Bapcor Limited (BAP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Bapcor Fiscal Year 2020 Financial Results Investor Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Darryl Abotomey. Thank you. Please go ahead, sir.

Thank you, operator, and good morning, everyone, and thanks for joining us for Bapcor's 2020 financial year results. First off, I'd like to introduce and welcome Noel Meehan, Bapcor's new Chief Financial Officer. He was appointed on the 1st of July 2020, and Noel is joining me on this call and will talk in a little while. 2020 financial year was like no other year I've experienced. It was a roller-coaster ride, impacted by ongoing drought, bushfires and, in the last 6 months in particular, the COVID pandemic. We have experienced some low periods, like through March and April; and some highs, big highs, like May, June and that continued into July. Just -- however, the impact of COVID particularly affected our New Zealand business where government-imposed restrictions were the hardest. The resilience of Bapcor businesses and our team members showed through all of the challenges. So upfront, I'd like to thank all Bapcor's team members and franchisees for their dedication, support and understanding during these challenging times. We'd also like to thank our customers, suppliers and landlords for their support as well as to say thank you to our shareholders, we were particularly touched by your support during our equity raising, which was done in April and May. So now onto some of the details of the year. And these details were lodged with the ASX this morning and are available either on the ASX website or on Bapcor's website. So I'm turning to Page 3 in the presentation that was given to the ASX this morning, and I'll refer to the page numbers in that presentation as I go through. So Bapcor delivered a solid result in a very unpredictable year. We saw revenue up nearly 13%. And if you exclude the couple of acquisitions during the year, it was up 7%. Our EBITDA pre-AASB 16 was down 4.1% to $157.8 million. And our net profit after-tax came in at $89.1 million. The second-highest NPAT we've recorded, and it was only last year that was higher. So our revenue was a record, and earnings was a record in Burson -- in the Burson Trade business and our Retail business and also in our Specialist Wholesale business. Burson same-store sales were up 6%. So it's a very strong performance over the 12 months and are up 14% in May and June. So you can see that the March-April period was hit pretty hard. Autobarn same-store sales are up nearly 10% -- or 9.5% in FY '20. So it's a very, very good performance. But they were up over 50% in May and June, and that's continued. So that sort of emphasized what I said about a roller-coaster year. New Zealand, as I mentioned, was impacted by COVID-19 with their same-store sales being down about 9%. Our cash conversion was at a record of 125% pre-AASB 16, and Noel will talk more about that. We had a successful equity raising of $236 million, and that's resulted in our leverage at the end of June being at 0.7x. We have declared a final dividend of $0.095 per share, fully franked, same as we had in FY '19. And that brings our full year dividend to $0.175. So dividends up over the full year by 3% on the prior year. And I'll particularly note that dividend is paid out of our cash flow from operations. So we generated more than adequate cash there to pay a dividend at the rate that we are. And that will only have been about 60% of earnings. So share price at 30th of June, it was up 6% on the prior June. So again, everyone has done reasonably well out of the business in this year. Turning to Page 4. Our team members effectively managed the external environment and made progress on delivering on our strategy. So we added the Truckline business, so we're now in heavy commercial trucks. So we now cover all vehicles on road. Truckline contributed in the year of $57 million and an EBITDA of $2.8 million. And that was well ahead of our expectations. To those that recall, we said that we didn't expect it to deliver much in the year, and it actually has performed very well. We've invested in retail point-of-sale and the warehouse management system, IT infrastructure and our new distribution center at Tullamarine. I'll talk about these a bit later. We added 45 branches. We've proactively handled COVID-19, and we've reset our staffing levels. So we did have approximately a 5% reduction in our overall staffing numbers. Retail continues to bear fruit with the new management team who've introduced new marketing, store formats and store standards. We've done inventory injections, and the online sales are up over 240% for the year. We're going to be paying through -- given to all our permanent staff an incentive, it's a thank-you incentive, that worked during the year, during what has been a very difficult period. On working capital, the sales was improved both in the management of our inventory and also our debtors, but also we've made prudent provisions at the end of the year to cover debtors and inventory, reflecting the economic uncertainty we're in. Just one other area to mention is we also recorded significant costs of about $10 million in our statutory accounts. And this relates predominantly to our new DC at Tullamarine. Noel will cover that a little bit later as well. So now if we move to Page 7, which shows the performance over the last 5 years. You can see that we have a compound average growth rate and still sitting in revenue of 21% and perhaps compound average growth rate of 20%. So the business over the last 5 years continues to perform well. And pre-COVID, we're certainly were tracking well for this year. But as a lot of other businesses found, it did have an impact in a couple of months. So turning to the details by business segment on Page 8. We had record results in 3 of our segments: so we have Trade, Specialist Wholesale and Retail. They were all record revenue and record profit results. Bapcor New Zealand was impacted by the COVID shutdowns, which were more stringent in New Zealand. In Group/Eliminations, we have made in the year some prudent, you could call it, conservative charges relating to inventory, doubtful debts, et cetera. And Noel will cover those in a little bit more detail. Page 9 just shows that we're still predominantly a Trade-focused business, but Retail, being at around 17% of our earnings, is still very important to us overall. And if I can move on to Page 10, which is the Burson Trade. So another record year for our Burson business. So this segment continues to go from strength to strength, and that's despite having a very soft March and April where same-store sales were negative. So Burton had record revenue, up 7.1%; had a very successful 6-month promotion; the same-store sales for the year, 6%. And that's -- May and June were very strong months at 14% same-store sales. And during that time, 70% of our stores set new record revenue performance. So it's an amazing result. We added 5 stores. The equipment business that forms part of the Burson Trade generated $39.4 million of revenue. So again, record revenue in that business, and that business continues to grow well. Our own brand jumped to be 31% of our sales. And our working capital management continues to improve. One of the things to mention is that the first half, our EBITDA margin sales was down a bit. It certainly recovered in the second half. So it got up to 15.4%. And that's particularly after the main promotion that we ran in the first 6 months finished and the -- also the selling price increase that was put through. So on Page 11, you can see the history of growth and excellent performance in Burson Trade business continues to grow, continues to perform better and continues to serve the customers very well. Moving on to New Zealand, which is our other Trade-focused core business. As I mentioned earlier, New Zealand was significantly impacted by the enforced restrictions. But our business reacted swiftly in taking all the steps that were necessary. We did receive a $3.9 million New Zealand government subsidy. However, all of that was paid to team members who otherwise would have been stood down. And I'll emphasize that in the same period there's a subsidy applied, on top of the subsidy, we also paid out an additional $4 million in wages. So we did not receive a net subsidy, it was all paid out to our people. In June, the business recovered pretty strongly to beat the pre-COVID sales level that had been set in February. So our business bounced back very, very quickly. In New Zealand, we did, during the year, opened a new 6,000 square meter warehouse in Auckland. Their own brand sales jumped to 30%. And also, they've been very focused on optimizing the use of working capital on that. They did a good job in doing that during the period. Page 13, we've got record revenue and earnings in the Specialist Wholesale business. Revenue was up 26% driven by acquisitions. However, even excluding the acquisitions, revenue was still up 5.5%. One of the things to highlight here is that, in this part of the business, we've actually increased our investment in people resources quite significantly. And this is in the management side, finance, in HR and, particularly, in marketing due to the significant increase in the size of the segment. So if you look at the size of the segment, it's now a $0.5 billion segment, and it's the second biggest in revenue and earnings when you look at it in how we report in our business. So we had decided that we needed to continue to grow this and set ourselves well to enable us to continue to [ thrive ] by investing in the management resources. We've launched numerous new programs. We mentioned the acquisition of Truckline in December and that it's generating good revenue and good earnings during the period. So what we expect to see here is that this segment will continue with strong growth and especially as the commercial vehicle group performance continues to increase, which is certainly a priority. Turning to Retail. So we actually had record sales and earnings in retail. And one of the things that I'd point out here is that whilst we report sales of almost $300 million, you can almost double that if you were to include the end sales of our franchisees. Recognizing that we do not include the sales of our franchisees, we only include the product we sell to them, if you look at the -- what those franchisees sell, you can almost double the revenue. So Retail for us is really a $600 million segment. It's -- even though we reported the $300 million one. We had a brilliant performance out of the Autobarn stores, 9.5% up for the full year. And the company stores were up 14.5%, and the franchisees were up 6.6%, so still a very good performance. And you can see there, May and June, just performances I've never seen before. When you've got same-store sales over 50%, that's an amazing performance. And it continued in July. We added 13 new Autobarn company stores. Our online was exceptionally strong, going up 240% for the year. And I'll talk about what we're doing investing further in this area. And May and June online was actually up 400%. So that again reflects very strong sales in this business. What I would add here is that the new management team are doing a remarkable job in reinvigorating and expanding the segment. They've introduced new multimedia marketing calendars, brand awareness, brand compliance, et cetera. And we still expect big things to come from this segment. So Retail is an area that's performing very, very well for us. Thailand, I won't talk very much about this because they were impacted by the government restrictions. We do have the 6 locations. After they came out of the restrictions for COVID, they actually achieved a record revenue in the month of June. And they're now focused on rolling out the electronic catalog, which is an online business-to-business system, and it continued to get the stores established and grow the relationship with the workshop groups. Unfortunately, with the COVID restrictions, it does restrict our ability to expand in the short term. But as soon as those restrictions are over, then it makes -- we'll be in a much better position to look at what we do with this business. So now I'd like to hand over to Noel for his overall performance.

Thanks, Darryl, and good morning, everyone. Thank you for taking the time to join the call. I'll take some time just going through the main financial slides and give you some more detail. But before I do that, let me just make mention of the AASB 16 leasing standards. And you'll see in the appendices, we've given data on both a pre and post basis. In summary, just to recap, in FY '19, operating leases were treated as an expense as part of our occupancy expenses and treated as an operating activity from a cash flow perspective. With the adoption of AASB 16, they're now treated as a finance lease. And in the P&L, so then the split between depreciation and interest; and in the cash flow, they're treated as part of financing activities. The net effect of all of that, and you'll see it on Slide 32, if you care to look at that later, is that the EBITDA, because of the adoption of the lease standard, increases by $59 million; depreciation increases by $53 million; and interest goes up by $6 million. And so the impact on profit is basically 0. And so the absolutely precise is the decline of $0.4 million. And so in summary on that, the leasing standard makes no impact apart from the presentation on our cash flow, and there's no impact on our banking covenants. If I may just talk through Slide 17. As you see on the slide, we've seen good revenue growth, up to 12.8% or $166 million on the year. It was, as Darryl mentioned, been assisted by the acquisitions in the current year as well as the full year impact on the prior year acquisition of [ CBG Group ]. If you exclude those acquisitions, we still do see very strong revenue growth of over 7% with records in a number of the businesses. Gross margin percentage, you can sort of see there that it slightly declined by 0.4 percentage points. Now that's really because of some competition; the impact of sales promotions in the first half; some depreciation of the currencies, both in Australian dollars and also in the New Zealand dollar; and the prudent, conservative provisioning that we took on inventory, for 2 reasons: one, because we are obviously getting ready for the consolidation into the new Victorian distribution center and also part of the implications of the restriction on COVID meant we weren't able to do a 100% of our stock takes. We did 90%. And so in main numbers, the extra provisioning we've taken, in provisioning for the obsolescence, is around $3 million. The other point I would make, in the call dated, I think, 6 months or so ago, when the Truckline business was acquired, there was going to be obviously an impact of business mix on margins on that business. If you take away the inventory-specific provision, basically, gross margin percentage would have been flat year-on-year. Cost of doing business has increased as we've grown the business, increased our sales and made some investments in support functions, particularly in finance, HR, legal, et cetera, as well as increased marketing across the group, particularly in the Specialist Wholesale. Given the uncertainty around COVID, we took a conservative position on doubtful debts. And again, in round numbers, around about a $3 million additional provision would rise in doubtful debts. Doubtful debt as a percentage of total debt now sits at just over 6% whereas, historically, it was sort of in that mid-4s. I think it's conservative to take that position in this environment. The investments in new assets have meant that our depreciation has slightly increased as we brought those, obviously, new assets on, particularly sort of rolled out new IT improvements and things like point of sale. Our interest is lower due to the lower level of debt and particularly the high level of cash conversion as well as the impact of, obviously, having the additional funding coming through on the equity issue. Tax expense is pretty steady. The effective interest rate continues to be around the 29% level, in line with our earnings. And the difference between the net profit that you can see on the slide of $89.1 million after-tax and statutory, $79.2 million, there's essentially 2 components. The largest component is the recognition of some provisions, costs associated, particularly the expected costs associated with the transition to the DC warehouse; as well as some smaller costs associated with some acquisitions that didn't proceed during the year. Further details on both of those were included later on in the appendices on Slide 33. Moving to Slide 18, cash flows. As you can see on this slide, a very, very strong cash flow during the year. Cash generated, excluding acquisitions, was $67.4 million. Cash conversion, between 119% and 125%, depending on the leases. Net debt at 30 June was $109.2 million. This compares to $335 million in the prior year, which resulted then in financing costs of $11.6 million compared to $14.5 million in the prior year. Tax paid is basically in line with the tax expense for the year. You can see on the cash flow chart, investments in new stores cost just under $10 million, lower than prior years as we constrained the amount of investment, particularly due to COVID. The prior year, we spent around about $16 million on new stores. The CapEx number you can see of $35 million includes around about $12 million in relation to the Victorian consolidation of the DC project. So without that, it would have been around about net $23 million. Again, slightly lower than what we had in prior year as we managed our way through COVID. Really importantly, if you look at the cash flow statement, you can say, well, operating cash flow stood at just over $200 million. If you take off the CapEx for the new stores of $45 million, the finance leases of $55 million and the small amount of the shares for the long-term incentive, that would have left $100 million of cash flow, which was sufficient to fund -- fully fund the dividend as well as the acquisitions that were made during the year. The acquisitions that we made during the year cost us $68 million. That's a combination of Truckline and Diesel payments as well as the deferred payment for Don Kyatt that was acquired in the prior year. Overall, you can sort of see very strong cash flow, and the balance sheet has also benefited from the rights issue that was issued at $4.40, which rose to $236 million. Turning now to the balance sheet on Slide 19. You can see here, the balance sheet is in very good shape. As I've said, net debt at 30 June was $109 million. Leverage sits at 0.7x. You can see an increase in inventories year-on-year, essentially because of the growth in the business acquisitions and the investment in new stores. The property, plant and equipment number has increased over the year by $15 million, and that's a combination, obviously, with new stores coming on, less depreciation over the years. The movement in intangibles is attributed to the acquisitions during the year. And the increase in trade credits year-on-year is $43 million, and that is essentially as a result of the acquisitions made during the year. You'll see there, on the balance sheet, the impact of recognizing leases now on balance sheet which is, essentially, if we recognize an asset, a right-of-use asset and a lease liability. The last comment I'd make, on Trade working capital and sales, as Darryl mentioned, we've improved it from 21% to 17.4%. And so the business continues to look at optimizing its working capital position as well as maximizing cash generation. Turning now to Slide 20, just to give you a perspective of the liquidity of the group. What you can sort of see on this slide is essentially our net debt position. In terms of our debt, we've got $520 million of facilities with $2.5 million of that $520 million associated with bank guarantees. So of the $517 million of facility, we've drawn $231 million, and have just under $287 million undrawn as at 30 of June. The average remaining tenor on our debt book stands at just under 3.5 years. I've mentioned leverage standing at 0.7x. Had we not done the equity issue, leverage would have been around 2x, which is in line with where it has been for the last couple of years. In terms of tops -- taken on the Slide 20, some of our credit metrics with our fixed cover ratio at 3x and interest cover at 12x, well ahead of our covenant requirements. So our liquidity is in a very good position. Lastly now, just some comments on Slide 21, which just sets out the dividend profile over the last number of years. The Board has declared a final dividend of $0.095 per share, bringing the full year dividend to the $0.175 a share compared to that $0.17 last year, which is just under a 3% increase. In terms of payout ratio, current year dividend on a full year basis represents 62% of pro forma NPAT payout. Dividend record date, as you can see, is 31 August, with payment on 11 September. Incidentally, the 11 September is a date 2 weeks earlier this year than it was last year. Shares on issue, following the rights issue over the year, have increased now. We've got $339 million -- 339 million shares on issue, up 20%. Given the strong position of the balance sheet, the low level of gearing, a decision has also been made to suspend the DRP for the final dividend. With that, now I'll hand back to Darryl.

Thanks, Noel, and you joined the group at a good time to be able to put an excellent financial position, so in a very strong position. Just with that, I just would like to acknowledge Greg Fox. For the 9 years, he was Bapcor's CFO. He retired at the end of June. I have no doubt he's listening to this call, probably a bit jealously because of the excellent results here, but we'd just like to thank Greg and his contribution over the 9 years. It was outstanding. So -- and setting up the team well. Just turning now to the strategic area. This will be fairly quick because nothing's changed. So on Slide 23 that show -- we're very public in showing what our targets are over the 5 years. These targets haven't changed. The only thing that's changed is where we sit currently. And there have been some delays. We haven't probably -- we haven't got as far as we may have been expecting to in the last financial year, but that was quite deliberate because of the decisions we made when COVID hit. And we did constrained some of our expansion activities, but the direction and where we're aiming to get to was not affected. It has not changed. So Slide 24. Again, we have a consistent delivery of specific and measurable targets, and we believe we still have significant growth to come. And we show the main areas here that -- how we target to grow and continue our growth. And given that we're in an excellent position financially, we can act on good opportunities as they arise. Turning to Slide 25, just some updates on some of our key strategic initiatives. We have implemented the warehouse management system that's put into our Nunawading DC earlier this year, and it's operating well with improved efficiencies and set us up pretty well for the new consolidated DC. And I'll talk about our consolidated DC at Tullamarine, it's on the next page, so I'll come back to that. Retail point-of-sale system, the state-of-the-art point-of-sale has been implemented in the Autobarn. It had been delayed a bit due to COVID-19. But in fairness, that also had some challenges in implementing it. And I'd have to say that both the supplier and our team have lifted themselves very well to address those challenges. And now that's progressing very well. We did update the technology infrastructure. We invested heavily in new infrastructure. It was completed in December. We're implementing a new safety data system to ensure that we're right on top of safety and our zero-harm commitments. We're implementing some category leaderships, and the first couple are underway with air-con and tools and electrical accessories and 4x4. So we expect that to drive some of our business going forward. I mentioned earlier on the retail side that we are implementing over this next 6 months, or in this financial year, a new e-commerce platform. So as everyone knows, technology moves on, and we're investing heavily in the new e-commerce platform to enable us, particularly on the Retail and Trade Side. So it will become our platform that will be of use for many years to come. And that is, right up there, state-of-the-art. It's one of the top-tier platforms. So that will put us in a good position. And as I mentioned earlier, Bapcor's always on the lookout for businesses that fit with our core strategy. So we don't want to go outside our core strategy, but we're always looking for things that are fairly priced even though, at the moment, it's pretty difficult to do much on these when you're restricted as to where you can look. So but -- and Melbourne DC, the new DC in Melbourne, this is a massive DC. It's 50,000 square meters. It will have state-of-the-art technology, which is called Goods to Person. And for those that don't understand what that is, we would be putting a video up on our website, so you can actually see exactly how all of that works. But it's a very big DC. It's under construction, Tullamarine in Victoria. It's well under construction. You can see it from the photos. And we expect to be into that DC early in 2021. With, again, the COVID restrictions, that could move a little bit. What we've shown on this page also, sometimes accounting baffles everybody, including me, and particularly with new accounting standards in AASB 16. So we've just shown over the years, how the transition costs will roll out over the next 3 years. But there's also this little funny thing called right-of-use assets. We get a cost reported and then, eventually, we'll get a credit. So if you don't understand that, you can call Noel and ask him. But we just thought it's important that people understand how we expect, at this stage, for it to impact going forward. But we're looking forward to this facility because with our increased sales, our warehousing teams are really at maximum -- in fact, probably above maximum capacity and are doing a fantastic job at it, especially in Victoria where 2 of our main DCs are, and they're having to operate at reduced manning levels because of the COVID restrictions. Just moving on now to the all-important trading update. So on Page 28, I'd mention that we had some big ups and downs during the last year. Well, that's continuing. July was a very, very strong month, and it followed on from a solid May and June. And you see here, same-store sales, Burson Trade being up 15%, New Zealand being up 10%. In Retail, Autobarn continued to be 50% up on same-store sales, leading our Specialist Wholesale businesses. On a comparative basis from July the prior year, depending on the business unit, they're up between 15% and 20%. And a lot of this has continued into August. But even though August has been impacted by the Melbourne restrictions and now the New Zealand restrictions, we don't expect them to have a -- at this stage, in the way it's panning out, to have a material impact simply because our retail business is up. Even with all the Melbourne stores closed, it is still up on the prior year on a same-store sales basis. And whilst it is impacting some of the other businesses, the strength in the rest of Australia is largely compensating for it. In New Zealand, we are down a bit, in circa probably 30%. But the business is tracking reasonably well. So we've had an excellent start to '21. We believe it is driven by the increase in -- the end of last year was driven by the increased consumer cash availability, with people having low restaurant spend, travel, low entertainment combined with the government stimulus and the super withdrawals. So we know that some of that is flowing through. So we don't expect to continue forever at the heightened activity levels. But we do believe that COVID-19 is likely to result in changes that will be a significant positive to the automotive aftermarket because we expect to see more vehicle use and kilometers traveled with more domestic travel and lower public transport use, more vehicles per household. And we've seen record used car sales. In fact, there are shortages of used cars these days. So that bodes well for us. There's more repair and less replacement. So I would expect people to be keeping their cars. And a large part of that will be due to the economic conditions and the uncertain conditions. So that also leads to average age of vehicles getting older, and there's certainly a lot more do-it-yourself activity that we're seeing. So Bapcor expects that with the addition of the Truckline business and the ongoing improvements in our other businesses, including Retail, that these will all positively contribute to the current year. However, the portion that we have is that lockdowns in Melbourne and Auckland and any future government restrictions could have an impact on trading conditions and earnings. So with the lack of clarity and uncertainty around both those and the underlying economic conditions, it's not possible for us to give a forecast at all. However, historically, our businesses have been very resilient to economic downturns. And it's not just only Bapcor's business but the industry. And when you look through the GFC, you look at historic economic downturns, our industry tends to do very well through it. So with that, we'll give a further update at our AGM in October as to how we're tracking because we'll have another couple of months under our belt by then, and that we'll give an update there. So and also, just in finishing, acknowledge again the contribution of all our team members, and I also thank the Board of Bapcor for their support. We've been through some up and down periods over this last year where, with COVID, it was pretty hard to see how deep that hole is going to be. But we came out of it very well, and we've been very strongly supported by our Board. So I also thank everyone for joining us today. And we'll now go over to questions and answers. So operator, could you handle the question and answers for us?

[Operator Instructions] The first question is from the line of Tom Godfrey from UBS.

Can you hear me okay?

Yes.

Perfect. If I can just start with the Trade business and the July trading update of 15% same-store sales growth. Can I just get you to confirm that, that is an acceleration versus June which, from memory, was down around the 10% mark? And I'd just be interested in your view in terms of what's driving the acceleration into July and August.

Yes. It's a slight acceleration. We -- it's also got to do -- remembering it was the comparative period last year because of the same-store sales comparatives. So it is a slight acceleration, but it's not materially different, I don't expect. We did have a bit of a softer July last year. So that's a big part of it. So the actual demand levels and, if I look at absolute dollars, fairly consistent with May and June.

Got it. And just -- I think you did touch on it before, but just to confirm, you are seeing that majority is driven just by increasing end user demand, just any other anecdotes you've got around the current sort of trading conditions.

Yes. It's a really interesting one, and I'll break it by our businesses. So on the Trade side, I think there's a little -- there's probably a little bit of people who've got the time to get their car serviced and they got -- the cash is not what I would usually expect that our servicing is driven by a lot of that. But we have seen that in the past. But people aren't going to get their car serviced extra times just because they've got the cash. So it will just be that, that servicing is certainly there. And I think it's also because people are using their cars, because of the potential of -- if there's a COVID lockdown, certainly they want reliability in their vehicles, et cetera. When I look at the Retail side, it is really being driven by -- and I'll use the word -- a bit more of a dress-up, et cetera, because of -- I'll give you some of the areas: [ refracs ], they're up substantially, tools, performance. So things like steering wheels and internal gauges and stuff. Mobile electronics are up significantly. And seat covers, would you believe, sheepskin seat covers are the in thing, and they're up like 60% over the prior year. So a lot of the retail, I think, is driven by dress-up, and some of it is certainly improvements in our business. We -- our Retail business was improving prior to the May, June. It slid a bit when COVID first hit, but a lot of the things the team have been doing, we're seeing starting come through. And we've got a brand-new format of the stores that were recently launched in Bayswater before, and it is fantastic. So we're seeing a whole lot of different drivers sitting in there.

Got it. That's very clear. Just second question, can I just ask, just given the demand environment short term, can I ask how you're thinking about price increases in fiscal '21 just for Trade and Retail?

Retail, we probably don't see a lot, but it's more driven by our cost prices. I don't, at the moment, also see a huge increase in Trade. But we wouldn't have anything, especially when the currency strengthened, et cetera, it does make it a lot harder. So at this stage, I'm not sure that we'll see a lot come through there. A lot of it really depends on what comes through from our suppliers. And we're not seeing lots of indication of increases. There's some but not a significant amount at this stage. But we tend -- we would always pass them through on -- whenever they come through, we don't wait to pass through increases, except that the -- what we call the cost recovery that we try and do usually in January, we would certainly be looking at that guidance here.

Got it. And last one for me. Can I just ask for a little more detail on the negative operating leverage and margin degradation for Specialist Wholesale and just how we should be thinking about margins in fiscal '21?

Yes. No, look, the biggest degradation in Specialist Wholesale is, number one, bringing Truckline because it's -- as we'd indicated, it was -- we might have got $57 million of revenue. Its earnings are nowhere near the 1% performance that you would expect on the overall business. So we would expect to see that gradually improve. It won't happen overnight. But it's -- and we're seeing a gradual increase, so we're quite comfortable with that. And the second part is I would expect to see the percentage be slightly lower than historical simply because of the -- where we've now, in the short term, invested in resource to manage it correctly because the last thing we want is to have businesses that we're not managing properly. So we have definitely increased our investment in marketing, in particular, because we want to drive the marketing side of our own brand products through that group. So if you -- when you join those dots, you'll see how those are put together. So it will be lower than historical but not -- we expect it to improve from where it currently is.

Your next question is from the line of Matthew Nicholas from Crédit Suisse.

Congratulations on the results. Maybe first one, kind of like a nitpicking, just on the corporate cost side, I know there's a comment earlier in the call. But just to confirm, in that corporate cost line of $24 million, there's a $3 million provision in terms of bad and doubtful debt, and there's another $3 million write-down of inventory. Is that correct?

Yes, the majority of it is certainly in that line, yes. So it'd be also fair to assume that we would not expect it to be recurring.

That's good to hear. So as a go-forward rate, should we expect that $16 million to $17 million? And the reason I asked that question, I'm just trying to reconcile that with the comment you've got in terms of Tullamarine DC slide where you expected tax and provisions going forward. Can we just get some color on that as to where those provisions will sit?

Okay. The Tullamarine provisions are just the transition cost. So the majority of those are where there's some -- there'd be some make goods on the current warehouses where there's -- we expect there'll be some redundancy costs. And there's other things that, in normal course, we would have -- you'd capitalize them, but under the accounting standard, you can't. So it's nothing to do -- whatsoever to do with things like -- and nothing to do with the inventory or debts or anything like that. They're normal operating. We wouldn't put any of those in there whatsoever. So it's just those areas of transition costs. And another one is, like, we've got a lease tail, then that shows -- and that's a funny thing that shows in their work. You get the credit in 2024 or something.

Right. And just a follow-up from -- sorry?

You could expect the ongoing head office areas to be somewhere in the sort of high teens in annual cost.

Right. And just following on from Tom's question on margin, if you go into this -- so you've had a really big step-up in house brand in the second half. I mean your key businesses, you've got an exit rate of about 30%. Even in the absence of price increases this year, I mean, given a lot of that house brand stuff you're a direct importer, would it be fair to assume you've got another margin tailwind via currency just given where the Aussie is sitting at the moment?

Not necessarily because a lot of that, we don't do a significant amount of direct, it comes via a secondary sort of local suppliers. But the components that we buy direct, there's a potential currency benefit, yes. It's a question of then do we pass -- as that happens, does it get passed through to the market? Same as when we had increases, will we need to? And there's some indication that some of that will go back to the market just to make sure that we're competitive because some of the smaller players don't do or, say, realize that they can actually potentially make money by not passing it through. So we just got to stay competitive.

Sure. And just the last one on me. Just in terms of cash flow, you obviously had a cracking cash flow number. Should we expect a level of normalization in terms of working capital in the upcoming half? And I suppose, just an extension to that, just the cash outflows on Tullamarine, do we expect this year?

Tullamarine, there's not a lot of cash outflows because most of that's a lease. So there is a little bit that -- and I'll get Noel to cover it. But most of Tullamarine, we pay out some this year, there's a little bit next year. Noel, do you want to cover that?

So Matt, if you look at -- if I can bring your attention to Slide 26, you'll see there a capital number estimated at $34 million. Of that, we've currently spent $12 million. So then that leaves $22 million. There's an incentive then to come through of the $14 million. So you get the difference of that in the $14 million, so the $22 million to come through as cash outflow. We have a base of $8 million to $10 million.

Right. And sorry -- and just the part on working capital this year, just given [ how strong it was at the ] back end in the last year.

Yes, working capital will probably -- we wouldn't -- if we were estimating our cash generation over this next 12 months, we would expect it to be more traditional, that sort of 90% to 100% conversion. It wouldn't -- it was an exceptional year. And a large part of the exceptional year this year is because of the steps we took during COVID about cutting back on discretionary spend, cutting back on capital investment, et cetera, et cetera, when we didn't know what -- how deep that hole is going to be. So you wouldn't expect that to continue.

Your next question is from the line of Jo Little from Morgans.

Just on Truckline, you called out the $2.8 million in FY '20. Was that after acquisition costs and then it's that result? Because I think it was a $7.2 million EBITDA kind of business at acquisition, just trying to work out an annualized run rate.

Yes, there was -- there really wasn't a lot of -- there was no acquisition costs in that at all. Yes, it was insignificant. The acquisition -- the little bit of acquisition cost in Truckline were actually incurred in the first half, and some of those were insignificant items that are below the line. But it wasn't a material amount. And the biggest component of it was the stamp duty, and that was taken up in the first half of the year.

Okay. So if we think about -- just what's your view on the annualized EBITDA capability of this kind of business that could be incremental for next year?

We'd expect it to get up to the normal levels of our Specialist Wholesale businesses but not -- but that is -- we'd always say it's over a 3-year period because this was a business that was basically generating almost nothing. So over a 3-year period, if you -- and Specialist Wholesale, we'd expect it to be around that 10% EBITDA to sales. So over 3 years, we'd expect it to get. Otherwise, we shouldn't have -- we wouldn't have, shouldn't have, couldn't have invested in it.

Okay. And just back on those margin questions, particularly in Trade in Australia. Obviously, we're cycling a pretty weak first half given that promotional shift last year. Is there anything else in Trade, particularly in Australia, you need to call out on costs? Or would you expect that strong sales outcome at the moment to be reducing strong OpEx leverage?

In the absence of anything -- and that's making the decision to do any further promotional things, which we're already doing some, we'd expect it to continue on the way it's performing at the moment. I don't expect that the heightened level of activity that we're seeing over the last few months will be sustainable in the longer term. But I do expect that it won't drop sort of back to the lows, sort of like to go to negative. But we've always, in the past, said we'd expect a 3% to 4% growth year-on-year. I'd expect it to drop back to those sort of levels after this heightened activity goes because it's -- there are only -- even though some of the things are driving it, I expect that to settle a bit. And it's also the competitive side around it. If we have to take the market share, I don't expect the competitor is going to sit and say, "That was very nice. Thank you."

Okay. Got it. And Darryl, I think I missed what you said on New Zealand. I think it was an August comment, just down 30% post the renewed lockdown. Can you just confirm what you commented on that?

Yes. Look, I think it'd be fair to assume that both Auckland and Australia is pretty similar to what we saw, I'll call it, in Melbourne, not dissimilar. But once you're in lockup, your sales do drop. And we'd expect to see something along those lines that it drops, under the current restrictions, probably somewhere in the 30% mark. But it's still a bit early in that to identify. Certainly, on the Burson -- because of the bigger footprint in Australia, Burson which we were up in the Northern States, et cetera, it's -- the balance is such that we're absorbing it. Whereas in New Zealand, we don't have quite the same number of stores and the same balance, so it would have a bit of an impact at those sorts of levels.

Okay. Just lastly, just on supply chain and stock. Any shortages you've seen in recent months? And how is the supply chain flowing today? And I guess, on Matt's question, just working capital build next year, are we -- how much are we short inventory, if any?

I wouldn't say we're short inventory, somewhere -- [ I've been going to where the question is ]. They're pushing out everything and getting -- the only thing is that -- and it's not material but because the [ rates ] are high in Retail, and I think this is probably a bit of a [ JV high-five stock ] comment, that there are some product groups that we are having difficulty sourcing the volumes that we're selling. But is it material? Overall no. But there will be some areas that we struggle because nobody would have ever planned on a 50% same-store sales. And if it did happen, you might expect it for a month, for some reason. But it's the degree that it's actually getting happening and continues to happen. It's there. But some of the inventory challenges are being fixed, to some degree, by the lockdowns.

Your next question is from the line of John Campbell from Jefferies.

Darryl and Noel, just a couple of questions from me. Just to summarize what you're saying, Darryl, in terms of trade around pricing. So in terms of gross margins, which were down a little bit in FY '20, understandably, so are you saying that you think gross margins will stabilize in FY '21 at these levels and then, hopefully, as promotional activity drops away, potentially improve into later years?

Yes. Look, one of the things on Page 10, we did point out that the gross margin in the second half was fairly strong. And I think it -- so we went -- the first half where it was -- or the EBITDA margin was 13.5%; second half, that recovered to 15.4%. So you can see there's a big swing there. Taking that in the average area, to get back to where we were in FY '19 at sort of that 14.9% of EBITDA to sales, I think that will be not unreasonable that we should be getting back there.

Under pre-AASB.

Yes, got you. Yes. If you can figure it out after AASB, I'll employ you.

Yes. Okay. And just in terms of gross margin in Retail, is it sort of similar comments would you make in terms of a dip in gross margin in FY '20 but coming back in '21?

Yes. Actually, it better be fair. Our gross margin in Retail has been sitting pretty good. The fact that we are -- the thing that's influenced gross margin was a bit tricky in Retail, it's when we're adding company stores. So I don't see a lot of that. I think we're pretty much where we'll be. We like company stores, but there won't be a transition from franchise to company where you push your -- and essentially your margin goes down, but it always go up. So if you assume FY '19 type margins ongoing, it's where we're certainly targeting.

Yes. Okay. So just 2 more questions quickly. Firstly, the other retail stores' store base shrunk in FY '20. How do you see that? And presumably, that's just closure of underperforming stores. How do you see that traveling in '21?

I would expect it to be fairly stable. We've actually had already with that -- and we're actually converting some Autobarn stores into -- so you're going to see a little bit of a move from -- in this next year from some Autobarn stores to become Autopros because they're in -- the store standards, the size of the stores, don't match up to what we want Autobarn to stand for. So we'll see a little bit of a movement there. But overall, I wouldn't expect to see significant changes in that other area over the next 12 months.

Okay. And just one for Noel. So you've said you're well ahead on your debt covenants. Can you just tell us what are the main covenants and whether there's been any changes post-AASB 16?

Yes, John. So covenants are measured on a -- excluding AASB 16, so there's no impact on covenants from that. And yes, the main covenant you see on that chart on that table on Slide 20, let me just look through it.

So the main covenants that you've called out there.

Yes. Essentially, yes. So the first -- it's mainly the first 2, the net leverage and the fixed cover ratio. We don't have a specific interest cover -- covenants, it's included just as an interest. And so the top 2.

We've got to get up -- on the net leverage, we've got to get up to 3x before we manage trough.

And the second one, it needs to be above 1.75x.

We have a question from Jodie Barns of ACSI.

I'd like to ask a question around the culture of the management team. If I look at your disclosure, I can see that you've accessed rent relief, government subsidies, you've stood down some staff and you've had an emergency capital raising throughout the year. And your management has accepted a greater STI this year than they did in FY '19. And whilst I think there's a lot of judgment questions investors should ask around for discretion, what I would like to know is did the ELT offer 1/4 of their STI? Or did they offer to take it in equities to align themselves to shareholders? And given the STI was paid out at higher levels and in cash, what it says about the culture of the management team?

I'm not sure that you're asking the right people that, but I actually take offense at some of those questions in that if you want to understand the culture of the management team, just spend time with them. They have put in an enormous effort over this period. The company has a very solid financial position. Shareholders have done very well in the last year. And issuing equity to management, if you understand the tax laws in Australia, is disadvantageous to anybody because you get taxed at 50% on it and that means you're forcing management to sell the shares as soon as they get issued. So it's not a very smart way to go about it. So it's -- and yes.

Sorry. But I was interested to hear about the culture at that core.

Well, that's what I said, I expect -- you should spend some time with the management team if you want to understand the culture. You're not going to get an answer on a very short phone call. It's -- you're just not going to -- the team here are very pro and very dedicated to what they do. And they also -- the focus is always about our team members and ensuring that they are looked after as well as we look after our shareholders as well.

Okay. I have a question on the inventory levels. I can see that it continued to grow higher year-on-year. And looking at past reports, it's always been high as suggesting cash conversion is probably low. Can you make some commentary just because you -- there's a lot of discussion around record sales and yet that inventory level keeps continuing and the [ post ] inventory-to-sales ratio keeps on increasing.

Well, in fact, our working capital to sales measures have actually improved year-over-year. Inventory, the main increase in the inventory is due to acquisitions. Excluding the acquisitions, the inventory-to-sales is actually reduced year-over-year.

Your next question is from [ Sabwer Ess of Investor ].

I wanted to quickly look at, more from a macro perspective, your thoughts in the next sort of 3 to 5 years around investing in e-commerce or online channels versus actual physical footprint. And then second question more around what are you doing from a, I guess, national branding and marketing perspective to really drive home the message in H2 '20 around the fact that people will need to service their cars a lot more because they'll be traveling domestically rather than internationally. So can you share your thoughts on that?

It's probably -- on the second question, we don't tend to directly do some of that but certainly through some of our franchise businesses. So you might hear ads that are on MIDAS, which is one of our franchise businesses, just on the servicing side, encouraging servicing by people. So we do push that fairly, fairly hard, and we'll continue to do so. We also, through our -- the industry association which, we'll remember, the AASA, we try and push some of that as well. So just -- and sorry, on the e-commerce, I mentioned on the call that we're investing in a new e-commerce platform. And it's -- our online sales through Retail are up significantly. Interestingly, the biggest part of our online sales are click and collect. So we're still getting people in store, which we prefer. On the -- and we don't talk too much about this, but -- so on our Trade side of our business, about 20%, 25% of our sales come electronically. It's on a B2B platform. That's also -- this investment we're doing, which is quite material, is to enable that to get, call it, upgraded from what we currently have. Across the world, automotive parts, in history, so even when you look at the U.S., less than 6%, I think it is, of the market is actually transacted online. So we actually don't see the online site being a material part of the ongoing business. But having said that, we are certainly investing in it to get whatever there is and make sure we get a fair share of it. So we are investing in that area. But our vision at this point, and it's supported pretty much by most of the global players, is that, especially on the Trade side of the business, we deliver 80% or 85% of what we -- where we get orders get delivered in less than an hour. So we don't see an online platform from a retail perspective for that part of the business. Does that make sense?

Yes, it makes sense. My question was more on the retail front but -- and just a follow-up on that then. Is there a difference in margins between online sales versus in-store sales? Assuming -- given the New Melbourne DC coming onboard, is there going to be more efficiency with online retail sales and then correspondingly a better margin compared to in-store or not?

Certainly, the new DC has been designed so that we can do essentially, call it, input and have a much more efficient way of handling online sales. So that's an absolute design requirement that we're putting there. So it's what we might call emergency orders or orders that need to go out quickly. So that certainly is designed into it, and we would expect to get much better efficiency at it from there. As far as the margin goes, there's not a great difference for us in the margin between online sales and the in-store sales because the labor and the freight probably offset any other savings that we would get out of it. So the margin is not a lot different. And in some areas, it's probably a bit tighter than the in-store margins.

[Operator Instructions] Your next question is from James Ferrier of Wilsons.

Congratulations on the result. And can I commend you for your decision to pay that thank-you incentive to your permanent staff. I think that's a great sum.

Thanks.

Just to go on from the last question, to confirm a couple of aspects to that. Darryl, you mentioned that Trade is about 20% to 25% orders placed online. What was that figure maybe sort of 12 months, 3 years ago? Where did that trend come from?

Yes. Look, it's an interesting one, but we've had the online system for probably about 8, 9, 10 years. And it really -- it's increased, but it's very, very small. It might be 1% or 2% increase in the last 12 months. It has played out. And a big part of that, there's a lot of mechanics, when they got a vehicle up on a hoist and they need parts, they still highly prefer to pick -- whether I agree with it or not -- they tend to pick up the phone and check to see how long -- that, number one, you've got the part; number two is how long they're going to move because they're making decisions on what they do with their hoists and the vehicles that are there. So it's -- what we're aiming to do with the new e-commerce is just take a quantum leap in how they can use it on, call it, tablets and filings and all that sort of stuff. Whether or not they will actually use it is still a big question mark. That's the gist.

Yes. Okay. And just your comment around the new warehouse, did I hear you correctly in that you would expect that it will have the capability for direct fulfillment for online orders as opposed to -- yes, so that's both Trade and Retail?

When I say direct fulfillment, it's really -- and I'll call it the retail online, we'll have the ability to fulfill -- which we do today, so it's just sort of be in a more efficient way of doing it coming out of the GTP because most -- a lot of that online sales are big items. So we expect to -- the system has been designed -- and those would be done by -- we expect by the courier services or by Australia Post or whoever. We don't see ourselves delivering those direct. And the same would go with our Trade businesses that we do fulfillment for them pretty much and replenishing stores, et cetera. I don't see us doing, for example, direct from the warehouse to a mechanic. I don't see us doing that because that would just be totally inefficient for us. That's why we have the degree of trade stores around the place because you need to have the product close to the mechanic. Now can we get it out quickly from the DC to our stores? Absolutely. And could we potentially deliver direct to a customer if we needed to? Absolutely. But that would be the exceptions to the rule rather than anything else. Our primary thing is to try and ensure that we have the product in the local store close to the customer because that's the most efficient way to do it.

Okay. Great. And then the last question. Slide 25, can you just elaborate on what you mean, what your goals are around category leadership?

All right. Okay. So what we're doing is that we want to have experts. And it's really -- this is our Specialist Wholesale business, to a large degree. But in categories, it's to have -- some of it's the expert in that category. And then our Retail and Trade and frontline businesses are sourcing their product all from there. So if, for example, we've got somebody that's the air-con specialist, which we do have, then all our businesses would source the product through that. And if they need something additional or they want to expand the range, that's the expert's personal area that they would go to rather than them having to have that expert in their business as well. So as to try and make sure that we don't duplicate expertise within each of the various businesses that we've got at the frontline.

You have a question from [ Simprateen Rapta ] of Citi.

I have 2 questions. One, on Slide 24, you have set targets for your store rollout. How should we think about FY '21 rollout and how it would compare with these targets?

FY '21 should be somewhere within those targets. There shouldn't be too many that aren't. We've already -- if I look at some of them, we've already got quite a few stores approved in a number of those areas. The only thing that can -- and is having a bit of an impact at the moment is whatever might be the COVID restrictions because, for example, we have both in Burson and the Retail side, there are teams of people that do the store fit-outs and preparation rollout. So without -- with them not being able to travel, it's making it a little bit more difficult. But we're sort of adjusting for that by having the local people do it. We still expect at this stage, unless the restrictions become more than they are at the moment, that we should meet most of these targets. But the other thing that will hold us back will be any COVID or other type of restrictions.

Sure. And my second question is regarding New Zealand. So BNZ sales in July are up 10%. So just trying to understand your comment regarding deleverage in the New Zealand business. So why are you talking about that?

Yes. New Zealand was up in July, like most of the other businesses. But now with the COVID restrictions in Auckland where they're now at Stage 4, so it is -- then that is impacting the business, as you would expect, because a lot of our Auckland stores, well, they're all, from a front entrance, closed. And a lot of the mechanics, they're only allowed to do what they might call emergency work, et cetera. So that's dampened the demand in the Auckland area. And they've only -- if you take outside of Auckland, you just -- as distinct from our Burson business, New Zealand's got, in that business, 73 locations. I can't remember the exact number but x number in Auckland whereas, in the Burson case, we've got 186, 187 stores. And about 30 of those, 25, are in the Melbourne metro. So you see that percentage-wise, that we've got more upside in the Australian business but just simply because there are more stores overall.

[Operator Instructions] There are no further questions over the phone. Speakers please continue.

We might leave it there because we're sort of a little bit over our allotted time. But thanks, everyone, for joining us, and we'll see a lot of people on one-to-ones and happy to fill in any gaps at that stage. So thanks very much. Thanks, operator.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect. Have a good day, everyone.