Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Eagers Automotive Half Year 2020 Results. [Operator Instructions] And now I'd like to hand you over to Martin Ward, Managing Director and Chief Executive Officer. Sir, please go ahead.

Thank you for joining us to discuss the Eagers Automotive half year results for the period ending 30th of June, 2020. With me today is Sophie Moore, our Chief Financial Officer. We've launched our results pack, including the slides for the presentation with the ASX, which will be visible via the webcast and reflect our new corporate identity. Sophie and I will provide an overview of the results, update you on our strategic progress, the company's outlook and then open up the line for questions. Before we get into the details, I'd like to remind you that these results are our first full 6-month reporting period following our acquisition of AHG in October last year. These results also reflect our responses to COVID-19 to date. We took early, decisive action to rightsize our operations, leading to significant reductions in our cost base preserving cash and increasing liquidity, and our results have benefited from these. I'll talk to this in more detail shortly, but we're proud of how the company and all of our people have responded and what we've been able to achieve in a very challenging market. We've seen unprecedented fluctuations and declining new vehicle sales in the period, in particular, in April and May. Our underlying profit before tax from continuing operations was $40.3 million. This position reflects the trading profit for the period, excluding one-off benefits like the government wage subsidy and asset impairments. Today's result also reflects a net $40.4 million of noncash impairment to assets from continued operations. This is mostly associated with the profits -- property asset declines and restructuring activities associated with the holding exit and revaluations of our recently vacated South Australian properties. We have reported a statutory profit after tax of $11.8 million. We've outperformed the new vehicle market and we've increased market share. Our consolidated revenue from continuing operations was $4.2 billion for the half, demonstrating our scale post-merger. Our balance sheet is very strong. We've ended the period with a significantly lower net debt position of $7.6 million at 30 June, and available liquidity of $633.9 million, including cash and undrawn commitments. Net debt, including deferred payments, was still only $103 million. Net cash flow from operations was $473.1 million. Recognizing the Board's prudent approach to managing the current environment, no interim dividend has been declared this half. This will help provide us greater capacity and flexibility generally to invest in restructuring and growth initiatives. So moving to our strategic highlights. Despite the market conditions and business disruption caused by COVID-19, we made significant progress with our strategic priorities. Our Next100 strategy, which is centered on providing an enhanced customer experience from a lower cost base, is even more relevant as we emerge from the crisis. We are executing this strategy diligently, and I will discuss this in more detail later in the presentation. Importantly, we have made permanent reductions to our cost base, with $78 million in annual cost savings achieved this half year. Certainly, the current market environment has accelerated this effort and we see potential to optimize our cost base further. This is in addition to the post-AHG merger synergies, which have exceeded the $30 million target and have been achieved well ahead of schedule. In addition to outperforming our peers in the new vehicle market, we have delivered solid volume growth in preowned vehicle sales, whilst developing our digital offering via our new click-and-collect service. We continue to rationalize and unlock value through our dealership property portfolio. And the sale of the AHG Refrigerated Logistics business, completed on the 29th of June, allows us to focus entirely on our core automotive retailing business. Turning to our operational performance. COVID-19 has driven significant fluctuations in market conditions, with April and May representing the peak of the COVID-19 restrictions. The crisis compounded the external headwinds already facing the industry. June's decline in new vehicle sales was the 27th consecutive monthly decline. And according to the Federal Chamber of Automotive Industry Statistics, Australian new motor vehicle sales decreased by 20.2% in the half compared to the prior half year. Having said that, we saw a rebound in June supported by the easing of restrictions and government stimulus measures. This is encouraging. These market conditions have been a further catalyst for us to take significant action to resize our cost base on a more sustainable basis and we have done this. Importantly, in this environment, we've outperformed the new vehicle market as demonstrated on the right-hand side of Slide 6. This is a testament to our leading footprint and the potential to further extend our market presence and extend into new products and services through our existing network. And importantly, as you can see on Slide 7, there remains significant opportunity to grow our market share across Australia, particularly in the 2 largest markets of New South Wales and Victoria, which make up circa 60% in of the national market, and our current market share is 10.2% and 5.7%, respectively. I'll now pass it over to Sophie to take us through the financial results in more detail.

Thank you, Martin, and good morning, everyone. For the purposes of the call in our investor presentation, the analysis is focused on underlying operating profit from our continuing operations, being revenue and profit adjusted for significant items and discontinued operations. Discontinued operations are primarily across the motor group, which we divested on the 31st of October, 2019; and Refrigerated Logistics. Martin will spend through the highlights and some of the one-off items in our statutory results for the half. So I'll walk through the statutory results back to the underlying measures of performance for the business. A reminder that the first half '20 result is the first full 6 months of post-merger consolidating results with AHG. However, the first half '19 figures are for APE's operations only. On a statutory basis, including discontinued operations, the company recorded a net profit after tax of $11.8 million for the half. This is down from a net profit after tax of $42.4 million in the prior half year. This result reflects the benefits associated with the COVID-19 government wage subsidies of $66 million on a pretax basis to circa 7,200 eligible employees across both Australia and New Zealand. This represents approximately 85% of our workforce. A further $6 million benefit was in the form of rent waivers. Also reflected in this result is a $40.4 million before tax of noncash impairments of assets. I'll talk to this in more detail shortly. Removing the impact of discontinued operations from our statutory result, our net profit after tax from continuing operations lifts to $41.5 million compared to $42.4 million for the prior half year. If we further remove the COVID-19 benefits and the noncash asset impairments and other one-off items, we reported an underlying operating profit before tax from continuing operations of $40.3 million. This compares to $52.9 million for the prior half year. This figure also removes the impact of AASB 16 lease accounting to be on a consistent basis with previous years. Underlying performance was impacted by new -- declining new vehicle sales and margin compression. This was partly mitigated by our cost reduction, stronger truck retailing and improved pre-owned vehicle performance. Margin compression was particularly an issue for the COVID-19 impacted trading in the months of April and May 2020, the peak of the COVID-19 restrictions up to this point. Importantly, as Martin said earlier, this was followed by a rebound in June, supported by the opening of the economy and the confidence in the government stimulus measures. Looking at the segment breakdown now with a focus on underlying contribution for continuing operations. In the car retail segment, underlying operating profit before tax was $38.6 million, a decrease compared to $45.7 million in the 2019 half year. The decrease was driven by the impact of COVID-19, affecting all regions in Australia and New Zealand. Operating performance in the first quarter was tracking above last year. However, all of the decline was experienced during April and May, the peak of COVID restrictions, as Martin mentioned earlier. Notwithstanding this, easyauto123 recorded an improved performance driven by higher volumes and a more efficient cost base. In the national truck business, underlying operating profit before tax was $6.2 million compared to $5.2 million in the 2019 half year, reflecting AHG's contribution. The property segment underlying operating profit before tax was $2.5 million, which excludes the revaluation decrement to our property portfolio this half, which was down from $5.4 million in 2019. And this is reflective of the reduction in internal rental income from a number of properties that we divested in 2019. Corporate costs increased following the addition of the AHG corporate function, noting we are yet to see the full annualized benefits of the synergies achieved in this area. We've summarized here the key noncash impairment charges for the half, which totaled $40.4 million. Impairment charges of $34 million, predominantly related to the General Motors planned exit from Holden vehicle sales in Australia and New Zealand by the end of 2020, and primarily new car showroom leased assets associated with the Holden dealership operations. Our Holden dealerships will continue to operate service outlets to support existing Holden customers with warranty claims, spare parts, servicing and recalls for 5 years. In addition, the value of our property portfolio is still strong at $260 million at 30 June, but down from $267 million at 31 December. The $6.4 million revaluation decrement is attributable to 3 strategically vacated noncore properties, which are predominantly located in South Australia. Next, I'll take some time to detail our response to the COVID-19 situation. Our teams have worked hard to put in place social distancing and hygiene measures in accordance with government and health advisers. Despite these difficult circumstances, our dealerships remained operational throughout and our teams are to be commended for their commitment and efforts in these unprecedented times. At their peak, the COVID-19 restrictions have placed unprecedented strain on our customers' mobility and visitations to our dealerships. Our results reflect the access to government support for our workforce during this difficult time. We've responded to the situation with a disciplined focus on costs, preserving cash, boosting liquidity and strengthening our balance sheet. I will walk through key components of our significant cost reduction shortly. We've also benefited from deferral or waiver of rental obligations with a number of our landlords. These measures have been critical to protecting our financial position during the peak of COVID-19, which impacted trading in this half. As Martin mentioned earlier, the market conditions have been a catalyst for us to take swift and significant action to resize our cost base on a more sustainable basis. This includes a permanent reduction in our workforce by approximately 1,300 people. We've also accelerated our property rationalization following our merger with AHG with the exit of 13 sites. Our inventory levels fell during this time by some $411 million due to a combination of global manufacturing shutdowns impacting supply and management's initiatives in response to COVID-19. We've also continued to maintain a significant equity ownership in used vehicles. And finally, we secured additional working capital facilities from captive financiers, $100 million of which remains undrawn at 30 June, 2020. Our balance sheet remains robust with a substantial property portfolio and asset base underpinning the company's strong financial position. As Martin mentioned earlier, net corporate debt decreased to $7.6 million at 30 June, down from $315.8 million at 31st of December while COVID-19 deferred payments stand at $95.1 million at 30 June. The company maintained a strong cash position of $292.5 million at 30 June, driven by robust gross operating cash flows from trading with inflows totaling $473 million for the 6 months to June 2020. This compares to $113.5 million for the same period in 2019. With strong operating cash flows, reduced cost and inventory levels and the available liquidity from undrawn debt and working capital facilities, we have $633.9 million of available liquidity at 30 June. This provides us with significant liquidity buffer to withstand COVID-19 impacts and the flexibility to invest in growth opportunities and accelerating our Next100 strategy. I'll now hand it back to Martin to take us through our strategic priorities and outlook. Back to you, Martin.

Thank you, Sophie. I'd like to take this opportunity to provide an overview of our progress on our strategic priorities and our outlook. Many of you will recall this slide from previous presentations. Our rationale for the merger with AHG was clear. The industry is undergoing significant structural change and the national business of scale will be better placed to compete and invest as the market continues to rationalize. We have exceeded our stated $30 million in synergy benefits ahead of schedule, testimony to the strength of our combined platform. Furthermore, company-wide benefits will continue to be extracted in the future in the form of operational efficiencies with the group now aligned and focus on executing our Next100 strategy. Our Next100 strategy has been in place for some time, and it continues to provide a roadmap for our response to the evolving automotive retail landscape. Our strategy has been accelerated out of necessity due to the impacts of COVID-19, and we've made substantial progress in a number of key areas. This is especially in the first 3 areas of engaging our customers everywhere, redesigning our workforce and delivering optimized vehicle finance solutions where the opportunities are immediately before us. We are always looking to provide a better experience for the customer, supporting more throughput on a significantly lower cost base. We are improving our customer experience through the omni-retail approach. This will involve fewer traditional glass box dealerships, but more touch points with the consumer online, in shopping centers, destination auto precincts and in multi-branded service hubs, all located conveniently with the customer at the center. We've accelerated our dealership rationalization during this half, the benefits are twofold: reduced property costs and leaner teams to support them. We are announcing today that we've received $175 million credit approval from Toyota Financial Services to help rebalance our property portfolio. We will be looking to use this funding to acquire strategically located sites that are currently leased and have been identified -- and have identified a number of opportunities to accelerate this program in the near term, which will provide us with greater flexibility. Further announcements will be made in the coming weeks and months prior to Christmas. We're excited by the progress of our globally unique Brisbane Auto Mall. Last week, we signed on for an expanded commitment of 94,000 square meters and this follows our acquisition of the Toyota rights for the auto mall project in early 2020. This will be a major new automotive retailing and mobility hub on more than 94,000 square meters and is a flagship component of our Next100 strategy within Brisbane. We've also made strong progress with our inner-city Auto Mall concept in Albion, where we are turning a former Bunnings site into the first dedicated Auto Mall, including service in a major shopping center. While the retail credit market has been challenged during the COVID-19 period, significantly impacting the availability of credit for customers, we've made considerable progress in developing our range of innovative financial services solutions. We're particularly excited by the recent launches within our financial services toolbox, extending our reach across a broader range of customer segments. Both Taurus and Modus launched in January and February 2020, respectively. These will continue to be rolled out nationally after we have successfully migrated the AHG dealerships into the Eagers F&I operating model during the half. Based on our observations of the U.S. and the U.K. markets, we know that penetration of 80% is achievable with the right strategy, toolbox and financial partners in place. We're ideally positioned to deliver these unique services to customers as credit markets ease. Over the last few months, we've also progressed the development of our subscription business, simpler, which was launched in August 2020. Turning now to the preowned car segment, which remains a highly attractive market, which we're keen to grow our market share. We've often drawn the parallels to the United States fixed price used car market, which remains a relevant lead indicator and a point of comparison to the Eager's automotive business. Australia's preowned car market is 3x by volume the size of the new vehicle market, a significant part of the market. We're in the early stages of capturing this growth opportunity, leveraging our market leadership position in both the traditional auto retail space and our emerging fixed priced used car model. easyauto123 is already Australia's largest fixed-price pre-owned car retailer. Our pre-owned model has national scale through Zooper in South Australia and our Carzoos business in Queensland, covering big-box shopping centers and online, so we're excited by the potential. What's also exciting is that the omnichannel approach is equally important in pre-owned vehicles, and here again we've made some strong progress. On this slide, you can see the year-on-year volume growth for easyauto123, despite the disruption caused by COVID-19, you can see that it's an impressive growth trajectory, up 71% year-on-year volume. Our Carlins business also delivered an outstanding result with profit up 142% year-on-year. There are a number of important drivers of the results within pre-owned, and it's clear that our investment initiatives are paying off. These initiatives include upgrades to our online offering, which is driving growth in organic unpaid leaves as well as our click & collect service, which was developed in response to the pandemic. It was only launched in June 2020 with a major uptake and is generating already in the first 60 days, 10% of total sales across the easyauto123 network. We've made more -- we have more initiatives planned for this second half, leveraging technology to enhance our digital offering in both pre-owned and F&I, and we look forward to keeping you updated on our progress. So before we open up for questions, let me provide some thoughts on our outlook. Eager's Automotive now has the scale, geographic diversity and strategy to withstand the current challenging market conditions whilst being at the forefront of the industry's retail transformation. We will continue to be responsive to the changing COVID-19 market dynamics, and we have seen promising business performance in recent months in those states, which are operating without government restrictions. With a strong balance sheet and a fortified liquidity position, the company has the flexibility and capacity to invest in growth opportunities as it accelerates its execution of its Next100 strategy. In the near term, we're focused on delivering improved operational performance through continuing to unlock value in our enlarged, post-merger property portfolio across the country and transitioning within Brisbane to the globally unique Brisbane Auto Mall to support enhanced customer experiences on a lower cost base. And we're accelerating the scale of our fixed-price pre-owned car business through driving growth in volume, reduced cost and continuing to develop an omnichannel offering that delivers unique features and an enhanced customer experience. In the short to medium term, we're focused on driving EPS growth by prioritizing the following initiatives: continuing to drive operational efficiencies across all aspects of our business through a whole of company focused on delivering the Next100 strategy; leveraging our unique and industry-leading toolbox of financial solutions to increase the F&I penetration rates towards levels present in the U.S. and the U.K. markets, with an expectation of an acceleration as restrictive bank lending ease post-COVID-19; and ongoing restructuring, rationalization and consolidation opportunities. With that, I'd like to thank you for your interest, and I'll now open up for questions.

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

Martin, you alluded to just earlier the positive momentum you're seeing at Victoria across your businesses. I was just wondering whether you could give us sort of any color around the growth rates you currently are seeing? And what, if any, the current sort of supply constraints, how that's sort of impacting growth at the moment?

Okay. Well, first of all, the rebounds in the open states are a rebound, they are not growth. So just -- so that there's no misunderstanding, there is still -- we're talking about a rebound to levels that were pretty consistent with last year. We're not talking about levels that have rebound and then surpassed last year. But in the current environment with the cost out that we've achieved, then the reality is that, that is a very good position to be in. So in all the markets that are not restricted, let's call that all markets other than Victoria at the moment, then our business is pretty strong. But it is pretty strong on volume that's either in line with previous years or slightly below -- but just slightly below. Obviously, Victoria is significantly impacted with a significant chunk of our business shut in Victoria. And -- but the reality is, again, because of the strength of what we've achieved in the rest of the country and the liquidity, we can cope with short-term periods of shutdown as long as it is not extended and as long as it doesn't expand around the country. So we're feeling good about where it currently sits today, but we wouldn't want further shutdowns to really occur around the rest of the country, if we can help it.

Got it. And then just on the current sort of supply situation, is that impacting volumes in a material way at the moment? And can you speak to sort of what that's doing for pricing and gross margins on your front end?

Yes. So look, one of the things is the whole market tends to focus on volume. And we, as a business, always focus on gross. And the reality is that a tight market is always, and has always been, the best environment for growth. So our growth across the entire open businesses is as strong as it's ever been. And the supply issue is not something that -- we know that the supply will be available. We know it will come in at the right time. We concentrate on order intake. So I should just clarify for all of the audience, when I say that we have rebounded, we are talking about daily statistics of order intakes. Deliveries are not something -- deliveries will ultimately put the profit on the bottom line. We don't report any profit until the vehicle is delivered. But ultimately, we have very, very few order intakes that actually fall over. So we -- that's the measure that we are measuring.

Got it. That's clear. And just next question on the fixed-price used car business. Good to see the momentum coming through for easyauto123 there. But can you speak a little bit more to the sort of long-term opportunity here, both in terms of where you want to get to in terms of volumes and market share, and then also sort of profitability wise?

Tom, I'll tell you what I'm going to do on that, in order to help others get some questions in, I'm going to tell you and the rest of the audience that we plan later in the year out of a results cycle to do a major presentation on the pre-owned business. We haven't got a date set for it yet, but it's probably sometime in November, and we will put details out to the investment community for that. We need to do a proper presentation on where this business is going. And that will be a sole presentation in an Investor Day still online, and we'll put those dates out later in the year. We're only able to fit the couple of slides in for this. So if you don't mind, Tom, we'll address that before Christmas.

Our first question -- our next question is from the line of Paul Buys of Crédit Suisse.

Martin, Sophie, a question just on your permanent cost savings announced. And you've been pretty clear that you see that you've got scope -- further scope in that regard. Just keen to put that in the context, I know when you spoke about the merger. You highlighted your initial $30 million synergy target, but you've also spoke about other, sort of, buckets of cost savings down the track or things you could do, including easyauto, tire, in-housing of car care, just keen to understand if those things are -- if you kind of started those, or if you still get those down the track in terms of further efficiency benefits?

So the thing -- when you say we've -- so the investment community had a range of synergies that they put in, and we kept trying to highlight to everybody, synergies was our $30 million target, and that was specifically removing duplicated costs and taking areas out that we class as synergies associated with the merger. A lot of other people's view on our improvements were operational. As far as we're concerned, and that's what we're -- we don't intend to talk about the $30 million target or synergies again. This in Sophie and my view, is the announcement. We've achieved the $30 million. We're now one company, and it's now all about the Next100 strategy. So within the Next100 strategy, there are enormous amounts of things going on. We've talked to you about property. We've talked to you about people. Those are the 2 biggest costs. Yes, all the stuff you talked about there about bringing in-house, car care and all those things, they're all going on and none of those things have been stopped during COVID. So -- but they're not going to be reported as synergies to do with AHG. They're going to be reported as an improvement in our margins, and our total operating performance across the entire company under the Next100 strategy.

Got it. Thanks, Martin. Just to clarify something, I think Sophie mentioned earlier on, as I -- in terms of equity ownership of used vehicles, APE used to effectively fund that on balance sheet, whereas AHG used a bounce -- just to clarify, I guess, the model going forward?

So the model is a combination of floor plan and used -- owned, used vehicles. As I said in my presentation, we still have in excess of over $75 million of used inventory that we own. There is some other inventory that is floor planned.

Look, we have funding available. So we have funding from captive financiers to grow easyauto. We have funding from captive financiers for our new subscription model. So we will always use a balance between ownership and funding. So it's just the use of capital at the right time at the right price.

Okay. And then last quick one for me. Just you referred to, I guess, some Holden-related costs and the difference between stat and normalized P&L. I just want to understand if there's anything else in the numbers from Holden in terms of any compensation received as part of their exit or anything like that.

No. So we've announced in the 4-D today that post-June 30, we have concluded an arrangement with General Motors. And so that is not a -- that is a highly confidential document, but we have used the language, and I haven't got it right in front of me, but somebody's going to stick in front of me in a second.

It's in the amount of the compensation being materially consistent with the impact of the Holden-related impairments that we took in the first half result.

So if you understand that, that effectively means we've taken a hit of $34 million, and maybe the compensation's a figure that's not far off that figure. So -- but it's not in the June 30th number, so it will be reported in the full year number because it's occurred post-June 30th.

We now go to the line of Sarah Mann at Moelis Australia.

Just to ask about your property strategy. So you kind of highlighted that 2 of your financial services has given you kind of $175 million for property purchases. Just wondering if you could talk a bit more about what kind of properties you're looking to purchase? And what the kind of dealership model on those strategic property purchases might look like?

Okay. Well, the simple thing I'm prepared to say today is that as we announce specific property purchases over the coming weeks and months, then we will also lay out in more detail the benefits of why we bought them. In most cases, we are buying properties that then help us to facilitate substantial changes to other parts of our property portfolio. I will quickly use 2 examples here, but there's a property portfolio of 5 properties that we will be buying in 1 capital city where we currently utilize 10. By the time we've completed the process, we will effectively have no loss of brands, no loss of volume, no loss of profit, and we will have restructured our business on to only 5. So we will be using the purchases. We're not just buying property for property's sake, we're using strategic property purchases to reconfigure our portfolio so that we can lower costs in other areas. So in that particular location, we bought physically 5 properties. And we exit 5 others that we're using. The 5 we're buying we're already using, so we effectively go from 10 to 5. And there's another example in another capital city where we'll go and buy 3 properties, and we'll exit 8 leases. So that is how we're planning to use it. There is substantial gains that we hope to make over the life. Some of these properties, we are leasing in excess of 13 years at the moment. And one major deal is already under heads of agreement. But we will come out, as I say, with the specific announcements as soon as we can.

So we now go to the line of Jo Little at Morgans.

Just on the cost cut, just reiterating that $78 million. Can you give us some kind of rough idea of how much of that was banked in that last part of the first half?

Yes. So look, the $72 million relates to the 1,200 or 1,300 of employees that were taken out. So essentially, if you took 3 months of that, that would be reflective in the half year result. We obviously did benefit from the rostering arrangements we put in place. The other balance of the $6 million relates to property costs. None of that was recognized in the first half of '20. I guess the challenge that -- which we always talk to is given the significant impact of COVID-19 in April and May, obviously, growth was decimated in those months. So there's not a direct, I guess, drop-through to the bottom line. But certainly, that was a permanent cost reduction, that the portion of the $72 million in the half.

The majority of the people, Jo, left the company on the 23rd of March.

Okay. Great. That's helpful. And if we just look at -- you said you started the year well. And if we just compare the early part of second half to the latter part of the first half, just interested in anything you can provide us with kind of volumes versus margin, like what's the biggest contributor? Is it the tighter inventory and margins and obviously, good demand? Or is it a volume game? Or both?

Jo, I'm going to answer the question for everybody in a way that I think is appropriate to give real clarity on our results. APE has 34% more shares on issue than we had this time last year. So any result, in my view, that's not 34% after has gone backwards. In the first quarter, our -- even though we're not going to get into the habit of reporting or communicating about months or quarters, in the first quarter, we were greater than 34% up. And we were in reasonably good shape to have a very good year. We were decimated in April and May. And the worst 2 -- the worst combined result in the company's 107 years. In June, we were again greater in terms of profit above that 34%. So in the 6-month period, while you're seeing one number for the whole half, it was a story of a quarter that was fine and not only fine, good. It was a 2-month period of relative shutdowns for the country and then rebounded to a position that was back to where we wanted it to be. So that is why with the liquidity and the other elements that we've done, we feel that we've taken the right actions to get ourselves in a position to continue to perform at a level that is greater than 34% up on the previous year because anything less than 34% up, then we've gone backwards. Does that make sense, clearly?

Yes, that's great. I understand. And just the inventory reductions -- and I'm sure they'll kind of normalize in time, but any thoughts from your perspective, Martin, on running it a bit tighter from a Belmont perspective? Or will you just take as much as you can get? Or how you're thinking about inventory, I guess?

The industry has realized, and you know that we've been telling them this for the last 5 years, that the Ponzi schemes of putting ever-increasing targets and pumping out ever-increasing inventory to try and sell to customers is not a good model for -- it's not a good economic model for anybody to make money, and I include the manufacturers in that. The reality is moving forward is that there is not going to be an endless supply of vehicles in every yard and in every brand across the country. I'm not going to suggest that some brands aren't going to revert at some stage over the next 5 to 10 years into some of their poor practices of the past. But globally, factories are being sharp. Globally, brands are same. We're taking 1 million units out of production. We are in a situation where the whole of the globe is reassessing itself in terms of inventory supply and demand. So we expect moving forward that we will have leaner inventories across effectively the entire industry. So that is something that we believe is the right way to go, to run a far more professional industry that operates on a smaller footprint and effectively sells the right number of cars to the demand that is out there from the consumer. And so there is a resetting of our industry as well as a resetting of Eagers Automotive and our internal footprints. So we do not expect this to jump back. It's not going to be as hard as it currently is. Because obviously, factories are now beginning to open around the globe, but it isn't going back to where it was or it certainly isn't going back to where it was within the next couple of years.

Thanks, Martin. And then just lastly, I guess, we're probably under-appreciating how much is going on in terms of rationalization and pruning your existing businesses. Can you give us a sense of how much is left there to do? Like how many more marginal businesses are they're out there that we can continue to rationalize?

Well, this is where it gets a bit more strategic than just a simple -- the comment I made earlier when Sarah asked about the property. If we're going to take a current area, so in this current area that I mentioned earlier, we have 10 properties that we're using with 10 businesses on them. We own 1 of the sites, and we leased 9 of them. We are going to keep all of the volume, we're going to keep all of the gross, and we're going to move all of those businesses onto 5 properties, and we're going to own 4 of them and lease 1 of them. Now that is going to substantially change our rent. It is actually going to substantially change the number of people that we need to sell those cars and brands, but it isn't going to change our growth. In fact, it might improve our growth, and it's certainly going to improve our bottom line profit across that geographical area. On the rent alone on that deal, there's probably $3 million or $4 million of annual profit growth just on the rent component of it, apart from all the other components that go with it. And that can be repeated in other capital cities. And certainly, there are 2 substantial property deals in play at the moment that substantially improved 2 capital cities -- 2 geographical areas within 2 capital cities, and there's more to come.

Okay. We now go to the line of Anna Guan at Wilsons.

Firstly, congrats on a solid result in, obviously, a very challenging environment. Just a couple of questions from me. Perhaps firstly, if I can start with a follow-on from the earlier question. And if I can, I guess, talk about Victoria specifically, does the stage 4 lockdown or, I guess, the more restrictive environment change your thinking around, I guess, the optimal footprint? If I recall correctly, I think there's a portfolio of Victorian dealerships that were previously under the AHG banner that was loss-making?

So look, we've substantially already exited a number of loss-makers in AHG since the day we took over in August last year. Our experienced operator down there has done a great job divesting of a number of those businesses. Look, we still have 1,000 people in Victoria -- or sorry, in Victoria and Tasmania. So we have a region called Vic-Tas. And effectively, these numbers are for Vic-Tas and obviously, Tasmania is not shut down. So we have 1,000 employees in Vic-Tas effectively a significant chunk, obviously, of the Victorian business is shut down. Some of our truck businesses are still open for essential service work. And yes, at the moment, that is a challenge at the moment. Obviously, with the case numbers coming down in Victoria and some expectation that's going to open up, well, we can manage the negatives of Victoria because the rest of the country is still performing well. But we need to be mindful of that, and we will adapt to move very, very fast when those things occur. Being shut down because of COVID is not going to change whether we do or don't want to exit something. We did see a quick rebound in used vehicle sales across the rest of the country after a large chunk of the whole country was shut down. So one of the decisions we made in Victoria as an example. We've chosen not to move our used vehicles out of Victoria into other states, because we know that when it does open up, there'll be some pent-up demand, and it will just be a short-term issue. So again, this may not be fully answering your question. There's still a couple of weak businesses in Victoria we'd like to get rid of, but it's still a strong business down there. And we're still, as you see on the map, we've still got potential for growth in Victoria.

Yes. No, that's really helpful. And then my second question, I guess, looking ahead, you guys obviously have seen a more of a leash on recovery over the last part of the year. How are you guys thinking of, I guess, reintroducing some of the cost back, particularly on the people side, as sales recover?

It's not happening. We're not reinducing the cost. We're -- look, we need to run -- this whole industry needs to run on less physical facilities and less people required. And we can actually do it in a way where the customer will actually get a better experience.

And as we said, we took them out in late March, and we're still here in August with the number of head -- significant -- the number of 1,300 still removed from the business. So I think we put 100 extra people in, but that's been in a very managed and controlled manner.

So one thing. We mentioned the performance on Slide 6, the industry has dropped 20.2% in terms of new vehicle sales in the half and the Eagers Automotive continuing businesses only dropped 15.7%. So we outperformed the market, and we had 1,200 less people that left in March. A significant chunk of the rest of our industry didn't remove anybody. So if we can remove 1,200 people and still outperform the new car market, then there is no need to put these people back. We have put 100 people back since that were essential people that we took out. And I know that a number of people on the call know this, but some don't know this. Every single person that left on the 23rd of March were all on probation. And the reason that they left is internally, we didn't have to pay a single dollar of redundancy. It may be harsh, but we moved fast to cut our cost in the area where we feel it was going to cost our stakeholders the least amount of cash, and we took a very tough decision to just say anybody on probation had to leave. Now, that is not an easy call. It was the worst day in the company's history. But the reality is it was the right thing to do with the pandemic on and with the shutdowns that were looming, and then we went into the 2 worst trading months of our entire history. So we -- pleased we made the right decision. We did it fast. We moved on. And yes, there were a couple of roles that we probably took out that we needed. And so we put those 100 back. But we have got a total of 1,300 that have left, because some people have left our business since that announcement, and we haven't replaced those roles. So there's no intention of us putting the cost back in as the business recovers more because we can run it without it.

Yes. Yes. Okay. That's really helpful. And then my last question is on GM Holden. We saw that GM is potentially launching a special vehicles business in Australia. So I was just wondering if you guys can share some color, I guess, how you guys are thinking about potentially participating in that? And has the restructure of the GM portfolio and I guess, growth of the impairment taking into consideration of that?

Look, we might consider doing it in some locations, but can I just tell you it is not a -- I appreciate the question. It's not material in anything that APE is -- sorry, the Eagers Automotive will be contributing in the future. We will operate it in certain locations where we see the right value equation and in other locations we want. It is going to be a relatively small volume business, and it will be a boutique-style business. It is not a replacement to Holden as a generalization. But we are very, very comfortable that the impairments that we've taken at June 30th, reflect our negative scenario of the brand leaving. And we're -- obviously, we've mentioned that we have, since June 30th, reached conclusion to move forward with General Motors, with the compensation package that will be in the second half results and therefore, in the full year results.

The final question we have time for today is over the line of Chenny Wang at Morgan Stanley.

Most have been answered, but just digging a little bit more. I mean, I guess you sort of highlighted the $78 million cost out and $36 million in synergies and sort of also mentioned more broadly, there being upside on operational efficiencies. Can you sort of just give us a little bit more detail around additional sort of work streams you've identified, and what's sort of the near-term priorities there?

I think we've already done it, Chenny. Property is a significant one because it allows us to restructure considerable parts of the business. Property is only 10% to 12% of our total cost base, but the physical properties facilitate a whole load of other things. So property is significant and pre-owned vehicles is significant. So those are the 2 most significant areas. Sorry, and when I say the most significant, I mean, the core of our business is still our automotive franchise operations with Toyota and Mazda and Subaru and BMW, Mercedes, et cetera. And the comments on property and pre-owned vehicles don't mention those. They're still critical and will continue to deliver a great result for each of our partners, and we'll continue to do everything we can to outperform the market on a lower cost base. So that just goes almost -- I mean, I almost didn't say it, that goes without red. The strategic initiatives are, at the moment, concentrating on property and pre-owned vehicles.

Cool. And then just last one on F&I and the integration of the AHG dealerships into your operating model. Can you just give us some color on where sort of penetration rates are at the moment?

So penetration rates because of COVID and because of the restrictions by all banks on everybody and removing job keeper from anybody's applications and a whole range of other things, credit approvals in the last 3 months or so have not been easy. And therefore -- and as a generalization, we have not expanded our performance in penetration. What we have done in the last 4 or 5 months so is we continue to expand the toolbox. We've continued to build on our relationships with our OEM partners. And we are, of the view, that we are now going to get back on the journey of increasing penetration. So there are certain locations again that have still outperformed the market in penetration. But as a whole of company, we have not, in this period, moved the needle on penetration. Having said that, we're in the middle of a pandemic. We were closing things down. We were preserving cash. We were selling assets, light-used vehicles in April to turn them into cash as fast as we can. We were not concentrating on finance penetration during the direct periods of April and May. But it is fully on the agenda, and we're still of the view that it's a strategic area, moving forward.

As that was the final question we'd had for -- time for today, Martin, let's pass it back to you for any closing comments at this stage.

So I'll just close by saying thank you very much for everybody's questions and for your interest in our company. I think we are meeting everybody that ask questions and probably a number of people on the call over the next week. We look forward to those one-on-one sessions. Thank you for your time.

Thank you.

This now concludes today's call. So thank you all very much for attending, and you may now disconnect.