AMA Group Limited (AMA) Earnings Call Transcript & Summary

Good morning, everyone. Before we commence, I would like to note that due to U.S. legal restrictions, people in the United States are not permitted to participate in this webinar unless they are institutional accredited investors. So if you are in the United States and you are not an institutional accredited investor, please disconnect from this webinar. Thank you. On behalf of AMA Group, I would first like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. Thank you for joining us as I present the AMA Group results for the year ending 30 June 2023, which I'll refer to as FY '23. [Operator Instructions] Today, we have announced an equity raising in conjunction with our FY '23 results, and we're recently advised some Board and management changes, which I will touch on later. However, I'll begin today's presentation with a summary of the year before handing over to our CFO, Geoff Trumbull, who will take you through the financial results of the business in greater detail. I will then review the outlook for the business before Geoff finishes with some further detail on the equity raising. If you could please turn to Slide 6, I will begin with a reflection of the business environment and key achievements for the year. FY '23 was a transition year, characterized by strong demand for repair services and the continued trend of increasing severity, which drives higher repair costs and is reflected in increased average for repair days in our key metrics slide. Labor scarcity impacted repair throughput with elevated lateral hiring exacerbating the well-publicized labor shortages affecting multiple industries. Whilst we led the market in achieving price increases with our insurance customers, many industry contracts still do not contain appropriate dynamic adjustment mechanisms to offset the ongoing high inflations being experienced across the nation and the trend of increasing severity. Now to Slide 7. Whilst we did not achieve our original earnings guidance, we delivered a normalized post-AASB 16 EBITDA result, slightly higher than the midpoint of the revised guidance provided in April 2023. This represents a $43 million profit improvement over the year, thanks to the hard work and dedication of our teams across Australia and New Zealand. We ended the year with $29 million cash on hand after strong cost control and cash control and positive operating cash flows in the second half of the year. In FY '23, we delivered a record safety performance with an LTIFR of 2.07, meaning we kept more of our team members safe than ever before, and this is something I'm incredibly proud of. It has been a busy year. In addition to the turnaround in earnings, the year saw several operational achievements. We secured interim pricing for Capital S.M.A.R.T from October 2022 and pricing uplifts across the portfolio as well as ceased some unprofitable work and undertook network optimization. We implemented productivity and procurement initiatives, which saw heavy motors margins improve. We substantively reset the supply business with the new facility in Hammett, Queensland coming online during the year and progressed the parallel import and aftermarket parts strategies, albeit the latter at a slower pace than hoped. We completed the divestment of Fluid Drive, representing a culmination of the previously announced strategy to focus on parts and consumable supply in that business segment. During the year, we also renewed our paint supply agreement with BASF and opened a new AMA collision site in Queensland and significantly progressed the transition of our South Australian Heavy Motor site to a new Wales branded facility. Now to Slide 9. I won't cover the financials in further detail as Geoff will talk to these later. However, I will note that the Board has not declared a dividend for FY '23. Now to Slide 10. We know that our team are the key to our success as they deliver exceptional service to get over 250,000 cars back on the road each year. We also enhanced communication and increased training for our people as we are committed to providing opportunities to upskill or train in new technologies. I'm proud to say that the engagement survey conducted during the year received a high level of engagement and showed a 9% increase in team member satisfaction. We remain committed to building the workforce of the future through our market-leading apprenticeship program and will continue to support the business' immediate needs with international recruitment. With this background and context, I will now hand you over to Geoff to take you through the key financial information.

Thanks, Carl, and good morning, everyone. I'll now take you to Slide 12 for a summary of FY '23 financial performance. FY '23 financial performance was significantly improved compared to FY '22. With normalized post-AASB 16 EBITDA up $43 million to $64.6 million. This uplift largely reflects the outcome of our commercial pricing discussions with insurers and the resulting network consolidation as we exited some unprofitable work and a number of initiatives to reduce costs to reflect revised operational requirements. FY '23 was still a year of transition, and the results reflected a positive trend across each quarter in FY '23. Whilst there is some natural seasonality to our earnings profile, a Q4 EBITDA of $22.7 million was a pleasing result, which sets a strong baseline heading into FY '24. The group was able to limit exposure to interest rate movements during FY '23 through our historical hedging activities with 65% of our debt book on fixed rate arrangements after a portion of our fixed rate hedging arrangements matured in October 2022. Given the strong in-the-money position of our existing interest rate swaps and the planned refinancing through FY '24, we closed out our remaining swaps in June 2023, resulting in a cash benefit of $6.1 million. As a result, our all-in cash interest costs on senior debt is expected to increase in FY '24. However, under the relevant accounting policies, we will continue to recognize the P&L benefit of these interest rate swaps through to the maturity of our senior debt. Following the finalization of the Capital S.M.A.R.T negotiations, we have elected to fully impair the remaining goodwill of $57.7 million reflecting a more modest outcome than expected from those negotiations. This leaves the unamortized portion of the MRSA contract held on the balance sheet at a value of $166 million. At the same time, we have also taken a $52.6 million impairment of goodwill in the AMA collision business unit, reflecting the reduced network size as well as run rate performance and margins observed in second half FY '23. These impairment charges, combined with a further $6.5 million of impairments taken at closed, hibernated or loss-making sites are noncash. Turning now to Slide 13 and the summary of financial position. We ended the period with $29 million in cash, reflecting cash utilization of $23.3 million across FY '23. Combined with the proceeds of the equity raising announced today, which we will discuss later in the presentation. This provides us with the cash headroom we need to meet all operational requirements for FY '24, including the natural seasonality in working capital across the year. Given a waiver of the June 2023 covenant was received after 30 June 2023, our borrowings have been classified as current. However, excluding the $35 million debt repayment obligation in December 2023, the maturity of the balance of the senior debt is unchanged at October 2024. Now to Slide 14. There have been no significant changes to our debt during FY '23 with senior debt increasing by $1 million as a result of capitalized payment in current interest charges. Net debt has increased by $23 million due to current period cash utilization partially offset by the settlement of the last earn-out in January 2023. The group financial result exceeds the minimum EBITDA covenant for 30 June 2023 after allowable add-backs, However, the group agreed a preemptive waiver with senior lenders as part of a package of requests, including a reshaping of FY '24 covenants. I will talk to the revised covenant package later in the presentation. Now to Slide 15. The group had net operating cash flows of $17.6 million for FY '23. Pleasingly, a return to positive operating cash flows with the second half of the year being operating cash flow positive, including the principal elements of lease payments that are presented in financing cash flows. The group expects to see further improvement in operating cash flow in FY '24 with a projection to be free cash flow positive across the year. $15.3 million of cash was collected from the ATO under income tax carryback rules for the FY '22 tax return. AMA Group has also recorded a receivable of $4.2 million for further carryback expected to be received upon lodgment of the FY '23 income tax return in the first half of FY '24. Interest paid was down slightly from prior year, with the impact of recent interest rate rises offset by remaining hedging and the fixed rate on the convertible bonds in addition to the receipt of $6.1 million of proceeds from the closeout of the interest rate hedges in June 2023. I'll now hand you back to Carl.

Thank you, Geoff. In the interest of time and with the headlines covered earlier in the presentation, I will not cover off on segment performance in detail, and we'll instead move on to the strategy and priorities. As always, I'm happy to address any questions at the end of the presentation. Now to Slide 23. We have updated our 5-year strategic targets to the reflect current planning, while our objectives, strategic pillars and broad focus areas remain as previously stated. Now to Slide 26. While ever we remain in this current high inflation environment, ongoing price management is required to ensure that payment for the work we complete keeps pace with inflation and pricing reviews are now part of the business as usual activity in AMA collision. During FY '23, we also achieved interim pricing for Capital S.M.A.R.T from October 2022 with FY '24 negotiations completed earlier this month and applicable to all repairs booked from 1 July 2023. This agreement will now return to annual pricing reviews for the remaining 12 years of this services agreement. Now to Slide 27. With significant network and organizational optimization activities undertaken, the group now has a fit-for-purpose structure and will move to the ongoing evolution of the network and continue to address site profitability. Site utilization has improved with network adjustments, but remains impeded by labor shortages. During the year, we opened a new ACM parts warehouse in Queensland, which rounds out the East Coast supply network. Following ACM parts moving out of the Gold Coast around a warehouse and into Hammett in March 2023. We converted that space into a repair center to consolidate some local existing operations into the larger and more productive site. In Heavy Motor, we will soon transition our South Australian site to a new Wales branded facility with increased capacity, improved facilities equipment and customer service offering. As we move into FY '24, we are planning similar works in Gosford and Townsville. 4 sites remain hibernated and we will look to reopen those sites into the future. Now to Slide 30. Whilst the overarching strategy has not changed, our priorities will continue to evolve over time as shown here. Now to Slide 31. Our supply strategy remains a key part for the long-term value creation of the group. In particular, ACM's parallel import parts program has gone from strength to strength, which has seen a target expansion of the range based on demand as well as improved pricing through FY '23. This program has repeatedly broken sales records over recent months. We have also recently launched the aftermarket parts program following a significant quality assurance program, and we look forward to this developing as a key part of the supply strategy over time. Now to Slide 32. As previously announced, earlier in August, we concluded negotiations for new pricing under the Capital S.M.A.R.T Services agreement with Suncorp. The new pricing is applicable from 1 July 2023 and reinstate annual pricing as well as providing additional clarity on that repricing activity in the future. Arrangements include transitional support, while the group implements several operational initiatives, which are planned to lower the cost base, improve efficiency and profitability of Capital S.M.A.R.T and offset the loss of the transitional support at the end of FY '24. As a result of the revised pricing agreement, we expect Capital S.M.A.R.T to contribute to AMA Group EBITDA in the range of $32 million to $36 million on a post-AASB 16 basis, excluding approximately $7 million of rebate benefits captured within the group results in FY '24. Now to Slide 33. As the group continues to pursue revenue diversification opportunities, the direct revenue program has focused on the promotion of AMA Group's network and capability with an emphasis on accident management, fleet management, ride share and rental companies. Now to Slide 34. As we look to the future, we see opportunities to continue to improve our service offering within the physical infrastructure of our sites. Such opportunities may include ADAS, the expansion of private work and ancillary services such as [ Wings Grant ]. In identifying opportunities, the group will explore global trends and operating models which may provide insight into a complete customer experience provided by others in the global industry. Now to Slide 35. Following an incredibly challenging few years for both the collision repair industry and AMA Group, in which we have undertaken huge transformation. The timing is right for new leadership to realize the potential of the group. As announced last week, effective the first of September 2023, Anthony Day has retired as Chairman and Non-Executive Director of AMA Group; and Paul Ruiz has retired as Chair of the Audit and Risk Committee and Non-Executive Director. Current Independent Non-Executive Director, Caroline Waldron, has stepped into the role of Chairperson for the group. Talbot Babineau has been appointed Deputy Chair and Simon Moore has become Chair of the Audit and Risk Committee. Kyle Loades is continuing in his role as Chair of the People Committee. The Board will review its composition and skills before commencing a Non-Executive Director recruitment to ensure a fit-for-purpose board, which will support the group as it pursues the opportunities that lay ahead. Finally, I will retire as Executive Director and CEO at the Group's 2023 AGM on 23 November 2023. The Board will undertake a formal search process for the new CEO with both internal and external candidates considered. Now to Slide 37 and the FY '24 outlook. Having reset commercial and operational fundamentals, the Group is preparing for profitable growth in line with the company's strategic objectives. Strong trading results from May to August 2023 provide confidence in FY '24 guidance, which the Group reconfirms at $86 million to $96 million normalized post-AASB 16 EBITDA. Further, the group expects to be cash flow positive across FY '24. I'm incredibly proud of what we have achieved in my time as the CEO. We have reset the base business. We have established a new leadership team. We have improved governance and restored profitability post the substantial impact of the COVID-19 era, as well as having established a strong base for the evolution of the company. This leads nicely into handing over to Geoff to cover off on capitalization and the equity raising announced today.

Thanks, Carl. Now turning to Slide 40. As previously disclosed, our senior debt facilities are in place until October 2024. However, with the new requirement to repay $35 million of senior debt by the end of December 2023 as part of a reshaped covenant requirement. I'm pleased to say the relationship with our banking syndicate remains strong as evidenced by our ability to obtain changes required to provide the company with a clear outlook on FY '24 covenants. For the September and December 2023 quarters, we will be required to meet an annualized minimum EBITDA of $20 million with annualization from first July 2023. In the second half of FY '24, we revert to a net senior leverage ratio covenant of 4.25x and 2.75x for the March and June quarters of 2024. We have also converted the maximum net debt limit to a minimum cash requirement of $15 million at the end of each month. Management forecasts to meet revised covenants moving forward, which provides a stable platform for our financing activities, such as today's announced equity raise and debt refinancing that will be implemented in FY '24. The proceeds from the equity raising will ensure we have sufficient funding to meet the $35 million debt repayment in December 2023, provide additional liquidity headroom to meet all operational requirements and seasonal working capital movement through FY '24 and de-risk the refinancing task for the residual debt. With just over 12 months until the balance of our existing senior debt matures in October 2024 and convertible notes with a put date in March 2025. The group intends to investigate refinancing options through the first half of FY '24. Based on our post-equity raise capital structure, and FY '24 earnings profile. A focus of any refinancing would be to provide flexibility to pursue acquisition growth, where it makes sense to do so and invest further in our part supply strategy. Turning to the Slide 41. The company has today announced a capital raising of $55 million, which includes a $17.6 million institutional placement, including a $2.5 million placement to certain AMA Group directors, which will be subject to shareholder approval and a $37.4 million non-renounceable entitlement offer. AMA Group Director Simon Moore, Kyle Loades, Talbot Babineau and Caroline Waldron will also be taking up to their pro rata entitlements in the accelerated portion of the institutional entitlement offer. Both the institutional and retail elements of the equity raise are fully underwritten. The offer price for the new shares will be $0.075 per share, representing a 37.5% discount for the last traded price of $0.12 per share on the 30th of August 2023. And a 26.3% discount to the theoretical ex-rise price of $0.102 per share. As mentioned earlier, the proceeds of the capital raising will be used to meet the $35 million debt repayment in December 2023, and provide additional liquidity and working capital for the business and ultimately contribute to a significant deleveraging of the company. Now turning to Slide 42. Following the completion of the equity raise, pro forma June 2023 cash position increases to $81.1 million, and net senior debt reduces to $84.9 million. At the midpoint of our FY '24 guidance this provides a June 2023 pro forma net senior leverage of 1.9x, with total -- net total leverage reduced to 3.1x. I'll now hand you back to Carl to close the formal part of the presentation.

Thanks, Geoff. As we reach the end of our formal presentation, I would like to take this opportunity to thank management and all our employees for their ongoing dedication and commitment to our business. It has been a privilege to serve as the CEO of this business, and I look forward to seeing the company evolve into its next phase under new leadership. I will now address questions. Please note that you may submit your questions through the webcast facility.

[Operator Instructions] Your first question comes from Chris Savage with Bell Potter.

Just around the free cash flow positive for this year. I'm assuming that includes lease liabilities?

I might just jump in with some of the online questions. So the first question is from Peter. What is the forecast net profit after tax not interested in EBITDA for the 2024 financial year?

Peter. So we've put out EBITDA guidance. So we don't tend to provide guidance on NPAT. But what I would point you to is Slide 12 of the presentation. We're obviously not projecting any impairment expenses. Depreciation and amortization, we are expecting to be a little bit lower than this year. Conversely, finance costs are a little bit higher. And then obviously, the income tax benefits will sort of come off that. So hopefully, you can sort of walk through those maths, but certainly an improved position for this year.

The next question is from James. I do not believe there are any people on the Board that have run a panel shop or group of shops. This needs to change. What are the Board doing to remedy this as the current strategy is not appropriate?

James, I'll take that. So I appreciate the question. I think that the company and the Board goes through a fairly rigorous process in selecting Board members for the corporation. That selection process considers all of the elements required to be the director of an Australian listed organization of circa of $1 billion turnover. And whilst I appreciate your comment around panel beating experience. I think that is one of the things that can be taken into consideration. But the Board obviously goes through a very rigorous process to examine all of the attributes and all of the experiences and qualifications necessary to be a director of a public company when making those appointments.

There are no further questions on the webinar at this time, nor on the phones or we'll just wait a moment. It looks like there is a question in here from Warren. I'll just wait for the host to put Warren through.

Your next phone question is from Warren Ashley Jeffries with Canaccord Genuity.

Just on Board composition. And is there a skill set or a capability you maybe specifically looking for going forward? And maybe just a bit of a flavor for you talked positively about the start to the first quarter '24. Just in reference to how that stacks up maybe against fourth quarter or prior periods just for a bit of flavor on momentum going into '24?

Warren. Yes, the Board obviously is in a position now with obviously, a need to recruit a number of new board members following the retirements. And again, the Board will consider all of the skill sets required both industrial, financial, legal, compliance, and all of the normal mix of skills that you would get in an ASX-listed Board composition and our corporate governance statement that was recently issued to the web today goes through those various elements of self-assessment around that. So that will certainly inform the Board and our new chair as you go through that process. In relation to your other question, we have our quarter 4, if you look through the slide that detailed our quarter-on-quarter performance as we transition from FY '23, you can see that the Q4 was particularly strong. And whilst there is a degree of seasonality around that, the results that we have achieved through July and August certainly give management confidence that the assumptions that we have made around the forecast and guidance for this current financial year have merit. And we believe that the run rate as we exit FY '23 and into FY '24 provides a very solid basis for the performance of the company into the coming year and also into future years. So it has certainly been a good trading period for the last 3 or 4 months. Management has done a lot of work over the last 12 months to prepare for that whilst month-on-month results are interesting when they appear, they are the result of a year or so of foundational work done to produce those results, whether it was insurance pricing that we went through the pain of doing in May or June of last year, whether it was the work that the operations team did to reconfigure the [ rapid ] network, all the work that our people team have done to add labor to the business all of those have really started to deliver results for us through Q3 and Q4 of last year and certainly into Q1 as we enter FY '24. So whilst the results for Q4 for last year were good we are certainly seeing a nice strong start to the year as all of those initiatives that we worked through and some of the more difficult than others in FY '23 are really starting to deliver results in FY '24.

Your next phone question comes from Tim Plumbe with UBS.

Apologies, I jumped on to the call a little bit late. I had something else on as well. So apologies if you've already answered this call. But just in terms of thinking forward, I think you guys have said that $35 million gets repaid by the 31st of December. You've also highlighted $17.3 million of liquidity and working capital. When we're thinking about net debt in kind of 6 months' time, do we just take the net senior debt of kind of $85 million and add on that $35 million plus some $17 million. Like how should we think about free cash flow over the next 6 months, please?

Tim, I'll take that one. So the pro forma $85 million or $84.9 million, which is listed on Slide 42. That's obviously the full benefit of the cash from the full $55 million equity raise. So that's obviously gross debt offset by cash. In December, we'll put some of that cash into the debt. So that would -- we would expect to further reduce by the free cash flow generated across the year.

I'll jump in with a couple of the webinar questions. It sounds like there might have been a technical difficulty and a few people were unable to hear Geoff's response to Chris' question around whether free cash flows is after leases?

Sure. So just to confirm, we are projecting to be free cash flow positive. So that is obviously operating cash flow positive, but also free cash flow after all lease expenses and capital expenditure for the year.

There are no further questions on the webinar or on the phone lines. I think we will cut this off. And obviously, the company is available with our details on the announcement.

Thanks, Alex. From my perspective, that this will obviously be my last earnings call for the company. I certainly came into the role after a year on the board under some interesting circumstances. I'm incredibly proud of the work that has been done in the company during my nearly 3 years as CEO, I'm incredibly proud of the management team that we've been able to put together and the work they've done with all of the employees of AMA Group. And I feel the company is absolutely poised to be everything it should be and become everything it can be in the years to come. Thank you for attending the call, and I look forward to talking to you in the future. Thanks, operator.