Cazoo Group Ltd (NYSE:CZOO) Q1 2022 Earnings Conference Call May 3, 2022 8:00 AM ET
Alex Chesterman – Founder, Chief Executive Officer
Stephen Morana – Chief Financial Officer
Robert Berg – Director of Investor Relations and Corporate Finance
Conference Call Participants
Rajat Gupta – JPMorgan
Adam Berlin – UBS
Saim Saeed – Berenberg
Greetings and welcome to the Cazoo First Quarter 2022 Earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Robert Berg, Director of Investor Relations and Corporate Finance. Thank you. You may begin.
Good morning, everyone. Thank you for joining today's call and webcast to discuss our first quarter 2022 results. You'll be able to find today's press release on our Investor Relations website at investors dot Cazoo, dot co dot 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. 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 the risks related to our business, please see the filings of Cazoo Group Limited with the SEC. Now, I will hand over the call to Alex.
Thanks, Rob. Good morning, everyone. And thank you for joining us today. I'd like to start by discussing our Q1 performance, which was a very encouraging quarter in many respects and why we continue to expect strong sequential quarterly growth throughout the rest of the year, despite an uncertain macroeconomic backdrop, then I'll spend some time discussing why we remain highly confident in achieving our long-term targets. Starting with the first quarter, I'm extremely pleased with our record Q1 revenues and unit sales. Having bought UK reconditioning in-house during the second half of last year, we are now really starting to see the benefits of this strategic decisions, which has material long-term, operational, and financial advantages. Despite a rapidly changing macroeconomic climate, we achieved over 50% sequential quarterly growth in retail units sold during the period, driven by increased inventory available on our website and strongly supporting our fee set that increased reconditioning output and available inventory leads to greater sales.
We believe that our UK retail unit growth going forward will be primarily driven by our ability to continue to ramp up our reconditioning capacity. We now have 10 in-house vehicle preparation sites in the UK, which can recondition over a 120,000 cars per year currently, with the potential to double that capacity overtime. In October, we had just over 2,000 vehicles available for sale on our UK website. And despite record sales in Q1, we've managed not only to replace the inventory sold over the period. But also more than treble our available inventory to over 6,000 vehicles, as a result of having ramp up our reconditioning output. We've always stated that the principal constraint to our growth is the ability to recondition cause quickly enough, as opposed to consumer demand. Our customers love the Cazoo proposition, and this is reflected in consistent customer feedback on our market-leading Trustpilot rating of 4.8 [Indiscernible] and gives us increased high confidence in our strategy and growth opportunity. In Q1, we feel the cleared benefit of having more inventory available [Indiscernible], selling over 50% more cars than in the previous quarter.
As we advance through this year, we aim to continue to ramp up our reconditioning capabilities by adding incremental resources and continuing to improve all of our processes. We expect these initiatives to lead to further growth and allow us to continue our progress towards our long-term market share ambitions. Our growth in 2022, however, will not just come from the UK. We continue to make good progress in mainland Europe since our launches in France and Germany late last year, and expect to see a positive impact to our unit sales in those markets once we begin our brand marketing campaigns there in the coming weeks. We also expect to launch in Spain and Italy in the coming months and have strong local teams, infrastructure, and partnerships in place already in those markets.
This will see us grow our presence from one country at the start of Q4 last year to five countries by Q4 at the end of this year, with a combined addressable market of over £300 billion annually. And we expect these markets to contribute to our growth in unit sales and revenues over the remainder of this year, and to become a key contributor to our long-term growth target. Before I remind you of our long-term ambitions, I think it's important to touch on the macroeconomic backdrop our markets and industry are facing. Our solid Q1 momentum comes despite a rapidly changing macroeconomic climate as we navigate our way through a number of headwinds, such as supply chain issues and weaker consumer confidence. Whilst we're very mindful of the wider macro environment and continue to keep a closer eye on any potential impact, we remain laser-focused on the execution of our strategy as we continue to make progress against our previously detailed expectations for the year.
What is most important, however, is that we expect any micro uncertainties could be transitory in nature and have a little bearing on the huge market opportunity and exciting structural growth in front of us. All the confidence we have in achieving our long-term growth and margin targets, which I'll remind you of now. As I said a few weeks ago, at our full-year results, whilst we've accomplished a huge amount in a little over two years since launch, we're still just at the start of this very exciting journey. We're addressing a massive market opportunity with the UK market worth over £100 billion annually, and the Big Four EU markets worth more than £200 billion on top. Our addressable market is now over 26 million used car transactions annually. The market opportunity is so large that with just low single digit market shares and prudent medium-term GPU targets of £1,500 to £2,000, we would have an enormous business, which we expect to generate meaningful free cash flows over time. Our long-term target is to capture 5% or greater market share with a 3,000 panels GPU, which is why we are excited by our future growth opportunity. I will now pass over to Stephen, who'll run through the details of our Q1 performance in more detail.
Thank you, Alex. Good morning, everyone. During the quarter, our revenues increased a 159% year-on-year to £295 million. Our Q1 growth was driven primarily by retail revenues, which increased a 138% year-on-year, but also by strong performances from our wholesale and other revenue streams. Sequentially, we saw a retail revenue growth of 47% from Q4 last year, with retail sales units up 53%. During Q1, we sold 19,713 vehicles, up 102% year-on-year, including 13,353 retail units, up 72% year-on-year. As Alex said, this growth in retail units came following our initiatives with respect to our in-house reconditioning process, which had a positive impact on our available inventory and [Indiscernible] sales. As previously mentioned, bringing reconditioning in-house is a huge strategic benefit, and we believe well worth the short-term pain we've experienced during the transition. In Q1, we started to see the benefits of this investment on our sales numbers.
With our available inventory numbers growing to over 6,000 cars, up from a low of around 2,000 in October last year. As flat that our full year results, our UK retail GPU was down from the £233 we reported in Q4 to a £124 in Q1. As a reminder, our Q1 2022, and our Q4 2021 UK retail GPUs were heavily impacted by the two big steps we made in the second half of last year to recondition all our cars in-house and to source a large proportion of the cars that we sell directly from consumers. These are the two key strategic pillars we needed to put in place to be able to deliver on the long-term GPU targets. I won't go into all the details again as I discussed this in depth at our recent full-year results. While we're pleased with the progress we're making in these areas, the delivery of these two key strategic goals has in both some short-term cost of the business, much of which flows to the OpEx costs via GPU. We expect the impact from investments in the car buying channel and higher reconditioning costs will be highest in Q1.
Looking to Q2 and beyond, we have clear visibility on the more recently purchased and reconditioned inventory. Should expect to see a notable increase in GPU for Q2 and beyond. More specifically, we believe the impact in the launch of our consumer buying channel was in the region of £200 per car in Q1, I'm looking forward. We expect only to see a minimal impact in missing Q2. As the majority of the effective [Indiscernible] cars have now been sold. With regards to reconditioning, while investments are set to continue, as we further ramp about reconditioning output, we expect between now and the end of the year, we can make hundreds of pounds of GPU savings. Some of which will start to flow through in Q2, but unlikely to be bill hedged to weighted. In addition, as we detailed in previous calls, we've already put in place further improvements, which we'll expect will also continue to drive GPU growth during the year. Such as further optimizing our pricing decisions, increasing the proportion of costs sourced directly to consumers, and increasing finance and ancillary revenue streams.
We have stated we see a path to £2,000 retail GPU in the medium-term. And we remain confident of reaching this level and beyond given the steps we've taken in 2021. Turning to our near-term outlook, we continue to make solid progress. It's clear though, there is a rapidly changing macro-economic backdrop in our markets, which creates some uncertainties. And we're obviously managing through all of this on a day-to-day basis as we head through the coming periods. As we said in our previous results, we're well aware of the inflationary pressures and the subsequent impact on consumer confidence facing the UK and EU marketplace at the moment. And whilst we do not believe that they should impact retail unit sales, our current market share, there are obvious risks to short-term GPU if we do see cost inflation and pressure on the higher value new car sales. Internally, we remain laser focused on the execution of our strategy and expect any macro headwinds if they arise to be transitory in nature. I remain confident in achieving our long-term growth and margin targets. We remain well-funded to continue to capitalize on this huge opportunity and to execute on our ambitious growth strategy over the next 18 to 24 months. By which stage we expect our UK business to be reaching profitability. Alex.
Thanks Stephen. So in summary, we are very encouraged by the progress we've made in Q1. And whilst there are macroeconomic uncertainties in our markets, we continue to put in place all the building blocks to enable us to execute our ambitious growth plans, whilst creating significant moats around our business. In the UK, we've established a market-leading platform, brand, team, and infrastructure, and we now have a presence in the four biggest markets in mainland Europe. We believe that we're now very well-placed and well-funded to capture the huge opportunity across both the UK and the EU. We've seen strong momentum so far in 2022 and we expect that to continue throughout the year and beyond. I'll now pass the call back to the operator who will open the line up for Q&A. Thank you.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. One moment, please, while we [Indiscernible] for your questions. Our first questions come from the line of Rajat Gupta with J.P. Morgan, please proceed with your questions.
Great. Thanks for taking the questions. I had a question on the full-year, a month ago you had reiterated the full-year guidance. If I import correctly from your comments, you seem a little bit more cautious on the near-term. So just curious, are you still reiterating the full-year guide of 100,000 retail units and the £900 retail GPU? And it's not like -- has anything that's changed in the last three or four weeks that you're seeing in the business, already? Thanks and I will follow up.
Thanks. Good morning Rajeev. I think we certainly in terms of the things that we could control internally in the business, we've seen great momentum in Q1. We are on track for the guidance that we gave recently, subject to the caveats of the external unknowns that are affecting all businesses. So we are not yet seeing any direct impact, but we have concerns about what may happen in terms of consumer confidence and how that might impact topline inflation pressures and how that has the potential. So we're flagging a cautionary note but remain hopeful and certainly are on track in terms of delivering on all the internal objectives that we've set to hit those targets. The one thing that I would reiterate, which we just said, is that we see these macro issues as being somewhat short-term, months or a couple of quarters, and not having any impact at all on the long-term medium to long-term opportunity, which remain exactly the same.
Understood. Got it. And could you -- you mentioned that you expect that retail GPU -- in the press release, you mentioned that you expect that to bounce back in the second quarter and beyond. Can you give us a sense of the improvements you've already seen through the course of 2Q so far or maybe if you could give us a sense of how that retail GPU progress through January, February, March. Just to give us some comfort around, the recovery here in the second quarter and beyond?
Yes, we're expecting a significant uplift in the second quarter. So we would expect that about to be 2x or 3x what it was in the first quarter GPU and we're certainly seeing that so far into the quarter. And with -- as Stephen mentioned there were very specific reasons relating to specific cohorts of cause, inefficiencies in the transition of the -- bringing the reconditioning in-house. All of these things that are washing through the system. And as those things get washed through, then you start to see that number bounce back relatively strongly. So we are -- we're confident of our Q2 GPU number that's materially higher than Q1.
Got it. And this one last one. Is it possible to provide a rough sense or a range of what the EBITDA was for the quarter or the ending cash balance at the end of Q1? Thanks. That'll be all from my end.
I'll leave that one to Steve, and obviously we don't guide specifically on all talks about EBITDA on a quarterly basis, but Stephen, over to you on that one.
Yes. As Alex said, we don't guide. Cash would be not far off where we were. Obviously, less the Q1 losses, Q1 losses you'd kind of extrapolate over the year. You'd expect them to be coming down over the course of the year as we continue to move towards profitability in the UK. So Q1 and future losses will be higher than the standard quarter, exactly in line with expectations, really.
Our cash runway remains 18 months plus, based on where we are currently.
Got it. Great. Thanks for all the color and good luck.
Thank you. Our next question is coming from the line of Adam Berlin with UBS, please proceed with your questions.
Yes. Hi, good morning, everyone. Three questions from me, if I can, first thing talking about units, you talked about higher inventory on site driving quarterly improvements in the number of units you're selling. Is that a pretty linear equation? If there were 30% more units at the beginning of Q2 than the beginning of Q1, should we expect 40%/30% higher units sold in Q2 -- in Q1? That's the first question. Second question, just to carry on this discussion around GPU, it sounds like then the Q2 GPU is still going to below the £900 target for the year for the UK retail. Will we see it above that in Q3, or is it all going to be an a big improvement in Q4? Some sense of the timing as we go through the second half would be helpful. And then the third question, I -- Steve, I think you mentioned -- I missed what you said something about some timing about when you expect the UK business to break-even. Can you just clarify the timing you gave on that? And can you say something about how many cars do you think you need to sell in the UK to get to break-even point? Thanks.
I'll pick up the first two and then let Stephen pick up the third. So in terms of unit sales, relative payment, well, it's not linear. But there is a very, very strong correlation. The propensity of a customer to find what they're looking for, the more inventory you have. And it should over time become more linear. In other words, the target is to hold the right amount of inventory that equates to about six to eight weeks of sales. So as we continue to ramp up that inventory, we should see sales increase somewhat in line with that. Of course, as sales are growing, we have to run faster to not just grow the inventory on the website, but you have to replenish just the standard sale. So that's why I think you've seen a real step change in Q1 because we've gone beyond replenishment at the highest level of sales that we ever had, but also been able to add to inventory. And so if we can continue to do that on a monthly basis, where we can replenish the sold stock and grow inventory, then we'll start to see significant growth in unit sales. In terms of GPU in Q2. No, it won't be anywhere near the £900. £900 is a target average for the year.
We will be selling more units on a quarterly basis sequentially throughout the year and so on a volume weighted basis, you would expect to see both GPU and unit sales go up throughout the year so Q1 should be a low point both in terms of unit sales volumes and GPU. And therefore, we will see that could go up progressively on a monthly and quarterly basis throughout the year. So we expect the first half of the year to be on an average of probably sub £500, and the second half of the year will be at an average -- the spot higher as we see the benefit. And also, a lot of this is driven not just by improvements and efficiencies in the processes, both buying, reconditioning, and logistics; but it's also about the scale efficiencies, which is the more volume we're drilling, the more benefit we get, and you see that in terms of GPU. In terms of UK breakeven, I'll pass to Stephen.
Yeah. So what we said was we showed about 24 months away from the UK breaking even, so towards the end of '23 on kind of a monthly rolling basis, it would move towards and into a positive territory.
Okay. Thank you very much.
Thank you. [Operator Instructions] Our next questions come from the line of Saim Saeed with Berenberg, please proceed with your questions.
Hi, afternoon, everyone. Thank you very much for taking my question. My first one is maybe getting a sense of where your capacity will be at the end of the year? You had a 120,000 now, would we be correct in expecting that's being meaningfully higher by the end of the year or will it be somewhere around that? And maybe if you could give us any indications of where you expect it to be for next year as well, that would also be quite helpful? I guess my second one is about the refurbishment more generally. I know in the UK you have made it fully in [Indiscernible] but I do notice out of some of your peers, they to attain some sort of flexibility between first-party and third-party refurbishment.
And if you are aiming to gain as much market share out of [Indiscernible] reasonable pace, are you completely unwilling to do any [Indiscernible] third-party refurbishment potential about flexibility? [Indiscernible] you say if [Indiscernible] first-party to gain market share or will it just be entirely first-party refurbishing leading forward? And my final one is asking about wholesale average selling price. It seems that fallen quite significantly quarter-in-quarter from Q4. And that seems slightly odd given you managed to [Indiscernible] another high proportion [Indiscernible] vehicles directly from consumers, which I would have thought typically high quality vehicles. So any explanation behind that would also be very useful. Thank you.
Thank you for the questions. So first of all, in terms of capacity, this is a gradual improvement month on month that we expect to see. We are comfortable that we will have the capabilities this year to recondition enough cars to meet the targets we've talked about, the 100,000 this year. So we're confident in that, and we're seeing a monthly improvement in our ability to do that. And so we would expect by the end of next year to be at the run rate, but it is almost doubled where we come out at the end of this year. In terms of the second question, first party versus third-party. Absolutely not. In terms of having a problem with using third-party to boast the stock, our internal capabilities as well as our preference to do as much as we can ourselves. But you're absolutely right, that market share sales are the most important, if we can get the quality and costs from third-parties.
We are open to that and in fact, we are beginning to have discussions in the UK as to how we can bolster our own in-house capability with third parties that are beginning to start those relationships in the UK to add to that, and we're also already doing that in the EU where we have a mix of our own in-house capability, which is in Italy, and third-party partners in France, Germany, and Spain. So we're not close to the opportunity and we will, as long as we can get the quality that we want and the costs we will use whatever opportunities there are to maximize capability. In terms of the third question on wholesale, there's very straightforward answer to that. Which is, as a result of the issues in the backlog that we had in Q4 last year in reconditioning, we sold through wholesale a number of calls that would otherwise have been retailed. Higher-value cars in Q4.
Now that we've sold the backlog of the bottleneck within the reconditioning, we no longer need to sell those costs. We can now put them into our reconditioning queue and they become retail cars. That's what you saw happen in Q4 was we sold cars that we originally thought we were going to keep for retail, but because we were sitting on them for too long, we sold them by wholesale. We're no longer in that position where we are forced to sell anything via wholesale. All the things the for outside of our zero to six years, zero to 60,000 miles. So anything that we buy now with a view to it being a retail car, is now retail car and it goes into refurbishment, whereas in Q4, some of the cars we bought with the intention of being retail ended up in wholesale.
Great, thank you. And maybe just one quick follow-up. Can you find any guidance on your CapEx spend for this year and lag factor it's going?
Should we start by looking around? We said around £50 million to £60 million for the year, predominantly refurbishment. So just continuing to build out, this outlook said there isn't just one big down that you do here, this is constant ongoing upgrades so we have 10 refurbished incentives in the UK, obviously one in Europe and it's continuously upgrading, improving them. I think more capacity, capability machinery as some when you need them to continue to improve our refurbishment capability.
Great. Thank you very much.
Thank you. There are no further questions at this time. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.