Bapcor Limited (BAP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Bapcor Investor Update Call. [Operator Instructions] Just please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Mr. Darryl Abotomey. Thank you. Please go ahead, Darryl.

Thank you, Miles, and good morning, everybody. Thank you for joining us. I have to be careful here because we now have a crowd of over 100, and I think it's now illegal. So -- but I think we'll continue anyway. So with me this morning is Greg Fox, Chief Financial Officer, and we'll go -- we intend -- what we intend to do is to go through -- as we did for a group on Wednesday, we had nearly 70 investors on the call and -- to give you an update as to the business, how it's been trading. And also what's happening with COVID-19. So I'll just give a couple of opening comments. So number one is that when we get to Q&A, please don't ask us hypothetical questions as in what if this happens, what will we do or what happens to our cash if this happens or something else because we just -- they're just -- and how long to push a string, and we're not able to answer them. That's the reality of it. And we don't want to be in that situation because we will not answer hypotheticals. And also just to explain that we have sent out and said in the release we sent out that we're doing this call, and we're not doing one-on-one investor or analyst calls. Now that's unusual for us because we usually try and be pretty available for those calls. But our priority at the moment is running the business, and that's where it's going to be. So apologies to those that would prefer one-on-one, but it's just not practical for us to do that given the current circumstances and the speed things are changing daily and almost hourly on some days. So just a background, everyone's aware of COVID-19 and the impact it's having. But prior to that, and we put out a trading update on the 25th of March that everyone should have seen. And we were tracking well. Our base underlying business, our core businesses were tracking very well for us. Burson was continuing at greater than 5% at same-store sales and the price increase that had gone through in January was holding. So it was tracking along pretty well. Retail since January has been very solid. And it's actually, compared to the prior year, it was up quite a reasonable amount and some months were very strong. So -- and then the rest of the business is trading very similarly to the first half. So we're very much on target to deliver what we had -- what we were expecting to deliver. And we did not have any supply issues. So just putting that in context. And we still don't have any supply issues. We've got plenty of stock coming in, and we can keep pushing it out. However, we are now in uncharted waters, as everyone would be aware that from Wednesday, 5 p.m. or so, New Zealand is in lockdown. So what we've done in New Zealand, is that we've closed the majority of our business. We're running on 30 stores at the moment, a combination of BNT, the battery business and also Autolign. And they're in strategically placed around New Zealand. What we can say is that since that was implemented, we've seen demand drop off a cliff since the business has gone to lockdown. We are classified in our core businesses as an essential service for the trade, the supply of parts and that side of it. So we are -- and we currently consider that in Australia as well. However, having said that, that supply and supplying product for us and what I have classified as essential services. Demand from the general public, which is the biggest part of our business in New Zealand fell off the cliff once everything was shut up because people weren't allowed to travel around, et cetera. So we're seeing that in New Zealand and we're just predicting that probably what will now happen in Australia. We're also -- I should had say -- say that we're seeing that in Thailand because Thailand has got very similar restrictions to what New Zealand is now called. So even though we're an essential repair activity supporting essential services, we will see a drop in demand. So as I mentioned in New Zealand, we've closed the majority of our business, we're operating 30 stores that may reduce further. And we've sit down the rest of the staff. Priority is, first of all, they're taking whatever accumulated annual leave they have and then they're stood down. So they can get the benefit of the government's safety nets that they've now got there, which will be similar in Australia. We will take the same steps. People will be stood down depending on business demand and business performance. We don't have a choice in that. It's the only track we can go because we -- as a business, we will be there on the other side because there are 19 million vehicles in Australia, 5 million in New Zealand and 16 million in Thailand. And those vehicles will be there. They cannot catch the virus, so they will survive. And as soon as restrictions are lifted, we expect the business to bounce back very, very quickly. So some of the things we are doing, in our business from a cash management side, we've cut out all discretionary expenditure. Capital expenditure's been -- is only now at core critical areas. So we're basically cutting out any greenfield stores being developed or any acquisitions, other the ones we're already committed to. So we're seeing that happen. Inventory is being monitored very closely, and we're being very, very careful where we place replenishment orders. And those replenishment orders are basically only being placed for fast-moving items, which is a sensible thing to be doing. And we've pretty much locked down any acquisitions, so we won't be proceeding on any of those in the short term. So our cash position is going to be fairly good. We're monitoring debtors and following not very cautiously to make sure that we don't end up with collection issues, and we're also monitoring our creditors to see where we can balance that. So maintaining the highest level of cash possible is our core focus. Now that's not saying that we have an issue from a cash perspective at all. It's just that we see that as being the sensible, responsible thing to be doing. Our business is financially stable. It's historically resilient, especially in economic downturns. If you look back to GFC, if you look back at when there've been economic -- just general economic downturns, you look at our peers in the U.S. and also this business, the business has generally traveled pretty well. But we're in unchartered waters at the moment with the lockdowns because we haven't seen them in the past. But we expect to come out the other side. And we also expect to be strong and be in a position where we can pounce on any what might be potential likely acquisitions or things that we think would make sense. We do have the support of the financial institutions that have supported us. And that they realize that these are extenuating circumstances, and there's strong support from them. And so there's no issue with any of our facilities maturing. As people might recall, our facilities actually were renewed last June, and that's a 3-, 5- and 7-year tranches, and there's no issue with any of those. So we've got good financial institutions that we've a long history with. They understand the business. Their comments to us is that we're one of the businesses that's the least of their concerns. So we're strong there. And we're confident we'll pull through the scenario very well. There is -- we don't believe we'll get anywhere near bridging covenants. We've got -- there's -- and also there's provisions in our agreements that certain type of one-off events are excluded in the calculation. So we'd be fairly confident that we won't have any concerns in that area. And I'd make the point on the funding and financial side of it because I believe that's been some of the concerns of some investors. We don't have quite the same concerns because of the financial stability. And we -- whatever happens here, when we come out the other side, there will be -- we see a big, big upturn or quick recovery back to -- within our business because that's been the history of our industry over difficult times, as I said, whether it's GFC or economic downturns. So that's the general position we're in. We will act as we need to act based on demand, and we're doing that. We've done it in New Zealand. We will start some steps in Australia very soon. And we'll also be -- we've also done steps in Thailand as well to make sure that we match our staffing, our people with us. We'll also be -- there are process we're putting in place to have discussions with landlords to get rent relief along that way and all the potential things that we can possibly do. Because if we -- like anyone else, if you haven't got revenue or income in certain areas, then you certainly don't want to be or you can't -- or you prefer not to be paying out money when you can't bring money in. So we'll be having that discussion with our landlords that across the board, we've got good relationships with. We've always been solid and a strong payer, and we see that will be the case going forward. So that's pretty much the whole update that we wanted to do. As I said, Greg Fox is with me. And what we'll do, Miles, is we'll open it up to Q&A. So I'll get Miles now to ask -- to give you the instructions for the Q&A. Thanks.

[Operator Instructions] So we've got our first question from Tom Godfrey from UBS.

So just firstly, I know it's going to be heavily dependent on Australian government policy escalation from here. But just how we should think about the potential quantum of reduction in your Australian trade store network. Is it fair to use what's happening in New Zealand as a proxy for that in terms if it's about a 60% reduction in store count for NZ?

It depends what is put in place, so -- and it's hard for us to know if they put in place region-by-region or suburb by suburb, that's being suggested in Victoria. Then that's one type of implication. And if it's nationwide, then yes, we would be putting things in place as well. It just depends what the level is and whatever the reduction in our sales or revenue is, we will make sure that the staffing matches that reduction, at least.

All right. Got it. And just in terms of -- a second question, just in terms of the typical second half trading period, what's the skew or seasonality between third quarter and fourth quarter revenues and costs typically?

Greg?

The fourth quarter is a lot higher than the third quarter because we generally got -- we haven't got the whole holiday period in there, and we haven't got the -- and we've got the benefit of the equipment sales and things like that, that really come through in that last quarter. The second half of the year is we were forecasting around about 54% of the full year. So -- which would take us to around about an EBITDA of $175 million for the full year without the impact of the virus, which would have goes to that impact forecast that we had of the mid-5 -- mid-single digits around that 5%.

Okay. And on that 54%, could you give us potentially a weighting between Q3 and Q4, Greg?

No, no I couldn't off the top of my head, Tom.

Tom, we are -- into punishment. You worked on the call on Wednesday. You, in fact, arranged it.

The next question comes from Sam Teeger from Citi.

I managed to only connect 5 minutes late, so apologies if you spoke about this already. But look, in terms of the first question, just keen to understand what drives your view as to why this category has a quick return to normal activity post the downturn. Is it reasonable to take the view that the entire country's going to be in lockdown and folks aren't going to be driving their cars so much so there would be less need for servicing.

Look, it could be anything, but there's -- usually during a downturn, particularly when unemployment rises, our business is solid, largely because people actually end up wanting something to do. And once you're finished doing whatever you can do around the house, people do look at their car and they'll do their maintenance of things that they haven't done, they'll have time to take it for service. That's always been the history in the past. And I'm not sure that there's any logic to say it would be any different this time. And also, we actually -- there's a positive potentially out of this in that people are more likely to be driving their own cars than they are getting on to public transport because of the scenario here. Because if you talk about social distancing, the best way to social distance is to get in a car and go for a drive.

Yes, that's a great point. And just wondering also, given the current situation and you're clearly trying to conserve cash, just wanting to understand how this impacts your private label strategy in the short term. Do you have less willingness to have working capital tied up in private label stock?

No, it won't have any impact because the private label strategy is a long-term strategy. And in fact, if any, when I looked at the stages we would move down, we will keep our people that are doing things like on private label. They're probably one of the ones that potentially would continue working through simply because it's a long-term program development. It won't change in the short term.

Your next question comes from [ Jim Gregorio. ]

With staff being stood down and symbolism and solidarity being important here across the nation, what is management and directors doing to show solidarity with staff being stood down and pay cuts, personally?

There will be something that goes through on that, but I can't actually -- and it's not -- wouldn't be fair for me to say anything at this point, but it's certainly something that will be taking place.

Your next question comes from Matthew Nicholas from Crédit Suisse.

Just the first one, you made comments before about the covenant, and obviously, having the support of your bankers, which is very important. You had a comment about, I suppose, act of God events and how [ that not ] -- that's for your covenant calculation?

So you were chopping in and out, but I think what you're getting at is along the lines of why do we think it would be -- when we feel like covenants in a normal course, one-off events or a service, if we do a whole lot of redundancies for some reason, they usually exclude it on an impact from an acquisition or something. We have the ability to claim at their one-off circumstances. So -- and look -- and we can't be silly about it, it's got to be legitimate. So we would be extremely surprised if there was an issue with doing that sort of thing in this set of circumstances. The banks aren't going to be silly about it because what are their alternatives.

Right. And just a follow-up on that in the interest of asking hypothetically is that, in the instance that we go in a full shutdown and so you would have to close your entire business for say 6 to 8 weeks. What you're saying potentially is the banks would effectively and rightly so be willing to look through that.

I would expect so, yes. Because otherwise, what are we going to do realistically and we're one of the businesses, as sort they've of indicated to us that we're not their highest concern because they know and -- they know our history, they know the history of the industry. And you keep going back to this -- there's still going to be -- just so here in Australia, not only in vehicles there that do have to be serviced, do need thorough breakdown repair service as well as standard servicing. So they know that it's a bit different to some industries where it's much more -- there's no tangible thing in that industry. So whereas our industry, it's very, very tangible. Those vehicles aren't going anywhere. People will revert back to -- they've got to drive to get to wherever they're going. They're confident that we will kick back as are we.

Cool. And so -- and just last one for me. In the event of a full shutdown, if you look at, I suppose, your staffing expense across the business, how much of that staffing expense could you theoretically stand down on a temporary basis?

If we shut up the whole business, 100%. There's no reason to think that it wouldn't be because -- and I'll follow-up on the previous question, being really blunt about it. If it was a complete shutdown that was extended, everybody from management down will be stood down. I want now. Now having said that, people have got the ability to utilize unused leave and that sort of thing. But apart from that, if there's no business, then unfortunately, people have to be stood down. I don't see it ever being 100% anyway, simply because we do provide that essential service. And for -- whether it's an ambulance, a police car or that type of thing, even the army, et cetera, et cetera, they all need to be able to get from point-to-point, emergency services, personnel, the whole lot. So -- and trucks for delivery, the whole side of it because we've got a truck business. So I don't see it ever getting to that point. But if it did, and proportionately, we will make sure that we take the appropriate steps.

Your next question comes from Anna Guan from Wilsons.

Just one question from me around, I guess, how you guys are thinking about the FX impact, especially I guess, in terms of the pricing environment for the industry on the recent moves?

Yes. Anna, you're glad you took your trip when you did. Sorry, I answered the wrong question, didn't I? Now look, FX historically in this industry, nearly everything is imported. Everyone has the same exposure. However, the bulk -- the biggest proportion of our product is actually priced in Aussie dollars because you've got major suppliers like -- whether you talk NGKs or -- a number of those big suppliers don't have that exposure. So I put that to the side, though, because even those, you'd expect an indirect impact. That's always been passed through to the market. And I don't see that, that would change. It could be a timing, there might -- piece of the timing things that come up, but we're already getting from suppliers, talking about having to put through increases. We pushed back on a bit of that because we're also saying, well, we're not going to accept price increases at the bottom or where it might be today. We want to see it over a period of time and then let it -- let -- so whatever happens, happens. When you consider that our average unit sell prices spread $40, and some of it is like -- a lot of it like filters and oils, and that is $20 or under, they're not even -- a 10% or 15% increase isn't a huge increase on individual items. So -- but there's always been, because the whole industry will face it -- the FX is always passed through.

Your next question comes from Raveen Kuhadas from Ice Investors.

You've been doing a lot of work on managing our inventory over the past few periods. If you were to manage it for replenishment orders only, how much of that inventory can be run down?

If you're only doing your main fast-moving items, that's like probably 20% of your inventory, 20%, 25% of the value of your inventory. So -- because you have to keep the tail. So for us, it will take some -- it's not a fast-moving thing to get that tail through. So -- but the caution that we've got there is if we happen to sell something out of the tail, we're just not replacing it. It's -- because you're just putting out cash you don't need to put out. So it's a slow process but we're being very, very conscious of not replenishing anything if it's a slow mover. So -- and that slow movers is 80% of the value, 75-or-something percent of the value of inventory.

All right. So on a cash flow basis, we've reduced the cash outflow for that by 80%. Is that the right way to think of it?

No, no, no. Because you still -- it's 20%-- it's -- this gets tricky. It's only 20% -- whilst it's 80% of the inventory value, it's only 20% of your sales. So it takes a long time for it to have an impact. But it's -- if there is no golden egg here that we can say, we're not going to do that. But that's just one of the many things that we're looking at because when we look at that, the biggest probably -- biggest single impact in the short term is more like the impact on capital expenditure on acquisitions, expansion, et cetera, because people remember that historically, all our cash flow from generation is used to pay, first of all, we invest in our acquisitions and that side of it. And then greenfields, whichever you want to put it, tax and dividends. So that is a big, big impact. And then look at our capital expenditure, that -- pulling that back is also substantial.

All right. And then just given the long-live nature of our inventory, is that something we can secure additional liquidity or financing against?

No. I wouldn't think now is the time you're going to be successful in doing a lot of that. But we're not even looking at that because we think there's other ways to do it. If we need a temporary liquidity facility, we'd be going to the banks, which we're already having some discussions with them in case we need it. And try and set something up like other businesses are doing. And they're supportive in that sort of area at this stage.

[Operator Instructions] Your next question comes from James Bales from Morgan Stanley.

Just a couple of things. Firstly, you talked about the state of play in New Zealand and the smaller footprint. Can you talk us through what you're seeing there or what you expect in terms of run rate profitability and cash flow?

No. I don't think we can answer at this stage, James, because up until -- and given that they're on a shutdown -- essentially, yesterday was the first day, it's just too soon to really make those predictions. What I would say, though, is that we've seen sales drop off dramatically. And we -- that's why I made the comment that we may end up taking another step in stores because if the demand's not there, we will move fast. So it is a day-by-day thing that we're looking at. It's not an easy one to predict what's going to occur.

So is it possible that you could make the decision in New Zealand that none of the stores can reach that critical level of sales to achieve store profitability?

No. I think it's more like -- because what we're doing is using the hub-and-spoke scenarios. So we've got hub -- we call them hub stores. And like, for example, we've closed the store in Wellington, and we've closed the store in Christchurch because there's just no demand there. But we've got a store at -- I don't remember where it is, but it's -- it can still feed into there to supply the demand that is there for the emergency services or essential services along that track. So -- and that's what we would do everywhere is that you -- and why I don't see this being a full shutdown, it will be proportionate. And we'll always be making sure that we can support the customers in region. So with -- for example, in Sydney, we're seeing demand fall off. We would close the stores in inner city in Sydney, but we would still have the stores in the outer areas that are still strong, and they could supply into the few customers that are operating in the Sydney. That's the sort of -- it's a hub-and-spoke thing. And the positive for us is that it is variable. We've got -- it will be -- and that's why it's very hard to predict. Our levers are such that we can close store by store by store or even reduce down the -- and have scale and increase in some of the stores. It's not a matter of either stores got to be open or closed. You can reduce from, say, even some stores 10 people down to 3, and we're trying to match it so that the stores remain at least as a minimum cash flow positive, if not still contributing positively.

Got it. And then secondly, on CapEx, you mentioned that you could scale that down pretty materially. Forgetting what you're committed to for this year, if next year were as close with the same conditions for the next 12 months, how much could you flex the CapEx number down?

James, it's Greg. Our maintenance CapEx runs around $20 million a year. So we wouldn't have the network expansion or the acquisitions. So you have to look at the maintenance CapEx of $20 million, which is our normal run rate and cut that. So we don't have a hard look at it, but the lease would be able to cut half of that regular maintenance CapEx out.

And it's definitely down to essential. So example, our biggest single item that we spend CapEx on is motor vehicle replacements. So you know what would happen there. And other than essential replacements, which really means it's got to be written off, which does happen occasionally with over 800 vehicles on the road these days, then we would cut them back. So that's the core thing there. And of all the other capital expenditures, some of it's on projects with some of those we would cut back. Some would be a choice. So we probably wouldn't want to pull back on our Tullamarine DC, not that there's a lot of capital in that because that's a lease cost, but things like that or the processes to support it where there's capital, we wouldn't want to cut back on those because for the long term, they'd be the right things to be doing. And you've also got there, I say it, but some companies have already announced they chopped out even their interim dividends that they were going to pay out. We haven't got to that stage because we paid ours out already. But you'd be looking at everything, absolutely, there'll be nothing off the table to be considering. And I'll just say, James, we don't see in the short term that we're going after capital raising.

[Operator Instructions]

Do we have any more questions there, Miles, or not?

There are no further questions at this time.

Well, I'm happy with that because it's already 5 past 10. But -- so just last call. So if anybody's got a question, please ask it now or thank you everybody for being on the call. And some people could say, we'll see you on the other side.

Seems to be no further questions, Darryl. I'll give it back to you.

Excellent. All right. Thanks, everyone, for coming on the call. We appreciate it. We're certainly confident as to where we're going to be in a few months' time. Where we run the business or take -- our primary concern is the safety of our people. And the second part is that to support the community in the best possible way we can and to adhere to whatever the guidelines are from the government. We will make sure we do that. But safety is number one, serving our community and our essential services is our number two. As a business, we're still very confident we're financially sound and that whatever happens in the short term, we will be kicking -- we'll revert back and kick up after this COVID-19 scenario is over, and we're confident with the future. So with that, thank you for your support. We appreciate it. And as things do change, we may end up with another call if it's appropriate and -- because we think this is the best way to communicate to everybody rather than trying to do it on a one by one because we just can't do it that way. It's just not practical. So thank you, everybody, and enjoy the rest of your day.

Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating today. You may now all disconnect.