Amotiv Limited (AOV) Earnings Call Transcript & Summary

Well, welcome to the earnings call of GUD's Results for the 6 Months Ended 31st December 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 as per normal recording of this call, along with the presentation material will be available later on today -- later today on GUD's website. So we'll start the call by running through our key messages and financial overview, followed by commentary on our segments of Automotive, APG and Water business. I'll then hand back over to Martin to cover the financial results in more detail, and then we'll conclude with the trading update and outlook for FY '23 and beyond before the Q&A. Let's turn to Slide 3. We experienced a strong user end demand through H1, reflecting the resilience of the auto aftermarket, obviously, supported by our strong brands and the largely nondiscretionary nature of our revenue profile, and I'll talk about that later on. Our APG business performed in line with expectations with improvement in Q1 over Q4 and actually Q2 over Q1. This was expected and is helped by the improving range of supply. There are still massive backorders in the system with demand not being associated by supply, and that's leading to historic back order levels. Now we were very happy to keep margins stable, particularly in core automotive and accomplishment given so many moving pieces. And overall, our performance across all segments was in line with our expectations. And in particular, APG's first and second half SKUs are in line with what we had previously communicated. Finally, I'd like to reaffirm what we communicated at our recent AGM and recent investor conferences that our leverage ratio target of circa 2x by June '23 remains. I'll ask Martin to cover that in the next slide in terms of the financial. Over to you Martin.

Thank you, Graeme, and good morning, ladies and gentlemen. It's indeed a pleasure to engage with you this morning. Let's move on to Page 4. We'll address the overview of the half's financial performance, where you can see the group delivered revenue growth of 56% over the PCP, with the majority of the increase is coming from acquisitions, namely an additional 5 months from Vision X and the full 6 months from APG. We'll get into that a little bit more when we get to the segment slides. The additional revenue pulled through to an EBITDA uplift of 52%. While that growth lags the revenue growth, which at first parts might be puzzling as the organic automotive margins remained robust. It reflects the fact that APG's underlying profitability ratio is below our automotive business and therefore, sees a different weighted margin outcome. We also continue to reinvest to support the expanded size of the group as well as midterm growth initiatives. Cash conversion, 75% was achieved in the half, a little behind our internal targets, and we'll speak to that in greater detail later. The net debt to underlying EBITDA of 2.5x is in line with expectations and our internal targets, and we'll also speak to that in further depth. The underlying EPSA is up 30%, while our dividend is in line with the prior comparable period, given our flagged desire to reduce leverage following the APG acquisition. And finally, I want to highlight that our core automated businesses being those we've been holding for quite some time, being Ryco, IMG, AA Gaskets, DBA, Wesfil, BWI and Griffiths Equipment, quite a mouthful, continue to experience organic EBITDA growth, while our acquired automotive businesses have seen a step-up in EBITA driven by the additional 5 months of Vision X. Back to you, Graeme.

Well, thanks, Martin. And taking a closer look on Slide 6 at our Automotive ex APG segment results. It shows the revenue was up just under 18%, reaching just over $320 million, which is a record for GUD. Net of acquisitions, the organic revenue rose just a shed under 10%, which was an excellent outcome really quite pleased with that. Auto underlying EBIT was a record for GUD, whether you look at it total or just core automotive levels. And the growth came from across the respective business units. And again, we saw good contributions from newer channels and customers. The underlying EBIT margin dropped slightly, which was expected, however, the important bellwether of what we have recently retitled to core automotive, you'll see the footnote when you just heard Martin mention how to recognize those apples-to-apples comps over time. Well, that was a decent story, essentially stable with a slight drop of about 20 bps in what was a challenging macro picture. We were able to price appropriately and this was able to overcome the numerous important and the domestic inflation costs. We are going to have to balance other factors like that FX in H2 and an additional modest pricing will be in place to manage that margin and protect that margin. In the half, we experienced quite a change in the velocity of from factory floor to our warehouse inventory, the loss that movement certainly quickened as some of the supply chain starts to normalize, which, along with the organic sales growth impact mean,we increased our net working capital by about $19 million, all up versus FY '22. And I'll talk to our clear targets and inventory a little later on. Now turning to Slide 7. The size of the price continues to be strong. The car parc continues to steadily grow. It sits at just a smidge under 19.5 million units and car parc up 1.5%, and that type of growth is forecast to continue. And at the same time, we're seeing an aging of the car parc and acceleration, frankly. And it's now actually just over 11 years old, naturally positive clearly for our wear tear and replacement businesses. On Slide 8, a few more important car parc facts. Wells that car parc is growing, so does it complexity. And I've said before, we love car parc complexity. In fact, the segmentation conditioned the shift in the favor of SUV and pickups, again, very favorable for us. Now this car parc complexity is supported by our products and services, which we estimate circa about 80% of all that revenue is nondiscretionary products and services in nature, and we've stated that for the first time in the full year '22 results. And finally, an important reminder of our combined automotive APG revenue for FY '22, just under 70% was non-ICE and that's only benefiting from the 7 months of the new acquisitions, which are heavily on non-ICE. So our trajectory on the non-ICE continues to meet our expectations, we're quite pleased with that. On Slide 9, we call out a new member of the Automotive segment. You've been introduced to VX before, but I wanted to give you a bit of a feel from a Snapshot. We're really pleased with the Vision X performance in the half, a solid result that was able to keep margins stable and some might say a very challenging U.S. macro environment. And of course, the beauty of the vision is the balance of customer channels ranging from automotive through to mining and lighting. We were really excited with the introduction of the new products at SEMA and AAPEX to sort of the 2 seminal global shows for aftermarket. And those products were launched under the Vision X brand in November, and we started to deliver against the product synergy work as an example of warning light. And we've also picked up a really nice global aftermarket branded program through Vision X. Manufacturing operations for Vision X is going really well, good utilization. We're actually working through in-sourcing of select existing BWI products to start to get the vertical integration benefits that we'd eyed as the purchase was being considered. And then the last thing, as I talked about the U.S. was our launch of those 2 shows, the ones I just explained, SEMA and AAPEX of the BWI USA entity with the 2 brands of Ultima and Projecta. So this is separate from Vision X, completely separate. This is a medium-term playing will build over time. It's not a better farm approach, more organic in nature. And George, who runs this part of the business was very encouraged with the feedback and specifically the follow-up with the Tier 1 and 2 customers from U.S., Mexico and Canada. So more to see there, but I'm feeling quite energized by that. I now move to APG, on Slide 11, we put very plainly, put very simply, APG's result was dead in line with our expectations at $26.5 million pre-overhead charges. And as I said, I mentioned a little earlier, APG benefit from the prior half in this new half with the range starting to improve in terms of volume terms. Margin was stable, again, with some cost in costs rolling through from the prior half being dealt with the pricing that we put in the early part of the half, which has held nicely and that was expected also. We're still experiencing those some pretty high inefficiencies, particularly in our Australian manufacturing operation. Now we expect that to improve over time as the labor market and specifically ongoing COVID impacts perhaps have a lesser impact. Clearly, a vehicle supply is still really constrained. And I'm going to speak to that in a second. But what we do know well is that our OEM customers specifically. And then if you look at dealer groups and even as recently as yesterday, the lease companies like SG Fleet, they're all reporting massive backlogs of orders and demand are still building. I mentioned vehicle suppliers a second go. And on Slide 12, you can see the impact on wait times. The graph shows the volatility experienced in the average weight times. So we showed this graph once before, and we just updated it. And you can see a massive increase through the year and has continued to build through H1. Of course, the million-dollar question is when do supply constraints and specifically semiconductor shortest start to abate. And you can see a selection of industry commentators are sort of opining on the issue. And the prevailing sense from them seems to suggest relief through FY '24 onwards. But the constraints are evidence on the next slide where we show you the calendar year industry outcomes. We saw a modest improve in the overall industry and CY22 3% pickup, slightly lower growth. And what we don't show you there were some pretty wild swings from month-to-month, essentially sea-saring as units arrive in the country. Another example of what's happening in terms of a supply side-driven industry. The past reality was the industry size was well up its peak. And in fact, over 6.5% of the pre-COVID 5-year run rate. You can also see and that we're introducing some more information here about APG's top 20 models, and that's by volume. Now that grew by 4.7%, but I suggest you study Slide 35 in the appendix, when you have a little more time to get a granularity around the ups and downs of that top 20 to game, just at a little bit more insight. However, to help unpack one more level down, which you go to Slide 14. So where we show the comps versus prior half. So we're showing comps prior half, and we're showing comps Q-over-Q here. So we sort of switch gears here back into the financial year fiscal year approach. And you can see the top 20 APG volume was down versus the prior half by 9%. And pickups were also flat, which indicates to you, I suggest the impact of the range was starting to come through. And interestingly, this was further amplified when you look at the Q2 over Q1 slice, where Pick-Ups were down 3%, but APG top 20 started to improve. Ultimately, the story here is playing out largely as we expected with the result improvement in the APG EBITDA half-over-half still with a constrained base though. Now on Pages 15 and 16, you'll see some further Snapshots on the APG business performance. The team there won more new business since January. And since acquisition -- sorry, since June. Since the acquisition, over 86 new business wins, of which nearly 80% is incremental in new revenue. So every time I update this data, it really is encouraging to see just how much this team knows how to win. The core towing part of the business has benefited in Q2 from the recently announced gain of the frontline competitor business as new orders started to actually arrive in Q2. Functional accessory wins have been noteworthy with an Isuzu, Toyota and Hyundai, delivering some important new functional accessory wins that really introduce APG's functional accessory expertise and products for the first time to these OEMs. And of course, the highest share of wallet started to come through is the range of volumes improved. Now I'll tell you, in my view, there's still more to come in terms of that with models like the Ranger Sport XLT will increase, I suspect. And I think this trend certainly will continue into H2 and beyond. Now across on Slide 16, we will break out the trailering in the cargo management category. Now trailering primarily through the Cruisemaster business had a record result and was in line with our expectations. And the strategy we started to deploy with Thai manufacturing assisting with capacity bottlenecks and the careful conquesting of New Caravan customers starting to pay off. The ROLA brands, which is the cargo management. Well, their sales, while off a low base, really delivered excellent growth, and I think bodes well over the medium term as we start to now invest more PD energy into the product offering. And I think it's important to note. Before I hand over back to Martin to cover financials in a little bit more detail, let me just advance to Slide 19 to quickly cover off Davey. As I mentioned earlier, Davey's underlying was up over 30% from prior year. The overall revenue was slightly down, but the ANZ domestic revenue grew strongly and didn't reflect yet. In fact, the normal surgeon fire by sales, so that should be a tonic if that comes through. Export sales were down significantly, which was a reflection of destocking, specifically in Europe. Our distributors were leaning out of entry due to soft demand relative to a pretty volatile and uncertain macro environment, but we do expect demand to improve as those inventories start to normalize as the EBITA improved, so did the margin, assisted by pricing put into the market in H1, along with some tight cost control. A slightly softer overall sales outcome, and we had a bit of an elevated net working capital but expect this to resolve as that export demand normalizes. Okay. Well, let's cover off the key financial information. Martin, back to you.

Thanks, Graeme. And I'll start on Page 21. I previously talked about revenue, and I'm not going to labor that any further. And at the EBITDA and underlying EBITDA and EBITDA lines, you see the growth lagging a little bit the revenue growth, again, because of the mix influence of APG that I spoke to. So I'm going to focus my comments below the underlying EBITDA for the moment. And firstly, we see a step-up in amortization, which is really driven by the acquisitions of Vision X and APG. The next one along there is the acquisition inventory step-up. This was a noncash item. When you go through the purchase price allocation, you need to do that. We saw some of that in FY '22. And this is the balance of the inventory step-up for APG. So we're now done on the inventory step-ups from acquisitions. We won't see that in the second half. I just want to be really clear with you on that. And then lower down, we see the significant items. And they're outlined on Page 22. And on that page, they're pretty self-evident, so I'm not going to speak to that one in chapter and verse. We do see the net finance expense going up and that's really a result of the acquisitions and the full 6 months of those and speaks too well. The tax line managed well below the 30% that starts to see the influence of building a broader portfolio in the U.S., where we have tax rate closer to '21, for example, and tying them with a lower tax rate. So that all brings you down to that statutory NPATA position. And then we'd add back for the benefit of the readers, the -- back to the underlying NPATA. And as I quoted before, approaching 60%. So we're quietly comfortable with that outcome, and that we're getting the leverage at the NPATA level from the sales growth. And finally, at the bottom of the table, just for those analysts who want to run the numbers, we split out that amortization between the acquired businesses and those we've had in previous years. So moving forward, as I said, I'm not going to labor on Page 22, and I'll take us to Page 23, where we talk to net working capital. And here, we've provided some additional analysis to really avoid the distortion of acquisitions and avoid you having to do that math. So it's all there. And we had really several moving parts in net working capital in the first half, excluding acquisitions. And first of all, excluding those acquisitions, we saw inventory go up $17 million. And while that might seem alarming first part, I just want to highlight that $11 million of that was the impact from higher inputs from our suppliers of finished goods or raw materials for those that we make. And as Graeme talked to, we have addressed those with things like price rises, but there's no avoiding that as you sell through your old stock and replace it. So that leaves a relatively slim amount for organic growth in the product range expansion. So very happy with how that went overall. And the balance was -- sorry, moving on. Now what we did see in inventory was an acceleration of some of our customers delivering against us through the COVID period. The last thing you wanted to do is put an order on that said ship after November 31st because when all the factories were overloaded, they would take that to mean I'm not even going to production schedule until that date, and you'd be caught short of stock. So as we saw some of the supply chains unwind and also Europe slow up, we saw some of our contract suppliers delivering ahead of what we'd assumed would be the time that inventory turned up in Australia. So some of that organic growth increase reflected that. But what it did mean is we had to pay our creditors early and you really see a reduced creditor leverage compared to the usual December levels. We're confident that the inventory -- the higher inventory you've taken to sell through and when you back out the step-up because the supplier increases you can already see quite a bit of that has already been done. But there's no stepping away from that lower creditor position, but we're confident that, that will return. Just stepping on from that at the moment. We are recent in the process of resetting our safety stock levels and hence our reorder points and reorder quantities in response to the change in the logistics around supply capacity being far improved, or we move from a position of supplies, lacking capacity now having capacity. We've got port time clearance times back to pre-COVID levels and freight and reliability and so forth are selling through. So we've reset and we're in a good position for the second half.

I think that's a good point, Martin. I mean we have said now for a period of time that we'll watch very carefully how the supply chain continues to improve. And I think we're at a point where we've got a higher level of confidence to do what we were suggesting in perhaps prior halves. And so the full court press you speak of in terms of inventory is now, I think, upon us, given the confidence level we do have in the supply chain. Sorry to [indiscernible].

Yes, that's fine. And that takes us on to Slide 24 on cash conversion, where we can see cash conversion is 76% for the half. That's a little bit below what we were shooting for internally driven by those inventory and payable variables noted earlier. Moving on to the balance sheet on Slide 25. We can see both gross cash and debt levels held at the half year, reflecting the Vision X and APG acquisitions. Also, the gross cash position reflected the fact that we were preparing to pay the vendors deferred payment on Vision X, which occurred in January. The net debt level represents 2.5x lease adjusted underlying EBITDA, which is also within what we were trying to achieve in the half. And that slide also outlines some of our other key banking covenants. We retain healthy headroom against all our banking covenant ratios and have approximately $135 million unused borrowing facility headroom and sufficient borrowing limits to support that, although we don't anticipate drawing down that level of debt. I just want to be very clear on that. Reducing net debt to circa 2x underlying EBITDA remains a priority of the wider management team and the improved supply and logistic conditions mentioned earlier and the reset I mentioned earlier will drive a significant reduction in inventory and net working capital in the second half of the year. I'll now take you to Slide 26, where we'll speak to the debt profile. To the right of this slide, we've mapped out the debt maturity profile of the drawn facilities, which has a mixture of tennis. All the Pricoa debt, which is in green, is both fully drawn and also fixed in duration in interest rate, representing 49% of our current gross debt. We have also 17% supported by interest swaps and the remaining 34% drawn facilities involves floating interest rates. Our current all-in funding cost is approximately 4.5%. And we also note we've not renewed a $15 million short-term facility in January '23, as we know, no going need those facilities and that will allow us to reduce our unused line fees. You'll also see we've got $127 million of debt in the 2024 bucket. And that's due for renewal in January 2024. Once we finished the road show, that will commence the renegotiation of those facilities. Ideally, with our current banks although we've also received quite some interest from other financial institutions. I'll now hand you back to Graeme to finish with both the trading update and the outlook on Pages 28 and 29.

Well, thanks, Martin. Well, we split the trading update into 3 segments on Slide 28. APG's January sales were strong relative to prior year, and February started well. So in summary, tracking in line with our expectations. The Q3 OEM order book looks to be supportive of our plan. And we think the Q2 trends will continue to be positive in terms of vehicle mix. We expected to see continued good demand from cruise master customers, and that's transpired through the first 6 weeks of the year, and we're happy with the approach we're taking with utilizing the high-volume Thai plant to support that. Turning to our core automotive. Our sales in January were up versus prior year despite some resellers replenishing inventory at a slower rate. The sales pace picked up in late January and certainly into February as we can see, a very positive 2-week plus booking level at the independent workshops. We're always looking at that as a barometer. And as mentioned, we'll be implementing some modest price increases in Q4 to manage our margins as some of the things like FX roll through. Finally, Davey's Jan sales were up versus prior year with ANZ continuing its pace from H1. Okay. We'll finish on the FY '23 outlook starting with APG on Slide 29. Well, we remain very positive in APG's ability to deliver their business case targets as OEM supply normalizes and it gets back to its sort of historic levels. We know order backlogs are at record levels. We expect ongoing favorable mix, and we regularly see the opportunity to capture market share as competitors struggle. We do expect APG to deliver circa 55% of the FY '23 underlying EBITA in H2, and this is completely in line with what we communicated previously on a number of occasions. Automotive, ex-APG, should benefit from the resilience of the car parc, and it's heightened aging. And therefore, H2 should be robust. We do, however, have some growth investment planned in H2 to support the steady offshore opportunities. And across the group, we'll be keeping the same margin discipline you've seen over the last 3 to 4 years. Finally, I'd like to sort of finish by restating the leverage target of circa 2x by June '23, which we communicated again at our AGM. And as part of this coming half, we have expect -- we do expect to reduce inventory with specific targets for the first time that you'll note in the deck since COVID has struck with those comments I said earlier on around the supply chain, having more stability. Okay. Well, that concludes the presentation of the results. I'll now hand you over to the moderator, who will coordinate any questions you may have.

[Operator Instructions] We'll take our first question, which comes from Russell Gill of JPMorgan. I think he just clicked himself out of the call or something, never mind. He'll come back. I'm sure. Okay, let's go to James Ferrier.

Okay. How is that? Is that better?

Yes. All good.

Can I start by asking about the margins in the core automotive business, broadly speaking, pretty stable there. But just looking sequentially, 24.9% first half '22, up a bit, 25.1% second half '22 and then it ticked down a little bit in this first half, but again, broadly stable, but just directionally going down a bit. When we look ahead now, we've got FX on one hand, it's probably a headwind, but I'm just wondering, on the other side of the ledger, to what extent raw materials and maybe freight are providing a bit of a tailwind. So if you can just maybe add a bit of color around that on second half '23 margins for core automotive, please?

Sure. Thanks for your question, James. Look, we were down 20 basis points. And I think I've said previously that we would be up and down as long as we're in the range of 24% to 25%, that's what success looks like. So I would actually say, I would say, broadly stable, I'm actually pretty happy with that margin outcome because there's a lot of stuff moving around in that first half, carrying in from this in the second half of the prior year. I've mentioned that we anticipate will not anticipate we have already communicated, and we'll be taking some, what I call, modest pricing in the second half that's already in play. And I expect that to stick. That's part and parcel of trying to balance like we have over the last 4.5 years, I've been here, balance the margin in a successful manner. FX does move around a little bit for us. There we have a certain percentage hedged and that rolls off. So we're looking at the spot and watching it carefully, although I'd suggest that Martin's done a very nice job of working with the FX challenges in the last 2 to 3 years. So I think we'll work through that, but we do have to accommodate that, James. We will expect to see some moderation in certain cost inputs, but they're not necessarily all working in tandem to suddenly become all a tailwind, and we still have some cost imposts that roll through domestically as well. So it's a bit of a mixed bag. But as I said earlier on, I think we've proved ourselves to be very adept at managing margins all through this very volatile period. I don't see that changing at all.

That's very helpful. Thank you, Graeme. Second question is around the export opportunity that you're sort of leveraging off Vision X and into Brown & Watson in particular, but maybe thinking more broadly into some of the 4-wheel drive products and brands as well, and you've mentioned SEMA a few times. For those that are less patient amongst us, can you sort of talk about some time frames and quantum, I could see the opportunities there, and you're clearly enthused about it but maybe how it translates to sales outcomes and earnings, et cetera?

Sure. Well, firstly, I think it sounds like we're more patient than perhaps some of the audiences in terms of what our expectations and aspirations are. I said right from the get-go that we weren't going to be firm on this, that we were going to slowly and steadily work towards an offshore revenue that would exceed 15%. That was one of the targets we set there. I've actually got a stronger view on the back on mine. But in terms of time frame, I'm actually not willing to put a target on either Martin or myself's back. We have only just launched those brands. We've only just in November set up the entity. We've taken on some pretty capable employees there. There's OpEx costs rolling through the P&L at the moment to support that. So we're burning a little bit there, not crazy. We will only just, as an example, in February, start line reviews with some potential customers. And look, I think it's going to take some time, James. And so consequently, we're trying to find the right balance of investment, including net working catalyst sort of circa $5 million to $6 million of net working capital tied up in this current fiscal year budget to support the start of that. So if I were to suggest a time frame, we're probably talking 2 to 3 years here. I think we'll see some small wins to start with. And as we build that up, it will turn into something just a little bit more meaningful. But what we're not going to do is we're not going to sort of thrust forward so aggressively that it sort of distracts us as well. That's separate though to Vision X. I'm talking about greenfielding BWI, the Projecta brands, the Ultima brand, brand new in the U.S. If I think about Vision X, that's a different tempo. It's a different clock speed. We're expecting growth you've seen in the past and we've spoken about in the past the type of earn-out ranges of 10% to 25% CAGRs, and we fully expect to be able to quite happily pay out the top end of that earnout over that 3-year period. So I think that probably gives you some level of insight as to what we expect out of the Vision X capability in the U.S. And the reason I say that there are 2 different customers. Vision X is serving a customer cohort that's very much specialized engineered whereas the Ultima and the Projecta side we were aiming for is a more broader reseller that we are very familiar with in the Australian context, but in an American opportunity. So in a roundabout way I've tried to deflect part of your question, James, and give you a bit more detail on the other part of your question.

No, that's very helpful. And then last one and a quick one really. With Auto Pacific Group, historically, I think it's been a business that has probably had a little bit more seasonality skewed to the December half. With respect to your FY '23 guidance, you've reiterated that skew to the June half. So can you just tell us what, maybe, the 2 or 3 key assumptions are that are driving that guidance around the SKU?

Yes. Look, I mean, I think the typical historic SKU for APG is almost irrelevant at the moment because of the nature of the industry and the constraints that are being applied to it. So as I mentioned a little later on, the volatility is an example of, say, pickups month-to-month through the course of the year, but about 15% 1 month down the next. And that just simply as a representation of the vehicles arriving into the market and being sold. So if I step into that, I think that's why I say the historic SKU is not necessarily relevant as it stands today. The assumptions in the back end of the year, so the second half are built on a similar sort of constrained volume. Hard for us to forecast with exact science, but we are seeing some of the APG top 20 units start to arrive and then a little bit more volume, and I called out Ranger as an example. So the Ranger as an example, in calendar year '22 was down 6% for the full year. But if you look at the half-over-half and more specifically the quarter-over-quarter, and you can see that in the Slide 35, I think, is in the deck, you can start to see that the rains started to come in. And that's one of the tailwinds certainly that will come through. And look, I think we'll see a little less volatility, which means that our inefficiencies while it's pretty hard at the moment, they will abate a tiny bit, but there's more to come there. So it's really around stabilization of what it's constrained volume and more specifically, some of the top 20 units coming in with a bit more fury in terms of their volume through the second half?

[Operator Instructions] Next up is Shane Bannan from PAC Partners.

Two quick things. One, as Martin forecast, that $3.5 million in the adjustment presumably, that's just -- I think the capital adjustments against what you paid for the business in the first instance, I'm also assuming, therefore, given its nature, it doesn't attract any sort of tax related.

Yes. Thank you, Shane. So it's -- there is no additional $3.5 million a event. I just want to be absolutely clear. Second line, when you did the purchase price adjustment from an accounting perspective, you have to work back from the sell price back to what is a theoretical inventory carrying by value? And if that's higher than the book value, you get that step up accordingly. And you can get that -- the tax relief is possible on that because you're following those principles. So it's not like we're calling out a tax difference of that not being tax deductible. So again, noncash driven by accounting standards, we can use that for tax, and we've used it for tax.

Just an internal adjustment in which case there's no man just go outside the group...

That's absolutely spot on, Shane.

And can I just ask you a chance a little bit. I mean what I could see, I mean you really got 2 forces going forward. And this -- the ramp of the group or the traditional part of the group is reasonably economically resilient, I would have thought for the nature of the market is servicing. But the more recent acquisitions are seen write in 2 ways. One is just the new vehicle supply coming in. And countering that is just the economic environment we look to be moving into globally really over the next couple of years. Could I just understand for your eyes, and you see that forces playing out across the business?

Yes, sure. Well, I'll start with the first part. So yes, the aftermarket we serve are the traditional part of our business. We've always said is, and I use the term very specifically relatively recession-proof because I'm not sure there's anything other than debt and taxes that's recession-proof. But that hypothesis still stands. And even if I pass on back to the GFC, type of events, not that I was in this market and some other markets in North America. We saw the parts and accessories element of our business pretty strong, and there's some good McKinsey research out there that actually benchmark the relative performance at the time. What you'll also find in a really extremely severe scenario, we're in the midst of a terrible recession. The worst for us is vehicles not being driven, and therefore, not being required to service or repair or people extending out their service and devils. But sometimes that's equally offset by what our captive OEM service line customers migrating from that service line into the independents looking to stretch the dollar further anyway. So that often could be offsetting. So I think your hypothesis on the first part is very accurate. In terms of the new vehicles, the way we're looking at this, and it's interesting because the outcome is different by jurisdiction. So if you think about the U.S. at the moment, you're starting to see the SARS at 14%, 14.5% when it should be around 16% as a high retail content of that market, which is more prone or more exposed to the recession piece and more importantly, the interest rate rises. In the Australian context, the constraints now have been for a while. You're seeing it well below its peak and well below its pre-COVID level. The demand has been building because people cannot actually get the vehicles. That demand, you can just sort of put it to different cohorts, a fleet cohort and a retail cohort. A reasonable part of that retail cohort has been sort of associated through COVID, but still remains quite high. But the structural part of the market, the rental, the government, the large fleet, the medium fleet really has struggled to actually be provided, and that's upwards of 40% to 45% of the market. So that structural demand still sort of sitting there. And if you look at any of the other companies that are serving that whether it be dealer groups, whether be SG Fleet, they're all reporting still historic high demand profiles and still building. And I don't see that necessarily fatiguing in a dramatic way. In addition to that, as you see net immigration coming in, that's going to be a multiplier effect. So with the government thinking through its immigration policy. If we get back to 200, 250 type numbers of people coming in, that's also going to be driving car demand that hasn't been sitting there for the last 2 to 3 years. So again, it starts to cumulate into something quite meaningful. If I speak to some of our OEM customers, they have hundreds of thousands of orders sort of sitting there well in excess of 1, 1.5 years' worth of in some cases, 2 years' worth of demand. So I think that will carry us through this period, if that answers your question.

Our next call is Tim Piper [Operator Instructions].

Martin, Graeme. It's Tim Piper from UBS here. Just first question on the core auto business. I mean 10% revenue growth year-on-year strong outcome. Can you give us a sense on the quantum of pricing in there? And then you talked about Q4 pricing coming through. Can you maybe put that in the context of what you put through in the -- over the past 12 months?

Yes. So if I looked at -- might answer this more on an EBIT growth point of view, if I would identify and we comped at a core level, circa 9% versus prior period. If I looked at that comp and looked at the influence, the positive influences or the positive factors that were driving that, about 50-ish-percent of that is volume from that EBIT outcome if I looked at an EBIT bridge and the other primarily being pricing. So we've seen organic volume growth, which is encouraging. And the answer in terms of pricing, well, that's a difficult one to answer, Tim. It does vary by each of our business units. And so even aggregating it doesn't really do justice. So we -- as I said, we're putting up some modest pricing, modest in my mind, sort of 3s and 4s, depending on the competitive situation, the customer, the type of product, et cetera, et cetera. We've had over probably the 18 months somewhere in the region of 3 or so pricing round, which have all stuck. That's how we've been able to hold the margins through this period. But it would be probably a responsible mean to suggest that there's a sort of an aggregated number across the group because that's something that: a, I don't have to hand; and b, is something we don't generally look at because it's very much by business unit.

Got it. Just a second one on APG, and you sort of answered this a little bit in a previous question, but just curious on the margin half-to-half. I mean you've done 4% revenue growth margins kind of flat. I think you put through 6% to 9% pricing in July, which would have kicked in. EBITDA margin sort of hasn't gone up on the back of the price. Can you just talk through the moving parts in that margin half-to-half? And then you talked to some inefficiencies within, I think, the Australian manufacturing operations in particular, timing-wise around when you see those kind of resolving.

Yes, sure. I mean the price that we put in place was required to actually handle some cost imposts that's kind of neutralized as the hats come through. So that's the reason why we actually have to tap price. In terms of the second part of your question, look, the inefficiencies and the manufacturing are a slight driver of the margin. I mean -- we -- the plants, particularly in Australia, the plants are not operating anywhere near at an optimum level. And so I would expect actually that should generate a decent improvement over time. What's really happening here, Tim, is that if you think about a typical plant loading, we would have some normally an absent rate of, say, 2% to 3%, something in those lines, but have a vacancy rate of very low sort of 3% to 4%. If I looked at the half for APG, the assets rate was 5.9% on average across the half. On top of that, we had vacancies of between 5% and 10%. So you've got absenteeism of 5.9%. You've got vacancy rates of between 5% and 10%. So that not one of each other. You are then backfilling your vacancies. And if you can, backfilling your absenteeism with casuals, which obviously have a higher labor rate and a much, much less efficient because you having to retrain. You're lucky at the moment to hold on to a casual for 1 or 2 days and then they're moving on to something else, that's indeed actually turn up, and I don't mean to be so critical. But that's the kind of an efficiency that we're sort of seeing. Now as the labor market sort of improves a little bit and as we work through some of the COVID/health issues, I would expect us to return to something more normal in terms of the typical absenteeism and the typical vacancy. I mean APG as an example, year-to-date, has got a 20% turnover on the factory floor. That's 4-ish x the normal rate. So that kind of hopefully gives you a flavor of what's going on in terms of the inefficiency.

That's helpful. And Martin, can you just tell where are you at in terms of effective hedging on USD at the moment?

Yes. Certainly, Tim. Look, I think it's probably just worthwhile reflecting where we finished where we come off in the last half. So we did talk 6 months ago the hedges we were taking into the half, which were favorable, but obviously, the exchange rate has been all over the shop in the last 6 months and that part that we had to take at spot was more expensive in the hedges we brought forward. So overall in the U.S. dollar, we probably finished the last 6 months around about $0.72. We've been having a hedging strategy. We've been pursuing at most of our core or made businesses instead of a typical 80% hedge, where we've throttled that back to 70% because of our desire to reduce inventory in the second half. And we started hedging that with a number forward orders starting at 68%. We -- the last lot jagged at 71.5%. We just managed to get the peak of the market, and there's still more to come at 73% and final top-ups if we see the currency going to 74%. I'd certainly grab some more. So going into the second half with about -- just on 50% hedged at smidgen in the 70% range on the [indiscernible] whether 70.1% or 70%, but certainly in the better side of that range. And as I said, we'll top up more when we see that. Our strategy has been reflecting the fact that there has been quite a bit of short-term movements or volatility, if you like, in the Aussie dollar swinging upwards of $0.03 to $0.04 in a week or 2. So when we put those hedges out, including 71% everyone laughed at us, but that's what we've done. We're sticking the strategy. We'll continue to do so.

One last quick one, if I can. I sort of caught your comments around the drivers of the inventory uplift half-on-half. I think you said $11 million effectively was organic. Can you just talk to the $20 million that you expect to sort of roll off in the second half? I missed this commentary, sorry, but what sort of demand driven and what sort of supply chain normalization in the second half that would drive that $20 million?

Look, that's a very easy question. We're just trying to lean out some of our inventory. We've said last announcement in the previous one, so the full year and the half year before that, that we were watching really closely around the supply chain. And actually, Martin and I felt that in the previous half that we were looking to actually reduce some of inventory, but we then saw some concerns in what was happening in China, of course, the lockdowns in that previous half. So we sort of put our foot off the accelerator. So we've always had a view that we would be reducing our inventory on the back of what is a normalizing supply chain getting back to a normalized net working capital ratio. So shouldn't be a surprise to our investors that, that's coming forward. We just got more confidence that our supply base is in a more stable position, and that's kind of part of the approach.

Just to be clear, so therefore, 0 is demand driven.