Inchcape : Transcript (235.54 KB)

Inchcape

In the driving seat webinar: Our

Distribution Model

23rd May 2024

Transcript

Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither Inchcape nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

Duncan Tait:	Hello everybody and thank you for joining us today for the latest edition of
	Inchcape's 'In the Driving Seat' webinars. Today's session will focus on
	explaining our distribution model.
	I am Duncan Tait, Group CEO, and joined Inchcape in 2020. Since then, I've led
	our business throughout our strategic transformation to becoming a pure play
	automotive distribution business. This has been driven by our focus on
	deepening our partnerships with our Original Equipment Manufacture partners
	who we will refer today as our OEMs and providing the business with a digital
	capability that differentiates us.
	Our journey has been accelerated by acquisitions, a reconfiguration of the
	Group through a series of retail disposals, and supported by the organic growth
	and diversification of our underlying business. We'll cover all of these elements
	today.
	As an introduction to Inchcape, we are the leading global independent
	automotive distribution business with exclusive rights to distribute vehicles and
	parts for 60 OEMs in around 40 markets around the world.
	Our business has a long track record, having originally been established over
	200 years ago with a listing on the London Stock Exchange since 1958.
	Today, we'll take you through the key elements of our distribution model. We
	hope this gives you a sense of how we operate, what differentiates us, and what
	this means for the financial dynamics of our business.
	This is our agenda for today, with key members of our leadership team
	presenting who have a wealth of experience, both within Inchcape and from a
	range of sectors and industries. Full bios can be found within the webinar link.
	After my introduction, our Chief Digital Officer, Mark Dearnley, will talk about
	the digital enablers of our business. You'll then hear from Liz Brown, our Chief
	Strategy Officer, who will discuss our partnerships with OEMs. Our final
	presenter today is Adrian Lewis, our Group CFO, who will discuss the financial
	characteristics of our model.
	We'll then take your questions via the webinar platform, which are Head of IR,
	Rob Gurner, will facilitate.
	There are three simple messages we'd like you to take away from today's
	session.

Firstly, we want to highlight that Inchcape is well positioned for growth as the leading global independent player in automotive distribution. As you'll hear today, automotive distribution is a strategically attractive sector. It is capital light, highly cash generative, and relative to retail only, higher margin and higher return.

Secondly, we want to illustrate that Inchcape has a compelling, differentiated and valuable proposition for our OEM partners. And thirdly, we want to highlight the attractive financial characteristics of our business. We'll focus on how we think about cash, working capital, the value that new distribution contracts bring to us, and demonstrate that with our highly cash-generative model, we are well set to continue to drive returns for shareholders and deliver value for all our stakeholders.

Let me start today with an explanation of automotive distribution.

In broad terms, as a distributor, we take responsibility for a brand in a given market, and fundamentally, we manage vehicles and parts from the OEM at the factory gate or port, and take care of every bit of the value chain on behalf of the OEM, from logistics to sale to the end users. We're also heavily involved in providing value-added services for customers throughout the life cycle of a vehicle.

This slide shows the value chain, which starts with the product planning stage. During this stage, we use our digital tools to help analyse each market, including taking a forward-looking view based on a wealth of consumer data. This approach helps us to predict which vehicle models and what volume to order, what parts to order, how much inventory to deliver into a market, and how we should be building a brand proposition in that market.

Secondly is logistics, which is another key area of expertise for Inchcape. This includes shipping and storage of vehicles and parts. As a 'Cost Plus' business, any third-party costs we incur here, or anywhere else in the value chain, are incorporated into the retail sale price of the vehicle and parts. This pass-through element is planned for upfront during the initial product planning phase I previously mentioned.

The third phase is the execution of brand building and marketing campaigns to raise awareness of the product and to enhance its brand equity ahead of its entry into a market.

This phase is delivered through either our digital channels or through more traditional brand-building media. In our role as the exclusive distributor for that brand, we are fundamentally responsible for advertising investments and for executing media campaigns utilising the OEM's global brand assets and guidelines.

The next stage is channel management, which includes how we operate the dealer or retail network. Across our distribution business, the majority of our retail or dealer network is owned and managed by third parties.

In some markets, we have exclusive agreements with these third-party dealers highlighting the sticky nature of our retail network.

The fifth stage of the value chain is the retail or dealership interface with customers. Overall, the retail only is lower margin, lower returns and more capital intensive than distribution. We have disposed of our retail only businesses over the last 10 years.

However, we continue to own and operate some retail assets with our distribution model supported by our digital infrastructure. This enables us to engage directly with consumers, providing a seamless experience for them as they evolve through their buying journey across digital and physical channels. Our independent retailers are also plugged into this technology so they can access the full suite of our digital capabilities and provide data, which brings benefits for us and our OEM partners, including driving customer conversion rates, for example.

Finally, as a distributor, our aim is to also sell value added products and services to our customers. These services include parts, used cars, and service related offerings. We also offer finance and insurance products, helping to drive customer lifetime value.

With the evolution of new energy vehicles, areas like electric vehicle, battery maintenance, and infrastructure management are still nascent in our markets and present an opportunity for Inchcape.

We are a critical partner for our OEMs in the markets in which we operate, managing and developing their route to market. To that end, we continue to build a competitive moat for our OEMs by investing in our business to support them, particularly in technology.

OEMs do not see us simply as an outsourced cost providing service they'd rather not do themselves. We offer OEMs value ensuring they can focus on investing in their high-volume markets and in next-gen production and design. Hence, we are a critical partner to OEMs, which helps to explain the longevity of our relationships with them.

We deliver for our OEMs through three clear differentiators.

Firstly, we consistently perform for our OEMs as a key partner in the value chain. They value the combination of our specialist local knowledge and global expertise backed up by our global systems and processes.

Secondly, our digital and data analytics capabilities ensure we have a data-led approach to everything we do for our OEM partners, including brand building, managing the digital and physical networks within a market, and developing competitive pricing structures. This ensures we can drive improved financial growth and returns for our OEM partners.

Our third differentiator is our long track record of achievement with the longest partnership going back over 100 years. This shows the strength of our OEM relationships and highlights the confidence our OEM partners have in Inchcape in consistently delivering for them over the long term.

Our differentiators are underpinned by a clear and comprehensive responsible business agenda, which is a central tenant of our strategy and helps us to set how we work.

Now, let's look at where OEMs partner with us and why.

OEMs focus their investments on their commercial efforts on the 20 or so higher volume markets, sometimes where they have production facilities and other operational infrastructure. In those markets, the OEMs tend to play the role of the distributor appointing non-exclusive retail operators as the final step in the route to market.

For the longer tail of smaller to medium-sized markets, many OEMs appoint an independent distributor like Inchcape to represent their brand in those markets, asking Inchcape to work out the best route to market for their brand.

Those markets are generally higher GDP growth with lower motorisation rates. That last point means there is a lower proportion of vehicle ownership, which we see as a major opportunity for potential growth. For example, in markets where we operate like Colombia and Ecuador, the motorisation rate is less than 100 compared to the US, which is over 800, so lots of room for growth in our markets.

Our markets tend to be more complex, for example, in terms of specific local legislation or regulations, which requires our people to be nimble in responding to a changing landscape.

For Inchcape, we estimate that our total addressable market now stands at 10.7 million vehicles globally. This updated TAM includes our latest market estimates, potential OEM conflicts, and excludes certain markets previously seen as potential targets.

Of our TAM, we have a market share of only 3%, so that highlights the opportunity we have for growth in new markets and in our existing markets.

	The relationship with our independent dealers is crucial to the success of our
	distribution business. They ensure the efficient delivery of vehicles and parts
	through to the last mile. Also, the insights they bring from end customers
	provides valuable data, which we use in our discussions with our OEM partners.
	Around 70% of our retail network measured by our retail estate sites is owned
	and operated by independent dealers. So by managing our dealer network in a
	flexible and agile manner, we can maximise returns for Inchcape, our retailers,
	and our OEMs.
	It is important that dealers use the Inchcape platform for their own advantage.
	Here's a short video from Rodrigo Escarate of Automatura Bilbao, a leading
	independent dealer in Chile, giving his take on why he values his partnership
	with Inchcape.
Rodrigo Escarate:	Being an Inchcape dealership allows us to have at our disposal many
	technological tools that benefit our customers. This makes our customers much
	more loyal and we can serve them in a better way. For example, Salesforce is a
	key tool for customer management, and we also have access to important
	information, through big data or microdata, which allows us to proactively meet
	and satisfy the needs that our customers may have, both in the purchase of cars
	as well as aftersales, including maintenance, overpainting or spare parts.
	Being a dealership, we have a stronger platform, based on the greater support
	we now have. Inchcape is a very important importer worldwide and in Chile,
	and being part of their network has generated important value for us as a
	company. This value is also seen by our customers, given they now also have
	greater support, which they value when choosing a brand. They decide based on
	this, based on the importance of the Distributor in Chile.
	The shareholders of Automotora Bilbao are very engaged and very happy that
	Inchcape is their new Distributor, since it will allow us to expand our coverage.
	We aim to open new stores, to make new decisions, and to have more
	capabilities to enable us to service our customers in the best possible way and,
	together with Inchcape, to grow our company within the automotive industry.
Duncan Tait:	As I mentioned earlier, value-added services are part of our core vehicle
	distribution business. You can see on this slide our key capabilities here. This is
	all about keeping end customers within our ecosystem for as long as possible so
	that we can cross-sell and up-sell then more services over time.
	Our strategic position is an evolution of our previous approach, which was
	focused on vehicle lifecycle services that emphasised used cars and parts. Our
	refreshed approach on value-added services reflects our broadening perspective
	as the new industry develops towards a new energy future.

Our first service is the exclusive distribution of OEM-certified parts in our markets. These products like brake pads and door panels are lower in absolute revenue terms than vehicles, but higher in per unit volumes and in margins.

To help scale this business, we recently launched a digital parts platform for Subaru in Australia and are rolling this out in other markets in APAC with more OEMs.

This is effectively a proprietary software platform that we developed to support the digitalisation of the parts market for ourselves and other independent distributors. The opportunity here is to scale this product into more markets with more OEMs in the future.

Increasingly, we are using our AI capabilities to deliver our parts products in the optimal and efficient manner. Mark will talk more about this in detail.

Our next value-added service is finance and insurance, or F&I, another area of high potential and high margin. Our in-market approach here includes using our scale-to-operate funding panels in finance. We also run a number of global strategic partnerships with key finance houses, which are delivered on a local basis across our third-party and owned retail network.

High-quality finance products enable us to increase vehicle sales by making vehicle pricing more attractive to consumers around the world. F&I tends to be high margin and drives customer loyalty to brands, accelerating their repurchase rates and loyalty, so it is a critical value-added service. Importantly, we are not the principle finance provider to the consumer. This is a role typically taken by the banks. This approach limits our balance sheet exposure to consumer credit.

I mentioned earlier the opportunities associated with the transition to new energy vehicles, which is still at an early stage of development in many markets. We expect to see a mixed drivetrain future including internal combustion engine vehicles, hybrid and pure battery electric vehicles, as well as potentially other drivetrains in the longer term, possibly including hydrogen.

The key drivers that accelerate the transition we see as being pricing, infrastructure investment, and government incentives.

Inchcape is drivetrain agnostic. We'll bring to market the most appropriate range from an OEM. Ultimately, we aim to continue to be the leading independent distributor of vehicles in the new energy world and to support the transition.

In terms of value added services on EV, we are doing a lot, but we are still at an early stage. An example of our initiatives in this area include our work with Singapore Power to operate EV ride-sharing in low carbon districts. Of course,

certain elements of these services will be the same for new energy vehicles as they are for ICE vehicles.

These new products still need brake pads and other key components, and we will continue to sell various service packages to consumers. But they will also require new capabilities like battery services, home charging equipment support, and software updates. Currently, EVs represent just 2% of group volumes, so we see this as a major future growth opportunity for Inchcape.

Finally, on this slide is used vehicles. As we said earlier this year, we scaled back Bravoauto, our used car brand, focusing on our profitable sites. Going forward, our approach on used cars will be to leverage our distribution platform and partner with our third party independent retail network.

So I hope this gives you a sense of the value added services opportunity, and we'll give more details on the strategic development of our Accelerate strategy at our Capital Markets Day in November.

This slide shows our track record since 2016, a pivotal point in our strategic development, to transform ourselves from a retail and distribution business to a pure play distribution business.

In 2016, the proportion of our group's revenues from distribution was only 40%. Since then, we have divested £4.5 billion in retail only revenue and acquired £4 billion in distribution revenue.

The key attraction of distribution has been driven by its capital light base, attracts higher margins, is more cash generative and delivers higher returns than retail only.

To that end, our successful transformation since 2016 is clear from this slide. We have tripled the number of OEM partnerships and almost doubled the number of markets in which we operate. Our annualised distribution revenues have almost tripled, and we have more than doubled the new vehicle volumes we distribute.

As a result of this strong track record of delivery, we have scaled and diversified this business with a proven plug-and-play distribution capability. Going forward, our robust balance sheet enables further investment and growth. Our success has been guided by an experienced and diverse board, led by a dynamic management team and driven by the professionalism, expertise, and dedication of our 19,000 talented people in distribution.

That's all from me at the moment. I'll now hand over to Mark who will discuss how our technology enables our distribution model.

Mark Dearnley:	Thanks, Duncan, and hello everyone. I'm very pleased to be presenting today,
	which is in some ways an update on our previous 'In the Driving Seat' session
	when I spoke in detail on our digital and data in our business back in November
	2022.
	To access this session, you can scan the QR code on this slide.
	Our approach to digital and data is a major area of differentiation for Inchcape.
	The integration of our digital capabilities spans the entire distribution value
	chain.
	Our technology helps to deliver a perfect representation of the individual OEM
	brand experiences in our markets, thereby delivering a seamless experience for
	our customers and subsequently driving better financial performance for our
	OEM partners.
	Our differentiated approach in technology also enables us to attract the best
	people to help drive a shared vision and objectives for the group.
	Our technology stack supports our global managed capabilities, which are
	unique to the industry and are delivered on a local basis and fully integrated
	with our OEM partners.
	Our customer experience platform, which we call DXP, has helped us to drive
	customer engagement, improve our productivity, and fundamentally generate
	sales.
	DXP is an end-to-end omnichannel platform for selling vehicles and managing
	the ownership life cycle. Customers can browse, configure and buy a vehicle
	online, white-labeled for our third-party dealerships. Our sales and marketing
	teams can then use the data from their digital footprint around specific
	preferences and pricing sensitivities to support the customer in their decision-
	making process.
	The platform is developed in-house building on Salesforce's CRM capabilities,
	has a single global code base and is highly scalable. It is fully integrated across
	our own retail operations, our third-party retail network, and our financial and
	insurance providers in each market.
	Ultimately, this is a big advantage for our OEM partners as they look to launch
	their brands across additional markets using the data they get from our
	analytics capabilities. Going forward, we continue to develop the functionality
	and the user experience of DXP. Importantly, we have the ability to serve
	multiple OEMs through the same software in a market, delivering their
	individual brand experience.

DAP, our Data Analytics Platform provides advanced analytics and machine learning. It leverages data and drive smarter, faster, and better business decisions. We use AI models tailored to each OEM and optimising the stages of the automotive distribution value chain, such as product planning, logistics, marketing, pricing, customer relationships, and operational performance. Importantly, our AI models are tailored for each OEM in each market.

DAP is managed through a central capability, which drives local and global decision-making with business intelligence, providing transparency and consistent execution across markets.

The capabilities within DXP and DAP continue to be developed and supported by our highly talented digital specialists in our digital delivery centres. We currently have around 1500 of these specialists in our hubs in Manila and Bogota.

The foundation of our technology stack is our robust digital architecture, which is managed through our digital delivery centres. This stack incorporates leading applications in customer experience and relationship management, including Salesforce, to ensure our retail network has a powerful integrated solution.

This was just highlighted in the video we just showed you.

Other leading applications integrated within our technology stack include SAP for logistics and financial management.

We will continue to invest in these areas to ensure our technology remains a key differentiator whilst enabling efficiencies and driving growth in our business.

For clarity, we do not capitalise our investment in software as a service technology. This investment is part of our overhead base and the total technology cost has been less than approximately 1.5% of revenue over the last three years.

This slide highlights how our proprietary digital and data analytics approach supports every element of the distribution value chain that Duncan mentioned.

On the first stage, product planning, we use our data and analytics for sales and operations planning. This has ensured we are more surgical in our inventory management practices, particularly for new contracts and acquisitions. For example, our analytics helped us to reduce around 200 million pounds worth of inventory in Derco, our recent Americas acquisition last year.

On logistics, we have developed an AI driven forecasting algorithm for parts, which is embedded in our supply chain management processes. In the Americas markets where we have rolled this out, this algorithm has resulted in profit growth, improved efficiencies and increased customer satisfaction. This includes