Inchcape (LSE:INCH) — Interim Results

0:00 Good afternoon, and welcome to the INCHAPE PLC Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just click Q and A, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll.

0:25 I'd now like to hand you over to the team at INCHAPE. Good morning, everyone, and thank you for joining us. I'm Duncan Tate, Group CEO, and I'm joined by our Group CFO, Adrian Lewis. Here's our agenda for today. I'll give an overview of our interim results for 2024, and Adrian will then go into more detail on the financials, and I'll come back to discuss strategic progress and the outlook. And after that, we'll take your questions. The presentation is available on our website, and a recording of today's session will be available later today. I'll start with the highlights of the first half of the year. The major news during the period was the divestment of our UK retail business to Group one for £346,000,000 I am very pleased the FCA approved the transaction yesterday evening.

1:21 And as a result, the deal will complete on the August 1. This is a major strategic inflection point for INCHAPE as we become a pure play operator in automotive distribution. Proceeds from the disposal will provide additional balance sheet capacity for us to invest in future growth to support our capital allocation policy in the context of a healthy pipeline of bolt on acquisitions. During the first half, we continued to execute against our strategic objectives, delivering a resilient operational and financial performance with 8% revenue growth in constant currency, 4% organic growth, PBT of £226,000,000 and a reduction in leverage to 0.7x.

2:13 This performance is evidence of our diversified and scaled business, which helped us to win share in key markets across our regions. In addition and taking into account our excellent free cash flow performance in the first half and the strength of our balance sheet, we are accelerating the timetable of our share buyback and increasing the amount from £100,000,000 to £150,000,000 The share buyback will commence on the 08/01/2024 and is expected to complete during Q1 twenty twenty five. Looking ahead, in the near term, we are maintaining our expectations for moderated growth in 2024 at constant currency.

2:58 And over the medium to long term, we expect to return to higher levels of growth, and this will be driven by recovery across a number of markets, the increasing contribution from recently won distribution contracts, bolt on acquisitions, the development of our technology capabilities and our continued focus on cost management. I joined INCHAPE in 2020, and I'm even more excited today than I was four years ago about the potential for INCHAPE in a fast moving and dynamic industry. The business is in excellent shape and extremely well positioned for the future. Our success over the last four years owes much to the quality of our 18,000 highly talented people around the world.

3:47 I'm on the road approximately one week in three meeting our teams across the regions and I'm always impressed by the enthusiasm, commitment and innovative mindset of our people. We have built a collaborative entrepreneurial and high performing culture that provides the bedrock from which we can deliver future success at INCHAPE. This culture has also been the driver of our strategic transformation from a retail and distribution business to a pure play distribution company, as you can see from this slide. Since 2016, we have tripled the number of OEM partnerships and doubled the number of markets in which we operate. Our annualized distribution revenues have tripled, and we have more than doubled the new vehicle volumes we distribute.

4:38 Our performance in the first half is evidence of the strength of being a pure play distribution business, with CapEx at less than 1% of revenue, return on capital employed of 28% and free cash flow conversion of operating profit of 76%. We are already delivering in Distribution, which is capital light, attracts higher margins, is more cash generative and delivers higher returns than Retail only.

5:11 Let's now look at the macro backdrop and outlook across our regions. As you know, we are focused on small to medium sized, more complex but attractive markets, which are higher GDP growth and have low motorization rates. In The Americas, industry volumes are at historic lows in a number of markets driven by geopolitical and macroeconomic factors. We are seeing some key markets stabilizing, although it's too early to say whether this is the start of a recovery. Certain subregions like Central America have performed well. And overall for The Americas, we remain positive about the region's structural growth prospects over the medium to long term. In Europe, we are seeing some improvement in order intake in certain markets, although there is mixed demand outlook across the region, with Southern Europe remaining strong with some markets in Northern Europe more challenging.

6:13 Finally, in APAC, a growth engine for INCHAPE with robust volume growth and a positive growth outlook in most markets, To highlight the quality and diversity of our business and its prospects in APAC, we will be holding an in the driving seat seminar with a deep dive on the region in November. So overall, a positive growth outlook in our regions against a mixed set of trends. With that in context, I'll now hand over to Adrian to take you through the details of the financial results.

6:51 Thank you, Duncan, and good morning, everyone. With the disposal of The U. K. Retail business expected to complete later this week, as Duncan mentioned, it has been treated as a discontinued operation, which means the twenty twenty three comparators in the income statement have been restated to exclude The U. K. And we have provided in the appendix of today's presentation our income statement on a continuing operations basis for the full and half years of 2023 and a stand alone balance sheet for The U. K. Business. And hopefully, this will help to inform your modeling of the continuing operations of the group. So now let's start with the headline financials. And during the period, we generated revenues of £4,700,000,000 up 8% in constant currency, with organic growth of 4% and a contribution of 4% from acquisitions.

7:43 And this was partly offset by currency translation headwinds. Operating margins were 6.3%, reflecting organic revenue growth with some regional mix and price headwinds impacting gross margins, mostly offset by cost control driving operating leverage and adjusted PBT of two twenty six million pounds which on a constant currency basis was 7% above the prior year. We delivered another excellent period of free cash flow generation, producing £226,000,000 with a 76% operating profit to free cash flow conversion rate, and our return on capital employed was 28%.

8:28 Net debt reduced to £524,000,000 driven by a strong working capital performance, and this resulted in a net debt to EBITDA ratio of 0.7 times. Adjusted EPS was 34.7p. And today, we announced our interim dividend per share, 11.3p. And to remind you, this is set at onethree of the twenty twenty three full year dividend. And so in summary, our performance during the period is evidence of our strategic progress. The next slide shows the key drivers of our top line performance, and we grew 8% in constant currency with 4% organic growth and a 4% benefit from the acquisitions we made in Asia Pacific last year.

9:19 APAC delivered strong organic growth of 9%, while Europe and Africa again outperformed the market with 18% organic growth. In The Americas, revenue declined nine percent organically with our volumes down 7% against the 9% fall in industry volumes markets. These growth drivers were offset by a 4% impact from translational currency headwinds driven by the strength of the pound.

9:52 This slide shows our operating margin performance, and our operating margins were down 10 basis points in constant currency with overhead leverage offsetting gross margin pressure during the period. Gross margin pressure arose as a consequence of regional mix, a faster growing vehicle business but also some pricing pressures in The Americas, which is a consequence of lower industry volumes. On overheads, we continue to be proactive on cost management, supported by Durco cost synergies and more broadly in The Americas and across the group to drive operating leverage. So let's now look at our regional performance in APAC. Revenue grew 24% in constant currency, including organic revenue growth of 9%, and this was supported by market share gains in key markets and a contribution from acquisitions and with new brands in early stages of development.

10:52 Operating profit was up 41% with operating margins up 90 basis points to 7.8%, and this was driven by operating leverage and the mix effect of faster growing, higher margin businesses. Looking ahead, we anticipate continued growth in many markets with margin growth expected to be partially offset by recently won distribution contracts, including Great Wall Motors in Indonesia and Changgan in The Philippines. On to Europe and Africa next, where revenue grew 18% in constant currency, and this was driven by outperformance against the market in Europe, a continuation of order bank normalization, market share growth and new contract wins growing quickly.

11:41 Performance in Africa remained resilient.

11:45 Operating profit was up 25% with continued elevated adjusted operating margins of 5.2% despite some dilution of accelerating contract wins. Looking ahead, growth is expected to be supported by some improvement in order take, which will partly offset the effect of order bank normalization over the last eighteen months, with operating margins in Europe expected to moderate towards historic levels. And now let's look at The Americas, where revenue fell 9% in constant currencies. And the story for this region is that we are proactively managing the business in the context of lower industry volumes. Our market share across the region remained resilient with key markets stabilizing and Central America seeing growth.

12:39 Industry volumes across the region were below last year by 9% and while our volumes fell 7%, demonstrating our outperformance. And we also saw a degree of pricing pressure as a number of key markets, which are at historical lows. Operating profit was down 24% with adjusted operating margins down 110 basis points from half one twenty twenty three, but broadly consistent with the half two twenty twenty three run rate. Synergies and the wider cost programs have proved to be an underpin to operating margin and has mostly mitigated the deleveraging effect of reduced volumes. Durco continues to be transformative for our business in the region, helping us scale across The Americas.

13:28 And this is highlighted by three distribution contracts, one in The Americas in half one twenty twenty four. Looking ahead, we have prudent expectations for short term volume recovery, but margins are expected to improve in the second half, building on an improved margin exit rate at the end of half one twenty four. This slide shows our income statement for the period. The group delivered operating profit of £299,000,000 and PBT was £226,000,000 including a currency headwind during the half. Adjusting items amounted to £31,000,000 and this was primarily driven by acquisition and integration costs of £23,000,000 and noncash, nonoperational losses arising from hyperinflation accounting in Ethiopia

14:20 of £8,000,000 And we also note that on the July 28, the Ethiopian government announced a change in the way that it manages its currency to an exchange based regime. And as of the June 30, the net assets in our Ethiopian business was £155,000,000 including cash of 94,000,000 Ethiopia was an immaterial contributor to growth in the first half, both in constant and actual currency terms, and in absolute terms, a low single digit proportion of group profit. And we will continue to monitor the impact of this change working with our local teams and banking partners. The effective tax rate increased to 32.7%, partly due to the impact of mix and a Pillar two tax cost.

15:10 We expect our effective tax rate to decline over time with structural improvements following The U. K. Disposal.

15:19 We maintain a strong focus on cost management, and we reduced overheads despite the increased scale of the business with a ratio of adjusted overheads as a percentage of revenue reducing to 10.9% from 11.4%. And now moving on to our finance costs. Overall, finance costs were slightly higher than the prior period, but lower sequentially. And while interest costs are partly linked to the interest rate environment, they are also directly connected to our growth and success as a company, and our net finance costs totaled £74,000,000 for the period. The first element here is net interest of £34,000,000 which is directly linked to the cost of corporate facilities in the group and in particular, our corporate debt. This element declined due to a reduction in average

16:16 inventory flows during the period. Looking ahead, net interest will reduce as the organic cash generating capability of the group and the proceeds from The U. K. Retail disposal enables us to deleverage. And the second element of interest relates to leases, which is £9,000,000 and this is linked to our physical infrastructure and will grow as we grow and expand our business. The costs associated with inventory finance were £26,000,000 during the period. We expect this to increase as we grow the business and as we align the commercial operating models of acquired businesses and will reduce if interest rates begin to fall.

17:03 The final element is the £5,000,000 of fees and FX costs, which have been reducing as we drive structural efficiency.

17:12 We produced another excellent free cash flow performance, highlighting the cash generative nature of our business model, with adjusted free cash flow of two twenty six million pounds which is an operating profit conversion rate of 76%. This was supported by a strong working capital inflow of £82,000,000 driven by disciplined inventory management, particularly in The Americas. Inventory fell to £2,000,000,000 from the £2,700,000,000 at the end of twenty twenty three due to an improvement in inventory efficiency across the group and the exclusion of U. K. Retail inventory. And as a consequence of our strong free cash flow performance, performance, net debt reduced from $6.00 £1,000,000 at the end of last year to £524,000,000 equating to leverage of 0.7 times after dividend payments were made during the period of over £100,000,000 Looking ahead, we expect leverage to continue to reduce, supported by further strong underlying free cash flow performance and the cash to be received from The U. K. Transaction.

18:24 This provides us with the capacity to continue to follow our capital allocation policy, as you have seen today with the expansion and acceleration of our buyback program. And this slide serves as a reminder to how we allocate capital in priority order, focused on organic investment, dividend payments of 40% of adjusted EPS and value accretive acquisitions with a healthy pipeline of bolt on acquisitions at the current time.

18:56 The fourth element is our of our capital allocation policy is share buybacks. And taking into account the excellent underlying free cash flow performance in the first half of the year and the group's strong balance sheet, we are accelerating our share buyback and increasing the amount from £100,000,000 to £150,000,000 and the buyback will commence on the August 1 and is expected to complete during the first quarter of twenty twenty five. So you can see that our excellent free cash flow performance continues to support capital allocation. And that's all from me. I'll now hand back to Duncan. Thank you, Adrian. We made further progress during the period in continuing to execute against our strategy.

19:44 This slide shows the portfolio of some of our OEM partnerships categorized by manufacturer origin. We have a globally scaled, diversified and prestigious portfolio, which is unrivaled across our industry. Our portfolio of OEMs is the key foundation for our business. And we've worked with a number of OEMs like Toyota for over fifty years and have recently expanded into existing and new markets with other long standing partners like Mercedes. These long term relationships highlight that we are delivering for our OEM partners on a consistent basis across a range of markets over a long period of time. We also have a number of relatively new partnerships with Chinese OEMs.

20:32 We expect to achieve more growth with these OEMs as they seek to leverage our geographic presence and as wheel up to categories beyond passenger vehicles. Evidence of our success in this regard can be seen on this slide. This shows the new distribution contracts won during the first half and the related markets, including the annual industry volumes of those markets. Three of these contracts are with Chinese OEMs in The Americas, where we are further leveraging Durco relationships.

21:06 In addition, I'm delighted to say that overnight, our team in Australia has won a distribution contract with Photon, the largest Chinese commercial vehicle manufacturer. On the right, we give an update of the developments of other contracts won in recent years. And as you can see, we're making good progress. We're driving initial volumes with Great Wall Motors in Indonesia, supported by a strong product range and brand positioning. In The Philippines, we've refreshed our third party retail network to support the Changan rollout. We've been working with BYD in Belgium for over two years, and we continue to support them in driving volume growth in a key EV market in Europe. And finally, we ran a successful launch for Subaru in Ecuador in the period to support the brand road map there.

21:58 We expect to win further distribution contracts to help us drive market share with more OEM partners in more markets. We continue to enhance our distribution platform through the development of our proprietary data and digital analytics capabilities, which help to drive superior performance for INCHAPE and our OEM partners. Our two key technologies are DXP, our customer experience platform and DAP, our data analytics platform. DXP is a fully functional omnichannel customer facing platform, which enables us to capture significant customer and vehicle data. DAP provides advanced analytics and machine learning, leverages our data and drive smarter, faster and better business decisions.

22:48 These elements are supported by a common global technology stack and driven by specialists in our digital delivery centers in The Philippines and Colombia. During the first half, we expanded the breadth of coverage of our core AI solutions into our recently acquired businesses, and we developed and deployed new market leading AI solutions, including an AI based quotation capability for repair services.

23:16 So we continue to make excellent progress in digital and data, which is a key differentiator for the group, helping us to drive better helping us to better support and develop OEM partnerships. We see many exciting opportunities for growth and innovation ahead. To sum up today, INCHAPE delivered a resilient performance in the first half with a strengthened balance sheet. We increased our share buyback to £150,000,000 with an accelerated time line. We are reaffirming our guidance for 2024 at constant currency. And as INCHAPE becomes a pure play automotive distributor, we are well placed for future growth, supported by a healthy pipeline of acquisitions and contract wins.

24:05 Thank you very much indeed for your presentation. Ladies and gentlemen, please continue to submit your questions just using the Q and A tab situated on the right hand corner of your screen. Just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording of the

24:17 presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Guys, just going to bring your cameras up. Rob, we've got you up there. That's great. As you can see, we've had a number of questions through. I'd now like to hand you over to Rob Gurner, Head of Investor Relations to host the Q and A. Rob, if I may just ask you where appropriate to do so, read out the questions and give your response directly to the team and I'll pick up from you at the end. Thank you. Thank you Paul. Good morning everyone and thanks ever so much for your questions. Really good questions and many of them, so we'll try and get through them in the next half an hour or so. The first series of questions is around capital allocation. I've got three sort of questions that we've received. The first is, can you talk about how you balance your four priorities in capital allocation? That's for you Adrian, I think. Second is, can you explain why the buyback amount was increased by 50,000,000? Again, that's for you Adrian. And then the third question in this area was, can you talk about the acquisition pipeline, your approach, your focus areas, your targets?

25:15 That's for you, Duncan. Thank you very much, Robin. Thank you very much for the question. It's great to be here today. Capital allocation is a is clearly articulated, and you heard it in our in our presentation from yesterday morning. It is set out in priority order. And so our first priority is to invest in our business through the lens of CapEx, and we guide to less than 1% of revenues. And we have, in recent times, been tracking slightly below that. The second thing we do, you know, in terms of how we apply capital, we are we we are committed to our dividend policy, and you saw us today or yesterday rather following that policy with an 11p dividend per share for the interims.

26:02 And then we have a choice. We do value accretive m and a, and our fourth priority with funds left over from that, we return money to shareholders via share buybacks. And we do all of that within our balance sheet leverage limit of one times EBITDA. We started the year at about point eight. We finished the first half at naught point seven, and we and off the back of the very strong cash flows we've seen in the first half of this year, we're continuing to apply that capital allocation policy, which is why we have expanded the buyback to a £150,000,000 off the back of that strong free cash flow and in the context of the disposal of The UK business where we expect to receive £350,000,000 of proceeds in the next day or so.

26:54 So it's a very clear policy. We make sure our acquisitions are value accretive. That means we look for acquisitions that can both expand our footprint in INCHAPE markets and also build scale for us in the markets that we're already in. And that really is one of the priorities that we will continue to pursue in the second half of this year, particularly with expected transactions and outflows from a cash perspective for 2025. And in that answer, I've also hopefully covered the second point about why did we increase from a 100 to a 150. It was because of the very strong free cash flow in the first half, and we were just simply following our capital allocation policy again. And in the context of all of the different priorities we have, we thought that was the most appropriate use of those funds from the first half.

27:45 Duncan, if I can hand to you. Very good. Thank you, Adrian. So look. If I talk about them bolt on acquisitions and the way we think about them and our pipeline, so we specialize in running markets for OEMs in smaller to medium sized markets that tend to be faster growing with low motorization rates. This is the number of vehicles per 1,000 people. And if you think about the average in Europe is around five fifty. Many of the markets that we are targeting, if I give the example of Indonesia, has motorization rates of less than a 100. And we know that when we get GDP growth, we get TIV growth, total industry volume growth, which will increase motorization over time. So those are the markets we're after, We categorize them into A markets, B markets, and C markets, and clearly, we want to be going after deals in A or B markets with really great OEMs.

28:41 As Adrian mentioned, we are disciplined around what we pay for these business about what we pay for these businesses, and we use organic cash flow to fund our bolt on acquisition our bolt on acquisitions. Now if I give you one example about how this plays out for us, which are and the example would be Simpsons in The Caribbean, which was a new attractive market for us. That that piece of m and a is going very nicely, And then we announced this week that we've won a contract win then with Changan, and we'll run the Changan business to the existing infrastructure in in The Caribbean, which makes a nice accretive growth for INCHAPE. Thanks, Duncan. And this is actually a follow-up on that bolt on acquisition from another attendee of the call. Are there any scale players out there that are the size of sort of Durko or near that sort of scale that you'd be interested in looking at or you're just very much focused on bolt on acquisitions or strategy? Look, we were clear in our messages yesterday that we see we have a healthy pipeline of bolt on acquisitions.

29:50 That said, we are one of a very small number of companies that is capable of going after larger deals over time, but the signal we gave you yesterday is pretty clear that we are looking for bolt on acquisitions as we move towards the back end of '24 into 2025. Thank you. Question on the operational performance. How do you interpret the mixed performance across the regions with strong growth in APAC and Europe, the decline in The Americas? And what underlying factors could be contributing to these regional discrepancies? Well, if I if I'd start off with with that, Rob, look, what we've built in INCHAPE is a diversified scaled business because what we know is you'll always have some markets going up as as others are coming down, and that's what you can see over the last year or so. But despite that, INCHAPE continues to grow. So building a diversified business is really important to us, and that's what we've been able to do, and there is more to come. Edwin, do want to give some color on the market? Sure. Yeah.

30:51 Look, I think if the if the question I think is why why are they different? And I think one of and to Duncan's point around the benefits of geographic diversity, we're operating in nearly 40 markets as a distributor of representing over 60 brands. Some of those markets are running at different paces. So in somewhat so in Asia Pacific, for example, and in parts of Europe, we've seen economic growth and we've seen growth in the number of cars being sold in the marketplace, and therefore our share of those has also grown. So so so some markets are seeing very strong growth. I'll cite Greece as a good example of that. The economy in Greece is performing very, very well. The number of cars in the market have have has grown as has our business because we're we're we're performing in line with and in fact ahead of that market.

31:44 And then you go to somewhere like Latin America where where economically, it's been a little bit more challenging. Consumers haven't been had quite the same confidence as we've seen in other territories. And if you look at the overall Latin American footprint that INCHAPE operates in, our markets are about 9% lower than they were in the first half of last year. Now sequentially, they're materially consistent once you adjust for a bit of seasonality with the exit rates of half two twenty twenty three. But nonetheless, they are continuing to track at historically low levels, particularly markets like Chile and Colombia. But over time, those markets will come back. They're set for structural growth with low motorization rates and high on average GDP growth over time.

32:35 So the these markets will come back, the work that the teams have been doing in those markets to scale down the cost base will set us up to enjoy operating leverage as those markets rescale. But certainly, Robert, as part of this part of the makeup of our business, not all markets operate run at the same speed, we have different different temperatures as you can see in our in our organic results. But what you see in INCHAPE do INCHAPE doing is continuing to deliver growth with various difference and managing the various different cycles we see across our portfolio. Thanks, Adrian. And a follow-up couple of follow ups on the regions. You're guiding to an improved margin in the second half of The Americas. What gives you that confidence? Let's put it back to you, Adrian. Yeah.

33:21 Sure. I've I've I've just touched on that a little bit there, so I won't repeat the bits about the market. But the work the teams have done around the cost base, both structurally bringing DIRCO and the INCHAPE businesses together. The physical integration, the example we gave on the call yesterday was we have three vehicle compact vehicle processing compounds. When cars are imported into the market, they need to be prepared, cleaned, and then before they are then sent out into the dealer networks. We had three of those under the under the the following the Durco acquisition. We've been scaling that into one, reducing our inventory so it all fits into one site and driving the economies of scale through a single facility.

34:09 It's a great example. And so we talked in in the call yesterday about an improvement in margin in the second quarter, which sets which gives us the confidence to see a stronger second half. And that predominantly was a cost driven improvement in operating margins and reflects the great work the teams have been doing. And and we are the management team are taking proactive steps to make sure they continue to stay ahead and set the business up for the for whatever demand markets they they can foresee. Thank you very much. And Duncan, one for you here, think. Can you discuss some of the key market trends in APAC, in particular Singapore, Hong Kong and Australia? What's going on there? How's the outlook? Sure. Thank you very much, Rob.

34:55 So in general, APAC for us is a growth region. You can see that in our first half results, and it grew very nicely in 2023 also. Those three specific markets you call out, Rob. Australasia for us is steady as she goes. We've seen good consistent performance with a great OEM portfolio, and in fact, we announced just on Monday of this week a new contract win with Photon, which is a large Chinese commercial vehicles provider, which will enable us to gain more share over time. But Australia, by and large, steady as she goes when we're keeping a close eye on interest rate environment in Australia and what that does to consumer demand, but so far so good. Hong Kong has been coming back strongly for us over the period of twenty twenty three into 2024.

35:45 There's been some changes in legislation in Hong Kong around high end EV vehicles, but we bought a built a brilliant OEM portfolio of the wonderful Toyota company plus Great Wall's Aura EV brand, plus Sykes Neefer EV brand in our Hong Kong market, and we've seen improvements in profitability and growth in Hong Kong over since if you compare it to the 2022 period. Then in Singapore, look, those of you who follow us will know there is a Singaporean cycle in terms of vehicle availability as the government seeks to maintain vehicles at about a million vehicles on the road in Singapore. That goes in cycles. We are currently on the up cycle, and if I give an example, you know, the low point of TIV or number of units sold in that market across all OEMs dropped down as low as around 35,000.

36:38 The peak was over 120,000. We are on the upscale of that, and that's great for us as we gain our fair share of market share in a rapidly growing market in Singapore. So very positive what we're seeing in that Singaporean market. Thanks very much. The next question is around the digital technology elements of our business. First question is what sort of margin impact or business benefit do you see your digital strategy having on the business? And the second question is around AI and how embedded is in that in our business is AI and in what sort of capabilities? Right. Very good. That was a long question, Rob. So let me go step by step and if I if I miss things, know you'll remind me. Look, we have made great strides in the last three or so years with our digital and data capabilities.

37:29 And when you put our two platforms together, one is our digital experience platform, which is all about customer engagement and driving growth, with our digital analytics platform, which is a set of machine learning algorithms that improve either customer experience or our operations. When you put those two things together, OEMs know that we are the most advanced independent distributor they work with, and that is enabling us to generate growth with OEMs, and they are therefore supportive of us, growing through acquisition and through contract wins. And as CEO, that is super important to me that we can drive growth through differentiation in those two platforms. Now Adrian continues to ask me the same question about show me the money with these platforms. Look, let me give you a couple of examples in terms of our machine learning algorithms in our digital analytics platform.

38:25 So one of them would be parts pricing optimization. As you build scale in markets as we are doing so, you'll end up with hundreds of thousands of individual part numbers. It is impossible for human beings to optimize the pricing of those parts where we want to optimize profitability versus volume, and we use machine learning algorithms to do that. And in fact, in many of our markets, machine learning algorithms are dynamically setting pricing of parts without human intervention, and that is improving gross margin percentage in our parts business. The other example I would give you is around our sales and operations planning processes, which is all about how we optimize, have the right inventory at the right level in a marketplace.

39:11 And we've been using our algorithms to optimize stock in countries, which means less interest costs, lower physical real estate, and the example that Adrian gave before, which is us being able to consolidate the legacy INCHAPE distribution centers in much of The Americas into the DEFCO acquisition we made. That is another example of where this is giving us much better supply of parts and customer satisfaction for consumers, and at the same time, reducing inventory and reducing space for us. So difficult to give an overall number in percentage terms, Rob, but we can see it having an impact right across the business of INCHAPE. Great. Thanks very much. And on the subject of DERCO, we've had one question, which I think I can answer actually. What percent of DERCO the DERCO previous owners have retained a stake in INCHAPE? 9.3% the Del Rio family currently own and one of the families on the board of INCHAPE as well. Indeed, that's that question correctly. Next question, again, think this is for you, Duncan.

40:11 Is more around the industry? Firstly, on the how do you see the future for new energy vehicles and INCHAPE's role in that future? And then secondly, can you talk a little bit more about your relationships with Chinese manufacturers and, again, how you see the future there? Yeah. Sure. Rob, I'll answer the second question first, if I may. We have three core OEM partnerships that we work with in terms of groups. So European premium OEMs, such as Mercedes Benz, BMW, and Jaguar Land Rover. Then we have Toyota and their Japanese partners such as Subaru, Suzuki, Mazda, and Hino. And then we work with a segment of Chinese OEMs, many of which, by the way, we've built on the relationships that the Durco business had with companies such as BYD, Chang'an, and Great Wall.

41:04 And we choose those OEM partners based upon what is best for our markets. Our markets are a little bit slower in the transition to EV, but nonetheless, we are positioning ourselves as a leader in enabling that change. So then, Rob, to your question then about what we see around new energy vehicles, Well, let's make the distinction here between EV and new energy. So a lot of governments around the world see new energy vehicles, including BEV, plug in hybrid and other hybrid technologies. And we are building OEM portfolios by market that enable us to move at the pace that the market moves towards a zero carbon future. You can see that what we're doing in Indonesia, Rob, where we have a great partnership with Mercedes Benz and their new energy vehicles, and the same with what we're doing with Great Wall Motors where we're launching plug in hybrids and EVs into into that market. So the EV despite everything you hear about EV not growing, the reality is EV is absolutely growing at a slightly moderated pace.

42:12 Many of our markets will take hybrid on that road to EV, and then you'll find INCHAPE leading in that regard. Very good. Thank you. Question for you, Adrian. Can you give a sense of the outlook for net debt and leverage, and what are the key drivers there? Sure. Look. And and it's a really big first half for us, and the the acquisition cash flows that we're gonna see from the disposal of The UK is gonna put a substantial change through the debt and leverage line. So let me just orientate us where we are. So we started the year with about £600,000,000 of net debt. That was leverage on an EBITDA basis of about point eight. As we roll through into the second or the end of the first half on an organic basis, we generated over 200 or £226,000,000 of free cash flow.

43:09 We paid out about a £100,000,000 in dividends, and our net debt fell from that £600,000,000 to just over £520,000,000. And that was leverage of point seven. So the business is generating cash. It's it's optimizing its working capital position, which is helping to drive cash flows over and above our normal rates, which is normally between 60 to 70% of operating profit. So we're tracking above that. So we've done that organically. Now we've talked about the disposal of The UK. That that transaction is expected to complete imminently, and that would see us receive proceeds of about £350,000,000. And that will take a substantial portion of the £520,000,000 that we closed the first half with off of the balance sheet and take leverage down to around point two, somewhere in that order of magnitude.

44:08 And as we look out a little bit further on, the cash generating capabilities of the group will continue. We've obviously announced the share buyback, which we expect to the end of quarter by the end of to complete by the end of quarter one. So I expect us, this group, to continue to demonstrate a resilient and positive cash position and close the year in a very strong net leverage net debt position. Thanks very much. A couple of questions on Durco. The first is around, can you give a sense of where you are in terms of progress on integration and synergies? And the second question is around management retention. Have managed to retain the people within that business? Okay. Rob, I think I should take that.

44:54 So in terms of where we are with integration, we are on track with the integration of the two businesses. I gave some examples before about what we're doing in that in that regard. And then in terms of our synergy program, we originally said we would see $40,000,000 of cost related synergies in the Durco business. We've since upped that to 50,000,000 and we are on track to deliver that. And we're also seeing some revenue synergies come through with new OEM wins and being able to expand OEM coverage in markets we are in. I have said previously in terms of retention of key people, we had one regretted loss as we brought the two companies together in the very senior management ranks, and we've continued to have the right level of retention of those resources. And in fact, the retention of our people in Latin America matches what we see across the business overall.

45:47 So I think we've done a nice job of integrating the Durco and INCHAPE businesses in The Americas, and for that matter, our our other acquisitions too. Thank you. Question to you, Adrian. Will the working capital requirements of the business change following the disposal of The UK retail business? Good question. So so working capital is obviously a very big focus for us as as a distributor. To be very, very clear how this works is we are we are taking stock from the manufacturers at the factory gate, and we are managing that route to market all the way through to the retail networks and into the consumers around the world. And we do and our working capital cycle is made up of inventory, but also the trade terms against with which against which we pay for that inventory.

46:37 They're the two big components. Now The UK was broadly at a neutral level from a working capital perspective. So it'll neither have a positive nor a negative impact on our working capital requirements. Progress we've made in the first half is a credit to the teams around the world, and it was a distribution improvement in in terms of its in power inventory cover and the progress we've made in that regard. So obviously, The UK disposal won't materially impact how we think about working capital. Thank you. And and one more for you, Adrian here. Contract wins, a good performance this year and last year. Yeah. How long do these contracts take to contribute in BimTier in terms of profitability?

47:22 Yeah. Very good answer. On the May 23, we did a in the driving seat webinar which set out, firstly, it was a real sort of deep dive teaching into into how INCHAPE works. And one of those sections was how to how to think about the maturity curve of a contract win. Now in reality, all contract wins are slightly different. But when we step into a contract win, and Duncan's mentioned before that we signed in the first first half of this year, we we step in with an intent to get a certain level of market share. Typically, that's in the low single digits. And that typically takes us somewhere between three to five years. So the first couple of years, we're really using that time to build out the retail network, leveraging our third party networks.

48:10 We're really working out how the consumers in that market are gonna respond to the products we're bringing in from those new OEMs typically. And then in year three to year five is the period of scaling, and that's where you start to see volumes really pick up. And that's where towards the end of that, you start to see see those businesses operate in an accretive way to that market because you are really leveraging the fixed infrastructure that you have got. And as Duncan's mentioned mentioned this slightly earlier, we see real operating leverage and a real inflection point when we get above 10% market share. And contract wins are a great great way for us to get there without having to acquire businesses and pay goodwill.

48:55 Fantastic. And this is the final question for you, Duncan. And if I may, if you after after you finish answering this question, please, Samad. Can you just discuss the future opportunities with commercial vehicles and other new potential sectors away from passenger vehicles? Yes. Sure. Thanks, Rob. Look, we've been very clear about our Accelerate strategy, which our number one priority was to grow our passenger car business in our major markets around the world and enter new markets. We've been very successful at that and our number one priority continues to be driving our passenger vehicle business in our markets to gain scale. That said, there is absolutely an opportunity in a business model that is very similar to the core passenger passenger car market that we have today. It's very similar. We have an opportunity to grow further share this time in light commercial vehicles, such as vans and utility vehicles.

49:52 And in fact, we announced the deal I I mentioned earlier on the one in Australia with Photon is an example of of that. So we have an opportunity with core OEM partners like Toyota in their light commercial vehicle business. We won a contract earlier this year with Ford in Estonia, and you will know how powerful Ford is in commercial vehicles. We have an opportunity to expand our addressable TIV and continue to grow the INCHAPE company. So let's sum up. First of all, thank you very, very much for attending our webcast today and for the questions. I appreciate it very much. Our company is in good shape as we exit the first half. And as of tomorrow morning, we end up a pure play distribution company with another $350,000,000 of cash turning up pretty soon after.

50:44 We've had a resilient first half performance, whether you look at our performance in terms of cash, our balance sheet, or where we are with growth and profitability. We've closed more distribution contracts in the first half, with more to come. We've increased and accelerated our share buyback, and we remain very well positioned for growth, both organic and through contract wins and through bolt on acquisitions. Thank you very much indeed. Fantastic. Thank you very much indeed for updating investors today. On On behalf of the management team of INCHAPE PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.