Amotiv Limited (AOV) Earnings Call Transcript & Summary

Okay. Welcome to the earnings call of the GUD results for the 12 months ended 30 June 2022. I'm Graeme Whickman, GUD CEO and Managing Director. And I'm here with Martin Fraser, the company's Chief Financial Officer. As a matter of housekeeping, we'll have time at the end of the call for questions and discussion. So please hold your questions until then. And a recording of this call, along with the presentation material that will be available later today on GUD's website. So we'll start by Martin and I running through the key messages and group financial overview. I'll speak to our evolving view of the portfolio vision and our ESG efforts, followed by commentary on our segments of Automotive, APG and Water businesses. then I'll hand back to Martin to cover the financial results in more detail, and then we'll conclude with the trading update and outlook for FY '23 before we go to Q&A. So let's turn to Slide 3. So we've experienced strong end user demand, reflecting the resilience of the auto aftermarket and we also detail our nondiscretionary management estimate of revenue later in the deck, and that circa around 80%, which is a very important number. Through the result, there was a positive margin expansion in our legacy BUs in the aftermarket, which we flagged as our expectation, even though a pretty strong backdrop of the supply chain pressures and inflationary challenges. And then we did revise down our guidance in June due to the impact of the world documented new vehicle supply constraints, which has impacted APG's revenue, even as the demand for vehicles has hit record levels of backlog. We announced and subsequently completed those 2 important acquisitions, one I just mentioned being APG, but also one in Vision X, in the auto lighting power management elect category. And these 2 are supportive of that business transformation within planning in terms of customer and product and geographic and powertrain diversification, all part of the momentum building in our portfolio right now. Now as part of the portfolio are nearing the completion of the Davey strategic process, which did include a noncash impairment, and we're getting that in a few minutes. And then finally, we're focusing on ensuring our balance sheet is strong and our previously discussed deleveraging target of 2x remains the same aspiration. Okay. Martin will cover the next slide in terms of the general financial overview.

Thanks very much, Graeme. You can see on Slide 4 that we delivered revenue growth up over 50%. And within that, organic growth of circa 8%, taking our group revenue to $835 million. Clearly, when the acquisitions achieved full year will be well in excess of $1 billion. Our underlying EBITDA was up 46% to $175 million. And although that was down 50 basis points in the prior year, the organic Auto margin grew, which we'll see later. And therefore, the decline reflects the influence of new acquisitions. Margin management was well executed by the Auto business, although Davey did decline in its margin as a some change costs to absorb within the result, which we'll touch on later. Underlying EBIT grew by 46% to $147.8 million, in line with revised guidance, in fact, a little ahead. And I'll speak later on in the deck around the definition of underlying EBIT as well as underlying EBITDA when we get to Slide 28. Cash conversion was within our expected range. And we'll see later that this really reflects a step-up in inventory to address supply chain disruptions. We'll go into that further in the deck, but I just want to stress that we see that as being transitory and being represented by inventory with good velocity of turnover. And we don't think that represents a longer-term risk to inventory impairment. These are largely non-discretionary consumables and are at low risk of obsolescence due to fashion trade, changes and color preference and all those sorts of things, we've not seen in other business. Although the underlying EPS was up nearly 6%. The final dividend of $0.22 per share was down on last year's $0.31 and reflects a clearly stated desire to reduce our gearing level to circa 2x underlying EBITDA. And I'll speak to that again when we get further into the deck. Back to you, Graeme.

Thanks, Martin. Well, on Slide 5, we reflect on our recently released portfolio vision. Importantly, you should see a strong alignment in the portfolio vision to the FY '22 acquisitions and it helps build context as to the way we're plotting the future with the underpinning of some critical business foundations. And I feel we really are on a transformative journey with great prospects and a strategic path with clear messages and measures of success in 2025 and beyond. On the Slide 6, we update our shareholders on our ESG progress. Back in FY '21, we showed for the very first time a glimpse of how the ESG journey is broadening at GUD. And we do pride ourselves on some of the metrics we achieved in the areas of employee satisfaction and safety. We strive to operate as a top quartile company, punched above our weight basically. And these 2 areas, we certainly do that. We've been hard -- working hard to improve in the areas of diversity and ethical sourcing, and we just released our modern [ savory ] statement, you would have seen that. And the business reliance on non-internal combustion engine revenue, ICE, all of which have improved since that point back in FY '21. Now the Board and the executive team have got some pretty big ambitions to broaden our view and ultimate version on the sustainability of our business and also the impact we have on the world around us. We kicked off a multiyear effort to build a better foundation for that. The first phase was completed with materiality assessments, including a lot of external stakeholders. Obviously, that helps shape our own point of view. And we've shaped 6 key impact areas, which are shown on the slide. The next stage is to actually revise our baselines given the acquisitions over the course of the year. And then the third phase is obviously the ongoing measurement of what we're trying to achieve. I should also mention that we haven't sat still in terms of the existing ESG-related performance efforts as it pertains to exact compensation, and that's actually been reflected in a number of the important measures in terms of STI and LTI in terms of nonfinancial metrics around the ESG aspirations in terms of ICE revenue, safety and engagement. Now moving over to the first segment, Automotive excluding APG that is -- taking a closer look at this is on slide. Taking a look at our Automotive segment results shows the revenue was just up over 29 or so percent reaching $575 million. which is a record for GUD. Net of acquisitions, the organic revenue rose 6.5%, which is excellent, keeping in mind the impact of the lockdowns, if you cast your mind back to Q1 year-on-year, and therefore, it's accelerated a little into H2, which is great. The auto underlying EBIT was a record also for GUD, whether you look at it at total or just organic levels. The underlying EBIT margin was a little off, as Martin mentioned, just a little bit. However, the important bellwether of the organic margin ex [ JK ] measure we put into our deck the last couple of years was a positive story, lifting 50 basis points over prior year to tip at 21%. We were able to price appropriately through the year, and this was able to overcome the higher supply chain, freight and domestic inflation costs. Now on that note, we do expect future cost inflation FY '23 and additional pricing will be in place to protect the margins. In FY '22, the supply chain logistics and challenges I've just mentioned, they've actually escalated further. And we did need a good buffer of fast-moving stock, Martin has just actually touched on that. And we think that FY '23, we might be able to moderate that a tiny bit if those supply chains do stabilize. If you cast your mind through the China eradication period, we have to make sure we actually had good continuity of stock, hence, the increase in inventory. But of the fast-moving, As and Bs. Now turning to Slide 9. Well, the size of the price continues to be strong. The car parc, that is being the price, is steadily growing. It sits at just over 19 million units, up 1.5% or so percent and this growth is forecast to continue. And at the same time, we've seen an aging of the car parc to nearly an average fleet age of on average about 11 years, which, of course, is naturally very positive for our wear, tear and replacement business units. On Slide 10, we detail some other critical car parc data. So as the car parc is growing, it's becoming more complex, actually quite complex. And we at GUD, we love car parc complexity. In fact, the segmentation continues to shift in the favor of SUVs and pickups, and even the small amount of EVs being sold are actually predominantly HEVs, which also have a nice powertrains, we get the best of both of them in terms of tapping into that. The car parc complexity is supported by our products and services, which you can see on the slide here, we estimate to be circa 80% made up of nondiscretionary products and services when you look at our revenue profile. Now given the record automotive ex APG results, you'd expect to see some Auto highlights, some snapshots. In the next 3 slides, we touch briefly to give you a feel for the automotive business units. Now we've broken it down to some key categories, Auto, Electrical, Lighting and Power Management, Electric Vehicles, Powertrain, Four-wheel drive, Trailering and finally, Undercar. So on Slide 11, we speak to the power train category. We ended up with strong revenue growth for both Ryco and Wesfil. The service and wear parts were impacted as we spoke about in H1. But as we expected, it improve into H2. Congrats also to the Ryco team, who awarded the second place in the AFR Innovation category awards, with a pretty cool N99 MicroShield filter and even more impressive was their placing in the AFR's top places to work. So congrats there. Now both IMG, so Innovative Mechatronics Group and AAG delivered strong growth. AAG continued to bolster its performance. They were part of a profit improvement plan, which has come to fruition, and we're very happy with the traction there. IMG's repair activity and engine management products, they continue to fly from the first half into the second half really positive. We grew IMG's repair network into New Zealand and soon over into WA. And for a good measure, also, we started an early effort, sort of a nascent effort to enter into the industrial service repair market. So that's completely non-automotive in nature. On Slide 12, we touch on ECB and a number of the G4 businesses. So ECB's revenue from OEMs, such as the light truck, so customers like HINO, was consistent through the year, but the broader aftermarket demand was more muted due to the vehicle supply, similar situation to APG. In some parts, the manufacturing constraints impacted our revenue due to staffing shortages and the polishing part of their manufacturing process. They do have decent backorders and have just commissioned automation in the plant finally and actually secured incremental base workers to alleviate the capacity, bottlenecks, fully equipped in NZ, had modest revenue growth. It was a mixture of choppy car supply. And if you think about Australia's situation of vehicles supply, then NZ is actually even more choppy. And at times, it was difficult to support given the lockdowns impacting on the manufacturing capacity due to staffing primarily. Importantly, they have a strong order bank and more recently have been able to actually increase their manufacturing throughput, so that's a good sign. In undercar, both DBA and ACS performed strongly. Now DBA had a good mix of domestic and export sales. The rise in sales was in part due to the product launch of DBA's first entry into disc, pads and calipers and we're actually just about to launch hydraulics as well. Now ACS has come along really nicely since the acquisition and certainly above our expectations. And the 2 companies are actually now looking at a shared export set of resources to drive opportunities over the next few years, part of that sort of good balance of sovereignty but also strength in terms of the cost base. Now I'm going to talk about the other acquisitions of VX and APG, given I just mentioned ACS. But before I do that, let's round out the auto snapshots on Slide 13, where we finished with auto, electrical, lighting and power management. Now this is a great story. Starting in Australia with the BWI team who really did well in FY '22 with strong revenue growth across the year. Now it came from many of the 20-plus channels, but pleasingly, a good portion from new customers and new products and that's a reflection of the work over the last couple of years. The team have good pricing power and have managed the margins well, having to combat the large and complex supply base. They're one of the businesses that had yet had the most proliferated supply base. And so cost inflation rolling through there, but they've actually managed exceptionally well. And the Projecta, the brand within BWI, one of the key brands, was a strong performer in FY '22 with its power management products. And this year overall, they had over 7% of their revenue from new products, and that's a categorization we used was 12 months and less. So it's a pretty stringent view. Not only do they win awards for the Projecta products, but we started the process of greenfielding in Europe and U.S.A. And we're pretty excited about what we're going to put forward at the SEMA shows in November this year. Now our EV aspirations continue to evolve with IMG and BWI stepping into the market with product and service offerings. We actually did buy a small company called Hybrid Battery Rebuild in H2. Although not large, it does combine with IMG to be one of the strongest competitors in Australia and sets us up very nicely for the future. Now I mentioned the Vision X earlier. So let's turn to Slide 14. And we're delighted with VX's performance in the first 7 months of ownership, ahead of expectations. The financial performance is going well and actually so is the integration. But the next slide gives you a bit of a snapshot of what's going on. The team is already planning on the first tranche of revenue synergy opportunities with specific products, which actually work both ways. We also purchased a small company called Twisted Throttle. It's largely an online U.S. business that deals with motorbikes and specifically, motorbike lighting. It's got a lighting brand called Denali, which is very interesting. And that will be part of the small opportunities we can fold into both VX and BWI to expand the distribution of Denali and the reach of the respective brands. Now the U.S. market has been going well for Vision X, but we did recognize in H2, the European market started to slow down for I think, some fairly obvious macro issues. Okay, so on Slide 18, I turn to APG. Now we announced that some subs were completed in the year on actually January 4, the acquisition of APG. The acquisition summary shown later on the deck articulates that APG is a game changer and a clear ingredient in our portfolio ambition of becoming a leader in the forward drive accessories and trailering market in Australia and New Zealand. It's a well-established, well facilitized and well managed business. APG is a dominant force in the domestic market, whether it's traditional towbar products. It's got a proven capacity in recent times to win new business, particularly in the growing categories of functional accessories like nudge bars, bull bars and sports bars. But on Slide 18, we speak to the first 6 months performance, which was lower than expectation and led us to revise guidance back in June. The issues spoken about in June were about new vehicle volumes being severely impacted by supply constraints, but also the mix of certain important vehicles to APG like the Ranger and a small cost inflation piece that rolled through. Now we experienced month-on-month declines in vehicle sales in April, May and June. And with that, pickups going from being about 8% up year-to-date March, and this calendar year, of course, to being in June year-to-date, down 2%. That's a very big swing. And that makes it tougher for APG, when you think about the performance of the Ford Ranger, a great revenue earner for APG. Now the well documented launch of the new Ranger is very exciting for APG, let's be clear. However, the months of April, May and June were tough on the supply of both the runout and the launch models. And the model actually finished the Ranger -- finished calendar year date for June, down a massive 20%. So that's significant. But like I say, it's exciting at the same time because the flipper coin is that it will start to come through. Now I've mentioned that vehicle supply issues a few times. And on Slide 19, you can see the impact on the wait times. Now the graph shows the volatility experienced in the average wait times this year, taking -- if you take the sort of the top 3 pickups and SUVs, you can see a massive increase by our prior years and importantly, it started to come down a tiny bit in Q1 calendar year '23. Only to see it spike pretty viciously as we entered into Q2 calendar year. Now that context of wait time is then framed in the next slides as we show vehicle sales. So if you go to Slide 20, and the story here is simple. Year-to-date sales are off 4.5%. This is of last year, by the way, that wasn't at any historic level. In fact, it hadn't even come back to the trend line. And you can see the pickup sales started to tumble from April onwards. And behind this was a pretty tough monthly stability of the OEM customer orders and production schedules, and they were moving around quite significantly, quite unprecedented for the APG team to deal with. Now again, the graph on the right also illustrates the volume change of the top 3 pickups and simply put, just tracks the supply of vehicles available, not demand. Now on the next slide, 21, we refer to demand. And we are convinced that the demand is being deferred, a view that many different voices in the automotive industry share. The structural need for new vehicles is clear scrappage of over 800 to [ 4,000 ] vehicles per annum continues. And the unmet demand over recent years for the likes of small, medium and large fleet is waiting to be fulfilled. And we see Q4 FY '22 as a trough in terms of earnings and expect FY '23 to improve with the benefit of pricing, the rollout of the new Ford Ranger. And overall, though, we do note that supply constraints are remaining, and we expect to start to see them moderate in late FY '23 and into FY '24. Now there have been some notable APG achievements since the acquisition and Slide 22 details some of these. So APG have won more new businesses since January, since we purchased over 40 new business awards, which about 80% of it is new revenue, the Ranger launch went fully in swing represents a terrific opportunity because we have actually greater towbar penetration on this new Ranger because of the lower Ranger models actually get factory fit packs being offered for the first time. And the new Ranger Sports' model which is called the Ranger Sport, is fitted with some of our products, and that model didn't exist before. Now the APG team are hungry, and they've secured the volume starting in late H1 of their largest towing competitor, domestic, who has decided to exit this market. So this same hunger is also extended into winning some small caravan to our chassis business, and that will be supported by our Automotive Tier 1 manufacturing facility in Thailand. Now I've already touched on Slide 23, so I might just dwell on Slide 24. As the graphic is such a compelling story, we can see how GUD's portfolio covers the front to the back, the inside and out of what is on the page, a typical pickup and the trailer. It's truly amazing, the product coverage by our strong brands. Now before I hand back to Martin to cover off the financials in a little bit more detail, let me just advance to Slide 26 to quickly cover off Davey. Now as mentioned earlier on, Davey's underlying EBIT was down marginally from prior year. However, the noncash impairment in H2 of just over $37 million was in addition to the inventory write-off in H1. Now these were part of set of financial fitness actions to reset the balance sheet driven by the new leadership who are delivering operational fitness steps to prove out the underlying and all part of a checklist and completing the strategic process for Davey. The strong sales growth from Davey is noteworthy, and this relates to the inventory position in the DIPOT levels improving after our H1 actions. Okay. Well, let's cover off the key financial information, Martin, over to you.

Thank you very much, Graeme. Ladies and gentlemen, I'll start you on Page 29, which contains the financial summary. And we'll do a walk through the P&L, starting with revenue. We can really see that 50% growth that I spoke to earlier. And on the right with the exact numbers I spoke to earlier, so I'm not going to read them out. Importantly, we saw that pull through to a healthy 46% uplift in EBITDA. As I said before, Automotive margins remaining robust, acquisitions contributing nicely and Davey being unable to fully achieve their EBITDA leverage from the sales for the reasons Graeme mentioned. With APG and Vision X coming on board, the amortization of customer intangibles will be an additional $20 million per annum, and we've seen approximately $10 million of that in half. So we'll increasingly speak to EBITDA results going forward, starting with this very slide, where we see the EBITDA stepping forward 47%. Given that recurrent level of amortization, in the results following this one, EBITDA will become our primary measure that we will be reporting to. That said, when we called out the revised guidance for FY '22, when we made the APG acquisition and the subsequent update, we did so using GUD's existing business portfolio underlying EBIT plus the Vision X and APG EBITA as a final attribution, the purchase price accounting and the amortization for those businesses was not fully worked through and signed off by the Audit Committee and the Board at that time. So we had a guidance which was somewhat of a hybrid. And on this Slide 28, we've called out an underlying EBIT to very much pinpoint how we finished against the guidance we gave through the year. And I apologize if there is some confusion for people between underlying EBITA and underlying EBIT, but we've really called that out to try and make your jobs a little bit easier. Okay. So moving down to EBIT, we can really see the amortization of the customer intangibles we spoke to. We also can see a noncash inventory value step-up for Vision X and APG required under international accounting standards. To most people, it's a load of bunk that unfortunately, you have to work out your inventory value as if it had been sold, including the profit each stage of production and so forth. So we've called out that influence and it's still $2 million to cycle through for APG that stop but still in our position that we haven't sold through -- come through in a future period. We've also called out the inventory impairment taken by Davey at the half year and the year-end impairment of Davey intangibles as well as a third-party transaction cost for the acquisition. I'm not going to call out all the lines on the page, but I will speak to interest cost, which has risen to $18 million on the back of the acquisitions, all pretty logical. And I'll touch on that a little bit more when we get to Slide 33. So you can get some insight into what to consider as you build up your view of our results for FY '23. Before leaving this page, I also want to speak to underlying net profit after tax. When we exclude all noncash items, I mentioned before post-tax balance date, as well as the transaction costs we incurred on the post-tax, balance date. Here, we can see the underlying NPAT on that definition is just on $89 million, which is up nearly 39%, which is pleasing given that part year contribution from Vision X, 7 months and APG's 6 and those constraints that we're getting through end-user demand at APG because of the disruptions in OEM supply chains. Going on to Page 29, we've really pulled out the one-off items, and we've spoken to those before. I'm not going to dwell on them other than to just -- we do highlight how they pull through to the segments, and I really want to just reiterate that almost all of those are noncash and take us on to Slide 30, where we talk to working capital. Here, we provide some additional analysis to better understand the step-up in net working capital without the distortion of the acquired net working capital. The slide highlights the organic and the post-acquisition movement in net working capital is being driven by inventory, which mostly involved the Australian Automotive businesses and Davey. Should -- as Graham said, should supply chains and shipment point-to-point time start to improve and become more reliable, this will be a distinct opportunity item, and we'll be looking to act where we can in a pretty short time. But we just need to make sure that we don't jump too quickly and disappoint our customers. Our performance during the COVID time and being a reliable supply to our resellers has been a standout. And we've just got to make sure that we get the right balance between working capital reductions and not falling at the last hurdle. Meanwhile, the nature of the higher inventory I spoke to before, it's all the story around inventory. Ordinarily, we've got a little bit more relief from the creditors because you've got more time on the sea, you get less credit to relief them, if you like, at pre-COVID types environment. so it's all around the inventory. Interestingly, debt is -- we didn't really step up. And you might say, well, why is that and there was a degree offset. Yes, debt is grew to support our organic growth. But we do get a little bit of debt relief from APG given the quiet Q4 sales and the extremely short cash cycle, which was -- which gave us some relief there. All right. Now moving on to Slide 31 on cash conversion. We landed just short of 80%. That's broadly in line with where we wanted to be. And again, it just really reflects that issue around inventory on -- not an issue, just a reality around issue, around the inventory and those extended supply chains. We're not feeling at all uncomfortable with that. As I said earlier, we don't see there being a risk of being caught out with inventory, which it is technically obsolete or a fashion item with the wrong color and so forth. So we're feeling very comfortable with that. And the improvement of cash conversion will just be when we can reduce those safety stock levels. I'd like to move us now on to Slide 32, which speaks to the balance sheet and the capital management and it outlines both gross cash and net debt balances for the full year and really reflects the acquisition of Vision X and APG. Our closing net debt position represents about 2.36x lease adjusted EBITDA. And we also outlined what it would be on our banking covenant ratio 2.46x, where we include the extended payment terms for the Vision X acquisition. We'll see later on, we retain a healthy headroom against the banking covenant ratios and have $150 million of committed borrowing facilities available. And that's also within our covenant capacity. So in short, we're really well positioned. And at this stage, other capital management actions are not being contemplated. I should also stress that our covenants are on a pre-lease accounting basis. And I've noticed that several analysts' reports have included lease debt in their reports, and they told me that that's really dictated by their corporate compliance offices, and that's led to a little bit of confusion in the last 6 months around whether our net debt to EBITDA is in the [ mid-3s ] and therefore, whether we're in we're in a position where we've asked and sought covenant relief from our banks. And I really want to highlight that, that is absolutely not the case. And that's why we're making very clear about our borrowing headroom, both within our covenants and our actual firm banking facilities. For those of you who want to understand that a bit better and understand what do the banking covenant calculations look like in more detail, the matter is outlined on Slide 40. Moving on to Slide 33, the debt profile. This will be my final slide before I hand back to Graeme, who's a much better orator than me, so I better get back to him quicksmart. To the right of the Slide, we've really mapped out the debt maturity profile, which has a, I think, a very compelling mixture of tenors. All the Pricoa debt, which is in the green, is fixed in duration and interest rate and is starting to look really compelling in our current interest rate environment. But it also shows the efforts we've made to diversify our funding base. We've noted an all-in funding cost, including the unused line fees, ops and so forth later on in the deck. And Page 42 gives that color and will help you sort of triangulate back to your interest rate assumption for the coming year. I will now hand back to Graeme, who will finish with the trading update and the outlook.

Well, thanks, Martin. On Slide 35, we've split the trading update into the 3 segments, albeit actually, Martin and I haven't completed the monthly business reviews for the month of July with our business units actually happens after this period, but we can give you some color. So starting with automotive ex APG, we've seen sales start positively in most BUs. Now to be completely honest, a couple of our BUs were comping the biggest ever month on record in the history of their companies in the same month prior year, but they still haven't done too bad. But broadly, the sales have started positively. The end user demand feedback is encouraging, with workshops reporting decent inquiry and bookings and depending on which state you look at bookings, between 1.5 to 3 weeks. But on average, I'd probably say 2-ish or so weeks, which is consistent with what we're hearing from our resellers as well. APG is still seeing the broader OEM orders at muted levels as supply constraints remain, with some slight improvement expected over the fourth quarter, and then into Q2. We are seeing some positive improvement in the new Ford Ranger rolled out. And of course, we have to be very careful about speaking about any particular customer. And we're also seeing the trailing part of our business seeing some good demand in the first 6 weeks of the year. Finally, the demand for Davey appears to have remained from the prior year quarter and that started positively. In both auto and Water segments, we're putting in price range to manage the emerging cost inflation, something already completed at the beginning of July for APG. Okay. We'll now finish on our FY '23 outlook, starting with APG on Slide 36. So we remain, and let's be clear, we remain very positive in APG's ability to deliver their business case targets as OEM supply normalizes. That said, FY '23 vehicle sales are expected to remain subdued. And of course, these backlogs will continue to grow. They're at record levels. The recovery to the long-term trend, we believe, on balance, will be over FY '23 and FY '24. Now the graph on the right of the slide, I think, is quite informative. It helps the reader understand the differing views of what the industry sales size might be this year and going forward. So there's a number of forecasts there. We also show you what I think is more telling is the sales trough due to supply constraints there. And that represents a significant delta of unmet demand. And we think as that supply constraints start to normalize, we'll get what I call our unfair share of that backlog, given the challenges of some of our competitors and what they're facing at the moment. Now finally, on Slide 37, our outlook for Auto, Water and the Group is covered. Now we're of a firm view that our Automotive BUs will benefit from the ongoing and robust car parc, adding our brand strength, our product development tempo, and frankly, we're delighted with our prospects. We're expecting Davey's performance to improve in FY '23. And at a Group level, we're concentrating on margin management as we did in FY '22. Recognizing some more cost inflation as expected. And of course, as a progressive company, we will be looking to reinvest in product development and our geographic efforts to grow whilst acknowledging the biggest scale of our company will require, corporate costs to increase in FY '23 for items such as D&O insurance and Group and professional services. Net working capital will remain at elevated levels, but I'm hoping to be able to moderate some of that if the supply chain starts to stabilize, and you'll recognize through February and June, it was a difficult time in China. And if that doesn't repeat, and I'm expecting that supply chain to stabilize. As we've said a few times already today, we are committed to delivering our net debt to EBITDA position and reaffirm our target of 2x, which we believe can be delivered by June '23. Now as you might expect, we're not providing guidance right now. There are so many moving parts as it stands. But we do expect to update our shareholders in the October AGM. Okay. Well, that concludes the presentation results. I'll now hand you over to the moderator who will coordinate any questions you may have. Over to you, Dean. Thank you.

Thank you, Graeme. Your first question, gentleman, comes from a caller. I can see that the number ends in 7022. That's all that I have. So if you could unmute yourself, and please go ahead.

Graeme and Martin, James Ferrier from Wilsons speaking. Can I start on Vision X and just confirm there with that EBIT number at $10 million for FY '22. So given the small contribution in the first half, that would effectively have the business annualizing its EBIT contribution at about $18 million. Is that correct interpretation?

I think that broadly it is pretty indicative of where we think it is. We're very bullish about some of the growth prospects there. But I think for the moment, that's probably pretty good annualization, James.

The only thing -- and the only thing I'd add -- the only thing I'd add there, James, is we're obviously watching closely the European situation. I mentioned that, obviously, when I was chatting earlier on. So the European distributors of Vision X, we actually really quite an admiration of doing the fantastic job they are. They are struggling a little bit in terms of not just the broader economic environment in Europe, but also basically getting -- shipping in and out one of our main suppliers -- sorry, distributors actually in Sweden. So I think Martin is right to say that, that run rate is a pretty decent representation of what we think they can do, but it might get a little bit choppy up and down depending on the European situation.

And have you achieved any material cost or probably revenue synergies more applicably here in that period? Or are those opportunities still ahead of you and really that earnings performance is sort of the business largely untouched?

It's pretty much that, James, your latter comment. The revenue synergies we're looking for -- it's not so much about a cost synergy story for Vision X, it's is much more around the revenue synergy and that's what we spoke to when we announced the acquisition. I just mentioned earlier on SEMA, so that's the Specialty Equipment Manufacturing Associations, the biggest sort of aftermarket show and tuning show in the world. Well, for the first time, have the brand Projecta on the Vision X stand. We'll be launching a few other things I can't quite talk about right now, but it will be all through the Vision X stand. And that's when the [indiscernible] hit the road, we have got people seconded into that business from a product category point of view. And not only are we looking at what we think to be a series of side and rear lighting opportunities, including emergency by the way, fire, we're also looking at potential resourcing in some instances to the Korean facility as well in terms of manufacturing. So there's more to come, we think.

Okay. That's very encouraging. Second topic I wanted to ask about was AutoPacific Group. I'm referencing Slide 18 here. The sales line at $133 million, obviously, we can appreciate where the EBIT ended up relative to original expectations, but can you give us a sense around what the revenue delta was compared to the original expectation?

James, it's Martin. I'm sitting here. I don't have that number right in front of me right now, so I'm not going to have a stab at it. I'll come back to you on that.

Yes, sure. And so on a related sense then, I can see on that Page [indiscernible], for the depreciation was $5.6 million. And looking at the documentation at the time of the acquisition, the depreciation in calendar '21 was about a similar amount, $5.6 million, but obviously for a full 12-month period. So I'm just wondering what drove the near doubling in depreciation given it was only a 6-month contribution in FY '22 or perhaps I'm not looking at the right numbers there?

I think you're not looking at the wrong number. I'll come back to you on that.

Your next question comes from Tom Godfrey.

Can I just start with APG? And just maybe if you could give us any comments around sort of the EBIT run rate or exit rate from FY '22. You sort of speak to a robust third quarter broadly in line with expectations. Is there any sort of color you can give us around how that business has sort of exited '22? What we can sort of assume in 1H '23?

Yes. So where we talked about the robust, I mean, obviously, the first 3 months of the calendar year, the market was actually up. And up by, I think, 4 or 5 points. And then that by the time you raise 4 to now, it's down by 4.5%. And equally, the same sort of change in terms of pickups in fact, it's more accentuated where we find ourselves down. I think, pickups to where we were up 8%. So that's the swing I spoke about earlier on. And that represents actually the comment around the robustness of the first 3 months. We were there or thereabouts in terms of expectations and then obviously, started really moving around in terms of the OEM demand and importantly, the OEM production schedules reliability. So we talk, Tom, in the deck around Q4 being a trough. We are seeing, as we come out of Q4, some slight improvement, and I want to choose my words carefully here because even in July, the market was pretty much flat. But actually, within that, pickups were down 5%, within that number. The Ford orders we're seeing, we generally get about 2 to 3 months depending on the manufacturer, but the Ford orders are still muted, and that's a comment we made earlier on, Tom. We will see the benefit, though, of the emerging Ranger launch. Now that's -- I mean, Ranger, it was down, as an example, in the month of July by nearly 30%. So it's not coming yet, but we're starting to see the orders come in a little bit more robustly for that particular model, again, I have to be very, very careful what we say about our customers. So that's the comment we made in the deck, Tom, around an expectation of slight improvement as we get into Q1 and we expect to see that pick up a little bit more in Q2. And then Q3, Q4, we're expecting to see a broader supply chain moderation, which should assist us.

And just in terms of, I suppose, trying to sort of back out Q3 versus Q4 and FY '22, can we take Q3 as broadly in line with your -- if we sort of split it based on the initial business case estimates and then back out of fourth quarter contribution on that basis, is that fair?

Well, even in Q1, Tom, I mean, January was below expectations, but that was nothing about demand because that was far much around Omicron, right? So absenteeism and that plant was running at 30%. So not dissimilar to what's happening in some of our other manufacturing plants. So we were behind the queue in January, but then February and March started to bounce back, and we were within hundred thousand or so dollars of our expectation in terms of budget. But what we were expecting, though, through the course of the calendar year, Tom, to see an increase in the overall market start to taper up. That was our budgeting thinking and expectation certainly as we sat back in November and December of the prior year before, obviously, the Russian situation and the Chinese lockdown. So I don't think it's Q1 -- sorry, I should say Q3, I'm thinking calendar year -- Q3 financial year, again, probably isn't quite the normal velocity would expect because that was still muted anyway and you can sort of see that in the numbers. And then yes, Q4 was definitely a trough.

Okay. I'll leave that there. Maybe just one more question. Obviously, you referenced Russia and sort of Shanghai lockdowns and the various things that have been impacting the global supply chain. Just any comments on the European energy crisis. And maybe just remind us of your sort of supply chain exposure to Europe?

Look, we've got -- we haven't got a huge exposure to Europe in terms of manufacturing or supply base -- as a direct supply base. Obviously, the OEMs have some significant exposure. Hence, what's happening with semiconductors. And it's widely reported at the moment that somewhere between 30% and 40% of all the neon gas used in the production of semiconductors comes from Ukraine, a bit like the wheat story, so to speak. So that's been a big issue for the OEMs. And you would have seen in the last 2 weeks, Senate passed a $2.5 billion package to essentially almost nationalize by incentives, the semiconductor approach in the U.S. and similarly in other parts of Europe. So that will normalize over time. So it's more an indirect supply chain issue there, Tom, as opposed to direct for us. If anything, Europe presents more challenged -- not significant, but still more challenged in terms of the revenue that we achieved in Europe through DBA, ACS and Vision X. And so the macro situation there, we're keeping an eye on. Whilst it's not super material, it's still decent revenue. So that's kind of how the European situation plays out for us.

Look, just before we take the next question, I want to just revert to James' second question was perhaps quick enough on the uptake there? I do have the answer for that. So James is right. During the acquisition, we called out depreciation of circa $5-odd million. The number we got reported here for depreciation includes that fixed asset depreciation, but also the depreciation required under AASB 16, which is why, James, you sort of did a back [ side ] and said, "Well, it should be $2.5 million" is a profoundly higher number. The difference is lease accounting. We finished the first half at around about an annualized $4 million, a little bit less. We took a very careful view on appraising the fixed asset values we took forward on the purchase price accounting process. I'd expect that would be stepping up to $4.5 million to $5 million over the next year or so. We're about to commission the last of the [ leases ] and so forth, CapEx that was committed by the previous owners, which we deducted from the purchase price. And as they come online, you'll see a little bit of step-up in depreciation. So I hope that closes out James' question. And Dean, I think we're ready to track the next questions, please.

Okay. Your next question comes from Russell Gill from JPMorgan.

Great. Just firstly, just on -- I have a question. The acquisition dynamics relating to the inventory step-up obviously makes the numbers a little bit clouded. Can you just tell me why that wasn't included in capitalized through the acquisition accounting process?

What it was, and that's the issue. So when...

But it shouldn't be goodwill. It's not booked as goodwill on acquisition?

No goodwill is the remainder of -- well, firstly, you go through and identify all your tangible assets. And the difference between your intangible assets and -- sorry between the tangible -- you want to pay is intangibles and then you go through a process of determining how much relates to brand and how much relates to customers and things which don't belong anywhere else drop out as a result of goodwill. So had we not being forced to do that by accounting standards, our goodwill number would have been higher. So I don't know if that addresses your question, Russell.

Yes, that's my expectation that you sort of revalue the inventory on acquisition and the goodwill is the difference basically. This was done after the fact, the revaluation of the inventory?

Yes. And it's not something we elected to do. I would love not to do it because it just creates background noise in the accounts. But you've got to go through an independent purchase price allocation. And it's kind of ridiculous. You have to work out what profit there is embedded and something you've half made or you've made and go in your warehouse and haven't sold and reflect that and then you have to cycle out as you think you consume that stock. Now in the case of the Vision X because what they make is largely made toward of -- that cycle through in the 6 months. But on APG, we saw that amount cycle through, $5-odd million, and we've still got $2 million to go, and I expect that to close out in FY '23. And I apologize for the background noise, it is just there are some clever, smarter, academic accountants [indiscernible] that put this upon us.

Okay. Graeme, just on APG pricing, look, we understand the dynamic of the sale of the delivery dynamic. Can you just talk through what happens regarding pricing? So if you -- for the OEM, the dealer has sold a product of yours months ago, but now you're delivering it in the future, your cost base has moved over the time in APG. What happens on the pricing of this? Are you able to reprice that product to the OEM, to the dealership, et cetera, given there's a big timing difference between, I guess, sale and delivery?

It really depends on OEM to OEM. So as an example, there's one OEM. And again, Russell will always be careful about what I say by individual customers. There's one OEM as an example, who's gone through a launch process and post that launch process, we have agreed a reflection of the price -- sorry, the cost escalations that goes back to job one, so the original volume. So in some instances like that, that actually works that way. The other parts of the business in terms of the aftermarket is very different. Obviously, that's just getting priced and that's in the moment. And so it's a bit of a mix, Russell, but they are certainly, in some instances, a bit of a lag. The price increases we spoke about that are effective July 1, obviously, a reflection of some of the cost impacts we were seeing coming through in April, May and June. That's the [ Bimbo ] put to bed, and there's a bit of a retroactive element of that.