. Management may make forward-looking statements, including guidance and underlying assumption. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results differ materially. For a further discussion of risks related to our business, please see the filing of Cazoo Group Limited with the US Securities and Exchange Commission.

Operator: Today's call will not be recorded and will not be available for replays. We kindly ask you not to record it and not to transcribe it.

Paul Whitehead: I will now hand the call over to Paul Whitehead. Thanks, Anna. Good morning, everyone, and thanks a lot for joining us today.

Paul Whitehead: A very pleased with the results we are reporting today, and then we have delivered another quarter of meaningful improvement in our profitability. We have achieved a lot over the first nine months of this year. We restricted our operational footprint and headcounts to better match the scale of our business, and at the same time, we've consistently been driving improvements in our unit economics quarter and quarter against the backdrop of a deteriorating economic environment.

Paul Whitehead: Interest rates are much higher than a year ago, and inflation is the assisting part of the 2% target set by the Bank of England. High cost of living and cost of credit are causing volatility in demand for use cars. At the same time, supply of new cars has been rising towards levels seen before the COVID pandemic. This has had the effects of aggravating the misalignment of supply and demand in the use car market, and daily depreciation for our stock selection has been higher than normal market conditions.

Paul Whitehead: Despite all of this, we've continued to focus on unit economics, and we managed to maintain quarter and quarter improvement in retail GPU, reaching a new kazoo record of £1,470 per unit. The improvement was achieved across several areas. We took a number of steps which helped to partially mitigate the impact of higher interest and most significantly we focus our web platform optimization efforts on an enhancing customer's digital finance journey with our finance first approach.

Paul Whitehead: Despite these improvements, our finance attachment rate declined to 49.8% from our record performance of 53.2% in the previous quarter. And we are implementing a range of actions to target areas such as pre-allegibility and pre-approval with the goal of enhancing our future performance in this area. We also initiated a programme to enable our delivery specialist, Anna Gavrilova, Cazoo customer centres, to sell and setterly products offline when we hand over the purchase card to the customer.

Paul Whitehead: This has proved to be a growing source of ancillary revenue for us, helping to increase attachment rates for the products we offer. And we've made further progress in reducing our reconditioning costs as we focus on the efficiency of our operations. And we continue to work on optimizing our car acquisition pricing by combining our own proprietary data with party sources. And there is still further scope to sustain and grow our retail GPU by targeting opportunities across all these areas with particular focus on faster stock turn as well as further efficiencies in our operations through digitisation.

Paul Whitehead: In the third quarter, we sold 9,525 retail cars as our fully online proposition continues to resonate with customers. And we generated revenues of 173 million pounds. These results were in line with our focus on UNEconomics. Retail GPU at 1,470 pounds increased by 14% quarter and quarter and by 201% year on year. Average retail GPU for the first 9 months of 2023 was 1,215 pounds. Growth profit of 11 million pounds increased by a million pounds year on year, driven primarily by higher retail GPU to lower volume of units.

Paul Whitehead: Growth margin improved by 350 basis points to 6.5%. Ancillary revenue per retail unit sold at 735 pounds increased by 29% year on year. And the finance attachment rate of 49.8% represented a 6.7% percentage points improvement year on year. Both metrics, however, declined quarter on quarter due to factors related to higher interest rates. We continue to reduce fixed and variable costs in line with expectations to extend our cash from weight. Our cash position remains strong with 151 million pounds of cash and cash equivalent plus approximately 35 million pounds of self-finance inventory as of September the 30th, 2023.

Paul Whitehead: We now set numbers that we had entered into a transaction support degree with certain no-holders and shareholders in connection with a contemplated transaction. We are updating our cash balance guidance for 2023 year end to take into account such transaction related costs which were incurred in the third quarter and will be incurred in the fourth quarter. We now expect to finish the year with between 100 million and 115 million pounds of cash and cash equivalent and between 20 million and 30 million pounds of self-finance, in the tree.

Paul Whitehead: Higher interest rates, high-use car prices, rising insurance premiums, and the recent spikes in fuel prices, driven by geopolitical conflicts, mean higher cost of car ownership for customers. Demand for use cars will remain volatile, and against this backdrop, our priority is to continue to deliver better economics per unit sold. And we expect retail unit sales in Q4 2023 to be around 8500, and the four-year retail sales to be between 40,000 and 42,000 units.

Paul Whitehead: Total unit sales, including both retail and wholesale, are expected to amount to be between 50,000 and 52,000 units. Given that we have average 1215 pounds retail GPU for the first nine months of this year, we expect the average retail GPU for the full year to be higher than previous guidance. And we now expect to end the year with average retail GPU approaching 1250 pounds, and the exit rate is expected to be around 1,400 pounds, which reflects normal market seasonality and the challenging economic environment. We are maintaining our adjusted EB-DAR forecast at between negative 100 million and negative 120 million pounds.

Paul Whitehead: Our top priority is remain to further improve unit economics, reduce our fixed cost base, and extend our cash run rate, as we work toward that goal of reaching profitability.

Operator: Thank you very much, and we'll now take any questions you might have. Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation to indicate your line is in the question Q. You may press star two if you would like to remove your question from the Q. For participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment, please while we poll for your questions.

Rajat Gupta: Our first questions come from the line of Gupta with JP Morgan. Please proceed with your questions. Great. Thanks for getting the question. How does first question just on the profitability cadence going forward? I'm curious to know if there are more cost savings or on the SGNA side or more GPU opportunity at the current level of units that you can capture before the company can decide to return to growth again. When can we expect the business to return to growth or target return to growth in order to start scaling the fixed cost eventually? And then relatedly, what kind of macro or company specific factors we should be watching to determine that timing? Thanks.

Paul Whitehead: I have a quick follow-up. So I would say Paul will say thanks so much for the questions. There's a separate more to do as we said in reference to an announcement on GPU. I think there are a number of levers across multiple areas. The two that are sort of forefront of our mind, the one is to reduce the days to sale in the business. Obviously the faster we turn over vehicles, not particularly on the website, but that is the taking on refurbishment, getting on to our site and then eventually the fulfillment.

Paul Whitehead: The faster we do that, the less the vehicles depreciate during our own issues. So that still remains a significant lever for us. Finance and amphitheories has been a success story all the way through Paul to describe how it has taken a step back at an attachment rate level from finance and that is in Q3. But my new, that's been largely offset in terms of overall finance income or ancillary income by the other products.

Paul Whitehead: So we continue to evaluate new products and we continue to drive attachment through opening up new channels to drive attachment and improving our digital journey which is going to get me referred to in the commentary just then, really where a lot of our technical team is spending their time at the moment and we describe it as finance first. And then there's a question also. So GPU, yes, we would expect that to continue to go out all bit.

Paul Whitehead: We've called out in the announcement that Q4 will take, hopefully we expect it to take a small step back from the Q3 number due to the market and these analyses. So those two things are against us in Q4. But Q1, we'd expect to be sort of back on the growth track again. And then in terms of fixed costs, there is more to come out. I think the main numbers are out now.

Paul Whitehead: So it's smaller, it's smaller slices but we continue to reduce fixed costs. Really every quarter, we're not shouting about it because the numbers are relatively smaller. But the big chunks are done, but there are several, certainly the numbers aren't going to go us in terms of fixed costs. We expect to continue to gently go down, notwithstanding inflation and everything else, and there's a couple of questions. And the final question was around, which is the great question around growth.

Paul Whitehead: What we consistently said is once we established the right foundations for Uniteconomics, we wish to push the growth button again, but when we do that we're not going to be, we wouldn't expect to be growing at the sort of 50s or 100% as we were prior to 2023. We're in the process of putting together our plans for next year and we're talking about that in due course, but we're certainly at the levels of profitability now per unit, which you rightly point out means that by doing more units we will be better off developing the fixed bus better.

Rajat Gupta: Got it, that's really helpful colour and thanks for all the detail. Just one follow up just on that. Could you help us give us an update as it stands today on what be the fixed versus variable mixes within your SGNA? That would be all for Mayan. Yes, sure. So the fixed versus variable mix, I mean, it hasn't really changed. It is sort of 50 to 60% thanks within SGNA. Understood. Got it. That's helpful. Thanks for all. Thank you.

Operator: We have reached the end of our question and answer session.

Anna Gavrilova: I would now like to turn the floor back over to Anna Gabru Lover for closing comments. Thank you very much everyone for joining us today.

Operator: We'll speak to you next time. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time.

Operator: Enjoy the rest of your day. Thank you very much.