AMA Group Limited (AMA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the AMA Group's Debt Extension and Equity Raising Webinar. [Operator Instructions]. I would now like to hand the conference over to Mr. Mathew Cooper, Group Chief Executive Officer. Please go ahead.

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 committed to participate in this webinar unless they are institutional accredited investors. So if you're in the United States and not an institutional accredited investor, please disconnect from this webinar. Thank you for taking the time to join us for this presentation of AMA Group's Debt Extension and $125 million Capital Raising. For those of you joining us via webcast, you should be able to view the presentation on your screen. If you are joining us via teleconference, you should have access to our investor presentation via the ASX platform or our company website. I will begin today's presentation with a summary of the business overview, industry overview, business results and outlook, along with details of our portfolio of businesses. I will then hand over to our CFO, Geoff Trumbull, who will take you through the debt extension and capital raising. We will be taking questions through the webcast facility today. You can submit these at any time during the presentation and we will address them at the end. Let's begin on Slide 4. AMA Group continues to have a positive growth trajectory with a strong operating performance in FY '24. Capital SMART was ahead of expectations, AMA Collision is building on foundations, and Wales is outperforming. Unaudited normalized FY '24 pre-AASB 16 EBITDA of $49 million is up 125.1% on FY '23, including ACM FY '24 pre-AASB 16 EBITDA of $45.3 million is within the guidance range of $44 million to $49 million. Underlying growth is expected to continue into FY '25 and beyond. ACM Parts is to be divested and the AMA Group will focus on collision repair operations. Capital SMART will focus on optimizing operations, delivering on the customer value proposition and growth. AMA Collision will execute Project Wallaby to improve operations. The group will optimize and grow specialist businesses. Wales will remove bottlenecks and continue to strengthen customer relationships. Recapitalization facilitates funding certainty, which allows the business to focus on profitable growth. Existing syndicated debt facilities are extended to 31 December 2025. Geoff will cover further details later in the presentation. We will complete a $125 million fully underwritten capital raising that resets the balance sheet. These funds will be used mainly to repay senior debt and convertible notes with the residual to repay capitalized interest, transaction costs, future working capital and growth requirements. The residual debt of $80 million represents 0.59x net leverage ratio, down from 3.18x pre-raising. Now to Slide 6. This provides an overview of the business. AMA Group is a people business with more than 3,400 team members, operating from 142 locations, and we have a portfolio of 7 collision repair industry businesses with a revenue base of $933 million. We will explore these businesses in more detail in the remainder of the presentation. Now to Slide 7. The investment thesis for AMA Group has 4 limbs. Firstly, there are strong industry fundamentals, strong demand factors, increasing population, increasing vehicle car parc and increasing kilometers driven. Collision repair is an essential service with low risk of replacement by automation. Second, there are scale benefits. Scale provides a solid insurer customer value proposition with a national network and also enables maintenance of ongoing skills and breadth and depth of operational leadership. Third, the organization has profitable growth plans: Organic, vertical and through targeted acquisitions. Fourth, the organization has a disciplined approach to capital allocation. Having completed network rationalization in prior years, the focus can now be on considered investment opportunities to drive performance and growth. Now to Slide 8. The business has been reset after a period of underinvestment, COVID impacts and network rationalization. Profit and margin performance continues to increase from the lows of FY '22, higher gross and net debt levels since FY '20 are reset post this capital raise. Turning now to Slide 9. The Australian Collision Repair market remains highly fragmented. AMA Group has a leading position with 136 sites in Australia and New Zealand and approximately 14% market share. Now to Slide 10. As I mentioned earlier, market dynamics support long-term growth. More vehicles on the road, more kilometers traveled, claims frequency increasing and average insurance claim size growing. These have normalized post-COVID and support the investment thesis. Now Slide 12 and the FY '24 highlights. As I mentioned, we're a people business and have continued to focus on growing and retaining our team. We increased 146 team members in FY '24 and reduced turnover by 8.4 percentage points. Capital SMART performed ahead of expectations. Pricing and scope criteria under the Suncorp contract were reset effective 1 July 2023. And the business delivered over $20 million of annualized pre-AASB 16 EBITDA assets through project shift. AMA Collision continued to reset the network and through Project Wallaby is now building on these foundations to improve further. Wales outperformed with the South Australian site relocation delivering solid results and the refreshed forward brings strong depth of experience. The business delivered to guidance with unaudited normalized FY '24 pre-AASB 16 EBITDA of $49 million, up 125.1% on FY '23. Now to Slide 14. AMA Group is now positioned to focus upon future growth opportunities. The business will deliver growth by focusing firstly upon exceptional customer service with clear communication, timely repairs and the highest quality. Second, on our people. We care about each other, and we will keep them safe, engaged, rewarded and continue to develop them. Third, we see profitable growth opportunities by growing our team, optimizing our operations and maintaining and growing our networks. And fourth, we'll be even better tomorrow, innovating, focusing upon our customers' needs. Now to Slide 15 and the outlook. Repositioning the balance sheet allows AMA Group to turn its focus on core growth initiatives, net leverage of less than 1 returns the business to pre-FY '19 net leverage levels. FY '25 normalized pre-AASB 16 EBITDA is expected to be above FY '24, and we see a pathway to pre-AASB 16 EBITDA margin target of approximately 9%. We will achieve these improvements by continuing to invest in our people, taking our vacancies from approximately 250 to approximately 100, resulting in more production from existing facilities. AMA Collision will further repair and improve the base business through Project Wallaby, which is expected to deliver greater than $20 million in benefits and expand through growth greenfields and acquisitions. Capital SMART delivered on project shift and we'll now focus on capacity expansion, improved volume throughput and reducing average repair days. Specialist businesses represents diversification and unique market opportunities of ADAS, Prestige and mechanical. Wales will continue to expand capacity through a reduction of bottlenecks, and this expansion is expected to deliver $1.5 million in improved pre-AASB 16 EBITDA over the next 2 years. We have a strong cost control culture and this has topped down rationalization of the Board and management team has resulted in further savings. Now turning to our portfolio businesses, beginning with AMA Collision on Slide 17. The AMA Collision business has more work to do to drive improvement. This business unit was most impacted by cash constraints, leading to a loss of volume and team members in early FY '24. The focus has been on reversing these impacts by investing in insurance relationships to restore confidence, resetting the balance sheet will support that confidence. Now to Slide 18. The graph at the top left shows the reset of the network from FY '20 as the business responded to competitive investment, COVID and removing inefficient locations. This is a baseline from which growth can now be pursued. Now to Slide 18. It is through the structured Project Wallaby program that the business is targeting to increase pre-AASB 16 EBITDA in excess of $20 million over the next 3 years. This will be achieved by further repair base, building stronger customer relationships, providing exceptional and consistent customer experience and refreshing and growing the network. Now Slide 20 and Capital SMART. In FY '24, Capital SMART delivered ahead of expectations and delivered the benefits of Project SHIFT earlier than anticipated. These benefits more than offset transitional support provided by Suncorp. Capital SMART added more than 3,000 units of additional repair capacity through site conversions, moves and reopenings. Now to Slide 21. I have mentioned the Project SHIFT was delivered earlier than expected. The team transformed the customer offer through greater site convenience, reduced towing and parts costs and improved profitability significantly. Pre-AASB 16 EBITDA run rate benefits in excess of $20 million were achieved through this well-executed change program. Now to Slide 22. Capital SMART will pursue further improvement and growth with a focus on optimizing operations, expanding the workforce with more people being more effective in their roles, investing in the network with both refurbishment of the existing network and by growing 3 to 5 sites annually and improving customer satisfaction through convenience, communication, service and speed through a reduction in average repair days. Now Slide 23. Specialist businesses were recently separated to ensure these unique business opportunities have the right focus. These businesses all represent margin optimization opportunities and have their own growth profile. Over the next 3 slides there is more information on the opportunity in each of these specialist businesses: Prestige, TechRight and TrackRight. I will not go through that detail, but each business has a solid growth opportunity that is being pursued. Now to Slide 27. Wales heavy vehicle has grown pre-AASB 16 EBITDA 22.5% year-on-year and has further upside. It operates from 8 repair locations and has a strong and growing customer base. The new format site in Adelaide has performed well. To Slide 28. By removing further bottlenecks in the existing Wales footprint, we are targeting to deliver earnings uplift of $1.5 million EBITDA on annualized pre-AASB 16 basis over the next 2 years. Further, we expect the network to grow through acquisition. Now to Slide 29. The team has reset the ACM Parts business over the past 2 years, and it is poised for profitability. The Board has made a decision to sell ACM Parts and focus on a pure collision repair business moving forward. Pitcher Partners has been appointed to advise on the sale process. The ACM Parts business is now classified as assets held for sale. I will now hand you over to Geoff to take you through the Debt Extension and Capital Raising information.

Thanks, Mat, and good morning, everyone. I'll now take you to Slide 32 of the presentation. As Mat mentioned earlier in the presentation, our existing senior debt syndicate has agreed to extend the maturity of our senior debt from October 2024 to 31 December 2025. As part of this agreement, AMA Group will make an upfront senior debt repayment with $50 million plus accrued PIK interest of $3.8 million, which will reduce senior debt to $80 million. Further senior debt amortization payments of $5 million are scheduled for June 2025 and September 2025. However, we expect to have completed a refinancing ahead at this time. After the initial debt repayment and transaction costs, the pro forma cash balance will be $103.2 million, noting that $50 million of this amount will be set aside in an account held by senior lenders to settle the expected redemption of convertible notes in March 2025. This provides pro forma net debt balance of $26.8 million and reduces net leverage from 3.18x to 0.59x following the completion of the equity rate. AMA Group has received bank consent to proceed with the sale of ACM Parts with a 12-month window to complete the transaction. The higher of $25 million or 75% of net proceeds will be applied to further senior debt repayments. Following the completion of this sale and the further reduction in senior debt, we would expect to be in a net debt zero or net cash position. As part of the bank extension, our revised covenant profile has been established with the net senior leverage stepping down over time and the fixed charge cover ratio is stepping up over time. When combined with escalating margins from the start of calendar year 2025, there is a strong incentive for us to proceed with the refinancing of the residual debt as soon as possible. Importantly, the bank extension provides us with flexibility on CapEx and acquisitions over the next 18 months, such that our business plan and growth initiatives can be implemented. Refinancing ahead of the December 2025 maturity is expected to result in a facility of $80 million to $100 million, including $25 million to $35 million of bank guarantees and working capital facilities, or approximately $45 million to $75 million of drawn term debt. Now Slide 33. We are expecting to spend $25 million of CapEx in FY '25, up from approximately $14 million in FY '24, which is aligned with the terms of the senior debt extension. This increase reflects an uplift in maintenance CapEx as we implement a number of site refreshes across the network, including paint booth refurbishment and further investment in growth CapEx as we seek to expand capacity further across the network. Now to Slide 34. This slide provides an overview of the equity raising transaction as well as provide a summary of the sources and uses. The $125 million equity raise is fully underwritten and comprises a $32.5 million institutional placement and a $92.5 million 1-for-0.82 renounceable entitlement offer. The offer price is $0.042, which represents a 19.2% discount to the last traded price and 8.3% discount to the Theoretical Ex-Rights Price. There is also a director participation in the equity raising through the entitlement offer and sub underwriting, which is detailed on Slide 37. The sources and uses are summarized on the right-hand side of the slide, with the majority of equity raise proceeds being used to repay senior debt, convertible bonds and associated transaction costs. As noted here, there will be a small adjustment to the conversion price on the convertible notes. However, this is not expected to impact the likely exercise of the put option in March 2025. Now to Slide 35. This slide provides some further detail on the pro forma balance sheet movements for the equity raising and immediate senior debt repayment. The first column of adjustments reflects the net impact of the equity raise, net of transaction costs and the immediate senior debt repayment of $53.8 million. The second column then reflects the pro forma reclassification of senior debt to noncurrent, given the extended maturity is beyond 12 months of 30 June 2024, noting that the debt will remain current in our FY '24 accounts as the extension occurred after financial year-end. This results in a pro forma cash balance of $103.2 million and pro forma net debt of $26.8 million, which provides a net leverage ratio of less than 0.6x on FY '24 normalized pre-AASB 16 EBITDA. Further detail on the equity raising and timetable are outlined on Slides 36 and 37, but I don't propose to talk to these. I will now hand you back to Mat.

Thank you, Geoff. I will now address questions. Please note that you may submit your questions through the webcast facility.

[Operator Instructions] I will now hand over to Alexandra Holston to address any questions.

We're just going to give it a couple of minutes because there aren't currently any, so we'll just see if any come up. From Charlie Kingston from K Capital. Why are you talking about acquisitions when you failed to show the model at scale work and, in fact, seems to be the opposite, the bigger it gets, the worse it performs. Do you think you have the right to acquire anything when you're diluting shareholders? Surely you should demonstrate the business can be profitable before growth is considered.

Thanks for your question, Charlie. And we have shown, I think, that the business can actually deliver. I think you'll see now our Capital SMART results are quite strong, and that business is poised for growth. I share your view that the AMA Collision business has not performed to the expectations that we would want to see there. And we do need to do more work on repairing the base there, and that is indeed our plan with Project Wallaby. In terms of acquisitions, we will only do acquisitions where they absolutely make sense for the organization. They represent an appropriate deployment of shareholder funds to drive growth and further returns. Our approach to this is a very considered approach to acquisitions. And we won't be returning to the days of the past where acquisitions were probably not evaluated with sufficient rigor and were completed probably too quickly.

The next question is from Jim. The residual debt level seems too low. How is it detained?

I can talk to that one. I mean I guess the -- initially, the equity raise was sized to cover the upfront debt repayment, which was a requirement of the debt extension and also the upcoming convertible note redemption, which we expect in March next year. So in terms of long-term capital structure, we've mentioned a facility size of HD100. From market feedback, we believe that is where the appetite sits and certainly that we can get that done in the performing commercial bank part of the market. As Mat touched on earlier, it is a conservative balance sheet, and that gives us the flexibility and balance sheet resilience to pursue growth.

The next question is from Jason Lang. Could you elaborate more on the turnover rate? What are the common reasons people are resigning and what measures are being taken to reduce that?

Yes. Thanks, Jason. So the turnover rate is still at 30%, which is still too high in our business, although we do get industry data that seems to suggest that the industry is consistent with that rate, not only here but also overseas. We've been able to reduce that rate from about 42% over a year ago to now 30%, which is a solid improvement. Principally, people are leaving to pursue either alternative employment in the industry, alternative employment outside of the industry. We think that the key to actually reducing that level of turnover is to really focus upon center managers and making sure that our leaders in our business create the work environment where people feel rewarded, they feel appreciated, they're provided with the training. And that provides that work environment where people want to stay. And so as a result, we've actually invested very heavily in frontline leaders training, completing a number of courses for our frontline leaders. So they are better people managers. They create better environments for our people to work in. And I think we're seeing some of the results of that in our turnover stats that have reduced over time. But there is still more to do in this space. And we would like to see that number far less than 30% because as you can imagine, that's quite a disruption for the business.

The next question is from Jamie Young. Can you provide an update on the Capital SMART July 2024 contract price reset?

Thanks, Jamie. We're still discussing that with Suncorp. We're just working through a process at the moment. We hope to have that resolved very quickly.

Another question from Charlie Kingston. Is the Board now stable given the recent press and changes? Could you please clear the air on these issues and rumors about competitors having interest in acquiring AMA?

Thanks, Charlie. To address the Board changes, yes, we did have 4 Board Members resigned. And we did have Jo Dawson join our Board. We now have a more nimble Board of 4. We're not expecting any further changes to that in the immediate future. In terms of competitor rumors and so forth, I'm not sure what you're referring to. But we've had no inbound activity associated with that.

Another -- a question now from Simon Moore. Given the absence of any debt post the sale of the parts business, will the company commit to a capital return by a buyback or dividend at that time to return to a prudent capital structure?

Thanks, Simon. I can take that one. As I said before, I mean, we will get the ACM sale process done, and we'll probably be refinancing the residual debt. As Mat mentioned before, we have a pretty rigorous capital allocation process and all the options will be on the table at that point in time. We certainly have plenty of growth options in front of us. But if we think there's free cash available, we will certainly allocate it where most makes sense.

We have a question now from Jason Lang. In terms of salary, would you say AMA is paying in line with the market or lower or higher? I'm going to assume based on your prior question that you mean direct heads.

Thanks, Jason. Yes, we certainly meet the market in terms of the salaries or the wages for our trades. And as we came out of COVID, there was quite a significant inflationary movement at that point in time. We addressed that about 18 to 24 months ago. And what we're seeing now is a more stable workforce and environment around labor inflation.

Our next question is from Arthur van der Linden. Can you comment on the relationship with the insurers and how much margin improvement is still reasonable?

Thanks, Arthur. I think we've done a gradual work to seek to repair some of the damage done to insurance relationships over the last couple of years by engaging more proactively with them, by appointing business development managers to really focus in on their concerns and needs and so forth. So I think those relationships are in a very positive space. In terms of margin improvement, some of that is on us. We need to be better at the job that we do by getting greater productivity out of our facilities. They are bridging the gap in terms of the number of people vacancies that we have, which will drive greater throughput through the business. But we engage very proactively with the insurers to talk price on a regular basis and seek to make sure that we have commercial arrangements in place that can drive the right margin outcomes for the business.

The next question is from Charlie Kingston. Can you please comment on the true free cash flow of the business going forward? Is there a target for free cash flow after all normalizations and CapEx? When will this be a positive number?

Thanks, Charlie. I'll start off on that one. So in terms of guidance for next year, we haven't put out any guidance in terms of free cash flow. But I mean, talking to the sort of key items coming through the cash flow statement there, we will continue to have some noncash amortization of the market incentive, which will run through the P&L and that sort of circa $4 million at current run rates. The net interest cost will be significantly reduced, obviously, with the recapitalization. So we would expect that to be high single digits, which is really just the debt on the residual -- sorry, the interest on the residual $80 million of senior debt. The $50 million we have set aside for the converts is -- well, the interest on that will be expected to cover the coupons on that convertible. We've been hit in the past with working -- unfavorable working capital from suppliers tightening terms. We expect that to be released over time now that we've derisked the balance sheet. However, that's probably going to be offset with some broader growth in working capital as we continue to recover in the business. And then similarly, the tax payment. We have a tax receipt in '24 that we don't expect to continue. So all that being said, is the conversion from EBITDA to operating cash flow should be much tighter moving forward with really the noncash piece on the market incentive, the main difference there, a much smaller interest payment, we expect to be able to cover all of our CapEx requirements from operating cash. So we will be free cash flow positive from next year.

There aren't currently any other questions. We'll just give it a moment.

All right. So thank you all for joining the webinar session this morning. As there's no further questions, we'll now end the session. Thanks very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.