Bapcor Limited (BAP) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Bapcor Half Year Results Announcement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Angus McKay. Please go ahead, sir.

Thank you, Lynette, and welcome to everyone who has dialed into today's call. As Lynette said, my name is Angus McKay, and I'm joined here today with George Sakoufakis, and together, we'll be presenting the Bapcor half one results for the 2025 fiscal. I'd like to remind everybody that you'll be able to participate in the Q&A session if you have joined us via the dial-in and not via the webcast. Also, please note, as Lynette said, today's call is being recorded. We jump to Slide 2. I'd like to start today by acknowledging the traditional custodians of the country throughout Australia and pay our respects to Elders, past and present. We recognize the continuing connection of First Nations people with the country across Australia and beyond, in particular, the Wurundjeri People of the Kulin Nation, which is the land where we meet today. So today, I'll be talking to the results first at a group level and then for each of the segments. As part of that, I'll talk a bit about my initial impressions over the past 6 months since coming on board and our key focus areas as a management team. I'll then hand over to George to talk through the financials in more detail before closing with a summary and outlook. I will then open for questions. Turning to Slide 4. Before getting to the results, let me offer you some perspectives on Bapcor and our prevailing industry. I'm now 6 months into my role at Bapcor, and I must say I'm enjoying myself immensely. There is an abundance of opportunity, which will be delivered over time. As I've spent time with employees, suppliers, franchisees and shareholders, I've taken the time to talk about the great business that is Bapcor, the advantaged industry in which we operate and the positive I see, positive future I see for Bapcor. We have work to do to seize this opportunity. Our business is too complex, a situation of our own making. We lack current state processes and tools. We have duplicate infrastructure and associated resources and require a greater focus on the end customer. Our current state is, of course, a product of our history. We are blessed with excellent and knowledgeable people, but lack of investment or at least investment in the right place means it will make life difficult for them and our customers. Later, I'll talk to what is already being done, but it's fair to say we have more work to do. The Australia and New Zealand Car Parks are 11.4 and 13.6 years, respectively, and continue to grow at approximately 2% per annum. This is a backdrop for future success. There is an increasing reliance on independent mechanics and a move away from the OE provider as warranties end and cars get older. Cars are increasingly complex and so by the parts that they require. With a network of 732 locations across Australia and 205 locations in New Zealand, combined with our extensive parts range, we are perfectly placed to service these growing Car Parks and the customers that stand behind those vehicles. We have state-of-the-art distribution facilities and the opportunities to leverage these further. Combining supply chain assets with industry-leading knowledge and people, I believe we are competitively advantaged and well placed to serve those customers better. The opportunity is ours to take, but require a different approach to working with our customers. We have opportunities to improve across the business, most notably in Retail and Wholesale. In Retail, we are focused on getting the right product in front of the customer by investing in our people at a store level, our offer, technology and pricing to make that opportunity and that offer more attractive. Candidly, Retail is our most in the business. The team is committed to the turnaround, but it is hamstrung by poor decisions of the past. Our actions are rectifying this, but it is a journey. In Wholesale, we are rightsizing the cost base in both the warehouse and people perspectives as well as resetting pricing. We are setting both the Auto Electrical Group, AEG and Commercial Vehicle Group, CVG, up for success, but we need to rapidly shift these businesses to integrate them rather than them being stand-alone operations tied together by a single name. And what you hear more about today are the actions that we are taking across the business to simplify our operations, focus on the customer and reset the cost base to drive sustainable and profitable growth. What we have already done is clearly beginning to hit the right mark and is setting us on the right path. These actions will take time to implement. And as a team, we're focused on the task ahead to deliver the right outcomes for both the team, our customers and our shareholders. Finally, we are planning a strategic update in the week of the 28th of April this year. More will be said about that later, but I'd ask you to mark that week in your diaries. Turning to Slide 6 and the half one result. Pro-forma NPAT was down 15.2% on the prior comparative period. This is largely attributable to the underperformance in Retail and Specialist Wholesale, which we operated in a difficult macroeconomic environment. The Specialist Wholesale business has been disrupted by the ongoing consolidations and required restructuring. I'll speak to each of these a little later in the presentation. Despite the challenging macroeconomic environment, our Trade business delivered a strong result with revenue up 1.9% and EBITDA up 12.3% on the prior comparative period as the benefits of cost reduction programs begin to take effect and the team sharpens its focus on the customer. The simplification of the business has been a key priority over the half with more to come in the second half and beyond. Key priorities included the unwinding of the better-than-before head count, consolidation of warehouse sites and the integration of businesses and technology. This has been especially the case in the Specialist Wholesale division to get it back on track. New Zealand delivered a solid performance. In local currency terms, revenue was flat to prior period, but EBITDA was positive 4.8%. Economic conditions in New Zealand remained significantly challenged, and we consider the result to be positive considering the continuing position. All up, this resulted in positive revenue growth across the group when we adjust for businesses sold or that are available for sale in the current period. We're pleased that half one '25's performance is a strong build on second half '24. EBIT was down 7.2% due to higher cost of doing business, mostly related to our IT investment, employee expenses and the reinstatement of marketing spend. However, following the actions we have taken, it grew by 6.2% in H2, against H2 on '24. At the full year results presentation, the team outlined plans to achieve cost savings of between $20 million and $30 million. I'm pleased to say we expect to achieve those savings towards the top end of the range by the end of this fiscal year. We have been disciplined in our capital management, generating good cash flows with conversion up substantially to 108.5%. This allowed us to reduce debt by 10% and supports the Board's decision to declare an interim dividend of $0.08 per share, representing a payout ratio of 60% at the top end of our stated range. Lastly, the start to the second half of the current fiscal year has been consistent with the return to work within our industry, and we are confident in the balance of the year. Revenue for the first 6.5 weeks for H2 was positive by 0.5 percentage point and on a like-for-like basis, with Trade up 3.7% on the prior comparative period. We, like others, are heartened by the RBA's decision last week to reduce the cash rate by 25 basis points and hope that continuing improvements in underlying inflation facilitates greater consumer confidence and a continuing environment of interest rate reductions. With that in mind, we are optimistic, but we will be prudent in how we manage the business. Now turning to Slide 7. Our focus in the half has been on delivering against the key strategic priorities outlined in the full year '24 results and those that I talked about at our AGM. On Slide 7, we have detailed the progress made against these specific objectives. As I've mentioned, the targeted cost savings are expected to be at the top end of that $20 million to $30 million range and in line with what we've previously said, will be weighted to the second half. Most of the head office head count reduction was completed towards the end of quarter 1. So, some of that benefits are included in the first half, while those savings, the majority will occur in H2 and savings from our DC rationalization will be heavily weighted to the second half. We have also closed 9 marginal and loss-making stores and merged brands and business lines. We've made excellent progress, and these initiatives are all on track. We're also well progressed in our Specialist Networks consolidation, and those anticipated benefits will come through in the second half of the current fiscal year by cost savings. In focusing on our core divisions, we're expanding the network in our core Trade segment, and we have exited the MTQ diesel fuel injection business. Reinstating a store expansion program has been a key focus for the Burson team, and we have added 6 further Burson stores and merged 3 other stores, growing by a net 3. A further 6 new store openings are planned in the second half of '25. Operational reviews of our Retail and our Wholesale business are ongoing. We have commenced a restructuring in Wholesale to simplify the business and the organization design, refocusing the business on external sales rather than internal sales. As a consequence, a number of the businesses are likely to be merged or exited. In Retail, we are focused on rebuilding the foundations of the business, including improving systems, store processes and importantly, our people capability. Specific to Retail, we have needed to step backward in order to step forward. More detail of these outcomes will be talked about at the strategic update in that week of April. And lastly, we have made several technology upgrades, including the new Autobarn website, a common company-wide e-mail domain, IT infrastructure into our stores, a Trade pricing engine, the establishment and utilization of a data lake and the consolidation of several ERPs. The investment for IT in the half was approximately $11 million with 43% increase over the prior comparative period. Of this, $8.2 million was capital and $2.8 million was operating expenditure. We turn to Slide 8. Here, I've outlined some of the positive attributes of this business that attracted me to join in the first place and pleasingly have been affirmed as I've spent time getting around the business. As mentioned, there is no doubt that our range of parts and distribution networks are a competitive advantage in servicing our customer. At our core, we are a fulfillment business. Parts and products delivered to customers, coupled with superior service and product knowledge must be at the heart of our operations. And I've already talked about the resilient nature of our industry and our strong market position. We have a healthy balance sheet and an underlying financial position. One of our principal issues, however, has been a decade of underinvestment in systems and process. The good news is that we've already started to address this position, but there is more required. The right-hand side of this slide outlines the areas that we'll be focused on to get back to the basics and deliver for our shareholders. It's important to note that funding is not our constraint. We must successfully prioritize activities and resources to move forward with speed and without waste. We intend to be logical and sensible in our approach to this. We've continued to exit noncore businesses, reduce complexity and focus on the resources within our operations that are central to our future. We will, this will enable us to grow market share, but importantly, this reducing of this number of ERPs will help our back-end process and simplify the way we work. As such, our investment in our core businesses will position us to take advantage of growth opportunities. These investments are in process across intercompany simplification, both customer-facing and internal technologies and, of course, human capability. We have also recommenced opening new stores, especially in our core Trade segment. More investment here in a rational economic manner is planned. We're in the process of reviewing our inventory ranges and managing our pricing. This will improve our customer offering, increase our stock turns and help support and grow our gross margins. As I outlined at the AGM, the leadership team and I are developing a clear strategy and vision for the business, and we'll talk more about that in that week of April 28. Now turning to segment performance. Our largest businesses, Trade and Specialist Wholesale contribute 38% and 35% of the group revenue, respectively. And together, they make up more than 75% of group EBITDA. During the half, our Trade business grew revenue by 1.9% and pleasingly, EBITDA grew by 12.3%, primarily due to the operational cost efficiencies. On the right-hand side of this chart, you can see that 81% of our revenues are nondiscretionary, making the business more resilient in cyclical downturns. The other key takeaway on this slide is the earnings momentum we saw in H1 compared to the second half of '24 with EBIT up by 6.2%. All segments grew earnings in consecutive halves with the exception of New Zealand. Let me now dive into the segments in a little bit more detail. Trade has maintained market share in both parts and tool categories. Looking more closely at the revenue split for the Trade segment, Parts was resilient and grew by 1.4% over the prior comparative period. We are making solid sales gains in our key accounts and see further opportunity in the second half of '25, leveraging the strength of our relationships at a store level with these specific customers. Tools and Equipment sales were up 5.1% on the prior comparative period, driven by growth in our service chains. As I mentioned earlier, our network expansion continued with 6 new Burson stores across New South Wales, Victoria, Queensland and Tasmania, together with the merger of 3 new stores. 6 further new stores are anticipated in the second half of '25. In addition, we acquired the ACT-based independent parts distribution business, Motor Spares in October of 2024. These businesses were consolidated into 2 existing Bursan stores. EBITDA was up 12.3% because of effective cost management and better rostering, which increased our EBITDA margins by 165 basis points. Investments in technology upgrades continued with a key focus on EZYParts, our parts catalog. With a growing share of orders now placed online, improving this platform drives both operational efficiency in Bursan and ease of customer interaction. While small in contribution, we have stabilized the Thailand business. It is now both EBIT positive and generating positive free cash flow. Turning to Slide 12. Our Specialist Wholesale business undertook significant change over the period, including business consolidation, site closures and amalgamations. This has been a difficult process to manage in the short term, but these are foundational steps in building a simpler and more robust platform for the future. In Specialist Wholesale, trading challenges remain, but were partially offset by the cost reduction program. Specialist Networks delivered revenue growth, whilst Wholesale was marginally weaker in the first half of '25. Specialist Networks revenue was buoyed by good growth in AEG, while CVG grew revenue, the focus for the half was on rationalizing duplicate footprints and integrating the Truckline and WANO businesses. Wholesale continued to be impacted by intense competition with a softer performance in the bearing Wholesale business. Pricing was reset late in the half to arrest some of the volume declines, and we expect this realignment to continue to show positive outcomes in the second half. One of the other major businesses in Wholesale is AAD, a Wholesale automotive business, whose results were impacted by competition and stock availability issues. As a result, half 1 '25 EBITDA for the segment overall was down by 6.2% and margins were down 98 basis points. We simplified the AEG business, which included consolidating 3 ERPs into 1 and divesting the MTQ Engine Systems business. With technology integration successfully completed, we are now prioritizing growth opportunities in both AEG and CVG, including expansion into new categories. Significant work has also been undertaken in Wholesale to review, and as I mentioned earlier, we have commenced a restructure of that business to simplify the organizational design and refocus the business on external sales. Consequently, several businesses will be merged or exited. Now turning to Slide 13, Retail. We saw modest revenue declines of 1.1% in Retail, which was impacted by the macro environment and the Retail environment with lower sales of discretionary categories. The business also undertook a focused effort to clear obsolete stock. We have shifted circa $4 million in slow-moving and obsolete stock at a COGS level from our store network and changed our promotional cycle away from fully funded all store sales to pulse promotions supported by our key suppliers, more in keeping with a normal Retail organization. Whilst impacting our total sales performance, there are clear benefits to our gross margin. The 26.1% EBITDA decline was driven by the lower revenue and gross margin and higher operating costs as we include the restatement of advertising spend. EBITDA margins were down by 380 basis points. We invested in our Retail e-commerce platform. The launch of a new Autobarn website on the 20th of November has resulted in improved customer experiences, a higher conversion rate, and an increased proportion of online sales. This is an important validation and was pleasingly timed to coincide with the Black Saturday and Christmas trading periods. We also continue to grow membership in our Accelerate loyalty program, which now stands at 1.4 members versus the 1.2 members as of the 30th of June. Growing and activating this base continues to be a key focus for the Retail team. We've made good progress in our Retail operational reviews and have already started to implement a number of changes that will result in a better performance for this business. We're improving systems, core processes and our people capability to enhance our Retail capability across all of our brands. The detailed outcomes of this will be talked more about in the week commencing 28th April. Turning to Slide 14, New Zealand. The New Zealand economy continues to experience challenging conditions, which is impacting our trading. However, our business on a local dollar basis, New Zealand dollars was flat with a slight decline once converted to Australian dollars. This didn't impede our ability to increase EBITDA, which was up by 4.8% in New Zealand dollars and 2.5% in AUD off the back of procurement benefits, pricing disciplines and effective cost management. This led to our margins expanding by 71 basis points to 16.9%. We opened 2 new BNT locations in November in South Waikato and Central Auckland, whilst 2 locations were also closed, one at the very back end of half 2 '24 and in half 1 of '25 as we look to improve the returns across our network. We continue to experiment successfully with different selling and customer service models, which allow us to flex our cost structures and not adversely impact our customer service. Now turning to our supply chain. On Slide 15. We are on track to deliver a reduction of approximately 20% of our smaller warehouses. This table shows the progress we have made through to December 31 and then through to January 31. By the end of January, we have completed 8 warehouse closures with those sites being vacated and the properties handed back to landlords. In addition, we exited 7 warehouses with the transition of operations into either DCV or DCQ. We are still in the process of a make-good stage or in discussions to sublease these sites. A further 7 warehouses will be exited in H2. We've established 3 new state-based mini-distribution centers in Perth, Sydney, and Adelaide to service our customers more quickly with a broader range of our core product. During the establishment of these new mini DCs, higher safety stock levels were held to ensure supply to our key customers. As these rapidly mature, that is the mini DCs, we'll now work to work down stock levels in the surrounding stores. We've been granted Trusted Trader accreditation, which allows us now to accelerate access to our important stock. And going forward, further warehouse consolidations are expected with 4 already planned for FY '26, which will continue to optimize both cost and inventory levels. I'll now hand over to George to go through the financials.

Thank you, Angus, and good morning, everyone. I appreciate you making time to join the call. I look forward to talking to many of you over the coming days. Turning to Slide 17, income statement. As Angus mentioned, while the financial results have been challenging in certain trading segments, namely Retail and Wholesale, we are taking action to improve our performance. Our focus is on simplifying our operations, both in terms of prioritization of activities and removing duplicated costs as seen with the closure of many of our warehouses. We have consolidated related businesses and brands where it makes sense like our Specialist Networks business. We are removing complexity for our employees through implementing 1 company-wide e-mail system. We have established many state-based DCs to better service our customers, both in terms of stock availability and delivery efficiency. Our focus during first half '25 was on delivering the key actions we identified in August, and it's pleasing to see some of these benefits starting to flow through these results. Pro-forma group revenue, which excludes revenue from the MTQ business, which was sold in November and other businesses held for sale in the Retail segment was up 0.3% to $987.8 million. Revenue growth in Trade was offset by declines in Retail and New Zealand, noting New Zealand revenue was flat in local currency. Our total gross margin dollars of $463.2 million was 0.5% higher than the prior period and was largely driven by growth in Trade, but offset by declines in Retail and the Wholesale business. Our cost of doing business increased $12.6 million to $330.8 million. This increase largely relates to the strategic IT investments that have been made, our transitional supply chain costs and advertising and marketing costs in Retail Networks within the Wholesale segment. Of the CODB increase, $4.7 million of this was related to strategic investments in IT projects as we have invested in improving systems and applications, including the creation of a central repository of all business data, which we call our data lake. We are also building a pricing engine for our Trade and New Zealand businesses. As Angus mentioned, we have consolidated ERPs within the AEG business by merging 3 systems into 1. We are also implementing a common company-wide e-mail domain and investing in fiber to our stores to reduce call dropouts. The increase in transitional supply chain costs of circa $4 million were related to the establishment of the state-based mini distribution centers and a micro fulfillment center and the closure of warehouses associated movement of stock to DCV and DCQ. In addition, advertising marketing spend increased circa $2 million in Retail and networks to reinstate advertising and improve share of voice. Depreciation costs increased $0.9 million to $49.2 million, largely due to our investments in the DC network and the establishment of our national supply chain model. We managed to lower our financing costs due to the rationalization of the network of smaller warehouses and removing some options associated with certain warehouses. Pro forma NPAT of $45.5 million was lower than the PCP result of $53.7 million due to the combination of relatively flat revenue growth and increases in CODB mentioned above. Statutory NPAT of $40.8 million was down 13%. The main difference between pro forma and statutory NPAT predominantly relates to the loss on sale of the MTQ business and the trading losses of the businesses held for sale. Moving to our cash flow statement on Slide 18. Before I talk to cash flow, I would like to highlight some of the important changes introduced over the past 9 months. The key changes were improved financial governance and processes for our accounts payable, accounts receivable and general capital expenditure. Whilst there is more to do, we have made significant progress. We have established an investment committee that ensures we are properly reviewing proposed financial spend, making prudent financial decisions, leading to efficient capital allocation. Operating cash flows were $143.7 million in the first half versus $89 million in first half '24, which is related to better receivables collections and better management of our international supplier payment terms. We had no change in average payment terms for local suppliers, whereas there was a 22% improvement in days payable for international suppliers. The improvement in creditor days for international suppliers was largely driven by the negotiation and the increases in average payment terms with international suppliers and the reduction of upfront deposits made to those international suppliers. The business improved cash conversion in the first half to 108.5% versus 62.4% in the prior comparative period, driven by the strong focus on receivables collection and the improvement in creditor days on international suppliers. Importantly, we achieved positive free cash flow in this first half, which is the first time this has been achieved in the first half over the past 4 years. Finance lease costs were lower driven by the warehouse rationalization program. The new distribution store CapEx was focused on our state-based DCs in New South Wales, Western Australia, and South Australia and the micro fulfillment center we've opened in Victoria, in addition to the new stores that we've grown in Trade and the Specialist Networks segments. Other CapEx declined due to tighter controls on capital expenditure, especially in motor vehicles, which is down $6.3 million, and tighter controls on other property, plant, and equipment purchases. As mentioned earlier, we introduced stronger governance around capital expenditure within the establishment of the Investment Committee. The committee ensures optimal capital allocation across our trading segments and group functions and reviews the performance and use of our capital against plan. Proceeds from the sale of assets relates to the MTQ business sold in November. Dividends paid reduced from $39 million in half 1 '24 to $18.7 million in first half '25 due to a lower final dividend declared in FY '24 of $0.055 compared to 11.5% in the prior period. As noted, we are declaring a fully franked $0.08 dividend to be paid on the 3rd of April, which is at the 60% payout ratio. Turning to Slide 19. We have a strong balance sheet. We have worked hard to improve our working capital, most notably improved creditor terms on overseas suppliers and better enforcement of our trading terms, which has led to the reduced debt. But we have work to do, especially on inventory. The inventory build is largely driven by our stock in our new state-based distribution centers in New South Wales and WA and the new Victorian micro fulfillment center and the growth of new stores within our Trade and Specialist Networks businesses. Assets and liabilities held for sale relates to the noncore businesses we are exiting. However, there has been a material reduction since June 30 through the sale of the MTQ business. Property, plant, and equipment increased by $8 million from 30 June 2024 due to the investment in state-based DCs and the new stores in the Trade and Specialist Networks business. The reduction in the right-of-use assets by $53.6 million from 30 June '24 is in line with the decision made to rationalize a number of smaller warehouses and the reduction in lease extension options. Turning to Slide 20, net debt. Our net bank debt of $304.5 million has a leverage ratio at 1.65x, well within our covenants, and we have over $290 million of undrawn facilities. We are currently refinancing $170 million of debt facilities due to expire in July 2026. We expect to complete this refinancing in April and May of this year. We reduced our debt levels by 10% since June, primarily attributable to the strong cash conversion. We have a strong interest cover ratio of 7.69x and a fixed cover charge ratio of 2.66x, and we have the balance sheet support we need to execute on our plans and support future growth. We intend to be very structured, disciplined, and deliberate with the use of those undrawn facilities within our capital allocation framework. With that, I'll hand back to Angus for the summary and outlook.

Thank you, George. Before I turn to the summary and the outlook slide, I'd like to mention the announcement we made last week on the resignation of George. George is leaving Bapcor to pursue another opportunity. During his time with Bapcor, George has made an important contribution to the company with the restructure of the finance team, the establishment of the investment committee, and a strong focus on improving our cash conversion. It is disappointing that George won't be around to see the full benefits of these initiatives, but we wish him well. George will still be around until we find a suitable replacement. Moving to Slide 22, the summary and outlook. I won't hide from the shape of our statutory performance, which is not where we want it to be. As I've said, we have more work to be done, most notably in our Retail business. That said, the momentum in our core Trade business is pleasing with revenue growth of 1.9% and EBITDA growth of 12.3%. This supports our focus on this key business and the reset process across the other businesses. We are focused on simplification and the basics of running our business well to deliver growth, optimizing our footprint, and resetting the cost base to improve our margins over the long term. We are well progressed on the operational improvements I outlined earlier. And through thoughtful capital allocation, we have delivered strong cash flows and lowered our debt. In terms of our outlook, we expect to achieve the promised cost savings towards the top end of the $20 million to $30 million range. The work required in H2 is significant, but it is a continuation of what has already begun. As mentioned, trading momentum has returned following the Christmas and New Year break. Revenue for the first 6.5 weeks of the second half was positive by 0.5% on a like-for-like basis, with Trade up 3.7% on the prior comparative period. We have reason to be confident in what we are doing and it is working and that the changes we are making are improving the way the business operates and importantly, how it serves the customers. We have plans to Trade in challenging conditions, but we will embrace any positive changes on the consumer sentiment front and the underlying economic conditions we Trade within. Our focus is on sustained change that drives growth. We'll continue our Trade store opening program and enjoy the benefits of the new stores that were opened in H1, and we expect the price changes made in Specialist Wholesale will continue to drive volume and value in the second half. The rebuild of our Retail business will continue, our focus being on store operations, e-commerce, store-level profitability and margins, and merchandising improvements. Finally, we will continue to simplify the supply chain across all business units, driving efficiencies, scale, stock visibility, and an easier customer experience. With that, I'll now hand back to Lynette to facilitate any questions from the audience. Lyn, Can I just make sure that we're still connected to you?

[Operator Instructions] We're going to take our first question from Craig Woolford from MST Marquee.

Angus, and George you hear me?

We can.

Yes. It's very faint with Lynette, but clear for you guys. So just in terms of the 2 questions. The first one, just around the Retail business. I know this is a hard one to answer, but how do we judge what is company-specific challenges and the competitive dynamic in auto Retail is a challenge as opposed to just macro factors because it does look like the Auto Retail market has become more competitive and could increasingly become so with Bunnings expansion in auto in the next couple of months.

Yes. Look, Craig, I'm going to say, yes, firstly, the Retail dynamic in the marketplace is competitive, not just auto, but just Retail, you're seeing that from other results. I think secondly, what you're seeing within our business is the reset that we are doing, I'll say, at the store capability level, but particularly the way in which our Retail business Trades, if I can use that expression. I mentioned in my discussion that we've changed our promotional approach from being all store, everything store sales to very specific category-based promotions funded by suppliers. That's a significant shift in the way in which this business has promoted itself. So specifically, I won't attribute left or right hand here. But the steps that we are taking in Retail are fundamental to resetting it to a Retail operation, perhaps not where it has operated in the past.

Yes. Okay. Understood. And then, I mean, your key focus, your future focus areas at Slide 8. Just a clarification on the third item in that, which I'll read out is strategic inventory ranging and pricing to improve customer offering and stock turns. Can you just elaborate on what that means, please?

Yes, I can. So, we hold a vast array of parts within our organization, and that is a competitive advantage. But just holding that range everywhere is not being necessarily as smart as we can be. So, Level 1 is that balance between what range we hold as a DC versus a micro fulfillment center versus a store. So, getting that balance correct. That is work in progress because obviously, we're introducing the micro centers and our DCs, I'll say, are only just getting up to the level of performance we want. The other part is making sure that ultimately, we optimize the range we hold for the cars that are in the Car Park within the locality of that store or that DC. There's no point holding a broad range of parts that actually don't service the cars that are within a given locality. And that's what we mean by strategic ranging. Pricing is then also about making sure that we optimize with whom we compete. So obviously, our external competitors. But equally, because of the nature of the business we've got, we do spend some time competing with ourselves, and we need to eliminate that bluntly.

Yes. Understood. Okay. And there should be a balance sheet or an inventory working capital benefit from that over time?

Yes. George spoke when he was talking about inventory. Our inventory has lifted. We know that. That is, to some degree, by design as we insert these more efficient centers in between our DCs and our stores or where we actually expand that DC network into either Queensland, South Australia or Western Australia or New South Wales. The job now is actually to extract stock from the deeper parts of our network to allow those micro centers or DCs to be more efficient. That's work that is in H2 and H1 and H2 of next fiscal year. Obviously, our supply chain is very long by nature of our imported base, but we start that work now to get the benefits as quickly as we can.

[Operator Instructions] We'll move next to John Campbell from Jefferies.

I'll just ask 2 in the interest of time. The first is, obviously, pretty solid performance out of Trade in what looks to be pretty much flat volumes. And it appears to have been, it's obviously hard for us to work this out, but it appears like volumes have been flattish in Trade for, let's say, the last 3 halves, which is very unusual historically, my understanding, given the growth in the Car Park and the aging in the Car Park. So, the question would be, are you guys sort of expecting that after a prolonged period of flat volume growth that we've got a sort of a buildup in latent demand and that we're going to start to see volume growth within Trade?

Look, I suppose there is, I'll say there is a hope on that. I'll use that word. We're sitting here not trying to project what our customers are doing. My perspective will be the last 18 months across our industry, we have seen, call it, discretionary servicing needs change and customers have been pushing service jobs out as they manage their own wallets. That's pretty much a state of fact. Our focus is now to make sure that we optimize what is that volume versus value movement out there. A period of high inflation around imported parts, domestic parts, we need to make sure we recover that and maintain that margin structure been very, very important. Now we need to make sure we're doing is as customers return to that servicing world that we take advantage of their, I'll say, their volume-based business without sacrificing margin.

Yes. Okay. So, you're sort of essentially not making any assumptions around volumes and you're just going to take the market as it comes but try and improve your exposures and offering.

Correct.

Yes. Okay. So, the second question, Angus, obviously, you've called out in terms of IT and sort of systems modernization. Is there, and I know you can't really put a time frame on things at this stage, but there's obviously a big sort of consolidation of ERP systems across the group. And is there any sort of, well, any broad signs you can give us in how long you think that sort of core IT platform modernization and consolidation will take?

I wish I could give you the definitive answer. I certainly know that across the organization, there are thousands of people who'd equally like me to give that definitive answer on when it's going to happen. This is going to be a slow process. And it's going to be driven, I'll say, across 3 places. So firstly, as everybody knows, we've just got a very complex landscape and one that is aged. So therefore, what we want to do will necessarily take time. Second point is we're very focused on doing this in a structured way. So, this is about what we've already described where we can take 3 systems and make them 1. That one system is not necessarily the best system, but it's certainly better than the other 2, and therefore, building a constant level of improvement is important to us. There is then the perspective, and I said it in the words I use, this is not about money. This is actually about prioritizing our resources, which is actually may be even more specific about prioritizing our people and their activities. There is only a certain amount that we can get done. So, if you like, the governor on that change program becomes what we can ask of our people, and we're already asking a lot on that front. And then the final comment I'd give you is we're now sitting down and trying to work at how we actually can utilize the platforms we've got at a scale level. So rather than necessarily introducing new technology, what can we do with what we've got that actually provides scale and benefit right across the group as distinct from just benefit to one of the individual segments or micro segments within our organization. So, I hope that gives you sort of an idea of the way we're thinking about it. I wish I could tell you it will be done in 2, 4, 6 years' time, I don't know. We just keep going at it.

And we'll hear next from Elijah Mayr from Goldman Sachs.

Just a couple from me. Maybe just on the group allocated costs, obviously, a big step up there, largely due to the IT investment as noted. What run rate should we expect into the second half? Is there more cost to come in into the unallocated segment?

I think your question is on the AUD 20 million to AUD 30 million first half to second half in terms of the savings? Or is your question on the unallocated...

On the unallocated group costs, just sort of the step up largely attributed to IT investment. I just wanted to sort of get a sense of the run rate into the second half, just noticing that there's quite a bit of a step up.

It would be similar to what is in the first half, just slightly above that level in the second half. So, we did a capital allocation plan. And some of the projects just got -- timing got deferred a bit, but majority, the same run rate in the first half will apply to the second half. But with the delay of a couple of projects, it's slightly going to be elevated in the second half.

Excellent. And then maybe just on the Wholesale segment, margins obviously materially improving half-on-half. Can you give us a sense of the price increases that were put through sort of late in the second half and again, sort of the sustainability of those margins going forward into the second half? Or should we expect some of that cost optimization to sort of be more specific to the Wholesale into that second half?

Yes. So, from a Wholesale perspective, the actual price change that we talked about in the second half that we expect to bite in H2 is actually a decrease in price to drive competitiveness in units. And I won't give you the actual number. I think you understand why, but we have done that selectively on categories. Clearly, the largest component of those categories would be some of our braking world and engine components.

So with that price decrease, should we expect pressure on margins into the second half versus the first half?

Elijah, let me be a little flippant here, which is any pressure on margins, we want to be offset by an increase in volume/revenue. So hence why we've done it that way.

[Operator Instructions] We'll move next to Sam Teeger from Citi.

Just in terms of the cost savings, given the $20 million to $30 million cost out is nearly complete, how are you thinking about further opportunities? And from your perspective, what areas of the business have the most opportunity for a potential second phase of cost out?

Thank you. I'm I'll take exception that it's nearly complete. We think we've still got basically another 4 months to run before we've actually slam the door on that one.

You are more confident at the top end of the range, as you said.

No, you are quite right. We are confident that we're going to be at that top end of that, call it, the 30 end of that range. We're turning our minds to where it will come from. All I'll say to you is we've already got our eye on what's the next layer of, call it, small warehouse consolidation we need to do across the organization. So that is in our mind. I mentioned, I think, in my words that we've already got our eye on FY '26 around another 4 sites. So, we're already starting to think that way. There is work to be done around optimizing, call it, store-based costs relative to micro-DC costs, particularly within that Trade world. So, we're just thinking our way through that. And obviously, we've already talked a little bit about the Wholesale restructure that commenced at the very back end of H1. But I'm probably going to say to you, we're going to keep our powder a little dry until we get to April, where we'll talk to you about a more organized way to think about not just cost savings, but the restructuring process we're doing that lines up against the strategic direction.

Okay. And then in this first half result, what's the dollar amount of cost savings that's come through? I know it's back-end weighted, so you're probably $30 million for the full year, but how much should we be assuming has come through in the first half already?

So yes, so just under $12 million has come in the first half. Of the expected range, $20 million to $30 million, which we've said is at the upper end of that range.

Okay. That's great. And the third and final question. Just thinking about the trading update, it seems that Trade has been pretty resilient, but there's still weakness in Retail and Wholesale. Just keen to explore that weakness in more detail because on the Retail side, it sounds like you increased advertising and then you had good momentum in December in Autobarn, how come that hasn't been sustained? And then from the Wholesale side, why are you still seeing weakness there if you cut prices?

Yes. I just going to say it's a matter of timing. So the Retail business Traded really well, I'll say, through to the end of December, in line with, call it, the consumer promotions or Retail promotions and just general Retail Trade. January is a quiet month because everyone's done their buying in December and in November. We're now just into the February position, and I won't go into any detail there. But the business is beginning to turn positively, I would say, relative to the volume that we'd expect to do in that quarter 3 and then ultimately what we'd expect to do in Q4. So the market is subdued, just Retail generally, but the business is performing in line with our expectations. Wholesale, is just a little early right now on the bite associated with those price decreases.

We'll move next to James Casey from Ord Minnett.

Just with regards to the Retail business, the sales were down 1% and EBITDA was down 26%. So significant deleverage still occurring in that business. However, sequentially, the EBITDA has improved from $18 million in the second half to $23 million in the first half. So, I guess my question is, is that kind of 23% or 22.7% that you reported, is that kind of the new base case going forward? Are we through the worst of it for Retail?

Yes. Look, the honest answer, I'd like to say yes, but I'm not going to be that definitive just simply because of the volatility of the underlying market. The work that we've done around Retail around changing the promotional program. That will have to cycle through some of that in H2 because we only made those changes in the last half. There will be a margin benefit associated with that, but there will be a sales degradation on that. And that's the kind of trade-off we want to make in that world. We'll continue our investment in advertising, which is important from a competitive perspective. The investments that we've made through OpEx in our digital world, we continue to expect we'll get further leverage as we go through H2 with no more, call it, investment required, at least to that degree. So, we're really confident that what we're doing is positioning us in the right direction. I would really love to see Retail consumer confidence lift substantially which will give us an ability to, if you like, serve that wave. I'm not going to be brave enough to call that right now.

I might just add to Angus's point, John. Obviously, for Retail, the first half is always better than the second half given that you've got Christmas trading. So, it's very hard to compare the second half of last year to the first half because you always get that first-half kick.

Okay. Second question, just with regards to the Commercial Vehicle group. You kind of mentioned that you're consolidating the 2 brands under that business. Can you just provide a little more detail about exactly what you're doing in that CVG business?

Yes. So, this is a little bit of a continuation. But the reality is we had 2 truck businesses if you want to think about that, which I go back to a little more, but predominantly 2, which is a Truckline business and American truck parts business, and then we have Wana, which is predominantly Japanese parts. we've consolidated those under a brand name for the lack of a business name, CVG. The purpose now is for those 2 business units or those 2 separate forms of brand to now go to market to our customers in a unified way, and that's what we are doing. If I'm just blunt, putting a nice name AEG, or CVG across the 2 of them doesn't make them an integrated business, actually taking those 2 brands to market in a unified manner or an integrated manner is where we'll get the leverage. I equally said in the minute we've got a gap from a European perspective. We need to fill that gap on the truck side so that we can offer both American, Japanese, and European parts into that truck category.

And would you see that under one format, so under the one Truckline banner? Is that the way you're seeing it?

More to be determined. Is it one brand Truckline that might be the way to go to market? We are consolidating a lot of our Wano sites into the Truckline sites just to get that scale and efficiency, but more to come on that front.

We'll move next to Andrew Hodge from Canaccord Genuity.

Sorry, I had a problem with the mute there. Can you hear me?

We can.

Just interested, you mentioned better enforcement on accounts receivable. Just on the other side of accounts payable, whether that outcome is a sustainable outcome going forward or if it was just a beneficiary of some timing in this period?

No, we see that very much sustainable. And it has been a focus for us for the last 6 to 8 months. Our procurement team has done an excellent job in getting focused on negotiating better payment terms with our international suppliers and removing those deposits up front but there are inventory purchases. And there's more to go. So, we think this is a further opportunity to come through.

At this time, we'll move on to a follow-up from John Campbell from Jefferies.

Just a quick one. In terms of the Autobarn loyalty program, I don't know if it was in the result, and if you did disclose it, excuse me, but can you just let us know roughly how many loyalty members you have in that program now?

Yes. Total members, John, is 1.4 million, which is an increase of about 200,000, relative to the end of last fiscal year.

And do you reckon that sort of growth is fairly sustainable? I mean I understand some of your competitors have been going at it a lot longer and have a much bigger loyalty basis, but that certainly doesn't preclude them being members of yours as well.

Yes. Look, so my view is, yes, the growth is sustainable. I think I peel it back 1 level, the opportunity with that business is what do we do with those 1.4 million people and how do we play with them and the incremental value that comes with them, all those classic loyalty questions. But yes, continuing to grow the base is definitely sustainable.

At this time, there are no additional callers in the queue. I would like to turn the conference back over to your host for any additional or closing comments, Angus McKay.

Thank you, Lynette. Thanks, folks. I appreciate you taking the hour to speak with us. We look forward to catching up with probably everyone who's on the line over the course of the next week but really appreciate your time and attention and for those who ask questions, for the questions that you asked us. I appreciate it. Thank you.

That concludes today's teleconference. We thank you all for your participation. You may now disconnect.