Cazoo Group Ltd (CZOO) 2022 Q1 法說會逐字稿

Greetings and welcome to the Cazoo first-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 begin.

Good morning, everyone. Thank you for joining today's call and webcast to discuss our first-quarter 2022 results. 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. With me on the call is Alex Chesterman, Founder and Chief Executive Officer, and Stephen Morana, 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 are 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 the 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'd like to start by discussing our Q1 performance, which was a very encouraging quarter in many respects, and why we continue to expect strong sequential quarterly growth throughout the rest of the year despite an uncertain macroeconomic backdrop. Then I will spend some time discussing why we remain highly confident in achieving our long-term targets.

Starting with the first quarter, I'm extremely pleased with our record Q1 revenues and unit sales. Having bought UK reconditioning in-house during the second half of last year, we are now really starting to see the benefits of this strategic decision, which has material long-term operational and financial advantages.

Despite a rapidly changing macroeconomic climate, we achieved over 50% sequential quarterly growth in retail units sold during the period, driven by increased inventory available on our website and strongly supporting our thesis that increased reconditioning output and available inventory leads to greater sales. We believe that our UK retail unit growth going forward will be primarily driven by our ability to continue to ramp up our reconditioning capacity. We now have 10 in-house vehicle preparation sites in the UK which can recondition over 120,000 cars per year currently, with the potential to double that capacity over time.

In October, we had just over 2,000 vehicles available for sale on our UK website. And despite record sales in Q1, we've managed not only to replace the inventory sold over the period, but also more than treble our available inventory to over 6,000 vehicles as a result of having ramped up our reconditioning output.

We've always stated that the principal constraint to our growth is the ability to recondition cars quickly enough as opposed to consumer demand. Our customers love the Cazoo proposition and this is reflected in consistent customer feedback and our market-leading Trustpilot rating of 4.8 stars and gives us increased high confidence in our strategy and growth opportunity.

In Q1, we saw the clear benefit of having more inventory available for sale, selling over 50% more cars than in the previous quarter. As we advance through this year, we aim to continue to ramp up our reconditioning capabilities by adding incremental resources and continuing to improve all of our processes. We expect these initiatives to lead to further growth and allow us to continue our progress towards our long-term market share ambition.

Our growth in 2022, however, will not just come from the UK. We continue to make good progress in mainland Europe since our launches in France and Germany late last year and expect to see a positive impact to our unit sales in those markets once we begin our brand marketing campaigns there in the coming weeks.

We also expect to launch in Spain and Italy in the coming months and have strong local teams, infrastructure, and partnerships in place already in those markets. This will see us grow our presence from one country at the start of Q4 last year to five countries by Q4 at the end of this year, with a combined addressable market of over GBP300 billion annually. And we expect these markets to contribute to our growth in unit sales and revenue over the remainder of this year and to become a key contributor to our long-term growth targets.

Before I remind you of our long-term ambitions, I think it's important to touch on the macroeconomic backdrop our markets and industry are facing. Our solid Q1 momentum comes despite a rapidly changing macroeconomic climate as we navigate our way through a number of headwinds, such as supply chain issues and weaker consumer confidence. Whilst we are very mindful of the wider macroenvironment and continue to keep a close eye on any potential impact, we remain laser-focused on the execution of our strategy as we continue to make progress against our previously detailed expectations for the year.

What is most important, however, is that we expect any macro uncertainties to be transitory in nature and have little bearing on the huge market opportunity and exciting structural growth in front of us. Or the confidence we have in achieving our long-term growth and margin targets, which I will remind you of now.

As I said a few weeks ago at our full-year results, whilst we've accomplished a huge amount in a little over two years since launch, we're still just at the start of this very exciting journey. We are addressing a massive market opportunity, with the UK market worth over GBP100 billion annually and the big four EU markets worth more than GBP200 billion on top. Our addressable market is now over 26 million used car transactions annually.

The market opportunity is so large that with just low-single-digit market shares and prudent medium-term GPU targets of GBP1,500 to GBP2,000, we would have an enormous business which we expect to generate meaningful free cash flows over time. Our long-term target is to capture a 5% or greater market share with a GBP3,000 GPU, which is why we are so excited by our future growth opportunities.

I will now pass over to Stephen, who will run through the details of our Q1 performance in more detail.

Thank you, Alex. Good morning, everyone. During the quarter, our revenues increased 159% year on year to GBP295 million. Our Q1 growth was driven primarily by retail revenues, which increased 138% year on year, but also by strong performances from our wholesale and other revenue streams. Sequentially, we saw retail revenue growth of 47% from Q4 last year, with retail sales units up 53%.

During Q1, we sold 19,713 vehicles, up 102% year on year, including 13,353 retail units, up 72% year on year. As Alex said, this growth in retail units came following our initiatives with respect to our in-house reconditioning process, which had a positive impact on our available inventory and hence sales.

As previously mentioned, bringing reconditioning in-house is a huge strategic benefit and we believe well worth the short-term pain we've experienced during the transition. In Q1, we started to see the benefits of this investment on our sales numbers, with our available inventory numbers growing to over 6,000 cars, up from a low of around 2,000 in October last year.

As flagged at our full-year results, our UK retail GPU was down from the GBP233 we reported in Q4 to GBP124 in Q1. As a reminder, our Q1 2022 and our Q4 2021 UK retail GPUs were heavily impacted by the two big steps we made in the second half of last year to recondition all our cars in-house and to source a large proportion of the cars that we sell directly from consumers. These are the two key strategic pillars we needed to put in place to be able to deliver on the long-term GPU targets.

I won't go into all the details again, as I discussed this in depth at our recent full-year results. While we're pleased with the progress we are making in these areas, the delivery of these two key strategic goals has involved some short-term cost to the business, much of which flows through OpEx costs via GPU. We expect the impact from investments in the car-buying channel and higher reconditioning costs will be highest in Q1.

Looking to Q2 and beyond, we have clear visibility on the more recently purchased and reconditioned inventory, so expect to see a notable increase in GPU for Q2 and beyond. More specifically, we believe the impact from the launch of our consumer-buying channel was in the region of GBP200 per car in Q1. And looking forward, we expect only to see a minimal impact from this in Q2 as the majority of the affected cohort of cars have now been sold.

With regards to reconditioning, while investments are set to continue as we further ramp up our reconditioning output, we expect that between now and the end of the year we can make hundreds of pounds of GPU savings, some of which will start to flow through in Q2 but are likely 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 cars sourced directly from consumers, and increasing finance and ancillary revenue streams. We've stated we see a path to GBP2,000 retail GPU in the medium term and we remain confident of reaching this level and beyond, given the steps we've taken in 2021.

Turning to our near-term outlook, we continue to make solid progress. It's clear, though, there is a rapidly changing macroeconomic backdrop in our markets, which creates some uncertainties. We're obviously managing through all of this on a day-to-day basis as we head through the coming periods.

As we said at our previous results, we're well aware of the inflationary pressures and the subsequent impact on consumer confidence facing the UK and EU marketplace at the moment. And whilst we do not believe they should impact retail unit sales or current market share, there are obvious risks to short-term GPU if we do see cost inflation and pressure on the higher-value car sales.

Internally, we remain laser-focused on the execution of our strategy and expect any macro headwinds, if they arise, to be transitory in nature. And we remain confident in achieving our long-term growth and margin targets. We remain well funded to continue to capitalize on this huge opportunity and to execute on our ambitious growth strategy over the next 18 to 24 months, by which stage we expect our UK business to be reaching profitability.

Alex.

Thanks, Stephen. So in summary, we are very encouraged by the progress we've made in Q1. And whilst there are macroeconomic uncertainties in our markets, we continue to put in place all the building blocks to enable us to execute on our ambitious growth plan whilst creating significant moats around our business.

In the UK, we've established a market-leading platform, brand, team, and infrastructure. And we now have a presence in the four biggest markets in mainland Europe. We believe that we are now very well placed and well funded to capture this huge opportunity across both the UK and EU. We've seen strong momentum so far in 2022 and we expect that to continue throughout 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) Rajat Gupta, JPMorgan.

Great. Thanks for taking the question. I had a question on the full year. A month ago, you had reiterated the full-year guidance. If I import correctly from your comments, you seem a little bit more cautious on the near term. So just curious, are you still reiterating the full-year guide of 100,000 retail units and the GBP900 retail GPU? And if not, like, has anything that's changed in the last three or four weeks that you are seeing in the business already? Thanks. And I have a follow-up.

Thanks. Morning, Rajat. So I think we certainly, in terms of the things that we can control internally in the business, we've seen great momentum in Q1. We are on track for the guidance that we gave recently. Subject to the caveat of the external unknowns that are affecting all businesses.

So we are not yet seeing any direct impact, but we have concerns about what may happen in terms of consumer confidence and how that might impact top-line inflation pressures and how that has the potential. So we are flagging a sort of cautionary note but remain hopeful and certainly are on track in terms of delivering on all the internal objectives that we've set to hit those targets.

The one thing that I would reiterate, which we sort of just said, is that we see these macro issues as being sort of somewhat short term, months or a couple of quarters, and not having any impact at all on the long-term -- medium to long-term opportunity, which remains exactly the same.

Understood. Got it. You mentioned that you expect the retail GPU -- in the press release, you mentioned that you expect that to bounce back in the second quarter and beyond. Can you give us a sense of the improvements you've already seen through the course of 2Q so far? Or maybe if you could give us a sense of how that retail GPU progressed through January, February, March, just to give us some comfort around the recovery here in the second quarter and beyond.

Yes, we're facing a significant uplift in the second quarter, so we would expect that to be 2 or 3x what it was in the first-quarter GPU and we are certainly seeing that so far in the quarter. And with -- as Stephen mentioned, there were very specific reasons relating to specific cohorts of cars, inefficiencies in the transition of the bringing the reconditioning in-house.

All of these things that are sort of washing through the system. And as those things get washed through, then you start to see that number bounce back relatively strongly. So we are confident of a Q2 GPU number that's materially higher than Q1.

Got it. And just one last one maybe. Is it possible to provide a rough sense of or a range of the EBITDA for us for the quarter and/or maybe any cash balance at the end of 1Q? Thanks. That will be all from my end.

I will leave that one to Stephen. Obviously, we don't guide specifically or talk specifically about EBITDA on a quarterly basis. But Stephen, over to you on that one.

Yes, so I mean, as Alex said, we don't guide. Cash would be not far off where we were, obviously less the Q1 losses. Q1 losses, you kind of extrapolate over the year. You would expect them to be coming down over the course of the year, but -- as we continue to move towards profitability in the UK. So Q1 and kind of Q2 losses would be higher than the -- [than kind of] in a standard quarter, but exactly kind of in line with expectations, really.

And our cash runway remains at 18-months-plus based on where we are currently.

Got it. Thanks for all the color and good luck.

Adam Berlin, UBS.

Hi, good morning, everyone. Three questions for me if I can. The first thing, talking about units, you talked about higher inventory onsite driving quarterly improvements in the number of units you are selling. So is that a pretty linear equation? So if there were 30% more units at the beginning of Q2 than the beginning of Q1, should we expect 40%, 30% higher units sold in Q2 than Q1? That's the first question.

Second question, just to carry upon this discussion around GPU, it sounds like then the Q2 GPU is still going to be below the GBP900 target for the year for the UK retail. Will we see it above that in Q3 or is it all kind of going to be a big improvement in Q4? Some sense of the timing as we go through the second half would be helpful.

And then the third question, Stephen, I think you mentioned -- I missed what you said, something about some timing around when you expect the UK business to break even. Can you just clarify the timing you gave on that? And can you say something about how many cars do you think you need to sell in the UK to get to a breakeven point? Thanks.

I will pick up the first two and then let Stephen pick up the third. So in terms of unit sales relative to inventory, it's not linear, but there is a very, very strong correlation, the propensity of a customer to find what they are looking for the more inventory you have. And it should over time become more linear. In other words, the target is to hold the right amount of inventory that equates to about six to eight weeks of sales.

So as we continue to ramp up that inventory, we should see sales increase somewhat in line with that. Of course, as sales are growing, we have to run faster to not just grow the inventory on the website, but you have to replenish just to stand still. So that's why I think you've seen a real step change in Q1 because we've gone beyond replenishment at the highest level of sales that we ever had, but also been able to add to inventory. And so if we can continue to do that on a monthly basis, where we can replenish the sold stock and grow inventory, then we will start to see a significant growth in unit sales.

In terms of GPU in Q2, no, it won't be anywhere near the GBP900. GBP900 is a target average for the year. We will be selling more units on a quarterly basis sequentially throughout the year. And so on a volume-weighted basis, we would expect to see both GPU and unit sales go up throughout the year.

So Q1 should be a low point, both in terms of unit sales volumes and GPU, and therefore we will see that go up progressively on a monthly and quarterly basis throughout the year. So we expect the first half of the year to be at an average of probably sub-GBP500 and the second half of the year will be at an average that's much higher as we see the benefit.

And also, a lot of this is driven not just by improvements and efficiencies in the processes, both buying, reconditioning, and logistics, but it's also about the scale efficiencies, which is the more volume we are doing, the more benefit we get. And you see that in terms of GPU.

In terms of UK breakeven, I will pass to Stephen.

Yes, so what we've said is we saw about 24 months away from the UK breaking even. So towards the end of '23 on kind of a monthly rolling basis, it would move towards and into positive territory.

Okay. Thank you very much.

(Operator instructions) Saim Saeed, Berenberg.

Hi. Afternoon, everyone. Thank you very much for taking my question. I guess my first one is just maybe getting a sense of where your capacity will be at the end of the year. You are at 120,000 now. Would we be correct in expecting that to be meaningfully higher by the end of the year or will it be somewhere around that? And maybe if you could give us any indications of where you expect it to be for next year as well, that would also be quite helpful.

I guess my second one is about refurbishment more generally. I know in the UK, you have made it fully in-house, but I do notice, though, some of your peers, they do retain some sort of flexibility between first-party and third-party refurbishment. And if you are sort of aiming to gain as much market share at a relatively reasonable pace, are you completely unwilling to do any third-party refurbishment [potential] about flexibility? I.e., if you say max out your first party to gain market share or will it just be entirely first-party refurbishment moving forward?

And I guess my final one is just asking about wholesale average selling price. It seems to have fallen quite significantly quarter on quarter from Q4. And that just seems slightly odd, given you've managed to source another high proportion of your vehicles directly from consumers, which I would have thought are typically higher-quality vehicles. So any explanation behind that would also be very useful. Thank you.

Great. Thank you for the questions. So first of all, in terms of our capacity, this is a gradual improvement month on month that we expect to see. We are comfortable that we will have the capabilities this year to recondition enough cars to meet the targets we've talked about, i.e., the 100,000 this year. So we are confident in that. And we are seeing a monthly improvement in our ability to do that, and so we would expect by the end of next year to be at the run rate that is almost double where we come out at the end of this year.

In terms of the second question, first party versus third party, absolutely not in terms of having a problem with using third party to bolster our internal capability. It is always our preference to do as much as we can ourselves, but you are absolutely right that market share sales is the most important if we can get the quality and cost from third parties. So we are open to that, and in fact, we are beginning to have discussions in the UK as to how we can bolster our own in-house capability with third parties and are beginning to start those relationships in the UK to add to that.

And we are also already doing that in the EU, where we have a mix of our own in-house capability, which is in Italy, and third-party partners in France, Germany, and Spain. So we are not closed to the opportunity and we will -- as long as we can get the quality that we want and the cost, we will use whatever opportunities there are to maximize capability.

In terms of the third question on wholesale, there's a very straightforward answer to that, which is as a result of the issues in the backlog that we had in Q4 last year in reconditioning, we sold through wholesale a number of cars that would otherwise have been retail. So higher-value cars in Q4.

Now that we've sold the backlog or the bottleneck within the reconditioning, we no longer need to sell those cars. We can now put them into our reconditioning queue and they become retail cars. So that's what you saw happen in Q4 was we sold cars that we originally thought we were going to keep for retail, but because we were sitting on them for too long, we sold them via wholesale.

We are no longer in that position where we are forced to sell anything via wholesale other than the things that fall outside of our 0 to 6 years, 0 to 60,000 miles. So anything that we buy now with a view to it being a retail car is now a retail car and it goes into refurbishment, whereas in Q4, some of the cars we bought with the intention of being retail ended up in wholesale.

Great. Thank you. And maybe just one quick follow-up. Can you provide any guidance on your CapEx spend for this year and where exactly it's going?

Where it's going --

That would be around --

Stephen, go ahead.

We said around GBP50 million to GBP60 million for the year, predominantly refurbishment. So just continuing to build out. As Alex said, there isn't just one big kind of [band] that you do here; this is constant ongoing upgrade. So we have 10 refurbishment centers in the UK. Obviously one in Europe and it's continuously upgrading, improving them, adding more capacity capability machinery as and when you need them to continue to improve your refurbishment capability.

Great. Thank you very much.

Thank you. There are no further questions at this time. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.