Bapcor Limited ($BAP)

Thank you for standing by, and welcome to the Bapcor Limited Turnaround and Trading Update. [Operator Instructions]. I would now like to hand the conference over to Mr. Chris Wilesmith Chief Executive Officer and Managing Director. Please go ahead.

Thank you, Ashley. Good morning, all, and thank you for making the time. Well, it is undoubtedly seen the update that we've released to work the market. That's really pleasing about to talk about the things that we're actually seeing in the business starting to emerge, but we thought it was absolutely appropriate to reach out and to update the market on also the impacts that are being felt from what's happening globally. The announcement very clearly has given you a sense of the momentum change from the turnaround announcement. Notwithstanding 2 days after that, the global impact started occurring from the war in the Middle East. I wanted to really give you a sense of the actions that we talked about and have started taking in the business, having a material impact on the performance in each of the trading divisions. You'll see that in the actual announcement that we provided very clearly, the difference in the momentum that we're seeing post starting the very early introduction of these initiatives across the business. When we first started talking back in February, I talked about the critical importance of having a team-led turnaround. I talked about focusing on the customer and actually creating an environment where we were lighting up our trading engines. There's no question that what changed from that point, the impact on consumer, the cost of fuel at the barrels are hitting discretionary spend has had an impact. So I equally would say that the actions we've taken, and I would like to share some of the details that is actually supporting what we're seeing in terms of the very clear improvement in the post-February results, notwithstanding all of those challenges. I'm happy to report that customer measures across the business in the major trading divisions are actually improving significantly. We talked about when we last met turnover rates of 50% and 40%, and I can say to you that we are rapidly seeing a decline in turnover in the organization. And I'm very pleased to say that many leaders that are now in place have been so highly regarded that we're seeing really high-quality team members coming back into our organization. But of course, we'll continue to build momentum, but just a tremendous start to see some of these take people coming back into our business that were part of the build of the success story of Bursons right from the Genesis. Engagement programs have been commenced across the organization with senior executive leaders, director reports on my team, leading -- talking with these groups of people, frontline managers, senior leaders and actually middle managers. The people that touch the most of our population of team to understand what they want of us to create a better environment. These early conversations are being really well regarded, well received, and the team are actually building actions to create the culture that will create the future of our organization. We've also reintroduced leadership and training programs. The first 2 groups of our senior leaders have now started going through a Deacon Leadership Program, again, to help to really lead our teams into the future. If I look at the activities that we talked about moving stock out of the DC networks and into our branches and stores. These activities have now been underway, and we're certainly seeing significantly improved stock available to customer at branch level, and that is also underpinning the results and the performance. Still lots more work to do. We also introduced programs to stimulate and connect more effectively with customers that have been both declining and last customers making phone calls, visiting them. actually putting programs in place to ensure that more competitive pricing. And I talked previously about the impact on our customer of having uncompetitive pricing we have done significant work on the first phase of the price rollback. So over 70% of our active customer accounts have now got market competitive pricing, and we're starting to see very lists that we expected coming out of those accounts with a more competitive price. We've also taken very clear actions on the price on particular segments within the business. And equally, we're seeing a very positive response, while being very careful and measured in terms of the impact of rolling the prices back has on margin. I talked last time about our team initiatives that are underpinning the maintenance of the margin. It is clear that we need to just moderate and be careful with that as we continue to build momentum, just to ensure that it is a net positive profit impact, but work is well underway, being received very well. For me, good things are in place as much as the increased activity with very specific trade and retail marketing activations in market now and seeing really terrific consumer responses. There's still a lot to do, but what I am confident is where we started focusing on team, customers and activating our sales teams with our customers is starting to pay dividends. Clearly, from the update, you can see there is an impact of recent events in the world that have impacted these local environment here in the countries that we operate in both Australia and New Zealand and that's why we felt it was really important to reach out. So today, I wanted to be more about, one, just setting the scene in terms of why I'm so confident that the work that the team is doing is building the momentum. The flywheel is starting to move in the right direction, but we also had to give an update given what was occurring. So I'd like to pause at that point because I would like to hear from you and also answer questions that you may have of what we've released to the market. So I think on that point, Karen, we had one question, and I think over to you to help with the facilitation.

We'll hand back to the operator there, actually.

[Operator Instructions] Your first question today comes from Craig Woolford with MST Marquee.

On the numbers, it looks like the EBITDA downgrade on a pre-AASB 16 basis is about $11 million. Can you just attribute how much of that is a result of slower sales versus changes to the gross margin percentage?

Kim, do you want to comment? I'm happy to give a summary level.

Yes. So there's a few things that are sitting in that change in guidance. So it's a combination of sales margin cost factors as well. So fuel and freight as well as some supplier input costs have also increased as a result of the conflict, and we've also had the FX impacts from New Zealand. So what we're focusing here today is that within those changes, we have seen momentum building across the business units. We have seen customers returning. We have seen increase in our run rate leading into when this complex started to impact the market. We have seen our market share increase. Chris, if you want to add any more color as to what's driving those changes?

I think it's fair to say that there is a consumer that ultimately shops in many of the trade workshops that we serve and Craig I was just talking with the CEO of the AAAA, I'm actually the industry show for the next 2 days on the booth, meeting with our customers, partners -- and we're out sponsoring the event. And what is very clear talking to Stuart, who is the CEO of the AAAA, there's been a material drive in bookings in the workshops and also abandonment booked services. And quite clearly, the services are not occurring, then the parts are not coming out of the business. So that has an impact. But I'd also say very clearly, when you think about the impact of freight and fuel costs running a fleet of delivery vehicles and obviously the carriers that are providing our longer haulage sharp movements around the country, the impact that's come from there is into the millions. In the final element that I would call out is more so the -- which goes to your question or your margin, there are very significant cost of good increases that we've seen come out of the implications as what people have had occurred to their businesses that are supplying into us. So there's those number of elements that are impacting. However, Kim raised a very good point. When we look at our best point of reference in the trade business in terms of are we securing the market share. It is very clear in a very cost environment, we're not only showing a trend change, but we are picking up share, which will put us in a far healthier position as we continue to merge out of or into a more stable environment globally that will impact likely.

So just to clarify on the gross margin. There was something you said in your opening remarks, about having to manage the impact of the price rollback. So is growth -- I know it's hard to isolate, but is gross margin weaker than anticipated attributable to the rollback or better than I'm just trying to understand ...

It's a fair question. And so I would say it was not at the level that we would have liked to have been Craig, speaking very openly. But the -- when I first talked about this action being taken to roll back. I also talked about our team 8 activities to mitigate. One of those was very specifically in higher-margin categories, improving the mix in the business. And when you've got a more sensitive trade customer and consumer, it's fair to say that some of those elements that we thought would be more effectively offsetting the rollback haven't materialized at the pace of that. So we're just now moderating back a little bit the levers because we try to move very quickly, and I said we would. But I equally said that, that could be 4 months, it could be 6 months, dependent on what we saw. So we're just given the conditions needing to moderate that a little bit, just to pick back up the margin cost, margin and the impact of the costing cost and there is clearly a headline revenue headwind that all those elements.

Your next question comes from Sam Teeger with Citi.

Just taking into account the slower trading and the slower inventory reduction, what are you now expecting for net leverage and fixed charge cover at FY '26?

It's a good question. I might just throw it to Kim, if you didn't mind.

Yes, for sure. So very clearly, we are within our covenants and anticipate to be the same as the -- June. So with the lower EBITDA and as you mentioned, where the inventory is at we had taken actions to ensure that we've got the inventory in the line lies at the branch and store network, we have taken actions to reduce the overall inventory. Those actions will take some time to come through. And obviously, with the slowdown in sales will impact our inventory balances, but we are still taking those actions to reduce inventory. But the combination is that we will see leverage being higher than what we had anticipated in February, but still well within our covenants at 30th oof June and same with the SCR.

[indiscernible] on that.

Previously, I think you said 1.2% to 1.5% for leverage and you're saying it will be above that. But for the fixed charge cover ratio, which I think you have temporary relief in it, it's falling to 1.4x at FY '26, you think you'll be okay there?

Yes. So 1.4x is our covenant for 30th of June. And yes, we will be okay there is what this forecast is showing us.

I think just building on your comments, Kim, because it is a really important call out. We have worked on the early stages of more effectively looking at our ranging based on relevance to car park. There are nonperforming lines that have been removed. There's reductions of MOQs that have been put through thousands of items in our business and we're also moving on to Phase 2 of both driving the in-stock at the branch level and also continuing to pull back on nonperforming lines that just should not be in the greater organization. If I looked at the actions taken, these are annualized reductions that are very, very significant into the double-digit millions that will be coming out but the moderated consumer sentiment is certainly affecting the sell-through of those right here and now.

Your next question comes from Wei-Weng with RBC Capital Markets.

Chris, sorry, I'm very new to this company. So apologies in advance if my question is really simplistic or missing any nuance here. But if I look at the midpoint of guidance. I think we established a kind of an impact of about $11.5 million for roughly $3 million to $4 million a month, assuming that it's still started in April. Can this be extrapolated into sort of FY '27 for as long as this kind of war is ongoing?

I think that the assessment of whatever the instability maintains. It's certainly going to create a consumer and business environment that is less positive than it would be outside. What I would say is that what we are very confident of is the actions we're taking are going to put us in a far better position as we start emerging. To be honest, so I said any further times I talk in a meeting like this, I'm going to say we're going to caveat, except for wars, macro or global pandemics that those things that are unseen sometimes are difficult. But everything that we can see at the moment would say, yes, it's probably more moderated. But the direction is starting to build momentum. And so we're still confident of the direction as we start moving into F '27, but there will be quite clearly a little lower base to start on going into F '27.

Yes. And then maybe a bit more sort of, I guess, direct right now. As it stands right now, should the market be may be planning for a virtuality that FY '27 earnings might be below FY '26?

Your next question comes from Andrew Hodge with Canaccord Genuity.

Yes. So that's it hasn't be that what we can go back to it's been --

I think I've got a voice but maybe not a question or I didn't pick up the question, sorry.

We'll move on to the next question. This is from James Bales with Morgan Stanley.

I just wanted to clarify was the downgrade based on the trading performance that you've updated or that you've given to the end of April? Or are you factoring in trends you're seeing in May? And what are you seeing in terms of trading momentum in the last few weeks versus to the end of April where you've given the update?

There's no question in May and June, a very important as so. But yes, we've taken that into account with the updates that we're getting to today.

And so when -- has there been a material change versus in May trading versus the trajectory that you've outlined to the end of April?

Certainly, you started seeing the impacts coming into the April period, which we've considered moving forward. But the direction of an improvement over the prior year from the initiatives and actions we're taking is still directionally going in the right direction, not as quickly as we would like it to.

[Operator Instructions] Your next question comes from Angus Hewitt with Morningstar.

I just wanted to clarify what you were saying on increasing market share. So Supercheap noted market share gains in the March quarter. Genuine Parts is claiming market share gains. So what segments -- are you picking up share? And over what time period? Is it just in parts or trade segment overall? And how are you tracking in retail?

I think it's fair to say if you looked at the Supercheap number, which I think was just over 1%. I could say that the period post our turnaround are being released. We are growing in a very healthy position compared to the competitor set. If I looked at the broader trade business, I'd say that it is quite clear from the data we have. We are picking up share broadly, not specific categories, but broadly, across the trade businesses, and we can certainly see that there are some other businesses that may not be as -- able to be seen visibly that would indicate that it's coming from them, and I suspect many customers are going back to the larger organizations that they can perhaps be more confident with at this sort of point and when the sort of challenges are in place. It's broad-based market share growth and I would suspect that it's coming from the smaller businesses, given your comment about the others. But I will say we are very well placed from what we can see with the other competitors around us.

Your next question is from Andrew Hodge with Canaccord Genuity.

Just -- you mentioned that the market share growth, but also at a slightly lower gross margin than you expected. Is there any risk you're effectively buying that share growth? And as you dial that gross margin back up, you lose some of that share growth?

Good question. No, I don't think it will to be honest. The other activities that we put in place to reestablish relationships to bring back people to more effectively serve. If you look at what the business has been known for, particularly on the trade and networks business, it's been about relationships. So if you have a team that is in a good condition, and you've got enough people to serve effectively. Our delivery, which is still -- has always been considered to be better than the competitors, but also that we have a fair of value -- and we're winning back on a number of those dimensions. So no, I don't -- this is not about generating high low activity that's not a sustainable position, notwithstanding the other initiatives that we're putting in to actually increase margin but the right way while you're still delivering value. But as I mentioned, that was an initiative that I always called out. We would need to pace and sequence it based on what was happening at the margin level. So we just -- we need to moderate a few of those levers and accelerate a few of the offsetting actions to have to do it. Hopefully, that answers your question.

[Operator Instructions]. There are no further questions at this time. I'll now hand back to Mr. Wilesmith for closing remarks.

Thank you very much, operator. Look very grateful for everyone's time. Hopefully, it gives you a sense of the actions we've taken are starting to deliver the momentum change that we needed in the organization. The impact of the global changes we've experienced has certainly moderated that. But it just says to -- well, to me, we need to continue to double down and really focus on those elements and they are going to put us in a very good position as we come back to a more normal environment. It will come, and I know from previous events, such as the GSE, the investment, what we do put the seeds into the ground now are going to pay dividends. So thank you for your continued interest and support and look forward to getting together and updating you further in the future. Thanks again. Have a great day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.