AMA Group Limited (AMA) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for taking the time to join us for this presentation of the AMA Group results for the half year ended 31 December 2023. For those of you joining us via webcast, you should be able to view the presentation on your screen. If you're joining us via teleconference, you should have -- all right. So hopefully, everyone can hear me. We're having some technical difficulties here. So as I just said, if you're joining us via webcast, you should be able to view the presentation on your screen. If you're joining us via teleconference, you should have access to the investor presentation via the ASX platform or on our company website. I will begin today's presentation with a summary of the half year business performance. I'll then hand over to our CFO, Geoff Trumbull, who will take you through the financial results of the business. And I will then review the outlook of the business. Let's begin on Slide 5. This half saw a substantial improvement in earnings and operating cash flow on the prior comparative period. The group delivered pre-AASB 16 EBITDA of $19 million, which is an increase of $16 million over the prior comparative half. Our pricing discipline continued, with uplifts across the portfolio, including Capital S.M.A.R.T. MRSA. The business has stabilized, with productivity and cost initiatives improving performance. The workforce numbers increased and attrition reduced. The group completed a $55 million capital raising, with $35 million of these proceeds used to reduce debt. And the debt refinancing process has commenced. The group closed the half with $34 million in cash. And we maintain pre-AASB 16 EBITDA guidance of $42 million to $49 million. Now to Slide 6. We're a people business and must continue to invest in our team. We are committed to keeping those people safe and well. Our LTIFR remains low at 2.72. Our Take the LEAD program continues to improve site safety and reduce injuries. We've also extended mental health first aid training to our leaders. Attracting people remains critical. Our voluntary turnover has reduced by approximately 10% on the prior comparative period, reflecting improved engagement. And our workforce has grown over the last 6 months. We have maintained our focus on the apprenticeship program and international hiring. International hiring has, however, been slowed by visa processing challenges. We will continue to develop our people. In the half, we extended our Frontline Leaders Program to our emerging leaders. And we now recognize our I-CAR platinum qualified repairers with our "power to platinum" program. We have now 12 sites that are I-CAR Gold status. Turning now to our business units, starting with Vehicle Collision Repairs on Slide 7. Vehicle Collision Repairs delivered an EBITDA of $33 million. This is a substantial $20 million improvement on prior comparative period. Repair volumes reduced over the same period, reflecting network and mix challenges. We continue to focus on improving underperforming locations, for which site-specific plans are in place. We continue to operate below maximum capacity, with labor supply continuing to represent an opportunity for improved throughput. Turning now to Slide 8 and Capital S.M.A.R.T.. Capital S.M.A.R.T delivered strong results. [ Project Shift ] is ahead of plan and largely complete. It delivers a full spectrum of drivable repairs to a majority of locations. The team engaged well in this change program, and there was less business disruption than we expected. Capital S.M.A.R.T has reduced costs and increased operational efficiency. The use of parallel and aftermarket parts has increased from 26.4% to over 32% over the half. We have further opportunities to improve: further increasing the use of parallel and aftermarket parts, a focus on repair rather than replace where possible, insourcing some outsourced services and continuing to improve estimating capability. Turning now to AMA Collision on Slide 9. AMA Collision had a solid portfolio performance, but work remains to rebuild the business. Margins remained compressed. And the business was most negatively impacted by the group's cash constraints prior to the equity raise. Operational cost cutting in the prior periods impacted business improvement capability. We are focused on resetting this business with a customer-centric approach. We've launched [ Project Wallaby ]. This transformation program will reestablish business improvement and estimating training teams, refresh and rebrand sites over the next 3 to 5 years and introduce a consistent and improved customer service experience. In parallel, we are progressing targeted expansions. We are reopening our hibernated site in the ACT. We are moving Harris & Adams prestige to a larger site in Gosford and have a new greenfield development in Townsville underway. Please now turn to Slide 10. As many of you know, most new vehicles have some form of advanced driver assistance systems or ADAS capability. Approximately 10% to 15% of vehicles repaired require an ADAS calibration. This is expected to grow substantially over time. The group currently outsources more than 20,000 ADAS calibrations annually. With the technology now available, the group is investing in in-house ADAS calibration solution. A new ADAS calibration business has been established as Tech Right. The initial $0.5 million investment will see the installation of ADAS calibration equipment at 6 sites across the network. Each of these sites will complete 30 to 40 calibrations per week, and calibrations will be charged at approximately $350 to $450 per calibration. After an initial evaluation period, we expect to invest further in this space. Turning now to Wales, the group's heavy vehicle repairs business, on Slide 11. This is a great business with profitable growth continuing. Whilst it delivered an EBITDA of $4 million, this is a substantial 33.9% improvement on the prior comparable period. Wales' relocation has proven -- the Wales Adelaide relocation has proven successful. The new site offers an improved customer experience and facilitates substantially higher throughput. We will align all locations to this brand and service offer over the next 2 to 3 years. Capacity expansions are planned or underway in Newcastle, Perth and Townsville. Now to Slide 12 and ACM Parts. We have reset this business over the last 2 years. We're now seeing core new parts programs progressing well. And we expect the business to be profitable in the second half of 2024. Underlying sales growth is strong. Parallel import parts sales increased 64.7% on the prior comparable period. And internal sales to AMA sites increased...

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58.4% on prior comparable period. Lower scrap prices has -- have challenged reclaimed product margins, with pricing action to be taken in the second half. We are nearing the completion of our consumables business reset, and our aftermarket expansion program is a little behind plan. Our focus is on top line sales growth. We will continue to expand parallel and aftermarket parts ranges and now have a compelling market offer to the broader collision repair network and insurance customers. I will now hand you over to Geoff to take you through the key financial information.

Thanks, Matt. And good morning, everyone. I will now take you to Slide 14 for a summary of first half '24's financial performance. First half '24 financial performance was significantly improved compared to first half '23, with revenues up by 10% to $469 million and normalized pre-AASB 16 EBITDA up $16.1 million to $19 million. As Matt mentioned, this uplift reflects the outcome of our commercial pricing discussions with insurers, most significantly the reset of the Capital S.M.A.R.T pricing in July 2023; the early benefits of a number of operational initiatives and site expansions; and the continuation of initiatives to reduce costs to reflect operational requirements. The breakdown of the $19 million EBITDA was approximately $13.5 million in Q1 and $5.5 million in Q2. As previously disclosed, Q2 is typically the softest quarter for our business, as the lead-up to the Christmas break sees less bookings and our repair sites are largely closed between Christmas and New Year. We saw a reduction in depreciation and amortization expenses for the half largely due to a review of make-good assumptions in first half '24 and some accelerated depreciation which was previously booked in first half '23 as part of our network consolidation activities. Finance costs increased year-on-year, as our senior debt is now unhedged and the interest component of our lease accounting increased with market rates. I can confirm that AMA Group has been in compliance with all debt covenants for the period. Turning now to Slide 15 and the summary financial position. We ended the period with $34.3 million in cash, reflecting an increase of $5.4 million since June 2023. This includes $51.9 million of net proceeds from the September 2023 equity raise, partially offset by the early repayment of $35 million of senior debt and $1.5 million of associated accrued interest which is normally paid in Q3. We continued to invest in the network, with $6.6 million spent on maintenance and expansion CapEx and a further $3 million build in ACM Parts inventory. There were some adverse working capital movements during the half as supplier terms were reduced by some suppliers. We are targeting to recover approximately $3 million to $5 million through the second half of '24. Now to Slide 16. With the repayment of $35 million of senior debt in December of 2023, net senior debt has reduced to $98 million, with this remaining senior debt maturing in October 2024. The group launched the refinancing process in November of 2023, and we continue to work through the process with a range of prospective financiers. We are confident this will be resolved through second half '24 well in advance of our senior debt maturity, and we'll update the market as appropriate. As part of this financing -- this refinancing, we plan to provide a solution for the existing convertible bonds which have a put date in March 2025. Now to Slide 17. The group had net operating cash outflows of approximately $5 million for the first half '24 once all lease payments are taken into account. Included within this figure is approximately $3 million of cash costs on onerous leases and exit costs on closed but not-yet-exited sites, a further $3 million build of the ACM Parts range and early payment of $1.5 million of accrued interest associated with the $35 million debt repaid in December. It is pleasing to see the ongoing improvement of underlying cash flows. With a stronger second half earnings projection and expected tax receipts of nearly $5 million in Q3, we continue to project to be cash flow positive [ after all ] rental and CapEx costs for FY '24. As noted earlier, our interest costs increased from prior year with the impact of recent interest rate rises, with our senior debt no longer hedged. Now to Slide 18. There continues to be a focus on corporate expenditure and in the current year, with normalized corporate costs increasing by approximately 4% year-on-year despite a higher level of international recruitment activity and an escalation in legacy legal costs as we move through those matters. I'll now hand you back to Matt.

Thank you, Geoff. Now to Slide 20 and FY '24 outlook. Our teams continue to a -- to do a fantastic job, and I'd like to thank them all for their efforts. We are a people business, and without them, this turnaround would not be possible. We are looking to continue the positive momentum we now have. Looking ahead, we will do the following things. We will continue to care for our growing team. We will ensure a heightened focused -- focus on exceptional customer experience for both insurers and vehicle owners. We will pursue profitable growth, maximizing what we have, taking on targeted portfolio growth, growing ACM Parts sales and investing in our Tech Right ADAS calibration capabilities. And we will execute the group refinancing. Strong trading results in FY '24 to date provide confidence that the FY '24 full year guidance remains. The group reconfirms pre-AASB 16 EBITDA guidance of $42 million to $49 million. Further, the group expects to be cash flow positive across FY '24. I will now address any questions. [Operator Instructions]

The first question comes from Chris Savage. "When do you expect the refinancing to be completed?"

Thanks, Chris. I'll take that one. As noted, we're really confident that gets done through the second half. And we're not putting any specific timetables on refinancing. We're working through with a number of interested parties and a number of potential structures. We want to make sure that we get the right outcome for our shareholders, so we won't be rushing it but confident that gets done in the next half.

The next question comes from [ Mark Tomlins ]. AASB 16 has been in place since the 1st of January 2022, so it is in the prior period comparative. Why are pre-AASB 16 EBITDA figures and guidance still being used?

Thanks, [ Mark ]. So the -- we continue to report within the statutory accounts on a post-AASB 16 basis. I think, based on feedback from a number of stakeholders and shareholders, the pre-AASB 16 measure tends to be more informative. And it's certainly what we work with our banks on, so we've previously provided both ranges as guidance. We feel like using pre is the more informative [ way forward ].

The next question is from [ Mark Tomlins ]. "On Slide 7, you show a doubling in sites that are losing more than 5% on 2H '23. Is this being caused by low utilization? Are they the same sites period-to-period losing more than 5%?"

Yes, I'll take that one, [ Mark ]. So in that chart, we actually show that Capital S.M.A.R.T as a single group of stores in the prior comparative period, so the 57 that you see there in 2H '23. Capital S.M.A.R.T never used to manage profitability at an individual site level, and the change that we made with the [ project Shift ] has enabled this to occur. So this is the first time that we're actually showing the consolidated vehicle collision repair network in this format, so you can see now that the -- across the AMA Collision and across the Capital S.M.A.R.T networks, there are 12 sites that are problematic for us at present. So we do have very clear plans in place to deal with those. And in any distributed network like this, you would expect to have some that are more challenged than others and some that we are focused on improving. Now sites go in and out of this bucket, from time to time, based upon a variety of factors, including relative commercials, the financing, any specific events we might have from time to time as well. So they are the 12 sites there across the Vehicle Collision Repairs network in total, and we have clear plans to address them.

The next question comes from [ Mark Tomlins ]. "On Slide 8, is the increase in non-OEM parts usage reflective of a change in business mix between the insurers you're repairing cars for?"

Yes, so thanks, [ Mark ]. So not reflective of change in insurer mix. Reflective of a change in activity at our end. So we've got an improved discipline and focus upon procurement to make sure that we are purchasing the lowest-cost parts that we can consistent with the [ PES ] that is applicable. We've added an additional supplier in this space that we didn't currently have. And then we have also -- so we have also increased the range at ACM, so we have got a greater throughput as a result of that.

The next question is from [ Mark Tomlins ]. How much did the dry conditions of El Niño for most of the last half, excluding the storms in December, lead to a decreased volume of damaged vehicles in need of repair?

So thanks, [ Mark ]. That one is a little probably not in our wheelhouse. That's probably a question more for insurers, as to what they saw. Certainly from our standpoint, we saw continued volumes, so we're not seeing any great impacts of weather one way or the other there, but the -- I think the insurers will be best placed to answer some of those questions.

From Chris Savage, we have: "Are you expecting any additional normalized adjustments in H2? Or is the net amount in H1 a good guide to full year?

I'll take that, Chris. The -- if -- there's 2 components to those normalizations. It's the first half adjustment for lease, early surrender of a lease. We don't expect that to reoccur in the second half. The additional expenditure on legal costs probably does carry into the second half, so that might be a reasonable guide but, hopefully, a little bit more.

From Warren Jeffries. "Depreciation and amortization has reduced meaningfully for first half '24. Can we expect a similar number in 2H '24?"

Thanks, Warren. Yes, I think first half is going to be a pretty good guide for second half. Thanks.

From [ Mark Tomlins ]. "You discussed the impact of ADAS on Slide 10. With incoming emission standards, the portion of EVs in the car park is set to increase. How do costs of repair vary for EVs?"

Thanks, [ Mark ]. I think it's important to, firstly, say that the Australian car park takes a long time to change. So there's 20-odd million vehicles out there, 1 million vehicles sold every year. It does take a long time for new technologies to progress through the market and make a meaningful impact on that. In terms of the costs of repair on EV versus an ICE vehicle, obviously it depends relatively on the accident that has occurred, but more generally, aside from the powertrain, the vehicles are quite similar, so there's quite similar technologies in them today regardless of whether they're EV or an ICE vehicle; and quite similar impacts. When you do have damage to the battery in an EV, that is quite expensive, so there is challenge with that. So there are some changes with it, but we treat them all as vehicles. We can repair them all. And we have the technicians who are capable and being trained effectively on EVs, as with all forward technologies that we see coming through.

From [ Chris Mittleman ]. What is the prospect for significant price increases from Suncorp in advance of refinancing?

Thanks, [ Chris ]. I'll take that one. So we obviously have 2 areas of the business that we deal with Suncorp on. The first is the Capital S.M.A.R.T portion of the business. And we reset that pricing as of the 1st of July. That contract has an annual price review mechanism within it. It is more structured now, so it is referable to particular measures. And we track those measures and would expect an increase to be pushed through in the 1st of July next year as well. In terms of the other portion of the business that we have, there are other contracts we have with Suncorp and we review those on a regular basis. They certainly have an annual review mechanism in place. And we continue to have fruitful conversations with Suncorp about what pricing is required in what markets we service.

From Chris Savage. Are there any further price negotiations to go with the insurers, or are these now largely all done?

Thanks, Chris. I don't think we can ever say that the negotiations on price are ever all done. This is an ongoing practice that we need to have, and we've embedded that practice now in our organization. We review the cost of repair relative to the price that we're receiving on a periodic basis. We have conversations with insurers on that same periodic basis. And we seek price relief where we need it to make sure that we're generating an appropriate return based upon the cars that we're seeing. So I think it's an ongoing portion of our business and something that does not have sort of defined windows as to when we do it and when we don't do it.

From Warren Jeffries. Are expectations around the positive FY '24 cash flow result, after leases and CapEx, also before the benefit of the $4.7 million tax refund.

I'll take that, Warren. So that's all inclusive, that projection, so basically excluding refinancing -- I'm sorry, financing, yes, [indiscernible] but includes the tax.

From [ Mark Tomlins ]. Based on the net debt figure -- net debt and funding disclosures on Slide 16, is more PIK interest likely to be accumulated in 2H?

I'll take that one, [ Mark ]. So as we've said on that slide, PIK interest continues to capitalize on the loan. That's obviously subject to when we complete the refinancing, but all things being equal, it would be a similar amount of it in second half. So about $1 million.

There are currently no further questions, so I will hand back to Matt.

There's nothing online...

No, nothing online.

No, okay. Well, thank you all for your questions. If there's no more questions: Thanks very much for everyone joining this webinar this morning, and we will now end this session.