Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Eagers Automotive Full Year 2022 Results Briefing. [Operator Instructions] I'll now hand the conference over to Eagers Automotive CEO, Keith Thornton, to commence the presentation. Please go ahead.

Thank you for joining us today to discuss Eagers Automotive results for the full year ended 31 December 2022. With me today is Sophie Moore, our Chief Financial Officer. Our results pack, including the slides for the presentation has been lodged through the ASX and should be visible via the webcast. As outlined on Slide 2 of the presentation, Sophie and I will provide an overview of the results, update you on both our operational focus and strategic progress and finally provide the company's outlook for 2023 and beyond. We will then open up the line for questions. Let's now turn to an overview of the 2022 financial results. 2022 was a record underlying result for Eagers Automotive of $405.2 million, eclipsing our previous mark set in 2021. On a statutory basis, the profit before tax was $442.2 million. Our return on sales margin, a key industry metric, was also at its highest ever full year level at 4.7%. Our balance sheet is exceptionally strong with $631 million of available liquidity and a property portfolio of more than $607 million. This strong 2022 result, when combined with our confidence in the outlook for 2023 and beyond, underpins a record ordinary final dividend of $0.49 per share. This takes the full year dividend paid in relation to the 2022 financial year to $0.71 per share, an increase of $0.085 or 13.6% on the ordinary dividend paid in 2021. Note, the prior year included a special dividend of $0.084 per share associated with the divestment of the noncore Trucks Daimler business. Before we get into the financial results in a little more detail, I wanted to touch on the key achievements for 2022 and look forward to 2023 to outline some of the opportunities we'll cover in more detail today. The 2022 record underlying financial performance was underpinned by a strong industry dynamic and the specific progress Eagers Automotive has made against our strategy. Demand for new and used vehicles remains buoyant, while supply has not returned to the pre-COVID dynamic of pre supply for most OEMs. This imbalance between demand and supply has supported further margin strength. While our disciplined cost out program and continued execution of our strategy, provided the platform for our strong performance. The strength of our balance sheet and the foundations for growth to be more fully delivered during 2023 underpins our confidence in the outlook. This confidence is evidenced by our record dividend and the announcement in 2022 of a share buyback program of up to 10% of issued share capital. We are very positive about 2023. The growth initiatives put in place during 2022 will provide revenues this year expected to be more than $1 billion. We have a robust operating platform built over many years of disciplined execution of our strategy, which supports a sustainable, strong return on sales, particularly when compared to pre-COVID historic performance. Our record order book continues to grow into 2023 and provides both an opportunity to outperform, as well as a buffer, with a multiyear runoff period at a minimum with strong embedded gross profit. We are uniquely and best placed to lead the industry transition towards new energy vehicles, including battery electric vehicles, plug-in hybrid electric vehicles, along with existing hybrid and future hydrogen variants. We will continue to leverage and grow strategic partnerships with a view to creating a distinct and difficult to replicate market advantage. And of course, we continue to review accretive acquisition opportunities consistent with our Next100 strategy. I'm going to hand over to Sophie now to take us through the financials in more detail.

Thanks, Keith. As Keith mentioned, Eagers Automotive is in a very strong financial position, underpinned -- Thanks, Keith. For the full year, I'll go back to the slide before. For the full year ended 31 December 22, the group has delivered on a statutory basis, net profit before tax from continuing operations of $442.2 million. The statutory result included significant items totaling $37 million, net income before tax, which is predominantly related to the gain on the sale of the Bill Buckle Auto Group. Underlying operating profit for the period was a record at $405.2 million. Revenue on a reported basis declined by 1.4% to $8.54 billion, which was impacted by the Bill Buckle Auto Group divestment in the first half of 2022 and the continued supply constraints on new vehicle deliveries, which was partially also offset by the ACT and South Australian business acquisitions in late 2022. Underlying return on sales increased marginally to 4.7%, its highest level for a full year. The margin uplift in the context of a higher inflationary environment reflects continued favorable market dynamics and the benefit from an ongoing productivity and cost out programs. In Slide 32 in the appendix includes a reconciliation of the statutory to underlying EBITDA and PBT. Despite a reduction in turnover linked to these ongoing supply constraints, the underlying performance of the business remains strong, benefiting from the buoyant market where demand for new vehicles continues to materially exceed supply, resulting in the company's record order book of more than -- increasing of more than 74% on December 2021. As I said before, Eagers is in a very strong financial position underpinned by the substantial property portfolio and asset base together with $631.1 million of available liquidity at the end of December. This liquidity position includes available cash and undrawn commitments under our corporate debt facilities. We ended the period with corporate debt of $253.4 million net of cash on hand. During the period, we executed on discipline and prudent allocation of capital to finance strategic business and property acquisitions that I talked about before in the ACT in the South Australian markets and also the share buyback. The company's significant liquidity buffer again, provides us with the flexibility and the capacity to invest in organic growth, technology enablers, restructuring and acquisition opportunities. Following the announcement in July '22 of the on-market share buyback of up to 10% of issued capital, we bought back 1.5 million shares at the end of December. The buyback reflects the Board's focus on active capital management and is a testament to the company's strong balance sheet and continued optionality in capital management strategies. Let me hand back to Keith to provide some further context to the record full year dividend for '22.

Thank you, Sophie. Now as we've already highlighted, in 2022, we delivered a record final and full-year dividend for our shareholders. Importantly, this highlights our long-term consistent track record of growing the returns for our shareholders. Over the past 10 years, we have delivered more than 13% compound annual growth in dividends and underlying EPS. And we've delivered this growth in a disciplined manner, establishing a fortified balance sheet, which has provided the opportunity to execute on capital management initiatives, including the recent share buyback. This focus on rewarding shareholders, while remaining well positioned to capitalize on growth opportunities, is fundamental to our company's long-term outlook. Okay. Turning now to our operational update. And let's start with the new car market. In 2022, the total new car deliveries into Australia improved by 3% on the prior year but remain heavily impacted by supply chain disruption, which restricted the total delivery number. Despite the increase on 2021, the new vehicle market over the last 3 years remains significantly below the average market from 2012 to 2019. 2022 was the third year running that supply has been limited relative to the demand in the Australian market. If you reference the right box towards the top right-hand part of the slide in front of you, you will see that the average delivered cars into the Australian market between 2012 and 2019 was 1,137,000 per annum. Now from 2020 to 2022, it has fallen to 1,016,000. This has created a 363,000 car hole in vehicle deliveries into the Australian marketplace. Another way to look at this from a pure supply perspective is that the market would need to rise to 1,258,000 units per annum, which is higher than we have ever seen in Australia for the next 3 years to simply catch up to the 2012 to 2019 average and bridge the hole created by supply constraints. This is before taking into account any element of elevated demand that has been widely spoken of in the last 3 years. Now this analysis is critical. It demonstrates that it's highly unlikely that any cliff event will eventuate. And the structural dynamic of an order bank maybe not to the extent we see today, but still material being likely to become a new norm for the industry. This compares to the sell and deliver from stock conditions that existed pre-COVID. Eagers Automotive occupies a unique position in the automotive new car market, which circa 10% of the industry, but this market-leading position extends across all parts of our business. The automotive industry we operate in and the total addressable market is exceptionally large, remains highly fragmented and extends well beyond the new car market. The markets highlighted at the bottom of this slide demonstrates the resilience and opportunity within the economic model, while also demonstrating the opportunities that exist inside our core business as automotive retail continues to evolve. It also demonstrates the opportunity to drive further consolidation, rationalization and evolution is exceptionally large and provides material opportunities to Eagers Automotive throughout the next decade and beyond. Now let's drill into the demand dynamic in some more detail. In 2022, order rate not only remained strong, it actually improved further on 2021. Although new vehicle supply improved marginally on 2021, the gap between orders and deliveries expanded further in 2022, driving order bank growth throughout the year. Looking forward into 2023, demand is expected to remain resilient despite economic headwinds, supported by a generational transition to new energy vehicles. This shift is notable for including a unique combination of organic shifts in consumer demand, compelling government incentives and ESG-driven mandates across large fleets. This is a perfect storm of demand drivers that is expected to last for numerous years and help offset any cyclical downturns in broader economic conditions. While there is some easing of industry-wide supply constraints, it's still highly brand and model specific, and the vast majority of high-demand models remain in tight supply situations. It's expected this supply dynamic will continue throughout 2023. Turning to our order bank. Our order bank has grown by 74% since December 2021. Cancellation rates remain immaterial at sub-5% across our total portfolio with some variability on a brand-by-brand basis for models impacted by the longest wait times between order and delivery. Now it's worth noting that this cancellation rate is a gross statistic. It does not measure the net impact of customers who have canceled an order and then replaced it with an alternative order, order a pre-owned car, or taking delivery of a new vehicle available from stock immediately. Anecdotally, these alternative options appear for the majority of cancellation outcomes. To further illustrate the resilience of the order bank, we've applied a sensitivity analysis using an all-time record supply number, which in Australia is 1,189,000 and an all-time record low demand environment, which was 916,000. Now in this extremely unlikely scenario, record supply -- record high supply and record low demand, our current order bank would take more than 2 years to be fully unwound. Whilst conditions remain supportive, it is our strategy that continues to deliver incremental profit performance irrespective of external market conditions. The current gross profit margin percentage indicates the strength of the environment and the strong supply and demand dynamics. The key profitability metric for our industry is the measurement of return on sales. The 2022 return on sales level of 4.7% at an underlying level, demonstrates the step change that has occurred in the industry and Eagers more specifically, when compared to pre-COVID and premerger levels of circa 3% on an underlying basis. Eagers achieved its depth change through the integration of AHG, which has subsequently been further supported by technology-enabled productivity improvements and our disciplined execution of our strategy. This has given the business a robust platform, which when combined with the structural long-term improvement in industry margins, will see the company deliver a sustainable, strong return on sales over the long term and specifically when compared to pre-COVID levels. Eagers is positioned uniquely in our industry. We continue to be the largest player in the well-established and highly resilient automotive retail sector. It's worth noting that circa 60% of new cars sold in Australia are either dual cab utility vehicles or larger SUVs. Now while not totally unique to the Australian market, there is no doubt the Australian consumer demand models that are not as ubiquitous in other large global markets. It's also worth noting that we are a minority right-hand drive market and that EV powertrains are yet to be offered in these segments in any meaningful way. It's also worth remembering the number of cars transacted in Australia was not simply the million-odd new cars. It was actually 4 million, which includes our pre-owned market estimated at 3 million units per annum. So of this total market, it's estimated that 99% of vehicles transacted in 2022 were combustion or existing hybrid models, and Eagers remains the scale leader in both new and preowned markets in Australia. So all this is to say, there is still a long way to go before the combustion engine or existing hybrid models are no longer a compelling, material economic opportunity. Having said this, there is no doubt the transition to our lower emission future is happening now and in fact, gathering significant pace. As a forward-looking company with significant future ambitions, our strategy is called the Next100 after all, it's probably no surprise we have uniquely positioned ourselves to be the leader in facilitating this generational market shift as a partner to existing players and major new entrants, while also leveraging key strategic partnerships which will enable and add to the economics benefiting from the market share. Being able to straddle both opportunities, in a unique and market-leading manner, while continuing to deliver against our strategy is a compelling position to the company. Let's move on to our strategic priorities and provide an update on our progress against the company's specific components of our Next100 strategy. Before we talk through our strategic progress, it's important to take stock and ensure that our strategy is appropriately aligned with the industry in which we operate and the dynamics and opportunities at play. The automotive retail industry is experiencing a generational evolution. The addressable market opportunity remains exceptionally large and highly fragmented, all consumers are changing behaviors and demand for how they shop and how they consume mobility. Our long-established business model is evolving by design and by necessity. Winners will be those that are able to use proprietary technology that innovate and have access to data to break away from the rest, which in turn will accelerate and crystallize consolidation and rationalization in the industry. All this leads to significant and profitable growth opportunities. Notably, this is occurring when we're on the cusp of a once-in-a-century change in product technology. It's a very exciting industry to be part of, and we are uniquely best placed to materially grow in this environment. Looking at our Next100 strategy, which you'll see on the slide in front of you. I'm hoping most of you on the call today are familiar with this strategy. We are very proud as a company to have a clear, consistent and well communicated strategy, and we hold ourselves accountable to it every time we report. It's pleasing to review our strategy against the industry opportunities I've just highlighted and feel confident that it is appropriate both now and into the foreseeable future as a template to grow shareholder value in a way that is not dependent on market cycles. So let's now turn to an update on a number of our key strategic initiatives. Let's start with a look at our property activity in 2022 and our plans for '23. We continue to use our property portfolio to deliver both innovation and consolidation of our retail footprint, focusing on a more customer-centric experience on a sustainably lower cost base. We expect to deliver significant productivity benefits over the next decade as we continue to execute against a reduced and reimagined retail footprint. At year-end 2022, our property portfolio was valued at more than $607 million, an increase of $159.3 million on '21. We continue to rebalance our portfolio of owned first leased property with a total of 22 leases exited during the period through a combination of footprint consolidation and business divestments, which in turn increased our total loan ratio to 21.4%. This continued disciplined execution will help mitigate the inflationary pressures on our property cost base with limited capital loan exposure to the rising interest rate market, achieved through the prudent use of long-term fixed-rate capital loans established in '20 and '21, with an average tenor of 6.3 years. Moving to technology and how we are planning to redesign our workforce. Technology remains a fundamental enabler for reaping higher and better productivity performance within the business over the long term. However, the development of proprietary technology is only a value where it meets specific customer needs or the criteria of the business. Our focus is to develop technology that delivers a combination of improved customer experience, equal or greater income opportunities, while also generating productivity gains leading to a sustainably lower cost base. In 2020 and 2021, we identified key customer, staff and economic pain points in our business and developed technology solutions for pilot sites for proof of concept. In 2022 and into 2023, we now focus on applying proven tech to operations across the wider business and extracting the benefits identified. Highlight on the right-hand slide -- side, sorry, of the slide for your reference is a number of key statistics against technology were developed that provides real evidence of progress and helps demonstrate the materiality of these benefits that these initiatives will provide. Moving to Financial Services. Our Financial Services division maintained its strong relevance despite challenging dynamics at play associated with long lead times for new cars and a rising rate environment. We previously highlighted our new and used finance penetration rates, which continue to outperform industry benchmarks. In addition, we've also included, so it's a like-for-like comparison, the top 30% of Eagers performers who have delivered approximately 19 percentage points higher share on new vehicles and 15.7% higher share in easyauto relative to used car industry benchmarks. This highlights the opportunity within our control as the auto finance conditions normalize. Despite the flat overall finance share results, Eagers was able to grow per retail vehicle income underwritten by disciplined margin control and accelerating ancillary revenues, including motor vehicle insurance and mechanical and cosmetic protection plans. Our proprietary financial services business by our JV with Taurus continued to perform well throughout the year, writing more than 4,600 contracts. While our car care business, Perfexion automotive technologies produced record results and increased profit per vehicle by 35.3% since the merger and has become a more relevant and material contributor. Our disciplined investment in growth initiatives have provided the platform for material top line revenue growth in 2023 and beyond. In '22, we invested in greenfield opportunities by new market representations with existing partners and material partnerships with new entrants in the Australian market, while introducing new innovative retail formats that provide accretive earnings opportunities. Targeted and strategic acquisitions have secured a national footprint following the acquisition of the ACT dealership group, representing more than 30% of the ACT market, in addition to further accretive expansion in our South Australian business. These acquisitions, combined with growth with our existing partner portfolio with brands such as Ford, MG and Volvo in greenfield points, retail partnerships with new entrants such as Cupra, Chery and our exclusive JV retail partnership with BYD is expected to underwrite more than $1 billion in revenue growth in 2023 compared to 2022. Further incremental growth is expected as we continue to sensibly scale our easyauto123 preowned business. Looking at our AutoMall West initiative, which is a key pillar in our internal Auto Mall strategy and aimed at leading the transformation and evolution of automotive retail, providing better customer experience on a sustainably lower cost base. The facility opened in April '22 and the response from key stakeholders, including our customers, our staff and our OEM partners has far exceeded expectations. Average daily unique footfall visiting the store exceeds 2,000 people per day, with the average drill time for customers in the store of approximately 16 minutes. The performance of the business continues to gain significant momentum with monthly order rates increasing more than 175% from April to December 2022, and monthly service repair orders from our service department located in the shopping center, increasing more than 38% over the same period. In the second half of 2022, we expanded our footprint with an additional 4 OEMs and continue to discuss opportunities with further brands. AutoMall West itself is a globally unique initiative. However, it also provides a template for future retail redesign under our Auto Mall strategy. Moving on to the NEV story or the New Energy Vehicle story. The automotive retail industry is the forefront of an inflection point for the entire industry. Without doubt, the next decade, we'll see a rapid and meaningful transition to new lower emission powertrains. Collectively, the OEM partners we represent are spending hundreds of billions of dollars in development of new technology to respond to these emission challenges. While there is investment across the range of CASE, which represents Connected Autonomous Shared and Electric technologies, the immediate opportunity presents in the low and zero-emission drivetrain segment. The global trend towards NEV, which stands for New Energy Vehicles and covers, battery electric vehicles and plug-in hybrid electric vehicles is the most prominent in terms of uptake. Australia has been a laggard in adoption of vehicles in this segment. However, a combination of state and federal incentives, combined with ESG-driven mandates provides significant stimulus to the consumer-driven desire to explore transitioning to newer, low or zero emission technology. Access to abundant supply at the more affordable end of the NEV price segmentation, taking NEV or electric vehicles to the mass market, in other words, is a unique and highly valuable opportunity for the company. Finally, we turn to our national fixed price independent pre-owned business, easyauto123, which is supported by our JV in Carlins Auctions. Our independent used car strategy is still a key growth opportunity for the company. 2022 was a challenging year for used cars in general with supply materially limited via our most productive channel, which is trade-ins on new cars due primarily to long lead times. This dynamic, combined with great interest in the pre-owned market from startups in the first half of 2022, led to greater competition for the right stock and therefore, compression in margins, putting our total profit under pressure. This competition for supply focused on external sources such as the private market and actions impacted our ability to achieve both volume and profit ambitions for the year. Despite this, we still managed to grow our revenue by 25% and our volume by more than 20%, while remaining profitable over the course of the year, a somewhat rare base in the independent car segment during 2022. We expect 2023 to benefit from internal structural changes made to our unique sourcing channels, combined with our investment in unique technology and added to our profitable, well-established existing scale. Finally, turning to our outlook. Eagers Automotive are uniquely placed to play a leading role in the transformation and consolidation of the automotive retail industry in both the franchised automotive operations and independent use, which will drive organic growth and provide further accretive acquisition opportunities. We have a clear strategy and a track record of disciplined execution. As a result of building blocks laid in 2022, this year, we expect to see material revenue growth, a sustained strong return on sales performance and underpinned by our record order bank. We are uniquely placed to be a leader in the transition to new energy vehicles, while growing partnerships with existing and new entrants to the marketplace. This gives us the opportunity to continue to outperform the broader market. We will continue to invest in easyauto123 with the ambition to build the most recognized and well-regarded independent pre-owned business in Australia built on a sustainably profitable platform. Finally, we continue to review accretive opportunities that meet our strategic mandate and create further shareholder value. Like 2022, we will balance delivering results for our stakeholders in the short term with investment in delivering longer-term growth. To this end, we view the future with great optimism with a plan to be able to deliver consistent revenue growth at a sustainable, strong return on sales. On behalf of Eagers Automotive, I would like to thank this -- take this opportunity to thank you for your interest in today's results, and we would now like to open up the line for questions.

[Operator Instructions] One moment for our first question, and it comes from the line of Tim Piper with UBS.

Just a quick one on your expectations around supply in the context of the $9.5 billion to $10 billion 2023 sales figure. What are you expecting in terms of new car supply within that sort of figure?

Sorry, Tim, just -- is that a question just about supply. Just missed a little bit before that. Was there something specific about supply?

Sorry. Just what are you expecting in terms of calendar year '23 uplift in new vehicle supply in terms of that $9.5 billion to $10 billion of sales in 2023.

Okay. So our increase in revenue is not purposed on the market materially increasing. So that's the first thing. So there is not -- that is an uplift in revenue that we have created through the building blocks, as I say, are things that we've done in 2022. So we're not factoring in a market uplift of 3%, 5% or 10%, to be honest. It's totally crystal ball. Our sense is that it should marginally improve on 2022 of $1.81 million. December and January have seen sort of double-digit lifts on prior periods. But we've still got some major brands reporting very tight supply and particularly tight supply on high-demand models. So 2 parts of that answer. We're not prefacing that uplift in our revenue for '23 on a larger market. In fact, we've done it based on all things remaining equal. And our performance in a sort of a stable marketplace. We do think there'll be more cars delivered this year. We don't think it will be a massive uplift.

Just a second question on back-end revenue. What are you thinking? I mean in terms of the trajectory of back-end revenue, you still think capacity headwinds there, is that freed up completely? I'm just thinking about the road trajectory of that back-end revenue, particularly in servicing revenue heading into 2023. This -- maybe look a tad on the soft side?

Yes. I probably think there was just a little bit of upside in the back end. It's not going to be material, but it's going to be better than 2022. The biggest issue in '22 was COVID absenteeism in workshops, it's simple as that. That's moderated largely in this year. We're not seeing that in any material way. We're probably much more -- much closer to what it was pre-COVID. But there's no doubt that it impacted our ability to maximize the amount of cars we could service, which then flows on to the amount of parts we can sell on those services. So it impacts both parts at the back end. We haven't put a number on uplift in the back end. It certainly -- we've got no expectations it will go backwards. It should actually grow this year for all the reasons I've just said. So -- but it's not a massive increase in terms of the total revenue story.

Maybe just one more on finance costs, endowment financing. I mean how much of the RBA rate increase effectively you've seen in that number through the second half of calendar year '22? And then secondly, it looks like new car inventories kind of picked up a bit more than sort of what revenue has, has turned slowed a little bit and we sort of need to feed that into the [indiscernible] financing, do you expect more -- that to pick up a little bit more heading into calendar year '23.

Yes. It's a really good question, Tim. So I'll get Sophie to give you some detail in a moment. The first thing I'll point out on inventory. Our day supply at the year-end was actually lower than what it was at year-end '21. So our day supply in new cars was down at 49.2 days. We were 51.4. So in terms of our order rate and the amount of cars we've got available to deliver, it's actually dropped a little bit. So the inventory story, we're not concerned about at all. It's actually quite steady with where it was in 2021. The second thing I'll make a comment about, there is no doubt that costs of floor plan interest rate -- charges on floor plan are going up. We can't stop those. That's obvious. However, it is important to remember that inventory costs make up about 2% of our cost base. So it's not a huge component. As much as we've got a lot of stock and interest rates are rising, it's not a massively material impact on our cost base and we can talk to cost base later. I'll let Sophie make some comments around that.

Yes. So Tim, look, since the rate -- base rates started rising in May, it has impacted [ Belmond ]. It's probably around $10 million. But as Keith said, when you've got a $1.2 billion cost base, it's a relatively small number. I guess what's important to note is, across the board, when you look at our debt portfolio, 72% of that debt, corporate debt is fixed. So we're reasonably resilient from that perspective. The only exposure we've got is around our syndicate debt, which is around $100 million at the moment. So those Belmond costs will flow through for a full year basis. But again, relatively small compared to the entire cost base.

Sorry, Tim, I'll just add one last piece to this because it's such an important part of the business. Our total cost base went up by $17 million in 2022, which again is -- it's probably one of the statistics we're most proud of, given the environment. $17 million in isolation, sounds like a lot. It's minuscule. It's less than 1% if you take out investments in deliberate technology. So we've costed all of our tech initiatives. If that includes M&A costs on our ACT transactions, and it includes a $10 million increase in inventory. So what that all leads to is a story that across people, across property, across advertising, across everything that we can control, we've taken structural cost out. So our cost base story is actually something that we're much proud of, and it's really why we're pointing to the sustainability of our return on sales margins will be solid. Our cost base story is continuing to be really well controlled.

One moment for our next question, and it comes from the line of Scott Murdoch with Morgans.

So I like to just start with that revenue uplift target, if we can just delve into that a little bit more, maybe a multipart question. Can you just, I guess, give us a little bit more color on the composition; the BYD impact flowing through. Just interested if that's a full revenue of the JV flowing through and also the composition, I guess, composition of the revenue coming through from previous acquisitions?

Yes, no problem, Scott. So there is -- in terms of the makeup of that without going into chapter and verse of giving you every single number, there's about 40% of it is linked to acquisitions. There is around sub-100 in terms of organic things like a full year of Auto Mall. We do consolidate total revenue on BYD in that retail joint venture. So I mean you can probably back calculate the sort of volume numbers that would be factored on BYD. But it is 100% of the JV that goes through the consolidation, but it's on a reasonably conservative volume outlook.

Just again, just on the financial stuff. On the GP coming through on that side, we can see that there has been a second half uplift just interested in, I guess, the agency impact high level if you can kind of help us split that out. And your insight into the stickiness of that GP margin, that's slightly obvious given the order book, but how you see that GP margin flowing through in the years ahead?

Yes. So first off, agency, I'll deal with that one first, if you don't mind, Scott. The agency is fairly immaterial inside Eagers. Mercedes-Benz volumes are sub-2.5% or circa 2.5%, Hondas are much less again. So in terms of agency having an impact on that margin story or even our return on sales performance, it's very minor across our business. So totally immaterial, we can probably split it out, but it would be totally immaterial. Effectively, what we've seen in 2022 was that margins strengthened across new cars, across franchised used cars, service, parts, finance per vehicle retailed across new and used. The only area -- the only part of our business where margins actually went slightly back was in our easyauto123 business. So that margin was across -- and that margin evolution and improvement was across the entire business, not just new cars. Now there's 2 things I just want to add to that. One, how sustainable is it? Well, certainly, the new car margin, we think it's -- there is a high likelihood that it's going to remain strong. We've got such a large order bank that it's going to wind off over the coming years. And I can't even tell you at what rate it will wind off because it's still growing as we sit here today. And that 2-year unwind that I mentioned in the presentation that would be with record high supply and record low demand environment. So it's basically a worst-case scenario. So we believe the record order bank, which is embedded with really strong growth that will reflect what we achieved in the second half of 2022, is likely to underwrite the margin performance certainly in the new cars. But then ultimately, what really matters, Scott, is less the gross margin and the return on sales, which impacts -- sorry, which is our net profit number, which involves both the growth story and our cost base story. And as I just said to Tim, our gross -- sorry, our cost base story has been -- we're really proud of this year because we've made structural cost out in a high inflationary environment for sort of a circa 1.4% increase in our cost base, which I think is really commendable.

I'll just ask one more, given there will be lots of analysts in the queue. Just on the order book, I think you've actually answered this in your statement just there before in terms of it's still growing, but a couple of your peers gave some insight into trading calendar year-to-date. So just interested in what you're seeing calendar year-to-date in terms of the demand dynamic and the order book growth for the first, whatever it is, 6 weeks of this year.

Over the first 6 weeks. Okay. So…

Just in this calendar year…

Well, for the second half of 2022, we grew by 29%. That's the first number. The gap between orders and delivery. So here are some interesting numbers in '21, the gap between order and supply was 25%. That lifted to 34% in 2022. It tightened more recent history, it tightened to 24%, I think, in quarter 4, and then it's jumped out to 34% in January. So 34% more orders were taken than vehicles delivered. So the order book is still growing at a pretty strong rate.

One moment for our next question, please. And it comes from the line of Sarah Mann with Moelis Australia.

Just wanted to ask firstly on the trading environment. Have you seen any change in the mix of, I guess, customer types, whether that fleet coming back relative to retail? Or are you still seeing kind of the fleet guys be undersupplied because the retail demand is still really strong.

No, Sarah, it's a good question. There is an element of the fleets coming back. I mean a number of the FMOs and the novated companies have released and made statements on to the market in the last day or so. And what they're saying is what we're seeing as well. There is no doubt that one of the things that will offset any retail softening linked to a high inflationary environment of rising interest rates is the return of fleet and this novated story that's going to have a fair bit of fuel tipped on it. Both those segments particularly are really going to help offset the demand story. So we're seeing it. If you -- the anecdotal story is if you walked into a showroom today versus 12 months or even 18 months ago, it will feel less busy, but the order rates still are up 6% in 2022 or 2021. And that is because there has been an element of the fleets coming back, the novated story is starting to gain some momentum, particularly in EV going forward. So there has been a slight change in the mix. But it's a really interesting dynamic. When has it ever been something where there's a carrot and a stick. The carrot there's huge incentives on going to low emission cars with the FPT exemption. But you've also got this stick, if you like, which is the mandate on fleets to green their fleet. That's going to have an interesting impact over the coming years. And it's not a temporary thing. This isn't over the next couple of months. This is over the coming years. Large fleets, if they can't get access to greener cars in material numbers may actually defleet and put more of their drivers into car allowances, novated leases, et cetera. So this dynamic has got a long way to play out. And all of those things may not increase the total number of cars sold into Australia, but they drive transactions. And we've always said our business is built on transactions, not on how big the market is.

And just to clarify as well. Look, historically, fleet sales have been lower margin than retail sales, but clearly, supply is still constrained, right? So just under the scenario you just described, like how do you expect margins on those sales to kind of move relative to…

I think if you read some of the notes from some of those fleet management organizations, they're talking about supply, they're not talking about discount rates. They need to get supply. In the past, they've obviously made money out of the financing arrangements and, to be honest, just rebates from us on low-margin cars. But at the end of the day, they're all chasing supply at the moment. It would be fair to say that it's a blend because there are models. There are brands where supply is actually freeing up or freed up over 2022. So it's not across the board that margins are incredibly strong and then it's a no discount environment. It's a blend. And this is why we sort of make the comment, going forward that if the order bank in Australia prior to COVID was about a 15-day supply order bank, and it's now north of 180 day supply. Looking forward, it feels like it's not going to be 180 days forever, but it's certainly not going back to 15 days. So when we talk about a structural change to this order bank dynamic, which trucks have had for decades, does it land at 60, 90 or 100 days supply or order bank, going forward. Now if you've got an order bank at that level, it's going to have a higher embedded growth than a sell from stock, high-pressure push environment that the industry has had before. We just cannot see how it's going to go back to that based on all the conversations we have with OEMs. What that does will shift, it will make a structural change in margin across the cars we deliver to both FMOs and the cars we've put in order banks. So that's a long answer to your question, Sarah. But at the end of the day, there is a blend that we're still doing fleet deals at fleet pricing on some product -- but the real name of the game is getting access to supply, and there's plenty of fleet vehicles or [indiscernible] cars that are being sold at full retail.

And then the other question I have is just on the cost. So you've obviously outlined a bunch of cost saving strategies. You've executed on some already. There's more to go. Like in a market where [ GPs ] are still good, like how hard is it to implement some of these changes? And how should we be thinking about, I guess, the productivity gains and the cost savings in terms of how that flows through from a time line perspective?

Hard to answer that, Sarah only because it's just -- it's a daily proposition. What we achieved in 2022 was literally nose to the grindstone every day on costs. But most of the conversations in this business that aren't strategic are about daily cost control -- they're not about margin, which is probably would be obvious. But -- so how do they flow out? Well, like-for-like in 2022, we reduced headcount by 83 people. So that's a $7 million savings. It wasn't reduced in our workshops or fixed operations. We just -- have just scratched the surface. On the technology slide in our pack, which I won't turn to you now because we had lost there, but you'll see a number of the benefits of the technology that we've developed in terms of productivity outline. What we haven't extracted yet and what we're sort of pointing to is that we've developed the technology, we've rolled out the technology. We've proved out the efficiency gain, but we haven't necessarily changed our business in terms of people resourcing. Remember, 55% of our expense base is people. So the name of the game is productivity. Linked to that is property and redesigning our property footprint so that we can consolidate more business on the smaller footprint. That's great from a property standpoint, but it actually is also the catalyst to redesign your workforce. Tech and property leads to lower people costs. So again, hard to be specific there, I'll give you how you think about it. But this is just something we've got to take structural cost out over the next, whatever, 6, 12, 18 months, while there is higher external costs coming to us that we can't control.

One moment for our last question in queue. And it comes from the line of Andrew Hodge with Credit Suisse.

Keith, just on the analysis you've used with the order bank. You've mentioned -- you've used demand continuing at the same level through that COVID period. But anecdotally, it would appear that the demand in that period was higher. So we think just from what you're observing, whilst you were talking about sort of 350,000 cars, if you took the demand through that time, is it more like 400,000 or 450,000 cars that you think the actual gap may be?

Yes. Sorry. Okay. Yes. No, you're right, Andrew. I was sort of thing -- I was trying to follow where you were going on that one, but I understand exactly what you're saying. Yes, that gap is based on, if the demand had only stayed at 2012 to 2019 levels of 1.137 million. So you're exactly right. That gap, that 363,000 car gap would only be keeping demand. So the reality is the anecdotal comments that the order bank in the industry is north of 500,000 is probably not wrong because there is no doubt we know from our order rate that over second half of '20, '21 and '22, order rates have run at well north of 1.3 million.

And then just a second question around commission rates, particularly with the 2 largest financiers having changed ownership, just whether you're seeing any change to commission rates at this point in time. And whether with that new ownership at some point, you expect commission rates to change in any way?

The simple answer is at the moment, a change in ownership. So with Allied taking St. George and -- sorry, Allied taking Macquarie and Angle taking St. George, sorry, I got the wrong way around that. There's no doubt there's a more competitive environment. Whenever there's a change like that, there is pressure on them to build their book to make sure that they manage their point-of-sale channels, which is us, the dealers, and we're critical to that going forward. So the short answer is it's been a really competitive environment for the last 12 months. That has helped us, and that's offset what is a challenging environment for writing auto finance at the moment. Long lead times, rising interest rates where auto loans are run ahead in terms of the costing and the rate than, say, a mortgage redraw, things like that make it a very tough environment. Again, one of the results that it doesn't necessarily look like it shot the lights out is our finance results were probably one of the things we're most proud of, to hold that will actually extend the gap between us and the industry. So again, back to your question, Andrew. It is competitive out there. There's no doubt that what we're earning out of our relationships is good at the moment. And will it change over time? It always does. It evolves. But at the moment, it's competitive, which is good.

And this concludes Q&A session. I will turn it back to management for any final remarks.

Thank you very much. I just wanted to take the opportunity while anyone who's listening to thank all of the Eagers Automotive employees, our staff are incredible. They -- we achieved -- we're very proud of our result in 2022, but that comes down to our great staff. So any staff listening, thank you for your support in 2022. The result is yours. Also, I'd like to thank our customers and our business partners, while we have this opportunity and, of course, our shareholders. We're very confident about '23. We're very excited about where the industry going is going, and we look forward to growing the company in the future. So thank you for the opportunity to give you this results update to everyone that's dialed in, and we'll talk to a number of you in more detail over the coming weeks.

And this concludes today's conference call. Thank you for participating, and you may now disconnect.