Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eagers Automotive FY '21 Results Briefing. All participants are in a listen-only mode. [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 full year results for the year ended 31 December 2020. With me today, I have Sophie Moore, our Chief Financial Officer. Our results pack, including the slides for the presentation has 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 up the line for questions. Let's now turn to an overview of the 2021 results. 2021 was a record year for Eagers Automotive. The company delivered an underlying operating profit before tax of $401.8 million and statutory profit before tax of $456.8 million. Our balance sheet is stronger than ever. We have a substantial asset base and $733.1 million of available liquidity at the 31st of December 2021. The outlook remains robust. It is underpinned by demand continuing to outstrip supply and a record order bank that has grown unabated since May 2020. Our strategy remains both consistent and clearly articulated, and we've made good progress over the last 12 months. The company is uniquely positioned. Eagers will continue to play a leading role in the transformation and consolidation of automotive retail in both franchised automotive operations and in independent used, which will drive both organic growth and provide further accretive acquisition opportunities. Now for those of you following via phone only, we have just reached Slide 3, which sets out the agenda for today's update. I'm going to hand over to Sophie to take us through the financials in more detail.

Thanks, Keith. For the full year ended 31 December 2021, the group has delivered a record underlying operating profit of $401.8 million, which is above the unaudited market guidance provided in November. On a statutory basis, the net profit after tax from continuing operations was $330.7 million. This strong earnings outcome was achieved despite ongoing operational challenges from COVID-19 and demonstrates the benefits of our cost-out initiatives, which have significantly reduced our cost base and enabled us to achieve a return on sales of 4.6% on an underlying basis. Our balance sheet is strong. We ended the period with corporate debt of $128.4 million net of cash on hand. We have rebalanced our debt profile during the period by the refinancing of our syndicated debt facility on longer tenor, while simultaneously repaying all debt drawn under this facility. In addition, we have utilized favorable long-term fixed price financing by our captive financiers to fund property acquisitions. The continuation of our strong performance and the strength of our financial position has underpinned the Board's decision to pay an ordinary final dividend of $0.425 per share fully franked. This brings the full year dividend in respect to 2021 earnings, including the special dividend to $0.709 per share. Now turning to Slide 6. Revenue from continuing operations decreased by 1% to $8.7 billion, with a marginal decline driven by the divestment of our Daimler Trucks business in April 2021. On a like-for-like basis, revenue from continuing operations increased by 6.5% to $8.4 billion, noting that both periods were impacted by COVID-19 and supply constraints. Underlying operating profit before tax was $401.8 million compared to $209.4 million in the corresponding period. Slide 34 in the appendix includes a reconciliation of the statutory to underlying earnings before interest, tax, depreciation, amortization, impairments and PBT. On a statutory basis and excluding discontinued operations, the company recorded a statutory net profit before tax from continuing operations of $456.8 million. On Slide 7, you can see a reconciliation of underlying to statutory profit before tax. The statutory results include significant items totaling $55 million net income before tax. These significant items primarily relate to the $42.9 million gain on the sale of assets, which is primarily the sale of Daimler Trucks, offset by noncash impairments of $5.2 million associated with the revaluation of a property. Looking at the segment breakdown now with a focus on underlying contribution from continuing operations, our Car Retail segment delivered an underlying operating profit before tax of $388.4 million. This compares to $199.4 million in the prior comparable period and reflects permanent cost reductions in line with our strategy as well as the benefits of a strong market dynamics. Our Truck Retailing segment delivered an underlying operating profit before tax of $4.6 million with the decrease simply reflecting the sale of Daimler Trucks business on the 30th of April 2021. And our Property segment delivered underlying operating profit before tax of $12.6 million, including impairment and gains on sale, an increase, which is reflective of the growth in our own property portfolio during the period. The value of our Property portfolio has increased to $451.1 million. The increase is due to the deliberate and ongoing rebalance of the Property portfolio. Finally, corporate costs were reduced significantly on account of a full year of merger synergies and internal recoveries of the corporate function. The company, as Keith said, is in a very strong financial position, which is underpinned by our substantial property portfolio and asset base, together with $733.1 million of available liquidity at the 31st of December 2021. This liquidity position includes available cash and undrawn commitments under our corporate debt facilities. Importantly, our liquidity position has increased from $683.3 million at 31st of December 2020, despite the relinquishment of temporary COVID-19 working capital facilities of $100 million during the period. The incremental available liquidity is due to debt repayments of $150.5 million in 2021, increasing the headroom in undrawn term facilities. The decrease in inventory and associated fall plan is primarily due to the sale of our Daimler Trucks business and supply chain disruptions, which has reduced the number of new and demo vehicles on hand. Eagers Automotive continues to maintain a significant equity ownership in used vehicles. The company continues to focus on cash management, retaining a strong cash position of almost $198 million at 31st of December, which is driven by operating cash flows of $302.7 million, supplemented by investing activities of $137.5 million. This strong cash position and undrawn debt has provided the company with a significant liquidity buffer enabling the flexibility and the capacity to invest in restructuring organic growth, technology enablers and acquisition opportunities. Let me hand back to Keith to provide an operational update, including current market dynamics and the execution focus that has underpinned our results.

Thanks, Sophie. Before I take you through some of the strategic highlights of 2021, I wanted to provide some context to the external environment and how Eagers Automotive are so uniquely placed. Firstly, to the new vehicle market. And an important observation of the difference between the strength of the underlying demand in the new vehicle market and the reported vehicle deliveries by VFACTS. With the ongoing supply chain impacts associated with COVID and the more recent disruption to logistics in both overseas and local ports, the correlation between the demand for new vehicles evidenced in our order book and the delivery of new vehicles is more divergent than ever. In the Australian market, new vehicle deliveries, as reported by VFACTS, increased 14.5% versus 2020, a strong recovery against the COVID-impacted prior year. Despite this strong year-on-year growth, the availability of semiconductors, microprocessors and raw materials, disruption to manufacturing plants and the associated labor forces and extreme demand for shipping across the globe restricted the number of new vehicles delivered in 2021, most notably in the second half. However, the number of vehicles delivered is not necessarily reflective of the ongoing strong demand as we will touch on support on shortly. In the New Zealand market, where we also operate, 2021 saw a record year of new vehicle registrations even with the supply chain disruptions.

This is the conference operator. We have temporarily lost our speakers. Please hold and we will get them back on the line shortly. Thank you for waiting. We do have our speakers back on the line.

Apologies to everyone on the line. We're not sure what caused that line to drop out. So I'll pick up where I was when that occurred. Talking about the New Zealand market that we also operate in, which in 2021, saw a record year of new vehicle registrations even with supply chain disruption. With our scale and extensive brand representation, Eagers Automotive is best placed to capitalize on strong market conditions. In Australia, we represent brands that account for 96% of all new cars and trucks sold in 2021. And of that, we represent a share of 10.2% even post the Daimler Trucks divestment. In addition, we have an estimated new vehicle market share of 4.5% in the New Zealand new car market. This market coverage is unique compared to both local competitors and against global peers. Moving to the market dynamics that drove our order bank. Demand for new vehicles, as reflected by our monthly order rate rather than reported new vehicle deliveries, continues to run materially above supply. During 2021, we grew our order bank by approximately 215% and that momentum has continued into 2022. We anticipate these market dynamics will continue well into this calendar year, while new vehicle demand remained strong and vehicle supply remains constrained. While favorable market conditions have contributed to strong results across the industry, we are more focused on what we can control. These market conditions demand that we remain disciplined in our operational activity and relentless in execution. It does, however, provide an ideal environment for measured investment to drive change across our business, ensuring we capitalize on the current opportunities while providing the foundations for future sustainable success. Our record results in 2021 has been driven by strong demand, further productivity improvements, the benefit of property consolidation and a sustainable permanent reduction in our cost base. Despite our record result in 2021, we are not immune to the impacts associated with the Delta and Omicron outbreak which resulted in lockdowns in the key markets of New South Wales, Victoria and New Zealand, primarily in the second half of 2021. Strict lockdown conditions resulted in customers being less mobile due to stay-at-home orders, place constraints on our workforce and exacerbated the disruption to logistics and distribution in these regions. The impacts on our business included a deferral in new and used vehicle sales and deliveries and the dampening of activity in our parts and service departments, which are estimated to have reduced our underlying operating profit before tax by $25 million. Let's now turn to the progress we are making against our Next100 strategy represented on Slide 15. Many of you will be familiar with our Next100 strategy. And for those who have been following Eagers for a while, you will notice in addition to our strategy slide for today's presentation, we firmly believe that our Next100 strategy ensures that Eagers Automotive are uniquely placed to play a leading role in the transformation and consolidation of the automotive industry across both franchised automotive and independent use. Automotive retail will transform and Eagers Automotive are positioned to take a leading role in the transition to a more customer-centric omnichannel model. Further consolidation across the industry is highly likely, and we've seen evidence of this occurring over the past few years. In Eagers' case, transformation and consolidation are both key catalysts for growth. We have committed to regularly reporting on our progress against these strategic pillars, and I'm pleased to have the opportunity to take you through some of our achievements today. Let's start with our engaging our customers everywhere strategic pillar, which talks to our omnichannel strategy. This strategic pillar is about ensuring we meet the evolving parts to purchase for our customers with a more responsive, flexible and convenient experience on a more efficient footprint. Over a number of years, we've been working towards maintaining an appropriate balance of owned and leased properties with a focus on ownership in key strategic locations. This provides us with greater flexibility to restructure our operations in an evolving industry and to further enhance our omnichannel retail approach over time. This focus continued during 2021, during which time we acquired some $169 million of property, taking the total property acquired across both 2020 and 2021 to $280 million. Meanwhile, our consolidation and rationalization activities enabled us to exit 52 leases during the period on top of the 44 leases exit in 2020. Of the 52 leases, 29 were exited due to business divestments and 23, importantly, regulated due to property acquisitions or further consolidation and rationalization activities. The ownership and/or control of larger strategic property will allow us to transform the physical property component of our omnichannel strategy and leverage scale benefits through consolidation. At the end of the year, our owned property portfolio was $451 million, up from $356 million on 31 December of the previous year. The most notable example of this strategy is our AutoMall concept in Queensland, where we continue to make progress on the -- in the execution phase across a number of projects. On your screen, you'll see some images from our AutoMall project at Brisbane Airport. Our design for the AutoMall at the Brisbane Airport has been lodged with the Brisbane Airport Corporation for their approval, and we are working closely with our OEM partners on the next stage of this project. Retail showroom at the AutoMall West in Indooroopilly Shopping Centre was delayed slightly due to a delay in key materials required in the fit-out, but is on track to open at the end of first quarter this year. This unique concept will showcase 8 brands in a 2,400-square meter mini-major showroom space, offering a convenient customer experience with dedicated customer reception and rooftop service with more than 100 cars. All this on a materially lower cost base compared to replicating the scale of operations in a traditional way. Now to provide a visual representation of what the customers in Brisbane will be able to experience in a few weeks' time, we have a fly-through of the final concept design, which is nearing completion, which will come on your screen now. [Presentation]

Hopefully, you can all hear me again, and you saw that video. We're very excited about that. Our AutoMall strategy is not limited solely for Brisbane. In other regions, we are using existing property, strategic property acquisitions and incorporating property into our M&A activity to continue to unlock opportunities to consolidate and develop a more sustainably profitable footprint. Two such examples are Osborne Park in Perth and Maitland in Newcastle. Both examples reflect the transformation of our retail footprint that can occur when we own and control of strategic property. Both locations will end with a net position of a number of exited surplus external leases and a consolidated more customer-centric, convenient and sustainable footprint. Turning now to how technology is going to enable our Next100 strategy. Our key focus over the last 18 months has been a measured investment in technology to support and enhance our omnichannel strategy. Through a combination of in-house technology solutions and partnerships with key stakeholders such as our Taurus JV, we are making significant progress towards an end-to-end fully online digital experience. Integration of our technology solutions with our in-store processes is enabling the redesign of our traditional roles and responsibilities in our workforce. So what does success look like for us with our technology solutions? In short, better customer experience, maintain or increase gross profit and provide a sustainable lower cost to serve. Now at Eagers, we have a relentless focus on execution. So rather than just showing you images of our technology developments, we wanted to provide evidence of our progress via a short video, which captures some of the technology solutions in actions developed over the last 12 to 18 months. So if you turn to the screen now, you'll see another short video. [Presentation]

One area of our business that encountered adverse headwinds due to the current industry dynamics was finance and insurance. As lead times for vehicle deliveries have continued to increase, the unique point-of-sale advantage we enjoy in automotive retail has been diminished due to the time between order and delivery. Combined with a number of other external influencing factors, this has led to an industry-wide reduction against historic penetration levels. Despite this, we are proud to be able to report that -- despite this external environment, we have remained relentless in our focus on executing what we can control and delivering on our strategy. We achieved a marginal increase in new car penetration in the year, which was the most impacted industry-wide area and a 13.6% increase in used car penetration, which was less impacted by lead times and where our technology rollout was much focused. You will note that both of our new and used penetration levels are materially above the most referenced industry benchmark for 2021. And that's indicated on the slide you're looking at to the right. Finally, we remain incredibly focused on maximizing the return of our invested capital through the disciplined execution of M&A activity. This disciplined focus on capital allocation will continue going forward with a focus on 4 key pillars of acquiring businesses that provide scale, support the strategic mandate, enable our core business and facilitate consolidation. In 2021, we executed 3 acquisitions that provided complementary brands and the addition of large strategic property holdings. With all 3 businesses offering significant upside opportunities through the execution of our Next100 strategy. We continue to be active in reviewing further accretive and complementary opportunities. So the final strategic item for today is an update on our national fixed price -- sorry, fixed-price pre-owned business, easyauto123. 2021 saw a strong financial performance despite the impacts of COVID lockdowns. Now please note, to provide a more illustrative comparison, we have adopted the period of full year 2019 as the significant negative COVID impacts of 2020 made a prior year comparison of little value. Compared to the uninterrupted period of 2019, all key metrics have shown material improvements and led to a significant lift in profit. This is despite the impacts of lockdowns in the key regions of New South Wales, Victoria and New Zealand in the second half of 2021 and the start-up cost of new stores in Auckland and Townsville. Note that the financial performance and key metrics represent actual results and have not been adjusted for the second half COVID impacts. We saw significant year-on-year growth in website traffic, a key component in reducing long-term reliance on third-party advertising and continued our rollout of components of our digital experience, including the ability to buy a car online and unconditional finance approval online. In 2022, our ambition is to offer the full end-to-end online customer experience, providing the capability to buy car, trade a car, finance and insurance a car and settle the transaction completely online from the comfort of your couch or complete as much or as little as the process as you wish online before finalizing the transaction on site and in store. Turning to how we will win in used cars. We've previously touched on the opportunity within the independent used market within Australia, and we have established a clear road map for how we will win in this space. To create a large-scale, cost-effective independent used business, you need 4 things. Firstly, you need to be able to source enough quality vehicles at the right price to feed a high-volume, high-growth business. Secondly, those vehicles need to be reconditioned in an efficient and cost-effective manner at scale. You need to offer a convenient experience, which allows the customer to seamlessly interact with you online, in-store or a combination of the 2. And finally, you need to operate the business in an efficient and productive manner, leveraging data and analytics to drive the right decisions across sourcing, reconditioning, pricing and the customer experience. So why hasn't this been done already? The simple answer is that the first 2 components, sourcing and reconditioning, are very hard to do at scale, and have created a deep and wide moat around the used car industry globally. However, solving these 2 factors will equally create an even deeper and wider moat between the successful first mover and the competition. In short, the pricing is exceedingly large. The used car market in Australia is estimated at between $30 billion and $40 billion per annum and no single hand would retail even 1% of the available market. At Eagers, we have been reconditioning and selling used cars since as early as 1915, and we believe we have the right combination of industry experience and the desire to agitate for a new technology-led scale solution to ultimately succeed. To demonstrate our progress over the next 12 months, we wanted to briefly touch on the key areas of sourcing and reconditioning. Sourcing the right vehicles at the right price is the first hurdle you must overcome to grow a large-scale business on a national footprint. To help accelerate our vehicle sourcing capabilities, we have established dedicated buying teams specifically for the private market. These buying teams are using proprietary technology and our extensive data bank of transactional, reconditioning and refurbishment data in an integrated Eagers' buying portal, which provides an efficient platform for firstly identifying vehicles; and secondly, making sure they are priced correctly. A centralized call center operation following a standardized buying process has been piloted in 3 locations in 2021, and with purchasing on average more than 500 vehicles by quarter 4 2021. In conjunction with our other sourcing channels, which includes an unmatched training opportunity through our Eagers' franchise new car network and our extensive fleet partner sources, our private buying centers represent a scalable operation that will significantly drive our sourcing capabilities into 2022 and beyond. The second hurdle you must overcome is reconditioning the vehicles you source in an efficient and cost-effective manner. In quarter 2 this year, we will launch our first dedicated reconditioning facility in Brisbane as part of a national strategy to provide end-to-end reconditioning services in an assembly line, factory-style operation. This facility will scale to recondition more than 1,000 cars per month. Utilizing best-in-class technology and real-time data, we'll be able to drive continuous improvement in our processes and expect a material, repeatable and sustainable competitive advantage in reconditioning. Preparation and logistics cost per car, which all translates fully to the net profit retained per vehicle sold. One significant reconditioning facility is planned for each capital city. So finally, turning to our outlook. 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 activity as we accelerate execution of our Next100 strategy. We expect the current favorable environment and industry tailwinds to continue in the near term, and we will seek to capitalize on these conditions to invest in technology that will not only enhance our customer experience to provide a platform for future productivity growth. Our strategic priorities are underpinned by creating shareholder value through profitable growth at our easyauto123 business and leveraging our point-of-sale advantage to continue to pursue growth of our finance penetration levels. As always, we will continue to manage the business with a balanced approach towards optimizing all key stakeholder outcomes, but with a relentless focus on leveraging opportunities that create long-term and lasting value for shareholders. On behalf of Eagers Automotive, I would like to take this opportunity to thank you for your interest in today's financial and strategic update, and we'd now like to open up for questions.

[Operator Instructions] The first question comes from Scott Murdoch from Morgans.

I'll just kick off with a couple, if I can. Maybe Keith, just some insight into the GP margin, which has obviously got some tailwinds from the industry. I think that was up half-on-half. Just I guess, interested in your thoughts on the offsets of the metal margin potential compression looking more than 12 months out, say, 18 to 24 months and maybe your thoughts on the finance penetration offset there that is potentially coming?

Yes, Scott, thanks for the question. And a very hard one to particularly put a time around the way the cycle may change and way margins may move on the way being composed at the moment. The first question -- sorry, the first comment I'd make is that the second half of 2021 continued our strong margin. We saw no reduction in metal margin at all. I would say we even saw some marginal increase as supply got more and more disrupted in the second half -- late in the second half of the year. The reason is that car deal has been hardwired for 100 years to sell volume rather than focus just on gross profit on the metal. It's taken probably the best part of 12 months for retailers to truly understand their pricing power and combine that with the fact that retailers are now truly believing that this tight supply environment is not going to ride itself anytime soon. So the first thing I would say is that where the margins sit at the moment on the metal, we see as very stable, quite a runway with strong margins, certainly through 2022. How far beyond that? We don't know. But we have called out, Scott, as you rightly point out, there has been some compression on the other income, the target base and KPI income. There's also been some compression in F&I. So those 2 components of the pool of growth have squeezed in this environment. They will absolutely expand as supply frees up. But the other thing that we're working on is gross profit is only one part, but we're focused on net profit. So our gross profit, obviously, is something that we will control what we can. We will maximize whatever cyclical changes to gross profit, but we're really, really focused on redesigning our cost base so that the net profit outcome irrespective can survive any forces going forward.

Okay. Thanks, Keith. That's great. Just on the order bank, obviously, really elevated and up. I guess it implies a number of months of deliveries yet to come, which you're probably not going to specify to us. But I mean, I guess my question here is if we're thinking that a lot of OEMs are going to the build-to-order model, then intuitively, you're going to have a higher order book nowadays compared to pre-COVID level. So just interested in that order book growth and how that actually levels out given, again, in sort of past the 12-month period, we might be looking at a more build-to-order longer lead time normal?

Scott, we believe that's the case. We believe there has been a reset in the OEMs' plans globally. And reading third-party commentary on it, there's an article that's produced by Cox Automotive in the U.S. And they talk about the fact that the OEMs' profitability is largely underpinned on this new dynamic that exists at the moment around supply and demand. So we do believe that this build-to-order model and a delivery period, probably not as extreme as at the moment is something that will survive any writing of semiconductors or raw materials or labor forces. What that actually means is, we don't expect any return to the extremely low growths that predated the current environment. We do think we will have a longer period, and we think that there may be is a longer term reset where growths are much, much more reasonable for the business we do. But it also -- again, I keep focusing on it, and what it allows us is to be a more proactive than reactive business. When we don't have long lead times, you're very capital intensive and you're very people intensive. And it's quite a reactive business where you have to employ lots of inventory to sell from stock, lots of people and the productivity and the way we actually run our business is not optimized. We truly believe we can redesign the way you run your business in a more orderly fashion given this sort of change in dynamics. So again, it's impossible for us to say definitively, but the sentis and the commentary from our OEM partners is that this is the way they want to run their business going forward. I literally feel no discussions with OEMs anymore talking about how desperately they're chasing stock to drive volume, whereas my whole career, that's all I heard.

Okay. I'll just ask one more because I know there will be plenty of others on the line. Just on Mercedes, I guess, early insights into the change of model. I know one of your peers gave us sort of quantified some of the impacts that they expect. Just your comments on how the model is unfolding in the early days and any expectation of a PBT change from that particular OEM?

Yes. So first, a couple of probably comments around the agency and any questions that may follow, Scott. We won't make any comments around any of our OEM partners probably or negative. That's not our place here. We're a very respectful partner to our OEMs, and we certainly won't be making any public comment around individual brands and the way their business is being run. The second thing is I'll just put it into context. Mercedes-Benz represents 2.7% of our sales -- new car sales volume. Honda represents 1.1%. So it's less than 4% of our sales volume. In the total market, it's less than 5%. So the agency model is getting a lot of questions and a lot of, I guess, scrutiny, but it is the absolute minority of the existing new car market in Australia under 5%. And there is not one of our existing OEM partners that is talking about it or making any plans, working with their deal body to implement agency across their models. So I just want to put it into context because there's a sense that it seems to get -- it's over indexed in the amount of scrutiny it's getting from the outside world, but it's quite a small part. In terms of -- we're one month in the Mercedes-Benz model. So again, any observations are probably far too early to talk about, and it's only in the transition month. The comments I've made around agency in the past still stand today. We have our reservations around agency. We feel that it removes some of the flexibility in the urgency that automotive retail brings to customers. At the end of the day, if you go into a non-agency operational brand, you pay recommended retail price or less. If you go into an agency brand, you pay recommended at retail price. So that's the first thing. The second thing is there is no flexibility to tailor a transaction with our OEMs -- sorry, with our customers in an agency model. So we do have reservations around how agency will work. Again, I'll just also enter -- you did mention there were some call-outs on how it would impact our business. At this stage, the only impact we'll talk about is the change in turnover. On a full year basis, it's about $200 million to $240 million in turnover across Mercedes-Benz and Honda, but it won't be this year because there's a number of cars, particularly on the Mercedes-Benz model, but we'll still sell and deliver in the old way, which will reflect normal turnover figures. So this year, it might be $100 million to $150 million impact on turnover. Ongoing, it would be $200 million to $240 million in turnover. Now Scott, thank you for your questions. I just wanted to interrupt the questions for a moment. And I just wanted to -- if you don't mind, turn everyone on the lines attention to a separate ASX announcement where we just released to the market this morning. Apologies that this has been a little bit interrupted. There was some technical difficulties at the ASX. But what this announcement refers to is a nonbinding term sheet that we have just signed to become the exclusive Australian retailer for the EV manufacturer of BYD. Now BYD is one of the world's largest and fastest-growing automotive manufacturers. They specialize in electric and hybrid electric vehicles, and they plan to launch their first EV model into Australia with delivery starting from July, and that's the Atto 3. And they've got further models planned to follow late into '22 and into '23 and beyond. So Eagers will be in partnership with EVDirect.com. We will form a joint venture to operate a national franchise agreement to provide retail sales and aftersales centers for BYD in all key Australian markets for an initial period of 5 years. Our national footprint and our geographic diversity, combined with our retail expertise and our commitment to innovative solutions for the future of automotive retail mean that we will be an ideal retail partner for BYD to achieve their aspirations to grow into a leading automotive brand in Australia by sales volume in the next 18 months. The term sheet is nonbinding and was only formalized late last night. So we won't be able to go into too much more detail on it today, but we do look forward to providing further information on this exciting announcement as the opportunity progresses. I'll now turn back to the questions, and apologies for the disruption.

Your next question comes from Sarah Mann from MA Moelis Australia.

So just a question on this BYD deal and also, I guess, the broader view around EV. So just firstly, what is BYD's distribution model in China? I'm just interested in how that's going to be different for you guys in Australia?

Sarah, BYD have sold for more than a decade. This is our understanding. So I'll be very careful in what I say here because it's early days in this arrangement. But BYD has sold more than a decade in China, electric buses and cars and they sell through a dealer model in China. The first market, we believe that they went to market outside of China, was Norway, and they've done that through dealers as well. In Australia, they have -- or they are talking about having a more, I guess, innovative automotive retail solution, and they're looking to combine very much -- very similar to what we've been talking about here an omnichannel model that is an end-to-end online solution but also experience centers, shopping centers, traditional dealerships, service satellites, et cetera. Now the reason that Eagers has been identified as complementary to their initial plan is probably around how ambitious they are in terms of ramping up their volume. And what you think, Sarah, a big part of it is that as people transition from petrol or diesel cars and into EV cars, you move past the enthusiasts and the early adopters. And what that means is that the purchase becomes less emotional and more rational and trade-ins and resale and finance and after sales support and warranty and all those things that Eagers have got 109 years' experience in become a lot more valuable and become a real catalyst to enable BYD to achieve a fast ramp-up in what is pretty ambitious sales volumes.

Excellent. And then I guess a broader question around EVs. So it feels like the Chinese OEMs have kind of been ahead of the curve versus maybe some of the more traditional OEMs. And it's not clear that all of them are necessarily going through the traditional dealership model. Obviously, we've had some changes to distribution with agency. Do you think the transition to EV could be another trigger point for, I guess, a change to the OEM distribution strategy? And how do you position for that?

So Sarah, I think first off, BYD is the fourth largest automotive brand by capitalization. So they're a credible EV brand hugely valued globally and is probably the major competitor to Tesla. They have chosen their home market and then their first international markets to go through a dealer model. And I think the great opportunity we talk about transformation and consolidation, the fact that they've chosen us as a single dealer partner rather than having a traditional network is possibly an opportunity for us going forward with other OEMs as they bring -- emerging OEMs or even existing OEMs as they bring EV to market. I will point out Tesla have and are investing in more and more dealership facilities. It's just that they own them. So Tesla, you read quite a bit online that Tesla have taken on old dealership sites as they scale. So Tesla in Brisbane, for instance, in my understanding is they're taking on our old south site, Toyota site that we sold to scale up, run storage, predelivery, a normal dealership, after sales service, et cetera. The only difference is it's owned by Tesla. So the reality is if a brand is of serious substance and they want to get a serious scale, they start going much more back to an omnichannel bricks and mortar. It's very hard in cars to simply have an online platform, click and then get delivery from somewhere. And also, Sarah, if you're spending money on new technology, the confidence of knowing that you can go and see someone or after sale service to help you with a problem to explain new technology that you can drive past and see the business that you bought your new product from is really important because as price range buys by EV, that $40,000 or $50,000 becomes a lot more material. It's not a flipping or emotional transaction. They want some security. They want some aftersales. They want -- not everyone wants online. We truly believe a lot of people do, but a lot of people also want on-site and in-store.

Great. That was really good. And then just a little bit more short term. You mentioned the order book was at record levels for this calendar year despite Omicron. Can you give me a feel just for, I guess, what kind of growth you're seeing in order intake versus the same time last year for Jan-Feb, just roughly?

January, February are up on January and February 2021 marginally, a better indication, and this goes to both orders and supply, quarter 4 2021 versus quarter 4 2020. So if you think back to quarter 4 2020, everyone thought it was utopian conditions, it was the bounce out of a big dip during the initial COVID lockdown. Our order book in Q4 2021 was up by 10% on Q4 2020, but deliveries were down by 15%. Now if you look at that delta between where the orders sit and where the deliveries are, you can imagine what the order book is starting to do.

Your next question comes from Russell Gill from JPMorgan.

Guys just staying on the order question, Scott left your hook here on Slide 12, is it possible you can give us an indication if you're doing $5 billion of -- around $5 billion of new car gross, what that number on gross terms looks like at December '21?

Russell, we haven't articulated what that growth is on the metal of the order bank, sorry. We haven't actually done the calculation, and it varies by model. We'd have to actually go back and look at OEM by OEM. Obviously, the more expensive the car is, generally speaking, because of the percentage of growth, the more margin. So we'd have to go back by OEM and actually back calculated that. We haven't done that.

Okay. No problems. Just on the BYD deal. Two things. One, does it actually preclude you or is there any level of exclusivity or preclude you both through contractual arrangements or even soft arrangements entering similar transactions with other OEMs? And secondly, it's a little bit different because it's kind of an equity stake by the OEM into Australia. If we roll forward a couple of years, obviously, there's changes from agency models like do you see an emergence of where the OEMs may actually look to put equity stakes into large partnerships in the marketplace given this deal is very different?

Russell, it's really early days. We're literally at a nonbinding term sheet. So there's a long way to go in terms of the way this deal will finally land. Again, it's really hard to say this is a new opportunity. I think it's a great example of the headwinds that some people talk around franchised automotive. And for a number of years now, we've sort of said, we believe if we position ourselves correctly, we'll actually be a preferred part of the solution to come to market in a meaningful way. And we believe this is a great example of how that can occur. Now to your specific question, what will the model look like? Will it be agency, will it be traditional, will it be a JV? I think there's going to be multiple models. There's no reason for it to be one only. This is probably a great example where there can be a different approach taken. It doesn't need to be one-size-fits-all and it will all change in a linear manner from the old to the new, and that's how it's going to be, and that's how it's going to operate. I think different OEMs will want to look at it in different ways. So again -- and I know they're just words on a slide, but I do say this transformation of automated retail is real, and it will drive consolidation. And the question is -- and I think the BYD is a great deal, is a great example, is that as things change, there's no doubt the OEMs will look for the most efficient and the best way to go to market. And seeing us as a retail expert and having us as their retail partner is a critical piece to getting their cars in front of a lot of people in every single market in Australia very quickly.

[Operator Instructions] Your next question comes from Chenny Wang from Morgan Stanley.

Just the first one for me. I just want to touch on market share actually. So it does look like you have lost some share across most states relative to 2020. And I know there's obviously a focus on profitable growth year. But can you just talk through some of those dynamics?

Chenny, nice to hear from you. Yes, there's a fairly simple explanation to that. First off, there was a drop that relates to the divestment of Daimler Trucks. That's a small part. A couple of businesses that we divested as part of our, I guess, portfolio optimization. So we've always said that businesses that don't provide us a strategic platform for growth, we will possibly look to divest. So there was probably more divestments than accretive acquisition in volume. But the real issue is that we -- there was quite a bit of market share picked up by brands outside the traditional top 10 selling brands in Australia. And that's because simply, with the shortage of stock, people were effectively buying anything that was available. And literally, one of the key points of advantage or difference was to have stock available. So there was -- there's been numerous articles about the emergence of the challenger brands in 2021. So these not -- they're not second tier, but they're not top 10 in terms of sales rate brands, picked up share during 2021. Now traditionally, Eagers focused in a much more overweight in those top 10 brands and the top 5 or 6 luxury brands rather than some of these brands have picked up market share during 2021, and that's a simple explanation.

Got it. No, that's useful. And then that's probably a good segue into the second question around supply. Towards the end of last year when you guys gave that trading update. You sort of also mentioned supply potentially starting to get better, not normal, but getting better end of first quarter, maybe start of second quarter. Just wondering if you had an update on that view?

Chenny, I think it's going to be pretty tight. Unfortunately, we -- some of the -- I think it will still be -- it will be about where it sits at the moment. So half -- in the first half of 2021, we were running towards a 1.1 million car market. We ended up at 1.50 million. As we sit here at the moment, it's running about 1 million cars, maybe a little bit more. It's so variable by brand. And you literally will have some OEMs saying we're about to get some great stock. We've got a variance in days' supply between 45-day supply down to 15-day supply by different OEM. That's the variance. So it is very variable. And then you've got to say, okay, well, the brand that has a lot of stock, are we -- do we have a big representation of them? The general sense, though, Chenny, if you're looking at supply on VFACTS, if you're asking me to say, how does the first quarter, look, I think the first quarter will be more or less where it's been running over the last couple of months. We're actually expecting a reasonably strong. We can forecast out based on transparency from our OEM partners. For February, we think February will be a strong delivery month. March and April at the moment are looking a little bit tight. But what is happening at the moment is we are generally getting greater visibility just before cars arrive. We're suddenly being told 2 weeks out that more cars are arriving than is showing a month or 6 weeks out. I don't know why that is, we have spoken to a number of OEMs, and they have different reasons why, but I think they're all struggling to get a more transparent view on the stock pipeline. But if you had to ask me, I think it's going to be broadly where it sits at the moment.

Your next question comes from Tom Godfrey from MST.

Can you hear me okay?

Yes, we got you, Tom.

Just one for me. I was just going to ask on your back-end businesses. I think servicing revenue was down 10% in '21 and past revenue down 7%. It's probably not where you want them to be. And obviously, there's some pretty decent COVID disruptions playing into that. Can you sort of speak to how you expect those businesses in a more normalized operating environment to rebound this year and what that could mean for sort of gross profit as that sort of revenue mix shifts?

Well, just in terms of how they're about this year, those drops are almost entirely related to COVID because as we've said many times, when you lose a trading day or an hour sold, you don't get it back. It's not like if you don't deliver a car today, you can deliver it tomorrow anyway. So they relate almost entirely to a, customers not being able to come and transact or from a service point of view or labor not being able to come and work. So if you had in late last year when we had the Omicron outbreaks, we had staffed with literally 10% or 15% of our workforce in a service department couldn't come. So you've got the customers not showing up because they're affected LGA. You've got the labor that we sell, which is our technicians, not coming because they're sick. So what happened last year is very much related to COVID. Looking forward, and the easiest way to describe particularly service is that most of the industry is running at 100% capacity because it is a very rare workshop where you can get service done immediately. There is usually a lead time. What that means is that most workshops are booked at greater than 100% every day because they assume that, a, some customers won't show up; and b, that their technicians are going to be more efficient and more productive and get the work done faster. The reality is the industry sort of runs at about 100%. So if COVID is not going to impact us this year, you could see those -- both those areas bounce back to more normal, but what really drives profit is the efficiency. And that's the cost of your labor, the efficiency of your labor, how quickly they can get the work done, how we can drive technology in and have less nonproductive staff, which is the service advisers, service receptionist, et cetera, how we can do more with less there. That is actually what will drive service and parts growth from a net profit point of view. In terms of modeling growth, again, Tom, we haven't actually done that, I don't think Sophie, have you done that exercise, no?

No. And look, obviously, it was impacted by the sale of Daimler as well. So there's a combination of that, but majority of it was related to the COVID impacts.

Got it. That's helpful. And maybe just one follow-up for me just on your used car business and maybe if you could sort of speak to easyauto123 in particular, just interested in acquisition volumes and coming through about your sort of trading network and other channels? How are you sort of going from a volume perspective in early sort of calendar '22 on the used car side?

Well, early '22 was January and we're in February. So unfortunately, I'm going to talk to January, which was not great. And again, we kept in line with our Q4 volumes. But January, again, used cars is affected like service and parts with COVID. And because, again, customers are less mobile and people don't order used cars. So unless they buy from online, which a number of people do, they generally want to come and see the car, transact the car, then take delivery of the car. So used cars have been impacted by COVID. Our acquisitions, our sourcing has ramped up over Q4, which is the most important thing, but January was a flat month compared to Q4 volumes with all those interruptions around COVID. But the key thing is going to be around sourcing. Our volumes for 2021, we wanted -- we came out this time last year when we spoke to you and everyone else, we wanted to be on a run rate of 20,000 units per annum by Q4. That's where we got to in November, and then we dropped back in December. So I'm not saying we're at 20,000 run rate. So I'm a bit frustrated. It's probably one of the areas that was frustrating was driving the volume to where we wanted it to be in easyauto. But we still saw a 40% increase on prior year's volume. So we're growing it, not as fast as we would like, but we're always -- we're trying to grow this at a rapid rate or not. One of the challenges is that our business is so hard and wide to profit. And we don't want to lose that profit obsession by growing the volume too fast. So it's getting the balance between the 2.

Your next question comes from Anna Guan from Goldman Sachs.

Just a quick follow-up on the used car comment you had earlier, Keith. It sounds like so when we spoke last time, acquisition of inventory appear to be more of a challenge versus demand. If I sort of read or heard you correctly just now, it feels more like the balance has shifted the other way. Would that be the right way to read it?

That's -- you're probably interpreted what I said correctly, Anna, whether I've said it correctly or not is probably something I need to qualify. So we buy cars and we turn them in a 45-, 60-day cycle. So we buy cars and then we look to sell them in a 45- or 60-day cycle. After 60 days, the cars are gone. So we're constantly buying cars, and it's that stock turn that matters. Now what actually occurred at the right at the end of last year is we bought a lot of stock. We then went into January, and it was an interrupted demand month because of all the reasons I just spoke. So when you've got more stock than demand in that month, we're pretty ruthless when it comes to stock. So we turn those cars, we wholesale them rather than retail them, and that impacts margins, and we don't count those wholesale cars in our retail volume. So it's more a point in time commentary there. I wouldn't jump to what I said to say we've sold sourcing, but demand has dropped off. I don't think that's the case at all. Because ultimately, and as the market for used cars, it's 3x the new car market. What actually matters -- and people don't search for an easyauto, they don't search for a CARS24 or any other used car brand. They actually search for a Red Golf GTI with less 1,000,000 for under $20,000. That's what people are looking for. If we've got that car at the right price, recondition quickly with the right margin in it, and we can sell that and deliver that to you in a convenient way, we win. It's as simple as that.

Got you. I guess where I'm going with that is just to get a feel for acquisition costs kind environment at the moment. But I suppose that's where I was going to. And also, if I can wrap one together with new cars. I think I saw Audi raise their retail pricing for a couple of models. Are you seeing a more broad-based increase in retail product on the new car front as well? And therefore, how do you think about passing through that?

Yes. So the OEMs will make their own decisions around increasing prices. There has been some increases on prices. It's probably logical when supply is this tight, there you can expect to see some. I wouldn't say it's broad-based or across the board. And while I made the comment before around I'm not spending as long on the phone talking to OEMs about how much stock and how much market share, none of them want to give up share either. So they're all protective of share. So it's still competitive in that environment. So like there is inflationary pressures across all sectors and segments, there is probably the same going to be on new cars. Now if you can't get new cars, this is what may again drag up the prices or what's at least putting a floor under the prices of used cars. So the used car ramp-up in prices is not likely to see any dramatic decline soon. One of the flow-on benefits of that is that in finance, we -- our net amount financed, our NAF, on used cars has increased by $8,000 -- sorry, $6,000 a car, let me just check my numbers, $6,000 a car in 2021, which means that the dollars of income per contract that we write on used cars has gone up.

Yes. Okay. Great. That's good color. One final question, if I may, a follow-up on Tom's question earlier around back end. Just thinking the supply challenges the OEMs have had around new cars. Do you think part of the -- well, certainly the parts part of the decline in part. Do you think part of it is related to supply by any chance?

No, not at this stage. It may have -- it's part of a lag because when you sell a car, the first service is usually sort of 12 months away. And then the second service in year 2 and year 3. So there's always a lag on deliveries to service activity. So we don't, at this stage, see any. And the reality is one of the ways that we will offset this -- this is an interesting comment around the new technology coming to market is we're actually seeing some increases in retention because as there's more technology coming in the cars, people are feeling probably a little bit less comfortable taking it to aftermarket repairs, and that's combined with longer warranties than ever being provided by OEMs. So the offset to what I just said then, first off, there's a lag delivery to service. And the second offset to that for the future is that the retention levels are edging up. Just linking to EVs, we actually see very early data that EV, while there is concerns -- obvious concerns around the amount of service work done on an EV car, the retention levels are expected to be very high.

That does conclude our time for questions. If you do not get the opportunity to ask your question, Eagers Automotive management will be in touch. I would now like to hand the conference back to your speakers for closing remarks.

Fantastic. Thank you for that. I really do appreciate everyone's time and your interest in Eagers Automotive today. Thank you for your questions. I know we're going to speak to a number of you over the coming days and weeks. And again, thank you for your time.