Cazoo Group Ltd. (CZOO) Q2 2023 Earnings Call Transcript

Cazoo Group Ltd. (NYSE:CZOO) Q2 2023 Earnings Conference Call August 1, 2023 8:00 AM ET

Company Participants

Anna Gavrilova - IR

Paul Whitehead - CEO

Paul Woolf - CFO

Alexander Chesterman - Founder and Executive Chairman

Conference Call Participants

Rajat Gupta - JPMorgan

Operator

Greetings, and welcome to the Cazoo Second Quarter and First Half 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce [Technical Difficulty], Anna Gavrilova, Director of Investor Relations. Thank you. You may begin.

Anna Gavrilova

Good morning, everyone. Thank you for joining today's call and webcast to discuss our second quarter and first half 2023 results. You will be able to find today's press release and accompanying presentation on our Investor Relations website at investor.cazoo.co.uk. We appreciate everyone joining us today. With me on the call are Alex Chesterman, Founder and Executive Chairman; Paul Whitehead, Chief Executive 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 U.S. Securities and Exchange Commission.

Now I will hand the call over to Paul Whitehead.

Paul Whitehead

Thanks, Anna. Good morning, everyone, and thank you for joining us today. We are reporting the second quarter and first half results today. I will talk you through the major changes we have made to our business this year enabling us to significantly improve the unit economics. I will then hand over to Paul Woolf, who will cover our financial results and guidance.

We've achieved a great deal in the first half of this year. In the current challenging economic environment, we are pleased with our decision to pivot from fast growth to full focus on unit economics and preserving cash. Over the past 3.5 years, we have demonstrated that we can sell retail cars online at scale. Customers have purchased over 130,000 retail cars on our website since December 2019 and our proposition continues to resonate strongly with consumers.

We continually work hard to make it transparent, convenient and a great customer experience to buy and sell cars on our website. We have a great value proposition, market-leading platform, talented team, established brands and an end-to-end infrastructure in the U.K.. The U.K. represents a significant and attractive opportunity with its 7 million used car transactions worth GBP100 billion annually, low online penetration and a fragmented retailer base.

We have three priorities for 2023. First, full focus on unit economics. We have improved retail GPU from GBP596 in the last quarter of 2022 to the GBP1,290 in quarter two 2023, we are reporting today. Finance attachment rate is at an all-time high, thanks to the strength of our proposition, meaning that ancillary revenues continue to grow. We are delivering progress across all components of retail GPU and are making meaningful progress on our path to achieving our goal of profitable growth in the future.

Our second priority is optimization of our fixed cost base. Following the announcement of our revised 2023 plan in January, we restructured the organization swiftly and decisively by reducing the head count, closing a number of our customer and vehicle preparation centers and exiting our European operations. This generated around GBP100 million in annualized SG&A savings that is largely already in our run rate.

In this last quarter, we've identified a further GBP20 million of annualized cash savings, which will be delivered in the second half of this year and so fully benefit our performance in 2024. Thanks to higher retail GPU and the cost savings we have already made today, we are reporting another improvement in adjusted EBITDA in line with our guidance earlier this year.

Our third priority is preservation of our cash balance. We have proactively managed expenditure and can report that we have spent less than planned on both restructuring and the EU exit. All-in-all, positive results on all three objectives. We are now a leaner and more efficient organization with a path to deliver better profitability, rightsized to the date and with a view on returning to growth in the future.

Our results summarized on Slide 5 came in line with expectations and our focus on unit economics. The second quarter was our strongest yet in terms of retail GPU of GBP1,290. During the second quarter, we generated revenues of GBP171 million, a 44% decrease year-on-year. The decline in revenues due to lower volume, which is in line with our focus on unit economics rather than volume.

We sold over 9,000 cars to retail consumers, and we also sold just over 2,000 cars by our wholesale channel, and we are winding down the subscription business to focus on retail. This is a solid result given the challenging economic environment. Our volumes were also impacted by broader industry factors, not least the higher cost of living to the consumer as a result of higher interest rates and inflation.

In the first six months of the year, we generated retail GPU of GBP1,106, GBP880 higher than a year ago. Revenue was GBP419 million, and we sold over 22,000 retail units and over 6,500 wholesale units. Ancillary revenue for the first 6 months of the year was GBP17 million, a drop of only 2% compared to the 22% decline in retail units, as we continue to improve the customer journey on our website and price our products and offers competitively.

Ancillary revenue per retail unit was GBP765, up 25% year-on-year with the finance attachment rate of 52.8%. We anticipate that the cost of living, ability to get finance and cost of used car finance will continue to be critical factors as customers consider their next used car purchase.

Our operational footprint is now much more aligned with our targets for 2023 and we believe we are right sized to return to profitable growth in the future. Since the beginning of the year, our Cazoo customer centers were consolidated from 21 down to 7. We optimized our retail vehicle preparation centers from eight down to three, plus one wholesale site. The retail refurbishment capacity of the site is more than 85,000 cars annually, and it can be expanded if we activate currently multiple sites.

We have a customer service site in Southhampton and an office in London. All of these sites are strategically located in geographically optimal locations, driving efficiency in our logistical operations. We operate a significant transport fleet with both multicar vehicle transporters to move cars between our vehicle preparation centers and customer centers, and single-car transporters to deliver and collect cars from consumers.

Headcount was further reduced by around 150 employees in the second quarter as we continue to review costs and identify areas where with the right focus on the implementation of supporting technology, we will not need as many resources. We have now exited Europe completely and are fully focused on the U.K. market as that's where the largest opportunity lie for us.

I want to expand on some of the components that are driving improvements in retail GPU, in particular, the changes to our inventory selection. We combine Cazoo's proprietary data with third-party data powered by machine learning to forecast the value of a car, taking into account multiple vehicle attributes and the market environment. We also factor into our buying the predicted refurbishment costs and the likely propensity of that car to attract finance as well as the likely demand from our online customers.

We have also priced our ancillary products and finance options more competitively compared to a year ago. Finance attachment rates have been over 50% over the last three quarters and we are seeing strong growth in ancillary revenues due to the investments we are making continuously in the consumers' online journey on our platform and introducing new opportunities to drive ancillary revenues such as offering to customers to add ancillary products at the time of collection or handover.

We acquired a vehicle and factor in logistics costs and we then sell the vehicle via our platform, and the data from this cycle feeds back into the model to continuously improve the accuracy of our estimates and unit economics. I'm pleased to say that we are delivering improvements across all the key drivers behind retail GPUs.

In Q2 2023, we improved retail GPU by GBP310 since Q1 and by over GBP600 into last quarter of 2022. We spoke about better inventory selection, finance attachment rates and ancillary revenues earlier in the presentation. We continue to buy about half of the vehicles we retail directly from consumers, and that's been fairly stable.

We would like to increase the share, and we're working on our proposition to drive more direct buying and part exchange. Refurbishment costs continue to come down as we tighten our operations and become more efficient in line with our standards and promise to the customer, and as we continue to extract further efficiencies from our supply chain.

We have made good strides in improving inventory management, which is resulting in publishing cars on our website quicker, and delivering cars faster in orders. We are guiding to a 2023 retail GPU of average of GBP1,200 and approaching GBP1,500 at the end of this year. We see that a lot of progress has been achieved to date with much more to go after, to be better, faster and more efficient.

I will now hand over to Paul Woolf, who will take you through cost savings and our financial results.

Paul Woolf

Thank you, Paul. Paul has talked you through our performance of the revenue and gross profit levels. I will now describe how we are driving costs out of the business. SG&A costs consist of all people costs with the exception of those directly involved in reconditioning cars, which were included in retail GPU, marketing and advertising costs, property and facilities management, legal and professional fees, license fees for third-party products and other smaller cost items.

Through the restructuring changes excluded earlier this year, we have removed about GBP100 million of annualized SG&A costs across all these areas. Some of the hardest decisions were around people where we derive almost half of the savings. As I said during the full year results call in March, we had planned to look again at all costs post the restructuring to see what else we can do. In Q2, we identified a further GBP20 million of cash costs that will be removed in the second half of the year and will fully benefit 2024.

These additional savings span many areas of SG&A, with the exception of marketing, where we believe we should continue to invest in our great brand and proposition. Outside SG&A, we've also identified cash savings in lease costs and capital expenditure. We will continue to review costs regularly as we look to improve the efficiency of our operations. Out of the GBP72 million year-on-year improvement in adjusted EBITDA over H1 2022, well over half was generated from SG&A savings.

Looking now at the operational and financial results. In line with our reset expectations for 2023 to focus on unit economics rather than volume, our units and revenue declined in H1 2023. Retail units of 22,438 were 22% lower than the corresponding period last year with total units, including wholesale, 29% lower. In line with the lower units, total revenue was 28% lower than last year. However, as you can see from our results today, this strategy has enabled us to significantly uplift our unit profitability.

Gross profit of GBP23 million stated after including GBP3 million of losses as we run down the subscription business was GBP17 million higher than last year. H1 retail GPU of GBP1,106 was GBP880 higher than H1 last year, an increase of 389%, a big improvement, driven by our focus on unit economics and better results across all the components of retail GPU, as Paul described earlier.

SG&A costs before depreciation and amortization of GBP98 million represented a GBP54 million saving year-on-year, equivalent to a reduction of 36%. SG&A costs will continue to reduce into H2. This resulted in an adjusted EBITDA of minus GBP70 million, less than half the losses we made in the corresponding period last year. And please remember that in Q1 2023, we were still largely operating with the same cost base as last year as our restructuring took effect at the end of that quarter, so the bigger EBITDA uplift took place in Q2.

Looking now at cash flow. Total loss for the period was GBP150 million compared to GBP241 million in the same period last year. Working capital was a significant cash inflow in the period as we reduced the level of inventory in line with the lower volume plan compared to our growth last year. Within investing activities, we have reduced our spend on technology development and on PPE, and we are divesting rather than acquiring businesses.

Financing activities are adverse to the same period last year when we derive the benefit of the convertible note issue and the increased stocking loans to finance inventory growth. The negative movements in inventory financing in H1 2023 somewhat offset the working capital improvement noted above. Overall, we saw a GBP61 million cash outflow over the period, leaving us with cash and cash equivalents of GBP195 million at June 30, 2023. This is in addition to around GBP35 million of self-funded inventory.

In terms of guidance, we are on track to deliver against the guidance we made at the start of the year. To recap, the guidance for 2023 is the following: retail unit sales of 40,000 to 50,000 units. Retail GPU for the year approaching 1,200 with the exit retail GPU approaching 1,500. Adjusted EBITDA loss of GBP100 million to GBP120 million.

Year-end cash position in the range of GBP110 million to GBP130 million, and year-end self-funded inventory is expected to be between GBP15 million and GBP25 million. In terms of the cash savings, the GBP100 million of SG&A savings targeted in the Q1 restructuring are now largely in the run rate. The additional GBP20 million of cash savings identified in Q2 will be realized over the balance of this year and will fully flow through in 2024.

I will now pass back to Paul Whitehead.

Paul Whitehead

We have delivered a great deal since the beginning of the year. Unit economics are improving, operational footprint has been optimized, and we have taken a lot of cost out of the business. Cazoo has established a market-leading platform, brand, team and end-to-end infrastructure in the U.K. The economic environment remains challenging, but our proposition remains appealing to customers, thanks to the selection, transparency and convenience of using our platform. Our progress makes us confident that we are laying the right foundation for profitable growth in the future.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Rajat Gupta with JPMorgan. Please proceed with your question.

Rajat Gupta

Great. Thanks for taking the question. I had a first question just on the operating expenses and where you are today as a company, including the GBP20 million that is expected to come later this year? What percentage of the expense would you say is fixed today? And at what level of volume can that fixed cost base support today? Obviously, once you start to grow, variable expense will come back. But just curious where we are in terms of that mix and the level of volume, the current cost structure can support? And I have a follow-up. Thanks.

Paul Woolf

Hi, Rajat. This is Paul Woolf here. Thank you so much for the question. And I mean, it's a very topical question for us. So out of the -- out of SG&A, we would estimate that around a little over half is sort of fully fixed and a little less than half is of the sort of more variable nature. Now obviously, there are sort of degrees within that, but that would be a good basis for your modeling.

Rajat Gupta

Got it. And the fixed cost base today like based on the dollars of expense, I mean what kind of volume can the business support at this point based on the infrastructure that you have?

Paul Woolf

It was -- it would support -- I mean we've said in our presentation that we've got the sort of a network capacity of up to 85,000 units per annum compared to our -- this is retail units compared to the 40,000 to 50,000 that we're projecting for this year. And beyond the sort of the network capacity in terms of the other fixed cost element, the structure that we currently have in place would need, I mean, limited additional costs to get to that type of number, probably a few people, but not many.

Rajat Gupta

Got it. Limited fixed cost, do you mean or will there be variable expense going from the 40,000 to -- like the remaining 50% of SG&A, that will continue to grow, right, like when we go from the 40,000 to the 80,000?

Paul Woolf

Yeah. That's absolutely right. So if we go back to my sort of previous comment around overall SG&A, a little over half of it is fully fixed. And the other portion is, to some degree, variable. After the variable portion, that would be -- we would require more variable costs growing from the 40,000 to 50,000 up to the 85,000, yes.

Rajat Gupta

Got it. And then just on the capital structure. Few months back in May, you had talked about discussions with the bondholders or any potential restructuring. Curious if there's any update on those discussions, whether they're still ongoing? Are you not in discussions anymore? And like can we expect any agreement in the near future? Thanks.

Alexander Chesterman

Hi, Rajat. This is Alex. So yes, those conversations remain ongoing. There's no certainty that we will reach a conclusion. But we believe that an improved capital structure will allow us to do the things that we want to do to get to the volume required for profitability, which may include further fundraising or M&A and consolidation activity. And so it is preferred to do that from the basis of an improved capital structure, but we will obviously keep people posted if any progress is based in that area.

Rajat Gupta

Understood. Thanks for taking the question and I’ll jump back in queue.

Operator

[Operator Instructions] Our next question comes from Julia [indiscernible] with UBS. Please proceed with your question.

Unidentified Participant

Yes. Hi. Great. Thank you for taking my questions. The first question, if possible, could you please update us on the unit sales growth in July? What trends do you see? And then I'll have a follow-up.

Paul Whitehead

Yes. Paul Whitehead's here. So yes, trends in July, we're seeing continued focus on our unit economics. The market remains challenging, but seeing continued good improvement on all levels of the unit economics, whether that be GPU or the variable costs that sit beneath that.

Unidentified Participant

Okay. Thank you. And the second question is about average price per car in the retail segment. I think on my calculation, Q2, there was about 5% increase year-on-year, while it was down. So could you please elaborate on how we should think about this going forward? Does this mean that we could see the price increase in the full year?

Paul Whitehead

Yeah. We're seeing some price increases. I think what we have been doing though in our inventory mix has been targeting our inventory based on desirability and based on GPU. So what cars can we acquire that drive higher ancillary revenues, for example, so -- and as a result, some of that has seen some price increases as part of that.

We've also seen some unnatural happening in that part of our subscription cars where new cars that are coming back of subscription has been winding down that business. So that may reduce the overall kind of headline price. But I think the key to focus on is the improvements we've made on GPU because we've targeted our buying more around that now.

Unidentified Participant

Okay. Thank you.

Operator

It appears there are no further questions at this time. I would now like to turn the floor back over to Anna Gavrilova for closing comments.

Anna Gavrilova

Okay, everyone. Thank you for joining the call today. Thank you for your attention and your questions. If you have any further questions, please feel free to recap to us at investor.cazoo.co.uk. Thank you, and have a good day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.