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Edited Transcript of AUTO.L earnings conference call or presentation 7-Nov-19 9:30am GMT

Half Year 2020 Auto Trader Group PLC Earnings Call

London Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Auto Trader Group PLC earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine Faiers

Auto Trader Group plc - COO & Director

* Jamie Warner

* Nathan Coe

Auto Trader Group plc - CFO & Executive Director

* Trevor Mather

Auto Trader Group plc - CEO & Executive Director

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Conference Call Participants

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* Adam Ian Berlin

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Andrew Geoffrey Ross

Barclays Bank PLC, Research Division - Research Analyst

* Bridie Anne Barrett Schmidt

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Joseph Barnet-Lamb

Crédit Suisse AG, Research Division - Research Analyst

* Natasha Brilliant

Citigroup Inc, Research Division - VP

* Robert Berg

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Silvia Cuneo

Deutsche Bank AG, Research Division - Research Analyst

* William Henry Packer

Exane BNP Paribas, Research Division - Executive Director of Media Equity Research

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Presentation

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [1]

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Good morning, everyone, and welcome to Auto Trader's Half Year Results through the 30th of September 2019. Before handing over to Nathan and the team, I thought given this will be my last results as the Chief Executive of the company, I'd take this chance to make 3 high-level observations about the business that come through clearly in these results. Firstly, the core foundations of the Auto Trader business, which drives over 85% of our revenue, remain absolutely rock solid. Our market position and competitive moat remain strong, indeed have become somewhat stronger. Our customer base of retailers are growing despite tougher market conditions. Our strength in pricing remains, and our product innovation continues as can be seen through the results of our April 1, pricing event this year. We remain able to innovate despite keeping our cost base predominantly fixed. And of course, we have a very high return of cash flow to investors with almost 0 capital tied up.

Secondly, whilst there's understandable pressure on revenue from display advertising and from available stock in the market given Brexit uncertainties, the business has shown once more how resilient it can be in tougher macroeconomic conditions. And thirdly, given this core strength and resilience, our mid- to long-term growth potential from the continued digitization of the automotive ecosystem in the U.K. still feels extremely significant.

So finally, as I expected, Nathan, Jamie and Catherine have all been stepping up to both drive the success and continue the commitment to purposely focus on and extend from the core. The transition is proving almost seamless, and I'm confident that post March, I'll be watching this business continuing its prosperity from the outside.

Over to Nathan to go through the key highlights.

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [2]

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Thank you, Trevor, and good morning, everyone. I'm pleased to say that we've made a good start to the year. Our core business has performed well, delivering strong revenue and operating profit growth alongside gains in our competitive position against all external measures. We've seen continued growth in revenue at 6% mainly through strong growth in our core classifieds business, with revenue from retailers up 8%. Operating profit grew at 9%, and margin improved by 2 percentage points to 70%. The increase in margin resulted from a continued focus on costs, which increased by just 2% in the period and a contribution from our joint venture, Dealer Auction.

Basic EPS growth of 14% came through a 12% increase in net income and fewer shares in issue as a result of our continued share buyback program. I'm pleased to announce that we'll be paying an interim dividend of 2.4p, up from 2.1p in the first half of last year. Cash generated from operations was up 3% to GBP 133 million. This is a lower growth rate than that of operating profit. However, our cash conversion remained high at 98%. Jamie will further explain this variance in the financial section that follows.

And finally, cash returned to shareholders in the period was GBP 70 million through a combination of dividends and repurchase of shares. The amount of surplus cash generated in the first half was reduced as additional tax payments were made following a change in HMRC's payment profile.

In terms of key drivers, we continue to focus on the same priorities that underpin the health and sustainability of our core business. We are the U.K.'s largest automotive marketplace. Despite more competitors, we have grown market share of time spent and increased visits on an absolute basis year-on-year. Cross-platform visits increased by 4% to $51.2 million per month on average for the period, and engagement increased over 75% of total time spent across our full competitor set, up from 72% a year ago. Full-page advert views declined 6% following changes we have made to the site as we seek to improve the car-buying experience.

Retailer forecourts grew an impressive 1% year-on-year, predominantly from smaller retailers, which does have a dilutive effect on ARPR growth. In a market where conditions are undoubtedly challenging, the growth in retailers highlights the importance that our fragmented customer base places on Auto Trader.

Average revenue per retailer forecourt or ARPR grew by 7% or GBP 125 per month compared to the previous year. This growth largely came in products due to the monetization of our vehicle check and text chat products in April. We also continue to upsell customers to our Advanced and Premium advertising packages, which provide retailers with increased prominence on our marketplace, resulting in more sales and therefore, profits.

The number of cars advertised on-site increased 10% to an average of 481,000 for the period. Much of that was due to new car stock, which averaged 33,000 cars, predominantly on a free trial basis. Core retailer stock has proven its resilience, demonstrating that stock on Auto Trader is less cyclical than used car transactions, which, in turn, are much less cyclical than new car transactions.

We've also seen an increase in private stock following the launch of a new hold-until-sold package, which has seen strong takeup. And finally, the number of full-time equivalent employees remained flat at 798 for the period, a slight decrease as a result of us transferring 15 people to our Dealer Auction joint venture. The continued focus on our growth strategy and the acquisition of KeeResources, in October means we expect this to grow on a full year basis.

We're also making good progress against our strategy to improve car buying in the U.K. for the benefit of consumers, retailers and manufacturers. All of these areas will be covered further in the course of the presentation. However, at a high level, we've continued to grow our core through a product-led packaging event that also improves the buying experience for consumers while continuing to see a good uptake of our prominence products.

In October, we acquired KeeResources, a primary data source that provides what we believe is the most accurate data set for identifying vehicles in the U.K. We've also made notable progress in our adjacent opportunities. Our new car marketplace has grown over the past 12 months, and we are very pleased with the product, user growth and the outcomes our retail customers and consumers are achieving. As a result, we've commenced monetizing this and will continue to do so throughout this financial year and beyond.

Dealer Auction, our joint venture with Cox Automotive, has come a long way over the past 6 months and is looking to provide a great foundation for us to begin meaningfully growing our share of the 3 million car opportunity in the B2B marketplace.

And finally, we continue to work hard in the component parts of an online transaction journey for consumers, with our most immediate focus being on improving and digitizing the automotive finance space with our retailers.

I'll now pass over to Jamie to take us through the financials in more detail.

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Jamie Warner, [3]

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Thank you, Nathan, and good morning, everyone. Starting with revenue. We continue to see good top line growth, with revenue up 6%, primarily driven by our classified advertising products. Our core trade segment has been the key contributor, growing at 8%, which was largely driven by a 7% increase in ARPR and a 1% increase in retailer forecourts as customers focus on maximizing their exposure in a competitive market.

Also within trade, we have continued to see a decline in Home Trader pay-as-you-go listings, although this was partially offset by growth in other trade-related revenue. Consumer services revenue increased by 5%, which was revenue growth in C2C private listings. Much of this growth came through a change to our package structure and the introduction of a new higher-yielding hold-until-sold package. Lastly, we saw a decline in revenue from manufacturers and their advertising agencies, which was down 22%. Although this was largely in line with market trends, it was greater than we initially expected at the beginning of the year. Manufacturers are under pressure, with tougher economic conditions, which include the low rate of sterling and new emissions regulations, which have, in turn, led to a decrease in U.K. marketing and display advertising budgets across the industry.

Now on to ARPR, the key driver of our trade revenue. As Nathan said earlier, total ARPR has grown GBP 125 or 7% when compared to the same period last year. The good level of growth has been suppressed somewhat by a strong increase in retailers, many of which were smaller forecourts with a lower-than-average yield. Once again, the largest contributor to ARPR growth in the first half was products, which benefited from the products built and launched over the past 3 years.

Penetration of our Advanced and Premium packages continue to increase, ending the period at 21% of advertised retailer car stock compared to 15% a year ago and 19% at the full year. Also contributing to the product lever with our successful packaging event, which took place in April and included 2 new products, text chat and vehicle check. In addition, we continue to drive further penetration of managing forecourts, growing by 400 retailers in the half and returning to good levels of growth for this product following a slower second half of last year. As a reminder, there was a GBP 9 headwind on product as revenue from Smart Buying was transferred out of Auto Trader and into our joint venture, Dealer Auction, following its formation in January 2019.

Turning now to stock and the chart on the right. The turquoise line shows the increase in cars on-site, which grew by 10% in the period, largely as a result of the increase in the number of new cars on our marketplace since the product was launched on a free-of-charge basis in August 2018. The average number of used cars advertised on Auto Trader each month increased by 3%, with the majority of that growth coming from an increased number of private listings, largely through the uptake of our new highest-level package.

The stock lever was marginally down for the period by GBP 5. When comparing the stock lever to live stock, it should be remembered that free-of-charge new car stock and pay-as-you-go Private and Home Trader listings do not impact ARPR for the stock lever. Finally, the increase in price of GBP 50 relates to an effective increase of just under 3%, of which the majority was delivered in April 2019 and was consistent with that achieved in the prior year.

Cost growth was 2% in the 6 months to September, with growth being broken down as follows. People costs, which includes share-based payments, decreased by 1% to GBP 28.1 million. This decrease was partly due to a lower number of full-time equivalent employees, which was impacted by the transfer of people to Dealer Auction. Underlying average salaries continue to increase as we compete for in-demand digital talent, although this has been marginally offset as we place a greater focus on early careers recruitment.

Marketing costs represented 5.4% of revenue in the period. However, as previously guided, we expect to spend 5% on a full year basis. Other costs, which include data services, property-related costs and other overheads, increased by 11%. The increase comes largely from higher costs as a result of the group's ongoing migration to cloud-based services, which increases our level of resilience, security and speed of releasing software whilst, over time, reducing the need for capital expenditure in physical on-site assets. There are also small costs linked to functionality Dealer Auction provides to Retail Accelerator customers as well as costs associated with our new vehicle check product.

Finally, depreciation and amortization declined by 27% as the group's [self-developed] order-to-billing system became fully amortized. As a reminder, our low levels of CapEx and depreciation are not a reflection of low levels of investment in our business. In addition to our investment in cloud-based services, we have around 300 people in product and technology who are continuously improving our platforms and developing new products for customers, the costs for which are taken in full through the P&L.

CapEx for the period was GBP 0.9 million and was mainly on technology and hardware. With revenue up 6%, costs up 2% and a GBP 1.8 million contribution from our share of profit from joint ventures, operating profit grew by 9% and our operating profit margin increased 2 percentage points to 70%.

Cash generated from operations was up 3% to GBP 132.7 million. The increase in cash generated from operations was lower than the increase in operating profit for 3 reasons: firstly, a slight shift in cost base with an increase in overheads and a lower level of depreciation and amortization relative to prior years; secondly, the noncash contribution from the share of profit from joint ventures; and finally, a negative movement in working capital compared to a positive movement in the comparative period. Overall, cash conversion remained high at 98%, demonstrating the group's ability to efficiently convert profit into cash.

The statutory income statement outlines areas beyond operating profit. Finance costs decreased year-on-year to GBP 3.7 million, in part due to the reduced level of debt drawn under our facility. The prior year also included an additional GBP 2.2 million of accelerated amortization costs relating to our former debt facility, which we have not had to incur in this period. Our profit before tax was GBP 127.7 million, and our effective tax rate was 19%, which is in line with the standard average U.K. rate. At 14% growth, basic EPS grew faster than profit after tax as a result of fewer shares in issue due to our share buyback program. And as Nathan said in the financial highlights, I'm pleased to say we'll be paying an interim dividend of 2.4p per share.

Moving now to net debt and capital allocation. Net debt reduced by GBP 9.7 million over the period and leverage reduced to 1.1x. Cash generated from operations of GBP 133 million was used to pay GBP 0.9 million of CapEx and lease payments of GBP 1.3 million. In terms -- in cash terms, we paid GBP 3.1 million of interest, and we incurred GBP 0.5 million of refinancing fees as we extended the majority of our facility by an additional year to June 2024.

Tax paid increased to GBP 47.3 million as HMRC accelerated the due dates for quarterly installment payments. This is a one-off impact, purely an acceleration of when payments are made, and there is no additional tax charge for the group.

Of the remaining free cash flow, GBP 42.6 million was paid in dividends relating to last year's final dividend, and GBP 27.3 million was used to buy back shares at an average price of GBP 5.32.

In total, we returned GBP 69.8 million to shareholders in the first 6 months of the year. Gross debt increased by GBP 16 million in order to initially finance the acquisition of KeeResources, which we completed on the 1st of October. Our overall capital policy remains unchanged from that communicated in June.

That concludes the financials. Catherine will now talk about the current market and product update.

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Catherine Faiers, Auto Trader Group plc - COO & Director [4]

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Thank you, Jamie, and good morning, everyone. New car registrations declined by 2.6% in the first half of financial year 2020, a modest improvement from the 3.7% decline in financial year 2019. Manufacturers remain under pressure, and specific issues such as the real driving emissions test measures and concerns over exchange rates are having an adverse effect on the supply of some new cars into the U.K. market.

As noted in June, used car transaction volumes in the 2019 financial year decreased by just 0.9%. However, in the first quarter of financial year 2020, the last period for which data is available, transactions declined by 2.9%. This reduction in used car sales was due to a decrease in transactions of vehicles over 10 years old and also those less than 2 years old, for which new car supply and the availability of preregistered cars is important.

Whilst Brexit has been and will continue to be a significant focus for the industry over the coming months, we will only be affected by the outcomes to the extent that there are significant changes in consumer confidence and/or new vehicle supply into the U.K. market. We do not foresee any issues with our ability to provide our services nor do we expect any material change to our cost base.

We continue to publish a monthly price index of trade cars advertised on Auto Trader, the results of which are shown in this chart. The turquoise line shows the average price of a vehicle advertised, which you will see -- which you can see has increased steadily. By grouping cars by type, age and fuel, we separate the impact on price from a change in the mix of cars on-site. It's worth noting that this index shows prices at any point in time and does not attempt to show residual values as it ignores the original retail price of the cars.

As you can see, for several years, like-for-like prices, indicated by the dark blue bars, have increased. However, this trend reversed in July. For the 6 months to September, like-for-like prices decreased by 0.6%. This decrease in advertised price is likely a result of a fall in wholesale values in May and June after a period of excess trade supply. Interestingly, a change in the mix of cars advertised towards more expensive car types have caused the overall advertised price to continue to increase. This mix impact is shown by the gray bars on the chart.

Now on to our audience metrics. We continue to exhibit clear market leadership in terms of audience, and we have strengthened our position throughout the period. Cross-platform visits increased by 4%, and engagement remains strong as time spent on Auto Trader increased by 1% year-on-year based on our internal measures. What's more, our trusted brand, large stock choice and consumer-focused user experience means that unlike most of our competitors, around 91% of our audience is from nonpaid channels. The small increase in paid-for traffic to 9% in the period resulted from an increased focus in direct over brand marketing. In absolute terms, both paid and unpaid audiences have grown over the period.

There were, on average, 233 million assets viewed each calendar month through the period. This was a decrease of 6%. This was due to the continued optimization of the car-buying experience we provide. We have enriched the content of individual adverts, which has, in turn, increased the level of consumer engagement. Changes including parts exchange, finance calculators and deal builder have influenced this. Our new vehicle check product, which I will speak about later, is another example of such an improvement.

We use comScore along with a number of other external metrics to help us track how our audience is performing relative to the market as a whole. Whilst there are challenges with all of these measurements, it remains the only way today to get an approximate view of our relative share. We have grown our share of minutes according to comScore and have over 75% of all minutes spent by consumers across our full competitor set. Our closest competitor, which is the Gumtree/eBay Motors group, is seeing a decline in their audience share, which has reduced significantly from 19% to 11% over the past 2 years. The combined CarGurus and PistonHeads share of minutes has remained broadly flat, with their overall share of 5.6% compared to 5.7% 2 years ago.

Looking at minutes spent on automotive sites in September, as measured by comScore, Auto Trader was 8x the size of the Gumtree/eBay Motors group and 15x the size of the combined CarGurus and PistonHeads group.

There have also been 2 new entrants to the classifieds market over the summer, Heycar and Finch. Both have invested significantly in launching their propositions and were recorded by comScore for the first time in September. We remain materially larger than both in terms of minutes spent. In total, Auto Trader is hundreds of times larger than Heycar and Finch combined. In addition, users spend, on average, 14 minutes on Auto Trader per visit compared to only 2 on Heycar and Finch.

The relative importance of aggregators in the marketplace continues to grow, and so our relative share versus manufacturer and dealer sites has increased in the last 2 years. We are now more than 32x the size of all manufacturer sites combined and more than 48x larger than the combined deal agreed that we are able to measure in September.

Now for an update on our product initiatives. As we have already mentioned, we monetized 2 products as part of our annual event in April, our vehicle check product and text chat. Our vehicle check proposition targeted initially at independent retailers has seen strong levels of uptake, with around 80% of independent retailers opting to pay for the product. This product provides strong benefits to both retailers and consumers. For our retailers that have bought the product, they gain access to unlimited checks on vehicles they may be looking to source either at auction or through a possible parts exchange. This gives retailers confidence in the vehicle that they are looking to purchase, knowing that there are no underlying issues that could inhibit their ability to make an onward sale for consumers. We provide this product at a discount to the major alternatives.

In addition to this, all of their vehicles on Auto Trader will appear with a full check, providing consumers with additional transparency and confidence in -- based on the retailer and the car that they are looking to purchase.

In April, we also introduced text chat within all our advertising packages, which gives buyers a quick and easy ability to chat with retailers via text, complementing our existing live chat product and ensuring we are offering the communication options most used by consumers today. Since launch, there have been over 200,000 text chat sessions.

We continue to take meaningful steps forward with our new car proposition, which we first launched to retailers on a free of trial basis in August 2018. Our stock-based product allows retailers to upload physically available new cars at current retail prices, much the same way as they've been doing for decades with their used car stock. On average through the period, 33,000 new cars were advertised by retailers on the marketplace, predominantly on a free-of-charge basis across over 1,000 retailers. The majority of these vehicles have discounts applied, which allows the consumer to better understand the relative options, and all of these vehicles are immediately available.

Consumer reaction to the proposition has been strong. New car adverts attracted 19 million advert views across the period, with 1.6 million unique consumers viewing a new car on our platform in September alone. By way of context, this is around 10x larger than the number of new cars sold privately in September. The strong performance of the product to date has led us to decide to monetize this product throughout the financial year. Retailers will pay a fixed subscription fee each month, the magnitude of which will depend on the brand that they are advertising.

There will remain significant opportunity for growth in this area as there are a further 90,000 new vehicles across more than 3,000 retailers that we have not yet [then] advertised. We expect to increase penetration in time as we overcome technical and operational challenges that currently make this difficult for some retailers.

I will now pass over to Nathan to talk about strategic acquisitions and the outlook.

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [5]

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Thank you, Catherine. Before we get to the outlook, I'd like to talk briefly about 2 investments we've made in the past 12 months. The first is securing the taxonomy and data services that underpin Auto Trader through the acquisition of KeeResources. And the second is the formation of Dealer Auction, our joint venture with Cox Automotive, which furthers our goal to make the industry more digital, more data-driven and thereby, more efficient.

On the 1st of October, we acquired KeeResources. KeeResources has been an integral supplier to Auto Trader for some time as their unique vehicle data underpins almost every experience we provide to consumers, retailers and manufacturers. Whilst this may only be a small acquisition, it is strategically important as it secures a key asset on which our core depends and is critical to accurately identifying cars in a digital world.

In addition, KeeResources provides a range of data and software services to other players within the industry, most notably manufacturers, lenders and fleet companies. And as we move towards our third horizon of transacting online, we believe our relationships with these customers will become ever more important to the business. More information on how KeeResources will impact this financial year is contained within the appendix.

Dealer Auction, our joint venture with Cox Automotive, continues to make good progress. Our focus for 2019 has been integrating the technology and commercial models of the 3 businesses we transferred into the joint venture. I'm pleased to report that the teams have made excellent progress over the past 6 months, whilst maintaining the strong profitability of the business.

Moving on to the outlook for the full year, which incorporates the impact of the acquisition of KeeResources as discussed on the previous page. In the first half, we have seen stronger-than-expected revenue growth from retailers, underpinned by product innovation. We expect good ARPR growth to continue, albeit with a slightly increased headwind from stock. We anticipate the average number of retailer forecourts to see modest year-on-year growth, largely through the acquisition of small retailers.

Consumer services growth is expected to moderate slightly as we lap a tougher comparative in the second half. Manufacturing & Agency revenue, which is 5% of total revenue, has been weak due to the challenges facing these customers, and we anticipate the rate of decline to accelerate.

With KeeResources included, we anticipate total operating costs for the year to increase by low- to mid-single-digit percentage. And finally, the Board is confident of meeting its growth expectations for the year.

Thank you for joining us this morning. That now concludes the presentation, and we'll now take any questions from attendees in the room. And if you could just -- I know I say this every time. If you could start with your name and organization and try and keep it to 2 questions, just so we can make sure we get around everyone in the room. Go for it, Will.

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Questions and Answers

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [1]

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It's Will Packer from Exane BNP Paribas. 2 questions. Firstly, you've updated, [to ask of] your H2 stock ARPR guidance, which sounds reassuring, slightly worse than H1 but similar, I think is my interpretation. Many people in this room track the data on your website, on inventory trends. If we adjust for private listings for new cars, et cetera, the underlying run rate in the second half of your financial year is more like minus 5% to minus 6%. Could you just help us understand why that is not an accurate representation of your underlying stock offer? So why are you more confident on the outlook there? And then secondly, historically, at this time of year, you've commented on your thoughts around product for FY '21 over next year. Last year, you were reticent to do so because of the strategic value of vehicle check. Could you update us on how you're thinking about product for next year? What's interesting? What's exciting?

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Jamie Warner, [2]

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Yes. So I can field the stock offer question. So I think where we were back in June, the guidance was slightly down in line with market trends. And I think we got a similar question where people look in the live stock and it was more favorable. And again, I think if people are tracking it, it was largely down to large customers who were putting on more stock. So where we're guiding to now is slightly worse than the minus 5% that we've done in the first half, but still probably not as bad as the minus 22% we reported last year. And the reason for that being the stock trend you're referring to is I'm not sure we do expect that beat from those larger customers, but it's -- because of that mix effect and the yield impact, it doesn't have such a big impact on ARPR. It wasn't as beneficial on the upside when there was that base, and we don't believe it will be as negative on the other side.

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [3]

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Just it's not that you see some cyclical improvement, it's on the current run rate, you're comfortable.

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Jamie Warner, [4]

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Yes. So I think the guidance of it being a slightly bigger headwind is that used car transactions are likely to still be down and it's a tough market. The reason it's not necessarily down as much as the 5% to 6% is more in the mix and of who was putting on the stock for that comparative period.

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Catherine Faiers, Auto Trader Group plc - COO & Director [5]

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And in terms of the events next year, the focus is very much on products within the core, save the goals we have to base products to, still to help retailers generate more profit and to sell cars faster. In terms of the options we're looking at, they are all linked to data-driven retailing and helping retailers to hit those goals. Outside of the event next year, we're continuing to focus product thinking on Horizons 2 and 3 and how we continue to grow our new proposition and look to move towards online transactions over time.

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William Henry Packer, Exane BNP Paribas, Research Division - Executive Director of Media Equity Research [6]

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And maybe just to come back almost on both combined, in Q2 next year, we have the annular -- or the 3-year anniversary of the new car market going negative quite severely. Do you need to have a really good strong product here next year in order to maintain growth rates? Or are you a bit more sanguine on the risk around stock?

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Jamie Warner, [7]

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I think the shape of the levers would still be -- will still be that product will be the largest component. But I think there's elements of the event there. There's continued upsell of Advanced and Premium. There's managing products. And there's likely to be some contribution from new car.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [8]

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I think I'd just add one thing, which is in the same way as we had years and years of the really high market of new car growth, we didn't necessarily see that flow through in a positive way to the -- and I think that's probably because those cars are coming back into the market after 1 year, 6 months, 18 months as well as 3 years and 4 years. I think, at the same time, on the other way, when it's coming the other way, you're not going to see the same negative. Adam?

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Adam Ian Berlin, UBS Investment Bank, Research Division - Director and Equity Research Analyst [9]

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It's Adam Berlin from UBS. I'll ask 2 questions as well. The first question is when you got to June in previous years, you've talked about products that you've been trialing kind of free that you've been able to monetize in the March, April pricing season. Is there anything you've got under trial right now and that you might be able to monetize next year, specifically with reference to your comments around digitizing auto finance? Second question is, the improvement in the penetration of the premium products was a little bit slower than this time last year. Do you think that product is reaching maturity? Or is it just a kind of first half issue, and we should see more acceleration in the second half?

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [10]

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I'll take the question. Do you want to take the second one?

So I mean, the short answer on -- there's always free trials going on in Auto Trader's product world because that just runs at the very core of how we work out what products we should be building in the first place. And we do have a -- we have a number of those going on at the moment, but nothing like the things that you might be used to when we normally talk about free trial or something like finance or something like new car, where we have thousands and thousands of customers, and we're moving to a moment of perfecting the product and then monetizing it. It's not necessarily the same as that this year. There are still those options that we're looking at, but they're probably for more subsequent periods. I think the -- we will get to a period where the answer to your question will be yes, but it might be in a few months' time or such like. In terms of Advanced and Premium, did you want to...

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Jamie Warner, [11]

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Yes. So I mean, if you look back historically, with the only exception being the very initial launch of this product, it is always a little bit slower in the first half. And that's probably -- it does tie in with the event that you're feeling with our managing products as well. So I think we do expect slightly better growth rates in the second half. It lapsed a slightly tougher comp. I think in terms of penetration rates, we've said that we kind of priced the products at 30% to 35% penetration, so we still think we can get there. I think the rate of growth and the rate of uptake does slow down.

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Joseph Barnet-Lamb, Crédit Suisse AG, Research Division - Research Analyst [12]

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Joe Barnet-Lamb from Crédit Suisse. I'll take my allotted 2 as well, please. Firstly, on new car, where you seem to have pulled forward monetization a little bit, can you talk -- give us a little bit more detail on how much of a benefit that was to product in 1H and maybe talk a little bit more about how you are starting to monetize that, how that process is working so we can think about how that flows through? And then my second is your penetration of retailers. You said smaller independents has improved a little bit. Can you help us -- can you tell us what your penetration is, just to help us understand how much more there is potentially to go after with regards penetration of independents?

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Catherine Faiers, Auto Trader Group plc - COO & Director [13]

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On new car, we've been -- [we started]-- when we started the free trial in summer of 2018, we've always talked about, for retailers, there are significant operational and technical challenges for getting this stock live because often it's stock that hasn't been imaged, that hasn't been priced. It doesn't have the same kind of operational process that dealers have been used to running on years -- for many years. We are confident that over the course of the second half, we'll get to a period by year-end where of the 1,000 or so retailers we have currently to trialing the product, a good proportion of those will be monetized. And so it will be a bigger contributor to H2, but it is a product that we think we're on a multiple year journey of continuing to drive that franchise-customer penetrations in much higher than the sort of 25% or so that we're currently working with.

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [14]

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In regards to retailer penetration, every time we've looked at this, it's a difficult question to answer because the barriers to entry to becoming a particular independent retailer are very, very low. Having been here 12 years, we seem to still be able to find them. Officially, we have probably 85-percent plus of franchise retail, it's 85% to 90%, somewhere in that region. For independent retailers, when we look at it, it's probably around the 80% to 85%. I think, well, certainly, for the remainder of -- generally, we think the market is going backwards at around 1%. We've kind of said that, and we think that's been true for probably the last 15 to 20 years. And we think that's still true. We still see that we'll be able to grow as we've kind of guided for, for the rest of this year. Ordinarily, we guide to typically flat, which is still a market share increase. I think what we do find is as we get into some of those different dealer groups, you've got to remember there's -- the trade online or pay-as-you-go ads, where we have thousands of dealers that use us on an intermittent basis, and some of the growth that you've seen in subscription have been those retailers converting, and there's thousands and thousands of retailers there.

So officially, the data stats, and it feels like there's some way to go, but we wouldn't be saying that we're going to see huge jumps in penetration because I think it gets ever more if their business models are slightly different. They're doing cheap cars. There's a whole bunch of reasons that, sometimes, they don't necessarily choose us.

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Jamie Warner, [15]

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I'd say one thing that is just interesting and [I don't think] more than anything else, clearly, a lot of the franchise -- a lot of the manufacturers are saying they're trying to reduce their networks and they're going to reduce their network over the next -- well, it varies, but 5 to 10 years. What we're seeing actually on some of them that we know are actually making plans and they're removing their franchises, and those franchises tend to last 2 years. So it's going to take a couple of years to come down. What we're seeing is those franchise physical locations are being taken away and just immediately being replaced by independents. So it's almost like a -- it still ends up being a forecourt. It's -- and sometimes, even within the same group, they're just switching it out and saying, "I'm no longer going to be a Nissan guy, I'm now going to be an independent guy away from the restrictions of the manufacturers." So it's not as bleak as one might imagine, even with the potential decline of the franchise world.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [16]

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Joe, I guess just back here, we'll just go with John there in the middle there. Sorry, he had his hand up the whole time.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [17]

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John King from Bank of America. I got a couple of questions. Just on the market share gains that you've been seeing in the cross-platform visits, I wonder if you can just talk to us about why you think that is still happening? Where do you think the big gaps are versus the competition? I mean and perhaps, that's a trite question, but obviously, the supply gap doesn't seem to be growing. If anything, that seems to be that [Express] is closing that gap. So why do you think consumers increasingly seem to spend more time? Is it the app? What's the driver?

And then the second question is just maybe perhaps for Catherine. Just talk to us about the idea of selling entirely online and what the big barriers would be for doing that in the consumers' mind.

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Catherine Faiers, Auto Trader Group plc - COO & Director [18]

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Sure. So on market share, we benefit from the years of history that we have from our brand. And so the fact that we have this underlying benefit from very strong direct traffic, very strong organic traffic, underpins a lot of the audience performance that we see. I think from consumers, potentially, that history and that brand trust does play in a market of uncertainty. And so I think, potentially, we have seen some flags of quality from consumers.

We have shifted slightly more of our investment this year towards direct marketing channels over brand. We felt like we were seeing good efficiencies from some of that spend, and that has enabled us to get more targeted and more sophisticated in some of the audience segmentation that we've been doing. So we're seeing good gains there.

And coupled with that, the majority of growth has come from mobile and the app platforms, and we have been focused on them from a product perspective and have a pipeline of continued product development and innovation that we're hoping to drive that should revive repeat visits and more visit volume back into those platforms as well.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [19]

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I can take the online transactions. I think the brief answer is consumers -- when we say transacting online, it can sometimes be deceptive because it implies that, at the end game, it's doing the entire transaction online, the car being delivered on the back of perhaps a fancy trailer. And we do think there is a possibility of that happening. But when the main benefits we see is moving most of the transaction online, if you think, at the moment, the efforts involved in a dealership and for a consumer as well, they're probably spending 2, at least 2 or maybe even 3, 3-hour visits. Now that all requires labor within the dealership. You've got automotive finance, which is quite paperwork. Heavy -- certainly, the way it's done today.

So the short answer is there seems to be an appetite for, and dealers are certainly looking for, a more compliant, more efficient way to be able to sell cars. What's missing is someone at scale that can develop the technology to do that. In most of these markets, you've had big retailers, [the test goes, and lack of the word], that are able to invest in supply chain, invest in technology and have a wholesale impact.

Probably one of the good things and bad things of our market is it's highly fragmented and no one can necessarily take that position. So I think that's where we see Auto Trader stepping in almost and becoming that technology-enabler for online transactions. And even if we can get the appointment down to 20 minutes, the implications of that for the industry, you're talking about GBP 2 billion, GBP 2.5 billion worth of labor that goes into that. They're quite massive. So that is probably more the way that we think about it. All right. We'll go over this side now just to be democratic. Robert?

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Robert Berg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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It's Rob Berg from Berenberg. I'd just go with one question, a quick one on capital allocation. We've heard you detail a couple of deals in the last 12 months, albeit not hugely material in the grand scheme of things. I know as some of your growth comes from areas which maybe you deem it quicker or easier not to generate internally, should we be marking a certain amount of cash flow for more of these JVs, acquisitions? Or is it going to remain fairly immaterial going forward?

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [21]

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Yes, it's a good question. I don't think we don't have an acquisition strategy as part of our strategy. So in terms of us thinking about allocating capital to mergers and acquisitions, as an ex-mergers and acquisition person, I think that's a recipe for disaster in some way. So I don't think it needs to be something that will be in there. That being said, I think as we look at particularly the new areas, but not at all when it comes to our core, it feels like organic is definitely the way to go there. But as we're looking to get into automotive finance, as we're looking to get into new cars and we're looking to move the transaction online, what we're finding is that because we're very culturally orientated in terms of how we hire people and the sorts of people that we have, that does become a limiting factor. And we think in some of these areas, it's worth making generally small acquisitions because you can't name any big targets, to be honest, when it comes to these generally capability acquisitions that can get us to move forward, something that might have taken us 24 months to do internally or we don't even necessarily have all the experience and background in acquiring that might make sense. But I suspect they will very much be sporadic here and there sorts of things, not something that you'd see as a constant recurring element of what we do with our capital. Yes. Sure.

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Natasha Brilliant, Citigroup Inc, Research Division - VP [22]

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It's Natasha Brilliant from Citi. Just coming back on new cars. If the customers you've got at the moment are on a free trial, do you anticipate you'll be able to convert all of those to a monetized subscription? Or is there any risk of some of those churning offers they [as try to] overcome the challenges or don't want to pay? And equally, as you bring on new customers, will they be on free trials, or would you expect to monetize them from sort of day 1? And then secondly, just so I understand on the new customers, I'm thinking, beyond this year, is it fair to say that the forecourts will continue to get smaller, if that's a great opportunity, and therefore, we should anticipate that sort of dilutive impact on our per set to continue if those are the customers you're signing up?

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Catherine Faiers, Auto Trader Group plc - COO & Director [23]

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So in terms of new car, yes, we've got, of the 1000 odd so customers currently on trial, so those retailers that are investing and getting the right quality of ads, that have discounts, that have images, we think they're seeing really, really strong value. And the current yield at which we're monetizing, we're very confident that retailers will convert. For those retailers that are churning, they are typically retailers where we haven't quite got either the operational or the technical solution right, so we're confident actually that there's a rolling pipeline of people that we can keep going back to, to help work through and fix those solutions.

In terms of the 1,000 that we've currently got trialing the product, we do expect that number to grow between now and year-end as we find sales activity that is encouraging those customers to invest in the operational and technical processes. So we hope that we'll convert a good proportion of the 1,000 and then maybe a growing pipeline [that should be able to in] coming months as well.

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [24]

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And on fourth quarter, it does tend to be pretty mathematical, so I think the fact that we're guiding for modest growth, we talked about at the time of the IPO a rule of thumb, which should be taken with caution. However, it does -- it seems to be relatively helpful, is that for every percentage growth we typically see in retailers, you'll see kind of half of that in terms of ARPR dilution. So 1% growth in retailers, so it translates through to roughly kind of 0.5% dilution in ARPR. So the extent to which we guide growth, you could take that into account. When we don't, don't is probably the best advice.

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Natasha Brilliant, Citigroup Inc, Research Division - VP [25]

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Coming back to the new customers. Sorry, just coming back to the new customers -- sorry, the new car -- new customers, will they be monetized immediately, or will they go into a free trial?

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Catherine Faiers, Auto Trader Group plc - COO & Director [26]

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I would say customers are typically being onboarded to a free trial period.

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Bridie Anne Barrett Schmidt, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [27]

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Bridie Barrett from Stifel. Just one question. Your annual pricing event obviously went quite well. But there doesn't seem to have been quite the same benefit flowing through to ARPR from the increase in Premium and Advanced packages. And so if we look back half year and half year, you saw a nice 7 percentage point increase in uptake, which I think works out at about 2% to ARPR growth, whereas last year, you also reported a 7 percentage point increase in uptake, and I think that set through to about a 4 percentage point increase in ARPR growth. I wonder if you could just talk a bit about that dynamic if I can...

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Jamie Warner, [28]

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Yes. I think -- no, I can take that one. So I think there is definitely a slight disparity between the measures that are reported. So Advanced and Premium stock is exit to exit. It's also just car-advertised stock, whereas offers are on an average over the period and includes all our customer base. And then built into that, there's a way. There's also a yield impact. So typically, those, the smaller customers that we're acquiring have driven that full growth. They tend to be on our standard package, a middle one rather than -- it's not to say we can't upsell them, but they tend to be standard, whereas the larger customers are typically the ones that are taking Advanced and Premium, which have come at a lower average yield.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [29]

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Andrew?

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Andrew Geoffrey Ross, Barclays Bank PLC, Research Division - Research Analyst [30]

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It's Andrew from Barclays. I guess one question with 2 parts. So first part, on -- interested in your perspective on independent car dealer profitability and how you think that has changed this year. There's been a lot of noise from the PLCs around gross margins under pressure, but wondering what you think independents are seeing and I guess at net margin as well, with -- kind of how the pressure is on the cost base. And then an extension to that, do you think there's enough health in the dealer profitability pool that you are confident that with price and products, you can get to kind of your normal 6% or 7% ARPR growth for next year, even with a stock headwind? And I understand we're not going to get all the details of the product mix today, but I just want to be clear you can do that normal level of ARPR growth even if stock is down.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [31]

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Yes. I mean I'll take both of those questions, and others, chime in. So having spent a lot of time with a lot of dealers, the answer to all these -- any question relating to a dealer is a bell curve and profitability in net margins is no different. I think one comment I would say is when we look at our industry level analysis, independent retailers run at probably a better gross -- a better net profit than most franchise dealers. And when you think about that, they don't have some of the costs imposed on them that come along with a franchise agreement in terms of where the profit is and what's got to be done to it from a capital expenditure and therefore, depreciation and amortization perspective.

So independent retailers, we talk about margins of 1%, 1.5% being about the industry average. We will see independent retailers operating well above that, some at scale of 3%, 3.5%. So -- but at the same time, you'll see retailers, they don't typically operate for a very long time at 0 or negative margins. It tends to be a source of new business, I guess, at some point down the line. But there will be those customers that are struggling.

One thing I can say is my experience of retailers is those retailers that are running their business in the sort of way that are progressive retailer, and I'd like to think we talk about using data to source cars, making sure they're pricing to market day 1, not being too opinion-driven about things. They can still achieve not only decent profit margins in this market, but growth as well. So it's -- there are dealers out there that are growing year-on-year, above kind of 2%, 3%, 4% at good profit margins. So they're not doing it as sacrificing margin.

As to your second question, I think if you look at the profit pool for retailers, it's an incredibly competitive industry, incredibly competitive industry. And one might say, actually, the profit margins reflect more of that perfect competition than they do any other particular aspect. I think when we think about what we're doing from an event perspective, and vehicle check and dealer finances are 2 very good examples of this and this is definitely a theme that we want to take forward. We're looking at what things can we package or additional products that we can sell to a, they will increase your gross margin with finance -- as an example, one more finance deal, that's another GBP 400. That probably quadrupled the price that the dealer paid for that product. Or something like vehicle check, where we know there's an existing cost in their business, that we can do it maybe 1/3 of the price that they were paying previously.

So we're very proactively not looking at the profit margin and asking how much of that can we take, but actually asking how much of the cost can we help reduce for the dealers, where we can take some of it and they can keep the remainder. Silvia? Sorry.

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Silvia Cuneo, Deutsche Bank AG, Research Division - Research Analyst [32]

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It's Silvia Cuneo from Deutsche Bank. Just following up to this last point, can you share some more thoughts about how much auto data represent now of an average dealer in terms of revenue in percentage? I remember that used to be a single digit. Is that growing because of the monetization of the new product or maybe because the revenue base of the dealers is coming under pressure? And then...

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [33]

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Was that the percentage of gross margin question?

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Silvia Cuneo, Deutsche Bank AG, Research Division - Research Analyst [34]

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The percentage of revenue, like Auto Trader cost into [some detail] ..

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [35]

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Okay. Yes. Yes, yes.

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Silvia Cuneo, Deutsche Bank AG, Research Division - Research Analyst [36]

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And then secondly, just going back to the market point. Now your move to total minutes spent are the metric to measure the leadership position. Why is this a better measure than overall traffic per month? And can you share some more thoughts given that the average page view went down, but the average time spent increased? You mentioned parts exchange is benefiting that. Is it also the time spent texting to the dealers, maybe?

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [37]

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I'll take the first one. Perhaps, Catherine, if you can take the audience question? So the gross margin is the better way to think of it because it's a better way to think about dealer profitability. So I think at the time of IPO, we were around a 5.5% to 6%. Ironically, despite the way that we have kind of changed over the years, we still represent about the same number, probably around about 6%. Now that varies greatly depending on retailers. So some retailers, we might be upwards to 15% or 20%, particularly in our car supermarket, it's very heavily focused on used. When you come to some franchise group dealerships, we might be 2%.

Interestingly, there is no correlation between those 2 decisions in that margin. So very often, actually, the supermarket's net margins turn out to be better. So we're probably about the same as what we were, which might sound a little strange, but the thing to remember over that period of time is used car transactions have grown. In terms of the absolute volume, we expect that the used car, car park is bigger than it's ever been. Now it's not turning at the same rates that it used to, but at some point, it will get back to that normal level and volumes will be up.

And the other thing is that, which has been true up until the most recent data, is the average price or value of a used car has been increasing. So it's still true that the average value has been increasing, but it's partly driven by mix. So if you take, say, 2% volume growth and you combine that with, on average, 4% price or value growth and gross margins have held relatively the same, actually, that's why we end up being about the same as we were ironically about 5 years ago.

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Catherine Faiers, Auto Trader Group plc - COO & Director [38]

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In terms of audience, the realities we track, visits and these minutes and increasingly leads as well as measures of how are we performing for relatively to share and also for our retailer customers. The reason we focus on minutes for share is that we think that's probably the best indication of the quality of consumer engagement and the quality of the audience that we are attracting. And it's not that we don't track visits, but we place more emphasis on minutes because we think that's a better quality measure.

In terms of the ad view trends and how we think about that ad view trend, we continue to focus on products and driving products to either improve the consumer experience or to drive more connections or lead through our retailer customers. And all of our product thinking is driven by one of those 2 goals. As we continue to make and drive improvements, sometimes, those product changes we are investing in will drive positive ad views. Sometimes, we might see a different trend in ad views. But we're confident we've seen double-digit lead growth for retailers in the first half. We've seen good visit performance. And we're seeing good minute performance. So we're confident that the product journey that we're going on is delivering the right outcome for audience and for retailers.

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Trevor Mather, Auto Trader Group plc - CEO & Executive Director [39]

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Very good. If there's no more number of questions, we'll finish it up there. So thanks very much for making the time to come and be with us today.

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Nathan Coe, Auto Trader Group plc - CFO & Executive Director [40]

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Thank you all.

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Jamie Warner, [41]

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Thank you.