Autosports Group Limited (ASG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Autosports Group Limited H1 2021 Fiscal Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Pagent, CEO. Please go ahead.

Thank you. Thank you, and good morning, everybody. And my apologies for any inconvenience caused by us moving the start time for this to 09:30 from our original of 10:00 a.m. But welcome to the investor presentation for the financial results for Autosports Group for the first half of the 2021 financial year. My name is Nick Pagent, and I'm the CEO of Autosports Group. And joining me today is Aaron Murray, the CFO of Autosports Group. This morning, I'll start with a short presentation on the group's financial and strategic performance over the first half of the 2021 financial year. And following the presentation, I'll open up the line to any questions you may have. For any of you following the slide pack, as much as I can, I will note the slides that I'm moving through. And that is the slide pack which is lodged at the ASX this morning. If we start with Slide 4, it's pleasing, firstly, to report to investors that following a difficult and volatile period, the new vehicle market has returned to growth. The months of November, December and January have all seen the new vehicle market grow at a rate of over 10% per month: November at 13.5%, December at 12.7% and January at 11.1% growth. It's also pleasing to note that despite the significant disruptions over the last 12 months as we've been grappling with the challenges posed by the COVID-19 pandemic, all of Autosports businesses are now fully open and opening -- and running at full capacity. These factors have provided some of the framework for what is an improved result for Autosports Group in the first half of the 2021 financial year. During the period, statutory revenue was up by 7.8% to $903 million. Statutory net profit after tax was up 132% for the period at $16 million. The normalized net profit before tax was up 163% to $29 million. The normalized EBITDA was up 77.8% to $38 million. The business continues to deliver strong cash flow production during the period. Cash flow production was $27.9 million normalized, of course, for the impact of AASB 16. This strong cash flow has allowed Autosports to continue to grow via acquisition. And during the period, we agreed the purchase of the Jaguar Land Rover business in Brighton in Victoria. This business was settled last week and continues Autosports growth within the luxury and prestige segments of the automotive market. We're pleased to announce that the company will be paying a dividend -- interim dividend to shareholders of $0.02 per share. This dividend has been calculated on a cash basis for the period and factors in the company's desire to maintain an elevated cash balance through what is still an uncertain period. It is the company's intention to revert to its normal dividend policy as the external environment continues to reduce in uncertainty. If we move to Slide #5 to look at some of the statutory result highlights. The statutory revenue grew during the period by $65.1 million to $903 million. This result was achieved despite the revenue -- our revenue contraction of $49 million within our Victorian division. Gross profits grew by $12.1 million as the group restored operating margins particularly in the new and used vehicle sections of our business. Statutory operating expenses were down by $6.7 million for the period, inclusive of the acquisition costs relating to the last 3 acquisitions that we had of $300,000; costs relating to the closure of Volvo stores in Mt. Gravatt and Brighton of $400,000; redundancy costs during the period of $300,000 and JobKeeper wage support during the period of $10.6 million. Statutory EBITDA was up $18.8 million on the prior corresponding period or 50.4%, impacted by a $19 million adjustment with the application of AASB 16. Statutory profit before tax of $23.5 million was impacted by $4.5 million in AASB 16 adjustments and benefited from lower interest costs as inventory levels dropped during the period. Strong cash generation and tight capital management saw the business cash balance rise $22.8 million to $61 million. As I mentioned earlier, this has allowed us the scope to return the $0.02 dividend to -- interim dividend to shareholders whilst retaining an enhanced liquidity position to combat any uncertainty but also to position the group to take advantage of any growth opportunities. If we move to Slide 6 to have a look at the normalized result. Normalized revenue was up 8.1% driven almost entirely by growth in new vehicle revenue of 22.3% versus the prior corresponding period. This growth was reflective of increased demand particularly in the December quarter where the market delivered its double-digit growth. importantly, the new vehicle revenue growth continues to be limited more by supply constraints than demand. This tightness in supply has supported margins, improved our order banks and reduced our operating costs. It is clear that this tight inventory position will continue through the balance of the 2021 financial year. On the flip side of this, the first half of the 2021 financial year was heavily impacted by the level 4 lockdown in Victoria. Victorian revenue was down 30% versus the prior corresponding period. Our back-end revenue streams of service, parts and collision repair were particularly affected during the lockdown. Put simply, these divisions could not open at full capacity. As a result, the total service revenue was down 7.1% for the group, and parts revenue was down 22% for the group driven, of course, by a fall of 46% in Victoria across those 2 divisions. This decline in back-end revenues particularly in Victoria was not a demand-led decline. It was a lockdown-led decline. We've been pleased to note a strong rebound in the back-end revenue streams over the months of November, December and January. On an operational expenses basis, growing revenues and tight expense management has unlocked operating leverage for the business. Our OpEx ratio dropped from 14% in the first half of 2020 to 12.4% in the first half of 2021 financial year. Of course, the September quarter saw lower revenues supported by JobKeeper wage support during lockdown. However, the revenue growth post-lockdown has seen these improved OpEx ratios remain even with increased raw expenses. As we move into the second half of 2021 financial year, we can report January and now February are trading in line with our expectations, with strong new and used car order banks and improved back-end performance. The acquisition of the Jaguar Land Rover business in Brighton has been completed, and this will contribute to the second half earnings. Additionally, the acquisition of underlying real estate in Brighton takes the group's real estate holdings in key sites to $55 million. This growth in real estate holdings will assist in underpinning the group's balance sheet with strong tangible assets that is being done on a cash-neutral basis to maintain capital for growth. I'd now like to ask Aaron to go through the detail of the first half 2021 financial trends, margins, expense management measures, cash flow and balance sheet.

Thanks, Nick, and good morning to everybody on the call. If we move to Slide 8, normalized revenue bridge, ASG's first half '21 revenue has increased $69 million on PCP. Revenue growth of $83 million has come from prior year acquisitions. Like-for-like revenue growth, excluding our Melbourne business, have increased $35 million on PCP. Our Melbourne businesses had a decline of $49 million on PCP as a result of the stage 4 lockdowns that ran from August through to October. If you can move to Slide 9, financial trends. In what was a strong growth period in the new vehicle market over the FY '15 to FY '18 period, ASG, through a mix of organic and acquired revenue, has shown consistent revenue growth. Despite a falling new vehicle market through FY '18 to FY '20 and continued declines in the first half of '21, ASG has maintained its revenue through strategic acquisitions and like-for-like growth, leaving ASG's current portfolio well positioned to take advantage of any future market growth. Historical EBITDA through FY '15 to FY '18 has also experienced strong historical growth in what has been a buoyant new car market. Over the FY '18 to FY '20 period, ASG's EBITDA has been impacted by a combination of a number of one-off effects, such as WLTP quarantine, COVID-19 and the stink bugs. Improved GP margins and reductions in OpEx have driven EBITDA in the first half of '21. Slide 10, margin overview. ASG's first half '21 gross margin of 16.7% has seen significant improvement driven by improved new and used vehicle margins as a result of tighter supply lines and higher demand. GP margins for the first half have also been impacted negatively due to forced COVID-19 lockdowns limiting the revenue flowing through the higher-margin departments of service and parts. ASG's EBITDA and PBT margin have improved significantly to 4.2% and 3.2%, respectively. The margin upswing is a result of improved GP margin and a $5.8 million reduction in like-for-like OpEx. The business expense base has been reset and will continue to drive operating leverage with returning revenue volumes. If you move to Slide 11, expense management. Through COVID-19, ASG targeted OpEx reductions resulting in like-for-like OpEx reduction of $5.8 million on PCP. $3.3 million of the reduction came from employee costs with $3 million from other fixed expense areas and an increase of $800,000 in occupancy costs. Additional OpEx of $12 million from prior year acquisitions will also reduce as further synergies are driven through the acquired businesses. ASG plans further fixed cost out in the second half of the year in areas of leasehold costs, employee costs and other semi-fixed expense reductions. Slide 12, cash flows. ASG had strong normalized operating cash of $27.9 million and a closing cash balance of $61.6 million at December '20, which is being driven by strong operating profit; first half ATO deferrals of $13 million, bringing the total balance outstanding to $45 million at December 2020; OEM financier support with capital repayment holidays of $828,000; no final dividend for FY '20 due to COVID-19 uncertainty and a decision to hold cash and strengthen liquidity. The company increased borrowings by $7.4 million, which is predominantly insurance premium funding, which has been offset by $10.2 million of repayments in borrowings. Half 1 2021 saw $2.2 million spent on PP&E and pre-committed panel shop and workshop expansions. ASG expects cash impacts through the second half of the year of $4.4 million net of borrowings for the settlement of the Brighton JLR business and underlying property, $4 million for 2021 interim dividend and repayment of $8.8 million in ATO debt. Slides 13 and 14, liquidity and balance sheet. ASG's liquidity has increased by $120.8 million to $350.1 million since June '20, strengthened by an increase in cash available of $22.8 million. Liquidity improvements have also been supported by significant stock reductions, resulting in an increased unused bailment of $99 million. $12 million of bailment facility has been converted to capital finance facilities to cover the Brighton JLR property acquisition. And hence, ASG now has a total of $335 million in undrawn facilities. ASG's net debt of $26.2 million is down from $49.4 million at June '20 and $75.2 million at December '19. ASG's total corporate debt of $87.8 million includes $27.5 million of borrowings on property with a carrying value of $32 million. ASG has improved its balance sheet position to ensure it is future ready, whether it be defense of future COVID interruptions or to take advantage of consolidation opportunities. I'll hand back to Nick now to take us through our strategic overview.

Great. Thanks, Aaron. I'm starting on Slide #16. And what I'd like to do is just take a couple of minutes to update you on our strategic and operational direction. Firstly, since our inception in 2006, Autosports Group has followed a simple but focused strategy. That strategy is to grow within the prestige and luxury segments of the market and to focus on the East Coast of Australia. This slide attempts to show why. Since 2006, the luxury market has outperformed the total market. During that time, the luxury market has grown at a compound annual growth rate of 4.5%, whilst the total market has fallen by 0.3% on a compound growth rate. And of course, that's impacted by the decline in market in 2020, but the compounded -- but the growth rate of luxury has far exceeded the total market. From 2014, when we pro forma numbers back for our 2016 prospectus, which is why we picked 2014, Autosports Group's new vehicle compound annual growth rate has been 19.4%. We've delivered this growth by being in the right segment and being able to grow both organically and by acquisition because of being in that segment. In the first half of the 2021 financial year, Autosports performance versus the market remains competitive. In the first half of 2021 financial year, the total new car market fell by 6.7%. The luxury market fell by 6.1%. Autosports Group's new car revenues, as we have seen, grew by 22.9%. And on a like-for-like basis, the new car revenue grew by 12%. On a geographic measure, the East Coast continues to be the largest market for new and used vehicles. Interestingly, in the 2021 financial year first half, the contribution of our Victorian division to the group's total revenue dropped from 22% to 14% as it battled one-off factors. But some of those one-off factors are explored in Slide #17. As we've noted, Autosports Group is well positioned for growth. We've got diverse revenue streams. We've got an improved OpEx and a strengthened balance sheet. All these things help. We've got support of OEM financiers. That helps as well. And in the first half of the 2021 financial year, we did, however, see some external environment factors, which impacted on the business. And we're particularly -- the impact of the level 4 lockdown in Victoria particularly -- this particularly upset the revenue balance of the business on a temporary basis. Since listing, we've been growing our important back-end revenue streams to drive an even gross profit split between the front end, which is the new and used vehicle sale, finance and accessories part of our business and the back end, which is the service, parts and collision repair part of our business. In 2019 financial year and the 2020 financial year, we reached a mix of 52% of our growth coming from the front end and 48% coming in the back end, which in our mind is an almost ideal gross profit generation split. In the first half of 2021 financial year, this dropped back to 62% in the front end, which was powered on by strong growth in new vehicles and 38% in the back end, impacted by our inability to open in Victoria for an extended period of the half. The back-end impact for the business was clear, and it is temporary. There was a 15% reduction in back-end income -- revenue for the group that was stable in New South Wales and Queensland, which grew at 1.2% during the period with only collision repair volumes impacted, but it was 46% down in Victoria. This temporary imbalance in revenue streams is an H2 2021 financial year focus area for the group, and we're pleased with our progress over the months of January and month-to-date in February. Subject to these -- subject to conditions, we expect these back-end headwinds to ease over the course of the next 6 months. Slide 18 provides some additional data on the H1 2021 headwinds. Used cars were strong in margin retention, strong in gross profit generation, strong in demand, but supply was constrained. And as a result, our revenue declined in this area by 7%. Service and parts were a combined 15% down, as I've said, versus a 2015 to 2020 compound annual growth rate in this area of 20%. As I've said, we're already seeing this headwind abate. Collision repair was down in the first half of the year for the same reasons. In addition to this, vehicles off -- vehicles being off the road during the first half of the year also impacted this area as did some parts supply shortages from our OEMs. We're also seeing a rapid return in collision repair revenues, all of which has Autosports looking at growth opportunities similar to our recent acquisition of Jaguar Land Rover in Brighton. If we move to Slide 19, we recap some -- our growth record since listing and our opportunity areas. Since listing, Autosports Group has completed 8 acquisitions. These have incorporated the luxury brands of BMW, Mercedes-Benz, MINI, Land Rover, Jaguar, Aston Martin, Rolls-Royce, Bentley and McLaren. We've also opened 4 greenfield sites, covering the brands of Volvo, MINI, Maserati and Bentley. In 2021, we'll start construction of an additional greenfield site in Ringwood for BMW. This site will be operational late in 2022 calendar year. We continue to see the franchise automotive space as a highly fragmented market with further opportunity for us to grow. We still only account for 2% of the total market, and we believe conditions still exist for well-priced and complementary acquisitions. With lower debt, higher liquidity and supportive financiers, we believe we're well positioned for growth. Before I open up for questions, I'd just like to quickly recap on the 2021 financial year first half results. Revenue, EBITDA and net profit after tax were optimized. Strong operating cash flow came through the business normalized for $27.9 million. Operating expenses dropped off the back of a like-for-like reduction of $5.8 million in expenses. December and -- November and December trading recovered strongly on the reopening of Victoria. Our luxury and prestige East Coast strategy remains focused and relevant as the luxury market performs well. Our on-strategy acquisition of JLR Brighton is settled. And as I've said earlier, we're well positioned for growth. Through the next 6 months, we're going to focus on maintaining these strong new vehicle order banks. And the new margin levels that we've achieved in the first half of the year will be helped in that with some new vehicle supply constraints over the period. We're looking to maintain strong cash preservation and liquidity disciplines from the first half of the 2021 financial year. And we're going to concentrate on the rebound in service and parts in Victoria particularly as the market remains open there. We're going to develop further synergies, as Aaron touched on earlier, and cost-out initiatives to drive improvements in our OpEx ratio. And we'll work to integrate our new JLR business in Brighton. Insofar as the outlook, it does remain too uncertain to give firm guidance. But I can say that January has been trading at and above our expectations. February month-to-date is trading well. The revenue growth for the period will still be constrained by new vehicle supply. The new and used car vehicle supply constraints will support improved margins that we've been enjoying over the first 6 months of the year. And consolidation opportunities remain available for the business, and we look forward to exploring some of those in the second half of the year. Now I'd like to turn over the phone to anybody who has any questions for Aaron or myself.

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

Can you hear me okay?

Yes, we've got you clearly, Tom.

Great. Maybe just the first one just around sort of the demand that you're seeing across your business at the moment. There was a great slide in your last pack that sort of showed us the growth in your order bank. I'm just wondering -- obviously, supply constraints continue to impact your revenues. But what sort of growth have you seen across your order bank over the last sort of 3 months? And how are you seeing the demand environment as of today?

A couple of things. Firstly, Tom, I did warn you last -- 6 months ago that I wouldn't put that slide in every time. But the -- so demand continues to exceed our deliveries. And what we're seeing is about a 10% to 15% delta between our deliveries and our order rate. So our order rate is continuing to build up a strong order bank. And we've walked into February with the largest order bank that our company has ever had.

Right. So just to be clear, Nick, if we use the VFACTS data as sort of a proxy for revenue growth, you can sort of get to an order bank growth rate in sort of mid-20s. Is that fair?

You can get to that number. I won't sit on just yet. I'm not sure that -- I think that's a bit high, that number. But we're -- our rate is solidly in excess of our delivery rate at the moment.

Got it. Very clear. Second one I just wanted to ask was around the cost out. There's a bullet point on Slide 11 that sort of speaks to further fixed cost out in the second half of fiscal '21 around leasehold costs, employee costs and other expense lines. Can you just maybe give us a sense to the materiality or potentially the quantum of what that could be in the second half?

Yes, I can do that. Last 6 months -- or the first 6 months of this year, as we talked about 6 months ago, we targeted around $2 million. And I think we can -- we achieved $5.8 million, so we overachieved during the period. I think we're targeting about the same sort of cost out on our fixed and semi-fixed expenses in the second half of the year.

Got it. Very clear. And then just last one from me just around cash flows. Sort of noting that the ATO debt continued to build in the second half, it's now at $45 million. How should we sort of think about that liability unwinding and how that will impact cash flows over the next 6 to 12 months?

Yes. So at the moment, the ATO, we've entered agreements on all the debt with the ATO to repay it over 36 months. Those repayments started in through September and November on most of the businesses. At the moment, there is an interest rate attached to the loan. However, the ATO is still remitting all interest when we call up and ask it to be remitted. So whilst we've still got interest-free loan with the ATO, we'll take the 36 months or make a decision to repay it -- when COVID settles down a little bit, we might make a decision to pay it a little bit faster.

Your next question comes from James Ferrier from Wilsons.

Nick and Aaron, congratulations on the results.

Thanks, James.

First question, just around the demand. Just curious what your DPs are telling you around the sort of the type of customer you're seeing coming in and writing an order. Is it the sort of the regulars that are coming in and now is the time that they're going to upgrade, trade in their cars? Or are your DPs seeing a lot of new customers, different sort of profiles to what they would normally have seen historically?

I'll start with that, James. Firstly, I don't have to ask our DPs that. Our CRM system and our Salesforce system is so solid now at the moment, I can see exactly where our inquiry is coming from exactly the sources of the inquiry. So what we've seen during the period is good solid retention of our customer base, which was your first part of this. That's been at the same level as it's always been. But the growth that we've seen in demand has come from new customers. A lot of that inquiry is being sourced digitally. And that inquiry is new inquiry to our business. And it's one of the big improvements that we have made in being able to handle our business over the last 6 months. We're not quite there on being able to effectively sell online. Our products are incredibly complex, big price, lots of different options. But we're getting much better at generating our inquiry and refining our inquiry online. And that's where the growth is coming from, in new customers who are dealing with us through the first part of the buying process online and the growth there, James.

Yes, okay. That's encouraging. I know in the past, you talked about seeing pretty limited impact across your customer base from the changes that took place with F&I. And it's the nature of your customer base, many of them purchasing with an ABN. Is that still the case with the new customers that you've managed to acquire into the pipelines? Are they similar customers in nature along those lines?

Yes. They certainly are in new cars. We're -- we've had a slight change of mix, James, in our used car business. We're probably retailing more cars than we used to. So the retail-wholesale mix has changed a little bit. And so as we go deeper down in price levels on used cars, our penetration and mix of finance drops a little bit. But over the first 6 months of the year, we were up in finance and insurance by nearly 5%, which is pretty solid during -- in terms of income generation during the time from finance and insurance.

Yes, okay. No, that's helpful. You talk about new vehicle -- or vehicle supply constraints in Germany. I guess it applies to both new and used in this environment. Just I'd like to get a feel if you can, all things equal, for the perfect environment. And based on those constraints, what's the sort of maximum like-for-like sales growth you could actually get in the next 6 months with those constraints?

James, I can't answer it. It's too complex a question, and I'll give you a headache because I can get enough cars to have good growth. They're just not exactly the cars that the market is demanding. So across different brands, I've got some first quarter or March quarter shortages in Land Rover, March shorter -- March quarter shortages in Volkswagen, some March quarter shortages in some superluxury brands like Lamborghini. But I seem to have enough supply in the first quarter in BMW and Mercedes-Benz. If we continue at this order rate, we might have some supply constraints in the second quarter in BMW. We may have some supply constraints coming at the end of this period in Volvo. But I mean -- but by that time, we should have decent supply coming through in Land Rover and Volkswagen. So it's all up and down. We're probably short on light commercial vehicles. In our Volkswagen -- particularly in our Volkswagen brand. I think that's an area that will have strong demand through the next period. It doesn't impact our growth as much as some others. But I think the 100% investment write-off will continue to have a strong positive impact on light commercial vehicles during the next couple of months. I think there will be shortages there. So it's a garbled answer. I'm sorry, James, but I just can't give you a perfect one.

Yes. No, that is helpful. That's helpful color. I guess if I can -- not put words in your mouth, but maybe if we look at the like-for-like growth that you achieved, like revenue growth you achieved in the first half and putting Victoria to the side, it doesn't sound like the supply constraints are going to put that sort of run rate of like-for-like growth at risk.

James, without taking the words that you put in my mouth, I'll say that the opportunity exists to go and have that sort of run rate running.

Yes, okay. That's helpful. Last question for me is, it's just around the margins, the PBT margins that we used that as a reference point going into the second half. I guess it's just too simplistic to strip out JobKeeper and say, well, that's your run rate of margins going into the second half because you're going to have -- you're going to add Victoria, touch wood, stay open for the full 6 months. So how would you -- what sort of color can you add to the margin outlook in the second half relative to what you achieved in the first half?

Well, I think the best color I can give you is I think we're going to be okay in new and used car margins through the period. Our order bank is pretty solid, and I think the demand will run that through. I think if you have a look to the slide that we presented on the mix between front end and back end, as we get an improved mix in back end, our margin has opportunity for upside. We've got to unlock that. And against that opportunity for upside, we've got the -- we've got no JobKeeper money coming in during this period. And my expectation is that -- well, my view is that we lost -- or I think we've guided twice $7 million in the period that we were locked down in Melbourne. And I've got to say to you, I didn't budget to lose $7 million. I actually budgeted to make profit. So if you combine all those things together, I think we've got chance for actual -- we've got an opportunity if we execute well for actual margin growth both at the GP level, and how we maintain our OpEx during the period will determine if that flows down to PBT.

Your next question comes from Brendan Carrig from Macquarie.

Just a few follow-ups if I may. Maybe just starting on the demand side, so we're pretty well covered there. But just interested in any comments that you can provide around potential risks around your sort of prospective demand and future order book and the potential for substitution into alternatives. If the supply environment improves so some of your competitors offer alternative brands, can you provide any color as to how you're thinking about that potential?

Yes. There are 2 or 3 points in that, Brendan, for you. The first thing is, this is why it's great to have the full basket of goods across the luxury segment. We think that people will -- if they move because of long supply lines will move amongst the segments that we operate. So that's a great strength that we have. But secondly, we are conscious of overextending the weight that our customers will accept. And we're conscious that we don't want to run into a period where they decide to roll over and keep their current car because they can't get supply quickly enough. That will impact on us both on a new car basis and also a used car supply basis. So we're watching it closely. We think about 6 months in luxury in terms of order bank and order rate is something that we can manage if we communicate well. We think above that, particularly in the more volume areas of the luxury market, we start to run into some problems. We're not quite there yet, but we're watching it pretty closely. That won't impact us over a 6-month period, but we're watching it closely, Brendan.

Okay. No, that's helpful. And then just on the cost out that you mentioned, the sort of $5 million to $6 million that you're targeting for the next half, how much of that relates to the BMW Melbourne site? Or is it sort of more broadly across the portfolio of sites? And is Melbourne more of an FY '22 story?