AMA Group Limited (AMA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome, and thank you for joining the AMA Group FY '20 Results Call. CEO, Andy Hopkins; and CFO, Steven Becker, will take you through the results for the group for FY '20, followed by a Q&A session. I will now hand you over to Andy.

Good morning, everybody, and thanks for joining the webinar this morning. You would all have access to the Investor Presentation uploaded on the ASX this morning. Steve and I will take you through the FY '20 key points, but we don't intend to take you through each page of the presentation. I will now provide a broad overview of the activities for FY '20 and the outlook for FY '21, which is actually very exciting. The first half of FY '20 delivered below our expectation mainly due to the unseasonal prolonged dry weather, static prices in an environment of rising prices, increased costs from increased ADAS technology and year-on-year decreases in the new car sales. And on top of that, we were distracted with a few large acquisitions and the Board movements. But as we started the second half, we had a very clear focus to achieve our key deliverables to the market and drive improved financial performance throughout the business, and I am pleased to say that we have done that. In fact, in the March quarter, we achieved over $20 million of EBITDA, setting the company up to achieve our FY '20 financial goal. In Q4, we were impacted by COVID-19, but we used the slowdown to focus our attention on some very important key items. The most significant were the finalization of price and volume negotiations under our long-term agreement with Suncorp, which is expected to deliver increased earnings in FY '21. We achieved price increases with our other major insurer customers, including allowances to ADAS, which will deliver improved margins as well; and the diversification of revenue by securing new contracts. Our financial performance for FY '20 exceeded our expectations, considering the impact of COVID-19, and the group achieved a normalized EBITDA of $53 million. Also, the group traded profitably and remained cash flow positive. Operating cash flow was strong and the group delevered by circa $14 million after a loan from $19 million in H2 for acquisitions and earnouts. Our net debt position was $227 million at June 30, 2020, which is lower than it was in December, a great achievement, especially in the current environment. The integration of Capital SMART is complete within 8 months of acquisition. The BASF paint roll out is also progressing very well and on track to be completed well before the end of December 2020. The net paint break costs have also been negotiated and are significantly lower than the $14 million originally estimated. And also, the synergies outlined as part of this transaction are on target to be achieved in FY '21. By all accounts, a noteworthy achievement for the business in a relatively short period while managing through this challenging period. The integration of ACM Parts into the business has also delivered efficiencies and cost savings throughout the whole business. And over time, this is expected to grow. The business continued its growth via ongoing consolidation in the repair industry, albeit at a slower pace than previous years due to the pandemic. Like all businesses, the onset of COVID-19 and the impact to our business as a result of the reduction in kilometers traveled due to the restrictions imposed by governments, we immediately responded to ensure the safety of our employees and that customer service and revenue generation was maintained. This included optimization of cost of repair volume including managing operating errors and hibernating sites. The management of the government lockdowns and state-wide restrictions and the government wage subsidy programs assisted the business in maintaining operations and retaining our highly skilled workforce, especially for when the normal trading conditions return. We reduced nonessential costs and stopped all CapEx, sought rent relief from our landlords, secured ongoing liquidity from our lenders, implemented high standards of health and safety measures to support our employees and the Board and senior management accepted a 20% reduction in remuneration for May and June. The senior management team and all employees have done an outstanding job in these difficult circumstances adopting and responding to ensure quality service to our customers and the operations are maintained. Cost and operational disciplines implemented during this period are now entrenched in the business, and these focuses will continue beyond the pandemic. During these uncertain times, the Board decided not to declare a dividend, and instead, we invest in our people and our growth. I will now hand you over to Steve Becker to take you through the key financial information.

Good morning. Thanks, Andy. Unfortunately, due to COVID, Andy and I can't be in the same location. So apology for any technical difficulties or delay especially on the Q&A. We'll do our best. The financial position of the group and business is set out on Slides 9 to 22 of the presentation. On Slide 10, you'll see normalized EBITDAI came in at $53 million for the year. And this includes 8 months of Capital SMART and ACM, which was better than expected coming into the pandemic. Importantly, year-on-year normalizations were much reduced, and we had no normalization for COVID. Due to the uncertainty of COVID-19, the group prudently took an impairment charge of approximately $47 million against the carrying value of goodwill in Capital SMART, including most of the impacts of transaction costs AASB 16, and the net loss for the year came at $70.3 million. On Slide 13, you'll note that the group's net debt position, excluding deferred vendor consideration, was approximately $227 million. This is a reduction of $14 million on the net debt at December and is a positive result, given the difficult trading conditions and the acquisitions that [ no one else ] conducted in H2. We engaged early with our lenders to ensure we had adequate liquidity for an extended period of disruption due to the pandemic, and our liquidity position remains strong. Our lenders are supportive, and we're very confident that we'll trade within our covenant requirements going forward. During the year, the group also adopted the new accounting standard for leases, AASB 16. Although this standard doesn't have a cash impact, it does materially impact the statutory results and set out on Slide 14 as a reconciliation of these impacts. Operating cash flow for the year was strong, and this was supported by an additional market incentive tranche received as part of the Capital SMART acquisition and also very proactive capital management during the period. And this is outlined on Slide 15. I'll now hand back to Andy to continue through some of the divisional results and a discussion on outlook on the future.

Thanks, Steve. Slides 18 to 22 include the performance of each of the divisions. Revenue in the Panel Division increased by 51% as a result of the Capital SMART and other acquisitions completed during the year. Despite the headwinds of COVID-19, the division achieved a normalized EBITDA margin of 7.2%. In addition to the acquisition of Capital SMART and ACM Parts, we acquired 6 other businesses during the year, adding a total of 61 new sites to our portfolio. Following the acquisition of ACM Parts, a natural fit was to incorporate the business into the ACAD division, now known as APAS. This division was impacted by the decline in new car sales, exaggerated by the emergence of COVID-19, resulting in a decline in revenue and normalized EBITDA. The consolidation of the businesses, though, will optimize the cost structures, with benefits expected to be realized in FY '21. Slide 24 sets out the achievements delivered in FY '20 and those that are ongoing for the business. Our growth strategy remains a significant focus for the business and delivering increased shareholder value. We have a significant pipeline of acquisition opportunities that are growing by the week and are all very attractive and accretive. We will continue to assess the business and optimize our portfolio and capital allocation, considering core skills, expertise, growth strategy and the broader objectives of the group. We have expanded the skill base of the Board, and the senior management team have been in the business for most, if not all, of the year, and I would personally like to thank Anthony Day, our Chairman for his guidance this year. The focuses for FY '21 and beyond are the ongoing consolidation of the panel market, significant growth potential from attractive and value-accretive bolt-on M&A opportunities. AMA is well positioned to capitalize on these opportunities. Diversification to broaden services and vertical integration is also on our card. Focus on more fleet customers and the broker network, capitalize on the industry technology, enhance value-add of recycled parts, accelerate the organization's environmental initiatives in areas of recycled parts and green energy, invest in the growth and development of our employees and ensure the health and safety of our employees and all our stakeholders. And also reduce our debt levels below market and bank expectations through retained profits and asset realignment. Some of the key milestones for FY '21 is to achieve all of the Capital SMART synergies, to meet the bank facility undertakings for Q2 FY '21 and to drive scale benefits to deliver additional synergies beyond the $17 million, which we're on track to deliver. And reestablish full network operations as soon as we can and as soon as COVID-19 restrictions relax and return to pre-COVID-19 acquisition pace targeting FY '21 revenues of circa $1 billion. FY '21 has started extremely well with a strong operating performance in July 2020 and revenues of over $90 million. Actually, the performance of the business in June and July demonstrates the resilience of this business and the rate of recovery post-lockdowns. And therefore, we are confident that once the restrictions are fully lifted, repair volumes will return, and we expect that in line with trends in other countries, volumes will increase, especially with the resistance to using public transport and people holidaying in Australia. So this should provide increased revenue generation for the business. And the business is well placed to capitalize on these growth opportunities in the year ahead, delivering ongoing shareholder value. Thank you for listening. And we'll now open it to questions.

[Operator Instructions] Your first question today comes from the line of Tim Plumbe.

I missed the first part of the conference call, so I'm sorry if this has already been answered. But Andy, are you able to talk a little bit in terms of the pricing negotiations? I think you said that it kicks off 1st of July, but obviously, you've had multiple pricing renegotiations with some of your major customers. Should they all be contributing from the 1st of July? And then second to that, if I have a look at the second half '20 EBITDA margins within the panel division, 8% compared to 6% in the first half, but obviously, a lot of moving parts, JobKeeper, et cetera, how do you see the margins within that business once you have JobKeeper flowing off that you've got the volumes that you're seeing? And then how does that change once you get the paint synergies coming through?

Well, a couple of bits to that question, Tim. So the paint synergies have already started coming through because the BASF roll outs is on its way. And the rest of the synergies with Capital SMART, the consumables et cetera, are already in, and the parts deals are being done, and there's quite a lot of synergy in terms of utilities, et cetera. So there's a lot of work already been done. So we're confident with the synergies with Capital SMART in this year. In terms of the margin, and we run a project in the business called Project Oliver, which was to talk to all of our insurers and look at the vehicle car part and the change in market with the technology on vehicles. And we've spoken to all our insurers and change the models so that it enables us to be paid for the increased parts costs right through the business, so -- but we think that margins are on an increase now. In terms of the JobKeeper, as soon as that falls away, hopefully, the volumes will come back. And we saw a normal month in June and July with increased volume right through the business. So our budget in July was exceeded quite nicely because all the volume is back in the business. So without JobKeeper, we achieved a really good margin in July. So we can only sort of think that, that's going to continue. So Victoria at the moment, to give you some idea across the country, and you're probably seeing this from other numbers. WA is probably about 110% of capacity. New South Wales is over 120% of capacity. Queensland's about on par, about 100% of capacity. Obviously, Victoria in August is quite slow, and we expect it to be in September and then start building again in October. But the whole country, when it comes back to pre-COVID levels, we're expecting more volume than we saw last year.

So maybe can you talk to the current run rate of that margin that you're seeing, maybe excluding Victoria out of the portfolio? How is the rest of the state is tracking?

Yes. Well, the rest of the states are tracking above budgets.

Sorry. No, I was thinking in terms of how we're thinking about the EBITDA margin heading into Q1.

We've always said that we should achieve somewhere between 9% and 10% on a sort of a normal basis. And I think we're on track to achieve that. And maybe that's probably the easiest way to explain it.

Okay. And that's 9% to 10% once you've got the paint synergy through?

Yes. And that goes in. And we have a creep that up over time. But certainly, everything to all our thesis about the things that go into that, everything is panning out. Obviously, we -- COVID, yes, does affect things at the moment. But July was, as Andy said, a very good month. And it was probably closer to a normal month. And it just showed that post-restrictions lifting that traffic volumes do come back rapidly, and that turns into volume for us.

[Operator Instructions] Your next question comes from the line of Aaron Yeoh.

Just a couple of questions just around the cash flow and the balance sheet. I'm just wondering what sort of driven that really big increase in payables over the period, particularly the trade payables and the payroll and stat liabilities?

[ The ]…

[ At ] June 30, has that reversed?

Really, that's a growth, I suppose, Aaron. Remember, we -- during that period, we acquired Capital SMART, ACM and all that. So that all goes in those balances. So when you're comparing back to June last year, and also December. Obviously, that increases into that. So -- but there's been no like a buildup in any sort of negative working capital or anything like that.

Right. Sure. And then what is the change in the provisions as well? Just looking at your sort of operating cash flow reconciliation?

Which page are you looking at, Aaron?

So just to in the slide. I think there's a change in provisions around $14 million.

That would just be normal...

Slide 16.

Slide 16. Yes, that would just be normal just provisions. It's just basically a normal cash flow reconciliation, normal change in all there are myriad of things and provisions.

Can you sort of go through...

Employee -- biggest one to be around employee liabilities, long service [ led ], those sort of things.

Right. Okay. And can we sort of just dig into the sort of the write-down for Capital SMART in terms of that $147 million, what that sort of reflects? Obviously, COVID-19 impacting the business at the moment, but thinking about the long-term prospects of Capital Smart as part of AMA Group has anything changed?

No. So I suppose, we obviously had to do impairment testing at year-end as everyone does. And when -- basically, we just prudently because of COVID-19 and future outlook on cash flows, we just prudently, I suppose, took an impairment charge on that. Nothing has changed in our view on Capital SMART. As Andy said, we're very positive about the opportunity here. Obviously, our run rate has slowed in terms of getting the [ paving ] and all those things from the COVID. But really, it was just a prudent measure at this time. A lot of companies obviously getting pressure to look at employment charges and goodwill and those sorts of things. And the Board just thought it was prudent to take a provision at that level.

Your next question comes from the line of Warren Jeffries.

Look, just going back on -- just with regards to what Tim touched on before, how the businesses performed, I guess, pre Victoria going back into lockdown and achieving targeted performance for June and July. Is that budgeted performance post-COVID? Or are you sort of getting numbers in that period that were in line with what you were thinking pre-COVID?

We -- I'll let Andy go jump in. Sorry, Andy.

Why -- what we're seeing is that when the states are back open, we're seeing increased volume. So it was very difficult to put a budget together for this year because nobody knows really today with what's happening with COVID. But all I can say is that we were very pleased with June's performance in the business and even more pleased with July's performance when all the states were open made -- Victoria closed down towards the end of July, as we know, but our business is very resilient because we normally carry about 2 weeks work in progress and about 2 weeks booked in. So the work that we've been doing, most of Victoria has been open for most of August, but then it will start to get closed on. We'll have to hibernate sites in September. But we're back to -- in July, our numbers were above pre-COVID levels.

And that tends to capture that through the sheds?

Yes.

Yes. Yes. And how is Victoria shaping? I mean we've been -- you've sort of downsized once or hibernated once to some degree. How does Victoria play out in the next sort of 2 to 4 weeks? Do you get to a settled 50% of normal volume, 60%? What's the expectation there? Just trying to get a sense of how good it ramps back up again?

Well, it's quite interesting [ it ramps back ] because I've always said, there's a bit of a tail to it. So it slows down gradually because we've got work in progress. When everything is closed, we've got work in progress in the shops, and we've also got cars booked in. But when it opens up, we sort of get an influx straight away because we can start getting those cars and straight away. So it will ramp up very quickly once Victoria opens up. That depends how long it ship for now. As you can look at, you wonder, there's no cars on the road, so there's no accidents in Victoria at the moment. So that slowed down then. But the rest of the scopes are at capacity or overcapacity.

Yes. Is that providing some compensation to Victoria?

Yes, it is, actually.

Yes. Yes. And just on the paint synergy, it sounds like you're just about fully implemented. That synergy, I think, is [ turning ] to be something in the order of sort of $10 million a year with paint. What sort of proportion do you realize this year, do you think whatever the number might be? And it sounds like it fully realizes in '22.

That will be run rating here definitely by '22 and then later in this quarter. And we expect to have all the shops rolled out by December at this stage.

A good proportion of what we said, Warren, will be in this year.

Your next question comes from the line of Chris Savage.

One each. You first. First covenant test end of the year. If [ Vic ] doesn't rebound in the December quarter, are there any discussions yet with the banks to potentially adjust the date or adjust the covenant?

No, we haven't -- we still, based on all our projections, Chris. We're still very confident of not having to renegotiate those. Obviously, not everything is very fluid. But all we can say is our banks are very supportive. We talk to them all the time. It we -- as you can see, [ Gem ] was about $112 million, which was probably almost $80 million about over what we recovered thinking when we first went into COVID. So banks account tool, we are comfortable. But obviously, we need to monitor if Victoria shuts down longer than we'll have to have a look at that point. But certainly, based on when we see things at the moment, we're sort of confident of on making those covenants.

Okay. And Andy, you said earlier on the call that you're aiming to reduce debt through retained earnings and assets. I think the word you used was optimization, I might be wrong. Does that mean you're looking at potential asset sales as well?

Well, we're looking at everything, to be honest, Chris. Yes, absolutely. I mean the business is majority panel and parts, but we we're looking at the whole business at the moment. But the word I used was asset realignment, actually. So we're just -- we're looking at everything, every sector, as you'd expect us to, in this market.

There are no more questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

Thank you for all the questions. Yes. Yes. Sorry, Steve. Thanks for all the questions. If there's no more questions, thanks again for joining the webinar and look forward to catching up. I think we've got quite a few one-on-one meetings over the next few weeks. So look forward to catching up with everybody. I just hand you over to Steve, but thank you very much.

Now thanks everyone. Nothing more to add. Thank you all for joining and look forward to catching up during the next few days and weeks. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.