Cazoo Group Ltd (CZOO) on Q3 2022 Results - Earnings Call Transcript
Operator: Greetings, everyone. Welcome to Cazoo's Third Quarter Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that today's conference is being recorded. At this time, I'll turn the conference over to Robert Berg, OBE Founder and CEO. Mr. Berg, you may now begin.
Robert Berg: Good morning, everyone. Thank you for joining today's call and webcast to discuss Cazoo's third quarter fiscal year 2022 results. You'll 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; Stephen Morana, Chief Financial Officer; and Paul Whitehead, 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 a further discussion of risks related to our business, please see the filings of Cazoo Group Limited with the SEC. Now I'll hand over the call to Alex.
Alex Chesterman: Thanks, Rob. Good morning, everyone, and thank you for joining us today. I'd like to start by discussing our Q3 performance, which despite the very tough macroeconomic backdrop, was an extremely positive quarter in all respects. And then I'll talk about how this performance leaves us firmly on track to reach profitability without the need for any further funding. I'll also spend some time discussing why we remain very confident about achieving our medium and long-term targets. Starting with the third quarter, I'm very proud of our performance during the period. Whilst the challenging macroeconomic backdrop for the U.K. consumer has impacted demand across most retail sectors and our competitors, with many businesses reporting declining demand and sales in recent months, we bugged the trend and seen record demand with U.K. retail unit sales growing over 100% year-on-year to 18,889 units as consumers continue to embrace our offering. This led to record U.K. revenues of £347 million in Q3, up 103% year-on-year. As you can see from our growth rates, we're taking significant market share as our market-leading proposition continues to resonate strongly with consumers and the shift to online car buying and selling accelerate. This has and will continue to allow us to grow strongly despite the tough macroeconomic conditions. In under three years since our launch, we've become one of the largest players in the U.K. used car market, having now sold almost 100,000 vehicles to consumers entirely online. Whilst we've accomplished an enormous amount in terms of our scale in a short period of time, our strong growth rate and market outperformance suggest that we're still just at the start of this exciting journey. Consumers are voting with their orders and their subsequent reviews that the way that we buy and sell cars is the future for the U.K. used car industry. We're more encouraged than ever about the future opportunities for Cazoo and our ability to capture a 5% or greater market share of the £100 billion per year U.K. used car market. Whilst our growth and scale positions us as one of the fastest-growing businesses in the U.K., with revenues of well over £1 billion in just our third year of operation, we continue to keep both eyes on the road to profitability. We remain laser-focused on maintaining our strong balance sheet, and we had cash and self-funded inventory of over £450 million at the end of September and have a clear plan to reach profitability without the requirement for any further external funding. In Q3, we made strong progress on our operating metrics, including our U.K. retail GPU, which was up 58% compared to Q2 '22 at the same time as reducing our U.K. SG&A per retail unit by 30% versus Q2. On GPU, we continue to make good progress with a further £179 sequential quarterly improvement, driven by continued efficiency gains across buying, reconditioning and ancillary products despite the inflationary pressure. As we constantly improve all elements of our operations, I want to call out the particular success we've had with our direct car buying channel, which now represents over 40% of our U.K. retail sales transactions and has allowed us to benefit from improved pricing and range. This highlights the strong platform and infrastructure we now have in place to buy cars directly from consumers at scale. We also continue to make good progress in improving our reconditioning efficiency. A particular note this quarter, we made some changes to our reconditioning processes, which allow us to lower the cost per vehicle whilst ensuring our customer proposition remains market-leading. We've also continued to scale our reconditioning capabilities to record levels, allowing us to maintain strong inventory levels despite record sales. Additionally, we've made further progress with our ancillary product sales. We launched monthly payment plans in Q3 where customers can now spread payments for our products over a longer period. Whilst it's still early days, we're very encouraged by the impact this is having on our attachment rates and GPU and expect further positive impacts from monthly payments and other ancillary product initiatives in the coming quarters. At the same time that our U.K. retail GPU is increasing steadily quarter-on-quarter, we've seen a material decrease in our U.K. SG&A cost per unit of over 30% in Q3 as our strong growth, combined with our focus on cost control, is starting to have a notable positive impact on our unit economics. Having successfully implemented our business realignment plan, we're starting to see the benefits and expect to see continued improvement through the remainder of this year and beyond. Our solid Q3 momentum and improvement in profitability comes despite the deteriorating macroeconomic climate. Whilst it's likely that headwinds such as supply chain issues and weaker consumer confidence have negatively impacted our results, our strong performance through this period only serves to show that consumers love our proposition, which provides us with even more confidence on reaching our medium and long-term targets. As a reminder, we are addressing a massive market in the U.K. with around 8 million used car transactions and a value of over £100 billion annually. Digital penetration remains incredibly low and the market remains hugely fragmented, giving us the opportunity to build the leading brand in the sector. Much like we've seen year-to-date, we expect to continue to rapidly increase our market share towards 5% and beyond over time. As we've said previously, the U.K. market opportunity is so large that with just a 3% market share and a prudent medium-term GPU target of £2,000, we would generate gross profit of close to £0.5 billion annually and meaningful free cash flows. With our long-term target of a 5% or greater market share and a £3,000 GPU, the opportunity is even more exciting. Before I hand over to Stephen, who will run through the details of our Q3 performance in a little more detail, I just want to discuss the strength of our balance sheet, which remains extremely robust, with over £450 million of cash and self-funded inventory at the end of September. We've taken decisive actions to increase our GPU and reduce our SG&A costs and are focused on ensuring our business achieves profitability as soon as possible. Our business realignment plan announced in June, together with our decision in September to withdraw from Mainland Europe, has ensured that we have a clear plan to reach profitability without requiring any further external funding. I'll now pass over to Stephen.
Stephen Morana: Thank you, Alex, and good morning everyone. Before I go through the numbers, I just want to highlight that all the numbers we've discussed in our Q3 release, and that I will discuss today, relates solely to our U.K. segment, which as a result of the decision made during the quarter to withdraw from our EU operations, will be how we report going forward. We will report our European segment as discontinued operations in the FY '22 results. For reference, we have restated Q1 and Q2 this year as well as Q3 2021, which is hopefully useful to be able to see the U.K. only trends. In Q3 2022, we achieved U.K. revenues of £347 million, which were up 103% year-on-year. Growth was driven primarily by U.K. retail revenues, which increased over 118% year-on-year, driven by continued strong uptake of our proposition. During Q3, we sold 23,775 cars in the U.K., representing 82% year-on-year growth, including 18,889 retail units, representing a 100% year-on-year growth. This growth in retail units came despite the challenging macroeconomic climate as we yet again continued to take significant market share testament to the strength of our offering. Moving to GPU, as Alex discussed, we've again seen a strong improvement in Q3. We grew by 58% to £179 from £309 in Q2 to £488 in Q3. This improvement came despite ongoing inflationary pressures and has been a result of our improved buying, reconditioning and product sales efficiencies, which we are confident will continue into Q4. As a reminder, Q3 2021 GPU was positively impacted by the strong price appreciation of used cars seen in that quarter. We were obviously operating the four European countries as normal until the 8th of September and from that date began the close process in carrying some of the anticipated wind-down costs this quarter. Going forward, we'd expect cash burn to be significantly lower as we stop all trading and investment activities in the four countries and complete the wind down process. The current run rate of the U.K. was less than half of the overall cash plan. I'll now pass back to Alex, who will run through our current trading and outlook.
Alex Chesterman: Thanks, Stephen. Despite the weak macroeconomic environment affecting growth amongst our peers and across all other retail sectors, we've maintained our very strong Q3 momentum into October, where we expect to maintain our growth rate of over 100% year-on-year and to continue to increase our market share. We expect to see continued strong progress through the remainder of Q4 with U.K. retail unit sales growth continuing at over 100% year-on-year, along with significant further improvements to our U.K. retail GPU as we continue to optimize our operations, increase the proportion of cars sourced directly from consumers, lower our reconditioning costs and increase our financing and ancillary revenue streams. As I've said many times but it's worth stressing again, we continue to expect to reach profitability without the need for any additional external funding. So in summary, against a very tough economic backdrop, we've had a very strong quarter of growth, achieving record sales levels, taking significant market share, and we've become one of the biggest players in the market, having sold almost 100,000 cars entirely online in less than three years since our launch. We've also shown further progress towards breakeven, with a marked improvement in our unit economics in the period. We remain very well positioned and well funded to capture the huge market opportunity, and I'm delighted that we've maintained our strong Q3 momentum into October. We're incredibly excited about the future and extremely confident in our ability to reach our market share ambitions. I'll now pass the call back to the operator, who will open up the line for Q&A. Thank you.
Operator: Ladies and gentlemen, we'll now start the question-and-answer session and open the call for questions. Thank you. And our first question comes from the line of Rajat Gupta from JPMorgan. Please proceed with your question.
Rajat Gupta: Hi, good morning, good afternoon. Thanks for taking the question. Maybe just to start off with just broader consumer health and the used car backdrop, can you give us a sense of your expectations of the industry heading into the later part of the year and into early next year? While Cazoo is starting off a small base and online penetration is still low, it should be able to grow volumes and market share even in a declining market. Just curious as to your expectations for the environment as new vehicle supply improves, but just the consumer backdrop probably takes a further step down before normalizing. So are you concerned at all about pricing power and just ability to hit the 2023 GPU targets? And I have a follow-up.
Alex Chesterman: So clearly, the U.K. consumer and beyond the U.K. is facing a challenging time. We are very encouraged by the performance in Q3 and the performance so far into Q4, given the various challenges in the market. If you look at supply, there are supply challenges, obviously driven by the knock-on effect of supply chain issues in the new car market, which have gone on for now well over two years and are affecting supply in the used car market. And of course, you've got demand challenges as a result of both elevated pricing, consumer confidence, inflationary pressures, etcetera. So despite all of that, -we are growing very significantly, 100% year-on-year, 20% growth quarter-on-quarter. And this isn't a new phenomenon with the consumer. This has been going on for some months now. So we're already seeing that. We're seeing that in the behavior of consumers gravitating towards lower price cost, generally less value. So the opportunity for us is in the future, in a normalized market with normalized supply, normalized demand, normalize pricing, the opportunity is very significant. And as we look into Q4 and beyond into next year, our model and our budget takes account of the fact that things are unlikely to get better in the short term. In the medium to long term, we expect to perform significantly better than in this difficult market, but we still expect very significant growth in unit numbers and sequential improvements in GPU despite those issues going on in the wider market.
Rajat Gupta: And maybe on the SG&A target, obviously, it was still like you're away from the 1,500 target. But if you could give us a little more detail around the progress you've made over the last couple of months in terms of improving headcount leverage, particularly from a driver and customer support headcount perspective? And then on advertising, are you seeing any drop-off in conversions or funnel metrics as you've pulled back on brand spend? And also curious if you could share any color on benefits of moving to a higher mix of performance marketing. Thanks.
Alex Chesterman: Yes, so the SG&A per unit target is one we're very confident because in the simplest terms, if you think about SG&A per unit, if we simply double the volume of units, we half the SG&A cost per unit. So we've seen a notable decrease over the last couple of quarters in SG&A per unit, down from fully loaded, including group costs, down from about £5,000 to under £3,500 in Q3. We see getting that to £1,500 or less by the end of next year as a result of a combination of things, obviously, the growth in the unit numbers, but also reduction in a number of costs. And obviously, there are two actions we've taken in the last 6 months. There was the realignment plan towards the end of Q2, where actually a lot of those costs carried into Q3 because it takes some time for that to actually take effect. And then, of course, the withdrawal from Europe, where still we have some of those loaded group costs, and that will continue into Q4. But as we go into Q1 next year, we see the full benefits of having completed and got all the costs from pre the realignment plan and all the European costs out of the system. And so we're very confident in our ability to continue to see that number decline.
Operator: Our next question comes from the line of Adam Berlin with UBS. Please proceed with your question.
Adam Berlin: Just one question from me, thanks for taking it. I just wanted to confirm, Stephen, that you said that the cash outflow in Q3, only half of that related to the U.K. business. So is the right math, I think cash position was £400 at the end of Q2. It's now £308. So there's £92 million cash outflow in Q3, of which the U.K. would just be half of that. So is that a good idea of what the...
Stephen Morana: I think when you look at. You're not a million miles away with that assumption. Yes. Looking at cash and cash equivalents in a way, you've dropped just over £110, I think, and the U.K. would have been half of that.
Adam Berlin: So on that basis, is the 12,000 units a month, £1,500 GPU still the right basis for breakeven?
Stephen Morana: I think all of that will be looked at over the coming months. Can we get there for less? How do we look at the SG&A line, how do we get more efficient and more effective. So I think that was the base assumption. Obviously, we'd like to hope that we can break even at either a lower volume or a lower GPU, but that means finding more efficient and effective ways. As Alex said, we've done a lot. We've built a big infrastructure now. We've got the CCCs, we've got the delivery processes in place. We've built out the refurb centers. So the marginal cost on sales are significantly lower. But we haven't come back yet and changed on that but the hope is that we can find faster ways of getting to breakeven, or ways of getting there that don't need that kind of GPU.
Adam Berlin: And maybe just one more question on the marketing side. I know in the plan, there was talk of dialing back the U.K. marketing spend a little bit to help you get down the SG&A per unit. Has that happened yet? Because it doesn't seem to be impacting unit growth. So is that still to come? Or actually, you're still delivering unit growth despite spending less on marketing?
Alex Chesterman: A lot of that is still to come because as we start to unwind some of the brand spend and move more towards a balance of 50-50 performance brand next year and actually tilt more in favor of performance beyond that. So there's still some further benefit to come in the
Adam Berlin: But you don't think that's going to slow down the growth rate as that brand spend comes off?
Alex Chesterman: No. If anything, the opposite is true because brand spend, you're buying future. Performance spend is more response based. So it doesn't really have an impact and given the strong brand awareness we've already built up over the last three years, it's unnecessary for us to continue to spend on brand at that rate. So actually, you're moving from a less efficient marketing pound and brands who are more efficient in performance. So therefore, you don't see an impact. And if you massively reduced absolute spend, then that would impact volume. But if you're shifting from non-performance to performance, actually, the opposite is true, you drive more volume.
Adam Berlin: So you're going to keep the absolute level of marketing spend broadly where it is? It's just a shift. It's not actually a cut in marketing spend that you need to do to
Alex Chesterman: There may be a marginal reduction next year in overall spend because we don't need to continue spending the same level on brand, but we don't think it materially impacts volume. And if you look at our growth versus the overall market, the overall used car market in Q3 was probably down high single digits, low double digits, somewhere between 8% and 12% from various other parties who have reported, and we grew 100% year-on-year. So we're taking very significant share. We will continue to grow. I don't think we'll grow at 100% year-on-year, but we will certainly continue to grow at over 50% year-on-year next year. That takes us to over 100,000 retail units in the U.K. next year, makes us one of the two or three biggest players in the market. And as we highlighted, I think it's important to remember, this is our third year. We haven't reached our even our three-year anniversary, yes. So the scale of the brand and the infrastructure and the volume that we're delivering, I think, is important. And to be able to grow at those sorts of rates, not off a low base, right? If you look at our unit volumes this year, 65,000 to 70,000 units, that's not a low base. That is a top three player in the U.K. base and to continue to grow at those levels of that.
Operator: The next question is from the line of Sam Saeed with Berenberg. Please proceed with your question.
Sam Saeed: I guess my first one is just related to something in the 6-K. I think one of your stocking lines seems to have interest rate of base rate plus 13.9%, I mean should we just assume this is like a very small amount of your overall stocking loans not representative at all of bulk? I guess... Sorry. My second one, could you maybe provide us an update on where your reconditioning per retail unit is right now? Maybe relative to your longer-term target, I think it was £600 the longer-term target. And I might have another one after Steve.
Alex Chesterman: Yes. So on the stocking loans, that's an anomaly and they are materially lower rates than that. Reconditioning costs, we've seen very good progress over the last three or four months with changes to processes, increased efficiency at sites, changing shift patterns, all sorts of things. And of course, because there is a delay from the time that you implement those things to cars being bought, going through the system being sold, actually, some of those benefits that we've implemented over the last three months are starting to come through in the numbers now because you sell cars today that you bought a couple of months ago and reconditioned a month or so ago. So we are very encouraged by the continued improvements that we're making in that area and expect to see further improvements, and that is one of the drivers of the further improvements we expect to see in GPU. If you look at our GPU throughout the course of this year, we have grown it by about £180 per quarter from Q1 to Q2, Q2 to Q3. So broadly a £60 per month improvement in GPU throughout the entire year so far. And we expect that to continue in Q4. So we expect to see a further improvement of £150 to £200 to GPU sequentially from Q3 to Q4, and some of that comes from the improved reconditioning efficiencies, but we still have further to go, and we'll start to see more of that again as we get into next year.
Sam Saeed: And maybe just finally, so I think you mentioned that supply is gradually improving, but clearly, the demand environment isn't improvin, getting incrementally worse. When we're thinking about pricing for retail units for the remainder and maybe into the early half of next year, I think you've already saw a 3% quarter to quarter decline in Q3. When I think in the last call, you said twice was going to remain flat from then onwards. So should we kind of view this 3% as a good sort of run rate quarter-on-quarter decline moving forward? Or is it going to sort of remain flat from this level? And just anything on that would be quite helpful.
Alex Chesterman: So supply is not improving. That's not something that we said. I think supply remains constrained and until new car suppliers back to previous levels and until used car pricing is back to normalized levels, I think that will continue. Pricing is remaining relatively flat. You've got the push-pull of balancing out supply and demand issues there. So the shortage of supply is driving up pricing challenge, demand is weighing on our pricing and those two things sort of even each other out. So we see pricing as remaining relatively flat over the coming months, but that very much depends on what happens in the macro environment. Doesn't really make a huge difference to us from a GPU perspective. So I think whether pricing is sort of up or down 3%, it doesn't make a material difference to our numbers.
Operator: Our next question comes from the line of Catherine OâNeill with Citi. Please proceed with your question.
Catherine OâNeill: Actually, I had a follow-up on the question you were just discussing about pricing. And I think you said pricing is sort of broadly flat at the moment in the market, and you don't expect it to impact GP up or down 3%. I just wondered if you could help us think about to what degree would pricing need to shift, let's say, if demand starts to improve that it would be more challenging for your GPU. How can you manage that? And then the second question I've got is on consensus for EBITDA for the year. I think it's looking for about adjusted EBITDA for about minus £280 million. I just wondered if you're fairly comfortable with that number given the sort of run rate around savings in the U.K?
Alex Chesterman: So on pricing and its impact on GPU because the wholesale market and the retail market pricing largely moves in tandem, there is a slight delay effect. If pricing moves one way or another because you're selling cars you bought between one and three months ago, there's a month-to-month impact potentially if pricing moves materially in either direction. But over one to two quarters, that impacts itself out. And so it doesn't really have a material impact on GPU. If you look at what happened last year, we saw significant appreciation on pricing in Q3 and then it sort of flattened out. But if you average the quarters out, you take that pricing effect out of the number. So I think we don't expect a material change there. In terms of group adjusted EBITDA for the year, we expect H2 to be significantly better than H1 because of some of the things related to the realignment plan and change the cost base. And the number you mentioned, I think, Stephen might have out there.
Stephen Morana: Yes. I mean, obviously, the EBITDA consensus is for the group, and we're going through a process now of closing down the group so it's U.K. only. The U.K. only will be lower than that. And then going forward, everything will just be from a U.K. perspective once we brand Europe out.
Operator: Our next question is the follow-up from the line of Saim Saeed with Berenberg. You may proceed with your question.
Sam Saeed: Yes. Sorry, just one other quick question on wholesale units. I think it's now 20% of the total U.K. unit mix. Is that sort of a good percentage to think about moving forward?
Stephen Morana: I think so. Look, wholesale is not our core business, and it's somewhat a byproduct of the retail business, you end up with wholesale cars that you choose not to retail. So you bought them for a reason other than your core business. They either, they fall generally into one of two categories. You thought you were going to retail them and then you change your mind for whatever reason, they're not what you thought they were. Or, you bought them through your direct car buying channel because that's a service you're providing to consumers. Or, through part exchange, which is a large driver of the wholesale business. So we're not trying to drive for maximum volume in the wholesale business. Those are cars that we largely inherit through either part exchange or the car buying channel. But we expect that number to fluctuate between the sort of 20% to 30% range, I think, is a sensible place to look at it. And the drop in absolute volume is actually a positive for a couple of reasons. One, if you look year-on-year, we have greater reconditioning capabilities now and therefore, able to recondition and retail some of those cars, whereas at this time last year when we were very constrained on reconditioning, we sent cars to wholesale that we would have otherwise wanted to retail. And the other thing is we are getting much better from a data perspective and getting much better at being selective in the cars that we choose to buy from consumers. So we want to, effectively, whether it's auction process in a B2B context or if it's you're buying directly from the consumer, which is an auction process in effect, in a B2C context, we're being much more selective about what we choose to win, versus trying to buy everything. So that absolute number is not a -- it's a positive if anything because it reaffirms that we're buying only what we want to buy, and we're able to recondition more than we were historically.
Operator: Ladies and gentlemen, this concludes today's call. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Alex Chesterman: Thanks, everyone.
