Amotiv Limited (AOV) Earnings Call Transcript & Summary

Well, welcome to the earnings call of GUD's results for the 6 months ended 31st December 2021. I'm Graeme Whickman, GUD's CEO and Managing Director. I'm here with Martin Fraser, the company's Chief Financial Officer. Now as a matter of housekeeping, we'll have time at the end of the call for our questions and discussion, so please hold your questions until then. And a recording of this call along with the presentation material will be available on GUD's website. Okay. So we'll start the call by running through our key messages and financial overview. And then I'll speak to our evolving view on our portfolio vision and ESG efforts, followed by a commentary on both automotive and water businesses. I'm going to hand over to Martin to cover the financial results in more detail, and then we'll conclude with the trading update and outlook for the second half before we get into Q&A. Now in the material, we do touch on the COVID impacts to our business. It's clear in our results today that we continue to be very fortunate in relative terms. And I believe that's a reflection in part of our good preparation and planning to mitigate all manner of those COVID-related impacts. And with that in mind, I'd like to say thanks to our employees who've worked so hard in the first half of FY '22. More recently, of course, the Omicron strain has further tested GUD and many other businesses. And I want to recognize our leadership group who continue to lead the businesses and really a humane sort of centric way but all, at the same time, delivering record results. So well done to the leadership group. Thank you. So let's turn to Slide 3 and the first half, which was excellent in so many ways. Our sales were strong. The underlying EBIT was encouraging. We achieved an all-time operational record EBIT result even though we experienced record levels of lockdown in Q1. Over the half, we saw some choppiness in demand month-to-month, but that was seen certainly between Q1 and Q2. But in aggregate, there was strong end-user demand in many of our BUs, our business units, reflecting the resilience of the auto aftermarket. Importantly, there was a positive margin expansion over the prior half, both at group and automotive level, which we had flagged as our expectation and when we were talking in our FY '21 year-end commentary, even with the backdrop of supply chain pressures and inflationary challenges. And we announced and subsequently completed 2 important acquisitions in auto lighting and 4-wheel drive accessories and trailering. Now these support of the business transition we've been planning in terms of customer and product and geographic and powertrain diversification. And at the same time, we've taken an important but tough step in addressing some challenges at Davey. Finally, we go on to reiterate our recent guidance, and I'm going to touch on that a little later on. So it's pleasing to note that the first half result was, as mentioned, an operating record for GUD, and you can see that on Slide 4. We delivered revenue growth of 32% and, within that, organic growth of sort of circa 6%, taking our group revenue to just over $330 million. Our underlying EBIT ex JobKeeper or JK, to keep it short, was up about 19% to $59 million. And reassuringly, the margin expanded by about 1.8 percentage points as a result of some operating leverage and pricing, cost control and some FX gain, which was partially offset by the anticipated imported and domestic inflationary pressures and some expenses in the long-term growth initiatives that we've been talking about. Underlying NPAT ex JK or JobKeeper increased by nearly 15%. However, the reported NPAT did decrease due to the Davey noncash write-down, which we'll speak to later in the webcast. Cash conversion was lower than our typical levels, let's be clear there. However, this was expected. We did flag that and have been flagging that for a while. And this is a reflection purely of our current inventory strategy in support of the sales opportunities. It doesn't signal a reset of our normal cash conversion run rate. And then finally, we announced an interim dividend of 16 -- sorry, $0.17 per share, recognizing that we have an expanded capital base and no contribution from our new acquisitions as yet. And this represents just under 70% of the underlying NPAT. Now on Slide 5, we reflect upon our recently released portfolio vision, which we look forward to sharing in more detail at our Investor Day on the 8th of April. Importantly, you should see a strong alignment in the portfolio vision to our most recent acquisitions. And I think it helps to build context as to the way we're plotting the future, certainly also with the underpinning of some critical business foundations that don't go away. Now I'll speak to how we are building a stronger and more diversified sort of future-facing GUD shortly. However, on Slide 6, we update our shareholders on our ESG progress. Now back in our FY '21 year-end results, we showed for the very first time a glimpse of how the ESG journey is broadening for GUD. And we pride ourselves on the metrics in the areas of employee satisfaction and safety, and we strive to operate as a top quartile company. And in those 2 areas mentioned, we certainly occupy that ground. Now we've been working hard to improve in areas such as diversity, ethical sourcing -- in fact, we just released our modern slavery statement, and the business reliance on the non-internal combustion engine revenues, all of which actually have improved since that FY '21 year-end point in time. Now we do have greater ambitions at the Board and executive levels to broaden our view and the ultimate vision on the sustainability of our business and the impact we have on the world around us, whether it be in the way we operate or the products and services we provide. And because of that, back in FY '20, we kicked off a multiyear effort to build a better foundation for our shareholders' returns sustainably. And there are 3 phases over 24 months. Now in H1, we've been completing the first phase with a materiality assessment. And this has included our external stakeholders, which, in addition to our own point of view, has shaped our key impact areas shown on the slide. Now we're in the process of assessing our revised baseline given we have some recent acquisitions, and we expect to be formalizing our key impact area targets and KPIs in FY '22. And that relates to the future in terms of what is it like in 2025 and also 2030 in some instances. Now the third phase will be the ongoing measurement and plan of those targets. And I should also mention that we haven't sort of been sitting still in our existing ESG-related performance efforts, and we've added measures where sensible, such as the FY '22 KMP and senior executive compensation plans linked to some select ESG targets of employee engagement and safety just to make sure we have that focus. Now as mentioned in our opening slide, you can see on Slide 7 that GUD is in the midst of a positive and exciting business transition. It's been guided by our portfolio vision, which is a mix of acquisition and organic business strategies. And as we sit and reflect on what GUD's profile will be over the next 12 months and beyond, we can see on that slide, the next slide, that is, that our addressable market grows considerably. We become even less leveraged to ICE, so combustion engine powertrains. Our customer diversity grows really well, and both our sourcing and revenue reliance on certain geographies starts to moderate quite positively. Now much of these gains in the near term are coming from our automotive actions. And with that, let's just turn to Slide 9 to dive into a little bit more detail about what's happening in the first half. Okay. So taking a closer look at the automotive segment results. The revenue was up just above 38%, reaching $272 million, which is a record for GUD. Net of acquisitions, obviously, we had some acquisition flow through there. The organic revenue rose 4.6%, which was excellent given that the prior H1 was up 13% in its own right and keeping in mind actually the impacts of the lockdowns in Q1. And right at the end of the presentation, we remind our viewers that Q1 and the chart there was the most lockdown quarter of the complete COVID period, so we had some tough things to do, but nevertheless, it was still up, which is fantastic. Now auto underlying EBIT was a record for GUD, whether you look at it in total or just organic levels. The underlying EBIT margin ex JobKeeper or JK dropped due to acquisition dilution, which was expected, of course. However, the important bellwether of organic margin ex JK was a very positive story, lifting 290 bps or 2.9 points versus the prior half of H2 FY '21 and with only about 30 basis points away from the pcp, which is, I think, a very, very strong effort. We flagged at the full year FY '21 our expectations of ongoing domestic cost pressures in addition to freight and logistics and supply cost-ups. Now to date, these have all played or are playing out as expected. To offset, we have delivered growth. We've been controlling costs. We've seen some FX benefits, and we've actioned the FY '22 price raises that we spoke about, first one put in early Q2 and now a second round in mid-Q3. We've just actually done that in February. The supply chain and logistics challenges, I think, if anything, have escalated in regard to the physical time needed to manage in the operations to ensure enough of a buffer to overcome any issues and sort of capitalize on grabbing a little share here and there. We don't expect the cost side to increase. However, we have continued to run the elevated inventories. They're in factories, in transit and in our own DCs. And Martin will touch on that in a later slide. Now given the record results, you'd expect to see some auto highlights, and in the next 3 slides, we'll sort of touch briefly to give a feel for the auto BUs. We've broken it down into some key areas: auto electrical, lighting and power management, electric vehicles, powertrain, forward drive accessories and trailering and then finally undercar categories. Now in the auto electrical, lighting and power management category, both BWI and AE4A teams, they have experienced strong growth in the half. GEL in New Zealand has been more impacted by the New Zealand lockdowns, and those are well documented where for long periods, much of all retail has been closed. We saw some really strong OEM customer demand in Australia for BWI, with caravan, truck and bus all featuring well. BWI was so proudly awarded the top 3 place in the AFR Innovation Awards in their respective category, with the Intelli-Start jump starter range, which was launched in the half. We leaned into operating synergies with AE4A migrating to the BWI ERP while still cracking on with securing new business with BCF and Anaconda and SCA. We also had 1 month of Vision X ownership, and that really has started positively. Now whilst EV sales and the EV car park are still in the nascent stage, we do aspire to build an aftermarket leadership position in Australia. And to that end, we were excited by the hybrid battery program moving to commercialization stage. We started to utilize a recently awarded government grant for the pilot program for second-life EV batteries project. And then finally, I should also mention BWI have been progressing their level 1 charging offering and associated charging accessories program. So certainly a good start for electric vehicles. Now moving on to Slide 11. So in powertrain, we saw a modest growth for Ryco and slightly lower than pcp for Wesfil. Now I'm not alarmed at this at all. In general, the service and wear parts have seen a bit more of impact of the record lockdowns and even more so in New South Wales this time around. Now as prior lockdowns, we expect the demand to rebound in H2 as the present sort of what we would call the shadow lockdown sort of abates. And on a positive note, Ryco was awarded second place in the AFR innovation category awards with its N99 Microshield filters, and we were super proud of Ryco placing in the top 10 in the category awards for the AFR's top places to work. So well done to Stuart and his team. Now both IMG and AAG delivered strong growth. AAG continued to bolster its performance after concluding the profit improvement plan, which is really getting excellent traction. IMG's repair activity and engine management products have been flying. We're also excited by IMG's repair network growth opportunities as we embark on facilities in NZ and WA for Q4. And for good measure, we started an early effort to enter into the industrial service repair market. So again, a nonautomotive potential for IMG. Now we finish on the existing automotive business snapshots with our forward drive accessories and trailering efforts and undercar categories on Slide 12. Now Fully Equipped in NZ had decent revenue growth driven by new vehicle sales. It was difficult at times to support given the lockdowns impacting on the manufacturing capacity, really down to staffing primarily. Importantly, though, they still have a record order bank ahead of them. ECB's revenue was flat and a reflection of the manufacturing constraints due again to staffing shortages in the polishing part of the manufacturing process. And they have very strong back orders and plans in place to recruit incremental visa workers and automate certain processes in late Q4 to alleviate the future capacity bottlenecks, which I think is quite encouraging. In undercar, both DBA and ACS have done well in the first half. We're both enjoying good domestic and export demand. Recent product development at DBA is also encouraging with the launch of DBA's first entry into disc pads and calipers that stand to really grow out for the product offering there. And then rounding out our first half automotive snapshots were clearly the acquisition announcements of both Vision X and APG. On Slide 13, we summarize why Vision X is so exciting for our auto lighting category. We have ambitions to achieve a leadership position in global niche auto lighting, and Vision X was an important first step in this direction. Now Vision X allows BWI to leverage its existing and future product portfolio selectively in the U.S. and European market. So it's a highly complementary business to BWI. Vision X has a strong financial track record, is a well-respected brand with great product development credentials. And in my view, with a well-considered integration plan and supporting resources, we feel Vision X within the BWI Group is a force to be reckoned with. Now Vision X completed at the beginning of December and has really started quite strongly, as I mentioned just a few minutes ago. Now in the same time frame, we announced and subsequently completed on the 4th of January the acquisition of APG. Now this acquisition, shown on Slide 14, is a game changer and a clear ingredient in our portfolio vision ambition of becoming a leader in 4-wheel drive accessories and trailering in the ANZ market. A well-established, facilitized and managed business, APG is a dominant force in the domestic market with its traditional sort of towbar products. It's also got a proven capacity in recent times to win new business in the growing category of functional accessories, such as nudge bars, bull bars and sports bars. And the business supports the large and growing forward drive and trailering markets. And on Slides 15 and 16, you can see very clear the impact of our recent acquisitions and how they can service our -- both our existing aftermarket and growing our 4-wheel drive market. Slide 15 helps build a picture on the sum of the parts where addressable market size, life cycle coverage, broadening of channels, creating a one-stop shop all come together to provide a powerful combination going forward. And of course, Slide 16 gives you that striking visualization of how GUD's products support the 4-wheel drive market, something hopefully our investors can touch and feel at our impending Investor Day. Okay. Before I hand to Martin, let me review our water business. So on Slide 18, we detail Davey's first half. And you can see, the revenue was up just under 10%, which came from a mix of positive gains in domestic and select export markets, primarily driven by home pressure systems, commercial pumps and pool pumps. As discussed previously, though, the export sales do come with a lower margin, which, with our mix in H1, contributed to a drop in EBIT versus pcp of about $300,000. Now as communicated, recently, we installed a new CEO, Valentina Tripp. That was about 9 months ago. And also a new CFO came on board now about 4 months ago. And Val has been leading the team to drive change in the operating model of the business, needing to reshape and reassess the direction and the efforts of the midterm profit improvement plan. And in the half, we took the painful but necessary decisions to address some inventory issues as -- arising as a result of that aforementioned pivot and how we serve the market going forward. And Martin will touch a little bit more later on in terms of the precision around those financial impacts in the nonoperating items. Suffice to say, it's important, as Val and her new team reshape the operating mode, that we do support that. Okay. Well, let's cover off the financial information in a bit more detail. So Martin, over to you.

Thank you very much, Graeme. And first time I could say good evening for one of these presentations. So good evening to you, ladies and gentlemen. For those of you new to GUD, my name is Martin Fraser, and I'm the Chief Financial Officer. It's my pleasure to take you through the financial section of this presentation and talk to the financial overview as well as GUD's financial position. I'll start on Page 20, which contains the key profit and loss measures of the group. Graeme has already outlined much of the results, so I'll not repeat his remarks word for word but rather highlight a few key points to help understanding. First, I want to highlight the contribution of the acquisitions, which collectively added $66.3 million to revenue and circa 26% to the underlying EBIT. More granular detail is being weaved into the various slides, which Graeme has already spoken to. We've seen depreciation step up in the half, which is both in line with expectations and natural given we've got G4CVA and ACS now both contributing to that number. And we've really seen a notable rise in nonoperating items, and there's a whole slide and I'll cover that shortly. The net finance cost was lower than pcp due to both lower interest rates, and of course, people will note that we did an equity raise at the end of H1 last year ahead of the acquisition of G4CVA. And this year's result also includes $1.5 million in loan arrangement fees to enlarge the funding base ahead of the APG acquisition, and they were fully expensed in the half. The tax rate has increased and reflects some permanent differences and some true-up to the FY '21 tax provision balance. The interim dividend, $0.17 per share, Graeme spoke to before, does truly reflect that higher capital base in the absence of contribution from APG in the half and represents 100% of net profit after tax and, as Graeme said, just under 78 -- 70%. And for those who want to be a bit more exacting, it's actually 68% of underlying NPAT. I'm now going to move us all on to Slide 21 to talk about the nonoperating items in particular. Firstly, we can see third-party costs associated with the acquisition activity of $3.9 million. And there, I want to reemphasize that's third-party cost. We did not attribute any of our internal costs and efforts to that activity. As well as the reassessment of Davey's future inventory requirements and recoverability, Graeme spoke to a new management team, and they are very clearly tasked to look at this particular area. And we are seeing a number of changes being implemented to Davey around sales, operational and manufacturing products, including speaking to which products and how Davey will make those products are going to feature into the future and how we provide end-to-end transparency around product costs, inventory values, overhead absorption and so forth. And that's all behind these 3 realignments we talk to -- or reassessments we talk to. We believe these changes will lead to improved transparency and help -- hence help Davey make better make-versus-buy decisions, production cycle planning decisions, reduce plant downtime and switch times between products and ultimately improve efficiencies and cost positions. It's important to note that the Davey impacts we're talking to here are of a noncash nature, and we'll come back to that point in a moment. In fact, let's just go on to Slide 22 where we'll see that manifest a little bit more. Slide 22 talks to net working capital. And here, we provide some additional analysis to better understand the step-up in net working capital without the distortion of the acquisitions. This slide highlights that net working capital in our existing or organic businesses increased by a reported $11 million. Although from a cash perspective, this rises to $21.5 million because we just need to be reminded that the Davey inventory realignment was a noncash item. So you have to add that back to really understand how much our working capital increased in the legacy businesses. And as you can see there, it's all around inventory. So the cash absorption reflects the higher inventories, for the reasons already well articulated by Graeme. And I would just also add that if you walk into our sheds, you don't necessarily see this inventory. A lot of it is in the time taken to get from factory to port -- through port onto a ship, a number of shipments being transshipped, the cancellation and shipping, et cetera, et cetera, et cetera. So we really have to have this inventory. You can't sell from an empty barrow. And one of the things we've been very key about is ensuring that we have compelling [ divot ] for our customers and that we don't disappoint either our customers or our resellers. I'll now move you on to Slide 23 where we'll talk to cash conversion and CapEx. Not surprisingly, given the net working cap comments we just covered, cash conversion was about 63%. And if you add back the cash M&A costs -- third-party M&A costs, that brings you close to 70%, which was notably below the 80% we called out for FY '22, but it's clearly appropriate given the tighter supply chain environment. I just want to reiterate, we're not seeing a blowout in the freight and logistics costs that we called out earlier in the year. It's really an elongation in the time -- the cycle time between committing to inventory and being able to have it in our shed for sale as well as the need to increase safety stock for the reasons Graeme already noted. Turning to CapEx. The notable lift in CapEx also reflects acquisitions that we've made and is broadly consistent with the $10 million run rate we called out for FY '22, excluding Vision X and APG, of course. I'd like to move on to Slide 24 to talk about our debt profile. This is a slide we haven't had before but know a number of you may be anxious to see this and better understand it. The chart reflects the expanded funding base installed to support the APG acquisition and address our expanded group size. Immediately after the APG acquisition and considering interest swaps we have in price and the Pricoa facilities, which are all fixed-rate loans, approximately 3/4 of our gross debt will be fixed interest rate debt. And we currently have a blended borrowing cost of approximately 3% of gross debt. I'll now take us to Slide 25. Slide 25 demonstrates both large gross cash and debt balances at December 31. Seems a little bit illogical, but it was put in place to ensure the smooth completion of the APG acquisition, which occurred the following banking day, being the 4th of January. After the APG acquisition, we start the second half with approximately $500 million in net debt, which, considering the borrowing facilities outlined earlier, demonstrates GUD is well placed to fund organic growth, seasonal net working capital or dividend requirements or bolt-on acquisitions. It's also worthy noting that we'll activate a share buyback program, which seems a little incongruous, although it's unlikely to be immediately activated, is being put in place for future capital management flexibility. I'll now hand you back to Graeme who will finish with both the trading update and outlook. Thank you, Graeme.

Yes. Thanks, Martin. Given we gave a trading update on the last day of November, you probably think not too much has changed. But of course, we've seen the very quick rise of Omicron and its impacts. Before I touch on January, though, of note are the continued positive underlying automotive industry trends as the calendar year '21 sort of finished up. On Slide 27, you can see that new vehicle sales grew, although not back to the normalized levels yet. And actually, when we were talking around the acquisition, we sort of predicted 1.049 million. It came in to 1.050 million. So we're like 1,000 units out. So I think pretty decent forecasting. Segmentation was strong with SUVs and pickups accounting for more than 70% of new vehicle sales, which naturally is good for our businesses that are leveraged to the front end or the new vehicle sales but also in the future of the -- GUD as that passes into the car pack. Talking of the car park, that grew to over 20 million units for the first time in Australia. And it got a little bit older as well as the average fleet age was older, which is great for us. So all positive tailwinds for GUD's existing and new businesses. Now back to January, so the trading update. Well, we certainly saw the Omicron impact in some of our business units with either dampening of demand due to the shadow lockdown, which is manifesting to some degree in a drop of miles traveled, but on the flip side, also experienced some heightened operational challenges in regard to really staff absenteeism, it's been heightened. Now we think the dampening of demand is largely a deferral of the vehicle owners' needs to service or repair vehicles. And we even start to see that at the back end of January and certainly into February. We certainly didn't stop them driving, but they just didn't want to service or repair in the intervening period. Now this phenomenon is a repeat of the prior lockdowns in 2020 and 2021. We have the operational capacity support particularly in our import and distribution BUs, and we've got strong inventory levels. So we're feeling very comfortable. We did see a drop in the January new vehicle sales, reported to simply be a supply issue, but pickups were still strong. They were actually up as the OEMs continue to prioritize the lengthy backlog of orders, and they're quite lengthy actually. Okay. So we'll now finish on H2 and FY '22 outlook on Slide 29. So if you think more broadly, GUD, we're positive on the underlying structural support for the auto aftermarket, and we got a strong position in the industry, as you're aware. And although the obvious COVID challenges will linger, we still feel positive on the net benefit of those headwinds and tailwinds. Margin management remains a key focus. We do expect further organic growth, although obviously, we're having to be a little bit cautious depending on what happens in the next month or 2. And in addition to the first half pricing, we expect the second round of pricing, which is in mid-Q3 happening right now. It's actually in -- just been implemented to stick through the second half. We remain vigilant on the inflationary pressures, although domestic and imported cost inflation and the freight and logistics are playing out as expected. The latter is certainly proving harder to manage in terms of our attention in terms of management hours for sure. And part of that equation will require us to continue to operate at elevated inventory levels, although we might moderate slightly after the Chinese New Year. And so we're just watching that carefully. We expect water performance to improve in H2. We're expecting a positive tempo from our ANZ markets and some of our export markets. And we do expect a moderation in the manufacturing inefficiencies and other elevated costs. Now in terms of acquisitions, well, the appeal remains but centered primarily with the bolt-on auto opportunities. Now we'll continue to work on those strategically sound acquisitions, and those opportunities still exist. Now we are cognizant, though, of our bandwidth and have dedicated the right level of integration resources to our most recent acquisitions and also centrally to manage a much larger business. And at the same time, we're sort of acting on our stated desire to bring our net debt ratio down below 2x as we finish CY '22. That was the commitment we made in our acquisition information. So as we look to the full year, we sort of reiterate our recently released guidance back in December of the existing GUD businesses of $112 million to $116 million and take into consideration the 2 most recent acquisitions. Our guidance for FY '22 EBITA is $155 million to $160 million. Now naturally, we expect a higher group EBITA in H2 versus H1. And as we touch on skews, we do expect APG to have a higher skew to their H2 in the calendar year '22 or our H1 FY '23, which is a reasonably normal phenomenon for them in regards to normal seasonal demand, although it's a bit more pronounced this year because of the new Ranger launch, the new Ford Ranger, which sort of kicks in around April, May. So there's a bit of a skew that will follow that as the ramp-up comes in. And finally, I'd say we expect to see an improvement in the second half cash conversion. So the first half, as I said earlier on, isn't a signal for a new run rate, but it does reflect the elevated inventories and a few other bits and pieces like some of those acquisition costs. So finally, we are looking forward to seeing our investors on April 8. We're just about to announce that, the Investor Day, where we'll get more chance to share a little bit more around the GUD BUs, including a visit to our newest acquisition, APG. Okay. Well, that concludes the presentation of the results. I'll now hand you over to the moderator who is going to coordinate the questions that you might have. So over to you, Dean.

[Operator Instructions] So with that said, our first question comes from Sam Teeger from Citi.

Yes. Thanks for the aftermarket release. It works well. Just a couple of questions from me. Can you talk a bit more about the ECB performance? I would have thought these guys might be doing a little bit better based on what we're seeing in that industry. And then just in terms of the average price rises the broader group took -- in the second round of price rises, to what extent does that fully cover the cost increases that you're exposed to now? And any comments in terms of how the market absorbed those price rises? And just before the operator unmutes me, just from Martin following, just on the hedge rates, the last time, I think you indicated you weren't fully hedged in the second half. Could you let us know how far you covered? And how should we think about second half gross margins given the lower AUD?

Okay. I'll have a crack at the ECB and pass over to Martin to get to the cost piece, and then we'll converge on the price piece and then cover off the last one. So look, we've been pretty consistent, Sam, and thank you for the questions around ECB. We are going hell for leather in terms of its capacity. We're at about 72-ish bars a day there at the moment, and we're capped out. We can't do anything about that. It's been actually made worse in the latter part of the first half and certainly into January where we've had even higher absenteeism. So we've got staff shortages, which is contributing to what is a polishing bottleneck, no new news there, which is generating around about a 72 per day outcome. Then we've had staff shortages that's made a bit more difficult because we have a visa worker program that's been a little bit constrained given obviously the borders, but then obviously, Omicron through January has not been helpful, and so we've seen higher levels of absenteeism. So they're tapped out from a capacity point of view, their back orders have continued to grow, and that's why we're investing in actually automating polishing. So we've got the first of those polishing machines, and that kicks into Q4. So I'm expecting the back orders to come down and we start to meet the natural demand a little bit more. And at the moment, we're not advertising, we're not marketing of any consequence because obviously, that would be a stupid thing to do. We're not putting on the incremental BDMs that we had expected to sort of fully promote that brand at a better level. So we're in a bit of a holding pattern until we can actually increase the capacity, and that's kind of where we're at there. Martin?

Yes. Thanks, Graeme, and thanks for the question on hedge rates. So our hedging runs through about end of February. As for the cash that goes out, what we are seeing compared to previous years because of the stretching out of the supply chain, that's going to take longer to come through to our COGS than ordinarily it would do. So it's probably going to be well into Q4 before some of that plays out. So we're coming off around about a 76. we'll be stepping in the second half for that cash that flows through probably around about 72 given today's exchange rates, but it will take a little bit of time to come through to COGS. And we've sort of built all that in to our forecast and the range we've gotten, probably a little bit of safety margin in that as well. But hopefully, that speaks to your question.

And then in terms of pricing, that has been accepted in the market with no problems. It's implemented. The second round was February 1, so that's been put in place. That was communicated before Christmas. So look, we're very happy with both steps in the pricing as we flagged. Hard to give you an aggregate percentage because it does range business by business, and you can probably use anywhere between 3% and 6% across the businesses, but you might say it's somewhere in the region of 3.5% or something like that, but it does range -- actually probably 2.5% to 6% was the range, and it's probably about 3% to 3.5% or something like that. And it's been well accepted in the market. We don't expect that to be passed back. It will stick as the first one did as well.

Our next question comes from Russell Gill.

Can you hear me?

Sure can, Russell.

Great. I've got 3 or 4 questions. Just firstly, I'm going to try and sneak this one in on your guidance for the APG, $80 million to $84 million. You did say it's kind of calendar second half weighted, and it's good to get that feedback that that's a seasonal dynamic. Is there a way you can sort of imply what you expect it to be in your forecasts this year? Is it a 40-60? Is it a 45-55? What do we -- how should we be thinking about that contribution for APG this year and then also in a normalized year?

Look, when we chatted and introduced the business, we said that there was always going to be a skew -- in their calendar year skew, so just to make sure we're using their language. So in the calendar year, the second half, so that sort of July through to December, is a busy year. You can imagine people build up to Christmas all sorts of different things. So there was always a skew. And we were probably talking about at 48-52, something along those lines at the time and not being super precise here, but with the impact of the Ranger, and it's a positive impact, so it's all good news because the launch of the Ranger for us represents further opportunity not just in the volume but also the share of wallet because there's some opportunities there. So we're quite ecstatic about that. But because the way the Ranger is running out and ramping up, we reckon the skew probably is going to be about 43, 44 first half, something along that -- along those lines, maybe 43-ish, Russell. It's a bit hard because we are, at the end of the day, a little bit the tail here in terms of the dog. When they launch and when they ramp, obviously, that -- we're sort of dictated a little bit. Their full year volumes will be very strong, though. So we're not too worried. This is just about a calendarization. It just happens that this particular calendar year skew is going to be materially impacted in that first half because Ranger is one of the most dominant vehicles in the market.

Yes. Just on that, Russell, that's why we're still sticking to around $155 million to $160 million because I'm sure you're about to ask why isn't it high given that the rest of the auto business has performed so well in H1.

You've preempted my part B, Martin. So thank you. Second question I have is just on your Davey write-down, $10 million is a big number for the size of that business. That's basically years of historical normalized EBIT. Two questions on that dynamic. Firstly, is any of that write-down associated with that 9% revenue growth this sort of first half, i.e., you're just effectively giving stock away? And then secondly, how should we be thinking about the -- I guess, the normalized EBIT of this business going forward? Particularly this year, if you've written off a full year's worth of profit in one go, how should we be thinking about the normalized EBIT this business should be generating?

Yes. Thanks, Russell. I'll take your first question first. Really, none of that write-off relates to 9% revenue growth. We're very much pivoting the way Davey operates. It's traditionally tried to be a very flexible manufacturer by having raw materials and being able to respond to everyone's needs all the time and by having plenty of raw materials, being able to do whatever is needed, wherever the market takes it. And really when we [ stripped it back ] with Val coming through, and I'm trying to understand where we made and lost money, it was becoming very clear that a few things were happening there, where we're getting extremely short production cycle times. The sales and operational planning wasn't what it needed to be because people could always assume that they could make what they'd sold. And you could imagine just how much we're stop-starting the manufacturing process. And with that, we're being programmatic enough about our product life cycles and how we phase products into life and how we phase products out of life and therefore what raw materials do you have in the shed to be able to be as flexible as what you've done. And we've really stripped it back to come back to what does Davey need to make, what products do they need to support, what do they need to make and what are those really destroying value in the process, and let's pivot away from that. So the result of when you work all of that through is you start to say, well, there's a lot of things historically we've had here for the sake of that flexibility, we aren't going to take into the future. And that's a large part of that write-off. There's been some costs also in getting things right through -- and most of that's been reported outside -- below underlying EBIT. There's been some things we've been doing and leaning into, which are in underlying EBIT as well. But I think I would caution thinking we're going to bounce back immediately. We're still getting these new sales and operational planning processes fully embedded. We've taken a lot of finished goods that was all sitting in scores, being properly populated into state warehouses. We're moving to a high level of finished goods and a much, much lower level of raw materials. And there's a transition amongst that in and of itself, which is also contributing to a little bit higher inventory overall. But all those things are running through. And I think it's probably a bit too early to say H2 will get you to a normalized EBIT. That needs time to bed down. Graeme, do you want to add to that?

Well, I think you covered it off nicely. I mean if you were looking at a normalized run rate, then it certainly wouldn't be double the first half and that suddenly becomes a new run rate. I think the underlying business is probably a little bit bigger than that in terms of maybe the 8- or 9-type category, but that's going to take more than just this half to carry through. So we're concentrating on just cleaning this up properly and making sure we've got a balance sheet set correctly, make sure we've got the operational processes set correctly so that the underlying performance can shine through.

And also, so we can really understand where we make and lose our money, there was such a degree of complexity into what was being made and how it was being processed through standard cost accounting and so on that we couldn't really get the sort of intelligence and alignment between sales, the product category managers and the people producing it to have the sort of match fitness that business needs to compete on a world scale, which it does.

I'm not sure we adequately responded to your question around the skew on the base business, Russell. So did we do that well enough? Would you like a little bit more color?

Yes. No, it's fine. It was just a skew on the APG business because that's the sort of the big variable when you come to your group guidance given the mismatch in terms of the guidance for that one relative to the base business, which is fine. Just on -- so we can round up the Davey discussion, this business used to sort of do 8% to 10% EBIT margins. It's been sort of trending down for a while, but the sales have actually gone up. So if we look back at history, sales were up 20%. Is this a, I don't know, 6 or 7 EBIT margin business? Or is it 10% EBIT margin? How should we be thinking this? Obviously, I understand the issues you talked about, some might take a couple of years, but how do we think this sort of 2, 3 years down the track?

Look, with the way the sales are building and the -- let me come back a step. First thing I'd say is you can see the sales are built nicely in Australia. Through all of this strip-back process that Val has been undertaking is -- and revealing habitual processes and ways of working which weren't really in service of the customer, she's been stripping those back, it's been getting better engagement with our resellers. You're starting to see the pull-through in the Australian sales. If you start to fast-forward that over a couple of years, Russell, then you'll get the operating leverage out of that. So probably in the near term, you're more like saying it's probably a 7 to 8. And then as you work through these elements we've talked about and further improve customer delivery, get more and more dealers leaning towards Davey's as a preferred brand and get the volume growth, there's no reason over the midterm why you can't get to that 10%. You're probably still going to track some of the global firms that just got much, much greater scale, but it -- I would say it's a 2- or 3-step process rather than get to the 10% overnight.

Great. And just a final question [ so I'll give ] others a go, just this is a bit more higher level. You've given some good, I guess, chart on obviously the average price rate across your portfolio, the impact of the lockdowns. But we can see sort of the charts you provide on the presser about things reopening and, I guess, the volume growth we've seen in your auto business. The question, over the last couple of years, you guys have obviously -- you've got much bigger scale than some of your competitors in the parts space. You've spent a lot of money on freight and getting things to Australia probably at the cost of margin. I just got a question around market share gains that you've had in some of the categories and whether you see those as sustainable and whether it will be a benefit, I guess, accelerating out of a post-lockdown world or whether you expect to see any sustainable market share gains across your automotive business?

Two thoughts come to mind. Firstly, more recently, it's [ now not an ] expensive margin, right? So we've just expanded our margin in auto by close to 3 points of margin versus the prior half and only probably 27 or so basis points off where we were a couple of years ago. So I think that's been encouraging, and that's a very strong story. Margin expansion for us has been something we've been working very carefully on. By the way, that margin expansion isn't just simply an FX gain. If you think about the EBIT in dollar terms, call it, sort of $8 million or $9 million increase, you're talking probably only 2-ish of that is actually FX. So it's come through some good efforts of the team, including pricing and some cost control. And so back to your other question in terms of market share, we've gained market share. We know that. I mean we can see it on the share. And then the very few empirical data points we have in, say, filtration as an example, we've gained share. That's positive. And then we have to rely on different measures in terms of shelf space. We get growth rates of house brands versus ourselves in certain categories and the like. And we've captured new contracts as well, so whether it's Jayco contracts, whether it's PACCAR, whether it's expanded product ranging in certain of our bigger customers. So all that points to market share, and we're confident of that. And that's why we're seeing organic growth when we've probably seen some flatness in other companies. I expect to actually be able to hold a good portion of that. I'm not stupid enough to suggest that it's all going to be -- stay with us. But we've seen material gains and in certain categories where people won't even go back -- so as an example, let's say, Jayco with some power management products out of BWI, they're now installed in caravans. And as long as we provide the right level of support and the right level of product development ongoing, then there's no reason for them to depart from us, and yet we've captured that business. And similarly, we have other examples of that same ilk. At the same time, we haven't slowed down the product development all through this period, Russell. And so BWI in the next 12 months are about to launch some products that -- in terms of the cadence that they haven't had that cadence for probably 3-ish years. I'm not talking about catalog here either, by the way. I'm talking about discrete bespoke products, whether they be Intelli-Start jump starter ranges, forward lighting, rear lighting and the like. And so we haven't pulled back, as I think I've talked about. In fact, in the last period, when we finished the full year, we talked about $1 million higher product development spend than the prior period. So that all bodes well in our perspective. We're expecting to increase market share in a number of our businesses either through new penetration into some of the categories or new products or holding some of the gains we had through this period. And of course, that's why we're not going to pull back on some of the elevated inventories nor pull back on the product development. So feeling pretty confident in that regard, not just in terms of market share but also the way we've been going about the margin expansion as well.

Our next question comes from James Ferrier.

First one is on the organic automotive margins at 24.9%. Just given the timing of your price increases during the period versus what was probably a full 6 months of cost being passed around supply chain, et cetera, would it be fair to assume that your exit run rate is higher than that 25%?

We don't break them down month-by-month to that level of specificity. I mean logic would suggest that yes because of the timing, but to be precise, I just couldn't answer that question specifically. But I think that's a fair assessment, James, certainly in the back end. You know that the pricing -- the first round of pricing was sort of in the October period. And we've been enduring some of those elevated costs through the whole half. So I think that's a fair assessment, but I won't give you an accurate number because I don't watch it every single month end. And of course, when you think through the second round of pricing, well, that's now being put in place in February, so you got about sort of 4 to 5 months of the benefit rolling through. So that's a bit of an assistance. But Martin has already mentioned that we've got a bit of spot to concentrate on as well just to see where that goes. We do have a few elevated costs in the second half unrelated to COVID where -- we're a bigger business, so we've probably got about $0.5 million or so dollars worth of D&O insurance that is new to us. We have a little bit of an expanded director base and a few more employees to manage the central bulk of GUD. So there's a few rolling through there, but at the same time, obviously, we have the impact of the pricing rolling through. So we're feeling pretty positive about the margins at the moment, James.

You're also starting to see cost revisions that are linked to CPI, for example, rentals starting to cycle through bigger increases than they have done in the last few years as well. It's certainly an early sign of inflationary cycle.

Yes. That's helpful color. Second question, with the inorganic automotive EBIT, so half-on-half, it's sort of gone roughly $7 million to $10 million. Now it would seem that ECB probably didn't contribute to that. Vision X probably gave you $1 million or so. So am I right in saying that ACS and the rest of the G4 business have picked up a couple of million dollars of EBIT half-on-half?

You're a very smart man, James. You're almost on the money. ACS and our AE4A auto electrical business, which now sits under BWI and it's just a very elegant better, best approach to market like Ryco and Wesfil, they've really -- they've come on like a steam train. Graeme talked earlier about the ranging. They've got super cheap in Anaconda and so forth, particularly with a fantastic range of solar products for people in the camping and so on. So that's where it's really stepped up. And as we heard earlier, ECB, capacity constrained, to a degree Fully Equipped as well because trying to get key raw materials from the U.S. to New Zealand has been a challenge, to say the least, with transshipment times of an extra 50, 60 days and having your airfreight. And that's been a bit stop-start on manufacturing, and we've more recently lended safety inventory there. So it's really APG -- sorry, ACS and AE4A, and that's pretty much to a degree as we expected G4CVA to play out. And that's why we cost -- called out that CapEx at the -- when we acquired the business, that sort of $7 million CapEx. And you're seeing -- Graeme talked about the robotic polishers. We got the first of 3 coming in. It's very pleasing to see the gentleman from APG had a look at that and gave it a tick. And in fact, we may have more to come there that is able to be recycled. So we might in time save some of that CapEx.

For [ robots sitting up into that ]. I think another thing, James, just to touch on what Martin said, the likes of ECB, Fully Equipped and even APG, given we've had just on a month, where we've got manufacturing challenges, either through capacity, the likes of ECB, or short-term absenteeism because of a huge wave of Omicron impacts in, say, January, the really encouraging thing for me is that in every instance, that's translating to back order outcomes, not lost sales. So Fully Equipped, record back orders. ECB, very strong order book. And even -- I mean we haven't -- the dust hasn't really settled on the first month for APG. But similar to Davey as well where you're assembling and manufacturing, there are impacts with Omicron. And if you got absenteeism running between 15% and 25% for a few days, you have to try catch it up, but the back orders in APG, very, very strong as well. So that bodes well for us, and that's what we like about some of these businesses because it's about deferral at worst. It's not really about lost sales. So I just want to give a bit more added color there, James.

And just a couple of simple ones to finish then. The corporate cost line popped up a bit in that half. Can you just give a bit of color on the contribution you're expecting there in the full year? And secondly, given the moving parts in this second half, just roughly where you'd be expecting net debt to end FY '22?

Yes. Good questions. I mean certainly, it's probably fair to say that Graeme and I and many of the group -- team have been working pretty extensively on acquisitions in the last half. And that sort of higher corporate cost in part reflects us reviewing where we're spending the time and whether it's fair to [ bill ] Terry Cooper at Wesfil and he hasn't seen very much of this because we've been working on acquisitions. So that reflects that. Graeme said before we've got some of those costs -- I mean another director -- D&O stepped up considerably in the first half, will step up again in the second half because we've got the bigger capital base, which will drive D&O. Again, we added a few people to the group. We're going to have to add a few more because of our scale and complexity both in terms of absolute size and geography. So in terms of the second half, it's probably as it is in the first half or a little bit more where some of those other costs pull through.

Yes. So it's a tiny bit more. I mean you've got the full half of the D&O. The other thing, James, we have added to the team. And in the 3 years I've been here, I've been pretty cautious about adding central resource. I'd much prefer to be adding resource where the rubber hits the road and the revenue is generated. But the reality is the work on portfolio vision, our evolving view on ESG, some of the strategy work within the business units, some of the cyber efforts we made, we've ended up adding probably 3 to 4 heads in the central team to make sure that we're governed and managed in a way that we desire in terms of precision and capability. So that is coming with more cost. Now I'm cognizant that we don't want to drive the corporate overhead, but we also have to manage the balance of planning for the future. And that's why we talked in a couple of line items around sort of investing in the long-term future as well. So it's an interesting balance right now.

A little bit more of that to do in the second half as you'd expect us to.

I'm sorry, the -- yes, the net debt, yes, roughly what...

Sorry, net debt.

Yes.

Well, certainly -- we called out with the APG acquisition to be at net debt to EBITDA of 2x the end of...

Calendar year, yes.

Calendar year '22. And we expect to be relatively well advanced to that. The big question is, will inventory sort of need to go up in the second half? I think from where we're sitting at the moment, the answer is probably not, which would then suggest we'll get pretty good cash conversion pull through other than higher debtors with sales growth. So expect it to not be at the 2, but certainly, very good progress towards that number, James, very, very good progress towards that number. But that's all presupposing our view of supply chain being elongated and being able to potentially see that stabilize. That's the $64 question. That's the way we think it will play out. Is that going to prove out to be the case in the second half? I think it is. Otherwise, all the small competitors will go broke because they won't have enough stock to sell because they can't commit to the working capital and then just be left with big people like us with the balance sheets. And it's probably not good for any economy in the long term. So we probably all hope that doesn't occur, but..

I mean at the end of the day, our cash conversion in the second half will be a reflection of essentially how we handle the inventory position. And look, if you -- speaking in brass tacks, if we look at FY '20 H1 and you go all the way to FY '22 H1, we've increased -- if you took out the acquired inventory, let's just concentrate on inventory, then it's up 37%. That's the fact. Sales are up 20%. So you got a delta of -- just call out round numbers, delta of 20%, just for fun, right? And so I think our job is to work out the balance of what that 20% should be. Should it be 15% by year-end? Should it be 10%? Or should it be where it is right now? And that will directly relate to the cash conversion and then obviously indirectly through to the net debt. And so there will be -- other than margin expansion and acquisition integration, there's going to be some big concentration on inventory in the H2. So that's kind of how we're viewing it. Hope that gives you a bit more flavor.

Next up is Anna Guan from Goldman Sachs.

Can you guys hear me now?

Yes, sure can.

Just 2 follow-ups for me, please. The first one is just on the auto business, trying to get a feel for the exit run rate. So looking at the December quarter-ish performance versus, I suppose, the outcome for the half versus your previous guidance, it looks like organic growth sort of accelerated into the December quarter. And obviously, in your outlook commentary, you talked about a slightly muted January performance. And if I recall correctly, January historically is a relatively volatile month for you guys. So I guess my question is, just in terms of the feedback you guys have been getting from customers, to what degree [ are you working at ] a sell-through kind of rate versus, I suppose, partly just inventory customers holding on to a slightly higher level of inventory going into first half -- well, the June half calendar year '22, I should say.

Yes. Look, I mean let me answer it with a trading perspective point of view. So when we last updated the market, we talked about at a group level of sort of 3-ish-or-so percent EBIT growth net of JK, and obviously, automotive, we're now talking 4.6%, approaching 5 net of JK. So -- and we're bloody pleased with that actually. I think there was a few people who were perhaps questioning our view that we could actually have organic growth off a record year, the prior year. And we just comped a pretty big half on the back of some pretty tough restrictions as well. So we're looking at that thinking that's a pretty good result. I mean we always want more, but we're bloody pleased. And then so we did see a typical acceleration in December. We were unsure as to how December was going to finish because Omnicron -- I keep saying Omnicron, I apologize. Omicron started to get a bit of noise right, right, right at the end of December, and we were worried that we wouldn't be able to get it away in terms of just physical logistics, but we got it away. January has come in, and it was January 2 when we had our first leadership group call to discuss how we're going to handle Omicron. That's how we entered into the year, and then we went into every second day calls back to our COVID response framework. And when I talk of demand dampening, I'm thinking more versus our expectation. So without being too precise because the month hasn't washed up properly yet internally, but our year-over-year in January will largely, I think, come in flat to probably maybe 1-or-so percent higher than the previous January. That isn't necessarily our expectation, though. So as you know, we've just -- if you think auto for 1 second, we're just shy of 5% year-to-date. And in that 1 month we're essentially flat, it was one -- we'll just call it flat for a second. So that's the dampening I talked to in terms of a little bit of momentum in January sort of puddled off a little bit versus the first 6 months. And that relates in part to what we're seeing in the market in terms of a little bit of dip in mobility, but then it came back. And then the latter part of January, it started to pick up a tiny bit, and into February, it's starting to get stronger again. And we're seeing now workshops back to 2 and 3 weeks booking times. So that's what we were referring to when we say sort of a bit of dampening. There was no specific -- and by the way, January was a strong January in the prior year, by the way, stronger than it normally is. And so we've just comped another strong January, and we're basically flat to a tiny bit higher but not at the same clip that we'd had in the first 6 months. And so yes, we're feeling reasonably encouraged, but we're being cautious, and that's part of the guidance, right? If you look at the guidance, $112 million to $116 million on existing businesses, it suggests that the second half will come in at between $53 million and $57 million. Now you probably got a point of view around how Martin and I operate in regards to guidance, but it does assume, well, hang on, what happens if indeed that momentum stops? Now we don't necessarily believe that. We think that we see full order books, we're starting to see the workshops come back, and we expect to see the rebound come through. But the sell-through wasn't impacted by any particular reseller behavior.

Got you. That's good color. My second question is kind of related to your comment around guidance. So just on margins, Graeme, earlier, you gave some color in terms of the incremental cost that potentially might come through in the second half around corporate costs, insurance costs, et cetera. Just thinking about as far as Omicron-related supply chain/staffing cost-related challenges, a couple of the retailers that we follow have flagged extra DC and, I suppose, wages, one-off associated with that. And therefore, I suppose my question is, to what degree have you guys kind of factored that into your guidance? And how should we be thinking about it?

So we've had to take on higher casual labor. Comes at an increased cost. We're having to catch up in some instances with overtime. And that's a change from prior COVID impacts, so there's a little bit in there, Anna. I wouldn't say millions, but there's a little bit in there. In the second half, in the guidance where we're thinking about it, we do have some incremental costs. Yes, that's the one that you just asked about and I've just mentioned. Yes, D&O in the second half will be $0.5 million or so more. I think it may be slightly more. We do have the FX, but we have to think our way through, but we've got some pricing to offset some of that. And then we've got some incremental costs in terms of managing the business, this larger business we have, and also building a growth business for the future as well. So we're investing in some costs in the second half and through next year as to how we're going to continue to grow and be the bigger business that we aspire to. So we do see a step-up in costs. I'm not saying that's going to be dramatic, but it's not going to be in the hundreds of thousands. And so that's something we have figured in if you start to cume that up.

I think just to add, we -- during the Delta outbreak, we established with many of our sheds running split shifts, morning shift, no one in the shed for an afternoon and afternoon shift. Part of our risk management, if there was an outbreak, at least it was potentially limited to only half the shed. So...

We had to put those back in place literally...

Yes, we had to literally put those in place. So we were hoping for a bit of that saving. That's probably wishful thinking now. What we would say is, firstly, thank you to our employees for being willing to work that way. Secondly, we've got a pretty stable workforce, which is largely permanent. But where we are, we're needing to reach into temps, and that's been particularly Davey with some of the manufacturing changes, and trying to catch up after a COVID lockdown is -- temporary staff are frightfully expensive right now. And that's probably hit Davey more than anyone. But the other issue is temporary staff, well, they're expensive if you can get them. So we've been trying to navigate all ways of managing with our existing staff, and we have to take this opportunity to call them out and applaud them and thank them. They've really helped us dodge some of those costs, but more importantly, as I said, temporary staff if you can get them.

Okay. So we have 3 more questions. [Operator Instructions] But our next question now comes from Andrew Donlan from UBS.

Just a quick one on the guidance, the $112 million to $116 million. I'm just keen to understand the half-on-half movement in the core auto business, just trying to piece together some of the comments you've made around organic growth and costs and things. I mean are these incremental costs? Are they offsetting the price increases that start to really come through in the second half? So I guess should we be assuming sort of flat margins half-on-half? Or should they be growing in that auto business?

Look, it is a difficult balance, Andrew, and thank you for the question, not knowing where spot is and where that takes us. And so look, we talked about margins obviously the full year, and we said that we were going to improve them, and we have. I think it's fair to say that the margins probably will be in a similar state, I think, in the second half. I don't think they will advance given what we've just spoken about. And look, they may retreat by 10 basis points or something like that. But we're not talking sheep stations in that regard. So -- but again, I mean we're trying to be cautious in our guidance. I mean even if we were to deliver at the top end of the range, just for 1 second, use that situation, let's call that the $116 million, that would suggest that we'll come in at $57 million in the second half, just pure existing businesses. So that would put us down sort of 3%. But putting it into context, that's still a 17% lift on the prior period in that second half. So we're still plotting a path that's pretty positive. And the margins, even just for fun's sake, if you were to take that $57 million and put it across a repeat of the overall revenue, we'd probably be about 30 basis points down. That would be the worst-case scenario unless obviously something unforeseen rolls through. So our job is to try to maintain the margins. We actually said at the year-end that it would take probably until FY '23 in our view to get to the -- what I would call the organic existing businesses' margins back to that sort of 25%, and we're already back at the 24.9%. So I would say, without being too precise, I wouldn't expect too much of advance in margins, probably more flat, give or take, where perhaps some of those costs roll through and where the spot sort of plays out.

I just want to reemphasize that the way we laid it out there is to remind everyone how we got to the $155 million to $160 million, effectively through our various announcements in the last half year, and that we are really managing to that $155 million to $160 million, and we're reaffirming that guidance rather than each and every constituent part of the 3 previous announcements. As we heard before, there'd probably be a little bit more skewing with the APG business towards the second half of calendar '22 and a little less in calendar '21, and the existing businesses will effectively fill in that gap. So I just want to reiterate, we're not calling out the automotive for each and every part of it.

Yes. No, that makes sense. And then just a final one for me. You touched on that trajectory of the organic growth from modest to finishing the half of that 5%. Can you maybe just talk a little bit about Ryco and Wesfil and how they looked over the course of the half given they finished it sort of flat to up a little bit?

Look, and obviously, we try to give a little bit of color without letting too much information go to competitive sets and other stakeholders. But you could see that -- we commented that Ryco was -- had a modest improvement, but Wesfil was slightly down. Again, they were -- you got to remember again, they're comping record years, all-time records. So for Ryco to be up on an all-time record in a mature market is a pretty decent outcome in its own right, but -- sorry for that extra color. But Wesfil certainly, we saw more impact and definitely in Q1, definitely in Q1. New South Wales impacts, they've got a stronger base in New South Wales. They serve a lot of customers there. We certainly saw a big effect there. And so they started to bounce back in the second half. And so subsequently, the full half was just under. Ryco didn't have quite the same impact in Q1, but it still was impacted. But some of the businesses, and we saw a little bit of that in GEL and NZ as well, where they're more exposed to service and wear parts, people are making that deferral. And you have to be careful when you think about our existing businesses, when the term trade is often used, well, there's -- if you sort of dissect trade and think about trade in 2 camps is kind of like the repair piece where you have to do something, if your brakes fail or your light has gone or whatever, right? So that's part of trade, whereas there's also another part of trade, which is your service and wear parts. And so when people are making decisions to not drive or fearful of going out to any public area to get something done, in this case, service a car, then they defer. And so I think there's sort of a little bit of deferral roll through there as well. January for them wasn't -- it didn't start out well because Omicron really did start to put the cat amongst the pigeons for them, but they started to come back in the last part of January. And I said to you that if you look at our existing businesses, January over January, they were sort of about 1% up in aggregate. And when you flip through the likes of Ryco and Wesfil, they started to pick up in the last part of January. And then we're starting to see a little bit more buoyancy as we get into February. So that's quite encouraging. So there's a bit of a distinction around the wear parts piece. There's a bit of a distinction around the likes of Wesfil in New South Wales. But again, as I said in my -- and I said earlier, at the end of the day, I'm not alarmed by that. It will be deferral. It will come through. We're not losing business to anybody else other than Omicron or a bit of a lockdown, and that will bounce back. And we have experienced and seen that in 2020 and 2021.

Our next question comes from Mitchell Sonogan from Macquarie.

Can you hear me?

Sure can, Mitchell.

Most have been answered, so I'll just ask a few quick ones. Just in terms of, I guess, that impact of the Omicron wave, can you maybe just give us a little bit more detail of how you're seeing things by -- state by state? Obviously, New Zealand, heavily locked down over there. But are you seeing any differences in terms of New South Wales probably having the biggest impact first half and maybe then coming out of it earlier? Can you maybe just provide a little bit more color state by state what you're seeing particularly across here on the East Coast?

Yes, sure. So probably in order of severity, it goes sort of New South Wales, Victoria, NZ, Queensland, South Australia and WA. Now you're asking the wrong person to start listing states, by the way. I'm an Englishman sitting in Australia. But I'm sure I've missed provinces, territories and other such things. But the way we're looking at the businesses, that's how I would characterize the impact. So New South Wales, pretty tough through the lockdown, starting to bounce back a bit and then Omicron arrives, and it gets a bit skittish again. Victoria, certainly but not as much as previous years. NZ, really tough, and yet GEL has actually done pretty well to be where they are at. And I'm actually quite proud of their efforts to be where they are. And then you go Queensland, a bit bubbly. And then WA and SA have been flying. They've been doing pretty well. So that hopefully gives you a bit more color. And the variability, much in terms of the chronology of what's going on, has been up and down. It's been up and down. I mentioned earlier on that through the first half month-to-month, particularly the first quarter was pretty horrible in certain parts of our businesses in certain geographies. But even in the second quarter, we saw variability month-to-month. So it has been quite patchy. But in aggregate, a good performance. I'm not complaining by any stretch, being up 5% given we're off a pretty big year prior year.

Yes. All right. And I guess just the final one. On Davey, I guess, some of the rationale of always holding that one with some of the synergies from corporate overheads and freight and that sort of thing, given the VX and APG acquisitions, the new scale of the business, does it make more sense to consider other options for that business? Like how are you thinking about that, where that's placed in the portfolio?

At the end of the day, that narrative of the past is now not relevant in the current day, put it straight there. So there's no need for any of our businesses to be thought in that context. Davey, like every other business, needs to be able to stand on its own 2 feet. Yes, it does have some synergy benefits in the back office, but we're not comfortable with its performance. Val is certainly not comfortable. We brought Val in to lead the charge. At the same time, we brought in a new CFO. We've got a new S&OP leader. We've got a new sourcing leader. We've got X, X, X to drive some change there. And so what Martin said earlier on in answer to Russell's question around what does the percentage look like, yes, it's a 10-ish-type number and Val will work to that, and I'm sure they'll achieve that. And in doing so, it will stand on its own 2 feet. And in that situation, the Board will always reserve the right around what options it has as it pertains to any part of our portfolio, but we're not going to hold Davey in its current position just because it has a synergy benefit. That's not the right approach in my eyes. And we're all clear about that both at the Board and every single leader in our portfolio.

Okay. We come to what is so far the final question for today. [Operator Instructions] But coming up next is Andrew Hodge from Crédit Suisse.

I guess given that I'm last, I got to keep it brief. I just want to touch on the guidance, Martin, that you referenced, the larger guidance, which I guess now becomes the main source of guidance, the $155 million to $160 million. I just want to break down the inclusion and exclusion of amortization add-backs to that figure. So obviously, APG and Vision X excluded, I know you're still working through what that outcome is in terms of quantifying it. If we use a ballpark of $20 million annualized, so call it $10 million for the second half, does that in effect, if those numbers were correct, it takes the guidance to $165 million to $170 million on an EBITA basis? Is there anything wrong with the way that I'm thinking about that?

Yes and no. Firstly, the guidance we called out and perhaps we needed to put it in a bigger font is EBITA for that very reason. So any amortization we bring, once we've worked our way through the purchase price accounting, will be a deduction from the numbers we've given, not an add-back to the numbers we've given. Now in terms of the quantum, we're working our way through it. We did a high-level estimate on the way through with our equity advisers, but they're also our auditors, so I can't do that. We've got someone else working through that. I don't think the number you put out there -- if I had to stab a guess, I don't think the number you put out there would be that far wide of the ballpark. But at the moment, sort of it's an educated guess. I'll reserve the right -- we're going to work our way through that. But it's an EBITA guidance. So if you then bring it back to EBIT, it will be a deduction will come in under the $155 million to $160 million by whatever that works out to be. And obviously, whatever we generate there, it triangulates through the debt reduction in the medium term, too.

Thanks, Andrew.

Okay. I think that's it. Mitchell, can I just double-check? You've got your hand raised, but that may be because you've got a follow-up or perhaps I forgot to lower your hand when you finished your question. Was there a follow-up? Or were you done?

No follow-up here. All done.

Fantastic. Thanks very much. Just before I hand you back to Graeme, this is the second time we've used Zoom rather than a traditional dial-up. Using the raise hand function, can I just get a sense of whether you guys prefer this over a traditional dial-up? If the answer is yes, then we'll continue it that way. Just raise your hand and say yes, we like this idea versus a traditional dial-up. And if you don't like it and if you prefer the old way, of course, you can always dial into these by phone anyway. But if you can just let us know whether you prefer this over the old-school way, then that will be handy. Thank you very much. So there's a whole bunch of hands coming in here. So all good. All right. Wow. Okay. That's pretty emphatic. Thank you. All right. Well, that done, Graeme, back to you.

Okay. Well, thanks, Dean, and thank you, everybody, for taking the time. And appreciate the fact that there was an aftermarket release, but we wanted to make sure that we gave plenty of air to the result and also sort of separated what is a busy period, so I appreciate you taking the time. You can tell we're quite pleased with the result in a lot of different ways. As I mentioned earlier, we're right in the middle of a very positive transition. The acquisitions are bang on from a strategic point of view. At the same time, the operating results are in record territories, which is always encouraging. I think we're beating a number of people's perspectives in terms of whether we could grow organically. And we're not going to beat our chest about that because at the end of the day, we're just going to get on with that. But we are pleased with the performance. Margin expansion is reassuring. And essentially if I chart some of the comments and discussions we had at the full year year-end, it's playing out as we largely expected and committed to. And so that's pleasing in terms of do what you do and say what you do and the like. So we recognize that the second half might have a few challenges. But again, we're working hard to mitigate those in terms of the extra COVID overlays, but we remain very positive at the end of the day. Yes, there are some extra costs rolling through in the second half, and we've gone through those. But at the same time, we're feeling very positive, not just at the -- in the short term but certainly in the midterm prospects as we start to really integrate the acquisitions and see the benefit of some of the product development and channel work that we've been doing well. Perhaps some of our competitors have been perhaps distracted. So a positive result, and looking forward to having more discussions over the next 5 or 6 days in a smaller group setting. So thank you for your time, and will let you get to your beer, your wine, your cup of tea or indeed your dinner and your family. So thank you, everybody. Cheers.