AMA Group Limited (AMA) Earnings Call Transcript & Summary

Good afternoon, and welcome to the AMA Group Annual General Meeting, which is being held virtually online for the first time. All attendees will be able to watch the live webcast of the meeting. In addition, shareholders and proxyholders will have the ability to ask questions online and submit their votes. I'm Anthony Day, and I have confirmed with the Company Secretary that a quorum is present and, therefore, declare the Annual general Meeting open. Also welcome my fellow directors who are also online: Simon Moore, Leath Nicholson, Carl Bizon, and Nicole Cook; and of course, the [ infamous ] CEO and Executive Director, Andy Hopkins. We have online our CFO, Steve Becker; and Company Secretary, Fiona van Wyk; Adam Twemlow, partner of KPMG, the company's auditors; and representatives from Computershare and Lumi Technology who are facilitating the online meeting today. If we experience any technical issues during the meeting, a short recess may be required. Should this occur, we will communicate accordingly. Questions can be submitted online at any time. To ask a question, press on the speech bubble icon. This will open a new screen. On the bottom of that screen, there is a section for you to type the question. Once you have finished typing a question, click on the arrow to submit your questions. You may ask questions at any time during the meeting. However, I will address questions as I move through the respective items of the business. I may consolidate questions that are similar and encourage shareholders to submit their questions as soon as possible. When submitting your questions, please provide your name. Voting today will be conducted by poll on all business -- all items of business. To provide you with enough time to vote, I declare the poll open, and you may now vote on all resolutions. I will provide a brief overview of 2020. And then CEO, Andy Hopkins, will expand on the year and the outlook for 2021. After his address, I'll move to the formal business of the meeting. So when I became Chairman just over 12 months ago, I'm not sure anyone could foresee what has transpired over the last 12 months, both here and overseas. 2020 was undoubtedly an extraordinary year for AMA as it has been for most businesses. The business performed significantly better than we could have expected at the outset of the pandemic. And we are confident of returning to at least pre-COVID-19 volume as restrictions are lifted, as evidenced in the trends we've seen in the states that have opened up over recent months. In March, the business swiftly responded to the emergence of COVID-19, focused on safeguarding the health and safety of our employees and customers in line with government health recommendations and restrictions. Management quickly set a plan to optimize the performance of our operations and manage expenditure in line with volume reductions on a state-by-state basis. We immediately consulted with our lenders to ensure the ongoing liquidity that would enable the business to withstand the impact of the pandemic, which at the time was very uncertain. Wage subsidies in Australia and New Zealand were welcomed and ensured the business was well prepared when volumes returned. The business implemented cost reductions and reviewed operating processes for the short term. These are now entrenched in the business for the longer term. With increased discipline on cash management, the group remained cash flow positive, including wage subsidies, reducing the net debt position to circa $252 million at June 30, 2020, a significant achievement considering it included approximately $19 million for acquisitions and earn-out payments plus the ongoing demands of the business. The group remains within its banking covenants and cash management disciplines with a focus on further reducing the group's net debt position. The completion of the acquisition of Capital Smart and ACM Auto Parts business in October 2019 was a significant and strategic milestone. And whilst in the first half we saw an impact in our performance as we started the integration, we are now seeing the true value of this acquisition. The integration is largely finished with the paint rollout expected to be completed by the end of December 2020. The business is on target to achieve an annual run rate synergies of $17 million by the end of the 2021 financial year. The combined businesses have created a leader in Australian smash repair business and provides the platform for improved operational performance and future revenue growth. When we released our half year results in February, management made a commitment to implement a number of key initiatives aimed at improved operational and revenue performance. In the third quarter of 2020, the business was on track to deliver on its commitment prior to the impact of the pandemic. However, in the last quarter, we've delivered on those commitments, including negotiated revised terms for the motor repair partnership between Capital Smart and Suncorp, which would deliver average repair pricing and volume increases in 2021, reflecting the change in the mix of repairs to be pathed through the Capital Smart network; and, secured price and volume increases for AMA Panel network with all major insurance customers to ensure sustained and improved revenue generation and profitability for the group from July 1, 2020. The revised pricing has delivered margin growth and contributed to the financial performance of the business in the first quarter of this financial year. The Board would like to acknowledge the significant efforts of our senior management and all our people who are instrumental in managing the business through an extremely demanding year and delivered the performance of the group for 2020. When appointed to Chair of the Board in August 2019, we set a strong focus on improving governance, disclosure and implemented policies you'd expect from a strong ASX-listed company. We listened to feedback we received at the 2019 AGM, implemented numerous initiatives on our journey towards improving and developing governance in all sectors of the business, which included developing an overall People, Culture and Remuneration strategy for the group, including short- and long-term incentive remuneration structures for senior management which align our senior management's interest with the interests of shareholders; reviewing and implementing new governance policies to ensure best practice in corporate governance is maintained; and improving our reporting disclosures aimed at increased transparency for our shareholders and stakeholders. We welcomed 2 new Independent Non-Executive Directors, Nicole Cook and Carl Bizon. These additions to the Board complemented the existing skills, expertise and in-depth industry knowledge base of the Board. During the height of the pandemic, the Board met on a regular basis to provide support and guidance to the management team. I'd like to express my gratitude to my fellow Board members for their guidance and support in a very challenging year. AMA continues its value partnership with I-Car to enhance the skills of our workforce and ensure the business is equipped to repair modern-day vehicles effectively. We are committed to leading the way in providing education and training to our frontline staff and in line with the current rapidly changing digital environment, our focus over the past 6 months has been on the automotive digital technology. The group has a successful apprenticeship program that recognizes the benefits and supports diversity, including gender diversity aimed at attracting and retaining mature age, female, regional and indigenous apprentices to our industry. In 2019, we reported the group's apprenticeship program was recognized awarding an industry first female finalist in the World Skills Competition held in Russia to Maxine Colligan, who works in our Campbelltown repair facility. Since then Maxine has traveled to Vietnam as an apprentice ambassador with the Australian Federal Government Trade delegation and is consulting to the New South Wales Government for the Department of Education and Training, encouraging careers in trade. She has recently accepted a Women in Leadership Scholarship. If I look to the future, although Victoria has remained in lockdown for most of the first quarter of this financial year, the overall business has performed strongly, delivering results above expectations. All states are currently operating at or near pre-COVID-19 levels, except for Victoria, which is expected to return to pre-COVID-19 levels by the end of this calendar year. We've seen volume return and the business rebound quickly from the easing of restrictions. This has directly impacted on revenue generation. The business is less reliant and impacted by state and international border closures. With the lifting of restrictions in Victoria and initial preference for private transport over public transport use, we anticipate the entire business to return to pre-COVID-19 levels. We're pleased to have announced that the group has transacted to divest its ACAD business to GUD Holdings Limited. The Board has for some time been reviewing its strategic objectives aligned with the business simplification in leveraging the group's core capabilities and determined that the focus on the Panel Repairs sector would provide greater opportunities for investment and growth for our shareholders. Tomorrow, the company will announce that shares held by senior management, including our CEO, Andy Hopkins, will be released from escrow on the November 27, 2020. Similar to last year, Andy has no intention of divesting of his shares in the medium term. On behalf of the Board, I thank senior management and all our people during a demanding year and their ongoing commitment to delivering quality service to our customers. We thank our customers, insurance partners, investors and all stakeholders for their ongoing support of the AMA Group at a time when so many have been impacted by these challenging times. The business has demonstrated its resilience throughout the year. It has been able to adapt to an ever-changing environment and will remain agile in its response to ongoing market conditions. The business is emerging from the pandemic in a stronger position than initially anticipated and is committed to exploring growth opportunities aimed at delivering shareholder value in 2021 and beyond and for the ongoing success of the group and all its stakeholders. So thanks for that. I'll now hand over to our CEO, Andy Hopkins, who will give you an overview of the business performance in the last 12 months.

Good afternoon, everybody. Thank you for that, Anthony. I think you said it all, but I've got a few bits to say anyway, but thank you for chairing our Board for the last 12 months and doing an excellent job as well. 2020 has been an extraordinary year, not only for AMA, but for most businesses and people throughout Australia and the world. If you look back to October 2019, we almost doubled the size of our business with various acquisitions, including the acquisition of Capital Smart and ACM Parts, and we set our sights on further growth and increased earnings. This transaction secured a significant customer and with that came significant opportunity for growth over the long term. The business has now been fully integrated and the paint rollout across Capital Smart will be complete in December. And the synergies we anticipated when buying Capital Smart of at least $17 million on an annualized run rate will be achieved, I'm pleased to say. Other acquisitions obviously took somewhat of a backseat while we focused on this acquisition to deliver everything that we promised. But the consolidation of the panel industry still has a long way to go, and the growth of our core business and capability will return in January 2021, with a number of potential additions earmarked for the second half of this year. Quarter 3 last year saw repair volumes return. And in the quarter, we were well on track to achieve our FY '20 performance and targets that I outlined to shareholders in February 2020. In March 2020, COVID-19 diverted our focus to preparing the business to withstand the challenges that were expected at the onset -- outset, sorry, of the pandemic. We responded immediately, and for the remainder of FY '20, we monitored and adjusted the lockdowns and restrictions imposed by the Australian and New Zealand governments. We use the government wage subsidiaries in the business for the exact reason that they were meant, for our staff. And anything that the government didn't cover, I'm pleased to say that AMA did cover, so no one missed out, which has helped us instill in our workforce that AMA is a compassionate and people-focused business. And this will enable us to keep our valuable employees and key -- and retain our key skills within the business in readiness for post-COVID-19. We successfully negotiated reduced rents for most of our sites. We stopped all nonessential CapEx and stopped all projects. We closed any loss-making or marginal sites to optimize our footprint. And the AMA Board and senior management took a pay cut, and no cash bonuses were paid in FY '20. All this produced a much better than expected cash balance at June 30. This combined with a favorable terms and liquidity negotiated with our lenders ensured we could sustain our operations for a prolonged downturn, if required. As promised in February 2020 and despite the challenges of the pandemic, we were unwavering in securing favorable and increased repair pricing right across our major insurance customers. This was fundamental to improving our margins in FY '21. Our improved and very pleasing FY '21 year-to-date results have demonstrated how fundamental this was for the business to return to the expected margins. The improvements and cost management disciplines we implemented as a result of the pandemic are certainly a silver lining and are here to stay and will contribute to the margin improvement for FY '21. As announced this morning, not only are we very pleased with the performance of the group this year-to-date, but I'm truly pleased to tell you that AMA has entered into a binding agreement to divest its ACAD business to GUD Holdings. ACAD is strongly aligned to the GUD Group of businesses in manufacturing and retailing of accessories and, although a great business, has never been considered the main area of growth for AMA. The AMA Board and I performed a full review of the business, and it became obvious that the medium- to long-term strategies and opportunities lie in our core skills and now complete focus of the AMA Group will be as the Australian, global leading, panel consolidator. The ACAD transaction is targeted for completion in late December. The total proceeds of the sale, circa $70 million in cash, will be used to retire debt and, importantly, set the group up for continued growth in the Panel Repairs sector, which is the group's core skill -- expertise and capability. I'm really excited about this transaction. It allows management to focus its efforts on the core operations of the business, driving growth and development, and it also creates a very strong balance sheet. I would also like to congratulate the current management team at ACAD for their work and commitment to the ACAD business. In particular, Trevor Long, Mark Henricksen and Evan Black. Thank you, guys, and I wish you all the best for GUD. The outlook for AMA remains very positive, especially considering the year that it's been. The business has emerged from the pandemic in a strong position, seeing increased volume and increased margins, and that's all aimed at increased financial performance and growth in shareholder value. AMA Panel and Capital Smart businesses are now fully operational in all states, except Victoria, which is expected to return to full capacity by the end of December. And as statistics in other countries and Australia have shown, post pandemic, private vehicle use is preferred to public transport, which positively impacts our volume and earnings ability. Our Q1 FY '21 results, which tracked ahead of expectation, even with Victoria in lockdown, are evident of this. As the panel leader -- sorry, as the leader in the panel industry consolidation in Australia, the business will continue to focus on acquisitions in the Panel Repairs sector in Australia, a $7 billion repair industry, targeting our aspiration to grow the company past $1 billion in panel, replacement parts and clients management. ACM Parts is Australia's largest recycler of panels and mechanical parts for the automotive industry and is an important part of the success of the panel group. ACM has benefited from the growth in utilization across our business and will continue to grow in this sector of recycled and most definitely aftermarket parts for the collision repair industry. We have always been efficient and vigilant on operating cost, as you know, but we are ensuring disciplines are maintained as we grow this business. We will continue to invest in training, growth and development of our employees to provide career growth opportunities and improved customer service. We are currently one of the largest employers of apprentices in Australia, which will ensure the ongoing sustainability of the AMA Group. There's no doubt that AMA Group would not have performed nearly as well and achieved the result it had without the performance of the AMA Group employees. And I personally extend my gratitude to all our team, but in particular, Steve Babulj, the CEO of AMA Panel; Dave Marino, the CEO of Capital SMART; and Campbell Jones, CEO of ACM Parts, who have all been relentless in putting AMA where it is today. Also, all of our employees' daily commitment and dedication during an extremely testing and uncertain year, for you all, I personally thank you because you have ensured our operations were able to continue and our customer service and safety were maintained. I thank our supportive financiers, investors and all stakeholders for their continued support of the AMA Group who themselves have also been impacted by the pandemic. And I also acknowledge our great Board and fellow Board members for their support during the year. In closing, I would like to reiterate that the year has got off to a great start with FY '21 year-to-date financial performance tracking ahead of expectation despite the Victoria in lockdown. And the circa $70 million in cash proceeds from the ACAD sale will lower our debt levels, and I look forward to the year ahead, perhaps one with less uncertainties, which will allow the business to develop, grow and achieve its objectives and aspirations for the benefit of all stakeholders. So thank you very much, and I'll pass back to Mr. Day.

Thanks, Andy. Great overview of the business and great opportunities that lie ahead of us. So I'll just move on. I confirm that a representative from Computershare has been appointed to act as returning officer for the purpose of conducting and determining results of the poll. I have written advices on the proxies received to date prepared by our share registry. Proxy votes received represent circa 56% of the issued share capital of the company. As Chairman of the meeting, I'll vote in favor on all open proxies for all resolutions to be put to the meeting. The Notice of Meeting was made available to shareholders on the October 15, 2020. And unless there are any objections, I'll take the notice, including explanatory notes, as read. The first item of the business is to receive and consider the Annual Financial Report, including Directors' and Auditor's Reports of the company and its controlled entities for the full financial year ended June 30, 2020. A copy of the 2020 annual report was made available to shareholders on the August 25, 2020, and is also available on the AMA investor website. There is no formal resolution to put to the meeting in relation to the adoption of the 2020 annual report. However, I will respond to questions from shareholders in relation to the annual report. Adam Twemlow of KPMG is also available online to respond to any questions relating to the audit and financial statements. I will now respond to any questions. So I'll just give it a minute or 2 for Fiona to ask any questions. Or are there none?

Yes, Mr. Chairman, we actually have 2 questions on the annual report today. They're both from [ John Withington ], who is a volunteer company monitor of the ASA and he holds proxies for 5 members and nonmembers of over 117,000 shares. And he has asked, on Page 40 of the -- and Page 120 of the annual report, it lists $7.7 million related party transaction. He says that's a lot of money. What is the governance around these transactions?

So certainly, thanks very much for your question. It's one area of focus the Board has had over the last 12 months. And in particular, following the release of our half year results, we took a lot of feedback around the related party. In March this year, we implemented a related party conflict policy, and we issued that onto our statements where any incentive fees wouldn't be available to any directors going forward or employees. It also talked about the conflicts that exist. Many of these have been historic over time. We're in the process of just looking at how can we either remove those and ensure we're controlling those. So any potential conflict is now raised at the Board and has to be approved. But I'm sure that you're going to see continued improvement in those arrangements going forward with the policies that we've implemented over the last 12 months.

Thank you, Chairman. We have another question also from John. He references Page 9 of the annual report, wherein it highlights a $59.9 million incentive from our paint supplier. What is the basis of this? And was this included as a one-off revenue in FY '20?

I might hand to Simon Moore, our Chair of the Audit Committee, to just give you some detail around that.

Sure. And John, thank you for your question. The incentive monies referred to there are part of our paint supply arrangements with our paint supplier, who is BASF. It takes the form of effectively a market development payment, which helps us on a working capital basis, which we earn through time through the paint volumes that we actually use in the business. This is a mechanism which is, let's say, quite pervasive internationally in the paint supply industry for a customer such as ourselves, and it's a very useful source of working capital. It's not taken as revenue in the single period. It is unearned revenue in an accounting sense. And as we use volume of paint, we effectively earn a portion of that unearned income, and that is reflected in the accounts -- in revenue in the period [ that is at ].

Chairman, there are no more questions on the financial report.

Thank you very much. And as there's no more questions, I'll move on to the next item of the business. Resolution one, in accordance with the Corporations Act, a resolution for the adoption of the Remuneration Report included in the 2020 annual report is required to be put to shareholders of the company. The vote on this resolution is advisory only and nonbinding on the company. However, the Directors recognize the outcome of the resolution as an indication of shareholders' sentiment in relation to the 2020 Remuneration Report. As noted in the explanatory notes in the Notice of Meeting, in our commitment and journey to ongoing best practice in relation to remuneration frameworks and structures and considering the feedback from all stakeholders following our 2019 AGM, we have improved the disclosure of the remuneration report, improved the remuneration structures for the senior executives [indiscernible] long-term incentives and revised governance policies that align with best practice. So it's been a significant change from previous years for those who have been around. And certainly, over the last few weeks, we've been continuing to get feedback, and we'll continue to enhance those. But right now I'll respond to any questions that are coming through.

Yes, Chairman. We have 2 questions on this -- on the Remuneration Report, also from John Withington of the ASA. And he refers to the Godfrey Remuneration Report, a remuneration consultant which publishes tables of pay, and these show the median CEO fixed remuneration for companies of market cap between $500 million and $1 billion to be approximately $770,000 and and median total rem of $1.4 million. Mr. Hopkins is being paid considerably more than this and, indeed, likely to earn considerably more than the 75th percentile. And he'd like to know why is this so much more than his peers?

At the time, we made some changes to Mr. Hopkins' remuneration back in, I think it was, October last year, in 2019. And at that time, he had taken on the additional responsibilities from what he had been CEO of the Panel Division, including the whole group. We went through a process where we did a lot of benchmarking, and there are many different benchmarking activities conducted by different people that produce different results, but we went through a benchmarking for the level of skills and experience at the top level that we felt Mr. Hopkins held that would set his remuneration as we had, which included, obviously, his fixed pay as well as short term as well as long term, which aligns -- long-term interest aligns very much in shareholders' interest. So we believe that was appropriate at the time, but I take on your feedback and we continue to go through and do benchmarking on remuneration, and we'll continue to do so. Thank you for your question.

And Chairman, we have another question also from John. And he acknowledges that while your Rem Report this year is fairly clear, it does not contain some important information that they would expect. Example, what were the FY '20 targets after [ the tax ]? What STI would be achieved at budgeted EBITDA? What percentage of the CEO's targets are financial measures? And how the number of LTI performance rights to be issued is calculated? He also mentioned that we mislabeled the statutory remuneration as a table of actual remuneration. That's his question. There's a few questions in there, I think.

Yes. And certainly, that's a valuable feedback for us as we continue to improve our reporting on this area. I'm not suggesting that we've completed to everyone's requirements. I'm sure there's a lot of more information lots of people would like to get, but we're trying to get the balance right from where we've come from to where we need to get to. So we'll take each one of those points that you've raised, John, on Board and in our conversations. There's more improvements that we need to make. But at this stage, I think what you're seeing there is quite a significant improvement on previous years, and we'll continue to review the levels and the disclosure requirements that we think is appropriate for this group. So -- and we'll continue working on that.

Thank you, Chairman. There are no other questions on the Rem Report.

Okay. So as there are no other questions -- no further questions, I'll put Resolution 1 for the adoption of the Remuneration Report for the financial year ended June 30, 2020. Valid proxies are now displayed on screen, so please cast your vote for Resolution 1. [Voting]

Okay. We'll move on to Resolutions 2, 3 and 4 as they relate to the reelection of Directors. For each election, I'll invite the Director standing for re-election to address the meeting. The Resolution 2 relates to the re-election of Nicole Cook, who retires in accordance with the company's constitution and, being eligible, has offered herself for re-election. I'll now hand over to Nicole.

Thank you, Anthony. As you know, I joined the Board this time last year with my first introduction to the AMA leadership team and you the shareholders in the 2019 AGM. The past year has certainly proved to be a complex time for senior management and Boards. And I would venture to say that there's never been a crisis like it, particularly from a human capital perspective. The people in performance functions, as you know, at HR have gone above and beyond to carry people through some very challenging times, and I'm -- I enjoyed supporting the AMA leadership team through its challenges. My background, as you will have read, is varied. I have deep experience in human capital, having run the APAC division of a global provider of outsourced HR recruitment services. I grew into that role having joined the company running the recruitment technology business because of my professional trajectory in management consulting and tech. More recently, as the CEO of Jobs for New South Wales, I worked with the New South Wales entrepreneurial ecosystem, evaluating businesses that are shifting major industries, including advanced manufacturing towards the digital economy. This experience will be an asset to AMA as industry leader in digital trends impacting the AMA strategy unfold over the next several years. Over the past year, I've worked with Anthony on the PCRN Committee to help improve our Remuneration Report, disclosures in our reporting, implementation of the current STI-LTI scheme and, more recently, the people and culture strategy. Should I be reelected, I will continue to work with the team to refine these areas as well as to continue to advance our governance with particular attention to people-related matters. In addition, I'm looking forward to bringing my digital expertise to the Board, having one eye on industries with parallel digital trends and help advance the strategic direction of the business going forward. And with that, I thank you for your consideration and hand back to Anthony.

Thank you, Nicole. And it's great to have had you on Board and support over the last 12 months. So Fiona, are there any questions in regard to...

I think there are no questions on this resolution.

Okay. Thank you very much. So being no questions on this resolution, I will put the Resolution 2 for the re-election of Nicole Cook as Director of the company. Valid proxies are on the screen, please cast your vote for Resolution 2. [Voting]

We'll now move to Resolution 3, which relates to the re-election of Carl Bizon who retires in accordance with the company's constitution and, being eligible, has offered himself for re-election. I'll now hand over to Carl. Welcome, Carl.

Thank you, Anthony. I joined the Board in February this year, just in time for one of the greatest management and leadership challenges any business could face with the emergence of the COVID crisis. From very early on in my time on this Board, I have been impressed with the leadership display by the Chairman and the cohesion of the Board in guiding, assisting and leading management through what has been a very difficult time. The background and experience that I bring to this Board were honed through the career progression from a trainee mechanical engineer in the steel industry, [indiscernible] in my 20s to ultimately leading a $1 billion U.S. public company with more than 5,000 employees across 21 countries as a leading supplier to the automotive industry. This background brings substantial experience in managing large and complex global industrial organizations with many operational sites with significant hard operational and human assets. The experience of serving in and ultimately leading a U.S. public company has given me a sharp edge and eye for the compliance, ethics and governance skills needed to operate in that environment. My continued role on the Audit and Risk Committee will give a substantial opportunity to leverage those learnings with an experienced eye on the realities of operating a complex business, with the knowledge and experience of the risk and governance framework mandated of a public company. I believe my overall business and leadership skills and experiences will assist the Board and management to continue to improve the AMA business in many regards to the ultimate benefit of its stakeholders. I'd be grateful for your approval to continue to serve the company for the next term of my appointment. Thank you, Anthony.