Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eagers Automotive HY '21 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Keith Thornton, CEO. Please go ahead.

Thank you for joining us today to discuss the Eagers Automotive half year results for the period ended 30 June 2020. With me today, I have Sophie Moore, our Chief Financial Officer. Our results pack, including the slides for the presentation, have been lodged with the ASX and should be visible via the webcast. Sophie and I will provide an overview of the results, update you on both our operational focus and strategic progress as well as the company's outlook and then open the line for questions. Let's begin with an overview of the financial and strategic highlights. For the half year ended June 30, 2021, the group has delivered a strong underlying operating profit of $218.6 million, in line with the unaudited market update we provided in July. On a statutory basis, the net profit after tax from continuing operations for the first 6 months was $202.3 million. This strong earnings outcome was achieved despite ongoing operational challenges from COVID-19 and demonstrates the benefits of the restructuring, rationalization and cost-out initiatives that we have undertaken. This has enabled -- this -- sorry, this has resulted in a significantly reduced cost base, which has enabled us to achieve a return on sales of 4.7% on an underlying basis. Our balance sheet is strong. We've ended the period with a corporate debt of $32 million net of cash on hand, down from $129.3 million at 31 December 2020. The continuation of our strong performance and the strength of our financial position has underpinned the Board's decision to pay an ordinary interim dividend of $0.20 per share fully franked. In addition to this, the Board has also declared a fully franked special dividend of $0.084 per share, following the successful completion of the sale of Daimler Trucks for a total dividend payable to shareholders of $0.284 per share for the period. The result today has been driven by a number of factors. Firstly, and most importantly, we're seeing the impacts of disciplined and relentless execution of our Next100 strategy. I'll revisit this strategy later in the presentation, but I know by now, many of our shareholders are more than familiar with it. Our national fixed-price, preowned business, easyauto123, continued to deliver improved financial results driven by an increase in scale, margin growth and fractionalization of our cost base. Additionally, we've invested in in-house technology solutions such as click and collect, an online finance preapproval, which have helped us adapt to evolving consumer behavior and allowed us to continue to operate in restricted conditions. We have continued to take a very disciplined approach to operating our business with cost reductions of more than $100 million annualized and postmerger synergies of $35.8 million, also annualized, driving a sustainable, long-term uplift in return on sales. We also accelerated our property strategy with focus on ownership in key strategic locations, acquiring $110 million of property during the half year period. This will provide us with greater flexibility to implement our omnichannel retail approach in line with our Next100 strategy. Finally, we remain an active manager of our business and our portfolio of assets. We are always seeking opportunities, whether it be the strategic divestment of the Daimler Trucks business or considering acquisition opportunities that meet our Next100 strategic mandate. For those of you following via phone only, we have just reached Slide 4, which sets out the agenda for today's update. So now I'm going to pass over to Sophie who will take us through the financials in some more detail.

Thanks, Keith. Revenue from continuing operations increased by 13.1% to $4.7 billion with the prior corresponding period impacted by COVID. Underlining (sic) [ underlying ] earnings before interest, tax, depreciation, amortization and impairment calculated for our continuing operations increased to $252.9 million in this half. The underlying operating profit before tax was $218.6 million compared to $40.3 million in the prior corresponding period. This significant improvement was largely driven by our cost-out program over the past 12 months, which has delivered a more sustainable cost base, together with strong demand for new and used vehicles across all regions and was further supported by favorable market dynamics. Slide 41 in the appendix includes a reconciliation of statutory underlying EBITDA and PBT. On a statutory basis, and excluding discontinued operations, the company recorded a statutory net profit before tax from continuing operations of $267.4 million. On Slide 7, you can see a reconciliation of underlying-to-statutory PBT. The statutory result includes significant items totaling $48.8 million net income before tax. These significant items relate predominantly to a $41.1 million gain on the sale of assets, offset by noncash impairments of $5.2 million associated with the revaluation of a property. Statutory net profit after tax, including discontinued operations for the first half, was $202.3 million. Looking at the segment breakdown now with a focus on the underlying contribution from continuing operations. Our Car Retail segment delivered an underlying operating profit before tax of $211.6 million. This compares to $38.6 million in the prior comparable period and reflects the permanent cost reductions in line with our strategy as well as, again, the benefits of favorable market dynamics. Also, our continued focus on building a trusted national fixed-price, preowned business by the easyauto123 brand is delivering strong results. easyauto123 delivered growth in all key metrics, operating on a more efficient cost base with benefits from the postmerger scale and the integration into our wider business. Our Truck Retailing segment delivered an underlying operating profit before tax of $4.6 million with a decrease of $1.6 million simply reflecting the sale of our Daimler Truck business on the 30th of April 2021. Our Property segment delivered an underlying operating profit before tax of $2.3 million, excluding impairment and gains on sale, down $0.2 million on the prior corresponding period. This decline was driven by the finance costs on the recent property acquisitions, combined with the decision to defer the recovery of internal rent on a number of properties recently purchased, which are currently under development. The value of our property portfolio has increased to $409.2 million as a result of the ongoing rebalance of the portfolio post the AHG merger and the acquisition of a number of strategic sites. During the period, we acquired 5 strategic sites and divested 10 properties that we considered noncore. Finally, the corporate costs were reduced significantly by merger synergies and internal recoveries of the corporate function. I'll now turn to the strong balance sheet on Slide 9. The company is in a very strong financial position, underpinned by our substantial property portfolio and asset base, together with $661 million of available liquidity at 30 June 2021. This liquidity position includes available cash and undrawn commitments from our corporate debt facilities. Corporate debt, net of cash on hand, decreased to $32 million as at the 30 June -- as at 30 June 2021, down from $129.3 million at the 31st of December 2020. The decrease in inventory and the associated fall plan is primarily due to the sale of our Daimler Trucks business. Inventory levels continue to be impacted by a combination of global supply chain dynamics and management's initiatives in response to COVID-19. Eagers Automotive continues to maintain a significant equity ownership in used vehicles. We continue to focus on cash management, retaining a strong cash position of $294.7 million as at 30 June, which is driven by operating cash flows of $204.2 million, supplemented by investing activities of $134.9 million. This strong cash position and undrawn debt has provided the company with a significant liquidity buffer to ensure that we are well positioned to withstand any further short-term and isolated impacts of COVID-19 while enabling the flexibility and capacity to invest in restructuring, organic growth, technology enablers and acquisition opportunities. Let me hand back to Keith to discuss the current market dynamics and the execution focus that has underpinned our results. Thanks, Keith.

Thank you, Sophie. Now before I take you through some of the strategic highlights of the first half, I wanted to provide some context to the external environment and how our relentless focus on execution delivered our strong first half financial performance. So firstly, the recovery in the new vehicle market. As you can see on Slide 11, we are cycling an extended period of monthly decline in new vehicle sales. This cycle was notable for both its length, 31 months in total, and depth, particularly during the initial COVID lockdown periods of the second and third quarters of 2020. The recovery in demand for new vehicles, first and in the fourth quarter 2020, has remained strong across all regions in which we operate and also across most brands. On Slide 12, you can see our representation across Australia and New Zealand. Following the transformative merger with AHG, we are enjoying the benefits of a truly national footprint that gives us unique revenue diversity and scale across both regions and brands and across more than 200 dealerships. Our national presence has allowed us to participate in the growth in the new car market across the country with Eagers represented across all states and territories, with the exception of the ACT, while also positioning the company well to manage the impacts of localized lockdowns. Again, we note the future opportunity in New South Wales, Victoria and the ACT, which represents approximately 60% of the national market, and we are arguably underweight. The company remains relentless in its focus on execution, leveraging whatever the external and environmental conditions that exist and delivering tangible evidence of progress. The automotive industry continues to enjoy strong operating conditions with economic, societal and industry-specific tailwinds combining to create an environment of unusually strong demand. Now to highlight a single compelling dynamic at play is the increase in value of used cars, which, according to Moody Analytics, are up 34% on 12 months ago. The reason this is so notable is due to the unique to automotive retail dynamic of trade-ins. The value of the new car less the value of the trade-in represents the changeover cost. The lower the changeover figure, the more compelling it is to transact. Now in a period when new car retail prices have remained broadly static, and trade-in values have risen by 34%, changeover cost has dropped materially. This is a compelling and major catalyst contributing to the exceptional demand across the industry. However, simply taking advantage of a favorable external environment is only half the story. We maintained our relentless focus on execution, focusing on key incremental drivers, managing our restructured and materially lower cost base and accelerating our investment in technology to provide the platform for future productivity gains. With ongoing global disruption to downstream part supply, labor markets and logistics and some structural changes in OEM production, we continue to experience a marketplace where demand for new vehicles continues to outstrip supply with Eagers experiencing month-on-month order bank growth. However, it is important to note that as an industry, we continue to deliver vehicles. While 2021 shows a cyclical pattern that -- sorry, shows a less cyclical pattern than the pre-COVID periods from 2016 to 2019, it does demonstrate that the new vehicle market is tracking broadly in line with these years relative to the significant COVID impacts of 2020. It also highlights the smoothing of deliveries, reflecting vehicle arrivals to a greater extent than vehicle sales. This moderates the seasonality of normal years and allows the businesses to operate in a more efficient and productive way, COVID lockdowns notwithstanding. We expect this dynamic to continue while new vehicle demand remains strong and vehicle supply remains constrained. Now looking at margin versus expense. While the favorable market conditions have certainly provided some tailwinds to the industry in 2021, our financial performance has been underpinned by our disciplined focus on restructuring our cost base, continuing on something that we began pre the merger with Automotive Holdings Group. The graph on the right of the screen, as you look at it, demonstrates our underlying return on sales since 2013, which has averaged 3% over this time with a peak period of 3 point -- or peak year of 3.7% in 2015. The uplift in return on sales to 4.7% for the first half represents an increase of 1.7% relative to the long-term average. However, the majority of this uplift has been delivered through a disciplined focus on cost rather than driven by margin, including our merger synergies and recent material cost-out program. These 2 initiatives represent a combined 1.5% uplift in return on sales relative to the total 1.7%. What's even more important is that our commitment to ongoing cost management means that our reduced cost base will deliver sustainable, long-term uplift in return on sales above historic levels and beyond a time when the current industry dynamics may have softened. Now we'll turn to progress that we are making against our Next100 strategy, which is represented on Slide 17. So looking at the strategy, I'll just recap, and going from left to right, as you look at the screen, there are 5 circles that represent our Next100 strategy. Starting from the left. Our strategy is around optimizing our existing business by engaging our customers through omnichannel experiences and redefining our workforce around these experiences. In a nutshell, that's our property and people strategy. The middle circle refers to us further developing our vehicle finance offering, our finance strategy. The fourth circle talks to supporting innovation of all forms, whether it's new products, electric, autonomous and connected; new ways to consume mobility like sharing and subscription; or very importantly, innovation in used cars through our easyauto123 business. And the final circle talks to our growth via disciplined reinvestment in our business and accretive acquisitions. Now we've committed to regularly reporting on our progress against these pillars. Our strategy doesn't change from period to period, and I'm pleased to now have the opportunity to take you through some of our achievements and progress today. Firstly, engaging our customers everywhere. This is about ensuring we meet the evolving path to purchase of our consumers with a more tailored, flexible and convenient experience on a more efficient footprint. A key part of this involves maintaining an appropriate balance of owned and leased properties with a focus on ownership in key strategic locations. Now this provides us with greater flexibility to restructure our operations in an evolving industry and to further enhance our omnichannel retail approach over time. During the half year period, we acquired some $110 million of property, which is in addition to the $111 million acquired in 2020. Meanwhile, and in parallel, our consolidation and rationalization activities enabled us to exit 31 leases during the period, on top of the 44 leases we exited in 2020. Now this equates to $13 million in annual rent outgoings removed from the business. These activities provide both immediate and ongoing profit benefits, but they also improve our risk profile as we rebalance owned versus leased property attached to business disposals. At the end of the half, the value of our own property portfolio was $409 million, up from $356 million on 31 December last year. Turning to our AutoMall concept in Queensland, where, excitingly, we have moved a number of projects into the AutoMall strategy into the execution phase. We opened our AutoMall West Service Center at Indooroopilly Shopping Centre in August, while customers were welcomed to the first stage of our multi-branded service center located in Albion in April. The retail showroom at AutoMall West inside the Indooroopilly Shopping Centre is on track to open for Christmas this year. Now these represent the first stage of an integrated AutoMall network strategy, which will culminate in the opening of the Brisbane AutoMall located in the Brisbane Airport Precinct in late '24. Our AutoMall executions are a great example of how we are continuing to evolve our customers' lifestyles, circumstances, wants and needs and the scale and diversity of our own property portfolio will afford us the opportunities to replicate this format in other ways in other regions. Now the following 2 slides, which we'll click through quite quickly, just provide some images around our developments of both Indooroopilly and in Albion, just as further evidence of the start of this execution of this particular strategy. Moving to Slide 24, which talks to redefining our workforce. We have been very effective in reducing our fixed cost base with the focus shifting towards redesigning our workplace to respond to changing consumer behavior and ensuring we maximize the productivity of our people. We are undertaking a number of initiatives to drive increased productivity. These include: redesigning our workplace to ensure they meet current workflow requirements, evolved online shopping habits and, of course, social distancing requirements; redefining the roles and responsibility of our workforce; supporting this with the development of in-house technology to provide tools, which not only enhance the customer experience, but also drive operational excellence. We see the culmination of these initiatives is something that will provide a platform for resetting our productivity metrics across the business, and it provides an opportunity for the next material step change in our cost base. Moving to finance. The company remains committed to leveraging our point-of-sale advantage and delivering optimized finance solutions for our customers and, in turn, generating incremental finance income from the same number of transactions. This is why we focus on penetration. Once again, our scale of partnerships with automotive finances, combined with our proprietary investment in our own finance company, Modus; a rapidly growing JV with Taurus; and our own subscription company, Simplr, provides something that is unique in the industry for us to exploit. The conditions for automotive retail finance remains challenging with a number of headwinds related to current market dynamics. Despite this, we have improved year-on-year and continue to outperform industry benchmarks. We remain confident that the conditions for automotive finance will become more favorable in the medium term, which will simply assist our relentless execution in this space. Talking to innovation on Slide 24. You will see examples of our continued focus on innovation via technology investment, which we've ramped up since COVID. The development of our online solutions have been accelerated since the pandemic, and the impacts of our changing consumer behavior and the way we operate our businesses. While in the early stages, these new tools are allowing us to interact in new ways with our customer and in providing a more streamlined and convenient sales and service journey. We now offer a faster online sales experience for easyauto, SMS payments, increased online functionality for service bookings and online finance preapproval supported by automation pilots that have the potential to transform back-end productivity. By developing these fully integrated, in-house solutions, we are able to leverage the unique scale of data and analytics we have and monitor changing patterns of usage and behaviors. This will allow us to fine-tune our resourcing and tailor our consumer offerings going forward. The final part of our Next100 strategy is talking to our reinvestment strategy, which is something that we are -- we remain incredibly focused on. In the last couple of years, we have simplified through a number of strategic divestments. These have included Automotive Holdings Refrigerated Logistics, the 360 finance brokerage business and the sale of Daimler Trucks, which completed in April. This disciplined focused on capital allocation will continue going forward with a focus on 4 key pillars of acquiring businesses that either provide scale, support the strategic mandate, enable our core business and/or facilitate accretive consolidation. Now finally, before we move to the outlook and open up the line for questions, we'd like to briefly update you on our national fixed-price, preowned business, easyauto123, which is a key component of how we plan to create and grow shareholder value over the next decade. Within the new merged group of Eagers and Automotive Holdings, we have a clear focus. We wanted to simplify the business and focus on core automotive retail, which we've rapidly and successfully achieved. But we are now in a position where we can leverage our totally unique scale and unmatched national footprint to drive our complementary and accretive independent used car strategy under our easyauto123 brand. We are uniquely positioned in this space. easyauto123 gives us a unique platform and first-mover advantage to transform the used car market in Australia and fast track to a dominant position through leveraging our scale. Now in the past, we provided comparisons with the U.S. market, which provides a window into the compelling opportunity that we have to provide long-term growth and shareholder value by being the largest franchised automotive player and the largest independent used car operator in both Australia and New Zealand. This is something that will be globally unique. With easyauto123, we have transformed the economics since the merger. Since the Automotive Holdings merger, we have utilized our extensive expertise across our organization to develop a business model geared towards profitable, sustainable growth, and we are pleased to report that despite the introduction of COVID, all our key metrics, which you can see on your slide on the screen there, continue to trend in the right direction. The evidence of our execution in this transformation and key metrics has seen a significant turnaround in financial performance since 2019. On the left-hand side and demonstrated in the graph that you can see there, you will see that we inherited a business that was not profitable and arguably not sustainable. Through full integration into our franchised auto business and integrating Carlins options, disciplined cost management, material improvements in finance and insurance and the introduction of tech enablers, we are on track to deliver $10 million of year-on-year improvement per annum in net profit over the last 2 years. Encouragingly, this growth is not prefaced on cyclical market conditions but on a whole business approach to build a sustainably profitable platform so that we can now accelerate top line growth. A key component to driving top line growth is adapting to the way we interact with our customers, and the COVID-19 pandemic has certainly shifted how the consumer is seeking to interact with us. Use of the Internet when looking for a car is a trend that's here to stay, and our ambition is to develop an experience where the customer is in control of what parts of the buying experience they prefer to complete from the comfort of their sofa versus physically in store. What we're striving to deliver is a one-stop shop where a customer can easily discover the car they're after, secure a finance online, complete a remote trade-in and complete the transaction entirely online even from a mobile app. It's all about making it easier for the customer, and it will be a key source of our competitive advantage. It's important to note that future growth of easyauto123 is not contingent on a physical store rollout strategy. In fact, our volume can double through our existing operations, and with a more developed omni-channel offer and specifically with future full online capability, we can see even greater opportunity to leverage our existing footprint. We do, however, see an opportunity to complement the existing network with selected and strategic locations that also allow the repurposing of existing sites we control. During the first half of 2021, we opened a further 2 new stores in Auckland in addition to the first store, which was opened in September 2020. We also relocated our Sydney store to a site we already own in Castle Hill. We will also be opening a Townsville store in the second half of the year on a site we currently control. Next year, we plan to open our first store in Tasmania, and we'll continue to explore opportunities to open a site on the Gold Coast as well as second stores in the major markets of Melbourne and Sydney. At the AutoMall West and Indooroopilly Shopping Centre in Brisbane, we will open a virtual store as part of the offering there, which will be a first for the business. These easyauto123 locations in Auckland, not only complement our existing franchised automotive footprint around the city, but also provide full coverage across the north, central and southern areas of the city in a country that overindexes in used car sales relative to new. Longer term, the expansion of easyauto123 business will include a flagship easyauto123 store within the Brisbane AutoMall development at the Brisbane Airport. Brisbane AutoMall will eventually host flagship dealerships, manufacturer experience centers, regional offices, hotel and conference facilities. These facilities are all planned around a multipurpose performance track designed by racing champion, Mark Skaife. We anticipate our easyauto flagship store will open in late 2024. It will be state-of-the-art, purpose-built, 400-plus car showroom on a lower and more sustainable cost base than our current comparable site. Turning finally to our outlook. We are uniquely placed within the automotive retail industry with unmatched scale, geographic diversity and partner relationships, which allows us to best withstand challenging external conditions and benefit from accelerating industry transition. We have a clear strategy and a track record of disciplined execution. We have a strong balance sheet to invest in restructuring, organic growth, technology enablers and M&A as we accelerate execution of our Next100 strategy. We expect the current environmental and industry tailwinds to continue in the near term, and we'll seek to capitalize on these conditions to invest in technology that will not only enhance our customer experience but provide a platform for future productivity growth. Our strategic priorities are underpinned by creating shareholder value through profitable growth of our easyauto123 business and leveraging our point-of-sale advantage in the growth of our finance penetration levels. While the company remains positive about the outlook, we are cautious of the short-term impact of localized lockdowns, and we will continue to monitor the evolving COVID-19 situation. As always, we will continue to manage the business with a balanced approach towards optimizing results for all our key stakeholders. On behalf of Eagers Automotive, I would like to take the opportunity to thank you for your interest in today's financial and strategic update, and would now like to open up for questions.

[Operator Instructions] Your first question comes from Tom Godfrey of MST.

Can you hear me okay?

Sure can, Tom.

Keith, can I just, first question, start off by asking if you gave an update around the new car supply dynamics in Australia. We've seen your most significant OEM recently come out and talk about cutting global production by sort of the magnitude of 40%. Is it a situation where, for the next 6 to 12 months, you're still just seeing that sort of tight supply environment supported pricing? Or could it be, if more of these sort of big reductions come through, that you could start to see your growth curved a little bit?

Yes. It's a fair question, Tom. I think it will be a topical question for a lot of people. There's no doubt that there is no easing in supply constraints in the short or midterm as far as we can see. In fact, the one thing that's becoming very obvious to everyone is I think everyone underestimated just how complex the global supply chain for automotive retailers, the complexity of the automotive product. Remember, it's not like making an iPhone. Each car is made specific for an individual market, and there is multiple, multiple models. And effectively, what we're seeing is people are starting to really understand how complex the whole supply chain is. To your question specifically, we don't believe this is going to materially impact the overall number for the market. At the moment, VFACTS is tracking for about 1.1 million cars for the year, which, while it won't be a record, it's certainly not outside sort of the normal range for the new car market in Australia. What we are seeing, though, Tom, is there will be winners and losers. And interestingly enough, there's a number of manufacturing hubs or countries around the world that are seeing up to 20% declines in production capacity compared to a baseline of January 2020. But then there's also manufacturers. The Chinese manufacturers are actually up on that same baseline. So we'll see a little bit of a shifting of the sands. There'll be winners. There'll be losers. There are brands that are still able to secure production and, in fact, see Australia as a very strategic market. But there's no doubt that it's going to be an interesting period over the next 6 months where supply will not free up. That will support what we're seeing in terms of margins. It will more than likely support the order bank growth, and it will support some of the dynamics I referred to around used car prices being very firm for a considerable period of time because the final comment I'll make is that some of the products we are now seeing in this talk around changing -- or changes even to the spec of cars coming out, there was a note yesterday from a large OEM talking about how they can't bring some certain V8 models to market next year. What that does is create greater demand for near-new models of similar specs that are actually higher spec than current cars possibly going forward. So there's a whole heap of interesting dynamics at play. We're not concerned about not being able to deliver enough cars this year. And equally, we don't see any freeing up of supply certainly in the short to midterm.

Got it. That's very clear. And maybe if I could just follow on from some of your latter comments there just around your used car business. It looked like the revenues for that segment went back 6% year-on-year in the first half. Clearly, there's still -- that's still sort of a stock acquisition issue and supply remaining very tight. But can you just give us sort of a sense of the outlook there in terms of what you're expecting around growth in that business in the second half?

That's -- Tom, that's partially the market dynamics that you picked up there in terms of the acquisition of stock. That has driven some of it, but there's also some deliberate changes to the way we are operating the business since the merger particularly. Automotive Holdings had a very -- they had a strategy of really driving used car volume. It wasn't done in a profitable way. And we have made a deliberate move to reduce some of the used car volume in some of the businesses that wasn't actually producing a net contribution to the business. So we've seen a deliberate and cyclical reduction in our franchised automotive side of used car business, and we've seen growth over in easyauto in the corresponding -- at the corresponding period. But the net is, as you point out, there's been a slight reduction or there has been a reduction in used car revenue. Obviously, the profit is substantially up, which, again, in easyauto, is not related to the cyclical market conditions. In franchised automotive, it's probably certainly benefiting from the margins that are available in used cars, however.

Maybe just a quick one for me, just to finish, Keith, sort of a longer term, strategic question. But just with the go-live of Honda's new distribution model in Australia from 1 July, shifting to agency there, you guys are in a pretty unique position to sort of give us a lens on how that's playing out, just given you were sort of given the greater Brisbane region, I believe, to service -- to continue to service Honda. Just any comments you can sort of give us around initial sort of takeaways and how you're seeing that transition to agency from the traditional dealership model playing out in terms of your business economics.

Sure, Tom. It's probably unfair to make too many comments around it effectively 2 months in, is the way I'd like to answer that because there has been -- it's corresponded with a period where there has been some lockdown impacts, particularly in Queensland. One of our 4 locations is Indooroopilly Shopping Centre, which actually was the hotspot in Brisbane. So that has totally thrown what would be a normal review of the first couple of months of that business off kilter. It is certainly a change to the way we do business. It is hard to actually ascertain exactly what it's going to look like going forward because effectively, Honda did run down their business, their old model, through to June 30, and it's a start-up of a new model. I would prefer to give it a little bit longer before I make any comments, Tom.

Your next question comes from Jo Little of Morgans.

Can you hear me?

We got you now, Jo.

Sorry, guys. Appreciate the question. I was talking to myself for a bit. Just a very short-term question around the domestic lockdowns. I appreciate you've got a big weighting to Queensland, WA. But just your impact from a car delivery and service perspective. And I guess from a national perspective, have these lockdowns caused your order intake to drop below deliveries?

Yes. Thanks, Jo. Well, it's hard to -- again, it's hard to predict what it's going to do going forward. But as we sit here today, both in July and August, because of our national scale, Jo, we've actually seen an increase in our order right on this time last year. Now the reason for that is that we are benefiting from incredibly [ boring ] conditions in WA, very strong conditions in Queensland. And even in the COVID-affected markets, we're not seeing the declines we saw last year. Plus, we're cycling in Victoria a period this time last year where Victoria was in heavy lockdown, and it was also the initial lockdown. Now the final comment I'll talk -- the other linked comment to that, Jo, is that in these COVID-impacted markets, we're certainly getting a whole lot better at taking orders and transacting. So the declines when a market goes into lockdown, whether it's a 4-day, 2-week or a-couple-of-month one like Sydney, is a lot less material than it was last year where it was pulled down the shutters and everything stopped. We are still transacting. Fleet business still continues virtually unabated because that's quite often done remote anyway. We are taking -- we are still taking orders from retail customers over the phone and via e-mail. Service is remarkable. It really is standing up quite well, except in LGAs where -- or in Victoria, where there's limitations on local travel. Service has been quite strong. So what we're seeing is that when a market is impacted by a COVID lockdown, the decline is not what it was 12 months ago. Correspondingly, we're not also -- we won't -- we don't expect the radical peaks or spikes in business after, but we do expect a bounce back as soon as restrictions ease. And finally, that point I talked about, order rate is actually up in both of the last 2 months because we're benefiting from that national scale and the markets that aren't affected are absolutely booming.

Yes. Perfect. And just that really helpful margin chart. The 20 basis points from industry dynamics, would that be net of like F&I regulatory change in recent years?

Would that be net of -- yes, it would. It compares to -- basically, what we're looking at there is our margin on sales, so our gross percentage -- our gross profit percentage compared to sales in 2 corresponding periods. Now the thing to remember, and this is the real challenge for the industry is that a dollar in gross -- a dollar extra in gross is not a dollar extra in net, whereas the dollar saved is 100% to net. So when you look at the gross percentage lift now at that GP percentage compared to the peaks or previous peaks, which were probably around '15 and '16 -- '14, '15, '16, which were the peaks in F&I, you start to look at the pure benefit of finance profit where there's very little cost attached to it and a dollar extra finance profit largely fall straight through the bottom line compared to a dollar extra, say, margin on a car is diluted by the costs that are attached to it. So I don't know if that's an easy way to -- I don't know if that's the best way or the clearest way to explain that, Jo, but yes, you're right. It does...

Yes. No, that's good. Yes.

Yes. It does compare to that previous finance period.

Yes. And just the property slide, just interpreting that. So on a net rent savings, so the stuff you've acquired, the funding cost but then the exited leases, how should we think about that in annualized savings net today? And is that figure entrenched in your total $100 million cost-out?

Yes, it is. It's -- well, it is. All the property savings that we've actually executed and extracted so far are in that $100 million. There are more to come. And the reason I say there's more to come is that the property P&L, which Sophie talked to the $2.3 million is probably a little bit misleading. It effectively is a P&L that also reflects the cost of transition. There's a number of property -- a number of large properties over in Osborne Park in WA, the back of Castle Hill, for instance, that we are not fully recovering, and we are seeking to redevelop for the future. We'll see more property savings in the future once they're fully redeveloped, and we've relocated and exited further leases on to those sites that we own. But going back to your initial question, Jo, there is still -- and I use the term 8 figures worth of savings that is baked into that $100 million already with further savings to come.

Okay. Just lastly, conscious of time, sorry. Just on the acquisition backdrop. So aside from your merger with AHG, there hasn't been a lot of big industry M&A, really, since. Obviously, COVID's been a factor. I think you mentioned you can increase your market share. Can you just describe the acquisition backdrop at the moment, how you're thinking about multiples? And obviously, your national presence probably gives you a leg up in terms of synergies, restructuring.

Yes, Jo. To be quite frank, the thing that is slowing down any activity around there, not just for us, but I think across a lot of corporate Australia, particularly if it's a midsized acquisition, is COVID. It's very hard to buy businesses over Zoom. So I'll just put that as a holding statement for the general environment that we're trying to -- or that we are looking at these businesses in. In terms of the values placed on these businesses, there's always 2 things to drive the goodwill figure. It's the multiple and it's the profit. Profit needs to be normalized. It needs to be a fair and reasonable profit. Multiple needs to be fair and reasonable. You can -- you could pick the most recent profit and have a low multiple or you can have a high multiple of a more normalized, longer-term profit. Either way, we don't see the valuations particularly out of the normal range. If you look at the U.S. at the moment, it's probably a good marker for what will occur over the next 12 and 18 months when we can more freely move around. In Australia, there's been an absolute flurry of M&A activity over in the U.S. And I think it's really being driven by the fact that the large groups are feeling confident. They feel that they can navigate some of the challenges around the fact that we're simply in an industry that is -- has got some transition ahead of us. It is going to change. It's not going to be the same as it was 20 years ago. Now that doesn't scare a large group. It sometimes does concern a small- and medium-sized player. And that is a massive, massive driver of consolidation in the future. So we're not worried about values. We see it's going to be a really active and opportunistic market once we can actually start traveling. And then the final point, Jo, is that remember, whenever we look at acquisitions, we always put it through that slide. I don't know what number it is, 17, our Next100 slide. And we look at the business, and we say, "Can we add -- can we extract more benefits through property? Can we get greater productivity measures out of our scale by possibly doing it on a more productive, lower head count basis? Can we add finance to it? Can we leverage the used car trade-ins to drive our easyauto strategy?" And when you do that, sometimes we can pay a figure that perhaps suits the seller's desires.

Your next question comes from Matt Johnston of Jarden.

Can you hear me?

Sure can, Matt.

Yes.

Just a quick one from a couple of the comments you made earlier, just around, I guess, high-spec models and some of the demand you're seeing for the legacy models. I'm just trying to think, moving into next year, there's clearly a national plan for borders to reopening in a recovery. Just trying to think about how you see next year's volumes and how you -- it's just how consumer spending may shift.

Yes. Probably I made some comments there, Matt. Well, first off, let's start with supply. We -- to the best of our knowledge and the information that we see and the conversations we have with the OEMs, we don't see next year being materially different in terms of the amount of vehicles available. Now so start with that as the starting point, then let's move to that demand equation. At the moment, we think demand could be outstripping by supply by as much as 30%, and that's a significant amount across the industry, and that's a significant amount that it would need to decrease by just to match the supply for next year. One of the things is we talk about the societal and industry or economic drivers of activity, but that dynamic I explained during the script, and I'm not sure whether you were on the line or was particularly listening to it, I don't expect everyone to listen to every word I say. But used car values going up by 34% in a period where the new car price, the advertised price doesn't move is something that is unbelievably compelling. So suddenly, you go from a period where the normal things we talk about, why do people come and buy a car? They either want a car or they need a car. At the moment, and I can't see this change over the next 12 months, it makes compelling financial sense. That's the third driver. If you own a used car, it is actually the best time now to buy another car. It's economically rational to buy a car. That's not always the case. So when you put those 3 things together, you start saying, "Gee, this is going to float demand for quite a while," and at the moment, that's the way we're seeing it. Of course, things could change. Of course, used car base could change. But again, that's why I talked around the fact that the more there is headwinds to supply, the more there is changing specification, the more the almost limitless access to models and availability and production of the past disappears, the stronger used car prices will be for longer, and you link that with very, very low -- historically low interest rates, and there really is -- it's actually when you talk to people, they go, "Actually, it makes sense. Why wouldn't I go in and buy a car now? I should do it now." That is actually the environment we're in. So even with open borders, even with people moving around at the moment, it is a -- we keep saying, a compelling and unusual demand environment.

Okay. Great. That's really good color. And maybe just thinking about, I guess, the lockdown states, New South Wales, Victoria, obviously, less exposure for the group. I was just wondering, is there a strategy that you could implement where you shift inventory to different states to meet the demand in WA, Queensland?

Matt, we can. The OEMs also do it as well. One of the key OEMs has started to move some of the stock around just to rebalance it across the markets, and they'll also redirect new cars back to their network as it opens up in Sydney, for instance. So yes, you can. Used cars is another opportunity for us. But there is -- to move a car across WA is more than $1,000 in freight, and that does eat into the margin. So it's more across the East Coast. But yes, absolutely, there is the opportunity to move inventory around. Again, it's just part of the benefits of our scale. Certainly, in our used car model, everyone can see each other's cars. And selling a car and then freighting it into the state and having the same business, just the local operator of it deliver that car, is something that customers feel totally comfortable with as opposed to buying from a business that's in Queensland, and the car arrives on the back of the truck, and you're in Sydney and you've got no one to show you how it works or ask about why it's dirty and scratched and not as described. So the scale of our business is, again, we always talk about that benefit of the national scale. It is really unique, and it is actually quite a strong advantage we have.

Okay. Great. And then just last one for me. Obviously, with conditions good, and obviously, it's good that, that special dividend came through, any other, I guess, optionality on capital management?