Autosports Group Limited (ASG) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Autosports Group Limited Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Pagent, Managing Director and CEO. Please go ahead.

Thank you and good morning for joining us for the half year presentation for Autosports Group. Firstly, thank you to everyone who's been able to join us this morning. It's the end of what has been a busy month for you all, and I appreciate the time that you've given us this morning. Joining me today on the call is Aaron Murray, the CFO of Autosports Group. This morning will begin with a short presentation on the financial and strategic performance of Autosports Group of the first half of the 2020 financial year. Following the presentation, of course, we'll open the call up for any question that you may have. For any of you following the presentation, I'll start at Slide 4, and I will call out the relevant slides as I move through the presentation. The investor pack that I'm going through today was lodged this morning with the ASX. So if I start on Slide 4, the new car markets continue to be challenging throughout the first half of the 2020 financial year-end date. The 2019 calendar year saw a market deliver its lowest new car vehicle volume since 2011 and has suffered 22 consecutive months of falling sales. Within this framework, Autosports Group's statutory result for the half year was also impacted by a number of noncash accounting adjustments. Firstly, an impairment to the carrying of the goodwill of $53.8 million was booked, and the adoption during the period of the AASB 16 accounting standards for the recognition of the leases has impacted the statutory result. Thirdly, the continuation of the amortization of acquired intangibles from our 2016 IPO will continue for about another 18 months. On a normalized basis, the business's revenue, net profit before tax and net profit after tax, all grew off the back of acquisitions and improvements in our revenue mix. Operating cash flows of $14.7 million during the period has allowed the business to maintain an interim dividend for the period of $0.019 per share. Our strategically important acquisitions, including the Mercedes-Benz Hornsby business and the Trivett business in Alexandria covering the brands of Jaguar, Land Rover, Rolls-Royce, Aston Martin, Bentley and McLaren have been completed and further broadened Autosports Group's revenue base. And importantly, especially for the Autosports businesses, the luxury market, which accounts for 83% of our new vehicle revenue, has grown by 5.4% over the last 7 months. And that is a significant change from the previous 12 months, where the luxury market was 9% down. Within this framework, Autosports Luxury & Prestige and East Coast strategy remains as focused and relevant as ever, and consolidation opportunities also continue in this environment which is conducive to well-priced acquisitions. If I move to Slide #5, I'll summarize the 2020 first half year financials before asking Aaron to take you through the details of our financial trends, revenue bridge and revenue mix, margins, operating expenses, cash flow and balance sheet. On Slide 5, if we look at the statutory result, statutory revenue grew by 1.4% to $838.6 million for the period. Gross profit also grew by 3.1%, driven by improvements in our revenue mix during the period. From here, we start to see the impact of some of the noncash adjustments. EBITDA was up 1% to $37.4 million, impacted by a cost impairment to the carrying value of goodwill of $53.8 million. The impairment was primarily the result of an increase to our independently determined WACC rate. This increased WACC rate reflected the challenging conditions in the new car market, lower consumer confidence and lower discretionary spending. Our announcement to this effect is in the appendices at the back of this presentation. The EBITDA result was also impacted at the statutory level by the adoption of the new AASB 16 accounting standards. We can say this adoption impacted the EBITDA positively by $16.9 million for the first half. And our net profit before tax was impacted negatively by $1.38 million for the half. The impact of the AASB 16 adoption is in line with our expectations and in line with the disclosures that we gave to the market at our AGM in November last year. The resulting statutory resulted net profit before tax was a loss for the period of $47.5 million. On a normalized basis, revenue grew on the acquisitions of Sydney City Prestige and Mercedes-Benz Hornsby. Gross profit margins also continued to rise as our strategy to improve the back-end revenue mix worked and continues to drive a better balance within the business. Net profit before tax and net profit after tax were marginally higher than 2019 first half, up 1% and 3.9%, respectively, in a market that, of course, was challenging in the new car segments. Net profit before tax and net profit after tax was impacted during the period through lower OEM bonus income of $7 million for the period compared to the last first half. Over the period, good stock management saw our overall interest bill dropped by $2.1 million versus the first half of the 2019 financial year, although stock did drift higher in December, and we need to go and address it again. Operating expenses rose during the period on acquisitions and facility growth to capitalize on future growth opportunities. Both Aaron and I will touch on this later. If we move to Slide 6, Aaron will take you through some of the underlying numbers, starting with the financial trends.

Thanks, Nick. In the first half 2020, ASG's normalized revenue grew $3.9 million on PCP in what was a difficult new car market. With a historically strong and robust overall revenue growth of 21.8% CAGR over the FY '14 to FY '19 period. New vehicle revenue was running at 23.4% CAGR with used cars running at 14.5% CAGR over the same period. The after sales departments and service and parts continued their strong growth supported by maturing dealerships including repair businesses. Services running at a CAGR of 23%, with parts running a CAGR of 32% over the FY '14 to FY '19 period. The group's EBITDA is running with a CAGR of 19.3% over the FY '14 to FY '19 period. EBITDA for half 1 has been impacted by falling new car market, which has been partly driven by WLTP supply constraints. If we move through to Slides 7 and 8, I'll talk you through the revenue growth for the full year. Overall, our statutory revenue increased $12 million over the PCP, supported largely by acquisition of Hornsby Mercedes-Benz (sic) [ Mercedes-Benz Hornsby ] and Sydney City Prestige. These acquisitions have offset organic declines. Normalized revenue increased $3.9 million on PCP. The higher margin back-end revenue streams of service and parts continue to grow, up 6.1% on PCP. This increase has been driven evenly through acquisitions and organic growth. New vehicle revenue is down 3% on PCP, with organic growth impacted by a challenging new car market and product delays as a result of WLTP. New vehicle revenue is up 7.7% on PCP, supported strongly by the Sydney City Prestige acquisition. Organic revenue growth in used cars has been impacted by reduced trading opportunities coming from lower new vehicle sales. Finance and insurance revenue increased 18.4% on PCP. That has been driven by a mix of acquisition and organic growth as consumer take up of value and financial product offerings is increasing. Other revenue declined 17.6% on PCP due to reductions in OEM bonus income. If you move to Slide 9 and 10, we'll have a look at our margins. ASG's gross profit margin of 15.98% continues to improve as a result of increased revenue flowing through the higher-margin back-end divisions of service, parts and collision repairs, along with an improved mix of revenue coming through an improved luxury portfolio. Declines in EBITDA and PBT margins have been a direct result of strategic decisions more so than general industry margin compressions. Important acquisitions of BMW and Mercedes-Benz along with facility improvements and expansions have increased our OpEx cost base. We expected our OpEx ratios will realign the historical rates with the stabilization of luxury new vehicle market volumes. Integration of new businesses will continue to drive semi-fixed expense base savings and improved facility utilization, which Nick will touch on later, will drive reduction in our fixed property costs. We move to Slide 11, our company cash flows. The company generated strong operating cash flows of $14.7 million, which will allow an interim dividend of $0.019 per share to be paid. The company had net proceeds from borrowings of $14.5 million, which consisted of an increase in corporate debt of $22.6 million, offset by $8.1 million in capital repayments. $12.5 million of the increase in corporate debt is to fund the property that underlies the Mercedes-Benz Hornsby showroom. Payments of $17.9 million to be made for PP&E (sic) [ PPE ], including the Hornsby property, collision and repair center at Silverwater, Mazda showroom refurbishments, Mosman Smash Repairs fit-out and general maintenance of CapEx of $3 million. The final dividend payment of $6 million for FY '19 has been paid along with the $2.4 million payment for the acquisition of Hornsby Mercedes-Benz and the Sydney City Prestige. If you move to Slide 12, we'll have a look at our balance sheet. Net debt is up $10.2 million to $77.9 million from $67.7 million at June 2019. Total borrowings have increased $78 million through a combination of corporate debt and floorplan finance. The group asset mix has improved with corporate debt now backed by $31 million of real property assets. Floorplan finance has increased as a result of year-end end-of-month (sic) [ OEM ] stock movements and stock acquired with the Hornsby Mercedes and Sydney City Prestige businesses. I'll hand back over to Nick to take you through the strategic focus.

Thanks for that, Aaron. I think, importantly, out of that -- the OpEx review, mark that the EBITDA and PBT margins at Autosports Group have dropped during the period, but they have not dropped on the back of an industry-wide compression in margin. They have dropped on the back of investments that we've made to unlock future growth. The overall gross profit of the business continues to rise as the strategy that we have in unlocking back-end growth and moving towards luxury brands continues to bear fruits for us and grows our overall margin profile. If I move to Slide 14 and talk to the strategy of Autosports Group, which is relevant. It's focused. And the way that the market is moving at the moment, makes us feel confident that it's the right strategy moving forward. In a challenging new vehicle market, the strategy continues to be relevant with an important focus on luxury brands. We continue to focus on -- in the areas of Luxury & Prestige businesses and the East Coast of Australia. The East Coast of Australia accounts for just over 80% of the total new vehicle market in Australia. We continue to develop our diverse revenue streams, and where possible, continue to concentrate a fragmented market. In acknowledging the headwinds from 22 months of falling markets driven by supply issues and fall to consumer confidence and reviews in finance and insurance, we continue to use these factors in assessing our current market conditions; the profit potential of acquisitions and channel size through active portfolio management. Over the last 12 months, we've closed one of our loss-making sites at -- in Sydney, the [ fit-out from my ] business. And we'll continue to look at underperforming businesses within our portfolio in 2020. During the period, we added the sites of Mercedes-Benz Hornsby, our first Mercedes-Benz business in Sydney. We added the sites of Sydney City Prestige to give us further capacity in used vehicles. This acquisition has helped the business drive a 7.7% increase from used vehicle revenue over the first half of 2020 financial year. And the Mercedes-Benz business helped move our share of Mercedes-Benz revenue from 10% to 15%, as we'll see later in the presentation. During the period, we also bought the Trivett Alexandria business, which I'll talk to in a minute. All these actions have been consistent with our strategy and improve our position as the new market -- as new vehicle market grows through the cycle. Over the next 12 months, we've identified opportunities for the business within our strategic matrix. We believe now our OEM targets are reasonable and have been -- and have reduced the chances of missing OEM bonuses like we did in the first half of 2020 financial year. We believe we've got continued upside in our used vehicle departments. Further investment that we'll talk about in a second in collision repair presents an opportunity for us. Service and parts, core businesses will continue to grow as OEM-based service plans gain traction. And we still think there's opportunity around the complementary and well-priced acquisition opportunities. If I move to Slide 14, and we'll have a quick look at this Alexandria acquisition and why it fits perfectly with our strategy and why we put this business on. Firstly, it had 100% exposure to luxury brands. And largely, these brands are new brands for Autosports Group. It improves our revenue balance, while keeping us exposed to the area of the market that we want to be exposed to, the brands Land Rover, Jaguar, Rolls-Royce, Aston Martin, Bentley and McLaren; indeed, our first Bentley site down the East Coast of Australia. Being on the East Coast of Australia and Sydney drives synergies with administration, used vehicles and panel businesses. The business is expected to deliver annualized revenues of approximately $200 million over the course of the next 12 months. The business will run on slightly lower margins than the rest of Autosports Group as it is currently weighted to the front end in terms of revenue production. That is it's currently weighted towards new and used vehicle sales rather than after sales. This presents an opportunity for us in the future. But at the moment, it's a front-end loaded business. We expect the business to contribute approximately $1 million at net profit before tax across the 4.5 months through the balance of the 2020 financial year. The business was funded by cash reserves and full plan for the stock. It broadens our revenue base brand representation in the luxury market. If we move to Slide 16, I'll take you through the luxury market and some of the tentatively positive signs that we see in that marketplace. The table to the right-hand side of the page shows the overall total new car market, which is well-known to be a falling market, 22 consecutive months; and 2019 calendar year was 7.9 -- 7.8% down following a 3% decline in the year before. However, in the last 7 months, we have seen some movements in the luxury car market as it has run over the difficult period of 2019 first half. The luxury market in the period of July through to January of 2020 has grown by 5.4%, while the total market during the same period has fallen by 7.9%. This growth, as I said, has been marked from -- as they're driven primarily by the return of supply in vehicles that were affected by stock sale orders, WLTP, emissions, qualification standards and delays in shipping due to quarantine over the prior corresponding period. Key brands for Autosports Group seem to be moving back towards growth. BMW grew by 7.6% in the period July to December of 2019. Mercedes-Benz in the same period grew by 15.6%. Volvo grew by 7.9%. Audi reduced the falling marketplace, it fell by 3.2% on an improved performance that has grown in the months of November, December and January. The improvement in the market is pleasing for us and gives us cause for some tentative optimism for the second half of the 2020 financial year. Importantly, 83% of Autosports total new car revenue comes from this growing Luxury segment. I contrast the Prestige segment, which cost to it is 17% of our new car volume, was down heavily at 14.9%, with Mazda at minus 18.7%, Honda at minus 14.2% and Volkswagen at minus 12.5%, all affected. If we move to Slide 17 to look at the improving new car revenue by brand of mix of Autosports Group. If we looked at this slide, firstly, our strategy continues to be the luxury markets, but what we've worked at -- what I'm doing over the last 3 years has to be -- has been to broaden our base, whilst continuing to increase our exposure to our favored Luxury segment. When we listed, we were dominated in terms of revenue production by our strong Audi business. Since then, we've actively broadened the base. First, with BMW, where they're added the sites of Doncaster, Melbourne City and Canterbury, which now contributes 29% of our new vehicle revenue. Then with the expansion by Hornsby of our Mercedes-Benz representation, which is now up from 10% to 15% of our total revenue. Through balance of 2020, of course, we'll add the brands of Jaguar and Land Rover. Jaguar and Land Rover accounted for 10.2% of the luxury segment in terms of volume in the 2019 year. We simply did not compete in that segment. The addition of these brands increases Autosports access to the luxury market and gives us coverage of 86% of the market by brand. This constant improvement to our brand portfolio and new vehicle revenue mix keeps us well positioned to drive profit improvements by our other revenue streams in used cars, finance and insurance, service and parts, while reducing individual brand risk. We move to Slide 18 to touch on that used car opportunity. Autosports Group continues to run a hub strategy in Sydney and in Brisbane with the second half of this year being purchased with the Sydney City Prestige business. Our used car business is strong, growing and profitable. The business has grown by 7.7% versus the prior corresponding period. And it did that even though new car revenue dropped 3% and the corresponding access to trade-in volumes fell with the new car volume. We believe we've got further growth in this marketplace. The used cars are running at approximately 50% of our new car revenue, while the FCAI continue to estimate the new car market to double the new car market. So we believe this market is a strong area for growth in the business, but we will grow within the constraints of competency and assuming the constraints of our ability to staff the business with quality people. If we move to Slide 19 to talk to some back end or service, parts and collision revenue streams and what we're doing there to continue to drive the shift in gross profit to a balanced business. A core part of our resilience is -- as they now diverse revenue streams. During the challenging new car market, we've benefited from a shift in gross profit to our service, parts and collision divisions. We continue to be on track to drive the business to a 50-50 split between front-end revenue streams of new vehicle sales, used vehicle sales, finance and accessories, and the back-end revenue streams of service and parts and collision repair. To drive this, we're continuing to invest in facilities, some of which Aaron has outlined already in his presentation. In 2020 financial year, 3 key collision repair investments are going on. Firstly, we've almost completed our Silverwater new panel business. Our business is purpose-built for Audi and Lamborghini and doubles the existing floor space from our old Five Dock facility. The business opens next month and has cost us $2.5 million to go and execute. In late 2018, we purchased the Mosman Smash business, which is approved by Volkswagen and Volvo. Over the course of the last 6 months, we've upgraded the facility with new equipment to allow the business to be approved by Audi as well. We've spent $700,000 on this, on the new equipment, and it was approved by Audi in November and opened in November. We're already seeing some strong moves forward in the revenue of that business as a result of these upgrades. Our old Audi business at Five Dock with panel is being converted and upgraded to accommodate the brands of BMW and MINI and has been approved as a BMW/MINI panel facility. That business will open a couple of months after the Silverwater site has opened and is costing us $500,000 in retooling. Why are we doing this? Well, of course, the back-end strategy has been, as I said, to drive revenue streams to be a 50-50 contribution between back end and front end. The back-end revenue streams we see is more predictable, more maintainable and more insulated from new car market fluctuations. The back-end revenue streams also have a materially superior margin profile. Over the course of the period, we've done well. Panel revenue has grown at a 79% CAGR since 2016 and supports the investment strategy that I've outlined here. And our growth supports the rest of our business as well, with parts and receivable synergies being driven by the panel growth in our business. Service revenue has continued to outperform, up 7.2% on H1 2019, and parts revenue grew as well at 5.1% after a very strong period in the 2019 financial year first half. I'll move now to Slide 21 to talk about the focus areas of the business through '20 -- the balance of the 2020 financial year. We're looking to at least maintain our new vehicle market share in the luxury segment core business. We're looking to drive used car vehicle growth through improved utilization of our Sydney City Prestige assets. We'll continue to work on this OpEx ratio that we've outlined and refocus on reducing the overall stockholding vehicles. We're looking to improve the interest cover ratio to the high end of our range. On the back end of our acquisition, we're going to integrate the Alexandria site and the brands of Jaguar, Land Rover, Rolls-Royce, Bentley, McLaren and Aston Martin. The panel facilities will be opened and utilized across Silverwater, Brookvale and Five Dock, and we'll continue to look at well-priced acquisition opportunities. If I recap the result on Slide 22. Revenue continues to grow in the business in the last period by our acquisition. Like-for-like revenue was ahead of market trend with 4.4% down in total like-for-like revenue against the market that was falling at 7.8%. Gross margins grew on improved revenue mix. OpEx was higher due to the acquisitions and facility investments that we've outlined today. We had an impairment to the carrying value of goodwill of $53.5 million as a result of the change of our adopted WACC rate. Dividend was maintained during the period at $0.019. Our outlook for the second half of the year, we expect the luxury market to continue a slow recovery through the second half of the year. We expect the Trivett Alexandria business, which settled in February of this year, and the Mercedes-Benz Hornsby business to support the full year revenue growth. We expect the gross profit mix to continue to improve with the opening of the collision repair center in Silverwater and later in the year at Five Dock. The consolidation environment, as I said earlier in the presentation, is expected to remain conducive to well-priced acquisition opportunities. Net profit before tax and EBITDA seasonalization is expected to be similar to the 2019 financial year. And as of this stage, we do not know of any economic impact that may come from coronavirus. I open the call up now to any questions that you may have.

[Operator Instructions] Your first question comes from Tom Godfrey at UBS.

If we could just start with the 3% decline you guys saw in new car revenues for first half '20. I'm just sort of wanting to think through what the phasing of that growth was through the half in terms of the exit rate. And then also just what you're seeing in terms of January and February.

Yes, Tom, first quarter of the financial year was weak on revenue growth than the second half of the period. So the exit rate was better. And in fact, the December new car revenue was quite a long way up on the December previous year new car revenue. So yes, those things have been going up nicely. The thing that we didn't expect was -- ordinarily, we have hit our OEM KPIs during the period, and we missed them by -- compared to the previous period by $7 million. So that was the -- and that was the one thing that I didn't like from the first half of the year, but new car revenues grew during the period.

Sure. And just -- since you've touched on it, Nick, is there any chance you could give us any sort of quantification around the reset of OEM targets into calendar '20 versus calendar '19?

It's pretty difficult to do overall because each individual brand is different. One thing I will say, though, Tom, is the reason I'm feeling okay it happened is our November, December, January, and so far, February order rate in the brand -- individual brands is at the level that my targeting is at. So I feel confident that our current order rate and our current inquiry rates are set appropriately for the targets that the OEMs have set us.

Great. Maybe just turning to the back end of your business. I think if you just sort of look at the gross profits that you guys provide. It sort of suggests that first half '19 was around 56% gross margin, and then it sort of stepped down 5% to 51% in the first half of '20. Can you just sort of talk us through -- is that a mix effect that's driving that? Or what's driving that gross profit margin there?

Sorry. Can you repeat the first part of that question, Tom? Because I didn't get it.

Just any sort of drivers behind what looks like a step down in the overall gross margin profile at the back-end business, the parts and services?

So Tom, firstly, I'm not seeing a reduction in gross profit margin in that area of the business. The only thing that could ever drive it is a change in mix between service revenue and parts revenue. Service revenue is a higher content margin because we're selling labor. And parts revenue is just taking a small markup on the parts. So that will be the only thing that would drive it. I didn't notice a back-end margin deterioration during the time. And I'm not expecting it moving forward.

Got it. Okay. Very clear. Maybe just one final one for me. I know you've called it out on your outlook slide. I mean it is early days and you don't have a crystal ball, but are you hearing anything from your OEMs just around any impact to their supply chain in terms of COVID-19 or coronavirus?

So nobody is raising any concern today, Tom. It is clear that there is series of parts generally called segment 2 and segment 3 parts. They are parts that are things like rubber from windscreen wipers, door stop, that sort of thing, puts tray format us and which are universally made in factories in China to keep the expense low. Those things, our OEMs are suggesting, have limited supply lines if the factory is closed. But they are the type of parts that they believe are easily sourced from other markets that's not the same price. But that's the only thing that people are talking about at the moment. The only brand that we have that has any production in China is Volvo. And we think we are well placed for stocking that brand over the next 6 months.

Your next question comes from Matt Johnston at Macquarie.