Inchcape Q4 2024 Earnings Report

Inchcape EPS Results

• Actual EPS: GBX 71.30
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Inchcape Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Inchcape Announcement Details

• Quarter: Q4 2024
• Date: 3/4/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, March 4, 2025
• Conference Call Time: 3:30AM ET

Inchcape (LON:INCH) is the leading global automotive distributor, with operations across six continents. By combining our in-market expertise with our unique technology and advanced data analytics, we create innovative customer experiences that deliver outstanding performance for our partners – building stronger automotive brands and creating sustainable growth. Our distribution platform connects the products of mobility company partners with customers, and our responsibilities span product planning and pricing, import and logistics, brand and marketing to operating digital sales, managing physical sales and aftermarket service channels. Delivering for our partners, our customers and our people – so they can realise their ambitions in the new world of mobility. The Group is headquartered in London and employs over 16,000 people globally. www.inchcape.com

Inchcape Q4 2024 Earnings Call Transcript

Key Takeaways

• Inchcape delivered 4% revenue growth and 5% PBT growth in FY2024, supported by disciplined costs, reducing net debt to £190 million and leverage to 0.3×.
• The board announced a new £250 million share buyback program and updated capital allocation policy with a 40% dividend payout ratio and continued focus on value-accretive M&A.
• In 2024 Inchcape secured a record 22 new distribution contracts, including key Chinese OEM partnerships, underpinning medium-term market share targets.
• Management unveiled medium-term targets aiming for over 10% EPS CAGR and generating $2.5 billion of free cash flow through FY2030, fully deployed to shareholder returns.
• Organic growth in APAC was flat in FY2024 and operating margins dipped slightly due to regional mix shifts and FX translational headwinds.

Presentation

[Duncan Tait, Group CEO at Inchcape]

Good morning, everybody. Welcome to Inchcape's Full Year 2024 Results. I'm Duncan Tait, Group CEO, and I'm joined by our CFO, Adrian Lewis. Here's today's agenda. I'll give an overview and strategic context. Adrian will then run through the 2024 results before outlining our medium-term targets published today. I'll then sum up and discuss the outlook for 2025.

[Duncan Tait, Group CEO at Inchcape]

Today's presentation is available on our website, and a recording of today's session will be available later today. After the presentation, we'll take your questions. I'll start with our key messages. First, we delivered another year of progress in 2024. Second, we updated our capital allocation policy and today announced a new GBP 250 million share buyback program. Third, we are today announcing new medium-term targets, including a target of EPS compound annual growth in excess of 10%. In 2024, we delivered 4% revenue growth and 5% PBT growth.

[Duncan Tait, Group CEO at Inchcape]

During the year, we launched an evolved strategic approach, Accelerate+, sold our U.K. retail business, and achieved a record year of 22 distribution contract wins. Our updated capital allocation policy includes dividends at 40% of EPS, a commitment to ongoing share buybacks, and value accretive acquisitions. In the context of our new medium-term targets, we expect another year of growth in 2025.

[Duncan Tait, Group CEO at Inchcape]

Over the next six years to the end of 2030, our target is to generate GBP 2.5 billion in free cash flow, which will be deployed in full to drive compound annual growth in EPS in excess of 10%. Now, Inchcape is well placed to deliver on our medium-term targets, supported by our clear and compelling investment case, the key dynamics of which are highlighted on this slide. Powered by Accelerate+, Inchcape is the leading global provider of an essential function in the automotive industry, distribution.

[Duncan Tait, Group CEO at Inchcape]

Our business is characterized by sticky, long-term relationships with OEMs in smaller and more complex markets, supported by Inchcape's highly differentiated technology capabilities. Our business model drives our attractive financial profile, which is capital light with resilient margins, highly cash generative, and delivers high returns. This financial profile enables Inchcape to deliver a disciplined capital allocation policy, ensuring we drive value for our shareholders. This investment case will help us to deliver on our new medium-term EPS target of in excess of 10% compound annual growth.

[Duncan Tait, Group CEO at Inchcape]

Now, Accelerate+, our new strategy, has been designed to help scale and optimize our business, enabling Inchcape to deliver on our medium-term targets. Accelerate+ is driven by the quality and dedication of our 18,000 highly talented people around the world. We've built a collaborative, entrepreneurial, and high-performing culture that provides the bedrock from which we can deliver future success at Inchcape.

[Duncan Tait, Group CEO at Inchcape]

We're very proud of what we have achieved. This culture is driven by our dynamic leadership team, where we made a number of changes last month to help deliver on our growth ambitions. These changes were the manifestation of our global talent planning process, which is regularly assessed by the board, with a particular emphasis on developing internal talent. Scale will be achieved through winning distribution contracts, value accretive bolt-ons, and further developing our market-leading technology capabilities.

[Duncan Tait, Group CEO at Inchcape]

Over the last five years, Inchcape has built a portfolio of 230 distribution contracts with over 60 OEM partners in approximately 40 diverse markets. Following two years of record new contract wins, we're now embedding these contracts into our business. In 2024, we won two contracts in APAC, both in Australia, with DEEPAL, a Changan Electric SUV brand, and Foton, a light commercial vehicle brand.

[Duncan Tait, Group CEO at Inchcape]

In the Americas, we won 14 new contracts, including various Changan brands in a range of markets, as well as Great Wall Motor and JAC commercial vehicles in Colombia. And in Europe and Africa, we won six contracts, including two more with BYD. On M&A, since 2019, the group has executed eight acquisitions. Our pipeline remains healthy in a fragmented independent distribution landscape. We'll continue to focus on accretive bolt-on deals, and we are not currently looking to target any large-scale acquisitions.

[Duncan Tait, Group CEO at Inchcape]

On technology, we have developed a market-leading approach in the use of data to support our OEM partners. In 2024, we rolled out the latest versions of DXP and DAP, our customer experience and data analytics platform, into more markets with more OEMs. In addition, we utilize technologies like AI to drive efficiencies across our business.

[Duncan Tait, Group CEO at Inchcape]

Accelerate+ is also focused on optimizing key elements of our business to ensure Inchcape remains the most efficient and effective partner for our OEMs. Firstly, we are optimizing our business through the divestment of non-core assets. Since 2019, we have disposed of a range of non-core retail assets, generating approximately GBP 750 million in cash proceeds.

[Duncan Tait, Group CEO at Inchcape]

In 2024, we sold our U.K. retail business and a retail after-sales business in the Americas. This approach has ensured that Inchcape is fully focused on our distribution value chain, which is capital light, more cash generative, higher growth, and higher margin than retail only. Secondly, on optimizing, as we grow, we aim to ensure that we have an optimal portfolio of brands, which is best suited to our business and our markets.

[Duncan Tait, Group CEO at Inchcape]

In the context of 44 new contract wins and a portfolio of 230 across the group, it is important that we continue to exercise discipline around those that work for us and for our OEM partners. Connected to this, in 2024, we mutually agreed to end four immaterial distribution contracts with certain OEM partners. You should expect Inchcape to continue to grow and rationalize our contract portfolio to ensure we optimize our market presence and leverage our infrastructure in the most important way.

[Duncan Tait, Group CEO at Inchcape]

In addition, we continue to optimize our third-party network in certain markets where we see the opportunity for enhanced returns. Finally, on this slide, we will also optimize through value-added services. This includes the distribution of relatively high-margin OEM-certified parts supported by our digital parts platform in APAC, as well as developing and delivering finance and insurance products by utilizing our global scale and strategic partnerships.

[Duncan Tait, Group CEO at Inchcape]

In addition, we'll continue to support new energy vehicle transition with early-stage specialist capabilities, and we'll continue to develop our used car proposition, leveraging our strong third-party independent retail network. So, driven by our diversified and scaled global market leadership position, our long-standing and valuable OEM relationships, and differentiated technology capabilities, Inchcape delivered progress in 2024. We delivered across a range of financial metrics during the year, which Adrian will now take you through. So, Adrian, over to you.

[Adrian Lewis, CFO at Inchcape]

Thank you, Duncan, and good morning, everyone. During 2024, we generated revenues of GBP 9.3 billion with operating margins of 6.3%. Adjusted PBT was GBP 444 million. We delivered another excellent year of free cash flow generation, producing GBP 462 million, and this was 151% free cash flow to adjusted profit after-tax conversion rate.

[Adrian Lewis, CFO at Inchcape]

And this is a new metric for us. Net debt reduced to GBP 190 million with closing leverage of 0.3 times, and return on capital employed was 27%. Adjusted basic EPS was GBP 0.713, and today we declared a final dividend per share of GBP 0.172, taking the total dividend per share for the year to GBP 0.285. So, in summary, our performance during this year is a reflection of our continued operational delivery and strategic progress. So, let's now turn to the key drivers of our top-line performance.

[Adrian Lewis, CFO at Inchcape]

We grew 4% in constant currency terms, driven by 2% of organic growth and a 2% benefit from the acquisitions we made in APAC in 2023. APAC organic growth was flat, with mixed market momentum, particularly in the second half of the year. Europe and Africa again outperformed with 11% organic growth, supported by an order bank unwind, particularly in the first half. The Americas' revenue declined 4% organically, with organic growth of 1% in the second half of the year compared to -9% in the first half.

[Adrian Lewis, CFO at Inchcape]

These growth drivers were offset by a 5% impact from the translational currency headwinds driven by the strength of the pound. This slide highlights our operating margin bridge, which shows that we continue to deliver operating margin resilience with margins of 6.3% for the year. This was down slightly from the previous year, partly due to regional mix, with a larger contribution from Europe and Africa, which is relatively lower margins compared to other regions.

[Adrian Lewis, CFO at Inchcape]

Our overhead-to-revenue ratio was stable as our continued cost discipline and the benefits of cost synergies at Derco offset inflation. Translational FX had a 10 basis points impact on operating margins affecting regional mix, and this was driven by the combination of the strengthening of GBP against our major currencies and the material impact of Ethiopia, where we saw half two impacted by the devaluation of the Birr, so now let's look at each of our regions, starting with APAC. We performed in line with the market and delivered resilient margins against a mixed market backdrop, especially in the second half.

[Adrian Lewis, CFO at Inchcape]

Organic growth was flat, and reported revenue grew 6%, 9% in constant currency, with a translational effect of -3%. In the second half of 2024, Australia saw a market decline affecting overall organic momentum in the region. And in respect of the acquisitions made in 2023, these integrations of these businesses are well on track. Operating profit grew, with operating margins down slightly to 7.8%, not forgetting some non-recurring property profits that enhance operating margins in the prior period.

[Adrian Lewis, CFO at Inchcape]

And for FY 2025, mixed market momentum is expected to continue with competitive dynamics, particularly in Singapore and Hong Kong. Growth in the region is expected to be second half weighted, with tough half one comparators and, more importantly, the timing of planned product launches of key models in core brands, as well as the ramp-up of new contracts. Regional margins are expected to remain resilient through continued discipline around costs.

[Adrian Lewis, CFO at Inchcape]

So now let's look at the Americas, where we saw a robust performance across the region with momentum building in half two. Revenue fell by 4% in constant currency, with the region returning to growth in the second half with some positive price mix help.

[Adrian Lewis, CFO at Inchcape]

Strategically, the region saw strong progress with 14 distribution contract wins, reflecting the strength of Derco's relationships, particularly with Chinese OEMs. Operating profit in the Americas was down mostly due to FX and, to a degree, the reduced scale of the region, which is reflected in operating margins down 50 basis points to 6.3%. As momentum improved in the second half, as did our margins with an exit rate of 6.6%, with improved operating efficiencies across the region as our Derco synergy program nears completion.

[Adrian Lewis, CFO at Inchcape]

And as we continue to look at our portfolio and optimize our business, at the end of 2024, we completed a transaction to dispose of a dilutive retail after-sales business, which generated revenues of GBP 80 million in revenue in 2024. And in relation to the contract exits that Duncan mentioned earlier, these were immaterial at an operating profit level.

[Adrian Lewis, CFO at Inchcape]

Looking forward into 2025, we remain prudent about expectations for a strong market recovery, and we continue to expect to deliver margin resilience. Onto Europe and Africa, where we delivered a strong outperformance in a market which grew. Organic revenue growth of 11% reflects the continued strong performance of our portfolio of brands as we outperformed the market. Organic growth in Europe started to normalize in half two, reflecting the order bank unwind that drove a strong half one. Performance in Africa was resilient in the context of fiscal turbulence.

[Adrian Lewis, CFO at Inchcape]

Operating profit grew with the continued elevated operating margins of 4.7%. And in the second half, operating margins started to return to historic levels as growth slowed, considering the dilution from the acceleration of new contracts. And in addition, Europe delivered strategic progress in diversifying the region's OEM partner portfolio with six new contracts across the region, including BYD in a number of markets.

[Adrian Lewis, CFO at Inchcape]

And for 2025, lower revenues are anticipated against tough comparators, with operating margins expected to moderate towards historic levels. And this is one of my favorite slides. We spoke in the strategy update in November about a 10.8 million unit total addressable market made up of the 38 markets where we operate and those markets where it may be appropriate for us to have a presence in the future.

[Adrian Lewis, CFO at Inchcape]

And to help investors better understand the momentum in our markets, we will now be publishing this table as an appendix to our results and quarterly trading announcements. I have commented in each of the regional summaries about our relative performance, so I will not say more now, and I will allow you time to digest at your leisure. I did want to touch on progress in relation to distribution contracts in 2024. We achieved a record year with 22 contract wins, 85% of which were won with Chinese OEM brands, all of which will help us to drive market share over time.

[Adrian Lewis, CFO at Inchcape]

As Duncan mentioned earlier, we also exited four contracts in 2024, and it's important to note that these contract exits were mutually agreed with our OEM partners in specific markets where we felt it would make more sense from a commercial perspective for others to run those brands or for the brand to exit the market. Retail space within our and our third-party network has been reallocated to other brands within our portfolio.

[Adrian Lewis, CFO at Inchcape]

Looking ahead for the 44 distribution contracts won since 2021, the details on the right-hand side of this page is the data we shared in our May 2024 In the Driving Seat webinar, where we set out expectations for how the average contract will perform at maturity. We expect this to be between GBP 20 million-GBP 30 million in revenue and GBP 1 million-GBP 2 million in adjusted operating profit for the average contract.

[Adrian Lewis, CFO at Inchcape]

Each contract typically aspires to achieve up to 2% of share in the relevant market. Now, back to our financial performance. This slide shows our income statement for the year. The group delivered adjusted operating profit for the year of GBP 584 million. Adjusted net finance costs were lower at GBP 142 million, driven by the impact of a reduction in average net debt. This was partly offset by an increase in inventory financing costs associated with a more stable working capital profile.

[Adrian Lewis, CFO at Inchcape]

Adjusting items amounted to an expense of GBP 30 million, primarily driven by one-off costs related to acquisition and integration costs of GBP 42 million, mainly related to Derco, which are now largely complete. This was partly offset by gains on disposals of the after-sales retail disposal in Americas and the reversal of COVID-era impairments on distribution agreements in Central America.

[Adrian Lewis, CFO at Inchcape]

Adjusted PBT was GBP 444 million, 5% lower at actual rates, but 5% higher on a constant currency basis. And on FX, you will see in the R&S that we have provided an additional disclosure on the future impacts of translational FX movements across key currencies. The effective tax rate increased to 31.3% due to the impact of Pillar Two tax regulations. And adjusted basic EPS was down 7% to GBP 0.713, mainly due to FX translation effects offsetting the profit growth and the impact of the share buyback program.

[Adrian Lewis, CFO at Inchcape]

And finally, in November 2024, the trustee of Inchcape Motors Pension Scheme completed a buy-in transaction. This has substantially reduced the risk of pension liability volatility for Inchcape, with the insurance policy being purchased, requiring no incremental funding from the group.

[Adrian Lewis, CFO at Inchcape]

Now, as Duncan mentioned earlier, our focus on the balance sheet during the course of 2024 has delivered a substantially delivered balance sheet, with net debt reducing from GBP 601 million at the start of the year to only GBP 190 million at December 31st. This deleveraging was supported by another excellent free cash flow performance, underlining the highly cash-generative nature of our business model, with adjusted free cash flow of GBP 462 million, with a free cash flow to profit after-tax conversion rate of 151%.

[Adrian Lewis, CFO at Inchcape]

A significant component of our strong cash flow was a working capital inflow of GBP 195 million as we continue to focus on efficiency in inventory management, with inventory falling further on an underlying basis and as we further align our supplier terms, typically within recently acquired businesses.

[Adrian Lewis, CFO at Inchcape]

Now, this excellent working capital performance follows changes that we made at the start of 2024 to our incentive schemes for management, incentivizing an improved average working capital position throughout the year. Dividend payments and share buybacks amounted to GBP 294 million as we executed on our capital allocation policy. And the net of these elements saw leverage fall to 0.3 times EBITDA, down from the 0.8 times at the end of 2023.

[Adrian Lewis, CFO at Inchcape]

So just to sum up this section, in 2024, we delivered on a number of financial KPIs. We grew the top line. We maintained disciplined levels of CapEx. We delivered high returns with resilient margins and generated significant amounts of cash. Supported by our performance last year, we remain well placed to deliver growth in the future.

[Adrian Lewis, CFO at Inchcape]

That brings us on to the next item on today's agenda, our new medium-term targets that were published for the first time today. This slide summarizes these targets and sets the financial direction for the group to the end of 2030. This encapsulates how we aim to deliver through the cycle and drive value for shareholders.

[Adrian Lewis, CFO at Inchcape]

From left to right, starting with our key value drivers. Firstly, we aim to generate organic compound volume growth of 3%-5% through market growth and our outperformance. Secondly, we expect to continue to deliver consistent and resilient operating margins of around 6%. Thirdly, supported by the highly cash-generative nature of our business, we anticipate converting profit after-tax into free cash at a rate of 100%. Delivering on these drivers will enable us to generate approximately GBP 2.5 billion in free cash flow by the end of 2030.

[Adrian Lewis, CFO at Inchcape]

And the cash the business generates will consistently be deployed through our disciplined approach to capital allocation, with our dividend policy unchanged, the balance being deployed between a commitment to ongoing share buybacks and value-accretive acquisitions. By combining growth from the business and our capital allocation approach, we expect to deliver in excess of 10% compound annual growth in EPS over the 2025-2030 timeframe.

[Adrian Lewis, CFO at Inchcape]

Now, let me take you through each element of our key value drivers, starting with organic volume growth. We have a long-term ambition to grow market share to 10% in each of our markets. And we will achieve this through organic growth and acquisitions. And this chart shows that since 2019, against a flat total addressable market, we have nearly doubled our market share from 1.6% to 3%.

[Adrian Lewis, CFO at Inchcape]

Now, the majority of this growth has come from the eight acquisitions we have executed in that time, as well as outperformance organically. Many of the markets we are in experience volatility, but through our geographic diversity, we expect our markets in aggregate to grow up between 1%-2% annually. And we expect to outperform and grow market share, driven mostly by the maturing nature of our contract wins and further new contract awards, driving volume growth of between 2%-3%. And as a result, we expect to deliver organic volume compound growth of between 3%-5% before any inorganic expansion.

[Adrian Lewis, CFO at Inchcape]

And onto our next value driver, resilient operating margins. A similar chart to this was presented in our May 2024 In the Driving Seat webinar, and it serves to outline our margin profile. Starting on the left, around 85% of the group's revenue comes from vehicles and about 15% from parts. Taking into account the underlying vehicle or parts costs and considering the cost of distribution, logistics, insurance, storage, we generate gross margins of between 15%-18% overall, with margins on vehicles of between 10%-15% and parts of between 40%-45%.

[Adrian Lewis, CFO at Inchcape]

Looking at our operating cost base, a high proportion is variable or semi-variable and runs at approximately 11% of revenue. This nets out to an operating margin range of between 5%-7%, which is typical in distribution businesses, with our blended margin of approximately 6%. Now, looking ahead, we see many positive drivers in our operating margin. These include economies of scale, particularly as we grow share and leverage our infrastructure, together with optimizing our retail network.

[Adrian Lewis, CFO at Inchcape]

Another margin tailwind is value-added services as we look to monetize the customer lifetime value through higher margin products in parts and finance and insurance. However, we also recognize that there are margin headwinds to consider. These include an increasingly competitive and dynamic environment, and as we look to invest in our new distribution contracts, they tend to be margin-dilutive in the initial years. Given this balance, we are confident that we will deliver resilient and consistent margins of around 6% through the cycle and over the medium term.

[Adrian Lewis, CFO at Inchcape]

Now, this slide shows our track record of free cash flow generation and is the underpinning of our medium-term EPS target. The chart on the left shows the absolute level of annual free cash flow, with the dark blue blocks showing our underlying annual free cash flow and the lighter blue blocks highlighting the working capital in and outflows.

[Adrian Lewis, CFO at Inchcape]

As you can see, working capital optimization, particularly in newly acquired businesses, has been a major driver of free cash flow in recent years. Typically, when we acquire a business, we find opportunities to improve inventory management and align supplier terms as part of adopting the Inchcape operating model. Excluding the working capital benefits, we have produced on average over 100% of profit after-tax conversion rate.

[Adrian Lewis, CFO at Inchcape]

And with our capital-light operating model and leveraging all of the third-party dealer networks supported by global best practice in tax, treasury, cash management, we see the opportunity to continue to deliver 100% free cash flow to profit after-tax conversion on an annual basis. And this, combined with further working capital optimization, will enable us to generate a total of GBP 2.5 billion in free cash flow up to and including 2030.

[Adrian Lewis, CFO at Inchcape]

This cash flow will be deployed through our capital allocation policy outlined on this slide, which we have updated. We will continue to pay dividends at 40% of earnings. Our policy is then to balance capital allocation between our commitment to an ongoing share buybacks and value-accretive acquisitions. Our policy remains to run leverage below one times EBITDA. We will remain disciplined and continue to look carefully at the balance of capital allocation between share buybacks and M&A.

[Adrian Lewis, CFO at Inchcape]

For 2025, we have announced a new buyback program of GBP 250 million, which is expected to complete within 12 months as we skew our allocation towards buybacks, reflecting the value we see in the Inchcape shares. This will serve to drive EPS growth and value for shareholders.

[Adrian Lewis, CFO at Inchcape]

To sum this section up, to the end of 2030, we expect to generate GBP 2.5 billion in free cash flow. We will deploy this cash flow to drive shareholder value with a consistent dividend policy and in excess of 10% annual compound growth in EPS. And that's it from me. I'll hand back now to Duncan.

[Duncan Tait, Group CEO at Inchcape]

Very good. Thank you very much, Adrian. So let's sum up for 2024. Inchcape delivered continued progress in 2024, reflecting our diversified and scaled global market leadership position, our long-standing OEM relationships, and our differentiated technology capabilities. During the year, we delivered record contract wins, launched Accelerate+, disposed of several non-core retail assets, and achieved industry-leading customer reputation scores. We also delivered against a range of financial metrics during the year, enabled by our disciplined approach to capital allocation.

[Duncan Tait, Group CEO at Inchcape]

Looking to the medium term, Inchcape will deliver growth and value supported by our key growth drivers, resilient margins, our highly cash-generative business model, and our updated approach to capital allocation. We expect to generate GBP 2.5 billion in free cash flow, which we will deploy in full and drive shareholder value in excess of 10% compound annual growth in EPS. This will continue to be underpinned by consistently high return on capital employed. Importantly, our executive teams and management teams across Inchcape are being incentivized to deliver on our medium-term targets, specifically EPS.

[Duncan Tait, Group CEO at Inchcape]

In the context of our medium-term targets, 2025 is expected to be another year of growth at Inchcape at prevailing FX rates, with product cycles and the ramp-up of new contracts skewing growth towards the second half of the year. We expect to deliver higher EPS growth in 2025, driven by profit growth and our new share buyback program of GBP 250 million.

[Duncan Tait, Group CEO at Inchcape]

So just to finish, we are really excited about the future growth opportunities for Inchcape as we continue to build on our leadership position. That's it for the presentation. Let's take your questions, firstly from people here in the room, then from the phone lines, and finally from the webcast via our head of IR, Rob. If you could limit your questions to two, please, that would be most appreciated. And Adrian, we should go and sit over there.

[Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum]

Okay. Morning, Sanjay Vidyarthi from Panmure Liberum. In terms of the volume growth target, can I just clarify if that includes contract wins in terms of the organic growth rate? And linking into that, Inchcape historically has talked about being in high-growth markets where car penetration rates are relatively low, but you're now talking about medium-term market growth of 1%-2%.

[Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum]

And I get that there are cycles and different markets evolve at different rates, but are we basically saying here that the higher growth that you might see in certain markets in APAC and LATAM is now going to be outweighed by lower growth rates in mature markets? I mean, how should we think about that?

[Duncan Tait, Group CEO at Inchcape]

Very good. Okay. Thank you very much, Sanjay. Good morning. So Adrian, if you could comment on the second point, sorry, on the first point, and I'll comment on our view of growth over the medium term.

[Adrian Lewis, CFO at Inchcape]

Sure. So the simple answer is yes. Contract wins will be a big driver of the growth over and above the market tailwinds of 1%-2%. We expect, as we said earlier, that the contract wins and the maturing profile of them, having signed 44 of them since 2021, they're all in the foothills of their maturity curve, really. The real acceleration was in 2023 and 2024, with 2022 last year. There's two or three years of maturing until we get to that three to five-year sort of maturity level. So we're anticipating those to be a material driver of our market outperformance.

[Duncan Tait, Group CEO at Inchcape]

Very good. And Sanjay, to your point then, which is a strategic point about how do we see those markets, look, I'd say a few things. The motorization rates of most of our markets, to your point, are way below the European and certainly below the U.S. average.

[Duncan Tait, Group CEO at Inchcape]

Therefore, do we think we will see structural growth in those markets over time, which would be greater than you'd see in established economies? The answer is yes. What we're saying today is, if you look at what we were saying just a few years ago, the world has completely changed, whether you think about the macros, tariffs, and other matters. And therefore, we're taking a prudent view of how fast those markets might grow over time. But do we think they'll be supportive to us getting to that 10% number, our 10% market share number into the 2030s? Yes, yes, we do. We're just being prudent about the way we think about market growth in the near term.

[Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum]

Can I just need one more?

[Duncan Tait, Group CEO at Inchcape]

Oh, Sanjay.

[Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum]

Just if we were to look at it on a standstill basis without any more contract wins, presumably we would see more operating leverage than you're guiding to in terms of a kind of relatively steady 6% operating margin?

[Duncan Tait, Group CEO at Inchcape]

It's a margin question.

[Adrian Lewis, CFO at Inchcape]

sure. Yeah, sure. Look, in theory, yes. All of the tailwinds of driving scale in our existing markets from those maturing contract wins, all of the good work we're doing around our digital platforms to improve our route to market, absolutely, we will see those tailwinds. I think we also have to recognize, as Duncan has just said, the world has changed over the last few years. It's an increasingly competitive world. And some of those competitive dynamics, we have to recognize in our approach to talking about margin resilience.

[Adrian Lewis, CFO at Inchcape]

Those tailwinds, we think, are going to help us be even more competitive in our markets and grow our market share and scale towards that 10% aspiration in each and every one of our markets. There's headwinds and tailwinds to contemplate. There's a bit of regional mix over time, which will move, plus or minus, depending on the cycle through the years ahead. Conceptually, we're not guiding to structural margin expansion because of that balance.

[Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum]

Very good.

[Duncan Tait, Group CEO at Inchcape]

Thank you, Sanjay.

[Andy Grobler, Financial Analyst at BNP Paribas Exane]

Hi, good morning. Andy Grobler from BNP Paribas Exane. I've got lots, but I'll just stick with two. Firstly, you talked about commitment to ongoing share buybacks. Could you just clarify exactly what you mean by that? Does that mean, for example, that we're going to have buybacks every year and the quantum will change, or you'll decide each year?

[Andy Grobler, Financial Analyst at BNP Paribas Exane]

Then secondly, on incentive schemes, you talked about you guys are incentivized on those long-term targets with a weighting towards EPS. Could you just tell us what those weightings are and particularly where free cash flow sits within that scheme? Thank you.

[Duncan Tait, Group CEO at Inchcape]

Sure. Look, I'll make a comment on both, and then if you could follow up, Adrian. In terms of share buybacks, we're being super clear. We will deliver share buybacks every year. There's intent in the new capital allocation policy, which we've put forward, agreed by the board. So you will see share buybacks each year from Inchcape. The amount to be determined, what we're absolutely clear about, is we're driving accretion in value for shareholders, and we'll put more weight on one side or the other of our capital allocation policy, depending on, frankly, where our share price is. Do you want to add points to that?

[Adrian Lewis, CFO at Inchcape]

No, I think you've got it. Very good.

[Duncan Tait, Group CEO at Inchcape]

Then, look, on incentive schemes, our RemCo chair, wrote to shareholders in the middle of January to consult on what I would call an Accelerate booster EPS scheme. So our top 300 or so executives in the company will have an Accelerate+ LTIP based upon delivering greater than 10% EPS. We have a core LTIP program, which is unchanged, which incentivizes management on EPS growth and free cash flow and return on capital employed. Now, as you would expect, every three years, we review our remuneration structures. And during 2025, our RemCo chair will consult with shareholders about how our ongoing incentive schemes would work from 2026 onwards.

[Duncan Tait, Group CEO at Inchcape]

But at the moment, what you should hear is you have a leadership team of our executives and our management teams around the world, which are locked onto delivering greater than 10% EPS growth.

[James Bayliss, Associate Director of Equity Research at Berenberg]

Morning both. James Bayliss from Berenberg. Two from me. On working capital, you talk around working capital optimization in businesses you've acquired. Can you give us a sense of how much more there meaningfully is to be done on that front with reference to Derco and APAC, or should we now be thinking about that working capital profile and use of vehicle financing, presumably being more normalized now and it being about the underlying efficiencies you're incentivizing staff to kind of eke out?

[James Bayliss, Associate Director of Equity Research at Berenberg]

And then question two, how should we be thinking about future non-core disposals? Obviously, U.K. retail was the major news in 2024, and then you exited a small position in South America. Are there any other pockets kind of hidden within the group that we should be thinking you could look to optimize in due course?

[Duncan Tait, Group CEO at Inchcape]

Very good. Thank you. Thanks, James. Good morning. Could you answer number one? Yes. And you could do number two.

[Adrian Lewis, CFO at Inchcape]

Okay. Thank you. I think that's all of them. There was definitely more than two questions there as well. In terms of working capital, yeah, great performance in 2024 off the back of good performance in 2023. So working capital closed at just short of GBP 150 million in aggregate. So is there more to do? I think I've been fairly transparent. I think we should aspire to run this group at a neutral working capital positions, and that's something we ask all of our markets to set the path towards. But we're certainly reaching that highly optimized stage.

[Adrian Lewis, CFO at Inchcape]

I think the work that we've done building tools to support sales and operational planning. When we acquire businesses, we find that's one of the first things where we find opportunities to drive value from those acquired businesses. That's what you've seen with Derco and some of the other businesses we acquired in 2023. I mentioned incentives, and you picked up on that as well.

[Adrian Lewis, CFO at Inchcape]

Yes, last year, we introduced an incentive scheme to incentivize management around the group to deliver an improved average working capital profile as part of the short-term incentive program, and that's proved really effective in just aligning our management teams and their focus, in addition to revenue and profit before tax towards the wider scheme. So we're very pleased with that outcome, and you can see the benefits it's driven in our reported results, and you're absolutely right.

[Adrian Lewis, CFO at Inchcape]

We're very pleased with the work the team did in Latin America dispose of a non-core retail after-sales network. Are there more to come? Look, we're going to continue to look to optimize this group, whether it be in our asset base, whether it be in our contract portfolios. And look, there's nothing significant to flag, and I would also flag that there were no significant property profit gains on the back of those supporting this year's delivery. And we'll just continue to look to optimize and tweak this asset base as we move forward.

[Andrew Nussey, Research Analyst at Peel Hunt]

Andrew Nussey from Peel Hunt. Two questions and one of clarification.

[Duncan Tait, Group CEO at Inchcape]

That's three.

[Andrew Nussey, Research Analyst at Peel Hunt]

Yes. In terms of the clarification, just in terms of the capital allocation, in a year of perhaps where you have underperformed in terms of the free cash generation, are you willing to borrow to fund share buybacks, noting the leverage ceiling that you've got in place? And secondly, in terms of the questions, I'll see a handful of mutual terminations this year. Do you expect more over the next couple of years, say, and do you think those might be OEMs looking to go direct rather than using a distributor?

[Andrew Nussey, Research Analyst at Peel Hunt]

And then secondly, in the Americas and specifically Chile, obviously, expectation of some market recovery coming through. To what extent is there a need to put investment in to support that growth, and could that act as a small near-term margin headwind? Thanks.

[Duncan Tait, Group CEO at Inchcape]

Very good. Could you do number one, and I'll do two and three, please, Adrian?

[Adrian Lewis, CFO at Inchcape]

Not planning on underperforming, Andrew, but in the circumstances where we see cash flow short, and actually, if you look at what we're committed to in 2025 of GBP 250 million of share buyback, that's more than profit after tax once you net off the dividend flows. So there is an expectation that we'll set to deliver consistently and through the cycle for shareholders through a commitment to ongoing buybacks. And we'll consider the balance between buybacks and bolt-ons and how that sits within our leverage profile every year. But be very clear, what we are going to continue to do is to deploy the cash that we generate in full across those two capital flows.

[Duncan Tait, Group CEO at Inchcape]

Very good. Thank you, Adrian. So in terms of termination, should you expect us to optimize our portfolio ongoing? The answer, Andrew, is yes. Adrian showed a chart before.

[Duncan Tait, Group CEO at Inchcape]

It's only just a few years ago, we had 140 contracts across the group. Through acquisitions and through record contract wins, there's now north of 230, and the teams have won another five so far this year. I'm not saying we're going to do another 22. So we continue to build that contract base. It would be reasonable for us to conduct housekeeping where we either have a misalignment with OEMs on market share expectations, or frankly, Inchcape isn't making the return it needs on those contracts. So this, I think, should be part of our ongoing way we just manage our business. Now, do I think OEMs will go direct?

[Duncan Tait, Group CEO at Inchcape]

Look, I think our strategy speaks to this very nicely, which is in the biggest markets in the world, China, the United States, Germany, France, U.K. I would expect OEMs to manage those markets directly in the way that they do so today. You can see BYD, for instance, terminated Hedin in Germany. I think entirely logical. It's one of the top five markets in the world. We specialize in smaller, more complex markets. And therefore, we actually work with our OEMs so they could use other distributors in markets if necessary.

[Duncan Tait, Group CEO at Inchcape]

But you should expect us to continue our housekeeping, and you should expect us to continue to grow. One point, by the way, on Chile, which might be helpful, is our market share in January and February is equal to or higher than it was in January and February of 2024.

[Duncan Tait, Group CEO at Inchcape]

Now, just moving on to Chile and your question around, do we think near-term investment will be required to gain growth? Look, the reality is we're coming to the end of our synergy program in the integration of Derco. I hope never to mention the word Derco again because we think about this as our business in the Americas. We've done a lot of work in that business, closing distribution centers. We've applied AI to our distribution centers and our parts warehousing so we can consolidate the legacy Inchcape and the legacy Ditec distribution centers into one. We've rebuilt our finance and insurance products.

[Duncan Tait, Group CEO at Inchcape]

So I would see that the opposite way around, actually. I don't think we're going to have to invest to gain growth. As the market inflates and gets back to historic norms over the next few years, we'll follow that. Our market share has been steady at around 25%.

[Charlie Rothbarth, Equity Research Analyst at HSBC]

Morning. It's Charlie from HSBC. Could you please, you very kindly gave an In the Driving Seat seminar earlier this year. Could you please comment on the Philippines and Indonesia? And then on the contracts from 140, 150 to north of 230, has there been a flavor change within those contracts or how those contracts are made up? Have we moved from bigger contracts to sort of more numerous smaller contracts?

[Duncan Tait, Group CEO at Inchcape]

Very good. Thank you very much, Charlie. So look, let me give you a sense about where we are in Philippines and Indonesia. So those markets were largely Mercedes acquisitions, one directly from the OEM, one from a, in fact, who are now our joint venture partner at the CATS Group. We've integrated those acquisitions. I think the teams have done a good job in terms of integrating.

[Duncan Tait, Group CEO at Inchcape]

In both markets, we've gone on to win new contracts, one with Great Wall Motor in Indonesia and some others. In the Philippines, we've won a contract with Changan, which we have taken from a distribution company and moved it to us. We are seeing in some markets, I think as related to what we're seeing in tariffs, is some wealthier customers in parts of Asia who are just holding off purchases to see where this may end up. But the businesses are integrating. We're adding contracts to them, and they will be a very nice part of the Inchcape group overall. Let's not forget, we've added TIV across those markets that we could go after of about 1.5 million units per annum.

[Duncan Tait, Group CEO at Inchcape]

In fact, I was in both Philippines and Indonesia just a few weeks ago to see the teams. In terms of contracts, I think Adrian's guidance that we gave at the in-the-driving seat, how our business model works in July last, sorry, in May of last year, is illustrative of where we think these contracts could go over time. They start small. We have to build them up over time. But if you look at when we think they'll reach maturity, somewhere between years three and five, these could be very material for us. And I think the guidance that Adrian showed before should help you understand how you might model those.

[Adrian Lewis, CFO at Inchcape]

If I could just add on, I think over the recent years, we've seen an increased geographic spread. I mean, it's largely skewed towards Chinese brands. About over 70% are Chinese brand oriented. But what was really pleasing in 2024, we started to see contract win momentum build in Europe and in Australia as well, as we said, 14 contracts in Latin America as well. So a bit more geographic spread is how I would also characterize the, to use your word, the flavor of some of these contracts.

[Duncan Tait, Group CEO at Inchcape]

Flavor is nice. Any other questions in the room, please? If not, can we see if there are questions on our phone lines? And if not, Rob, anything via the web?

[Duncan Tait, Group CEO at Inchcape]

Very good. In that case, thank you very much, everybody, for your interest in Inchcape. I'll sum up today's presentation.

[Duncan Tait, Group CEO at Inchcape]

So 2024 was a year of strong progress. We launched Accelerate+, delivered another record year of contract wins. We've updated our capital allocation policy and announced a new GBP 250 million share buyback program. We expect another year of growth in 2025.

[Duncan Tait, Group CEO at Inchcape]

And looking out to 2030, we aim to drive compound annual growth in EPS in excess of 10% with a consistent dividend policy. And we're really excited about the future of our company, Inchcape, and we'll continue to build our leadership position. That's all from us today. Thank you very much for joining. See you next time.

Participants

Executives

• Adrian Lewis, CFO
• Duncan Tait, Group CEO

Analysts

• Andy Grobler, Financial Analyst at BNP Paribas Exane
• Charlie Rothbarth, Equity Research Analyst at HSBC
• Sanjay Vidyarthi, Managing Director and Business Services Analyst at Panmure Liberum
• James Bayliss, Associate Director of Equity Research at Berenberg
• Andrew Nussey, Research Analyst at Peel Hunt