Connexion Mobility Ltd (CXZ) Earnings Call Transcript & Summary

The other thing to note, so that if we combine all of those, the total share count is just under 707 million, but there's also the effect of the time lag as well. So we're using a weighted average number, which is higher than today's outstanding number of shares. So there's a lag effect as that weighting moves through time. Yes, I think in short, the number that we've put down should be defensible. The second question. Can we provide some detail on how Covertrue is going? Car deliveries and sales seem to have rebounded recently, which is often a guide to their performance. So, short answer is Covertrue has experienced a downturn. And from everything that we can see, it's an industry-wide downturn for them. So they appear to be performing roughly in line with industry, but have experienced a softer half year. So past 6 months. We -- despite that, we are still generating an acceptable return, double-digit return on our investment. So we're not overly concerned. But the main thing for us is that Covertrue maintains and extends its market share in the industry. So industry downturn, our focus is the keep their market share and expand their competitive advantage within the market. So our understanding is that smaller competitors are finding things much more difficult than Covertrue is. So we just need to hold the course and work on growing that business. But we're still generating an acceptable return there. And of course, all our numbers are up to date. So you can see the effect of that in the breakdown of our earnings per share that Ben took us through earlier. The next question is from Trent. So acknowledging the guidance on the GM contract is not possible in the event that it's not renewed, do you consider that there is sufficient net cash and investments to continue with the diversification strategy as a listed entity, i.e., in the absence of subscription revenue? So it's -- the short answer is in our opinion, yes, of course, it's subjective. It's a bit of a how long is a piece of string type question. So we start with net cash investments. We ended the quarter with USD 3.8 million there. It's worth noting that does not include our net receivables, which are also meaningful. And you can obviously find those in our latest balance sheet, which was published in February. And then, in addition to that, you might take into account our earnings over, say, the next 6 months, for example. So if we're thinking about a worst-case scenario, you'd still have, call it, a 6-month period of earnings to add to that balance sheet. Then if we take a look at our recent acquisition of HRA, that was AUD 5 million. So very roughly USD 3.5 million ballpark and that's generating a meaningful contribution to our earnings. So I think, in summary, we do believe that we're sufficiently capitalized to continue life as a listed entity, continuing the diversification strategy that we are today. Obviously, that worst-case scenario would be a major hit. So it's not to discount that. But in answer to your question, yes, we believe the balance sheet is strong enough. Looking at your next question. In future quarterly reports, would it be possible to split out the financial performance by business group? We will take that away and give it some thought. I would say the initial thinking is our preference is not to split out the earnings there. A few reasons for that, but the main 1 for us is that being a public company is not ideal when new competitors are private, and we know that they can read our reports. So our preference is not to give away more information than we necessarily need to, whilst, of course, still being as transparent and candid as we can with shareholders. So yes, we'll always reconsider how much more detail we can give without creating any risk for the business. Next question. Can we offer some comments on our likely approach to the buyback over the next 6 months prior to the GM renewal decision? Is it correct that we're in a blackout period? Is there a general appetite to buy back shares if they're taking off over the rest of the calendar year? So the summary there is nothing has changed on our part. So you have seen our willingness to repurchase shares at what we believe is an attractive price in the past. That view hasn't changed or that approach to the buyback hasn't changed. We are from time to time in blackout periods. We have been in blackout for a little while for different reasons. Obviously, you've now seen HRA. So that was -- that put us in blackout for quite some time, got the usual quarterly reporting, the annual reporting, the GM renewal update. So we've had a lot more blackout periods than usual in the last 6 months. But nothing has fundamentally changed with the strategy. At the moment, we are in a blackout period, again, but obviously, I can't share anything -- any more detail around that. But as you've seen over the past 6 months, a range of different reasons for blackouts. And sometimes blackouts don't eventuate in any announcement either. It's probably something else to keep in mind. So we just prefer to be cautious in that regard. Next question. Is it correct that the R&D rebate is not included in the $3.4 million revenue, but it is included in the $1.1 million net profit before tax? That's one for you, Ben.

Yes, Peter, that is correct. So the $3.4 million revenue is operating revenue. The R&D rebate is classified as other income. And So it is not included in the $3.4 million but it is in the total $1.1 million.

Thank you, Ben. Next question, can we offer some thoughts on initial impressions of how Hallam Road Automotive is going. Does it all seem to be in line with expectation? Are there any signs of softness or bullishness? And any issues with retaining staff? So it's performing in line with our expectations so far. It's obviously very early days, but in line with expectations. The business recently, so over the past 6 months has not had as many technicians as it would have liked. It's recently hired a couple of technicians. That's nothing related to the acquisition as such. We haven't identified any issues with retaining staff. So we have essentially 2 workshop managers in that business, one of which is the vendor, Elie, both of them with the business performing well, enthusiastic, taking a long-term mindset to working with us. So very, very happy with our relationship with staff and performance of the business so far. Next question. Are we able to provide any comments on the investment portfolio risks? I understand it's primarily corporate credit. Is this investment grade? What's the duration profile? So yes, so that portfolio is -- it primarily consists of managed funds that are primarily corporate credit funds in terms of position sizing, the largest position is AUD 500,000. So fairly modest amount relative to the balance sheet. They're not all investment grade. The majority are. Many of the funds have sort of portfolio that comprises the majority investment grade, but also some sub investment-grade positions as well. None of the names of -- I mean, the managers that we're allocating to a whole well-known managers for the most part in Australia that you wouldn't see anything surprising there. I don't think, assuming a general familiarity with corporate credit funds and managed funds in Australia. I think it would be largely, as you might expect. The duration -- average duration of most of the underlying positions from most of the managers is, let's say, in the order of roughly 2 years. It's not something that we've actually looked at for a little while admittedly. So I don't have a specific number off the top of my head, but if you aggregate it all of the underlying positions for all of them, be roughly at that 2-year mark. They're generally all performing in line with expectations. So our performance there in that portfolio since inception has been very steady. Obviously, within corporate credit, there's been weakness in the past 6 to 12 months in particular. The performance of our portfolio has reduced, but it remains steady and positive. So it's in the order of 6% annualized. So we haven't seen any sort of material reduction below that number. And again, the other thing I'll stress is it is a temporary capital allocation between more meaningful M&A deployments of capital. So it's definitely not the core business. It's not our intention for it to be the core business. Next question, without disclosing confidential commercial terms, what remains unresolved in GM's renewal process? Does any part relate to Connexion's product performance or pricing? What would need to go wrong for the contract not to be renewed on terms at least is favorable? So Connexion has been fortunate to hold this contract now for coming up to 8 years. And it's simply a function of GM's purchasing process that they have a standard policy for suppliers that have that sort of longevity. GM has the customer needs to test the market for pricing. So as far as we understand, they are going through their standard renewal process. There's -- yes, there's no -- that there's been no sort of reference to our product performance or pricing or anything like that. As for what would need to go wrong. So if there was a material deterioration in our performance, that would obviously contribute. We haven't -- in our 8 years with GM, we haven't experienced any deterioration of performance that would be of that sort of magnitude that might cause a loss of contract on its own. I flagged previously -- in previous quarters I think, the bigger risk is around pricing. So they're obviously going through the standard process of testing market pricing. We don't believe that our pricing is unusual. Of course, again, if we're looking at a worst-case scenario, what could go wrong or certainly a competitor could significantly undercut us if they believed that there was strategic value in doing so. But that's not something that we would expect as being likely or logical. But of course, that's always a possibility with any renewal process. Looking at the next question. Assuming the GM contract is renewed, what realistic expansion opportunities exist over the next 3 to 5 years, such as additional dealerships, vehicles, products, et cetera, et cetera? How large could the contract become relative to its current revenue earnings? Okay. So we have touched on this in the previous AGMs and other meetings. So Connexion is playing in a niche. There's no doubt about that. Everyone should be very clear on that as shareholders. So courtesy transportation programs are what you would call niche programs. So they're fairly popular in the States, but that's not the case necessarily elsewhere around the world. So if you look at Australia, there are no meaningful OEM programs of this nature, as an example. There are a few different reasons for that, which I can discuss another day. But in the U.S., they do have OEM programs. GM's is by far the largest. So it's a nice place to be, that we have the largest, but the other side of that coin is it opportunities to grow relatively low. So if we look at the next largest program in the States that would be Ford. Ford runs an approved vendor strategy. So there's no single large mandate for dealerships. They're approved vendors. We haven't had any success in Ford because post being approved, we subsequently uncovered that there's an integration that's required with another software company that is not interested in integrating with any new software companies. So although we're approved, we do have a product in market, we do have some Ford dealers using our product, it's not likely that we'll retain meaningful market share under that OEM unless something changes. The next product, the next OEM is Stellantis. So they're #3 on the list. They're a long-time customer of TSDs. Yes, look, I think if we're going to go through the list, you might assume there could be one opportunity a year very, very roughly speaking. And we're in a market where we've got 3 fairly dominant competitors, so TSD, Dealerware, Connexion and each of the contracts available is smaller than GM U.S. So you can sort of make some estimates around that. We have expanded to Canada with GM Canada, which is pleasing. And obviously, we're doing our level best to continue expanding. The other way that we can expand very slowly over time is through our marketplace subscriptions, which we've been doing. That's a modest, very modest but steady growth there. We'll move on, just in the interest of time to the next question. Happy to chat in further detail, if you like. Just send an email. Can you let us -- the next question. Can you let us know your thoughts on what efficiencies or synergies might be obtainable by acquiring other similar businesses to HRA and combining them? Would they need to be geographically close? And are we actively looking at this? Yes. So the -- in summary, we would be looking at a hub and spoke model as being the ideal scenario for us. So Hallam Road is located in a suburb called Hallam, which as in the -- out of the southeastern suburbs of Melbourne. So ideally, we're really looking for acquisition targets that are within a 45-minute drive of Hallam. The idea there is that we can share resourcing as needed. So that's more around derisking the acquisition. So for example, where there are shortage -- if we have a shortage of technicians at one store or a shortage of workshop manager or we want general oversight from our -- the workshop manager. And also between Ben and myself, we also want to spend time physically in these businesses. It helps for them to be within 45 minutes or an hour, say, of Hallam Road. The efficiencies and synergies, I think, will be they are there, but they'll be modest. So mostly relating to how effective a workshop manager can be when they're using the best practices that have been developed over time at HRA and what we hope will be developed over the next 6 months between Connexion and HRA. So I think there are -- in automotive service repair, there are a lot of -- these are relatively small businesses. Typically, they don't have a focus on best practice for a number of different reasons, but often because they just don't really need to or have to drive all the resourcing, what we're probably more focused on are areas in which we can invest into Hallam Road in ways that smaller workshops can't. So if we look at the newer generations of vehicles that are more tech-heavy. The consequence of that is when vehicles are damaged. Then the repairs are typically more expensive because the technology is more susceptible to failure. So for example, these days, if you have damage to a windscreen, the windscreen actually contributes to more to the performance of the vehicle today with driver assistance technology, for example, than older windscreens of vehicles in the past. So there are some meaningful enough investments that can be made to improve our revenue stream. So ADAS calibration, for example, that would be an example of something where you might have an investment of, say, AUD 100,000 into a store, which is something that's comfortable for us, a single -- a small single vendor shop -- vendor-owned shop might question that investment or blink twice before making that investment. So we're looking for those opportunities. And conscious of time, so we will keep moving. Next question, how were we able to come to the view that HRA was a good business to buy? Has anyone from Connexion been to the business to take partners operations? What do you expect the staffing impacts to be after the current vendor leave the business after the transition? So a few questions in one. So I'll address the simplest one first. Have we been to the business? Yes. So Ben and I have -- and our COO and our CTO, we have all been the business a number of times. Ben being based in Melbourne and also due to the nature of his role has spent the most number of hours. So he has spent many, many hours at HRA in person. I've also been there many times as well. I am based in Sydney, so the visits are more infrequent. But yes, we have spent plenty of time there. From a staffing perspective. So the vendor is a chap by the name of Elie. He founded the business as his family-owned business. Elie has made it very clear to us that he enjoys working with us, still loves the business, has a mindset of working with us for the long term. So of course, our agreement is a fairly standard agreement what you would expect. There is a very clear handover process, handover period. Our intention and Elie's intention is to complete that handover period as best we can. So the intention is to reduce our dependence on Elie as much as we possibly can. One thing to keep in mind though, the nature of these businesses is they are always dependent on people. So it's a small business. You have a handful of technicians. You might have 1 or 2 workshop managers. If someone calls in sick, it will have an impact to the business or if someone gets hit by a bus, there will be an impact to the business. So we can derisk as much as we can, but there will always be an element of key person risk in that type of business. But certainly, as far as Elie goes, we're very, very happy with his performance and our relationship with him and there's a long-term intention on both side. That's good. And then as to the view of why HRA is a quality business, that's something that we spent quite a few months investigating. So obviously, we went through the standard sale process that you would expect. There's an information memorandum. There was a DD period we did our level best to obviously, went through all the Google reviews. We sent a mystery shopper in, spent time in person at the business. HRA is a good-sized location. So approximately 650 square meters. They have 9 hoists. It's a decent-sized business with good branding, very strong customer reviews. From what we have seen a loyal customer base. They have a good history going back over 20 years. And importantly, there was good logic around the reason for selling the business and how that will -- that process transpired. So it wasn't a business that was in poor shape by any stretch. So it's a good quality business. And again, the vendor is very happy to work with us and he's a high-quality operator. So very early days, but it's ticking all the boxes for us so far. So we look forward to giving you more reports as we go. I believe that's the end of the Q&A for today. As always, you have my e-mail address. It's in the quarterly report. So any sort of further detail that you would like to see, send me a note, and I'll respond accordingly. I appreciate your time today and the questions. Thanks, everyone, and we look forward to speaking next quarter. Thanks again. Thank you.

Thanks, everyone. Bye.