Company ‘resetting foundations’

Paul Millward has been resetting the foundations of 2 Cheap Cars since he joined the business as chief executive officer at the start of this year.

First up, the company appointed new auditors, secured a new finance facility, and reset its strategy to focus on the core vehicle-retail business and to act as a finance agent. 

“The rationale for this was simple – focus must be on what drives value for shareholders and what we do well, and that’s retailing affordable cars,” Millward, pictured, told attendees at the company’s annual shareholders’ meeting. 

“We already have great, profitable third-party finance and insurance solutions, so the NZ Motor Finance loan book remains in run-down mode with the business collecting receivables to recoup investment.”

Reflecting this new focus, NZ Automotive Investments Ltd (NZAI) as a corporate brand was canned earlier this year and replaced with 2 Cheap Cars Group Ltd.

“We’re privileged to have a strong brand, and it makes sense to connect with and leverage that brand at every single point,” Millward said at the meeting in Auckland on September 28.

“We now have a six-point strategy to execute and our commercial success has come about from total focus on what matters. 

“Firstly, we are continuing to strengthen supply-chain operations. Our Japanese-based procurement team is an important part of this. 

“We’re also undertaking some entry-compliance activity in-house, which delivers great cost savings and stronger supply-chain control. This means we get vehicles onto yards quicker, which then drives sales.

“Taking on additional shipping partners has meant inventory levels are no longer being impacted by shipping constraints. In short, the more we do in-house, the more we can manage our value chain.”

He added that fully electric and hybrid-electric vehicles (HEVs) have continued to be a sweet spot for 2 Cheap Cars (2CC) and accounted for 41 per cent of total sales in the 2022/23 financial year – up by 65 per cent over the previous corresponding period.

“Our ability to source quality hybrids in particular is a strength, and we’re proud year-to-date sales of EVs and hybrids have reached 52 per cent of total sales,” Millward told shareholders. “We’re confident pain at the petrol pump will continue to make EVs and HEVs an attractive proposition.

“Our approach to retail is to grow our footprint, but sensibly and over time. We are focused on strengthening a national dealership that fuels profitable growth.”

Gross margin expansion is 2CC’s key metric for success. It aims to achieve this through continuing to increase finance-and-insurance penetration, accelerating digital capabilities and ensuring it has “the right cars in the right places at the right prices”. 

Millward said: “Our intention is to prioritise margin over market share. Scale is still important in a low-cost retailer, but delivering profits is what will create value for shareholders. 

“In the digital space, sales via our website are healthy and we’ve made good progress refining our end-to-end online buying process. But there’s plenty of upside still to be had by simplifying the digital platform and executing on customer feedback.

“Behind the scenes, we’re working our CRM system a lot harder to take every sales opportunity. We have a great reputation and a strong social media following that we can leverage more. This is an area that can deliver for us with stronger focus.”

Market dynamics

Millward told the meeting that 2CC had a clear strategy with the brand being well-positioned to take advantage of current market conditions. 

“While used-car availability is generally improving post-pandemic, shipping issues remain and 2CC has the advantage of now using multiple shipping partners to support consistent delivery and strong inventory. Our inventory is back to where it should be.

“More generally, New Zealand is in a cost-of-living crisis, climate change is creating weather events causing vehicle damage and the national fleet is ageing. 

“The upshot is that car repairs are increasingly uneconomic, new-vehicle sales are under pressure and we’re seeing an increased demand for used cars in the $8,000 to $12,000 bracket, which is where 2CC is positioned. 

“In terms of competitors, we continue to see the numbers of registered dealers decline and there remain significant barriers to import at scale. 

“Simply put, the 2CC strategy – coupled with our scale, brand and market dynamics – paints a positive picture for the future.”

Retail footprint

2 Cheap Cars’ strategic property plan “will drive profitable growth through new and better branches in the right locations”.

Millward explained: “We need to be strong where it matters most. For us, that’s largely in big urban centres and specifically Auckland where we have seven branches. We have nine per cent market share in Auckland, but the scale of the city means we have further opportunity. 

“We’re also doubling the size of our Christchurch yard where we see potential for an expanded dealership in a market that’s significant and where our share is low. We recently closed our Napier branch – not because it was unprofitable, but because there are better opportunities for sustainable scale growth. 

“Over the next three years, you will see 2CC focus on a two-tiered site strategy with mega and satellite sites depending on the scale of the geographic opportunity. The rationale for this is that additional sites require low overheads to run and, given our business model, new yards require minimal capital investment.”

Stacking up numbers 

Millward said the company’s ambition is for $6.5 million in net profit after tax (NPAT) for the 2025 financial year.

“We’ve made good progress getting this business back on a strong footing with record profits looking likely based on current guidance. We’ve broken quite a few records this year and that’s something we want to keep doing. 

“Provided we execute on the strategy – and assuming foreign exchange, supply and regulatory stability – we’re confident this is a realistic and achievable figure.”

Highlights from 2CC’s 2023 financial year included its full-year revenue and income increasing by 25 per cent to $82.7m. 

Non-recurring costs of $1m associated with board and management changes included in 2022/23 and a one-off lease gain of $0.9m in 2021/22 saw NPAT fall to $1.3m from $2.6m in financial year 2022. Underlying NPAT, excluding the non-recurring costs, rose by 18 per cent to $2m in during 2022/23.

Underlying earnings per share climbed from 3.7 to 4.4 cents. Net operating cash flow, excluding lending, improved to $10.9m – up by $0.6m on the same period in the previous year. Total vehicles sales increased by 6.1 per cent, while market share reached 4.5 per cent.

“As you will be aware, the board took the prudent decision to retain capital and no final dividend was paid,” said Millward. “However, we are anticipating recommencing dividend payments at the half-year. 

“In the fourth quarter [of 2022/23], it became obvious that decisions taken to stabilise the company were beginning to impact results. 

“Underlying NPAT in the fourth quarter was $0.8m representing 40 per cent of the full-year profit. Retail contribution margin was $3.8m, up by 18 per cent on the prior quarter. We’re pleased this trend has accelerated into the first five months of financial year 2024.”

Millward, who joined 2CC in January as its new chief executive, added: “It has been rewarding to be part of the transformation that was needed. I want to acknowledge my team for all their hard work, which has started to create a far more valuable business. 

“I’m enjoying the challenges of transforming this business, and I’m passionate about seeing it reach its significant potential for our shareholders and staff.”