The car sales classifieds disruptor

Cameron McIntyre is the CEO of Carsales.com.au, the big disruptor in the car sales classifieds business in Australia which has expanded into Latin America and Korea and obviously had a fantastic year last year, not so good this year, the margins are under a bit of pressure. The main thing about Carsales is that it’s expensive and the question is, can investors continue to get the sort of growth that they’ve been getting over recent years? Their PE is 28.7 on a trailing basis and their yield is 2.9%. Obviously, you’re not going to buy them for the dividend and if they can continue to get the 25-30% growth that they have got in previous years, then obviously 28 times PE is okay. 

But that is the question and the business is maturing now, so the question for Cameron McIntyre is what sort of growth are you going to get and where are you going to get it from?  

Here’s Cameron McIntyre, the CEO of Carsales. 

Cameron, the origins of Carsales was the relationship with the dealers I think and I just wonder whether over the years it’s changed in any way?  I mean, it’s still primarily a dealer outlet, isn’t it? 

Yeah, dealers are still our primary customers.  We have thousands of dealer customers not just here in Australia, but around the world, and they’re certainly the heritage of the business and the core of the business.  But outside of the dealers we also serve private sellers, as you know, and we have about 80,000 private sellers trying to sell their cars at the moment on Carsales and in other countries around the world.  Then on top of that you’ve got the 60 or so car companies that are interested in selling their new cars and a site like Carsales is certainly a place where the consumers are, their customers as well.

In 2017, last year, you had a 50% increase in the share price, fantastic year, $10 to $15 I think.  This year, not so good.  I mean, the share price has come down a bit and I just wondered to what extent this is a margin story?  In the latest presentation there was a waterfall chart of margin, domestic business core business margin up 1%.  But it was in your investments area both international and domestically where your margins were under pressure and I just wondered to what extent the market’s starting to worry about those things that you’re doing in finance broking in Australia and also your international investments.

Yeah, I think if you go through that margin waterfall, our core business which is the largest part of our business by a long way and our domestic business – I mean, we still see operating leverage coming through year on year through that.  Margins continue to expand there and they’re healthy margins.  As a business, what we’ve been doing over the last several years is investing in what we call adjacent markets, so as you called one of those out before which was finance – that’s our Stratton Finance business, but there are others too.

We have a company called tyre sales which is an e-commerce platform in the tyre retail market.  We have an inspection business called Redbook Inspect and so on.  These are all high growth businesses but they’re not in the same sort of category as our core advertising business and the margins that we generate from those particular companies are lower but they’re higher growth companies in their own right.  It’s a sum of the parts in terms of – these are great opportunities for us as an organisation to continue to expand and the impact on margin is slightly lower but they’re great businesses. 

But just focusing on the core business for a moment, the domestic core business which obviously is the most important thing, the waterfall chart shows 46.6% margin FY17, up 1%.  We’re talking 47.6% margin there which is huge.  That’s a phenomenal margin and so the question I guess just looking at that core business, are we looking at a mature business that can’t really grow much faster than population growth and GDP anymore and really, you’re not going to get much past 50% margin, are you? 

No, look, we don’t see it that way.  I mean, if you look inside the core business and you go through each of the segments inside it, our private seller business is a story of continued growth, but not just through volume.  Obviously, having the sort of market share that we do today, it’s harder to attract greater volume but in terms of the way we package, the way we price, there’s still significant upside there.  We see opportunities in the dealer market sill to improve our customers’ businesses and to grow again through margin growth and through better product. 

We have a relatively small market share in terms of display when you consider how much OEMs spend on advertising their new cars.  The core business itself, we certainly don’t see as mature and the sort of growth that we generate through there consistently is helping.  

Really?  What sort of revenue growth do you think you can get now?

Well, again, if you’re looking at the half-year numbers and you’re just looking at the Australian domestic business and our online advertising components of that, I mean our dealer business grew by 7%, our private business grew by 20%, display business grew by sort of 4%.  They’re all healthy growth numbers.  Data business grew by 7% as well which is again a core component of what we do day in day out.  There’s still good growth that we’re generating through the top line there through those core businesses.

Okay, let’s just turn to international.  You focused on Latin America and Korea, why did you pick those?  Did it just kind of come up that way or did you go about choosing that?

The strategy to start with was to look for high growth markets, for markets where we could leverage intellectual property and our technology through, to look for markets where we could find partners that we could work with and to find businesses where they were a number one in their market.  Because in the online space the most profitable businesses tend to be the market leaders.  The chips sort of fell that way to some extent.  The Latin American opportunities we’ve had with WebMotors and Chileautos and so on, a part of that’s been about us going out and finding those. 

The SK Encar business that we’ve now got in Korea, they came looking for a partner back in 2010, so we’ve been working for those guys for quite some time.  It’s primarily about looking for high growth markets where we can leverage our intellectual property and technology.

Did you make a decision not to attack the US market?

Yeah, a pretty conscious decision, Alan.  I’d have to say the US market is a large market, but in terms of opportunity if you look at the things that we’ve done already, we’ve placed some reasonably small bets in high growth markets.  To place the same bet in the US market and tick all the boxes that we have particularly around finding the right partner and finding the number one player, you’re sort of going to be betting the house on it and I guess from our perspective we go, well it’s a far better use of our capital to look at high growth markets in other areas, other parts of the world where those markets are still substantially larger than our market here in Australia.  Brazil, for instance, outside of recession should be the fourth largest car market in the world.  They do 4 million-plus new cars a year and about 11 million used cars a year.  When you compare that to the likes of Australia, we’re doing 1.2 million new and about 3 million used, so there’s real scale opportunities in some of these offshores and it’s about making sensible decisions, not betting the house and being able to leverage our IP and tech.

A market like Brazil, what’s the pricing and margin situation like?

It’s fairly similar to what we see here in Australia but it’s been evolving.  The last sort of 18 months we’ve made some changes to the way our product functions inside that market.  They’ve moved from a subscription based for the core customer being the dealer to more of a performance based approach which is better for everyone.  Margins have been accelerating, so they’re not as high as what we see in our core business today but they’re getting there.  So you’re sort of talking about a 36% EBITDA margin there at the moment. 

That’s right, that 36% margin is quite a lot more than it was the previous year.  It was like 21% the previous year.

Yeah.

Is that because of what you just described, the change to a performance based mechanism?

Largely, absolutely.  The customers pay us for the opportunities that we’re delivering to them to sell cars as opposed to just a straight subscription based model.  That’s certainly one of the key drivers.  Other drivers – we’re focusing a lot more in terms of private seller, as we do here.  We’re focusing more on display advertising, again, as we do here.  It’s not one thing, there’s two or three things that are really driving that, but one of the keys is certainly that change in model for dealer.

And what’s the competitive situation like in Brazil and Korea?

We see two sorts of competitors.  We see vertical competitors which are competitors that are similar to us.  They’re focused on automotive as a vertical play in aggregation and classified advertising display, advertising, etcetera…  In a market like Brazil it’s a funny market, the vertical competitors tend to be owned by banks and in our case, we have motors in Brazil, our partner is Santander, the Spanish bank.  We’ll have vertical competitors and the horizontal competitors tend to be the likes of MercadoLibre, where they’re not just selling cars, they’re selling a number of different items. 

In terms of where WebMotors sits inside that competitive landscape, what you would normally find is with the horizontals they’ll be a little bit stronger in terms of private seller but in terms of dealer we’ll be much stronger and that’s how the landscape looks in Brazil.  We’re a clear number one in that market particularly with other vertical competitors.  In Korea it’s sort of similar.  Again, you have vertical competitors and horizontal competitors but the market dynamic is the same.  SK Encar is the clear number one in that market too. 

An investor looking at Carsales, should they think of you as being a potential global operator, is that what you’re investing in, that you can expand beyond those countries that you’re in or are we talking about just sticking with those countries?

No, we certainly see ourselves as a global operator.  The countries that we’re in now have been great for us.  At the moment it’s about scaling those opportunities, particularly in the Latin American countries.  They’re relatively new and young in their journey, it’s about leveraging the technology and the platforming of our technology properly into those markets and then continuing to look for more high growth markets in other parts of the world that make sense to us.  We definitely see ourselves as an international player.

Because there was an interesting report put out by Morgan Stanley in March looking at CarGurus which is the American one that’s listed last year and it’s now capitalised at USD$3.6 billion, which is obviously bigger than you because you’re AUD$3.6 billion.

Yes.

An interesting comparison in terms of the $3.6b, but anyway, according to this Morgan Stanley thing – and I don’t know much about CarGurus – they apparently have a lot of algorithms and AI that make the experience better for the dealers and the customers, the users of the site, by implication better than yours.  Have you been looking at what they’re doing and looking at emulating what they’re doing?

Yeah, we look at all potential competitors globally, we have strong relationships with other peer companies in other markets around the world so we talk to people all the time.  We’re aware of what all of our competitors are doing and certainly CarGurus is a company that we’ve watched over many years.  They do some pretty cool stuff in terms of, they provide some algorithms around pricing and whether the pricing that’s being offered for sale on a vehicle is a good price or a great price.  They’ll do things like seller ratings, 5-star rating, 4-star rating of a particular seller, etcetera, etcetera…  They’ve got some fairly nice features which are easy to replicate.

I think they were started by the people behind TripAdvisor…

That’s exactly right.

They’ve brought some of those interesting kind of ratings things into cars, which apparently are working?

Yeah, we have a lot of that data now, particularly around things like pricing and so on, and we survey consumers so we have a lot of data that we could effectively publish and do the same sort of thing.  We’ve watched them and watched them emerge and so on, they’re a good business in the US, we like some of the things they’re doing and we could potentially do them here too. 

I think Morgan Stanley’s concern was that – whereas you saw off both Drive and Carsguide in Australia, they challenged you about five or six years ago and you saw them off pretty much – that CarGurus are going to come at you again into Australia and make life tough for you here.  What do you think of that?

We’re certainly not afraid of competition, Alan.  We’ve competed against many, many companies over many, many years and we’re confident enough to be able to back ourselves and we know we’ve got the right technology and if we don’t we’ll certainly create it to ensure that we maintain our strong position that we have here.  But, certainly aware of CarGurus and certainly aware of other potential competitors and it’s about staying focused on what we’ve got to do but also keeping a good eye on where that competition could arise from.

CarGurus have moved into Britain, Canada and Germany.  Do you think they’re going to come to Australia?

I think it’d be naïve to assume that they wouldn’t at some stage, so I would suggest they possibly might, but it’s about us being in the right position at the time when they do, if they do, choose to come here to ensure that we’re in the right position to meet that competition as it arises.  I honestly don’t know but I would assume so at some stage.

Have you identified the next country that you will expand into?

I guess it’s about regions for us.  To answer your question specifically, the specific countries – no, there’s lots of countries that we’re looking at.  But the regions that we’re most interested in continue to be the Latin America regions, the Asian parts of the world whether it’s South East Asia or North Asia.  They tend to be the geographies that are most interesting to us just by way of the way the markets perform and the opportunity that exists for us in those markets.

Not Europe or North America, it’d be more South America and Asia?

Yeah, less inclined to be Europe and North America unless it was a specific niche opportunity that made sense to us.

Great to talk to you, Cameron, thank you.

You too, Alan, thanks for your time.

That was Cameron McIntyre, the CEO of Carsales.