TIDMPDG
RNS Number : 7383X
Pendragon PLC
02 September 2020
Pendragon PLC
("Pendragon" or the "Group")
Strategy update
(Issued 2 September 2020)
Pendragon today announces its strategy to "transform automotive
retail through digital innovation and operational excellence" with
financial targets intended to restore the Group to sustainable
profit growth and deliver attractive returns for stakeholders. The
Group is targeting an underlying PBT of GBP85-90m by FY25.
Covid-19 response
The Group responded swiftly and effectively to the Covid-19
pandemic, underpinned by the actions it took to minimise cash
outflows during the enforced closure period, as well as the support
received from the government programmes, such as the job retention
scheme and rates holidays. The Group also received support from its
OEM and funding partners, in particular with regard to stock
funding. During the national-lockdown period, the Group actively
advanced its digital and fulfilment capabilities, adding both
online payment functionality and a home delivery proposition. As
the business began to reopen, the Group sought to make permanent
efficiency gains, accelerated the right-sizing by both closing-down
stores that had no pathway to sustainable profitability and
reducing the size of the overall workforce whilst maintaining the
capability and capacity to deliver to customer demands. Together,
these efficiency gains will deliver c.GBP37m of annual benefit.
Strategy review and transformation programme
The Group had commenced a strategic review prior to the onset of
the Covid-19 pandemic, and over the past few months we have now
completed a comprehensive review of both external market dynamics
and business performance of our individual divisions. The current
landscape for the sector has been assessed, considering the pace at
which we expect the market to recover, how we expect consumer
habits to evolve across both physical and digital channels, and how
best to utilise the core strengths and advantages that the
Pendragon model possesses in order to transform the operational and
financial performance of the Group.
We believe there is a strong case for change and a significant
opportunity for upside in profitability and the Group is well
positioned to deliver transformational performance. To fulfil this
potential, we have identified three strategic priorities:
1. Unlock value in the franchised UK motor division
2. Grow and diversify Pinewood
3. Disrupt standalone used cars
1. Unlock value in the franchised UK motor Division
There is a material opportunity to improve performance and
unlock significant value in the franchised UK Motor division
through actions to:
-- Accelerate digital innovation
-- Drive operational excellence and embed consistent best practice
-- Operate from a lean and efficient cost base
These initiatives have been designed to drive improvements in
used car margins, aftersales profitability and operating cost
efficiency.
Accelerate digital innovation
The pandemic has driven a shift in UK consumption habits with
consumers adopting new digital, and low-touch activities. We
responded rapidly by strengthening both our digital and home
delivery capabilities during lockdown so we could continue to
trade. Whilst we fundamentally believe that there will always be a
major role for bricks and mortar in vehicle purchasing, we expect
these shifts in consumption habits to be permanent and that better
digital and fulfilment experiences will be necessary to augment
physical retailing. We are focused on delivering a number of
initiatives to drive performance through digital innovation.
We will improve the platforms on which the business operates by
building internal technology to provide improved and consistent
customer relationship management systems (CRM). Improved CRM will
allow us to create a single-view of the customer in order to drive
targeted performance improvements at customer touch points, such as
personal contract purchase (PCP) renewals and aftersales
activities, and by providing better resolutions to customer
feedback in order to improve satisfaction and long-term retention
rates. We will also develop the look, feel and functionality of our
digital channels.
We believe that there is material potential to improve used
vehicle gross margins through the development and introduction of a
used vehicle acquisition and management platform. By utilising the
Pinewood DMS system, we will build capability to utilise data to
improve the processes for vehicle acquisition, removing manual
processes, improving the efficiency and thereby enhancing the
margin we achieve from used vehicle inventory. We will also develop
automated inventory management capability to reduce, through better
use of data, the average number of days vehicles are held in stock,
which will also improve margin. Finally, we will develop dynamic
used pricing capability by harnessing both internal and external
data to optimise the pricing of used vehicle inventory in a
timelier manner. Each of these improvements will drive higher
margins.
Drive operational excellence and best practice
There is further opportunity for us to improve performance
through better operational practice, driving efficiencies. We are
developing focussed internal reporting to drive insight into
performance into areas such as vehicle preparation efficiency and
sales force effectiveness. These improvements will also reduce
costs, and improve margin profitability.
In addition, we have identified a series of opportunities and
initiatives to drive substantial improvements to aftersales gross
margin. These will include improvements to the store process, for
example conversion rates of customer vehicle health checks, in
order to improve technician productivity. In addition, we will
introduce changes to improve cross-business consistency in the
application of labour charge-out rates and use new system
capabilities to both improve penetration rates on service plans and
dealer guarantees, together with the introduction of new ancillary
products.
Finally, we believe there is opportunity to deliver improved
performance in the sale of finance and insurance products through
both improved internal operational systems and increasing product
availability through digital, customer facing, channels.
Operate from a lean and efficient cost base
We have made significant changes to our store and regional
operating teams in order to right-size the model and to embed the
efficiency gains we have delivered during the Covid-19 pandemic,
which will deliver c.GBP37m of annual benefit. In addition, we
believe there are further cost base efficiencies we will be able to
unlock across the property portfolio, through the replacement of
manual process with systemic solutions and through reviewing
existing key contracts and services.
2. Grow and diversify Pinewood
Pinewood is an established, market leading 'Software as a
Service' provider. It offers a dealer management system (DMS) and
customer relationship management tool, and has delivered revenue
growth at a compound annual growth rate of c.10% over the past five
years, driven by an increasing number of users, and high customer
retention rates. Pinewood offers a full suite of omni-channel
capability that manages customer leads and enquiries from various
digital physical and channels, quickly combines vehicle sales
proposals for digital presentation to customers and manages the
end-to-end aftersales operation. In addition, the DMS offers a
fully compliant accounting module for its customers and the DMS
dashboard is integrated with more than 50 OEMs. Pinewood's customer
base had historically been UK based, with an increasing number of
international customers now being added. We believe that Pinewood
has significant further growth potential through:
-- Delivering the material existing order pipeline
-- Further geographic expansion
-- Digital product extension
Deliver on the material existing pipeline of orders
Pinewood has a developed pipeline of customer orders which will
be converted over the next 18 months. This will continue the growth
in the overseas customer base, with existing orders adding c.80% to
the current international customer base and c.10% to the overall
customer base.
Geographic expansion
In addition to the existing orders, Pinewood will invest in the
capability to develop further orders and deliver subsequent
implementation to a wide global customer base. Existing
relationships have the potential to unlock further orders from both
dealer groups or from OEM backed solutions to be the single
in-market DMS operator. We believe Pinewood has material
opportunity for growth through these international channels,
underpinned by a compelling proposition.
Digital product extension
Digital product extension will initially be an enabler for
Pendragon performance across the previously highlighted areas such
as CRM improvements, dynamic pricing tools and used vehicle
acquisition and management platforms, but it is further envisaged
that these products will be available to sell to the existing
Pinewood user base, creating a new revenue stream for Pinewood. In
addition, we will explore the development of a digital 'turn-key'
retail solution for other dealer operators.
3. Disrupt standalone used cars
We believe the UK is the most attractive used vehicle market
globally, with a ratio of over three used vehicles sold for every
one new. The overall market for used cars is around eight million
cars sold per annum. Based on the desired age and mileage profile
for the market our target market, we believe there is an
addressable market for Pendragon of around three million cars per
annum, which is larger than the total new car market.
We also believe that Pendragon is significantly advantaged today
against its peers, with an ability to leverage the complementary
attributes of the wider Group to provide a steady source of
suitable stock, an ability to source parts for preparation at scale
advantaged pricing, a high level of brand-referrals within the
Group and cross-Group technical ability. In addition, the data
capabilities we plan to build will allow us to leverage further
scale advantages into a standalone used car proposition and drive
higher margins.
To capitalise on this opportunity, we will deliver:
1. Rebranding of the standalone used car proposition
2. Differentiated value proposition
3. A scaled physical estate
Rebrand the standalone used car proposition
Work is currently in progress to develop an appropriate brand
identity to reflect a digitally-led product offer, supported by
physical outlets. This will replace the existing Car Store
brand.
Differentiate the value proposition
In addition, we will determine the revised customer proposition
and operating model to underpin the repositioned branding in order
to differentiate the proposition from the franchised used car model
and to appeal to a broader customer base, both physically and
digitally. The used car proposition will benefit from clear
operational separation of the business unit from the franchised
model and will not be encumbered by the same OEM facility
requirements. It will, however continue to benefit from the Group
synergies and future digital product development.
Scale the physical estate
During FY19, the Group reviewed the existing proposition and
closed a number of Car Store locations that were not viable, and
improved the performance of the remaining estate. The next stage of
the development of the physical used car proposition will be the
creation of larger-footprint, purpose-built facilities in targeted
locations to provide both stocking points, customer retail and
collection points and fulfilment hubs for home delivery. Over the
next five years we are targeting the development of eight physical
locations at an approximate capital cost of GBP7.5m per location.
We believe that a combination of a digital proposition and these
physical stores will allow us to gain a meaningful share of the
target market.
Summary and financial targets
The Group is well positioned to deliver its three strategic
priorities for growth and transformation. There is significant
opportunity to unlock value in UK motor, to accelerate Pinewood's
geographic expansion and diversification into new products and to
disrupt standalone used car sales in the UK. We have created a
roadmap to deliver our target underlying profit before tax of
c.GBP85-90m by 2025 and a target underlying profit before tax
margin of c.2%. We believe this an ambitious plan, but is
achievable through the delivery of the initiatives we have set
out.
Bill Berman, Chief Executive Officer, said;
"We firmly believe the three strategic priorities set out today
will provide a platform to transform the Group's performance,
leading to sustainable profit growth and delivering attractive
returns for our shareholders. Critically, our strategy is designed
to equip the business to react to changing consumer patterns in the
years ahead and ensuring, in particular, that we are well
positioned to take advantage of digital innovation.
"Pendragon has grown to become a leading motor retail group with
a strong network of dealerships. Throughout my years in the
automotive industry I have seen, and responded to, major shifts in
consumer habits and market dynamics. I am confident we can unlock
the full potential of Pendragon by delivering targeted improvements
to our people, our systems and our operations. We look forward to
executing this strategy and embarking on an exciting new chapter
for Pendragon."
A presentation for analysts will be held today at 10:30am.
Please contact pendragon@headlandconsultancy.com to register for
the event. A recording of the presentation will be made available
for on demand viewing on Pendragon's Investor Relations website
once the meeting has concluded.
Pendragon will report its results for the first-half of FY20 on
24 September.
Enquiries
===========
Henry Wallers Headland 07876 562436
Jack Gault Headland 07799 089357
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