Cazoo Group Ltd (CZOO) 2022 Q2 法說會逐字稿

Greetings and welcome to Cazoo's Second Quarter 2022 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Robert Berg, Director of Investor Relations and Corporate Finance. Thank you. You may now begin.

Good morning, everyone. Thank you for joining today's call and webcast to discuss our second quarter and first half fiscal year 2022 results. You'll be able to find today's press release and accompanying presentation on our Investor Relations website at investors.cazoo.co.uk.

We appreciate everyone joining us today. With me on the call is Alexander Chesterman, Founder and Chief Executive Officer; Stephen Morana, Chief Financial Officer; and Paul Whitehead, our Chief Operating 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 and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, please see the filings of Cazoo Group Limited with the SEC.

Now I will hand over the call to Alex.

Thanks, Rob. Good morning, everyone, and thank you for joining us today. I'm extremely proud of what we've accomplished so far in 2022 as we continue to transform the car buying and selling experience for consumers. Against the tough macroeconomic backdrop and whilst many businesses across all retail sectors are witnessing declining demand, we continue to see record sales. It's becoming very clear that our market-leading brand and fully digital world-class proposition is continuing to resonate strongly with consumers and that the shift to online car buying and selling is accelerating.

Whilst our growth remains very robust, we remain laser-focused on maintaining our strong balance sheet, where we have cash of over GBP 400 million and self-finance inventory of over GBP 175 million. Our primary focus is on preserving cash and materially reducing the need for further external funding as we drive towards profitability. We've successfully implemented our recently announced business realignment plan, and we're starting to see the early benefits which we expect to continue into H2 and beyond.

Given our focus on cash preservation, we are also currently undertaking a full strategic review of our business in Mainland Europe with a view to further reducing cash burn and reducing the requirement for any further external funding. Whilst we've accomplished an enormous amount in just 2.5 years, we're still just at the start of this exciting journey. We're more encouraged than ever about the future opportunity for Cazoo and our ability to capture a 5% or greater market share of the huge addressable market that we operate in.

Before we discuss recent trends, I'd just like to recap the significant progress we've made. We spoke about this in detail on our last call, so I'll just summarize the key points today. Since our launch, Cazoo has been one of the fastest-growing businesses globally. I'm very proud of the world-class platform, team, brand and infrastructure network that we've built.

As you'll see on Slide 4, we've now sold over 80,000 cars to consumers with over 30,000 of those in the first half of this year alone, making us one of the largest used car retailers in the U.K. We've proven that we can buy and sell cars at significant scale with a market-leading consumer experience. Despite significantly growing our sales, we continue to source over 30% of our retail units directly from consumers, highlighting the infrastructure we now have in place to buy cars at scale, whilst achieving exceptional consumer feedback.

The strength of our brand and customer experience remains a key differentiator, and we now have over 80% national brand awareness across the U.K. We're also incredibly proud of the exceptional feedback that we continue to receive from our customers, giving us one of the highest feedback ratings globally in our sector. Looking specifically now at the most recent period, we continue to make strong progress.

You can see on Slide 5 that we achieved record revenues of GBP 333 million in Q2, up 145% year-on-year, with retail unit sales of over 17,000 as we grew our market share significantly despite the tough macroeconomic backdrop. Whilst our growth remains very strong, we are laser-focused on preserving cash and materially reducing any need for further funding as we drive towards profitability. And I'll talk more about this shortly.

We saw a very positive trajectory in our U.K. retail GPU in Q2, which was up notably by 150% compared to Q1 of this year. Despite our record sales, we've also grown our U.K. website inventory to record levels of over 7,500 cars, highlighting the progress we've made with our reconditioning capability, which, as you'll remember, was the key bottleneck for us at the back end of last year.

In more recent weeks, I'm particularly pleased that despite the weak economic environment affecting growth in many other businesses and sectors, we've maintained our strong momentum into Q3 with record retail unit sales and revenues in July, whilst continuing to also grow our website inventory further. Whilst our growth remains strong, we are not immune to the rapidly shifting external factors in the global economy, which includes deterioration in consumer confidence, volatility in the spot market and the possibility of a recession in the coming months.

And whilst we have a very strong balance sheet with over GBP 575 million of cash and self-finance inventory, we've already acted decisively to right size the business to ensure that we are well positioned to achieve our long-term ambitions. Our business realignment plan focused on cash preservation, sustainable gross margins and reduced SG&A costs, while still expecting to grow over 100% year-on-year in 2022.

As I mentioned earlier, we're also now conducting a full strategic review of our business in Mainland Europe with the aim of further reducing our cash burn and ensuring that the company has an executable plan to reach cash flow breakeven without the need for any additional external funding. In times like these, businesses like ours need to be laser-focused on what's most important. Our #1 priority is to reach cash flow breakeven without the need for further capital and our realignment plan, combined with our current review of our businesses in Europe will derisk this significantly.

On Slide 7, you can see all the building blocks that we've put in place to achieve success in our core markets in U.K., which is by far the biggest new car market in Europe. We now have 8 in-house reconditioning sites, which have increased their output significantly since the turn of the year. We operate 21 customer centers for collection, distribution, storage and servicing and have a fleet of around 250 delivery transporters. The investment we've made in our infrastructure will be pivotal to our ability to grow materially over the coming years.

And as you can see on Slide 8, we're addressing a massive market opportunity in the U.K., which has a used car market of around 8 million transactions annually with a value of over GBP 100 billion. Digital penetration remains extremely low and the market remains hugely fragmented, giving us the opportunity to build the leading brand in the sector. Customers love our proposition, and we expect to continue to rapidly increase our market share towards 5% and beyond over time.

The U.K. market opportunity is so large, but with just a low single-digit market share and a proven medium-term GPU target of GBP 2,000, we would generate gross profit of close to GBP 0.5 billion annually, and meaningful free cash flow. With our long-term target of a 5% or greater market share and a GBP 3,000 GPU, the growth opportunity is even more exciting.

I'll now pass over to Stephen, who will run through the details of our Q2 and H1 performance and future guidance in more detail.

Thank you, Alex, and Good morning, everyone. As you can see on Slide 9, in Q2 2022, we achieved group revenues of GBP 333 million, which were up 145% year-on-year. Growth was driven primarily by U.K. retail revenues, which increased over 140% year-on-year and supported by ancillary revenue sales. During Q2, we sold 23,955 cars, 124% year-on-year growth, including 17,033 retail units at 94% year-on-year growth. This growth in retail units came despite the challenging macroeconomic climate and implies that we continue to take significant market share, testament to the strength of our proposition.

Looking at Slide 10. As we highlighted at the Q1 stage, we've seen a strong improvement in our GPU in Q2 as investments we made during the second half of 2021 work their way out of our numbers. We've started to see the benefit to our GPU, which grew by 150% from GBP 124 in Q1 to GBP 309 in Q2 and also the impact our reconditioning efficiency improvements have had on our sales. Our increased productivity has led to a material increase to our website inventory, which, as Alex said, is at record levels and has been a key driver of the sequential growth in our sales, 30% quarter-on-quarter.

Turning to Slide 11. We have no change in overall guidance, which was set at the time of our business realignment plan. We're targeting total retail sales of between 70,000 to 80,000 units for 2022, which, when combined with the ancillary sales and wholesale business, we believe should drive total revenues of between GBP 1.4 billion to GBP 1.5 billion with year-on-year growth well over 100%. We continue to expect our U.K. retail GPU for 2022 to be in the region of GBP 500 to GBP 600 as we continue to build on the progress made in Q2.

With regard to reconditioning, we continue to believe that between now and the end of the year, we can make hundreds of pounds of GPU savings, some of which have started to flow through in Q2, but expected to be more H2 weighted.

In addition, as we've detailed in previous calls, we've already put in place further improvements, which we expect will also continue to drive GPU growth during the year, such as further optimizing our pricing decisions, increasing the proportion of costs sourced directly from consumers and increasing finance and ancillary revenue streams. We've stated that we see a path to GBP 2,000 retail GPU in the medium term, and we remain confident of reaching this level and beyond given the building blocks we've put in place.

Turning to Slide 12. And as a reminder of what we're expecting for 2023, we're targeting the U.K. getting towards cash flow breakeven by the end of the year as we approach 12,000 monthly sales and a GPU of GBP 1,500. We believe that these levels of sales, the reductions that we're making to our fixed cost base will mean that we reach cash flow breakeven in the U.K. and we have the required capital to get us to the position that our U.K. business will be self-funding.

With regard to Europe, while the outcome of the strategic review of our business in Mainland Europe has the potential to impact the contribution from those markets going forward. The aim of this review is to further reduce our cash burn and ensure that we have a plan, which materially reduces the requirement for raising any additional external funding.

Finally, I just wanted to take a moment to highlight our sound balance sheet. We have cash of over GBP 400 million at the end of June and cash financed inventory of over GBP 175 million. We're taking decisive action to improve our GPU and reduce our overall SG&A costs. We're focused on ensuring our business achieves breakeven as soon as possible and that we can execute on our plans with a material reduction in any requirement for any additional external funding.

Alex?

Thanks, Stephen. As you would all have seen in today's release, we've appointed Paul Woolf as Chief Financial Officer, who will join and succeed Stephen later this year. I'd like to thank Stephen for his significant contributions over the past 2 years and wish him all the best in the future. He'll be remaining with the business until Paul join to ensure a smooth transition.

So in summary, against a very tough macroeconomic backdrop, we've accomplished an incredible amount this year, continuing to grow strongly and achieving record sales levels. However, despite our strong growth, we remain very mindful of the challenging economic climate and remain laser-focused on cash preservation on our path to profitability. We'll continue to be decisive to derisk the company's path to breakeven and execute with a material reduction in the need for further external funding.

We believe that we remain very well positioned and well funded to capture the huge market opportunity and I'm very pleased with both our performance year-to-date and our strong start to Q3. The addressable market is huge. We've put all the building blocks in place to continue to rapidly take share and reach our long-term ambitions. We've seen great momentum so far in 2022, which we expect to continue throughout the rest of the year and beyond.

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

(Operator Instructions) Our first questions come from the line of Rajat Gupta with JPMorgan.

Maybe if we could start with like the strategic review options for Europe. So what prompted this review in recent months since the plan was -- since the new alignment plan was announced in June? Could you -- and also could you elaborate on the options you're exploring? And lastly, just for modeling purposes, could you confirm the current EBITDA loss run rate in Europe? I have it at roughly GBP 30 million to GBP 35 million per quarter, but if you could confirm, that would be helpful.

This is Alex. I'll take those first and then see if Stephen wants to add anything. In terms of the strategic review and what's changed since we announced the realignment plan. At that time, we stated very clearly that our overriding goal was to reduce our cash burn, but that we would need additional capital at some point to continue.

We now believe that the single biggest priority is to ensure that we have a plan that does not involve further capital raising and so we said at the time of the realignment plan that we would remain very fluid, look at what was going on in the market and take further decisive actions if we needed to. So we don't know, and I don't want to preempt what the outcome of the review will be, the range of options include everything from business as usual and doing nothing to a small investment in those markets to withdrawing from some all of those markets.

We don't know where we'll end up. We expect the review to be completed relatively quickly over the course of the next few weeks and have something to announce in terms of the conclusion of that review in early September. In terms of EBITDA, and again, I'll let Stephen add to this, but about 1/3 of the EBITDA loss is attributable to Europe.

And in terms of the EBITDA balance between H1 and H2, we expect the EBITDA -- irrespective of the strategic review, we expect the EBITDA loss in H2 to be lower than H1 because obviously, as a result of implementing the realignment plan at the back end of H1, we didn't see any benefits of that, which we will see as we get into H2. Hopefully that answers the question. Stephen, feel free to add.

Yes. Yes. European EBITDA is roughly around GBP 25 million to GBP 30 million a quarter at the moment.

Just maybe one follow-up. It looks like your June volumes were roughly 6,000 units. You mentioned that July was another strong month. So curious, like in terms of our full year guidance, is there still some conservatism baked in, in terms of how the economy shapes up in the second half? Just curious as to like what's embedded in the guide versus what you're actually seeing on the ground in terms of demand? If you could just like help elaborate that a little bit would be helpful.

Yes. So as Stephen said, one of the key drivers has always been the availability of inventory, and we've done -- we've made a lot of strides in improving inventory availability through improving our reconditioning, and we expect that to continue. Our run rate in June was strong. July, as we mentioned, we've had a very good start to Q3. July was a record in both retail units and in revenues. And in fact, going into August, we even saw a record day yesterday.

So in terms of what we're seeing on the ground is very positive relative to what we're hearing from peers in our space and also other retail categories. So is there some conservatism in those numbers. I think we are being cautious based on the likely worsening macro environment in H2 that I think is most people broadly agree that things are not going to get better. And so there's an element of that, and we stick by the numbers that we've provided.

It's really hard. It's a good question. It's hard to model in a way when you are predicting growth rates of 50% to 80% year-on-year in a market which is potentially in decline 10% to 15% at the moment because of kind of economic challenges out there. So I think you're right, there's an element of conservative, but it's hard to do -- it's a bit unprecedented the level of growth we're seeing compared to any other dealer out there.

Our next questions come from the line of David Reynolds with Davy.

I wonder if I could just ask one question, please. Clearly, strong progress in the United Kingdom. I wonder perhaps if you could comment on how you see the competitive backdrop there as obviously, you continue to take market share. And then also whether you see a future for subscription style products as the U.K. market evolves?

Thanks, David. The competitive backdrop has not changed materially over the last few months. We've seen one pure-play online player. There was a #3 player, (inaudible), went out of business. The 2 pure-play players remain us. And since a number of traditional players are starting to offer more digital services, which we think is an endorsement of our business model, of course, and also helps familiarize the consumer with pure online buying.

So the more people who start to offer our types of services, the more reinforcing it is and the more helpful. We continue to believe that online will go from its current 2% or 3% market share to 20% or 30% market share over the course of the next 5 years or so. We continue to believe that, that will get split between pure-play players and traditional players as it has in every other retail market.

And that's why we are incredibly confident about our ability to get to a 5% or greater market share because actually, it doesn't require us putting anybody else out of business or fundamentally changing consumer behavior. When we talk about even in 5 years, 20% being online, that means 80% of people carry on doing exactly what they've been doing for the last 20, 30 years.

So we think that online will continue to grow. And as Stephen said, we're growing 100% plus year-on-year this year in a market that will be flat and probably down 10% to 15%. So what you're seeing is an acceleration in the shift to digital, and it will go from -- it will be a steady plan from its current low single-digit market share.

On the second question, David, on subscription, as you know, we withdrew from that market because it was highly capital intensive. We always viewed it as niche. It remains very niche. I think there is a market for it. There will always be consumers who want to do short-term rentals, longer-term rentals, purchases, et cetera, but our core business and focused now.

And again, in these type of economic climates where you are single-mindedly focused on past the profitability, proving the model, delivering the best consumer experience you can then being simplifying the business model being the best at what we do, which is buying and selling cars directly online means that, that's the space that we're not going to play in for the foreseeable future. I think there will always be customers who want to do it, but it's relatively small in motion. It doesn't have a material impact on our numbers, whether we're in it and around of it.

Our next questions come from the line of Saim Saeed with Berenberg.

My first one is just on other revenue on a per retail unit basis. It looks to fall in a fair bit sequentially from Q1. I was just wondering, is this be a specific impact; cost of living, is this do you see that different type of consumers buying of cars? Any color on that would be helpful. And maybe just somewhat related to that in terms of retail average selling price, that's also fallen at least a fair bit sequentially from Q1. Is that due to the mix (inaudible) lower-priced vehicles in there? Or are you seeing continuous trading down quite significantly? And maybe just how we could expect that to progress over the rest of the year.

I'll take the second one, and then I'll throw the first one to Steve. In terms of the average selling price, it's a factor of mix that we're choosing to stock, looking at the overall market environment and the fact that consumers are feeling the pinch are generally looking to save. We are -- we've shaped our inventory slightly differently to combine with, obviously, consumers wanting to spend less and a bit of depreciation, the price depreciation that we've seen in the market over the last few months. So all 3 of those factors combined have led to that.

I think we won't -- I don't think we're expecting to see a material either decrease or increase in the average selling price over the rest of the year from where it was in Q2. In terms of the other revenue, I'll refer that to Stephen.

Yes. Yes, the other revenues, no, that's really the mix. So we had a ton of remarketing revenue in there, which was the B2B revenue we inherited. And as part of our plan, we've transitioned away from that as the refurb centers focus more and more on doing our own work. So that was always planned and built in, that isn't consumer spend at all.

And I think I may be wrong, but there may also be an element of the fact that we turned off subscription, which may or may not be in other revenue line. I don't have the numbers in front of me.

Yes, that was just towards the end, so not really an impact. But going forward, obviously, subscription revenue relatively will lessen out of that. But now in terms of the ancillary products that we sell to customers as part of the car buying process, that remains very robust. We're very pleased with that.

And just maybe a quick follow-up. Could you provide an indication of what Europe's contribution was in your full year guidance? And maybe it's a contribution in Q2 as well.

Europe accounts for less than 10% of unit sales and revenues in Q2 and for the rest of the year.

(Operator Instructions) We did have some questions come in via the webcast. The next 2 questions are from Catherine O'Neill of Citi.

Question one was, what were the main areas of cost inflation in 1H? And how do you expect this trend? How should we think about the phasing of adjusted EBITDA losses this year as it looks like there needs to be a material improvement in 2H to come in line with where the consensus is this year?

And 2, can you provide more detail on how you will deliver on GBP 250 million plus cash at year given the level of cash burn seen in the last quarter?

Yes. So in terms of cost inflation, I think we're seeing it across the board in labor materials, and it was a dampener on GPU growth in Q2 despite the fact that GPU went up by 150%. I think absent inflation, we would have seen a greater number there, which we're obviously seeing as every other businesses in all the same areas. So people paint parts, all of those type of things.

In terms of the cash, if you look at the burn rate over the next 6 months, combined with the fact that we will -- we expect to reduce the amount of self-finance inventory, which currently sits at GBP 177 million, we expect to reduce that -- some of that will reduce naturally by being out of the subscription business because half of that is subscription cost.

So as every car comes back because we don't have more going out that adds to that absolute cash number together with increased finance facilities that we have, plus we also talked on our last call about the fact that we own some assets, property assets that we may look to do sale and leaseback on, et cetera.

So we continue to be comfortable with that number. That may change as a result of whatever the outcome of the strategic review in Europe is, but as of now, we're comfortable with that figure.

And our next web questions come from the line of Adam Berlin with UBS.

Question one is, regarding Mainland Europe strategic review, if you are unable to find a willing buyer, would you be willing to close European operations? And what would be the cash cost of doing so?

Number 2, can you share U.K. retail GPU for July? Is it on track for the 500 to 600 target range?

Thanks, Adam. So in Europe, we are as I said, looking at a full range of options. The overriding aim of the review is to ensure that we reduce cash burn and that we have a plan that materially reduces our need to raise further capital next year. So again, I don't want to jump the gun on what the outcome of that review would be. They would -- if we were to shut some markets or there would obviously be some costs associated with that, but they would obviously be significantly lower than the investment that is required over the next 12 to 18 months in those markets.

In terms of U.K. retail GPU for July, we're not sharing that figure at this stage, but Stephen reiterated that be reaffirming our guidance of GBP 500 to GBP 600 for the year at this stage. And we're seeing a number -- a lot of the initiatives that impact GPU are ones that take 1 or 2 quarters to actually come through. So what you saw at the beginning of this year in Q1 was an effect of things that had happened in Q3, Q4 last year. What we expect to see in Q3, Q4 this year are some of the benefits of the improvements we've put in place. So we expect to continue to see a positive trajectory on GPU and that's a significant focus.

Now we will jump back to the phone lines. Our next questions come from the line of Saim Saeed with Berenberg.

Just another quick follow-up on marketing spent. Can you maybe just disclose a bit on brand best performance marketing during H1 and maybe how you expect to progress into H2 and 2023?

I'm not sure if we're sharing the specific split between brand and performance. I'll let Stephen tell us whether we are or aren't. But in terms of general trend from H1 into H2 and certainly into 2023, we should expect to see the balance shift much more in favor of performance. And if I think about a sort of more longer-term in 2021, we were at about 2/3 brand, 1/3 performance. I expect it to be the reverse in 2023 and sort of a progression between those 2 this year.

Yes. Yes, we'd still be weighted more towards brand at the moment in performance. So we -- again, as we focus more on capital preservation, cash management moving towards profitability, performance-based will become a significantly larger part of our ongoing spend.

And maybe just in terms of cash, have you seen this decrease quite significantly in line with your expectations from the analyst presentation during the original [SPAC] presentation? Or is that sort of all the different trajectory from that?

No, we are seeing a positive improvement in tax as obviously unit volumes go up and as we reduce absolute spend on brands and the U.K. (inaudible).

Thank you. There are no further questions at this time. I'd like to turn the call back over to management for any closing comments.

Thank you very much. I appreciate your time, everybody. And obviously, happy to follow-up as is Stephen and Rob with any further questions. Thank you for your time.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.