Autosports Group Limited (ASG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Autosports Group Limited, ASG 2022 FY Results, Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Pagent, Managing Director and CEO. Please go ahead, sir.

Thank you. Thank you, everyone, and good morning. Thank you for dialing in to our presentation. Welcome to the presentation of the financial results for Autosports Group for the full financial year of 2022. My name is Nick Pagent, I'm the CEO of Autosports Group. And joining me here today is Aaron Murray, the CFO of Autosports Group. This morning, we'll start with a short presentation on Autosports 2022 financial year highlights, strategic highlights, an update on the automotive market and our recent acquisition of the Auckland City BMW group, and then Aaron will take us through the detail of the financial results and the trends that underpin them. Following the presentation, we'll open up the call to any questions that you may have. As we move through the presentation lodged this morning on the ASX and Autosports Group's own investor site, I will, where possible, note the slide number. So starting at Slide #3 for the financial highlights. I'm pleased to report that Autosports Group has delivered a strong financial result in the 2022 financial year. This result has been underpinned by strong customer demand, improving margins and the return of service and parts revenue post the COVID-19 restrictions. This combination of new vehicle demand, service and parts revenue growth and improving gross margins is driving continued momentum into 2023 financial year. In 2022, the statutory net profit after tax was up 29% to $54.6 million. Revenue was down 5.2%, primarily on delayed new vehicle deliveries, driven by worldwide semiconductor wiring looms and transport delays. These customer orders continue to fill Autosports Group's order banks. For the 2022 financial year, Autosports Group took 25% more customer new vehicle orders than it was able to deliver. These customer orders, combined with strong underlying demand will continue to support the new vehicle revenue, especially as supply normalizes through FY '23 and FY '24. The group's gross margins grew to 19.9%, up 16% on the prior corresponding period and up from the first half of 2022 financial year. These margins have been driven by the continuation of new vehicle margins and the return of high-margin service and parts revenue post the COVID-19 lockdowns. The normalized net profit before tax for the group grew as a result to $92.8 million, up 23% on FY '21. The combination of record operating profits, cash flows and a positive forward outlook, has allowed Autosports Group to raise its full year dividend to $0.16, up 78% from FY '21 with a final fully franked dividend of $0.09 per share. If I move to Slide 4 to discuss the strategic highlights of the business. Autosports Group continues to deliver on its strategic objectives, improving our resilience, broadening our platform, driving growth opportunities. FY '22 was no different in this regard. Business acquisitions continue to drive accretive growth. The John Newell Mazda business settled in July of 2021. It's a high-margin business with great brands and have enhanced our Alexandria hub. The Sutton Subaru & Kia business was next settled in June of 2022, broadening our exposure to the prestige segment, giving us access to the key EV platforms and further enhancing our Alexandria hub. In late '22 financial year that settled in August 22, we purchased the Auckland City BMW group with 2 BMW, 2 MINI, 1 Rolls-Royce dealership, and I'll speak on this transaction in a little bit more detail in a few slides. Strong underlying market -- a strong underlying market has accelerated our operational outcomes. Demand continues to exceed supply, supporting profits and deepening margin improvements. Service and parts underlying growth rates returned to plus 9%. The runway for the group has widened with the expansion into the New Zealand luxury market. Our property strategy remains on track. We acquired the strategically important sites underlying our Bundoora BMW business and the Subaru Kia business in Alexandria. It takes our total property portfolio to $98.3 million (sic) [ $98.8 million ] against the group net debt, excluding floor plan of $21.7 million. Our strong financial position and outlook supports both our growth strategy and the improved dividend outcomes. We finished the year with $90.8 million in cash, which provides us growth capacity, operating cash flows of $135 million and strong customer order banks give us forward confidence. This allows growth and the $0.16 dividend fully franked that I announced earlier, which brings me to the outlook before I take you through some detail of market conditions and our recent BMW acquisition. For 2023, we see new vehicle demand to continue to exceed supply with new vehicle supply gradually improving, through FY '23 and FY '24. Indeed, in July 2022 in the first month of the '23 financial year, Autosports Group recorded a record July order right as conditions continue to be strong. Used vehicle demand is expected to remain elevated with underlying growth rates of between 6% and 9%. Service and parts are also expected to maintain underlying growth rates between 6% and 9%. Gross margins should continue to grow on improving revenue mix and the agency accounting treatments. Profit before tax margins should remain consistent in the next 12 months. Our strong balance sheet position will support further acquisition growth in the 2023 financial year. I'll move to Slide #7 to talk a little bit about the market. I'll start with the chart on the right side of the page. This chart shows the total market registrations. Ordinarily, this chart would be a proxy for underlying demand. Today, the chart is a proxy for supply. As you can see, supply is okay. It's consistent and broadly in line with a 1 million new vehicle car market. This supply is enough for us to deliver the outlook we have outlined today. The new vehicle market was 5.2% down during the last 12 -- last 6 months with Autosports Group's operating segments faring worse on more heavily impacted supply constraints. The luxury market was down 7.2% during the period. More interesting, however, for us, is the chart on the left-hand side of the page, which shows Autosports Group's underlying demand. It is this chart that shows why we're confident that supply constraints exceed any future impact on consumer demand. Quite simply, underlying demand, as measured by our customer new vehicle orders is running and still running through July and August, 25% higher than our available supply. As a consequence, our customer order bank continues to grow. Over the last 6 months, our customer order bank has grown 66%. This growth is off the 102% growth that we spoke about given the February half year report for the 2021 calendar year. The order bank is also skewed to high-value specialist vehicles with higher gross margin potential. For example, our super luxury brands have -- encompassing Rolls-Royce, Aston Martin, Bentley, Lamborghini, McLaren and Maserati have an order bank that exceeded 300 cars as of June 2022. This combination of demand and customer automates reduces our forward risk to any new vehicle revenue and margin pressures that may come through FY '23 and '24. I'll move now to Slide 8 to talk about the acquisition of Auckland City BMW group. The acquisition of Auckland City BMW group brings Autosports to strategically aligned business of significant scale, great brands, great locations, stable markets. The business brings a dominant market position in New Zealand, a well-established management team. The opportunity to pursue future growth by acquisition in a new market, and it also brings another deep customer order bank into the Autosports Group. Finally, it leaves us our runway in Australia, still open for further growth opportunities. Simply on a strategic basis, this was a no-brainer of an acquisition. Through to Slide 9, on a financial and operation basis, the opportunity to acquire Auckland City B&W group was also a no-brainer. The business covers 37% of BMW's volume in New Zealand through the calendar year of 2021. 50% of the MINI volume on that same basis, and of course, is the only Rolls-Royce dealer in New Zealand. The business has revenues of approximately NZD 160 million. It has high margins. These margins are in excess of the Deloitte New Zealand averages. The New Zealand luxury market as well continues to produce margins that are in excess of the Australian market. This acquisition will further support Autosports Group's overall margin growth. It follows our path of acquiring high margin and high-margin potential businesses. The business was well priced at NZD 55 million in goodwill with approximately NZD 13.9 million in assets. We funded the business with a new NZD 13.5 million debt facility from BMW Finance. The acquisition will be immediately EPS accretive, and it maintains our corporate debt lower than 1x EBITDA leaving us well placed for further acquisition growth. To recap the financial summary from -- for FY '22 through on Slide 11. The normalized net profit before tax for the group grew 23% to $92.8 million. Gross margins grew to 19.9%. Operational expenses were well controlled with like-for-like operating expenses only up 1.6%, driving further operating leverage for the business. Net cash was generated from operating activities was $135 million. Final dividend of $0.09 full year dividend, $0.16. Slide 12 goes through the normalized financial results. And just to pick a couple of highlights out here, the 2022 financial year normalized result demonstrates the value of Autosports Group's diverse revenue streams. This resilience is underscored by the strong rebound in service revenue at plus 9.2% and parts revenue at plus 8.5%. These high-margin income streams were interrupted in the 2020 and 2021 financial years, and indeed, through quarter 1 of the '22 financial year, by COVID-19-related lockdowns. As we've seen strong underlying demand continue -- continues and continued investment in enhanced capacity in service and parts should see these back-end revenue streams continue to grow through FY '23 and FY '24. New vehicle revenue we've touched on was minus 10%, driven primarily by supply shortages and delivery delays. However, $50 million of the reduction in revenue was driven by the accounting impact of the agency model. Aaron will touch on this later and go through the accounting treatments for agency. Operational expenses, as I said, well controlled, up $16.2 million for the whole business, $12.3 million of that coming from acquisition led expense growth, $10.7 million came as a rollover from the FY '23 JobKeeper amount, which was $10.7 million. If I move to Slide 13 and touch on the statutory results for a second. Net profit after tax was up 28.7% to $54.6 million. The impact of our acquisition amortization from listing is quickly reducing. Earnings per share were up 27.3%, and up 95% since our listing in 2016. Dividend per share was up 77.8% and since our listing was up -- is up 248%. And I'd like now to hand over to Aaron to share some more detail on our 2022 financial results and the trends in revenue, margin, operating leverage, cash flow and balance sheet. Thanks, Aaron.

Thanks, Nick, and good morning to everybody on the call. If we move to Slide 15, I will talk through the impact the agency model has on our accounting treatments. We're not making a comment on agency profitability as we haven't had enough time to assess the exact impact of the changes. We have been operating under the agency agreement with Mercedes-Benz for 6 months and the FY '22 result has a crossover with preordered franchise sales during the period. What we do want to do is make it clear the change in accounting treatments because it will have an impact on revenue recognition and margins. Firstly, it's important to understand that only new vehicle revenue is impacted for dealerships operating under the agency model. Under the agency model, the agent selling the new vehicle is paid a commission. The commission is paid by the OEM and as a percentage of the new vehicle value. The commission has no cost of sale and is recognized at 100% gross profit. In our financial statements, this agency commission is now recognized as other revenue combined with our finance and insurance, aftermarket and other sundry income. A direct result of this will see an increase in our gross profit margin and an increase in our OpEx margins. The new vehicle inventory is all owned by the OEM, which therefore removes our interest costs associated with new vehicle floor plan. We move to Slide 16, our revenue drivers. Whilst ASG's revenue declined on PCP, there is a strong underlying market with our customers, new big orders growing 300% since June '21. Our new vehicle revenue decline of $133 million is purely a result of supply constraints during the period. Other areas of revenue declines came by the $50 million impact of agency and $16.4 million in business closures. We achieved revenue growth on PCP of $14.8 million in our used vehicles and aftersales departments, which were hampered by lockdowns in H1 2022. ASG's continued acquisition strategy resulted in an additional $84.7 million of revenue on PCP during the period. In FY '23, our revenue will benefit by the full year trading of Subaru and Kia and 11 months of training in our new Auckland sites. These new sites will more than offset the adjustment of agency revenue recognition. We move to Slide 17, gross profit margin overview. ASG is a maturing business that has had prolonged margin expansions, moving from 14.5% in FY '16 to 19.9% in FY 2022. Gross margin has been supported by historical acquisitions of assets that presented high-margin opportunities and maturing greenfield sites and a favorable new and used vehicle market conditions. GP margin continued to improve in every revenue stream through FY 2022. The strong depth of our customer new vehicle orders will prolong current margin conditions. Move to Slide 18, unlocking improved operating leverage. Historically, ASG implemented disciplined expense reduction strategies through focused site rationalization by property acquisition and dealership consolidations to reduce occupancy costs. We've employed significant focus on driving the group's existing scale benefits and synergies through our acquired businesses. As a result of these strategies, we have seen OpEx decline on PCP of $1.3 million in like-for-like occupancy costs and $4.6 million in like-for-like other expenses. ASG's FY 2022 operating expense has increased by $16 million on PCP, with $14 million of the increase coming through acquisitions and $4 million in like-for-like increases and offset by a reduction of $2 million in closed businesses. The like-for-like increase of $4 million is a direct result of the absence of the JobKeeper subsidy in FY 2022 offset by the savings made in occupancy costs and other expenses. If you move to Slide 19, margin overview. Historical EBITDA and PBT margins have been impacted by acquisitions that were running at higher OpEx margin than the wider groups. The OpEx improvements in acquired sites and the strategy implemented improving our OpEx has driven improvements in the group's EBITDA and PBT margins. In FY '22, EBITDA and PBT margins have continued to improve to 6% and 4.9%, respectively. Margins have been impacted positively by favorable market conditions, improved site utilization, improved property portfolio, lowering occupancy costs and strong capital management reducing interest. Move to Slide 20, cash flows. ASG opened with FY '22 with strong cash reserves of $96.8 million and generated a strong $135 million of operating cash for FY 2022. Through FY 2022, ASG drew down $40.7 million of debt, largely to fund -- to fund property acquisitions. We had an aggressive corporate debt paydown of $29 million, PPE expenditure of $67.9 million, of which $43.3 million was on real estate, $15.3 million on improved showroom and workshop facilities and $8.7 million of maintenance CapEx. We spent $20.2 million on the acquisition of Alexandria, Mazda, Sutton Subaru and Kia and continued strong cash flows allowed a $28.4 million dividend payment. This left ASG with a strong closing cash position of $90.8 million. Capital expenditure plan for FY '23 includes completion of the BMW Kings Way development and $45 million for the Auckland City BMW group that settled on the first of August 2022. If you move to Slide 21, strong balance sheet. ASG's net debt, excluding floor plan closed at $21.7 million, a total corporate debt of $112.5 million with $32.1 million relating to goodwill PP&E and insurance premium funding and the remaining $80.4 million relating to $98.8 million of real estate. This increase in owned property has reduced and has resulted in improved profit margins and cash flows. ASG's inventory reduced by $33 million on PCP, driving continued reductions in interest and holding costs to FY 2022. ASG continues to have supportive value and finances with 98% of ASG's corporate debt and 100% of bailment finance funded by OEM financiers. ASG strong closing cash balance and undrawn balance facilities of $282 million, leaves it well placed to continue its consolidation strategy.

Thanks, Aaron. Just before we open the call up to questions, I'll just recap the results and the strategic and financial outlook of the business. To review the results, in FY '22, statutory revenue was down by 5.2% on new vehicle supply constraints. Normalized net profit before tax was up 23.4% to $92.8 million. Gross margins were up to 19.9% on resilient new vehicle margins and improvements in service and parts revenue. Like-for-like normalized operating expenses were tightly managed just up 1.5%. Net cash, as Aaron noted, was up $135 million. Final fully franked dividend of $0.09 takes the full year dividend to $0.16. On the strategic outlook, Autosports Group's strategy to drive further growth and shareholder returns is to continue to consolidate the fragmented automotive retail market by acquiring more dealerships in the luxury and prestige segments, but also to expand our dealership footprint to brands with strong electric vehicle capability. The continued -- continue acquisitions of key properties in key trading locations to maximize our flexibility, security and balance sheet strength. We're going to continue to invest in our organic growth streams. Greenfield locations such as the Ringwood BMW location, which will open in the 2023 financial year and increased service and parts capacity to unlock that high-margin revenue. We're looking to deliver consistent shareholder returns and dividends in the range of 55% to 70% net profit before tax. So the financial outlook for 2023, new vehicle demand is expected to continue to exceed supply. Used vehicle demand is expected to grow between 6% and 9%. Service and parts is also expected to grow between 6% and 9%. And the strong balance sheet position supports further growth by acquisition in 2023. I'd like now to open up the call for any questions that you may have. Thank you.

[Operator Instructions] And the first question will be from James Ferrier from Wilsons.

First question, can I ask you just one of the points you mentioned there, Nick, on the outlook around used vehicles. You mentioned demand is expected to grow 6% to 9%. I'm just curious as to how that sort of demand can get filled with deliveries in the context of the supply constraints we're seeing on new vehicles and the implications of the trading? Is that a sort of a market comment you're making there? Or is that a Autosports Group specific type comment?

James, it's probably more an Autosports' specific comment. We have not gone out chasing the used car market. We've gone out making sure that we take the underlying growth that's available to our business that we grow in a structured way there with high gross profit margin in our used car business. We've been doing that over the last couple of years. And we think that with the trade-ins that we know that are coming through and the demand that we have in used cars that we'll grow by that 6% to 9%. I slightly missed my target in the second half of 2022. We only grew by 5% during that period. And that was probably driven by some tighter supply on the way through than I had anticipated in the new vehicle side of the business. But overall, that 6% to 9% growth in our business is a comment more on what we see as our underlying growth and what we see is the sustainable growth at the high margins that we're getting now through the next 12 months.

Yes, that's helpful. And to clarify, is that sort of more of a wholesale or more of a retail type driver or both?

It will be retail, James.

Yes. Okay. And just to finish on used cars. What are you seeing in terms of pricing trends? Obviously, in the context of the segments of the market that Autosports Group is exposed to, but what are you seeing on price trends there?

Yes. So retail prices. So customer prices remain strong. Demand remains strong. On the acquisition side of it, we're seeing high competition continuing and higher cost of acquisition for used cars if we buy them outside of our group or outside of trade in source. So we see some risk there if we buy too many cars outside our normal trading acquisition source. We can see margins getting compressed. If we do that and chase the business too far. But overall, we're seeing -- continuing to see strong residual values and strong demand at the retail level in used cars.

Okay. Great. And then just last one, more of a clarification around your comment on agency. If I understood you correctly, you were talking about effectively the annualization of that revenue impact from the shift to agency coming through in the first half of FY '23. But we are in that second half FY '22 number, the revenue still benefited from delivery of Mercedes vehicles that were in the order book prior to shift to agencies. So I guess the question is, will that impact on revenue in first half '23, be greater than second half '22?

Short answer is yes. I'll try and give you some color around it, James, the best I can do. We thought in February, and we said to the market that we thought the impact on the second half of the year would be $18 million in revenue recognition. It turned out at $50 million because we had underestimated the impact of the forward orders that we had coming through as you noticed. Through the 2021 calendar year, Mercedes-Benz delivered the Autosports Group $181 million worth of revenue. So we think on an annualized basis, it's somewhere around that as a reduction in revenue for FY '23.

And the next question is from Matt Johnston from Jarden.

Maybe if I could just start with just around the property purchases. Could you give any color around what sort of benefit you get from lower lease costs going into '23?

So you've seen some of the benefits going through. Most of the benefits coming through in FY '22 of the purchases that we've made on the way through because we made the Bundoora BMW purchase in about August. Aaron, is that right?

Yes. August or July.

August last year. So we've got nearly a full year cycle, you met one of the primary reasons that we were able to keep our expenses so controlled through the 2022 financial year. So Matt, not a big reduction in forward looking operating expenses as a result of those 2 property purchases. But of course, we're looking for further opportunities within that sort of same framework, strategic locations that we want long term that we think are priced properly for us.

Okay. That's helpful. And then maybe if I just follow on from the previous question around used vehicles. Given, I guess, the outlook that 6% to 9%, is that a derivative of, I guess, what you're seeing and what you will see in deliveries of new vehicles? So you expect more tradings given your order book?

Yes. Very simply, that will be the case, Matt. I'm not -- again, as I said earlier, to James, we're not chasing the market here hard here. We're getting good quality business with high margin. We know that -- I know that I'll get some good supply of used -- quality used vehicles through the next 12 months based on the tradings I'm getting through on our order bank. And from that, we're pretty comfortable to suggest that we'll be -- we'll get between 6% to 9% growth in used vehicles at proper margins through this period.

Okay. That's helpful. And then maybe a final one for me. Just in terms of, I guess, the costs, the operating cost and the COGS cost, just in terms of, I guess, staff shortages around trades. Can you just give some color around what's happening there year-on-year?

So year-on-year, Matt, we're going to be very, very stable on our semi-fixed expenses and our fixed expenses. So our property expenses will be -- occupancy expense will be fairly flat. We will have to see growth in our personnel expenses during FY '23. They will largely come as a result of the difference between quarter 1 FY '22 and quarter 1 FY '23. In FY '22, we were locked down for 114 days, and we reduced the hours of some of our people in New South Wales and Victoria during that period. So we reduced our personnel expenses. They will go up probably in the region of 10% for the full year 2023 financial year, but that will be more than offset in growth that we'll see during the period because we are not locked down in quarter 1.

Yes. And I guess that's probably vary between the lines of comment about that the orders for service and parts looks quite strong?

Yes. Service and parts will be strong during the period, and it will be particularly strong when I look at the PCP result in quarter 1 versus quarter 1.

And the next question is from Brendan Carrig from Macquarie.

Maybe just a follow-on from the services and parts question. So just -- so I'm understanding the underlying growth comment. Is it the best way to think about it looking at what you delivered in the second half of '22 in the services and parts and then sort of annualizing that number and using that as the base for the 6% to 9% growth that you're expecting?

I think it's a pretty good start. And then you've got to add the acquisition of Auckland City BMW and a full year of the service -- the Subaru and Kia business payment, but you're on the right track.

Okay. That's clear. Just on the new shipments, obviously, very hard to predict over the next 12 months as we've continue to be getting this wrong for the last couple of years. But maybe just in the very near term, Nick, do you have any comments that you can make just around sort of confidence on sort of any larger shipments that have already been started to be sent over or just on optimism for receiving some of the deliveries and starting to satisfy that order bank in the current half?

Yes. Brendan, we're going to have a reasonable quarter 4 -- quarter 2 of the financial year, December quarter of arrivals. They'll be up in some of our key brands, particularly the Volkswagen group of brands. Volkswagen and Audi will have improved deliveries during that period. They are not all the cars that we've got on order bank. They are skewing production where they can build them within the limits of their semiconductor supply. So a lot of those cars are arriving, which will be available for immediate sale, which is great news for us and will allow us to go and satisfy some demand that we know is there. But yes, quarter 4 is an opportunity for us if all the cars arrive.

Excellent. And then maybe just, obviously, the metrics we're seeing still very strong from an order book and demand outstripping supply. But have you heard any feedback on the ground around sort of potential softening or at least your dealers starting to think or to hear or feedback to you that consumers are starting to be a little bit more cautious on the demand side of things?

Pretty simply not in our segments, Brendan. We're very conscious about this, and we look at it every week to 2 weeks, and we talk about this internally. But we're not seeing any changes in order rights, any changes in underlying margins and our order banks continue to grow at the moment. We're looking at it all the time, and we're hyper conscious of it, but we're not seeing any evidence that anything is changing at the moment.

Okay. And then the last quick one for me. Just on the Auckland acquisition. I mean, the multiple is a bit on the fuller side compared to some of the previous acquisitions. So -- and no property as part of that. So can you maybe just expand a bit more on the strategy there? And are the opportunities in New Zealand or potentially further M&A opportunities in New Zealand, is there potential property acquisitions there and/or opportunities or synergies or larger synergies to justify the fuller multiple you did pay on that on the Auckland City acquisition?

Yes. A couple of things there. Firstly, it is a full priced acquisition. I don't think it's as full or multiple -- as the multiple that you think it's quite at. And I tried to touch on that a little bit earlier by talking about the higher margins that the New Zealand market has compared to the Australian market overall. So we think this is going to be a great acquisition on a stand-alone basis. But beyond that, to touch on your second part of the question, we do think that this acquisition provides us a great basis for further expansion in New Zealand if we get the right opportunities. We did that in our strategy previously, Brendan, when we bought in Queensland for the first time, we bought the Williams Motor Group, and that was a fantastic business with great market share and great margins. We paid a little bit more in margin for that. We did the same we bought Doncaster BMW moving for the first time into the Victorian market. It makes sense for us to get this high-quality management team behind that. That management team can expand and look after more businesses within the New Zealand market if we get the opportunity. So on that basis, it was a no-brainer to go and have this business, which with such structural dominance in the BMW, MINI and Rolls-Royce markets in New Zealand and then getting such a great management team with it and the expansion opportunities behind it made it certainly, what I thought was a well-priced acquisition.