MT Interview: Trevor Finn, CEO Pendragon

Pendragon CEO Trevor Finn is one year into a business strategic review, pushing hard on used cars, making specific investment cuts in its premium business and selling off its US arm

In October last year Pendragon under CEO Trevor Finn announced a strategic review committing itself to reshaping the business, making specific cuts in premium brand outlets, expanding its used car and aftersales business, selling off its US division for £100m and expanding the Pinewood software and DMS business. For a CEO who has been heading up a plc for over 25 years, it raised ripples in the sector.

By making these changes Finn argued that he would give better value to its shareholders. So, one year on, what has been achieved? Its latest results saw a weak performance in its UK motor division with pre-tax profits down 42% to £27.3m on turnover up 0.2% to £2.47bn for the half year to 30 June.

On the premium side the company has made a number of moves, much of it the result of the £1bn restructuring taking place in the Jaguar Land Rover (JLR),network driven by the carmaker. JLR has been seeking, whenever possible, to get common ownership of the two brands in each market territory. The result is fewer dealers operating the two brands in larger market territories. As a result in July Pendragon sold Jaguar and Land Rover dealerships based in Doncaster to JCT600 for an undisclosed sum. It also disposed of Land Rover and Jaguar businesses in Cheltenaham. But it is not one-way traffic. Pendragon has also gained business and is set to begin the development on a new Jaguar Land Rover dealership in Newcastle

There is some history here. Back in 2008 in the financial crisis Pendragon was the biggest Land Rover player in the UK. The JLR restructuring has enabled it to divvy out the franchise to more players and reduce its reliance on any given dealer.

“The broad picture is there was consolidation with fewer Land Rover dealers. We were the largest and are now one of the top three or four. For others to get bigger we had to get smaller. We are relaxed with that,” said Finn.

There have been other moves in the premium sector, notably with Rolls-Royce. In June 2017 Pendragon announced that it was to represent Rolls-Royce for the first time, in Leeds. Then Finn said: “We feel it important to also continue diversifying our business, and believe our partnership with Rolls-Royce presents an excellent opportunity for this, whilst also delivering further growth for both parties.”

Fast-forward to September this year and the story had changed radically. It was JCT600 who is to open in Leeds. Why the change?

“We were not comfortable with the viability of the return on it. That was the bottom line for us. We would have had to do a standalone investment for it and the economics of it with everything going on in the market. We thought it was probably not the time to do it now,” said Trevor Finn.

I asked Finn what changed between Pendragon making the decision to invest in Leeds and the subsequent change of tack. He said the planning for dealer investments is lengthy and requires commitment over the medium term.

“I think the whole economic backdrop is not as favourable as it was two years ago, if we are referencing two years back. The economic backdrop and the car business is not as positive as it was,” said Finn.

So is Pendragon also going to reduce its presence with other premium brands?

“I think that would be a misunderstanding. It is very specific situations; a lot of it is centred on the JLR dynamic. We agreed what we were going to do with JLR and we are executing that. It is primarily geared around the JLR network,”he said.

I asked Finn if on the premium side its message was clear enough or were some brands getting nervous with the strategy?

“We talk to everybody very clearly and we are where we are from the investment point of view. Where the commercial reality supports

an investment, we make an investment.”

“So, we have opened lots of refurbished facilities in the last three to four years so. We are an investor in the space if the economics work. We are not out there looking to buy more new car dealerships and we are actually happy with the size that we are,” he said.

The big part of the strategy overhaul at Pendragon is in used cars. Three years ago it announced that it planned to double its used car revenues by 2021 adding 40 stores to the business using existing and new sites. The company has also opened to industrial used car processing refurbishment centres and plans two more, giving it capacity of 80,000.

Earlier this year the group has appointed Chris Caygill as its used car director, an operational role, to head up the rollout and delivery of its used car business. Caygill has been working in retail and distribution for the past nine years behind the scenes. Before that he was with Porsche Retail Group for eight years as general manager responsible for the factory-owned retail sites within the UK. Previous roles included managing director of the Car Group.

The network continues to expand as Pendragon rolls out Car Stores across the UK and builds industrial scale refurbishment depots.

“In the first half of this year we opened three additional Car Stores in Shrewsbury, Ipswich and Norwich and will be continuing to open Car Stores, in Carlisle and Perth. These two have just recently been granted planning,” said Finn.

What is the biggest challenge rolling out the Car Store chain? Finn cites Carlisle as a good example of the difficulties faced in rolling out a used car network. Nothing happens fast in the property development game he believes.

“The main thing is finding the site, getting planning, and building it. The gestation of that is at least a year, working 18 months ahead of reality is the most difficult thing to manage,” he said.

So, Pendragon is expanding its network of Car Stores. It is not alone. Sytner has also grown its used car business with the acquisition of Car Shop. All the big dealer groups are eyeing the used car market for growth. Finn, though, does not believe the competition is getting more intense, but that the bigger players are gaining market share at the expense of the small independents.

“The competition is changing by the day, I would not say it is getting more. All it’s doing is changing. The smaller independents are the ones who are losing volume to the larger players, which would include ourselves. If you look the MT Top 50 independent Dealers the larger players are growing,”he said.

Does Finn see what he is doing in the UK as based on the US model, Carmax for example? Does he have any particular model in mind?

“Carmax are clearly the biggest player in America. From our point of view with the used car business and our plans, it is fair to say the plans are ambitious in terms of growth and roll-out. We have 26 outlets out there, which is probably moving us as an independent unit not dissimilar from some of the biggest players there. We want to grow, that is the goal at this stage in the game,” he said.

The strategy overhaul also includes the sale of the US business for an estimated £100m. The profitable business operates from franchise points representing Chevrolet, Jaguar and Land Rover. In July it sold its Aston Martin business in the US for £3.1m and the disposal process for the rest of the US business is underway.

The announcement of the sale of the US business came as a surprise. Just three years ago Pendragon had wanted to expand further in the US with the purchase of a Lexus business in Glendale, California, a deal which fell through. So, why the change in strategy now?

“It was potentially confusing for people who were saying ‘Wait a minute you are expanding the franchise business in the US and in the UK you are saying you are expanding in the used car business,’” said Finn.

Finn argues that for some there appeared to be a disconnect between Pendragon expanding the franchise business in the US but not in the UK, where it was pushing its used car operations.

“The sale of the business will make it simpler for people to understand the strategy and what we are about,” he said.

The group also has plans for its Pinewood DMS and software business to grow abroad. It recently signed up Hyundai dealers within the Dirk Barten Group in the Netherlands to use its DMS.

The Pinewood business enjoys high margins compared to car retailing. In the first half of 2018 Pinewood had revenues of £8.4m and operating profits of £5.6m, giving an operating margin of 66.7%.

Is Pinewood something Finn wants to grow with a potential sale of the business on the horizon?

“It is a good company and our plan is to grow it as big as we can as fast we can because that will drive its value and the value of Pendragon,” said Finn.

As a listed company Pendragon always has to answer to its shareholders, notably the activist investor Teleios Capital Partners, and Odie Capital Partners.

What impact is this having on how the company strategy? How does this manifest itself in terms of how Finn is running the business?

“We speak to them and to all our shareholders. The big three are obviously more – I won’t say knowledgeable – but they are more in tune in many respects with the big picture strategy.

“They bought into the strategy of the company and understand what we are trying to achieve. So in that respect they are very supportive strategy-wise. An activist investor is one who buys into under-valued companies. Their ambition and whole ethos is to buy into situations that are under-valued. Being an investor is helpful in its own right because we both have a common interest to get the value of the company up.

In that respect they are no different from the other investors.”

And so we come to Brexit and the impact it is having on the UK motor sector. For Finn, the matter is largely out of his hands.

“There is not much we can do about whatever is decided and where it lands. Because we deal with international companies a lot of the risk is absorbed by them, like currency.”

And then there was WLTP. Pendragon like all dealer groups has had to contend with WLTP and the 1 September deadline with some carmakers facing supply shortages while others manufacturing cars right up to the deadline, requiring dealers to self-register them to comply with the WLTP regulations.

“The OEMs are all in very different places on this. Some have got too few cars, some have too many and some have the wrong cars,” said Finn. It is very difficult to see the out turn until the dust settles at the end of September and into October. It’s tricky.”