Amotiv Limited (AOV) Earnings Call Transcript & Summary

Well, welcome to the earnings call of GUD's results for the 12 months ended June 30, 2020. I'm Graeme Whickman, GUD's CEO and Managing Director. And I'm here with Martin Fraser, the company's Chief Financial Officer. As a matter of housekeeping, we'll have time at the end of the call for the questions and discussions. So please hold your questions until then. And a recording of this call, along with the presentation material will be available later on GUD's website. Okay. We will start the call by running through the overall summary of the group performance in FY '20 and then briefly review the COVID-19 situation, then provide commentary on both our automotive and water businesses. I'll hand over to Martin to cover the financial results in a little bit more detail, and then we'll conclude the outlook of the coming financial year and then into Q&A. Now before we start with the results, it seems appropriate to reflect on the global COVID-19 pandemic. Now in the material, we touch on the COVID impact to our businesses and stakeholders, as you would expect. And this impact so far would suggest that we've been pretty fortunate in relative terms. But we do recognize outside the world of GUD that there are many people who have been deeply affected and so our thoughts and best wishes go out to those people and businesses. I'd also like to say thanks to our employees, a number of them listen to this broadcast in such uncertain times and particularly a large thanks to our health and safety teams who have helped us keep safe. And in fact, we've even improved our safety performance in the second half, which is so important. And then finally, to our leadership team, who really have rallied to lead the business in a productive, open and, I think, an employee-centric way. Now the clarity sake today, in our webcast and in our released information, we will speak to the statutory reported results. However, we also have included the pre-AASB FY result information to ensure all stakeholders do have a clear view of the accurate like-for-like. Okay. So let's turn to the FY highlights, FY '20 highlights on Slide 3. Now it becomes quickly apparent that the year should be viewed in 2 parts. I believe the overall result is a respectable result. And I think it demonstrates our relative resilience when you consider the wider business context. We delivered organic revenue of just shy, 1% up, taking our group revenue to $438 million. Our revenue was impacted, though, by the world publicized full or partial lockdowns of all the markets we serve. In New Zealand, we had little to no sales through the lockdown. And in Australia, we saw large drops in April and May. Those outcomes triggered wage subsidies in a number of our businesses and also in a number of different countries. Our underlying EBIT, you can see on the slide here, was down 9% to $80.7 million, although this was down slightly further at a pre-AASB level of 80.1%, which represents about 9.9%. So just as much as 10% down versus prior year. Now as part of our original guidance and the first half update, we spoke about a year of consolidation that didn't change all the way through that first half. Where there a number of what we were calling in the slide or on the slide as known variable. So the step change in FX, the domestic cost inflation, customer agreements, price rises and other items that will play out through the year. And these essentially came through as expected, and were part of the EBIT and margin outcome. Although naturally, we had expected a higher revenue base, given we'd continued our H1 revenue increase of just over 3% right up until even to the end of March. Now of course, nobody predicted the pandemic. And what we didn't know at the H1 juncture was that the pending second half COVID impacts, things such as higher operating costs to overcome those challenges, things like warehousing, shift patterns and the like. Our unhedged FX at a weaker AUD level. And we saw that had a floor and been also some one-offs. Although offset to a degree by the COVID stimulus and cash conservation actions that we put in place. Now these unanticipated COVID impacts really did way on both the EBIT and also the margin outcomes as a secondary and unanticipated way. We did improve our cash conversion. This was on track to what we guided. In fact, it was a little better than guidance due to the impact of some unusual purchase patterns in Q4 relating to some creditors. Through the COVID period, we were comfortable with our financial position. I mean as communicated previously, we had refinanced in January. And then incidentally, we added to that to the tune of $22.5 million incremental finance in July. Frankly, although we have a significant portion of all that combined funding unused, quite a significant portion, actually. We're confident that it helps with both our organic growth and acquisition aspirations going forward. We're also pleased to still be able to provide a final dividend to our shareholders at $0.12 per share, which reflects a final year payout of $0.37 per share and approximately 67% of underlying impact. And then finally, even through this very difficult period, the team has remained focused on the core business and growth strategies. And it was pleasing to note some businesses saw increases in the revenue generated by their new products even in these COVID times. And certainly, it was satisfying to note that the operational fitness efforts that we'd embarked on pre-COVID were impacting in a positive way through this period. On Slide 4, we take a quick look at the performance, H2 over H1, I think it's quite instructive, actually. At H1 across the group, we reported a 3% revenue increase, and essentially flat EBIT. I think it was like $100,000 or so versus prior year. In the second half, we delivered $210 million in revenue, which was down from H1 by just over 7%. So that was the half of a half impact. The sort of notion of 2 parts, whilst not exactly H1 and H2, I think, has certainly further accentuated when you review the automotive results, where the H2 revenue was down nearly 10% from H1. And of course, this naturally impacted on some of the operating leverage factors. And that H2 wasn't the first part, as we've already talked about, and certainly when we withdrew our guidance in late March, we were still in the positive state. So you can conclude there that the effects were felt through the second half of the second half, so to speak. But not on the slide also, but certainly easily calculated, the balance in corporate costs rose in the second half to about some total $6 million, which was far higher than in the first half, which was running at about $3.5 million or so. And this was driven in the second half by some one-offs and also some employee incentives reconciling between actually H1 and H2, meaning that the fundamental corporate costs weren't significantly higher than the prior year at EBITDA level. Now before we go into the segment results a little deeper, we wanted to review the COVID response and impacts experienced so far. So on Slide 5, we demonstrate the chronology of what happened. In the first instance, we were concentrating on the supply side. In fact, we were in that mode when we announced our H1 results. And much of the questions from our investors at the time were actually about supply and logistics. Now we have to quickly pivot to the reality of the COVID situation and how that would more broadly impact the markets where we're operating, not just where we we're sourcing product from. We put in place a COVID response framework concentrating on people, operational and financial health and, of course, managing the myriad of stakeholders. Now we believe how we acted to our partners through this period will also reflect on how well we would recover. And certainly, it wasn't all about defense. In fact, we had 10 key defense and actually 10 key offense actions to ensure that we could capitalize on the tough situation where possible on the way through. And to date and acknowledging there is plenty of water to go into the bridge. Martin and I are pretty satisfied on how the team have handled the impacts thus far. Martin?

Thank you, Graeme, and good morning, ladies and gentlemen. I'm Martin Fraser, GUD's Financial Officer. And I'll take you through Slide 6 and return later to talk you through the financial results in some more detail. Clearly, as Graeme said, the second half saw far weaker revenue. And you saw on Slide 4 that the automotive revenue was down approaching 10% on H1 levels. And Graeme will speak to the more -- more recent automotive performance later. Although commonsense suggests that COVID may have been the paramount driver that has impacted revenue shift. And yes, we did see 3 businesses trigger JobKeeper in April and May. We are aware in broad terms that the fallaway was a combination of lower end-user demand and reseller destocking as they sought to save cash, and we fully respect that. We do not have access to our customer databases to identify and quantify those -- the impacts between those 2 demand drivers. Hence, it's difficult to carve out explicitly the COVID impacts to revenue over the second half on a run rate with the sort of certainty that would likely satisfy [indiscernible]. And therefore, we are not going to attempt to do so. This page, however, outlines how we approached prudent financial management in response to COVID, including working with our suppliers, our staff and our customer stakeholders. To address the important financier stockholders, we also successfully tested a number of downside scenarios to ensure we had sufficient liquidity and financing facilities, and we're able to remain within financing covenants. And incidentally, we engaged in a very proactive and open manner with our finances to take them through that and ensure they were feeling comfortable throughout. As you'd expect, we worked on cash conservation items, which yielded approximately $1.5 million in savings and includes salary reductions of senior staff and KMP like Graeme and myself. And importantly, we avoided substantial redundancy costs by prematurely reacting. The savings that we achieved $1.5 million were partly offset by the cost of implemented staggered factory shifts to create social distancing in factories and warehouses, and with that some ship loadings. Some additional IT costs and some higher shipping costs, particularly in the earlier stages when shipping was more disrupted. And all of that totaled $0.5 million. JobKeeper and similar programs in New Zealand and Europe yielded $2.9 million, and we'll go into more of that later on. Finally, our balance sheet has remained robust throughout, and we have acted honorably with how we have treated and paid our suppliers. This has involved working with suppliers early on to balance their limited capacity and their demand. And when necessary, pushing out production schedules to get that balance right. This has resulted in some of our purchases being further on in the year than normal. And with that, our payables were higher than normal, and we'll see that later. Perhaps more importantly, for a lot of you, we have not experienced a jump in bad debts from the COVID event and our collections have not been disrupted right across all our businesses, and we'll talk more to the balance sheet later on. I'm going to hand back to Graeme.

Okay. Thanks, Martin. Well, let's take a closer look at the automotive segment results on Slide 7. The revenue was essentially flat. And as I said earlier, the revenue dropped significantly in H2. The underlying EBIT pre-AASB of $80.8 million dropped by 8% or just over $6.5 million with a small increase and thereafter some asset life reviews. The margin reduced by about 200 basis points. 2/3 of that was driven by the previous mentioned sort of known variables we were dealing within that year of consolidation. The remainder of the margin drop was the net impact of the unexpected COVID impacts such as those operating costs, a weaker AUD and our unhedged FX impairments, and that sort of had some partial offsetting benefits from the wage subsidies and cash conservation. Now I should call out at this point that through Q4, we received the government wage subsidy. Martin has touched on that, in Australia, New Zealand and France. And the latter 2 countries were much smaller amounts in comparison to Australia. So this was taken by at Ryco, BWI and DBA in Australia. And then Davey and GEL in New Zealand and France. Now as a point of clarity, we didn't make any staff redundant through COVID and we think we operated to a higher minimum standard with our employees than simply the JobKeeper approach required. Now of course, the lower-than-anticipated volume also denied us a certain level of GP dollars and, therefore, weighed on the margin versus what was originally expected. Now I'd like to give a quick update on recent automotive trends. If we turn to Slide 8. Now at the first half results, this information wasn't available, and I think it's certainly pertinent to review. What we see in the Australian car parc at just shy of 19 million units is growth of about 2%, and this growth is anticipated to continue over the next 4 years. Now although we potentially serve all those vehicles, we do know our addressable market as that 5-year plus, and that also has grown versus last year and is forecasted to grow upwards of 15 million all the way through to 2024. Further interest is the data on Slide 9. And firstly, we're seeing an increase in the average fleet age. Now this data is about 6 -- a little bit more than 6 months old. And I note, we've seen continuing new vehicle sales drops, meaning that less cars are likely being scrapped at the moment. And the fleet age probably can go even higher than what's shown on the slide. Now the other trend that's increasing is the sales of SUVs and pickups. This has been seen in the last couple of years. And that's now combining nearly sort of 75% of the total sales in any given year. And of course, all that flows into the car parc, which over time, remains a net positive for GUD because we over-indexed in the parts to the SUVs and pickups. On Slide 10. So Ryco delivered a flat revenue over last year. It came from our traditional filtration products and also some further traction in our new combo kits, and those are kits tailored for the specific 4x4 models, which feature a fuel water separator and together with a Catch Can, that product, by the way, won Ryco a third place in the AFR Most Innovation awards, which is fantastic. Now Wesfil experienced strong growth in the year, a positive effort through in FY '20, both in filtration, and also some new products. And we've mentioned that previously in terms of spark plugs and car care products and a few other products. We believe that Wesfil's brand proposition, which really is focused on that value-orientated product, coupled with this really unique route to market certainly has played well through COVID thus far. Interestingly both of these companies have been pretty quick to respond with COVID-related products, and there's a couple of images on the slide, but probably hard to see. And you can see an N99, not N95, but an N99 MicroShield cabin filter. Literally a month away from being launched from Ryco and then workshop hand gloves and wipes from Wesfil, and it, I think, demonstrates how quickly and how nimble we can move. Of note, IMG delivered strong revenue growth and their repair and remanufacturing demand actually hit an all-time record level of jobs per day. So moving on to BWI on Slide 11. And you can see that BWI's sales dropped. And it was driven certainly by a very large drop-off in H2. It was a combination more of, I think, the discretionary types of products being impacted. The fact that New Zealand was locked down and that its OEM customers started to have to slow down production and also the impact of BWI products related to the actual new vehicle market, which dropped very sharply in Q4. BWI, certainly in a positive light, acquired some OEM customers, which were new to them, and I think that certainly reinforces their credentials. And interestingly captured some house brand programs from existing customers. You look down the page and you look at AAG. And we've spoken about AAG's turnaround plan, and that was tracking and has guided H1 to our satisfaction, but that has seen an impact due to COVID. Very hard to maintain the tempo around migrating ERP systems or building mezzanine floors or other such things in any sensible way through the COVID period. So we've had to slow that down by about 3 months. The scope doesn't change nor does the expectations around how it improves the profit outcome. DBA had a strong growth through the year, actually coming more from domestic rather than export customers. DBA's export markets of the likes of Russia and some of the other Continental European markets really closed down very quickly. And even though we actually had greater growth in the U.S. through this period, wasn't enough to offset the export piece. But fortunately, we saw strong demand domestically. Encouragingly, there are further product extensions. So DBA would like to own the wheel end in mechanical terms, meaning rotors brakes, calibers and other such things. And so we've seen product extension in FY '20, right at the end of that. And in the last 90 days, they've received what's called R90 certification, which actually allows them to sell into some western European markets that weren't available to them in previous times. Okay. So let's move to our water result, Davey. So on Slide 12. So Davey's revenue increased full year by 3%. Although there was slight growth in H2 over H1, which is a little bit different in automotive, but in reality, it was less than 1%, certainly well short of our expectation. And the export market is heavily disrupted. Australian sales were up about 5% to 6%. However, this still was well short of the recent trends. And the Davey business, as many will know, is a volume-sensitive one. And this, coupled with a sales mix of products like the FireFighters from now offshore instead of our own plant weighed down result due to the factory load impacts. Now Davey did receive a marginal amount of New Zealand and EU assistance, as mentioned. And there were several one-off costs, as you can see in the deck, mostly noncash related to some product cycle planning outcomes, which led to both inventory and brand name impairments. Davey achieved just over 10% of its revenue from products launched in the last 2 years, and that's certainly an improvement. And we did see more traction in the Modular Water Treatment. In fact, into further fields from agriculture into medical, 1 hospital in New Zealand, 8 further hospitals were commissioned. But through the Q4 period, this just stopped absolutely cold in terms of momentum. Suffice to say Davey's performance was deflated due to H2, although the hard work on product development was quietly sustained. Okay. So let's cover off some of the key financial information. Martin, I'll hand over to you.

Thanks, Graeme. I'll start everyone on Slide 14, which contains the key reported profit and loss measures for the group. As an opening remark, I'd like to reiterate that this is the first period where statutory results adopt AASB16 prospectively, meaning the prior comparable period has not been restated. This is particularly evident in the lines of EBITDA, DA and then again, net profit after tax. On Slide 15, we can see these impacts more clearly. And to better understand the year on a like-for-like basis, please turn to Slide 16, and where the FY '20 result has also been outlined on a pre-AASB16 basis. We had a clear defensive strategy for FY '20, which expected underlying EBIT growth with modest sales growth, which was playing out in the first half, as Graeme outlined, and really right up until March. On this page, we can see the impact of a lower automotive H2 sales seen earlier over the full year result, which delivered negative operating leverage and mix changes for the reasons Graeme outlined also impacted operating leverage in Davey. JobKeeper and cash conservation actions also contributed, but were largely offset by the associated costs of COVID-19 and commencing amortizations and brand values, together with some reviews of some fixed asset and inventory carrying values. On this slide, a delta between EBIT and underlying EBIT can be seen of $6.5 million, which relates to significant items, mostly around Davey's product cycle planning that Graeme mentioned. And I ask you to turn to Slide 17 to see constituent parts of that delta. So here, you can see the bits and pieces. I won't go too long. And I also note that $4.9 million of those items are of a noncash nature. I'd now like to turn to Page -- Slide 18, where we can see that net working capital decreased slightly over the prior year-end balance. Inventory is slightly down, although that's assisted partly by the Davey inventory write-down we saw in the prior slide. Debtors are up as expected, due to contract changes with some resellers, and payables were higher than the prior year due to the timing of Q4 purchases, as we already covered. This leads us to Slide 19, where we go through -- where we can see a strong gain in cash conversion compared to the prior comparable period. We were pleased with cash conversion result and now we exceeded our internal targets. Turning to Slide 20. We -- here we outline the refinancing exercise completed early this year, and we did outline most of this at the half year results. So I won't dwell too much on that. That said, we did secure some additional short-term facilities starting July 2020, which will improve our flexibility and our ability to respond to term opportunities in a timely manner. Now I'd like you to turn to Slide 21, which talks principally to our net debt position. Our net debt increased by $9.5 million over the year, and that's a slightly better result than our internal target because the cash conversion was high. I'll now hand you back to Graeme to finish with the outlook.

Okay. Well, thanks, Martin. On Slide 24, we actually conclude the presentation. But before we actually get there with the outlook statement, I want to have a look at 23. I wanted to share with you some more contextual information on the slide, which we're sort of effectively calling, looking forward and back. I said earlier that we believe our results are a relatively respectable. And I think it certainly demonstrates a resilience versus other industries. Before our blackout period, we were receiving a number of questions as to how we sort of see the next 12 to 24 months. Now neither Martin or I possess a crystal ball. However, I think there are some insights that at least give some directional perspectives. In terms of the aftermarket, we believe there are some clear COVID tailwinds. And headwinds, and I suspect depending on the severity of lockdowns and mobility restrictions, they still position GUD in a relatively positive position. We expect increased domestic tourism, less public transport, ride-sharing usage, increased used car volume velocity. And frankly, a frugal, what I'm calling a frugal end customer approach, which might see an increasing trend towards using independent repairers, equally. History demonstrated in the GFC, as you can see on the chart, that the aftermarket industry performance didn't suffer as badly as other parts of the wider auto industry. Although, clearly, in the GFC, we didn't have to deal with the pandemic impacts. Now given miles traveled is such an important driver to the normal ebb and flow of the GUD businesses, the Apple mobility statistics you can see there, and I'm sure many are watching very closely. And they were coming back nicely in July, albeit now with Victorian lockdown certainly drives a different perspective if you look at the state level. So now I'd like to finish with our trading update and a general outlook for in FY '21. Now I must say that the last 6 months have certainly kept us on our toes. And who would have imagined what was to come. And as discussed, the sales impacts in early Q4 couldn't really have been anticipated. Now encouragingly, in June and July, and July is almost over, we've seen a jump in sales. And as July comes to that close, we believe likely that the 60-day sales trend will probably be in that sort of double-digit sales growth at territory. And we see a bit more of that in Australia than we do in the New Zealand, which is taking, I think, a little bit more time to come back and we certainly think this is due to some pent-up demand and is more centric to our wear parts. Now our view, and I think one shared by some of our customers, is an expectation for this to moderate as we progress through the first half. We do, however, continue to have faith that the underlying structural attractiveness of the auto aftermarket hasn't changed through the last 6 months. And we may still be the recipient of some of those tailwinds not just headwinds. Much of this will be reliant on the social distancing and mobility restrictions through the year. And we certainly know there are high costs to manage the appropriately required health measures of which we've embraced fully. In terms of water, sales in July have been strong. And we've started to see New Zealand improve, although our European operations are slowly returning. Now previously, we have detailed our efforts across GUD to strengthen our business foundations and will continue to sharpen our strategic focuses in the area of core and growth and acquisition. And that certainly hasn't diminished, but we do have to have sort of a pragmatic lens applied due to managing COVID at the same time. Now it's clear with the latest Victorian stage 3 measures, we are in an exceptionally dynamic situation. And that demand environment is vulnerable to a number of COVID-related impacts. And we continue to watch to see the evolving government stimulus actions on a day-to-day basis. Now with all of that in mind, GUD feels it's exceptionally hard to give any reliable guidance. And therefore, we will give further updates at our October AGM. Okay. Well, that concludes the presentation of the results. I'll now hand you over to the moderator, who will coordinate any of the questions that you might like. So over to you, Ari.

[Operator Instructions] Our first question is from Matthew Nicholas of Credit Suisse.

So well done on the results. I think, one question I've got. I think you spoke about I think what drove the decline in the EBIT margin in the second half from first half, which is pretty clear given what happened with volumes. Can I get a bit of color as to what happened with the gross margin because that looks to be rolled down on the first half. So could you just give a sense of how much of its mix, or the price rises that you were hoping to put through, which you understandably didn't put through? I'm just curious to get some sort of color what happened there.

Yes, sure. I mean you got -- thank you, Matt. You've got a number of things rolling through this. Obviously, you've got a full year impact of FX rolling through that was going to drive the COGS. I mean the COGS impact from an FX point of view full year was something in the region of $7.5 million. But in the second half, we also saw some weakening of the unhedged FX roll through there as well, which clearly, we hadn't anticipated at the time. Yes, there is a little bit of mix that rolls through there also. But there were some contributing factors such as that.

Yes. Matt, it's Martin. There wasn't any question on price. Price was not an issue. It's really, as Graham said, mix, particularly for Davey, that skewed the factory utilization and left us with some under recoveries that we weren't anticipating because FireFighters were selling like the heaven. And then the products we're making in the factory were being impacted by social distancing and the close down in New Zealand and Europe. So that really affected the mix. And we've also taken a review of some of the stock and so forth that was returned through that period. So we've been -- put a slightly cautionary lens on that. But certainly, in the first half, we were tracking closer to the one overall. And the week we ended up at the 2, and Graham's talked about the 2/3, 1/3, and that's broadly it, but it's certainly not a price.

So just to comment on -- or question on the outlook. Obviously, you're seeing very strong demand at the moment in terms of auto aftermarket. To the extent that you can actually decide for this, how much do you think the numbers you're seeing is a reflection of end user demand at the service or workshop level, how much do you think is actually a restocking phase on behalf of your customers?

Look, it's very hard to decide for that matter, as you quite rightly point out. I think, certainly in Q4, a number of our businesses probably were not -- didn't probably -- they experienced certainly a large destocking impact from some of our major customers who are naturally trying to preserve their cash positions, and that was well in excess, I think, of probably the actual end-user demand. Hard to articulate whether that was a delta of 5%, 10% or 15%. But certainly, that bounced back. And so I think through the period of June or sort of the second half of June and then into July, I think we saw a destocking type of turnaround. And then -- sorry, I should say, at the beginning of June. And then through the second part of June. And in July, I think that's more pent-up demand related. So I think that there's probably a little bit of destocking that sits there still, but not a great amount in the current numbers. We're up, as we said, double digits in the month of July. And you know very well that we're a lagging indicator. So what some of our customers might report in the current moment, we might feel the effect of in 4, 5, 6 weeks. So that's obviously a bit of a delta that exists as well. I don't think that there is significant -- I used the word significant destocking impacts to carry through. I think we're now starting to look at more the pent-up demand in the consumer -- end consumer piece.

And also, Matt, I'll add that the data feedback from the Salesforce suggests there's also a degree of catch-up demand going on. And those elements are all playing into why we feel it's a bit difficult to give guidance at the moment.

Okay. And just a last one from me. Just in terms of the balance sheet, I mean you've taken a cautious view of the dividend, which is totally understandable. But just in light of the good cash flow in the second half and where you finish, which I think is about 1.7x normal EBITDA. Should we look at the movement on the dividend as a precursor to upcoming M&A?

I wouldn't say that it's a precursor to a specific event. But what it certainly allows us is the flexibility to contemplate that on the way through. Our appetite has not changed, although naturally, we need to be cautious. But the opportunity is still out there. And therefore, we felt that this was a useful way of retaining flexibility in addition to squaring away another $22.5 million of extra funding in July to embrace those opportunities, plus a little bit of organic growth as well.

Matt, I'll just add, I outlined in my notes that we had been quite intimate, keeping our banks fully informed on the way through in the scenario testing. What we learned out of that process was the banks have been rather overwhelmed, and their response times have pushed out substantially to customer requests, even just getting in front of them to give them updates was challenging. And so cognizant of that, we felt it was wise to take those additional facilities. So we're going to be pretty fleet of foot with the facilities we already had not used, plus those additional mean that we'll be fleet of foot to respond to M&A opportunities. As always, the timetable of that primarily sits in the hands of the vendors. So yes, we're active in that space. We haven't stopped. There was a couple of weeks there that we really just needed to make sure our offensive actions were correct. So they took momentum out for a couple of weeks, but we're active in that space. We're cognizant on those things. But again, the timing is largely in other people's hands.

Our next question comes from Tom Godfrey of UBS.

Can you hear me okay?

[indiscernible]

Great. Can I just start with the autos business and the double-digit demand growth you've called out for June and July. Just wondering what you've seen in terms of growth in Victoria versus other states? If you could give us some color around that.

I mean it's a little hard to isolate when you're in the current month. So this is probably more anecdote than anything else. I mean clearly, the mobility impacts are, I think, fairly obvious. But in terms of workshops, as we sit with our field force out there, we're seeing probably a stronger rural level of activity in Victoria, as you would expect. The metros, I think, are probably down just that little bit from pre-COVID as it stands, whereas they have been bouncing back, pre this latest stage being pushed through into Victoria. The -- although having said that, though, there is still a little bit of a booking lead time out there as well. And that's primarily for the wear part. So the service-related type of business. In terms of some of the other businesses, which rely on OEMS, production lines, bodybuilders, those sorts of things. That's certainly slowed down just a touch through this last 2 or so weeks. But it's hard to give you a very definitive or very specific or empirical response, Tom, given we haven't quite finished a month, and also, it's quite variable.

Understood. And can I just to ask on the pricing environment for filtration and BWI? I know that played out as expected in the second half of '20, but just to comment as we move into fiscal '21.

As we said in the discussion on the slides, we had communicated that we felt this was a year of consolidation, and we actually achieved the pricing targets that we had set ourselves by each business. In fact, we were pretty pleased. I'm talking automotive here when I respond to that, given your question centered around automotive. Filtration in both of our business achieved what I would call modest pricing outcomes. But they were part of the plan, they were neither higher nor lower than what we had set out to do. So I'd just say tick to what we had expected. Going forward, I think that's a very difficult situation to contemplate. Clearly, in COVID times, there is, I think, a lot of uncertainty, and I think people will be cautious with their dollars. And we just need to reflect on that from our own pricing perspective as I'm sure our own reseller customers are thinking through. From a water point of view, just incidentally, we did actually put some pricing through that started on June 1, which actually stuck all the way through the month of June. That's just an essential comment. But we're expecting a very tight pricing environment, certainly for the first half as we look at what's in front of us.

I'll just add to that, Tom. If we look at the momentum we've carried forward from the price increases we implemented in the second half. The full year run rate, so to speak, as well as the same from supplier cost-downs, where we're coming off a low 70 exchange rate into a low 68. We did follow the currency strategy, we outlined to a number of you in the last few months. So we're coming off by approximately $0.015, $0.02. But we've got enough tailwind from those other 2 levers to cover that. So we're not under day one pressure for price increase to sustain our profitability. And anything that comes in the second half will come in the second half.

Understood. And Martin, can I just ask one more just around the sustainability of that payables balance increase. How much should we expect that to normalize into the first half of '21? And maybe just to comment on the outlook for working capital more broadly and cash conversion?

Yes. Well, certainly, I wouldn't want to sit here and call it out exactly because that does move a bit on your timings. But we certainly got a windfall of probably I would think around about $3 million from that, approximately. And -- but we'll see where we get to next year. We set out to achieve somewhere between 85% and 90% this year. I think we'd probably be setting ourselves a target of 90% for this year. Because to go less, you're probably not -- you're not supporting our new product development enough. But certainly, 90% is probably what we can call out, and we'll certainly try and do better like we did this year.

Our next question comes from Sam Teeger of Citi.

In terms of the first question, the rebate as a percentage of sales continues to step-up in the auto segment. Can you please provide just a bit of color around what's happening here as well as the expectations set for FY '21?

Sure. So our rebates, as you can see, lifted about $5-and-a-bit million, $5.3 million across all the businesses year-over-year. Giving you some sort of context to that, probably about 20% of that was purely volume-related. I'd say about 75% to 80% was a step-up in the rate. But within that, there were some one-off rebate outcomes. We knew when we settle the new customer agreements, I'm not pinning that all on that. But as a portion of that, we knew that we were resetting the business for the next 3 years to guarantee some revenue flows for the 3 years at the same time, and that's why we made the comment, Sam, around a year of consolidation. We are working hard on some of this operational fitness. So we are operating leaner as an example, we're probably 4% to 5% down in FTEs pre-COVID, I must add. We're working on the supply cost-downs that probably added anywhere between $1.5 million and a couple million dollars of improvement. So we knew that we had customer agreements. We knew we had the FX and a few other bits and pieces to offset. So that's why we're working so hard in the background. And this was one of those known variables, and that's why I wanted to be clear. And I said earlier, we had some knows variables, which were on track and then some of the lesser known later on in that Q4 period.

Got it. So just to clarify. Is that the first [indiscernible] years and we shouldn't expect any changes to the rebate in the next 2 years?

Look, some of that's volume related, Sam. So there's elements to that. And there will be some ups and downs, no doubt. But in large part, we're not expecting those types of increases next year, as an example, with it. Yes, that's specifically what you want to know. So that's how we'll play out.

You could have fine-tuning as maybe we enter a new category with an existing reseller that we're not very active with, for example, but no substantial changes.

Okay. And when you talk about M&A timing being in the hands of vendors. How many live acquisitions are assuming right that you can -- could be completed in the next 6 months?

Well, and then -- I won't quantify the next 6 months because I think that's foolhardy for me to do because simply that there could be 7, 8, 9 months. We're currently working on less than a handful live acquisition discussions. There's always ones floating around, Sam. And I think we've said earlier on in previous discussions that we have a target list that we continue to work. But there are, like I say, less than a handful on one hand that is live discussions. But again, it's very hard to have some of those conversations when you can only do it by Microsoft Teams.

Yes. I think I'll also add to that. They are they are businesses not owned by corporates. Corporates run to a pretty good timetable. And once they're committed, they follow through. These are businesses owned by families or owner-operator families. And they can go through fits and starts. So that's why we're saying it's more in their hands.

Got it. Great. And Martin, you provided some good color around currency. But given recent volatility, can you just elaborate a bit further in terms of expectations for gross margins over the next 2 halves, and how hedged at the moment?

Look, I'm not going to call out gross margins next 2 halves exactly because there's mix and other impacts there. But certainly, ordinarily, we would be 75%, 80% hedged for the year. 2, 3 months ago, I called out a strategy when the dollar was really at its trough saying that I felt that the true value of the dollar was closer to high 60s and that we would go under hedged until it got there and then lock away at higher-than-usual levels. So we have locked in closer to 90% of our requirements for the next 12 months, a little bit higher than what we did in FY '20. And so yes, that's averaged out. We started doing that progressively at 67%, 68%, 69%, which is exactly what we said we'd do. And it averages to just at the low end of 68%. So higher than usual. And that's why we think that's not as much of a potential risk as it was last year, where we only hedged around about 75%, and that bit us in the -- it bit us a little bit in the second half, as Graeme said.

Well, I think at the end of the day, we've been trying very hard to isolate a number of our key business variables and put them in a, what I would call, a structurally type box so that we can concentrate on things like demand and a few other bits and pieces.

Great. Just last question. Can you just please provide a bit more color around the inventory write-offs in Davey and AA Gaskets? And why it's a one-off?

Yes. So AA Gaskets is in the process of closing down its manufacturing and moving into the Ryco site, and will incidentally merge the back office accounting and support functions. So we're having a final make process run through. And there's some lines that we just have done the math on. They're not economic to wreck out the warehouse for some of these lines in terms of product life cycle, it's easy to kill. It's better to kill them now and take a noncash write-off than invest in more wrecking and let them die a slow natural death. So that's the gaskets one. And then at Davey, we've been doing a lot of work on the product life cycle. You can see quite a bit of that coming through in the sustainability report. And as part of that, Graeme, and I had to look at how they manage the transition from old to new product. And the conclusion has been that they have done 2 things that probably have been a disservice. One is that they keep old product and new product in the market in parallel, simply because they want to avoid taking hit on some of the roles. And that doesn't -- that just creates market confusion and margin pressure on the new product, and we think that's unwise. And it just introduces a degree of complexity and takes away the halo effect of the new product. So we want them to pivot quicker. We also want them to shorten up the product life cycle. So some of those products we just support in the auto market way, way too long. So that is a substantial change in our product creation process that we go through. And part of that also was, again, around confusion -- we had confusion on product, we also had confusion on brand because we were still using the Monarch brand, which originally came out of Perth and was a bit -- a year or 2 ago, we rebranded the reselling entity in Europe from Monarch to Davey. And it was, again, we felt we had a very, very strong brand in Davey, which was reaffirmed by the Brand Health Survey. And when we look back, we were just being busy fools, we were maintaining 2 brands simply to avoid a write-off, and were probably incurring more cost and margin erosion by doing so than just saying that's not a smart way to proceed forward. So we've -- that's -- those 2 all tied back to that process. Graeme, have I missed anything there?

Well, I think we -- in the Investor Day, we talked about the 4 key pillars for Davey, their strategy. One of those pillars is product and innovation. This is a natural plow on from the product cycle planning that Martin's referred to, shortening up our expectation on average life. And so this was, in our view, coming once we decided on the final cycle plan so that we could shorten up and make sure that things not just like Nipper and Lifeguard, but some of the other key products like home pressure systems that we actually have, what I would call, younger age of product. So you should expect us to come forward with a few more products on the basis of that in the coming years given the cycle plan that has just been recently agreed.