Amotiv Limited (AOV) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the GUD Holdings FY '22 Results Earnings Call. [Operator Instructions] I would now like to hand the conference over to Mr. Graeme Whickman, CEO. Please go ahead.

Well, welcome to the earnings call of GUD's results for the 12 months ended 30th June 2023. First, apologies. We're 10 minutes behind time. The information was due to be released actually a full hour ago, but we had problems with the carrier pigeon. Its, obviously, wings weren't strong enough to carry the weight of what is a good result. I'm Graeme Whickman, GUD's CEO and Managing Director. And I'm here with Martin Fraser, the company's Chief Financial Officer. As a matter of housekeeping, we'll have time at the end of the call for Q&A. So if you could hold your questions until then, and then there will be a recording of this presentation on our website later on. We'll start the call by Matt and I running through the key messages and the financial overview. I'll speak a bit about the portfolio vision, our ESG efforts and then we'll give you some commentary on Automotive, APG and Water segments. And then I'll hand back over to Martin to cover the financial results in a bit more detail, and then we'll conclude at the end with a quick trading update and outlook for FY '24. So apologies for that late filing, but I'm sure you'll enjoy the read. And hopefully, we'll give some good color on the way through. Okay. Well, let's turn to Slide 4. So to give you a bit of context, and I may have mentioned this at other engagements, investor conferences, Martin, I and the rest of the leadership team have been really working on 2 thematics through FY '23, 2 of them. Managing the macro was one thematic, and delivering the portfolio vision was the second thematic. And that was the entire focus for all the leadership group throughout the year. Managing the macro has all been around delivering the key earnings, inventory objectives, while still handling that volatile macro, whether that be FX movements or logistics or supplier or manufacturing operation challenges. And then the second one, the second thematic was delivering the portfolio vision, which frankly was code for the next evolution of our plan, meaning that we would drive further rationalization and divestiture as we move towards our ultimate goal of being an automated pure play and I'll touch on that in a few minutes. In FY '23, all segments performed in line or, in fact, slightly better than our expectations, which we've previously outlined. APG stepped forward in H2. Our aftermarket businesses delivered solid growth, and their margins continue to hold up. Over the course of H2, we're able to reduce our inventory ahead of our targets that were previously committed. And with other associated positive impacts of earnings and management gross cash balances, we were able to achieve the debt leverage target of 2x, which you heard from us with a fair degree of monotony through the year. Finally, our view of the future remains positive and optimistic, if you think about the right-hand part of the slide. We're well positioned with APG to capitalize when the new vehicle constraints -- supply constraints start to improve with demand backlogs and other drivers, such as immigration infrastructure spend that are good tailwinds. Our auto aftermarket [ piece ] have experienced good growth, and we expect the basics of the aftermarket, i.e., the car parc aging, to continue to support that momentum. And finally, we've been working on the portfolio, and we'll talk about that later about its simplification and focus as a pure play automotive company. Now I'll ask Martin to cover the next slide. Martin?

Thank you very much, Graeme. On Slide 5, you can see we delivered revenue growth of 25%, underlying EBITA growth of 27% as overall margins held and underlying organic EBITA growth of 6.5%, which was a pleasing result. Contributions to the underlying EBITA growth were made by all businesses as margins were held in volatile economic and vehicle supply conditions. In that context and given the step-up in APG in the second half was in line with earlier flagging, this was a pleasing result especially given the limited supply of new vehicles. With a full year of both Vision X and APG as well as new shares on issue following the mid FY '22 equity raise, underlying NPATA grew by 33% and underlying EPSA grew by 12.7%. We set out to achieve net debt to underlying EBITDA ratio, at the time, we called it circa 2x, not a hole in one, circa. And we pretty much achieved very close to a hole in one, which is a great result, even after having to overcome accelerated inventory deliveries in the first half, which I'll talk to later on. The results saw us decrease our inventory by $50 million on the first half and nearly $30 million on FY '22, consistent with the $20 million to $30 million potential we've been calling out for some time as being possible once supply chains normalize. In addition to a step forward in profitability, the lower net working capital levels over both FY '22 and H1 '23, the result in cash flow performance -- sorry, cash conversion performance and a result in lower gearing levels remains noteworthy. All in all, a strong financial results. Later, I'll speak to our solid debt funding position, which brings a little bit more color, too. And finally, a final dividend of $0.22 per share was declared, consistent with our prior year and our stated desire to see the net debt to underlying EBITDA below 2x. Back to you, Graeme, who will start on Page 6.

Yes. Just moving on from some of the group financials as we talk a bit more about some of the nonfinancial efforts that we've been placing in FY '23. So in past years, we introduced GUD's point of view on our sustainability efforts. Our early ESG journey was seen in 3 phases: materiality assessments; baseline analysis and target setting; and then the third phase, where we are now, which is the ongoing measurement of those targets. Last year was the first year where we introduced KMP and senior executive compensation plans linked to select ESG targets, such as employee engagement, safety, ethical sourcing, non-ICE revenue, et cetera. And so the sustainability of our business and the impact we have in the world around us is articulated by the 6 key impact areas that are on the screen right now and importantly, detail some of the outcomes achieved through FY '23 and what's currently in progress. And I'm pleased with our efforts on GreenPower activation and towards our carbon-neutral position within our distribution businesses, the enhancement of what is an already high safety culture with the activities like the psychosocial risk reduction efforts, our efforts on packaging, our supply base as it relates to ethical sourcing. And finally, I'm delighted with the efforts in our pursuit of serving the new energy vehicle market with the launch of our Infinitev operation serving specifically the hybrid and EV aftermarket. But we've got more to deliver on those 2025 ESG targets, and I -- but I do feel positive of the momentum we've been building. Now on Slide 7, we detail the portfolio vision summary. And this slide actually today is purposely without the typical measures of success that normally attend that slide. I wanted to concentrate in our strategic direction as the importance of the very recent announcement made in early August about the sale of Davey marks what, frankly, is a pivotal moment in GUD's history as we move to be an automotive pure play. Now within that portfolio vision and after the sale of Davey, you can see the remaining 6 strategic imperatives. And as I said earlier, the second thematic in FY '23 was delivering the portfolio vision, meaning that we took actions such as selling CSM, moving AE4A into BWI, rolling Uneek into APG. And this was with a view to sharpen our portfolio of brands and companies, thus ensuring our financial and human resources can be targeted to support these 6 imperatives, including, though, on how we're going to organize for success both at the group and segment leadership levels and the type of reinvestment required. Well, more of this to come in a future Investor Day. I want to switch through now to Slide 9 and start to unpack some of the performance across the segments. So taking a closer look at the Automotive ex APG segment. The results on Slide 9 show the revenue was up circa 12%, reaching just a smidgen of $635 million. Our core auto business' revenue grew by 8.7% with a decent split of price and volume. Encouragingly, this came from both new and existing customers and channels. Acquired Automotive revenue grew at a rate of 20%, although that represents an extra 5 months contribution from Vision X. And the underlying EBIT (sic) [ EBITA ] margin of our core auto BU was essentially held year-over-year, an ongoing, in my view, positive story in the face of macro volatility. The pricing due to be implemented in Q4 was put in place and [ it stuck ]. We did experience some improvement in the acquired business unit margin, which was largely an improvement in the sales mix in ECB driven by switch from polish to powder-coated bull bars. Sounds quite simplistically, but some of the constraints we had were around labor, and that was one way of trying to improve. Our inventory reduction story was a feature of the auto ex APG where we delivered inventory reductions just over $32 million (sic) [ $37 million ] half over half and $22 million versus prior year, and that's kind of part of the wider inventory reduction story that Martin touched on and we'll continue to touch on a little later on in the slides. Now turning to Slide 10. I just want to remind everybody the size of the price, and that price continues to be strong. The car parc continue to grow steadily. It sort of sits to just short of 20 million, up year-on-year, and this type of growth is forecast to continue. And importantly, at the same time, we've seen the average age of the car parc reach beyond 11 years, naturally, also positive for our wear, tear and replacement BUs. On Slide 11, we detail some other critical car parc data. As the car parc is growing, so does the complexity. And you've heard me say this once before and I'll say it again, we love car parc complexity. And the segment is forecast to shift [ in favor of ] SUVs and pickups again, so more complexity to follow. That complexity in the car parc, that wonderful complexity, so not often you actually say the words wonderful and complexity in the same sentence, but it's supported by our product and services, which we estimate to be just short of 80% of that revenue coming from nondiscretionary products and services in nature. Importantly, as the year finished, our combined Automotive and APG revenue for FY '23 saw us deliver approximately 75% from the non-ICE category, which was a decent step forward from the prior year. Now on Slide 12 and 13, we highlight some snapshots of progress in 2 of our automotive categories of auto elec, power management and lighting and electric vehicle aftermarket leadership. Now by the way, we do have some other snapshots of the other segments and categories in the appendices, but I just want to concentrate on these. So on Slide 12, in the auto elec, power management and lighting, we ended up with strong revenue growth domestically with good performance in a variety of channels and new products, and I really like the growing opportunity in the truck, RV and body builder channels. As mentioned in the half year, our international expansion is on a steady path to ensure we have the right building box in place. Now we launched the Projecta, Ultima and the Narva brands in certain jurisdictions. And we expect in FY '24 we will start to see some modest revenue achievement as we build for the future. Now as part of that future opportunity, we have been working on our product complementation strategy rollout, which is, frankly, all about Vision X at this stage, both in the U.S. and a little less so but still in Europe. And in support of that, we've been investing in people in those jurisdictions and a stronger global core PD, so product development, and program management backbone. Moving to Slide 13. We highlight our efforts on new energy vehicles, specifically hybrid and EVs. Like I said earlier, I'm really pleased with the efforts in FY '23 in this area. I'm convinced we can live up to that strategic imperative to become a leader in the EV aftermarket in ANZ, something, I think, very few organizations are even beginning to talk about. Now we've been moving quickly and quietly in the background and launched the Infinitev brand, started that operation in Australia then opened that operation in New Zealand. Our hybrid battery exchange program is gaining momentum, including in New Zealand where we actually even haven't officially launched in totality. And then from that, we're also -- turning my attention to EVs. We're also awarded our second grant from Sustainability Victoria as we explore the commercialization of battery energy storage systems, so BES systems. Now even though the NEV car parc is not significant yet, we are occupying a leadership position that, I think, will all go well in the future. And it's also extending potentially into the OEM world as well. Okay. Let's turn our attention now to APG. That's on Slide 15. And APG's result was pretty much bang in line with our expectations, just above $58 million pre group overhead and just shy of $55 million including overhead. The interesting half-on-half skew of [ 54 46 ] was within 1 percentage point of our forecast, which was given all the way back at the beginning of FY '23. The margin improved year-over-year and half-over-half driven by some pricing in our retail channel, cost management actions and some better efficiency in manufacturing, albeit still not at efficiency levels we'd like, which is unsurprising given the lingering supply constraints through FY '23. Just actually jumping back to the revenue, we did see that more than double given the full year contribution. Interestingly, the half-over-half revenue grew by just a bit under 5%, which is reassuring when you consider the APG top 20 volume was actually flat. So that's, as a reminder, the top 20 vehicles by volume that report to APG. And this sort of demonstrates some of the share of wallet gains and the expected trailering new business wins coming through as the capacity increased. Now we still believe the supply constraints will improve over time. Although some volatility still remains, our customers tell us that they've got elevated back orders and demand from their end user customer is still there. And perhaps we can move to Slide 16 and 17 to unpack what sort of transpired in the new vehicle sales market or industry in FY '23. Now on that slide, 16 that is, we can see that we're still off that pre-COVID peak rate of NVS, so new vehicle sales. However, inching closer at the total level, yes. What we're seeing though is uneven growth largely due to some brands and models getting sort of [ free of ] supply versus others at different rates and at different times and cadences. We are still living in an artificially constrained industry environment. If you take the calendar year data and then turn it into financial year data, this is best seen with the industry up 10%. Pickups up at 4.6%. But if you look year-over-year, you can see that actually, APG top 20 was down just a smitten and yet we'll still be able to deliver a better result. So when you take this and you look at the same data with the F '23 half-over-half and Q-over-Q, particularly Q4 over Q3 slices, it becomes even more insightful, and that's on Slide 17. So the top of this slide shows the half-on-half. And as you work through the key slices, you can see that while the total market was up 7%, pickups were only up 1.5% and the APG top 20 was flat. Well, why is that important? Well, a few slides ago, we detailed the revenue and the EBITA in the same period was up 4.7% and 18%, respectively. It wasn't actually that long ago in May when I gave an update at an investor conference. And at that point, the April year-to-date new vehicle sales volumes were actually down. Now encouraging in the months of May and June, there were some stronger performances, and I guess it just shows some of the volatility from month to month. And this phenomena is nicely laid out in the bottom half of the slide where you can see the significant improvement in the APG top 20 Q4 over Q3, growing at about 7.5%. So ultimately, the so what of these slides is there are signs of vehicle supply improvement. It's uneven, and from month to month, there's still going to be some swings. But APG has delivered a better result year-over-year and the H2 exit run rate to suggest a better FY '24 as the constraints progressively remove. On Slides 18, 19, we detail some of APG's highlights. On 18, you can see APG have won more business. That's a tempo we give every time we update you, and that's improved again: 134 new business wins; $35 million incremental, of which -- sorry, $24 million of which is incremental to the $35 million. And within that, again, $14 million of that are from wins from functional accessories business that we didn't have before from Isuzu, Toyota and Hyundai, awarding us some really important new functional accessories, and that sort of introduces our products to them for the first time outside of towing. We've also been slowly working through which of the APG brands can work in the U.S. market and in doing so, taking up some resource to support the engineering effort. On Slide 19, we talk to APG's other strategic growth pillars. Now while we accept that new vehicle supply will improve and be a tailwind to [ past-to-recent ] APG results, we still have been working hard to [ up-weight ] the non-new vehicle volume-related parts of the APG business. Trailering has been a success story. The Cruisemaster brand sales have grown very nicely and as expected. This is on the back of domestic production improvements and with still more Thai capacity to come through as we start in earnest with our new customer conquest and existing customer expansion of wallet programs, remembering we still have quite low market share. So a lot of upside for us here. And the last one on the page I'll speak to is the cargo management efforts, which, while we've seen a double-digit growth year-on-year, it's still off a comparatively smaller base than the other APG pillars. And this has got a longer gestation period. And over time, I'm confident we'll see this become a decent portion of the APG sales. Now before I hand over to Martin to cover off the financials in more detail, let me advance to Slide 22 to quickly cover off Davey. As mentioned earlier, Davey's underlying EBITA grew in FY '23, notwithstanding continued weakness in the non-ANZ markets, which were impacted by distributor destocking, retailer destocking in Europe as well due to soft sentiment and drought conditions. The uplift in underlying EBITA margin to sales reflects change initiatives and [ some momentum ] that Val and the team have [ now to put ] there. But the slower sales level and the normalized supply and freight conditions allow David to moderate inventory significantly over there, which was witnessed by the lower segment assets compared to the prior comparable period. And finally, on August 5, GUD entered into an agreement to sell Davey to Waterco, an ASX-listed entity. And we expect the transaction will complete on September 1. Further details are available on the ASX announcement or in the appendices after the finance results, and you'll see some pro forma information that I think you'll find helpful. Okay. So talking about financial results in a little bit more detail, let's hand over to Martin to cover off those.

Thank you, Graeme. And I'll start, ladies and gentlemen, on Page 24, which walks through the profit and loss starting with revenue. We can see growth of 25%, even though water sales actually reduced over the year. Automotive and APG grew both organically but also benefited from another 5 months post acquisition of Vision X and 6 months of APG, respectively. The second half saw a noteworthy uplift in APG, consistent with our flagging, which Graeme has outlined several times already. Importantly, the additional revenue pulled through to a healthy 26.6% uplift in underlying EBITDA, reflecting very conscientious margin management efforts. With a full year ownership in both APG and Vision X, the amortization of customer intangibles stepped up, approaching $10 million on the prior year. The year also saw the remaining $3.5 million in noncash APG inventory step-up from the purchase price accounting [ wash ] through in COGS, although we have excluded that and significant items in arriving at underlying EBITDA, which is up 27% on the prior year. Moving down to EBIT. We can see those customary amortizations that I mentioned, the inventory step-up that I mentioned and the significant expenses which I'll talk to in more detail shortly. Below EBIT, you can see the full year impact of financing expenses holding both of those acquisitions for 12 months. And after considering taxation, we see underlying net profit before amortization of intangibles step up by approximately 33% on the PCP, and EPSA step up 12.7%. Now talking -- turning to working capital on Slide 25, and I'll probably take a bit of time here. As there have been significant movements over the past year, we've also included the midyear working capital position. Given the momentum in inventory over the year, I also want to remind us of what we saw in the first half before we talk about what changed in the second half. In the first half, as freight started to normalize, especially on the corridors from Asia to North America and Europe, demand on our contract manufacturing suppliers in Asia from their customers in continents outside GUD's footprint slowed as those -- and consequently, those continents trimmed their inventory levels. Our suppliers were left with idle capacity they then redirected to fill GUD's orders earlier than we had planned for and allowed for in outstanding reorder points and quantities. In short, we got [ hammered ] in the first half. This accelerated the fulfillment as we saw with the inventory, but also accelerated the -- because a lot of that happened at the beginning of the first half, accelerated a reduction in payables. In the second half, the higher inventory level from the first half, combined with what then turned out to be improved ANZ shipping corridor reliability and port clearance times combined with a return to stable supplier conditions, allowed us to reset safety stock and reorder points. Those actions allowed us to reduce inventory by approximately $50 million or 20% in the second half of the year alone. The result was circa $30 million reduction in the prior year and is consistent with the internal stretch goals we set for the wider GUD team at the start of the year. The full year inventory reduction is towards the top end of the range of reductions of $20 million to $30 million that Graeme and I have called out several times in recent reporting periods with the conditionality that, that will be achieved when supply chain conditions normalized. To achieve that in 6 months is especially pleasing and involved the focused action plan by all businesses to deliver the reductions without undermining our long-term working relationships with key suppliers. I'd like to acknowledge the contribution of all our management teams in delivering that outcome. We have yet to see our creditor levels return to more usual at higher levels due to the lower replenishment [ type ] cycle we've been through, although we activated some high supply chain financing in both the half and the full year at the same level to largely offset that impact. And we will look to moderate the level of supply chain finance through FY '24 as creditors return to a more usual level. Now I'd like to take us to Slide 26 to talk about pre significant items and where we report the significant items below underlying EBITDA. And you can see this largely reflects the restructuring impairments Graeme spoke to during the year, including moving Uneek into APG, selling CSM. And we also incurred some external costs on acquisition and disposal activity. The costs are mapped on this slide against the relevant segment. Moving on to Slide 27, which covers cash conversion. We can see inventory reductions I spoke to earlier drove cash conversion of 113% from 79% in the last year. And this is really consistent with the performance we needed to deliver our previously stated net debt to underlying EBITDA target of 2x for the full year. Moving on to Slide 28, which is the balance sheet. We can see both the gross cash and debt balances for the full year with the debt level reflecting the Vision X and APG acquisitions. Nonetheless, net debt is down just around $65 million from the previous year, reflecting the strong cash conversion and prudent dividend payments in FY '23. And that's all after settling approximately $21 million in deferred Vision X vendor payments. There are no further deferred vendor payments due, just to be absolutely clear, although Vision X still has a 3-year earn-out in play. To the right of the slide, you can see that we retained a healthy gearing ratio. We reiterate our medium-term target to achieve net debt to underlying EBITDA in the range of 1.6 to 1.9x on a pre-lease accounting basis. In the appendices, we outlined the pro forma FY '23 net debt to underlying EBITDA ratio of circa 1.8x, applying the anticipated proceeds from Davey's forthcoming sale. For those who want to understand those ratios I called out, which are consistent with our banking covenants in more details, the maths are outlined in the appendices. I'm now going to take this to Slide 29 where we speak about debt profile. Slide 29 outlines that we continue to have a well-balanced long-dated profile with a healthy proportion of fixed interest funding. To the right of the slide, we've mapped out our debt maturity profile, which has a [ mixture of ] facilities and tenors and finances. Late in the fourth quarter FY '23, we renewed the debt which was due to expire on January '24 and some, but not all of the debt, which is due to expire in December 2024. And that's on very favorable conditions with our existing finances, although we did take it to a broader market to ensure that, that process was commercially sharp. We'll address the remaining $50 million of debt facilities due to expire in December 2024 during FY '24. And during the year, a small debt facility which matured during the year was not renewed. Given the debt reduction during the year, we have approximately $220 million of unused debt facilities, well up on the previous $150 million. We've noted our all-in funding cost, including unused line fees but before interest swaps, on the right-hand side of 4.89% and it's approximately 4.3 [ of interest swaps ]. This has risen over the past year as we have a higher level of unused debt facilities, as I noted before, higher floating rates and slightly higher margins on the renewed facilities given current market pricing. I'll now hand back to you, Graeme, to finish with both the trading update and the outlook.

Good. Thanks, Martin. Well, we split the trading update into 2 segments, and let's start with APG's performance. That was strong in July versus prior year. And although early August, it started out positively as well. The industry growth does, however, remain inconsistent based on some of those supply constraints. I think that they will abate, and I expect the APG top 20 [ sales ] to start to be a little bit more reflective of the wider industry growth, as I mentioned earlier on. Trailering started out well versus last year, which is a continuation of the capacity and new business wins. But we are watching the industry for any signs of softness. However, given our low share, we still see market share gains as a really good opportunity. Turning to Automotive ex APG. Well, they've experienced a solid start across all the key automotive businesses, although the growth has been inconsistent across some of the BUs and geographies. However, domestically, we're seeing both large and independent resellers of our products grow at similar rates, which is actually very reassuring. The end user demand feedback is encouraging with workshops reporting sort of decent inquiry and bookings out to 2 weeks or so. So now let's just finish on our outlook for FY '24, again, starting with APG, which is on Slide #32. So as mentioned earlier, we are seeing signs of improving supply constraints as we exited Q4 FY '23, and we believe this will continue; however, not necessarily to normal levels until perhaps late FY '24. We remain very positive at APG's ability to deliver their business case targets as the OEM and APG top 20 supply constraints normalize. The historic sales trough you see in that graph due to the supply constraints still sits in the background and represents a significant delta of unmet demand. And we still think as the supply constraints normalize, we'll get, and I said this once before, we'll get an unfair share of that backlog given some of the challenges we've seen with some of our competitors. We are expecting, ultimately, that we would deliver further revenue and EBITDA growth in FY '24 as that supply improves for APG. Shifting to Automotive. Well, in terms of Automotive ex APG, we're of the firm view that our Automotive BUs will benefit from a steadily growing, aging and robust car parc, add in our brand strength and our product development tempo and we're confident with our prospects. We will, however, continue to reinvest with some discipline in our offshore operations for auto elec, power and lighting category and the ANZ sort of new energy vehicle opportunity with hybrids and EVs with our Infinitev organization to tap into that future aftermarket. And then finally, at the group level, as you would expect, we'll continue to focus on margin management. Part of that balancing act will be driven by the dynamics of the FX, which a large proportion is hedged for the H1 period. This focus on margin is to accommodate the inflationary pressures and also the step-up in corporate costs to support the robust growth both recently experienced and also in the future anticipated. As you might expect, and unsurprising, we're not providing guidance given there are so many moving parts at the moment. And we expect to provide further commentary to our shareholders at the October AGM. So with that, I'll conclude our material and pass back to the moderator.

[Operator Instructions] Your first phone question comes from Mitch Sonogan with Macquarie.

Can you hear me clearly?

Yes, Mitch.

Yes. Just the first one, just on APG. Graeme, the second half EBITA obviously had a good step up, $30 million. How should we think about that as a full year run rate into '24? And can you maybe just talk to any ongoing improvement you'd expect there? And are there other tailwinds, such as lower input costs, freight costs, et cetera? Can you maybe just provide a little bit more color about how you're thinking about the growth in that business into '24 if you do see volumes improve?

Yes. Thanks for the question, Mitch. As you can tell, we're energized by the improvement in the second half. We predicted that. So it wasn't as if it was a surprise to us. We knew that there were certain input costs rolling off, but we still have to manage some of the inflationary pressures in the different parts of the business. Clearly, we're still not operating at the efficiency level that we'd expect because the throughput of the volume isn't where it needs to be relative to supply constraints. But you can see, we're able to pick our game up and just advance the ball further in the second half. That, on the back of, as I said earlier on, frankly, a flat APG top 20. So you can see, it was a bit of a mix coming through there, a bit of efficiency coming through and then a little bit more of trailering coming through. No surprises there. I mean you can probably say that the exit rate at the 30 or the 32, depending on how you view it compared to the investment thesis, is encouraging. I've said earlier that we do expect to improve both the revenue and the EBIT, and you can see a strengthening in the margin rolling through in that second half as well. So we're not here today to give any particular number or guidance specific on APG. But I'm feeling confident that we'll see improvement. What I will say is it won't be to the investment case of sort of $80 million because the industry is not supporting that at this point, and we need to see that come through. I'm expecting that perhaps in the latter part of FY '24 as we truly get to what is a normal sort of industry state.

And maybe just a quick question on the Automotive ex APG. Obviously, you've had customers reducing inventory through FY '23, including, obviously, GUD itself. But does that have any further to play out in FY '24? And maybe just provide a little bit more color on any cost pressures you're still seeing in that business. And do you have any implemented or planned price rises to offset that in FY '24?

Look, I think -- and it's very hard for me to speak on behalf of customers, and as you know, I don't. But our expectation is that, that inventory out in the total channel is probably where it needs to be now. And we probably saw a little bit of that. You can see the half-on-half, Mitch, where it was relatively flat, right? That's primarily due to some destocking in the second half. I don't -- well, Martin and I and the rest of our leadership team are not sitting there with any expectation that, that would go any dramatically lower. So that's the first thing I'd say. In terms of the cost positions and how we balance the margin -- because at the end of the day, we're managing margin, right? It's revenue, margin and cash at the end of the day in our heads, right? And so that margin we expect to hold, but there are some swing factors there. So we put some pricing through in Q4. That was activated, as I said earlier on, [ and stuck ]. The swing factor here for us, Mitch, is going to be FX. In the second half -- we're hedged quite securely in the first half. We're stepping off of maybe a 71, 72 to maybe the late 60s. But nevertheless, we've got that covered in our view. It's where the exchange sort of sits in the second half. And if it stays where it is today, then we will be coming and pricing in the market. But let's see where it goes. I mean we've got most of it covered in terms of the inflationary expectations. The other thing, Mitch, is that through COVID, we didn't shortchange our employees. We kept the cadence of wage increases. And so we don't -- we haven't got big wage catch-ups or any of those sorts of things. We get a little bit of an offset with the freight rolling through for the full year. That's encouraging as well. So we think we can continue to balance the margins effectively, Mitch.

Your next question comes from James Ferrier with Wilsons.

Graeme and Martin, congratulations on the results. Can I ask about the G4 business in particular? And you talked before, in answer to Mitch's question, about APG and sort of where the trajectory looks like from here. And ultimately, you've got that $80 million line in the sand from the time of the acquisition. But for the G4 business, can you just remind us perhaps where it's trading now and where you think that upside ultimately sits for that business because it's clearly still constrained buying new vehicle supply as well?

Yes. You've got 2 things rolling through there, James, and thank you for asking the question. Clearly, we've got new vehicle constraints that rolls through there, right? So same impact as it is for APG in a broader sense. So that's a constraint. But then you've got some further constraints, and we've spoken about this in the past but I'll just remind the listeners is that we have some manufacturing constraints that sort of sit in the likes of, say, ECB that are far more impactful than even APG, meaning that we have parts of the -- bottlenecks and parts of the manufacturing process there where we are sometimes only operating at 15% to 20% of its capacity. I'm thinking about things like welding and polishing. That's much, much harder to contend with, with the business the size of ECB as opposed to, say, APG where you can have a little bit of a swing, although you are talking about skilled trades here. And so that's been a massive challenge for us for a period of time. Interestingly enough, James, I think we said it before, we have seen materially different absenteeism and vacancy rates between our Queensland businesses and our Victoria business as well. So what we were able to do in the second half was to start to [ force mix ] from a sales point of view a higher level of product that were powder-coated as opposed to polished, meaning that we weren't so reliant on the polishing part, sorry to be so specific here, but so reliant on the polishing. So [indiscernible]. That's why you saw it bounce back at a margin level and the like but was still fundamentally constrained. We cannot -- and I won't say what the bars per day number is because from a commercial reason, that's a bit off. But there are times when we're, at best, 50% of our jobs per day in terms of bull bars. And so that there is really the biggest swing factor, James. We saw some improvement in the second half because of that [ force mix ]. But ultimately, we're trying to find urgently ways to try remedy the bottleneck, and these are not easy things to do in the short term.

Yes. Yes, understood. I guess maybe to use that sort of circa 25% core automotive EBIT margin that you've achieved consistently, use that as a benchmark, how far away is G4 from that?

Look, when we bought the businesses, we said that it wasn't going to operate in the same margin profile as our core, just to be very, very clear. We felt that, that was generally a 15% to 20%, and I won't put a specific number on it in terms of EBIT to sales type margins. So -- and the exit rate, if you look in the second half, was sort of slap-bang in the middle there. You can see where it was in the prior half. And that -- it's almost a story of 2 halves to a degree, as we've at least been trying to pivot the powder coating approach with a few other bits and bobs that were sort of sitting there. We've also got plans to take some of that capacity and push that into Thailand to help our ECB. So it's a work in progress. But I would say, James, in that sort of range of 15% to 20% would be the range that we would find acceptable given what we paid for it and the [ multiple paid ] as well.

Yes, understood. Maybe a couple of questions for Martin. With the water divestment, are there any costs that remain in the group and need to be reallocated?

Yes, James, the water result you see there is after some corporate overhead of circa $1 million. [ And largely ], Graeme and I and a few other people [indiscernible] pretty extensively last year to support the business improvements there. We're going to redirect that resources to other growth corridors. That overhead is not going to be pulled out of the business.

Yes. Okay. And the cash conversion guidance for the year ahead, does that include the expected impact of unwinding the [ factory ]?

To a more typical level, and we've called out a more typical level, $10 million. And for us, a more typical level is around financing things that are new products we've yet to -- the way of building up the stock in anticipation for launch. So we don't have any profit against it. So that's what we normally use it for. But yes, it would bring it down from $23.5 million to $10 million.

Understood. And then finally, the $6 million investment in core Automotive OpEx that you referred to in the outlook statement, how incremental is that to '23? Is that a full $6 million of incremental spend? Or is that sort of similar to what you invested in '23?

No, it's not similar, but it's not incremental, James. So we probably -- it will be in the region of 3 to 4 incremental. If you think about, we've also got some other numbers later on in the deck where we talk about the corporate overhead as well, which is about $1.5 million or so. So you've got to put those 2 numbers together if you're starting to try to think about the overall sort of OpEx delta versus this year.

And it's still best guess because if we see encouraging signs, we may choose to go [ harder for medium ] growth. But at the moment, it's our best 50-50 call on that, James.

Your next question comes from Tim Piper with UBS.

Just a couple. I just want to go back to the APG question before, but more around sort of the model mix and the comment you made in the trading update around APG top 20 models are not growing at the same pace as total industry. I mean the last couple of months, [ range was down over 5,000 ] a month. Obviously, Toyota has been a big headwind. Is that what you're kind of referring to there is the Toyota has been such a headwind sort of last 6 months that those numbers are for, what, the last couple of months and is expected to continue to improve? So it looks like the overall model mix within APG has been getting better, particularly through the progress of the half. Is that a fair comment?

Look, I think in generality, Tim, that's correct. Like anything, there's always nuances. But in generality, that's correct. I mean if you go back to Slide 17, that's the story, right? At the end of the day, you can look at it half-over-half and quarter-over-quarter, and you can see we were a flat half-over-half. A little bit of pickup rolling through, but then it's really the APG top 20 Q4 over Q3. And you can see that starting to roll through up 7% quarter-over-quarter. And yes, there's this nuance around our customers [indiscernible]. But it's not just them, right? We have decent volumes from Mitsubishi and a few others, which are up and down. And later on in the appendices, you'll see that we've called out that top 20 in more granularity so you can really get a flavor of what's up and down. It kind of gives you the story that you're looking for, but just with a little bit more granularity and a little bit more accuracy.

Got it. Just the second one on APG. You called out, I think it was an incremental $16 million of revenue picked up by the business since the acquisition. Roughly, how much of that landed in the second half of '23? And then beyond that $16 million, what does the pipeline of new contract opportunities currently look like over the next 12 months for APG?

Well, look, you've reminded me of a very good point. So when we give you those numbers, they're not necessarily landing in any particular half or quarter, right? So some of that revenue -- incremental revenue could be coming later this year with the launch of a vehicle or an upgrade of a vehicle. So sorry if that's misleading to you, but it's not revenue necessarily delivered in the next -- or the half just gone, as an example. So this is more a broader view of how it's coming. And then to the second part of your question in terms of some big changes in our customers. Obviously, we don't talk about any specific model launches. Look, it's probably a bit more of a steady state in terms of competitive launch out there. [ Mitsubishi ], as an example, have announced their Triton launch. So that will roll through. And look, Mitsubishi is a very good customer, sort of in the same category or approaching the same category as Ford in terms of the number of products we have on some of those Tritons. But Toyota, as an example, they've been speaking about a new Hilux. But there's no details nor any timing, and it's not clearly our place to talk about a customer's launch. That would be very dangerous for us. So look, there is some stuff on the horizon that looks interesting to us, and I think we'll have a fair crack at that. And I think evidence of functional accessory wins in Isuzu and Toyota and Hyundai would suggest to you that we can win business beyond towing and other OEMs.

Got it. Maybe just one last one, just on the U.S. expansion in sort of the core auto business, and I sort of take your point before that you're not betting the farm on it. But any update there on progress around distributor and reseller traction in the U.S.? And then I think you said you've got some headcount costs in place. It was probably an earnings [ strike ] through the half. Does that continue to be a bit of an earnings drag into '24? I think you called out another $6 million sort of investment. How do we factor that into the prior sort of comments around U.S. expansion and investment?

Yes. So the $6 million in OpEx is not all incremental. So that's sort of [ reversed of ] something I just mentioned before. It's probably about $4 million or so incremental there in OpEx, which is targeted really around what you've just described in terms of the offshore piece and also domestically what we're doing with Infinitev and the EV brand, and that is another $1.5 million in corporate overhead. So you probably got about $5.5-ish million incremental [indiscernible] between those 2 numbers. The point here is that we haven't put in our projections any significant revenue in FY '24. I think I've said earlier on modest, that we would start to see some achievement outside, I think, of Vision X. Obviously, Vision X, with the product complementation strategy, is separate to what I've just said. So we launched Ultima. We launched Projecta in the U.S. We also launched that in Europe. And we've actually just launched Narva in Thailand, where we have the rights more recently. So it's a bit of a small bet in Asia, a large bet in Europe and a bigger bet for us in the U.S. But when I say big bet, contextually, we're not betting the farm, as you pointed out. And the majority of that $4 million of the $6 million I spoke about is primarily in support of Europe and the U.S. and then a little bit domestically clearly for Infinitev.

Your next question comes from Russell Gill with JPMorgan.

I just wanted -- a couple of questions. Just to talk through the working capital movements. You obviously made -- you went on some detail about the big change this year. You made some comments, I guess, in there about slow repurchasing from customers. I was hoping you could possibly go into a bit more detail. I guess, you're a much bigger business now with a lot of different products. Just maybe what product ranges you're seeing there and how are you confident that it's not an underlying demand challenge and it is just a genuine, I guess, industry normalization of inventory.

Yes. Look, we're watching the end user, for a start. As you know, Russell, we have good visibility to certain parts of what are important wear and tear end user customers, and that's kind of reassuring. The other thing I'd say, and there was a point we made actually, maybe I didn't make it well enough, but what was reassuring in, say, July and as we approach going to August that we're seeing very similar growth levels between both the large resellers and the independents. So we have businesses, as you know, that serve the independents, which are, frankly, those businesses are almost like the canary in the coal mine for us before the large resellers. And we're seeing no demand fatigue in that regard, which is encouraging. So that's the first thing I'd pull out. The other thing that probably gives me a little bit of confidence is the dynamics as it pertains to July and the first part of August and where we're seeing growth come from and from what particular customers. And you can almost see kind of a behavior going in and a behavior going out depending on the customer, and that gives me confidence as well. We're seeing, obviously, that growth translate into, I think, a stronger and more robust car parc outcome anyway, Russell. So it's kind of physics in my mind that says we've got a larger car parc this year. We've got a car parc that's gone from, I don't know, 10.6 to 11.13 in terms of its age. That tells me that the fundamental is sitting there. And we've been able to outperform system growth consistently since I've been here and before me as well. It has nothing to do with me. And I think we can continue with that. So I'm not seeing any wild swings in any particular channel or customer that would suggest we've got suddenly some very significant demand fatigue that would be worrying me.

And just, I guess, combined with that, a 2-part question. If your -- the interest rates today, I guess, doubled what they've ever been since GUD started making lots of acquisitions, particularly in probably a little bit more discretionary style automotive parts. Are you seeing any movements, firstly, in trading down within categories across some of your upgrade type categories? And then secondly, are you seeing any pressure given those higher interest rates from customers wanting extra financing for them funded by you guys and how you'll approach that over the next 12 months?

I'll take the last one first. No and no, put bluntly. We love our customers to death, but we're not a bank either. So we're in a position where we get very comfortable with those trading terms, don't expect them to change. And then to your first part of your question, look, on the edges, there's talk a bit of flight to value, a well-used term not just in our industry but any other industry. But at the same time, I mean, so much of our product is -- sits in that nondiscretionary space. And so it goes back to that same maxim, which you know well, Russell, is that as long as cars are being driven and as long as cars are being serviced, then the portfolio of brands we have, we are well positioned. There's no escaping it. The other nuance that you brought forward was maybe some of the latter acquisitions have more exposure to sort of a discretionary purchase. Even the 21% of the -- what we consider to be discretionary, they're all about upgrades. They are largely things like if you bought yourself a Land Cruiser and you want to [ tow ] something, more importantly, you need to have bigger brakes. Well, that's a DBA upgrade. So we consider that to be discretionary. I'm not sure that it's [ the truest ] sense. So I don't think we're right in that discretionary spot that you talk of, but there's probably a little bit of a swing factor there. I think the last, and a corollary to this, and sorry, it's a very long answer, is potentially your view of how new vehicle sales might be impacted by interest rates. And I've said before that one of the key drivers when I was running an OEM was that if interest rates started to get towards the 10 mark when [indiscernible] the paper, then you might start to see some demand fatigue. I think there's a massive unmet demand anywhere, and I see that in your own reports from JP. But at that point, you'll find that OEMs will start [indiscernible] interest rates anyway. There's no concession spend in the market. You will notice that. And so if there are any demand fatigue, then what -- the next thing you'll see is OEMs start to spit a little bit of variable compensation there to try to make sure that the industry continues. So that's a point of view that you didn't ask about, but I think it probably sits in some minds of people as well. So thanks for the question, Russell.

And just a final one while I've got you. Martin, just to understand maybe, I guess, the waterfall bridge into '24. We're seeing container rate -- price normalization of significant drop off, I guess, in freight costs. And I know you guys do bulk buying and, I guess, forward buy a lot of that. Appreciate there's movement in FX as well. Just to manage that gross margin, if FX rates do remain flat from here and you've got that tailwind of that freight coming off, what sort of price rises would be required over the next 12 months on, I guess, on a blended basis to get you kind of in that GM flat territory?

Yes. Great question, Russell, but I'm not going to use a public forum like this to tell our customers what we're going to come to them with price increases if nothing changes. But suffice to say the price resets we did in the fourth quarter of last year were very, what I would consider to be, responsible. We didn't exploit our position there. They were very fair to the market. They took into account currency which was then around about $0.69. They took into account some of these cost downs as well. That's secured. We took a lot of currency at [ $0.685 ], and we had a little bit of currency still on foot in terms of forward FX instruments. So we're really well placed in the first half. If it stayed at this level, yes, we're going to come back with price increases, notwithstanding the containers are down. And -- but as I said, I think, a, we're not going to call that out. But b, because we've been modest all the way through the different cycles, we're very confident that we'll have the pricing power to address that and hold margins through '24. And that's what we're looking to do. We're not looking to grow margins, but we're very resolute that we're not going to sit here and just let the macroeconomic factors dilute our margins either.

Your next question comes from Sam Teeger with Citi.

Following the Davey sale, where does APG need to be at before you're comfortable doing another transformational acquisition?

Look, I think great question. Thanks, Sam. We've been pretty consistent that we would like to see the performance of APG at the rate that we committed to. So that's been our very clear message. Look, we've got an exit rates probably sitting at 63, 64, 65 pre-corporate. Obviously, you're going to push that down. That's starting to get closer and closer to that 80. But there are a few things to transpire in terms of industry size, cost abatement and obviously, the [ intending ] efficiency. So that's kind of how we're characterizing our thoughts. If we turn to smaller or bolt-on acquisitions, we continue to have been watching those and working with those. And you've heard the range we want to operate in, in terms of our leverage. And if we can accommodate that, then, yes, certainly, that's something we would turn our attention to. But the transformative, pretty clear. We'd like to see the run rate be at that space around the 80.

Got it. Sounds good. And just on the Automotive updates ex APG, when you say not consistent growth, where are you seeing the weakness? What's driving it? And what's the risk that [indiscernible] you're seeing starts to spread to some of your better performing businesses and geographies?

Look, we were just being very transparent. The point here was that it's not alarming us. It's just that there was variability in the result. And frankly, it's probably more a reflection of the behavior of some of our customers as they entered into the -- entered the close and how they started the year. So it's not uncommon. It's a little bit more volatile than norm. But you can tell in my voice and my tone, it's not something that's worrying me. It just was a bit of diversity.

Okay. And just on the recovered debt, are those covenants related to APG earnings or group earnings? And are there any kind of unusual terms or covenants in them that we should be aware of? Just conscious if there'll be quite a bit out of the money [ for -- to finance that ].

Yes. So our covenants work on a GUD basis, Sam, and they're consistent with those 3 measures that we've put there. The banks would not want me to tell you exactly what they are because we might also have better terms than other people with our profile because they also do reflect the quality of management when they set covenants. So -- but we have nothing which is, what I would say, uncustomary in any sense whatsoever. So very safe, very secure. We've done a lot of work and -- to make those covenants as borrower-friendly as possible. And we even stepped forward in the refinance we did in Q4 and again, improved them to make them even more friendly to GUD than they were before. So -- and we'll continue to do that each refi. So very, very comfortable with our financing position and the covenants. There's no -- nothing that I would say you need to worry about and no allocation down to a subsidiary segment, whatever level.

Your next question comes from Elijah Mayr with CLSA.

Just a couple of quick ones for me. Maybe just following on from the repurchasing question we had previously. Just in terms of, I guess, the inventory levels. You noted that with [ yourselves with GUD that's ] a level that you're more comfortable with. What are you seeing, I guess, on the customer perspective? Are you expecting further destocking and lower repurchasing from your customers, I guess, into FY '24?

No, I think the short answer is no. I think our customers -- and I'll speak in general, not in any level of specificity -- have expressed that they wanted to achieve certain inventory targets. I'm assuming they've hit them. Some of those are public. Some of them are not. And frankly, I don't see any significant systemic concern around future inventory positions in the channel relative to where we are now.

Excellent. And maybe just a quick one. Just, I guess, at an industry level, do you think there would be any impact, I guess, widely on vehicle sales, particularly in your top vehicles with the change in [ instant ] asset write-off for this financial year?

Look, I'll put my old hat on, you see these types of schemes come in and come out. So you'll see sort of some episodic spikes, which might pull forward a little bit, but then it returns to the norm. Generally, if you look at it on the long run, you'll see far more consistent growth trajectory up until, obviously, supply constraints and bloody COVID and more importantly, Ukraine. So no, you'll see things be pulled forward and then it will drop away in the next couple of months and then return because fundamentally, there's still a need for vehicles, right? If you think about the S-curve in this market, if you think about the fundamentals that drive the industry size and the shape, they don't go away just because the asset right finishes on June 30. So no, I'm not feeling overly concerned by any stretch about that. I've got a strong belief in the fundamentals of the drive in the industry. If that changes, I mean, if we entered a GFC or suddenly there's no immigration or infrastructure and housing completely stops or whatever, there are 4 or 5 key drivers [indiscernible] of what drives the new vehicle market industry. But I'm not seeing any of that. And we're certainly not getting that from our customers who, frankly, have a much better view than we do. I'm just -- I can draw on my past OEM experience, but they're right at the coalface. They're speaking to their dealers. The dealers are speaking to the customers. They've got a bunch of economists sitting there trying to plot out what their industry planning volumes are, and that's sort of the feedback we're getting from them.

I think it's also just worth adding that right throughout that period, the OEMs couldn't get enough product, so the backlogs are record. So even if there is a part of the segment that will retreat because they accelerate it or what have you, for instance, asset write-off, there's still quite an unmet demand for people that aren't -- weren't driven by that, and we know that from just the difficulty in replacing our own corporate fleet. So I don't think -- if it was 3 years ago when capacity always exceeded demand, I think it would be a fair risk. But at this point of the cycle, I don't see that as being a risk.

We'll now move to webcast questions. Your first webcast question is from [ John Campbell ] with Jefferies. Can you give some more detailed context around the negative 250 bp margin contraction in acquired automotive? Do you see this as a semi-permanent step down?

Look, it's a good question. I think actually we've probably, in part, already answered it because we're talking about what was holding back some of those businesses and specifically G4, and one of the analysts asked that earlier on. What you're looking there, I guess, is the comp year-over-year and you talk of the delta. What you're really comping is some pretty tough moments, including the first half. And we've been able to -- I think the more important number to look at is what we've been able to do in FY '23 half-over-half. And you can sort of see that lift from the 13s to the 17s. I kind of talked earlier on, [ John ], about what my expectation is around where that margin profile should exist sort of in between that 15% and 20%. So that probably signals to where our view of success is as opposed to where it was in the prior year. So we've got a lot of moving pieces rolling through here in terms of labor shortage, absenteeism and efficiency in the plant and the sort of more broad new vehicle supply. But those businesses have got some particular challenges that are even greater than APG because they're smaller and therefore, more sensitive to the labor movement.

Your next webcast question is from Shaun Weick with Wilson Asset Management. If supply is normalizing late FY '24, is $82 million to $84 million EBITDA business case for FY '25 for APG achievable?

Look, we said this -- a similar sort of sentiment at the half and at the full year last year. If the business case fundamentals return to what we were looking at when we purchased the business, then my answer is yes. And that pertains to 3 or so really important factors, one being new vehicle sales and the industry size and importantly, the industry segmentation. That's the first thing. The second thing is when we bought the business, we had a point of view around the cost positions. Obviously, they've changed a little bit, but some up, some down. And then the third thing is around efficiency. And so if all those things -- 3 things came to partial, and then we would expect to be delivering our comments.

There are no further questions at this time. And I'll hand back to Mr. Whickman for closing remarks.

Okay. Well, thank you. Look, again, apologies for the fact that we were delayed 10 minutes and apologies that many of you received the information just as we're starting, which means that, obviously, that puts you in a little bit of a rearguard action trying to assimilate the information while listening to us. We will have time with you through the course of the next few days. We promise to give you the color that you're looking for, but just please indulge us with that technical challenge we faced. Before we sort of finish, I want to take time to call out the leadership team in GUD who worked super, super hard on those 2 key themes of managing the macro and delivering the portfolio vision. I mentioned that before. And then to each of our employees across the varying geographies, and they actually do listen in and read the transcripts. And we wouldn't have been able to deliver such a good result without their diligence, their commitment and efforts. So thank you to them, to you and the Board. And Martin and I are very, very appreciative. Finally, I do note that there are additional slides in the appendices that address the sale of Davey. I know people will have questions there, so we've tried to set that out very carefully and provide some additional business snapshots and some of the banking covenant maths and other such things. But at the end of the day, I want to thank you listening in today. Thank you for the questions, and we look forward to expanding on the result as we traipse around and do our road show. Thank you.