Bapcor Limited (BAP) Earnings Call Transcript & Summary

Good day, and welcome to the Bapcor Fiscal Year '23 Half Year Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Stefan. Please go ahead, sir.

Thank you, operator, and a warm welcome from our side as well. My name is Stefan Camphausen, I'm the CFO of Bapcor. With me are members of Bapcor's executive team, and together, we will present Bapcor's FY '23 half year results in the next 30 minutes or so, followed by a Q&A session. It is now my pleasure to hand over to Noel Meehan, Bapcor's CEO and Managing Director.

Thanks, Stefan, and Good morning to everyone on the call. Let me first begin by acknowledging the Traditional Owners on the land on which we meet today and pay my respects to their Elders past, present and emerging. I extend that respect to Aboriginal and Torres Strait Islanders on the call. Secondly, I also extend my thoughts to our New Zealand-based team, our customers in New Zealand and our suppliers and all the people in New Zealand who are dealing with a series of natural disasters over the past few weeks. As Stefan said, today, we'll go through the half year results presentation for Bapcor. As you see on Slide 2, there's 2 components that we'll work through today in line with what we sort of spoke to the market previously about in terms of perform and transform. I'll go through some Group highlights. The EGMs will talk through their specific segments. Stefan will then cover some of the financials in more detail. And then I'll give an update on where we are at Best Before and then we'll finish off with outlook and then some time for Q&A. Turning to the Slide 3. You've seen this slide before, but let me just reiterate a couple of things that I can. Bapcor is a business that has a market-leading position with scale and a dedicated team of over 5,000 people, servicing customers each and every day. We operate in a resilient industry. If you look at Slide 4, some data here on 2 key drivers that drive a lot of demand into our industry. The age of the car park on the left and the number of vehicles on the right. As you can see from both of these charts, the age of the car park in which we participate is increasing and the number of vehicles on road is also increasing. So, the market in which we origin is generally pretty resilient. I will then talk through some key highlights, which are shown on Slide 6. Let me first of all kick off by some overarching comments. The results for the half year of FY '23, pretty solid results. We need to do more on improving our cash conversion and we've made some really good progress on it better than before. I won't go through every box on this slide, but I'll just talk through some of the key fights. Starting on the left-hand side. In the 6 months ended 31 December, 2022, we've seen revenue grow by 11% to a record of just over AUD 1 billion in the half, with strong growth across all of our Australian segments. Pro forma net profit after tax has increased by just over 2% to AUD 62 million. We've seen very strong performance in our trade and wholesale businesses, offset by some margin compression in retail, partly driven by the conversion of franchisees into company stores, and our New Zealand business has faced subdued economic conditions. We've announced an increase in interim dividend of AUD 0.05 to AUD 0.105 per share, up 5% with a payout ratio of 57.5%. As we've gone into January, the strength that we've exhibited in the first half, the 11% revenue growth and 2% profit growth has continued into the first month of the second half of the year. We continue to renew the Board with the addition of Brad Soller during the half and the announcement that Kate Spargo will join as a Non-Executive Director on the 1st of March. Delighted to also announce that we've got 2 new EGMs who will be joining the business, as we sort of further progress the Better than Before initiative. One of them has already joined, Christoph Gill, the EGM of Strategy and Transformation. And he is on day 3 of his time in Bapcor. EGM of Specialist Wholesale, a new EGM all join us in April, which will then complete the leadership team that we've sort of been building over the last 12 months. The addition of those resources, I'm sure, will complement the quality leadership team that we've already got in place. We continue to make investments in lifting capability and improving the culture in the business, particularly around things like safety and simplification. As investors will know, store expansion and network expansion continues to be something that we do and have done for many years. If I look at the past 12 months, we've added over 31 additional stores across all segments. During the half, we've done some small acquisitions in the Specialist Wholesale space. And as I mentioned in the opening, we've converted a number of franchisee stores to company stores in Retail. Supply chain, which is a core capability of the business, we've made some great improvements across the year in supply chain capability. The distribution center at Melbourne and what we call DCV, we've added 2 more warehouses into that business -- into that operation very successfully during the half. We've got 3 more to do and they'll progressively be done in the next 6 months. And one of the key steps that you've heard me talk about before in terms of agency pick rates, we are averaging at least 99% each and every day. So, delighted with the improvement there. We've made significant investment in DCQ in Queensland, and we're on track, as I said on the slide, for practical completion in the second half of '23. We've actually taken practical completion ownership on the 31st of January, and we'll now progressively work through over the rest of the year, finishing that facility and then gradually then bringing the Queensland warehouses into that facility. Inventory position, inventory is a key component of the Bapcor story over a number of years with supply chain disruptions and growth and all those type of things, our inventory position has continued to increase. If I look at during the half and the last couple of months, we've now seen that reduce and delighted to sort of see that in line with what we've said before. We expect in the second half of the year to make further reductions in inventory as we optimize position coping with the long-lead time, sorry, on a number of our suppliers. I'll talk more later on the progress that we've made on Better than Before. But everything that we announced on the 22nd November is going to plan. All of our work streams are now sort of in place. We're moving to the execution phase, which is very exciting. And we're also putting in place an incentive plan across the whole organization, which I'll give a little bit detail on further. We should be self-funding. And so I'll talk about it a little bit later on what we're doing there. If I then move to Slide 7. Just as you can sort of see here, a number of sort of KPIs. Very pleasingly, if you look at the P&L-related KPIs, some real good progress on all of those measures. So, we're seeing growth in all of those. Generally, we've seen positive market momentum. We have had not unlike other people cost pressures and those type of things, which has temporarily impacted our margin. We have seen cash improvement improve towards the end of the first half and we know we need to do more on that. And with what we're doing on inventory, I expect that to continue to improve. Balance sheet is in very good shape and Stefan will take us through cash flow and balance sheet a little bit later on. Health, safety and well-being. We're making investments in this area. It's an important part of everything that we do each and every day. And very pleasingly, you can sort of see there on one KPI that we called out in terms of injury frequency rates. We have reduced that considerably over the last number of years. Obviously, more to do, and we continue to make sure that we're doing everything we can to ensure the health, safety and well-being of all our team members and that will continue to be a key focus as we move forward. Moving forward now just briefly into Slide 10. You've seen sort of a part of this slide before, a couple of observations. We do have a diversified business, spanning mainly in Trade and Wholesale, with obviously, an exposure into Retail. We operate in Australia and New Zealand with an emerging presence in Asia. On the right-hand side of the chart there, we've shown margins over a number of periods going back to FY '20 through to FY '23, and you can sort of see they go up and down, but overall, pretty healthy margins that do, so that give us sort of confidence as we look to the future, especially in what we're doing with Better than Before. Slide 11, you've seen before. But again, it just reinforces the hard-to-replicate footprint that's been established over a number of years and also reinforces the discretionary purchase bias of our business in terms of revenue, which you see on the chart on the right-hand side. I'll come back a little bit later and talk through some more of the strategic segments of the presentation. But now delighted to hand over to the EGM of Bapcor Trade, Steve Drummy to sort of go through his business performance.

Thank you, Noel, and Good morning all. I'm proud to be presenting a strong set of numbers across the Trade business. It's pleasing to maintain the EBITDA margins from the prior year, mitigating the inflationary pressures in the Australian economy. From a business unit stream perspective, Burson Australia has had a strong first half and continues to deliver. It is a naturally defensive business and it has robust earnings in all economic conditions, but especially in times when consumers are holding on to their vehicles longer. Our Precision business, record sales volumes, margins in line with expectations. The Blacktown Auto spares business, pleasing results from acquisition, and the business is performing as we expected it to and playing the role that we wanted it to. Our Thailand business is making good progress in an emerging market, localizing the business and also growing with independent garages. On a personal note, it's really important for me to be leading an initiative on mental health of the team. It is a passion for myself and the team. Finally, as always, the Bapcor Trade result is a true team effort. So, a big thank you to our dedicated and passionate team, our supply partners and our customers and thank you. I will now hand over to Craig Magill, our EGM of Specialist Wholesale.

Thank you, Steve, and Good morning. In Specialist Wholesale, we had solid growth of revenue and profit in the first half. This stems from organic growth and own brand program growth. This was driven by growing internal brands more quickly than external brands rather than just converting sales from external brands to internal. Growth and growth. This is a terrific dynamic. Zero Harm activity has been quite positive. We improved message cut through and it's coming through in positive statistic trends. Our truck business is trending well with solid growth, system integration and network growth. I'm very excited by the future of this particular business. Specialist Wholesale continues to lead the One Bapcor penetration, acting both as a value creator and a value enabler for other parts of Bapcor. Really positive steps here in our journey to be Better than Before. I'll now hand over to Tim Cockayne, EGM of Retail.

Thank you, Craig, and Good morning, everyone. We had a solid half for Bapcor Retail trading. Revenue at AUD 220 million, up 11.5% on the previous year. And as always, that excludes our franchisee sales revenue. EBITDA at AUD 35 million, up 4.9% on FY '22. And private label continued focus up to 35.1% penetration, which is a solid 1.2 percentage points up on the previous year. Same-store sales across all brands reflect strong results being up 10.2%. And as spoken about before, developing our digital road map continues to be a key focus with the new Accelerate Loyalty Club launched in December 2022. We're extremely pleased with our initial launch and we have more than 60,000 Accelerate members as at 31 December, with many, many, many malls since then and on track to achieve our internal targets. So, we're now in a position where we can start to commence providing our Accelerate Club members, exclusive offers, digital catalogs and personalized offers tailored to their members' purchase history and preferences. And I'd also like to highlight the Midas business. While it's not called out on the slide individually, the brand has seen significant growth in the market and is continuing to achieve double-digit like-for-like growth, which highlights the strength of the brand and the resilience of Trade business in the market. Thank you, and I'll hand over to Martin Storey, our EGM for New Zealand.

Thanks, Tim. And I'm also very proud to be able to represent New Zealand business at this challenging time. H1 has represented challenges to the New Zealand Business Group, primarily due to a weakening New Zealand economy. Same-store sales were positive despite all businesses encountering weakened market additions than forecast. This was primarily due to elevated fuel prices and general input cost pressures. As you see, EBITDA was negatively impacted by number of exits to and cost escalation around labor, coupled with COGS and other general OpEx increases. Continued strong management of price and base cost positions mean that the segment is well placed to face them to the likely H2 conditions. Superior customer engagement remains a core focus with good results evident from a large-scale share of wallet program. Ongoing spend remains at elevated levels across greater than 85% of the target group. A further positive came from an accelerated sales delivery in new branch operations where full year business case volumes have been achieved well ahead of plan. I'd like to also thank our 550 team members from across all operations, specifically for the way they pulled together through the various events of the last quarter 5 weeks. And to thank also the team in Australia for their ongoing support of our New Zealand team as we work our way through those various issues. Thanks, and I'll now hand over to Abdul Jaafar, our EGM of Supply Chain.

Thanks, Marty. And again, my thoughts with you and your team in New Zealand. If I may just talk through Slide 16 on the Supply Chain. You can see on the right-hand side a couple of recent pictures of the development that we have taken, practical completion out in Queensland, the new distribution center. Pleasing to sort of say 3 things that I can. Supply rates across the business are improving, which is great. I've mentioned DCV in Melbourne. Fulfilment rates averaging up, well over 99% consistently in the first half. The 2 businesses that we brought in without any interruption on sort of the fulfillment, Bearing Wholesalers and Federal Batteries have gone really well. And then we called out previously, if you normalized inventory compared to the business case, we're on track to deliver the benefits from the investment in DCV. Moving to DCQ, again, just reiterating, we've previously called out that we expect to see EBITDA benefits of AUD 4 million to AUD 6 million during the second half of 2024, no change there. And we will progressively this year, finish the total construction besides the technology, everything else and then start bringing in the businesses warehouses in Queensland into that DCQ consolidation. The really important message is the lessons that we've learned from the startup of the DCV have all been picked up and translated into the way we're thinking about DCQ. So, the lessons learned obviously now should put us in a really good place as we then go into a commissioning phase on DCQ later this year. If I can now just hand over to Stefan to go through the financial details in a bit more detail.

Thanks, Abdul. And moving on to the financial section and into the income statement on Slide 18. From a top line perspective, Bapcor has generated strong growth year-on-year with revenues, as mentioned before, exceeding AUD 1 billion, which is for the first time in any 6-month period in Bapcor's history, so that's the record result from top line perspective. In terms of bottom line, while net profit after tax has increased by 2% to AUD 62 million for the half year, we were subject to margin compression, particularly in Retail in New Zealand and you've heard from Tim and Martin on some of those background. And we've also incurred higher depreciation costs, which are a consequence of our ongoing and past investments into distribution capabilities and further to that, some increases to our finance cost, which is a consequence of the interest rate being raised in Australia, as well as our level of net debt. Turning to the cash flow on Slide 19. Cash conversion is on a similar level compared to a year ago, but with improvement towards the end of the first half of FY '23. And that has led to the overall OCF improving by 4% to almost AUD 100 million by 31 December. However, additional actions are being implemented as further improvement in the cash conversion are required. Moving on to the balance sheet, the main focus in the first half of FY '23 remained on our inventory levels. And we have reduced those in terms of growth compared to previous half years and also, as Noel already highlighted from a higher peak inventory position earlier in 1H '23. However, and in line with my comment on the cash conversion, more projects is required in the second half of FY '23. Slide 21 concludes the financial section with the overview of our dividends. On the back of the robust performance and the increased NPAT, the fully franked interim dividend of AUD 0.105 is up by 5% compared to a year ago and in line with the Bapcor's dividend policy of payout between 50% and 60%. I will now hand back to Noel for the remainder of the presentation.

Thank you, Stefan. As I said in the opening, the presentation is split into 2 parts, the perform section which you've heard, and now we'll move into the transform section. If you look at Slide 23, just a few comments, which has sort of taken from the Investor Day that we did on the 22nd November. Bapcor is a good business. We intend to continue to be a good business, but making it a better business as we leverage the scale opportunities ahead of us have been a fully integrated business. At the heart of our business Bapcor procures transports and sales parts. Our business section work better together to create leverage across procurement, pricing, property and supply chain. We've got a leadership team that we've assembled over the last 12 months, both those who are value creators and those are value enablers. And that significant industry experience as well as operational experience and integration and transformation capability puts us in a really good place on the journey then to make Bapcor better than before to continue to perform and continue to support further growth. If you look at the next slide, we announced on the Investor Day that we would -- completed the diagnostic and we were building up the detailed plan in terms of the commitment. That first 2 phases have now been completed. We are in a really good position now as we move into a delivery phase. What we're aspiring to do as an organization is deliver even more value for our customers, unleash the power of people within Bapcor and obviously drive more value for our shareholders. So, we're at that phase 3 now and have all started already to commence in terms of delivery. Slide 25. You've seen this before for those that have seen the investor pack on 22nd November, where we said we would look into in 30 June, 2025 from the Better than Before initiative, deliver AUD 100 million net EBIT number. No change to that. What you will see on the bottom of this slide is what the return on invested capital target is for 30 June, 2025, which is a 3-year average of greater than 12% return on invested capital. So, it's not a point in time, 12% is a 3-year average. We're also doing lots and lots of work and I'll take you through some of the details that we're doing to also make sure that we improve the organizational health of the business to ensure that the transformation that we're going through is sustainable. We spent some money in the first half, which has been shown as a pro forma expense. All the money that we spend is in line with the previous guidance that we've given to the market back in terms of OpEx and also the initial CapEx. Moving then to Slide 26. Very, very conscious of making sure we have a clear scorecard to track our progress throughout the journey. There's still more work to do, obviously, on the scorecard, but let me just sort of talk through the main components on the scorecard. On the health side, our ambition is to be the best place to work within the industry. We've got a score and it's called the Occupation Health Index score, which we've completed last year where we have ranked in the third quarter on a number of measures across the number of categories. Our ambition is in FY '25 to move into the second quarter. If you then move to the performance side of things. Again, no change here. We're looking to deliver from Better than Before, at least AUD 100 million net EBIT benefit. In terms of return on invested capital, as I said now this morning, historically, we've been running at about 10% there or thereabouts. What we're indifferent to do by 30 June, 2025 is to get that return on invested capital to a 3-year average -- simple average over those 3 financial years to greater than 12%. We're developing a scorecard around what we're doing on customers and what we're doing on processes so that we can continue to hold ourselves who can deliver more for our customers and make things easier for our team members to do what we need to do and leverage up the scale of back office. The next chart, Better than Before by the numbers, just to give you a quick snapshot of all of the activity that we've been working on over a number of months, but particularly since the Investor Day. A few call outs here if I can. We've energized around about 250 people in the organization for their ideas. The process started with in excess of 690 ideas. We've fine-tuned them, we've skewed them, we've ranked them, we've risk-weighted them, we've done all these type of things. And where we are today is we've got 290 business plans with milestones and initiatives and clear accountabilities across 120 people as part of the plan to execute. That's not to say some of those ideas that haven't made it through to the 290 won't continue to be pursued as we sort of go through with the transformation journey. The rigor that we've gone to, to make sure that we're confident of delivery is now up to us to build execution muscle to deliver. Very, very importantly, similar to what I've mentioned earlier, 16 of those initiatives are specifically related to improving the organizational health of the business. You can see on the right-hand side, a number of changed milestones, we're investing in change management. We're invested in training on how we sort of will go about executing on all of these things. And we're also very obviously concerned and about the way we need to make sure we bring all of our team members on the journey to make sure that we are Better than Before. As part of that, you can see on the next slide, my quick summary. We've moved into execution phase. We've kicked off the first pilot initiative in procurement and we have a number of them to do as we sort of move through the Better than Better journey. We own the process of establishing a Bapcor-wide self-funding incentive plan to ensure we are aligned as an organization in delivering the outcomes. 2 things I would say there. That incentive plan will only be payable if the program goals that we've articulated are met, which are the 3-year return on invested capital has to be greater than 12% and the net EBIT benefit after paying any incentive to anyone in Bapcor has to then be classified as more than AUD 100 million. I mentioned earlier, delighted to announce that we've brought in Christoph Gill to head up the Australian transformation effort for Better than Before. If I can now just go through to Slide 30. Let me just make a couple of summary comments, and then I'll talk about how we're sort of seeing the next 6 months. I think we've had a pretty good first half. We've got more to do to improve our safety. We've got more to do on improving cash conversion and got more to do on optimizing our inventory positions. We've made really good progress on putting ourselves in a great position on Better than Before and we're in the execution phase. In terms of the outlook for the second half of the year, you can see on the right-hand side, Bapcor continues to expect a solid underlying performance in FY '23 with slight improvements in Trading in the second half of '23 compared to the first half of '23, subject to market conditions. And as we've said before, we expect to see more progress to further reduce the inventory levels. So, thank you for your time today. And now, I'll hand back to the operator, and we'll move into some Q&A.

Thank you, Noel. So, this is the end of the presentation. And as Noel said, we will now commence into Q&A. So, we would ask the operator to share the instructions for the Q&A and to go ahead.

Thank you. [Operator Instructions] We'll take our first question from Mitchell Sonogan with Macquarie.

Noel and Stefan, can you hear me there?

Loud and clear, Mitch.

Just first of all, just on the guidance for a slight improvement in second half. Can you maybe just talk through sort of what your base case assumptions are from a segment perspective to get to that guidance? Obviously, you're seeing some softness here in New Zealand and some pressure on margins in retail, but you had some pretty strong trading in the Specialist Wholesale and Trade businesses. So, just keen to understand your base case assumptions.

Thanks, Mitch and thanks for the question. Let me give some high-level commentary, and I won't go into specific obviously by segment by segment. But again, if you look at the first half of the year where we've been able to deliver, I think, a pretty solid result with AUD 62 million. What we're saying is, as we look into the second half is some of the cost pressures that we experienced in the first half, such as, for example, high freight costs, high container costs, elevated supply chain cost, high fuel costs, we think will sort of ameliorate somewhat in the second half of the year. We have put in some price increases to try and calculate that margin compression. We put those through towards the end of our first half, so we should see that come through. But again, if I go back to our view and we're obviously watching the retail sector very carefully, albeit, obviously, mainly Trade and Wholesale business. The underlying drivers for demand in Trade and Wholesale leverage off of the age car park and obviously, the number of cars on the road, that is still pretty robust. So, we're expecting that to continue. In New Zealand, for lots of reasons that we're expecting hopefully to see an improvement in underlying performance there, notwithstanding obviously some of the natural disasters that we're moving through. So, I guess my summary Mitch, without sort of going through each specific example is as we stand here today and you look at that AUD 62 million, what do we expect in the second half of the year to see sort of some slight improvement on that AUD 62 million from a backhaul perspective.

And just moving on to the Victorian DC. You mentioned more recently it's been operating at 99% pick rates pretty consistently. Can you maybe just give us a bit of a sense, are you starting to see improvements in market share there? Obviously, there's some teething issues that you go through around like many DC projects, but can you maybe just give us an update on how that's tracking? I guess, how that also feeds into planned inventory reductions in the second half?

Yes. Thanks, Mitch. Look, a number of people were fortunate to come out to the Melbourne DC on the 22nd of November at the Investor Day. If I look at the improvement we made there, it's a large investment. It will deliver a very substantial accretive return. If I look then at, yes, the teething issues that we had last year, which probably give our competitors some opportunity to take some business away from it. I don't think that always and particularly in the Trade business, massive shifts in market share. What we're trying to do each and every day is make sure we deliver in full on time as best we can to all of our customers. One of the big improvements in the Melbourne DC is we've now shifting the balance to more full-time team members away from the casual team members, which, again, as people then get familiar with the products and the operations and they're an integral part of the business has given us substantial operational improvement. In terms of the inventory position, we have got clear plans in place, which we will execute against in the next 6 months to make sure that we optimize our inventory position and reduce a number of the dollars that we've got invested in inventory, not just in the DC, but also we have a direct to store. But I couldn't be more pleased with the improvement that we've seen on a day-to-day basis, 99-plus is a really hard measure. And if we miss those on one line item, then it's classified as a miss. So, it's not a case of sort of saying, well, we're nearly there. It's delivering full on time. So, we're doing that and have done that for a number of months. I'm delighted with the progress that we've made there. And very, very conscious as we translate those learnings into DCQ that we don't rush DCQ just to make a deadline. We will be very, very -- we know what happens when you do disappoint customers and do disappoint team members. So, we'll be very, very cautious as we move into DCQ commissioning.

And just final, I guess, medium-term strategic one. There wasn't too much information about the Southeast Asian strategy in the back there. So, could you mind just giving give an update on how that's tracking? I think you mentioned about localizing the stores and growing with some of the bigger chains or partners over there. But maybe just give an update about how you're thinking about that business over the next couple of years?

Yes. Thanks, Mitch. As you've heard me say previously, safety stage is a strategic option for obviously, Bapcor. We have put in a new manager into Thailand, who has moved to Thailand with his family. And so I guess that gives you some idea of our intention in Thailand, [indiscernible] one of our top performers to run that part of the business. Really pleased with the progress that we're making. And the localization, again, I think it's a lesson for lots of companies that expand in Southeast Asia to localize, listen to your JV partners and put a model in place that is fit for regions. So, we've obviously also got the investment team Taisun. And so the way I would summarize it, Mitch, it's a strategic option for us. We're making really good progress and we will continue to make that progress and be very sort of carefully sort of rolling out a network expansion in that part of the world. But we're really pleased with what's been done in a relatively short period of time under a new leader.

We'll take our next question from the line of Tim Piper with UBS.

Just firstly, just around the Better program, I think you called out there are some underlying OpEx investments as well. I think the range for '23 was like 2.5% to 5%. How much of that is in the 1H result? And is it on track to be around that level for FY '23 at this stage?

Tim, happy to take the question. So, from a [indiscernible] point of view, we've got AUD 7.6 million of one-off OpEx in the 1H result, which is in line with what we said on the 22nd of November. I mean also keeping in mind that on all things Better than Before given that the 22nd of November was only a few working weeks out on the end of the year. That obviously selling so much that you achieve in those few working weeks. What we set up to remind ourselves is that we were expecting early sales OpEx of between AUD 20 million and AUD 25 million, of which 70% to 80% would be spent in FY '23. So, with the AUD 7.6 million that we have spent and we call those out separately in terms of pro forma adjustments and for everybody consensus benefit. We are absolutely in line with what we said on the 2nd of November and in line with our expectations with regards to what that investment is enabling us to do, which was to move from the planning phase into implementation execution, which is where we are at this point in time.

Yes. I guess that I was more referring to the second point of capability to build up city state OpEx increased AUD 10 million to AUD 15 million, of which AUD 25 million to AUD 35 million being FY '23? Or is that also included in that AUD 7.6 million as one-off?

I was also referring to the first bucket. Now, the second bucket has started. So, we've made some -- we are in the process of making some initial appointments in terms of that capability build-up, which in essence means that we are expanding the team so that we do have in-house capability around procurement, around property and so on. And at 31 December, no kind of dollar has been spent, and that goes to the point that between 22nd of November and 31st of December, and there's only so much you can achieve and also only so much you can spend. And so from that perspective, we are still expecting what we said on the 22nd of November, but that will be in the second half of FY '23.

Just on January trading, is it possible to provide a bit more detail around maybe what a like-for-like sales growth number or something like that would be for Jan, some of your peers and sort of retail space, et cetera, and they're giving sort of growth numbers for January?

Yes. Look, Tim, look, I won't go through like-for-like. So, what I will say, again, if you look at the statement I made, we had at a backhaul level, 11% revenue growth and 2%-ish profit growth. That has continued at the end of January.

And just one last one. On the inventory from a dollar point of view, I mean how far are these are you at the moment? And then secondly, maybe just following on some commentary around stocking levels through the trade channel and workshops, what's that been like? And what's the key driver that's going to drive that inventory down? Is it more on the demand side to get that dollar value down by for the June?

From inventory perspective, we finished the half year at AUD 562 million. That is roughly AUD 24 million up compared to the beginning of the year. 95% of that increase is with regards to new greenfield stores, business acquisitions and inflation and the like. Performance business as usual perspective, which is what we are focused on, the increased amount was roughly AUD 2 million. And that is a consequence of a lot of actions that we have taken to optimize our inventory position to increase stock turns and to have obviously more of what is turning quickly and what I would kind of refer to as bread and butter and to a less of the tail end of our inventory position and therefore, to optimize our stock. The demand side is one of it. And the other bit that we are working through and again, Better than Before will also help with regards to supplier interactions, and then to optimize our ordering patterns and both of them will in the end from all other things being equal perspective, will have to reduce the business as usual inventory position, which is our expectation as we move into the second half of FY '23.

We'll take our next question from the line of Sam Teeger with Citi.

A couple of months ago, you gave us a presentation on Better than Before where you talked about AUD 100 million in EBIT upside in FY '25. Since then, the market increased its FY '25 EBIT forecast by less than AUD 20 million. I appreciate that some of the aspects are Better than Before you were doing already, but with less than AUD 20 million of a potential AUD 100 million upside, do you think the market's been too conservative on what's Better than Before by deliver for the company?

Look, let me give a comment, if I can, Sam. From my perspective, we've obviously called out if you take Better than Before as an initiative, we are looking for that initiative to make sure we delivered at least AUD 100 million. Now, how the market has interpreted that is obviously up to the market to do. So, I won't comment whether being conservative or optimistic. But what I will say is, from our perspective, we are very determined to deliver at least AUD 100 million from the Better than Before initiative. And I think what will happen and you guys will make your own determinations on this, as we get into the execution phase and get runs on the board and can then demonstrate this is truly Better than Before, people then will reassess how they're looking at things.

And we've seen good growth in your private label. But I'm wondering your thoughts on whether right now you should go beyond the investment you're making in this space in the short-term until you get the inventory a bit more under control?

Look, I think what I'd say, what I'd say to that, if I can, Sam and you've heard me say this at the Investor Day, so let me just again repeat it. I think, obviously, inventory availability is enormously key to the business. I think our approach to private label, what I've sort of said to the business and I've said to investors and I've said to everybody else is we need to selectively work out which private labels we do and do them really well as opposed to going across too many private labels and not doing them well. And so we are going to be very, very targeted in terms of talk about inventory optimization. And so that also includes private label and we will make sure that we're enormously focused on the optimization of our inventory position to drive the return on invested capital. But I don't think it's a question of diving down. I think it's a question of being more focused on what we do.

And has the solid start in January continued in February?

Yes. So, what we can -- not that we are commenting on that necessarily but it's only been a short 2 weeks, but there is no change in conditions over those couple of days that we've seen so far.

We'll take our next question from the line of James Bales with Morgan Stanley.

Firstly, I wanted to just reconcile a couple of things on the slide for New Zealand, where the number of stores went up, the comps went up and the revenue went down. Can you just help us understand some of the moving parts there?

Yes. Thanks for the question, James. So the main driver is volume that has been impacted from that perspective. And that is a consequence of the economy and the economic pressures that we've had in New Zealand. I think Martin called out quite some of them. And we've also tried to highlight some on the second bullet point on the slide, where we talk about the reduced servicing of peer volumes, that is a consequence of a number of things. But we do know that, obviously, in New Zealand the reaction to the post-COVID environment to inflation from a macro perspective has been stronger than in Australia, interest rates has gone up higher and quicker. And that's against the backdrop of a generally lower average household income and why, generally we say, what we do is non-discretionary. But at some point in time, there is an impact and it's kilometers, travel go down, then that does impact our business at some point in time as you would expect. So, all of that then has led to what you can see from a revenue perspective, but more so from an EBITDA perspective, where margins have been under quite a bit of pressure. The other 2 things I would call out and again that is a bit New Zealand specific, and we had a slide that some of those impact because they are New Zealand specific trying to outline here that we don't see that in the Australian business, and -- but the other impact that is stronger in New Zealand than in Australia is foreign exchange and the movement of the New Zealand dollar versus from the other major currencies isn't helping the economy nor is it helping that the immigration in volumes which normally add to spend at tonnes and that they haven't recommenced either. So, all of that, it is from New Zealand specific point of view and is impacting the business there.

And then I just would like to reconcile a couple of the comments you made where you've seen the strength in sales and earnings growth continue in the first few weeks of the second half, but you're essentially guiding to a slight improvement half-on-half. Whereas what happened in the second half of last year is you had a meaningful step-up in half-on-half in sales and earnings. Could you maybe just reconcile what you're expecting to play out to get the NPAT result in line with the guidance?

Yes. Thank you, James. I think the last year was every year driven by specific circumstances and the last couple of years with COVID and then post COVID and also some more [indiscernible] specific ones in terms of the commissioning of DCV and the teething issues that we are working through in the first half of last year, which impacted 1H '22. And then we had a rebound in 2H '22 as supply rates came up. And that is probably something where the half-on-half comparison has been more skewed to one or the other half compared to be if you rewind many, many years in the pre-COVID environment, our half was actually quite stable and we had much less seasonality. And again assuming that's what we're trying to outline with the subject to market conditions, assuming that we do have stable market conditions and we've got clean air in front of us and we can trade reasonably normal, then we would also expect for some of those impacts that we've had in the business in the last couple of half years not to occur. And therefore, for the second half in terms of trading and also the spend that as noted earlier, to be up slightly compared to 1H '23.

And then maybe lastly, on inventory and cash flow conversion, what are your expectations in terms of the underlying or a normal conversion of EBITDA into cash? And how much progress do you expect to make in the second half?

Let me sort of give a comment on this, Stefan, wants to add to it, feel free. What we've publicly said, Sam, in terms of -- sorry, James, in terms of inventory and again, it goes back to what we said at the first half of the year earlier, we are expecting -- and this is -- you're going to assume other like-for-likes. So, forget the new stores and those types of things. We're expecting to reduce inventory by tens of millions of dollars. So, that was always our intention. The intention was it was always going to be second half loaded because of the long lead items that you have to deal with in this business. And so without telling you how many tens of millions, the statement that we've so said is, on a like-for-like basis, you should expect tens of millions of dollars to come through. And then that will then flow into whatever happens on cash conversion, which ultimately mathematically then says it should be significantly higher than it is today.

We'll take our next question from the line of Elijah Mayr with CLSA.

Just a couple of questions from me. Maybe just firstly, on the price increases that you sort of put through the back end of first half '23. Can you sort of just comment on, I guess, maybe the magnitude of those price increases and how much the price increases slowed into the same-store sales growth in the first half?

Elijah, look, it's always -- and it's an interesting sort of analysis to sort of say, well, what price increases did hold and those type of things. But if I look at the trade side of things, which is obviously the large part of the business, the price increases that went through in late the first half. So, that we're -- they weren't enormous. So then they probably average a couple of percent those type of things.

And then, I guess, looking into second half '23 or maybe even calendar year '24, is there any expectations of further price increases to come through?

Again, look, it's something that we -- the business is always passing through as best it can, supplier and cost increases some product. The one -- the other specific price increases that I'm sort of talking about then is, again, stuff that you're sort of looking at normally non-COGS related. And so we'll just continue to monitor what's happening in the marketplace.

And then maybe just on inventory, again, we did speak about it briefly before. Can you comment on what the peak was early in first half '23, so you can just give relative sense of how much it's produced by the -- by December?

Yes. Again, look, if I look at to where it is to where we say, a couple of months ago, the reduction over a couple of months has been circa AUD 20 million.

And then are you able to comment on the impact from an OpEx perspective that the elevated inventory has had? Just sort of noting that Victorian DC EBITDA benefits were in line with expected if you normalize for the change in inventory. I just want to get a sense of how much of the cost impact the elevated inventory is? And should we expect that to, I guess, unwind in the second half or maybe...

Yes, let me try and sort of give some statement without giving a specific number, but to give you an idea. The more inventory, and please don't take this as -- I'm not trying to be too simplistic here, but let me just try and sort of explain it this way. The more inventory we have, obviously, the more space we occupy and then the more third-party warehouses that we have to then put in place. We have to have a third-party warehouse in place in Queensland to some of our inventory. We've now exited that. The more inventory have in place and the fact that we've got to make sure that we get inventory put away very quickly, the way you do that is then you bring in labor. And so ultimately then as you reduce your inventory levels, don't need to have that same labor bill. And then to complete [indiscernible], the more inventory you have, the more net debt you use, the higher interest you pay. So therefore, the less inventory you have, then the less debt that you use and the interest benefit that you should sort of recoup. But I won't give you a specific number, but what I will say is as we continue to optimize our inventory, then our supply chain cost should reduce in the same sort of proportion.

So, if you're just looking at second half '23 sort of impact? And if you got operationally, the business is performing in line or it or slightly better than first half and then you've got some of these tailwinds from reduction in costs related to inventory and perhaps interest that should also flow through as well to a stronger second half?

I think if you take all of those into account, which is obviously what we've done when we look at our expectation and then take the segment performances with the headwinds, with the tailwinds, with the expected improvement in inventory and supply chain costs plus, if you take the obvious, you can't take all the upside, you also need to look at some of the cost element in terms of building additional capability as the business also mature. And if you take all of that into account, that's how we've been landed at our statement with regards to our expectation for 2H '23 that we would, net-net-net, see some slight improvement compared to 1H '23.

We'll take our next question from the line of James Casey with Ord Minnett.

Can I just clarify with the Burson same-store sales growth or the trade same-store sales growth was obviously very strong. Can you just clarify the composition just roughly speaking between volume and inflation in that number?

Yes. Look, it would be probably -- I'm on the top of my head here, James, look, my best guess would be it's probably 50-50.

With the DC consolidation in Victoria now, can you just remind me how many DCs you started with, how many are in Tullamarine at the moment? And then, I guess, by deduction, how many to go?

Yes. Let me start with the easy one, James, in terms of how many to go to, there's 3 to ago. I think we started with 13.

And as a percentage of sales, it's probably relatively small, I suspect?

It is. Some of the wholesale businesses.

And then just finally on the inventory position, just looking back through prior years, inventory to sales started running 23% to 25%. Taking the top end of that range, you're running at 28% at the moment. Is 25% a good guide for where you intend to land?

Look, I won't be drawn on giving you whether it's a good guide or not. What I will say is, if you look at the last few years, for lots of reasons, we've grown the business as we first we integrated. We've got private label, all those types of things. We've got supply chain disruption, we've got long lead times, all of those other things. I think my guide is if we take tens of millions of dollars of that of inventory, that eventually will translate, obviously, to better inventory to sales number than you've seen today, but I won't be drawn on what the target is going to be.

Just the last one, just in terms of your guidance, I just want to make sure we're clear on this. You're expecting second half '23 NPAT guidance or second half '23 NPAT to be ahead of first half '23, but you're not saying it's going to be ahead of second half '22?

That's correct. We're saying, the way to sort of read the words that we got on the page is, again, we've made AUD 62 million in the first half. And our assumption, subject to market conditions, is to expect a slight improvement against that number in the second half.

We'll take our next question from the line of Andrew Hodge with Credit Suisse.

Noel and Stefan and the broader Bapcor team, just I understand your point, Noel around the cash conversion with regard to inventory. So, if we just put inventory to the side for a moment, normalizing for inventory, what do you think the business should cash convert at through the cycle in time?

Yes. Again, I look at this way, Andrew, and sorry, I should say Good morning, that was rude of me not say Good morning, if I look at the business and you sort of sit there and you say, okay, how much should we are able to convert? I think it should be obviously north of 80%. Sometimes it will be higher than that. Currently, 67% is not where we'd like it to be. Theoretically, could it be much higher than 80% or so, look, it probably could. But I think sustainably should be sort of north of 80%.

Just on the I guess, Better than Before, I mean the idea you're talking about margin improvements effectively captured in Better than Before. But from your point of view, I understand your point about a 3-year average ROIC target. When do you expect to start seeing, I guess, the margin improvement that begins to flow from better than before?

Yes. Look, I think, Andrew, if you look at one of the charts that we put out on the 22nd of November, and I think it's also in the pack, you can sort of see there are 3 bubble chart -- 3 circles, that sort of said, look, net-net, this year we will be sort of, from Better than Before negative, then will be positive next year and then obviously, substantially positive in FY '25. And again, the thing I would say on the return on invested capital, we're currently sitting today at just over 10%, 10.2%, I think is our arithmetic. First, and then to average 12%, you work the math out, then you say, well, if the next 2 years, we only did 12%, then we don't have average 12%, so by default in 30 June 2025, we have to be north of 12% to average 12. FY '25 is the year when you should see, obviously, Better than Before really coming on.

And then just on the -- I know you mentioned you've narrowed it down to, let's call it, 300 million -- sorry, 300 projects. I imagine that it's not an equally weighted benefit across the 300. So, what would be -- what's the value, if you like, of the say, top 20 projects versus maybe what the tail looks like?

That's an interesting question. It is actually a large number and with a reasonably low average value, which, in my mind, means that we kind of almost sound probability weigh the portfolio and there might be pathways on how we can get to the overall benefit that we're targeting. And there is not a go back to your implied 80/20 question. There is not one large or the top 5 initiatives. When we hit those, that's it. But when we miss those, then we've got a significant problem. It is actually a large number of initiatives with a reasonably kind of low average value across a lot of them.

And then just last question from me. You're through Phase 1 and Phase 2, as I understand it. McKinsey in on the project as part of Phase 3? Or are they now no longer required as you move into Phase 3?

Let me respond to that, Andrew, if I can. So we're building capability. And so part of the capability build is happening, the knowledge transfer is happening and so when we get into -- obviously, the really big execution phase, which will be next financial year and the year after, your expectation should be that we've built the capability internally then to deliver ourselves.

We'll take our last question from the line of Tom Chapman with Jefferies.

Just a quick one for me to finish off. Just wondering how your market share is trapped in Q2 compared to GPC? And then following on from that, how do you view that into Q3 and Q4?

Yes. Look, thanks, Tom. Market share is always a little bit subjective. Look from my perspective, if I look at particularly the Burson business, I think I don't see in that business large shifts in market share. But I think we're carrying our own way there. The retail business, it's always a little bit harder again doing comparisons and those type of things. We're a smaller business than some of our competitors in terms of scale. But again, look, think I don't think you see massive market share shifts. Thanks, Tom and thank you, everyone.

That concludes today's Question-and-Answer Session. Stefan, at this time, I'll turn the conference back to you for any additional or closing remarks.

Thank you, operator. Once again, we would like to thank all participants on today's call for your continued interest and support of Bapcor and are looking forward to engaging with many of you over the next days and hopefully in person. Thanks, everyone, and stay safe.

This concludes today's call. Thank you for your participation. You may now disconnect.