Amotiv Limited (AOV) Earnings Call Transcript & Summary

Okay. Well, welcome to the earnings call of GUD's results for the 12 months ended 30 June 2021. I'm Graeme Whickman, GUD's CEO and Managing Director. And I'm here with Martin Fraser, the company's CFO. And as a matter of housekeeping, we'll have time at the end of the call for questions and discussion, so please hold your questions until then. And a recording of this call, along with the presentation material, will be available later today on GUD's website. So we'll start the call by running through some key messages and the financial overview. I'll speak to the ESG, followed by some commentary on both our Automotive and Water businesses. I'll then hand over to Martin. He'll cover the financial results in more detail. And then we'll conclude with the outlook for the current financial year before Q&A. Now on the material, we do touch on the COVID impact to our businesses. It's clear on our results today and the other communications such as our Appendix 4E that we have been very fortunate in the relative terms. And we do, however, recognize there are many who continue to be profoundly affected. So our thoughts and best wishes go out to those people and businesses, particularly in Queensland and New South Wales at the moment. I'd like to say thanks to our employees who worked pretty hard through this FY '21 period in such a challenging circumstance. And really want to recognize our leadership team, who led the businesses in such a positive and deliberate manner. Now for clarity's sake today, in our webcast and in our released information, we'll be speaking about our statutory reported results which will be on a post-AASB 16 basis for both FY '21 and the PCP, but there's also a pre-AASB slide in the Appendix of the presentation for those who may be interested in that view. Okay. Well, let's turn to Slide 3 and FY '21 was one heck of a year in many ways. Our sales were really strong. The underlying EBIT was just above our guidance, and we achieved an all-time operational record result, actually, and there was strong end user demand, reflected the resilience, I think, of the auto aftermarket. And our recent auto acquisitions have been integrating nicely. Their performance, those acquisitions, that is, certainly in line with our expectations, and we're certainly keen on further opportunities in terms of acquisition. We did experience pressures in the supply chain. And certainly, we've been encountering inflationary challenges we have plans in place to mitigate. And again, we flagged that at the half year. The existing BUs in water and auto continue to work through their core and growth work streams, so no slowing down there. And all said, we remain confident, I think, in the business' position and positioning, but our eyes are also firmly fixed on the COVID uncertainties. Now on Slide 4, certainly, through the year, we provided profit guidance, and that was after the 2020 AGM, and we updated it again at the half year result. Now it's pleasing to note that the full year result was, as mentioned, a record for GUD, slightly ahead of guidance at both the underlying EBIT and also cash conversion levels. The overall revenue and underlying EBIT growth achieved in the year was compelling for both the existing and the new businesses. And those acquisitions again are performing well in line with our expectation. We delivered revenue growth of just over 27% with the organic component in terms of growth was about 15%, 15.2%, taking our revenue to just over $557 million. Now our revenue certainly benefited from some COVID-19 recovery in Q1, but that patent demand was seen across much of the year, so it continued. And our underlying EBIT was up 25-and-a-bit percent so $101.2 million. Now if we exclude the contribution from the acquisitions, the organic underlying EBIT was still up by 17% -- just over 17% to $94.5 million. Now this enabled full year dividends, nearly 2% above the pre-COVID-19 levels of FY '19 in spite of the expanded capital base following the year's capital raise and the acquisitions only making a part year contribution. The final dividend to our shareholders of 32 cps is up $0.20, which reflects a full year payout of $0.57 per share and approximately about 84% of underlying NPAT. And on Slide 5, we take a quick look at the performance of the half over half, so H2 versus H1. In H2 across the group against prior comparable period, we reported a 45% revenue increase and an underlying EBIT growth of 35%. And of course, the acquisitions played a part in this with just over $52 million. But if you strip this out, the revenue still grew by circa 20% and underlying EBIT about 17%. The H2 over H1 margin the drop, and probably the most appropriate comparison would be the organic underlying EBIT percentage of up 3 percentage points, which was expected and the flow-through of higher operating costs which we had flagged at the half year with a number of moderating actions that will carry into FY '22. Now before we go into more detail on the Automotive and Water segments, I wanted to touch on the subject of ESG. So GUD prides itself on some of the metrics it achieves in the areas of employee satisfaction and safety. We strive to operate as a top quartile company. And in these 2 areas mentioned, we certainly occupy that ground. We've been working hard to improve areas such as diversity, our ethical sourcing and the business reliance on non-internal combustion engines, ICE, revenues, all of which improved year-over-year. We do, however, have a greater ambition both at the Board and executive levels to broaden our view and an ultimate vision on the sustainability of our business and the impact we have on the world around us, whether in the way we operate or the products and services we provide. Now to that end, we've recently kicked off a multiyear effort to build a better foundation for shareholder returns sustainably. There are 3 phases over 24 months that have already kicked off with the materiality assessment with our key external stakeholders, and that will help us shape our internal thoughts. The second phase of future strategy and targets. And then the third phase will be the ongoing measurement of those targets. And I should also point out that from FY '22, we will actually have a part of the KMP and senior executive conversation linked to select ESG. Now there's more to come, and we will update our stakeholders periodically on the progress of what I've just laid out. Well now, taking a closer look at our Automotive segment results on Slide 7. Well, the revenue was up just over 34% net of acquisitions. That was 18.2% at the organic level. The demand remained robust, from H1 into Q3 and Q4 and was off the back of strong end user activity. Auto underlying EBIT was a record for GUD, whether you look at the total or just at organic levels. The underlying EBIT margin dropped due to acquisition dilution. However, at the organic levels, it was down about 10 basis points. However, the H2, and H2 versus H1 slide up next, talk to some of the tough cost pressures that rolled into the equation. It wasn't just the cost pressures related to the logistics and freight, it was also the level of effort to maintain supply of inventory. And I'm pleased to report we've been successful in that particular endeavor. It should not be a surprise to our shareholders as the resultant high inventory carry was well flagged as a deliberate strategy to provide what essentially is a buffer to overcome any issues and also to capitalize on grabbing maybe a little market share here and there. Now similarly, we flagged at the half year expectation of other cost pressures in addition to freight and logistics, such as supply cost ups and domestic cost inflation. Now these have all played -- or R&D playing out as largely predicted. And as part of our mitigation plan, the FY '22 price rises have already been announced, and we also might need to pull the trigger on further margin actions as we monitor our FX position. Now I would like to give a quick update on the half-over-half, I mentioned that previously, as we turn to Slide 8. So the auto H2 revenue against PCP was up just over 57%, acquisitions contributing about $52 million. However, the story was also strong with existing businesses who were up 23%. Organic underlying EBIT ex the subsidies as a Job Keeper was up 23% versus PCP. However, cutting to the chase and as flagged at the half year, it dropped. Specifically, half-over-half, it dropped by about $6.8 million in terms of EBIT dollars. And this was expected and was driven by the supply chain logistics costs peaking in H2, some of our FX hedging profile and the cadence of price rises. And perhaps that gives you a tiny bit more color in terms of the resulting margin delta that's on the slide. And then moving to Slide 9, I'd like to quickly update some important key industry dynamics. So car parc growth in the calendar year '20 continued in terms of growth, reached just over 19 million units, and that's forecast to grow to over 20 million units by 2025. And of course, and we know our addressable market is the 5-year plus vehicles, which has also grown in the calendar year '20 to just under 14.5 million units. And that's also our forecast to grow beyond actually 16 million units by 2025, quite an encouraging trend. It's not to say that some of our businesses aren't picking up revenue in the 0- to 5-year car parc. And perhaps the new legislation, which was passed into law in 2021 on the Right to Repair might also shift that dynamic a little in the future. Okay. Well, the further interest is the data on Slide 10. Firstly, we're seeing an increase in the average fleet age, which is forecast to continue, with the COVID impact flowing through, it might also mean less cars will be scrapped, and so that fleet age might even go higher than shown on the slide. The other trend that's increasing is the sales of SUVs and pickups, which is now combining to be about 75% of the total sales. And of course, they will flow into the car parc, which over time remains certainly a net positive for GUD in both existing and newly acquired businesses, because they're over-indexed in SUVs and pickups in serving those particular segments. Now on Slide 11, you can see the well-documented increase in the year-to-date calendar '21 sales, with increases of upwards of 46% in the last quarter, which is pretty strong. And this is also useful as we do have some exposure to our revenue driven by the new vehicle sales, particularly SUVs and pickups. If you want to sort of drill down and detail the hybrid and EV sales data, well, the growth is large in percentage terms, but low in volume terms, sort of less than 1% of all sales. Now whilst the current forecast expect about 3 EVs per hundred new vehicles sold and about 18 hybrids, which, obviously, have powertrains that are ICE related per 100 new vehicles sold, we believe that we're going to be well prepared to embrace that growth. Okay. So I'll probably turn to Slide 12 to talk about the resilience -- or reliance, I should say, on ICE revenue. And on Slide 12, you can see where we'll give you a quick update as to how we finished FY '21, where we now have only 40% of our revenue relying on ICE, so combustion engines. And that continues the positive trajectory we set ourselves over recent years. Now the next 2 slides speak to the acquisitions completed in FY '21. I won't go into too much detail there. On Slide 13, the acquisition of the ACAD Group, which we now call G4CVA has progressed well. I think really importantly here, the update centers on the integration effort, which is largely complete. We've utilized a dedicated integration leader. That's a first for GUD. And we positioned the auto elec business, AE4A, which was part of G4. We've put that into the BWI Group, which was part of the plan really right from the get-go in terms of the due diligence stages. No changes in terms of what we flagged for future CapEx, and the business performance of the G4 Group is in line with the expectations we had as -- at time of acquisition. Slide 14, same thematic really continues. ACS, Australian Clutch services, that integration has gone very well, part of the newly formed Friction group along with DBA disparates. Encouraging, the business performance after 4 months is actually ahead of our expectations. So all in all, we're feeling very positive about the 2 recent acquisitions. Moving on to our existing businesses on Slide 15. Well, Ryco had a very strong revenue growth. They furthered their product development outcomes. And we're proud of the AFR awards they received, both of them, which is a great indication of the quality of their business. And Westfil has strong growth. That enduring brand proposition around value-orientated products worked very well along with their outstanding customer service. IMG delivered exceptional growth, and their repair and remanufacturing demand hit record level of jobs per day, and that repeated throughout subsequent months all the way through FY '21. The team set up their first repair operation in New South Wales, and we're looking at other locations, which are all under review. And the IMG team also launched the hybrid battery refurbishment program, which, by the way, was quite a well-attended press launch heralding what we think is an emerging future revenue stream. Moving to Slide 16. Well, the BWI team really drove growth in the typical channels of auto elec in both trade and retail channels. They also enjoyed a really strong revenue lift in their OEM channels such as caravan and truck and trailer. We're feeling very positive on BWI's prospects. As I mentioned, they welcomed AE4A into the group. They delivered a very strong New Zealand result. And to cap it off, won another AFR Innovation Award, which is really quite important given the product development push the team have been on for the last 24 months or so. AA Gaskets delivered strong growth. And even though they were undergoing a massive transformation plan as they relocated the total operation to Ryco facility. So that's moved about 40 kilometers down the road and involved quite a lot of effort. So the growth was well received. And then finally, disparates Australia had a strong growth in both domestic and export markets. And although the export markets were probably a little bit choppy, actually ended up growing at a stronger rate than domestic. The team have actually recently, very recently, added more export markets. And the strategy, concentrating on brand line extensions, spawned another product range for the first ever DBA disc brake pad program in FY '21. Okay. Well, let's move to the water results on Slide 17. So Davey's revenue increased for the full year by just a smidgen under 6%. The export markets, as we've reported earlier, were heavily disrupted throughout the year, particularly the Pacific and Indian Ocean Resorts and certainly the Middle East. The European market went into essentially a hiatus and then showed sort of signs of life in Q4, although our product availability was certainly constrained at that point. The demand in Australia and New Zealand actually continued into H2. However, the Modular Water Treatment revenue was really quite low as customers deferred and continued to defer their expenditure. The EBIT dropped by circa $4 million versus PCP. And this is reflected in the margins on the slide as well. Now the story was all about the manufacturing challenges experienced through the year with the lockdowns and other COVID operating constraints. That resulted in significant idling of the factory, leading to significant factory recovery issues. And we covered some of that in the half year. Now additionally, we couldn't produce nonessential products through parts of the lockdown, which also left us with a sort of a pretty tough and constrained inventory profile. When we saw some of the export demand pick up in H2, we ended up having to drive through with some penalty labor rates, due to the H1 manufacturing decision, and so we found that challenging. But at the same time, we further eroded margin by shipping many of those products to the export markets using some pretty costly airfreight costs. Now we did this with our sort of our eyes wide open to ensure that we maintain the European customer relationship and really access to what is an important future market. On a positive note, in quarter 4, we welcomed a new CEO to Davey. Valentina Tripp started with Davey, coming from recently running Murray River Organics. Now Val arrives with a wealth of senior leadership experience, has deep competency in operational excellence and also strategy transformations from her past KPMG consultant days. So I'm personally excited to have Val onboard and leading the Davey business. Now turning to Slide 18 and a quick look at the, from an H-of-H point of view. So revenue moved ahead over H1 by about 7%. This is on the back of Australia and New Zealand, more traditional pump products, certainly not modular water treatment and then the aforementioned European pool sales. The underlying EBIT performance did lift this H1, however, the elevated operating cost to start to get our inventory profile sorted and the prohibitive freight and logistics muted any meaningful pull-through to the underlying EBIT. Okay. Well, let's move over to the key financial information. Martin, over to you.

Thank you, Graeme, and good morning, ladies and gentlemen. For those of you who are new to GUD, my name is Martin Fraser, and I'm the Chief Financial Officer. It's my pleasure to take you through an overview of our financial position. I'll start on Page 20, which contains the key profit and loss measures. Graeme has done most of my job for me today already. So I will not repeat his remarks word for word, but we'll rather highlight a few points to help understanding. First, I want to highlight the contribution of the acquisitions, which was -- which collectively added $52.6 million to revenue and $6.7 million to underlying EBIT. More granular detail in respect of the 2 acquisitions is in the slides Graeme showed earlier. We're seeing depreciation step up with the additional businesses now contributing to the depreciation number and a fall in nonoperating items, which I'll cover shortly. Net finance cost was broadly consistent with the prior year and included the facility costs for a short-term $22.5 million line which was taken as part of our COVID-19 defense and offense plan. We weren't using that facility towards the end of the year. Facilities do have significant flagfall costs, and we felt that the time is right to let go of those facilities. Nonetheless, we're very confident our finances will step forward if we need further capital, and I'll touch on that later. Nonetheless, the growth leverage from all of the sales growth we saw before and Graeme spoke to is evident at the reported net profit line, which is up 40% on the prior year. The final dividend, $0.32 per share lifts the full year to $0.57 and gives a rise of 54% over the prior year, representing a payout of 84% of underlying net profit after tax but also reflects the expanded capital base following last year's -- this year's successful equity raise. I'll now take you to Slide 21, please. And here we can see the costs associated with the final moves to close manufacturing at AAG and integrate the warehouse and back-office functions into the Ryco business, which was completed in the fourth quarter of FY '21. A small restructuring occurred at Davey. And at the group level, we also incurred costs associated with the completed portfolio acquisitions and transactions. Moving on to Slide 22. We can see the net working capital increased considerably over the prior year, of which $29.4 million related to the net working capital acquired as a result of purchasing G4CVA and ACS. Nonetheless, net working capital grew by $15 million once the acquisitions are removed. And that movement reflects higher debtors as a consequence of the sales growth we have seen, and higher inventories to respond to the demand and longer lead times. That said, for the time being, we've been able to cover the increasing inventory with higher creditors given our high inventory turnover present. That takes us on to Slide 23, where we can see cash conversion is lower than the prior year, but it's a little ahead of what we guided throughout the year. In a year where we had to invest in net working capital for the reasons outlined earlier, Graeme and I are very pleased with the cash conversion result. Slide 24 draws your attention to this year's capital raise of $75.7 million and strong balance sheet ratios with unused bank facilities of $42.1 million. Even after giving back the facilities I mentioned before and strong financial relationships, we are confident that GUD is very well placed to debt finance further logical and sizable bolt-on acquisitions. I'll now hand you back to Graeme, who will finish with the trading update and outlook.

Okay. Thanks, Martin. On Slide 26, I touched on the current trading conditions, which I guess if you'd ask me in late June, I would have given you somewhat of a different answer. Clearly, the latest lockdowns have impacted July and now into August. We can see the mobility rates have dropped in late July across Australia, and this is always going to be a fact of the GUD. The actual July sales weren't that far away from our expectation. And so it started tapering in the last 2 weeks of the month and the sort of the first week of August or the first 3 days of August. That pattern feels very similar to last year in Victoria. No doubt we're going to volatility in H1, although we managed through things like that last year. Absent these lockdowns, we also recognize that supply chain is going to be one of our greatest focuses in the next 12 to 24 months. On a positive note, the Right of Repair legislation was passed in June '21 and the scheme takes effect in July '22. This is a great development for the independent repair industry on how it can further serve the complex and growing car parc. Okay. So we're now finishing on FY '22 outlook on Slide 27. So GUD is positive on the underlying structural support for the auto aftermarket. We've got a strong position with that industry. And although the obvious COVID challenge will linger, we still feel positive on the net of the headwinds and tailwinds. Key to the business equation in FY '22 will be some organic volume growth, coupled with some volume growth from our acquisitions. Cost pressures in freight, a step-up in the supply cost and domestic cost inflation are certainly all at play. In addition, we will want to consider some further investment in our future growth drivers. Now we've implemented already H1 price rises and this and the favorable currency were largely absorbed by the aforementioned high cost and the investment in future growth drivers. In terms of auto acquisitions, our past sentiment remains. We will continue to work on strategically sound acquisitions, opportunities still exist and our desire has certainly not abated. We expect water performance to improve in FY '22. We're expecting a positive tempo from our ANZ markets and some of our export markets, and we do expect a moderation of manufacturing and efficiencies and some of those other elevated costs. Given the recent lockdowns, the growing inclusion and, I guess, duration of the many states like New South Wales and Queensland, certainly, the demand environment is proving to be certainly too dynamic to provide reliable full year guidance. So as we did in FY '21, we plan to come forward at our AGM in late October with a further update. Okay. Well, that concludes the presentation of the results. I'll now hand you over to the moderator who will coordinate any questions you may have. Over to you, Dean.

Thank you very much, Graeme. [Operator Instructions] So our first question comes from Sam Teeger from Citi.

Can you talk about what impact the current lockdowns are having on your ability to conduct due diligence and execute potential acquisitions?

Thanks for the question, Sam. I think probably the answer lies in the same outcomes that we had last year.So we're in lockdowns last year and we still managed to complete what we felt to be thorough and comprehensive due diligence on the businesses that we bought. In some cases, we positioned people into jurisdictions to allow them to actually literally be in the place of the companies that we were purchasing. So look, it doesn't make it easy, that's for sure, but there are creative ways that we've already, I think, evidenced. And we'll continue to go down that path. So I'm not feeling overly concerned, Sam, but naturally, it's just something we have to take into consideration.

Clearly, Sam, some of our leaders have to be willing to put themselves through quarantine. There's no getting away from that. And clearly, if it's worthwhile acquisition, that's something that we will willingly do and have done before.

Sure. And when it comes to acquisitions, more broadly, at the moment, what's the sweet spot in terms of acquisition size that you're considering? And is there a maximum deal size that you'd want to stay below?

So Sam, unfortunately, you cut out in the very first sentence. I got everything by the first thing, was it the contact something you said?

No, he was asking the sweet spot to acquisition.

Yes. I'll try it again. So when it comes to acquisitions, is there a sweet spot in terms of acquisition size that you're looking at here?

Yes. Sorry, I apologize. I thought it was an important word right at the beginning, I get it. Look, we've always said that we will consider bolt-on acquisitions and then potentially a game changer if we felt that, that was something that was really compelling and the Board was supportive. It's fair to say that there's probably more bolt-on acquisition opportunities than there are game changers. So that's kind of how I would phrase it. Sweet spot, bolt-ons of $30 million -- $25 million, $30 million, $35 million, $40 million $50 million, those sorts of million-dollar revenue organizations. Game changer for us will be sort of 200 sort of revenue type organization, just to give you some context.

Got it. Makes sense. And what's the average quantum of the FY '22 price rise that you've announced? And just after that price rise, how are you seeing your pricing comparing with the market broadly across your products?

Look, the price rises we put in place, which may well be a first round, who knows how things are going to play out this year, ranges across the businesses, Sam, and some of the businesses that's in the sort of mid-2s, all the way up to some businesses, 6s and 7s with a couple of outliers where we're making to order in some of our new businesses, which will reach up to 10. So I wouldn't give you a homogenous answer, but somewhere in that sort of middle -- midpoint, there's probably a fair assumption in that 3s and 4s.

I think it's fair to say, Sam, also. It's been a climate that's been perhaps a little bit easier or there's been more sympathy from custodians around the reason and the need for it. So it's been many respects, a better climate to get price increases away, and they're getting away either in market and agreed or being communicated well accepted, and we're just serving out notice periods. So good acceptance, good traction, pretty quick timing.

Got it. And just following on from that, what's the average notice period? What month did they kind of kick in?

Look, they range quite differently, Sam. So some already in, a small amount already in market. Most of them will be in sort of the sort of September, October, November period, probably more September, October. It depends on the customer relationship and what amount of time we give notice. Some businesses are already in place because they can literally switch into it. So our business like ECB as an example, we've been able to put that in the market and a couple of other businesses of that nature. So it does a bit vary, but the bulk of it is September and October.

Anna, would you like to unmute yourself? Anna from Goldman.

A couple of questions from me, if I can, please. The first one is on the ACAD business. Just looking at the accounts in business acquisitions, it does look like growth sales and EBIT are a bit short of your expectations at the time of the acquisition. Can you just give some color around what's changed versus the initial communication, please?

Yes. Look, I think the answer is yes and no. The -- when we completed the due diligence on that business, we felt the vendor was a little bit ambitious with what they thought they could achieve in terms of sales. And we put in place therefore a sales earner. We felt there was a bit of a difference there. So that earnout has come back in our favor. But broadly speaking, it's pretty close to one of the businesses, which is the motor body businesses performing a little bit below our expectation, and that's been largely curtailed because pickup trucks have been down in imported number and the OEMs are directing all of those sales towards retail customers, and corporates have been having an extremely long time -- a very difficult time getting them. We're experiencing 7-month lead times on our Ford Rangers on our corporate pricing even though Graeme used to run Ford. But if I want to go into a Ford dealership, I can get one at retail tomorrow. So CSM is largely focused on not the individual 1 and 2 trade, a bit more the fleet customers. So that's really been the only sort of constraint. But in terms of our own internal expectations, we pretty much expected that. And we've built the protection in with the sales earnout. And now the results have been announced. We'll set the wheels in motion to get that amount of money back from the escrow. So...

But the revenue came within a couple of hundred thousand dollars of our internal forecast and our due diligence approach. So again, we're not here to talk about other companies. The vendor had a different view. That's why we put it in place, and our DD was based on that revenue position and the EBIT position so -- and that's actually quite comforting to us in some strange way because our DD was pretty smack on.

And our DD did anticipate that there would be that issue with the vehicle supply that would impact the CSM business. And as you can imagine, Graeme probably had a little bit more insight than most on that. So it's pretty much played out as we'd expect, but there you go.

Okay. That's super helpful. And then just on the auto margins in the half, and I suppose looking ahead as well, can you possibly, I suppose, give us some color in terms of breakdown of the headwinds or the quantum of the headwinds that you guys are seeing around supply price increases, logistics, et cetera, just the quantum of it?

Sure. Very happy to, Anna, I mean, firstly, I just wanted to emphasize that when we're last engaged with everyone and we called out our guidance, I think people felt that our guidance had been a little conservative, and we said absolutely not. We see big significant headwinds coming through in the second half around higher freight, and we knew our hedge position in the second half was a weaker hedge position than the first half so -- which we called out. So if we look at it, the profit was approximately down $10 million of that JobKeeper was nearly $3 million so you're back to $7 million. And that was largely, $4 million of that was higher freight and the balance was the FX impact. So absolutely, as predicted. We had a choice at the time which we said at half year of do we go and pursue and cover that with price rises or not? We intentionally didn't and the reasons behind that at the time, just to give you some confidence as to how we think through these sorts of things, we were sitting there seeing the AUD had appreciated in the last 6 months. And we, at that stage, hadn't had all the supplier price pressures for our customers to probably concede a price increase against an appreciating currency. We also felt that we were really well positioned with some inventory, and we'd achieve a lot more by focusing on market share gains rather than polluting that opportunity by disenfranchising customers with price increases because our GP percentage is a better uplift than the price potentially, and we wanted to take the opportunity to win market share. And we did. And you can see that throughout the year. And we felt that we would get a better outcome on prices by tackling it at this time, of year because the forces we felt would come into play have come into play. And secondly, you can't go back to the well every 5 minutes. So if we went with price increases in December, it would have diminished our ability to negotiate the ones we just got through. So that was an intentional strategy. Graeme, and I believe that was right. I think it served us well. It means in the short term, you get a trough on margins. Now to your question on the second element. I've got to be careful here because we're trying to avoid guidance, but I'll try and tease it out for you. Clearly, there is scope for some of that margin erosion to come back in the second half. We've got a much better hedge rate going into FY '22, as you can see from the accounts in the 78s, but we're a little less covered than last year. So we've still got some to do in the second half on spot. And we've got the prices coming through. There is no JobKeeper unfortunately, and we've got the supplier elements to come through. But all in all, we do see quite a bit in dollar terms, quite a bit of that margin erosion dollars-wise coming back. But in percentage terms, you're going to have a full year impact from the new acquisitions, which trade at a lower margin than our legacy businesses. So dollar-wise, we see an opportunity for a lot of that to come back. But in percentage terms, you won't see exactly the same outcome, and that's absolutely fine, too. We're still going to take some of that and reinvest it for growth. We still see a pretty compelling climate to do that, and we're not going to flinch away from that, which is why Graeme said that predominantly the driver into next year will be some volume as well as the acquisitions. So without trying to call out guidance, hopefully, that gives you some confidence and speaks to your question, Anna.

Yes. That's super helpful as usual. And my last question is on the exit run rate for auto organic sales growth. Just looking at the second half organic growth there versus your trading update for the third quarter, it does look like it has accelerated a little bit in the fourth quarter, if I'm reading it correctly. And then if I recall, in the PCP, you guys had some destocking issues, And therefore, I'm thinking is that primarily driven by the cycling of a soft PCP there. And then thinking ahead in terms of run rate in July to August, where is that at versus the fourth quarter exit run rate, please?

Look, I think you've answered your own question in the first part. We were cycling some pretty interesting months, right? So the calendarization of our performance when we look at it internally is quite erratic of sorts because you're trying to cycle different numbers. And of course, a number of the businesses were affected at different rates and at different times through those months in the prior year, so it can get actually quite confusing. So that's the first part of the question. The second part is that we were actually pretty satisfied with the way the year ended. So whilst we were still cycling some interesting numbers, we were still feeling pretty positive around the tempo. And as we walked into July, as I said earlier on, we had a sort of a positive disposition around our position in the market. Now that's always going to be caveated by what we've just then experienced in late July and August. And so therein lies a very cautious I guess, a cautionary tail as to how you predict the future, but we were feeling pretty positive. And certainly, July started out in a relatively positive manner. As I said, almost up until the lockdown, our daily sales rate because -- obviously, you might be reminded, there's actually 1 less selling day in July this year, our daily selling rate, so that makes it a bit easier to compare was it was in a pretty reasonable position as to what our expectation was. And so again, we're going to see volatility, Anna. But like I said earlier, we managed volatility last year all the way through. And look, my expectation is that similar to Victoria, we saw lockdowns, people came out of lockdown and we saw a deferral of expenditure, deferral of service, deferral of many things. So it's not all doom and gloom. I guess there are a few other things rolling through the situation, that's obviously, the stimulus and JobKeeper doesn't exist this year as well. So there may be the less money in people's accounts, so there is something we keep in the back of my mind. But we were relatively satisfied by the way July kicked off. Sorry, it's a long answer to your second part of the question.

Thanks very much. Our next question comes from James Ferrier from Wilsons.

First question there, just following on from Anna's question about the margin outlook going into FY '22. Martin, from your comments there, am I right to interpret it that perhaps taking the organic auto EBIT margin in the first half, I think it was 26.6%. That's probably a reasonable starting point when we look to FY '22 and then from that point, we consider the impact of the acquisitions?

It's probably not a country mile away, but we could experience mix changes through the half there as well because our different segments do have different GPs. So it will -- remains to be seen. But yes, I mean...