Cazoo Group Ltd (CZOO) 2022 Q4 法說會逐字稿

Hello, and welcome to the Cazoo Fourth Quarter and Fiscal Year 2022 Earnings Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Anna Gavrilova. Anna, please go ahead.

Good morning, everyone. Thank you for joining today's call and webcast to discuss our fourth quarter and fiscal year 2022 results. You will 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 Alex Chesterman, Founder and Chief Executive Officer; Paul Whitehead, Chief Operating 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 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 a further discussion of risks related to our business, please see the filings of Cazoo Group Limited with the SEC.

Now I will hand the call over to Alex.

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 Cazoo has achieved since our launch in December 2019. Our growth over the past 3 years has shown that the Cazoo proposition is resonating very strongly with consumers and that there is a significant appetite for buying and selling cars entirely online.

We've now sold over 120,000 cars entirely online in the U.K. since launch and achieved around a 1% market share last year, something many people doubted was possible when we launched just 3 years ago. Our focus is now entirely on the U.K. market, the largest used car market in Europe with approximately 7 million transactions a year worth around GBP 100 billion annually.

We've built a world-class platform, team, brand and infrastructure network over the past 3 years 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.

Whilst we've achieved significant growth and scale over the past 3 years, in the current economic climate, our focus is now fully on improving our unit economics. To drive efficiency in our operations, we have consolidated our operational footprint and reduced the number of vehicle reconditioning and customer centers we currently operate.

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 GBP 950 per unit in the first quarter, materially up on previous quarters.

2022 was a very strong year in terms of revenue growth and scaling our operations. Revenue grew approximately 91% to a record GBP 1.25 billion despite the challenging macroeconomic environment. We've also driven retail GPU improvement in every quarter since Q1 last year. At the same time, we continue to invest in our in-house reconditioning capabilities and growing our direct car buying channel.

Our in-house reconditioning capabilities enable end-to-end refurbishment of the cars we sell, driving efficiency and speed of operations. 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. This allows us to both diversify our mix and support our retail GPU growth.

We're pleased with the operational improvements delivered last year. 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. We therefore announced a change in focus from fast-paced growth to focusing on unit economics.

We reset our expectations for units and revenue in 2023 and announced several actions in January to rightsize our headcount and operational footprint. These changes have been completed at pace, and we're already seeing the benefits in an improving gross profit per unit.

In 2022, we also made the decision to exit Mainland Europe, which we've now largely completed. The U.K. used car market is huge and the penetration of online car buying and selling is still materially below most other retail sectors. We continue to lead disruption in the sector, where over 50% of U.K. 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 3 key priorities, which are to further improve our unit economics, to optimize our fixed cost base and to maximize our cash runway. The market opportunity for Cazoo remains enormous with a goal of growing from around a 1% market share last year to achieving a 5% or greater share of the GBP 100 billion U.K. market over time.

As an illustration, with medium- to long-term expectations on market share and retail GPU, and the gross profit potential for Cazoo is very significant. Over the past 3 years, we've laid the foundations to capture profitable growth in the future.

I'll now hand over to Paul Whitehead, who's been with me on this journey from day 1 and will take over from me as CEO from the beginning of April. He'll walk you through the operational results in more detail.

Thank you, Alex. Good morning, and thank you for joining us on this call. I'll summarize performance highlights, revenue, retail units and retail GPU for full year 2022 and Q4 2022. I also would like to highlight the performance of our ancillary products as it is one of the important building blocks towards our goal of achieving profitability.

During 2022, we generated revenues of GBP 1.25 billion, a 91% increase year-on-year. We sold over 65,000 cars to retail consumers, an 88% increase over the comparable period. We also sold just under 20,000 cars for our wholesale channel. This is a strong result given the challenging economic environment.

The retail GPU for the year was GBP 403, down from GBP 427 in 2021 due to several factors that Paul Woolf will describe in its financial slides. In Q4 2022, total revenues were GBP 318 million, 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 was lower than retail unit growth due to a decline in wholesale revenue in the quarter. Retail GPU reached GBP 596, an increase of 156% year-on-year.

From the first quarter of last year, we have seen sequential improvement in retail GPU every quarter with this 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 GBP 900 in the first 2 months of the year, up 50% from GBP 596 in Q4 2022.

Ancillary revenue is an important component of retail GPU. We received commission on contracts or finance through our platform and earn an attractive margin on associated products.

Last year, we made GBP 40 million from ancillary products, an increase of 159% year-on-year, which equated to GBP 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 GPU, 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 cars for sales, 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 ancillary revenue opportunities. This includes initiatives to drive higher attachment rates for finance and other ancillary revenue products, thereby increasing customer lifetime of value.

In Q4 2022, we achieved a greater than 50% finance attachment rate, a 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 GBP 1,500 gross profit per unit, up from GBP 596 in the last quarter of 2022.

In the past 3 years since December 2019, Cazoo has gone through a period of phenomenal growth. From launching a website and servicing its first customer to becoming one of the largest players in the U.K. market and selling over 65,000 retail vehicles entirely online last year. Our costs increased to support this growth and beyond. Now we are rightsizing the fixed cost base to an optimized level commensurate with our target for 2023 and appropriate for profitable growth in the future.

We have consolidated our retail vehicle preparation centers from 8 down to 3, plus 1 wholesale site. The retail refurbishment capacity of the site is over 85,000 cars annually, and it can be expanded if we turn on a [multiple] sites.

Our customer centers 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 centers are in the most geographical optimal locations in order to maximize the number of customers who can come to a center 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 multicar vehicle transporters to move cars between our vehicle preparation centers and customer centers, and single [cars and] porters to deliver and collect car from consumers. Through all of these changes, we are driving efficiency and speed in our operations, our vehicle reconditioning sites and in logistics. We were able to select reconditioning sites and customer centers in the most efficient locations, supported by our own logistics infrastructure and fleet.

With the reduction of operational footprint,comes a reduction in headcount, which also took place in corporate functions and in Europe as we wound down business there.

Overall, since announcing the revised 2023 plan on January 18, we have reduced our headcount by about half. With these changes, we expect to see quarterly reduction in SG&A expenses of over GBP 25 million in Q4 this year versus 2022, or over GBP 100 million of annualized savings going into 2024.

In terms of market, we now solely focus on Europe's largest used car market, the U.K. We have sold our businesses in Italy and Spain. We announced the sale of Cluno, which is due to complete shortly, and we'll conclude our withdrawal from Germany.

And in France, we have largely 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 refurbishments, quicker inventory turn, greater finance attachment rates due 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 GBP 596 in the last quarter, and we expect to approach GBP 1,200 retail GPU for the full year 2023 through gains in each building block on this chart. We have a lot to deliver, but we have a market-leading platform, fantastic brand recognition, a great team and are now established infrastructure for online car retailing to continue progress towards our goal of reaching profitability.

I will now hand over to Paul Woolf, 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 U.K. 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 developments of reconditioning capacity at the vehicle prep centers, 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 GBP 427 to GBP 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 GBP 596 per unit. SG&A Increased by 45%, showing good scaling against a 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 GBP 254 million compared to a loss of GBP 168 million in 2021. As you will see in the guidance slide, we are dramatically changing our trajectory in 2023 as we look to prioritize unit economics and profitability over growth.

Looking now to cash flow. Total loss for the year ended December 31, 2022, including discontinued operations, was GBP 704 million. Adjustments, including amortization, impairments and share-based payment expense totaled GBP 329 million, and working capital was a net inflow of around GBP 122 million, as we ran down inventory in Mainland Europe, started to wind down subscription vehicles and improve the U.K. retail business inventory turn.

Tax credits and interest received amounted to around GBP 3 million. This resulted in a net operating cash outflow of GBP 250 million compared to an outflow of GBP 556 million in 2021.

Net CapEx was a GBP 43 million outflow. Business acquisitions and disposals, as well as sale and leaseback and modifications, were a net outflow of GBP 32 million. Within financing activities, we received proceeds from the convertible note issue of GBP 460 million, about $630 million, partly offset by various items, including an inventory finance reduction reflecting the reduction in inventory of GBP 33 million and interest and lease payments of GBP 48 million.

Net cash inflow for the year, including FX differences, was GBP 65 million against an outflow in 2021 of GBP 51 million. At December 31, 2022, we had cash and cash equivalents of GBP 258 million and self-funded inventory of approximately GBP 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. SG&A run rates were reduced by over GBP 25 million per quarter by Q4 2023, representing over GBP 100 million of annualized savings going into 2024.

And our quarterly cash burn will be down to around GBP 30 million per quarter by the end of the year. Once the dust is 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: Retail unit sales of 40,000 to 50,000 units, retail GPU for the year approaching GBP 1,200 a unit, about 3x the level we achieved in 2022 with an exit retail GPU of around GBP 1,500 a unit.

EBITDA loss of between GBP 100 million and GBP 120 million. And year-end cash of between GBP 110 million and GBP 130 million, plus self-funded inventory of between GBP 15 million and GBP 25 million. With cash burn down to around GBP 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 3 years since launch, establishing a market-leading platform brand, team and infrastructure in the U.K. Against today's challenging economic backdrop, our near-term focus is on improving our unit economics, optimizing our fixed cost base and 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 improvements 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.

(Operator Instructions) Our first question is coming from Catherine O'Neill from Citi.

Great. I had a question on, I guess, your plan beyond 2023, which we probably have to think about now. Clearly, you're in cash persuasion mode, which the pace has been pretty impressive of rightsizing. 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.

Once we achieve our exit 2023 run rate GPU of around 1,500 pounds, we have the capacity within our existing facilities by that, that's our buying, reconditioning and collection and delivery logistics to scale back up to 2022 volume levels and beyond.

So if we look at 2022, we demonstrated very clearly the ability to get to become one of the largest players. We did well over GBP 1 billion of revenue, 65,000 units, makes us one of the top volume players in the U.K. 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 -- for combining both the volume and the unit economics and very limited investment required to do so because within our existing facilities, we can get -- we can do 80,000 to 100,000 retail units with existing reconditioning facilities.

Okay. 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 U.K. in terms of supply and demand and pricing. And increasingly, we've been getting asked about if there's been any change post recent (inaudible) around banks and concerns about [tardent] credit conditions.

And then the other question was on the cash burn, where you talked about a quarterly GBP 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 phasing through the year. Is that a sort of GBP 30 million exit rate or -- yes, that's what I want to understand how should we think about it as we progress through the year?

So the market remains challenging, although there's the 2 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've talked about previously, that they are still not back to normal, improving slightly, but not back to all.

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'll sort of pass over to Paul Woolf to address that in a bit more detail in terms of where we see cash burn going as we head into 2024.

Yes. Thanks, Alex. So that -- so in terms of cash burn, you absolutely right that the GBP 30 million we described is the exit rate. And it's sort of the average Q3, Q4 2023 rate. I mean there is a bit small swings in working capital.

So with the first quarter, Q1 will be a slightly heavier burn because we're still carrying -- 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 stays -- it's sort of -- it continues -- it's a little bit higher in Q2 still as we carry some of those costs to Q3, Q4 at a 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 -- banks any of that -- in the plan that we're setting out. As I described in my commentary, we'll 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 they're appropriate. We've got a significant procurement exercise underway, which is something that hasn't been done in Cazoo ever, actually just looking at sort of all our input costs and how we can reduce those.

And I think we're just -- we've mentioned the better Q1 GPU per unit, and we've mentioned the 1,500 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 -- so our plan will be to get that GBP 30 million down pretty quickly, either at the back end of this year or into next year. But at the moment, we're saying for the moment, exit rate GBP 30 million.

We 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 Pauls. Thank you very much.

That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.