Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eagers Automotive Half Year '24 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Keith Thornton, CEO. Please go ahead.

Well, thank you for joining us today to discuss the Eagers Automotive results for the half year ending 30 June 2024. Sophie Moore, our CFO, joins me this morning, and together we have the privilege of presenting the results for the first half. Our results pack, including the slides for the presentation has been lodged with the ASX and should be visible via the webcast. As outlined on Slide 2, the presentation today will provide our financial results, followed by operational and strategic updates. We'll also provide the company's outlook for the remainder of 2024 and beyond before opening for questions. So let's begin with the financial results for the first half of 2024. At the start of 2023 and again, for 2024, we set out our simple ambition for the company, which was 2-fold: to drive material top line revenue growth while also continuing to optimize the underlying business to build a platform for strong, sustainable returns over the long-term. Our results today demonstrate continued progress on these fronts. Total reported revenue for the first 6 months of 2024 grew by 13.4% or [AUD 647 million] on the prior period to a record first half revenue of AUD 5.5 billion. This strong revenue result produced an underlying net profit before tax of AUD 182.5 million for the half, with a return on sales margin of 3.3%. Pleasingly, the strength of our underlying business is evident in the like-for-like return on sales margin of 3.6%. Excluding the retail joint venture, recent acquisitions and easyauto123, the return on sales percentage for the core franchise automotive business, which is more than 70% of our turnover is 4.1%, still a healthy margin above long-term averages. We also see continued improvement in the key metrics of rent to growth and productivity. Both metrics evidence the benefits of our ongoing execution of our NEXT100 strategy. Now interestingly, if you were to report our results for a financial year rather than a calendar year, we made AUD 408 million for the 2024 financial year ended June 30. This compares to AUD 417 million in the prior 2023 financial year or 97.8% of the record ever. We ended 30 June with total available liquidity, including cash of AUD 444.7 million and have since completed our planned syndicate refinance while also securing additional credit facilities for property-specific purposes. We now have approximately AUD 800 million in undrawn debt facilities at our disposal. With this, we have further fortified our balance sheet, providing the platform for future growth opportunities. We continued a key property for acquisition as part of the execution of our AutoMall strategy. Our property portfolio increased to just over AUD 725 million at 30 June, with further acquisitions locked in for the remainder of 2024 expected to take the total portfolio to over AUD 780 million by 2025. But based on this resilient profit result, the strength of the balance sheet and the confidence we have in our underlying business, we're pleased to announce an interim dividend of AUD 0.24 per share, maintaining the interim dividend set in the first half of 2023. Turning to our scorecard, which is our way of keeping us accountable to the updates we provide each half year. At our 2023 full year results, which we released to the market in February of this year, we communicated that we expected material revenue growth of more than AUD 1 billion for the full year 2024. And this was to be on the back of over AUD 1.3 billion in revenue growth in 2023. With that as the outlook, we've seen the business grow by AUD 647 million in the first half alone to be well on the way to achieving this forecast. We also provided an outlook of moderating new car margins despite a resilient new car delivery market, primarily as an outcome of normalizing supply across many OEM brands. The key offset to this new car margin pressure was expected to come through improved performance in used cars, finance and ancillary income and growing service and parts businesses. We have seen this play-out in the first half of 2024, with a surprise that the new car margins have held up better than forecast, while finance penetration across the industry has not recovered as quickly as we expected. We also highlighted the impact of materially higher interest rates and a high inflationary environment on our cost base. with offsets targeted through continued execution against our key productivity levers, which are people and property, combined with industry-leading cost discipline. Now, the key takeaways at the top of the slide highlight we have not been immune from interest rate and general inflationary pressures nor the effect of oversupply by several OEMs in a market characterized by a more cautious consumer. Having said that, the dynamics are playing out generally as expected, with offsets to the new car margin pressure across much of our business. The net impact of these dynamics are seen in a reduction in our underlying return on sales measure to 3.3%. It should be noted, the underlying like-for-like measure remained at 3.6%, which is still materially above long-term averages. Now, as always, it is worth scratching the surface of any headline numbers to ascertain the true health of the core business. While not a measure we normally refer to, it's relevant to look during a period of interest rate rises at the EBITDA performance to understand we're being successful at controlling the controllables. Pleasingly, our underlying EBITDA increased by 4.6% on the first half of 2023 to AUD 265.9 million, a record ever first half result. While our EBITDA margin for the 2024 period was 4.9% compared to 5.3% in 2023, still well above our long-term average of 4.1%. This is an exceptional outcome and real evidence of the work being done to deliver on building a stronger underlying business, able to perform through challenging headwinds, while equally able to extract maximum benefit from periods of tailwinds such as any anticipated interest rate moderation. So with that, I'm going to hand over to Sophie now to take us through the 2024 half year financials in more detail.

Thanks, Keith. I won't repeat the headline numbers that Keith already gone through, but instead will focus on some key insights into the financials. In a company that have grown by circa 30% or more than AUD 2.5 billion turnover in a 2-year period, it's incredibly important that we provide enough detail and commentary around the moving parts, so that an accurate assessment of the business performance can be ascertained. Underlying operating profit for the period was AUD 182.5 million. Importantly, underlying costs before interest and depreciation are at historic lows relative to turnover, which reflects the combined benefits of scale, leveraging our operating model and the relentless focus on a more productive and efficient cost base. For the half year ended 30 June 2024, the underlying like-for-like cost base is up AUD 52 million or 7.7%. Excluding finance and depreciation costs, like-for-like cost base is up AUD 26.5 million or 4.2%. Our employee costs, which represented approximately 50% of the total cost base for the first half of '24 increased only 0.2% or AUD 650,000 on a like-for-like basis across employee base of 7,490 people. And importantly, when you look on a like-for-like basis and before interest and depreciation, our expenses as a percentage of sales have declined in the first half of 2024 relative to the second half of 2023. Slide 30 in the appendix includes the reconciliation of the statutory to underlying EBITDA and PBT. Eagers has been a very strong financial position underpinned by substantial property portfolio and asset base. We ended the period with corporate debt of AUD 495.1 million net of cash on hand, up from AUD 262.7 million at December 2023. The increase in total debt during the period, both syndicate and captive is due to the recent large-scale acquisitions and purchase of associated property. Our long-standing relationships and support from both our syndicate and captive finance partners certainly allows us to continue to fund our disciplined growth strategy. The long-term debt provided by our captive financing funds our AUD 727 million property portfolio, which underpins our physical representation on key strategic sites. 53% of this captive debt is locked in at low fixed rates, extending out to 2036. At 30 June 2024, the property portfolio had in excess of AUD 250 million of equity. Overall, we remain well placed to fund growth with significant gearing capacity, which enables the ability to deploy available capital from these multiple sources in a disciplined and strategic manner. Total inventory was AUD 1.8 billion at 30 June, 2024, up AUD 217 million from AUD 1.6 billion at 31 December, 2023. It is important to highlight the components of the increase with AUD 165 million or 76% attributable to the acquisitions completed in the first half of 2024. At 30 June, 2024, Eagers had 42 days supply for unsold new and demonstrated vehicles and 22 days supply for sold vehicles awaiting delivery. There are significant opportunities to generate cost savings as we continue to focus on inventory management across the portfolio, together with an expectation of a lower interest rate environment in 2025 and beyond. As inventory levels-out at sub 60 days and interest rates start to moderate, you can see the tailwinds that flow through to our profit before tax results. In August, and as planned, we refinanced our maturing corporate syndicated facility with a strong appetite from our 3 banking partners, resulting in increased term facility limits by AUD 391 million, a 95% increase. In addition, we have secured additional committed property debt facilities totaling AUD 258 million, which will underpin the continued execution of our AutoMall strategy. The group's total liquidity capacity is supported by AUD 1.59 billion committed core debt facilities from our syndicate and captive finance partners with tenure extending from 2028 to 2036. Our ability to secure this additional liquidity absolutely demonstrates the confidence of our multiple finance partners in our long-term execution of the NEXT100 strategy, and importantly, the outlook through all evolving economic cycles. As Keith already highlighted, the company declared a first half dividend of AUD 0.24 per share, consistent with the prior period. Importantly, this highlights our long-term consistent track record of delivering returns for our shareholders. Over the past 10 years, we have delivered more than a 12.8% compound annual growth in dividends and demonstrated our ability to grow the business by delivering a similar annual growth in our underlying earnings per share. This focus on rewarding shareholders while remaining well-positioned to capitalize on growth opportunities is fundamental to our company's long-term philosophy of growing value for shareholders. I will now hand back to Keith to take us through some operational highlights for the first half.

Thank you, Sofie. Turning now to an overview of operational performance and particularly the market that we're operating in. So let's start with the new car market. The total new car market for the first half was a record result, up 8.7% on the prior period. Now this follows a full year record in 2023. And most notably, it's highlighted by 10 of the last 12 months being record ever delivery results for the Australian new car market. Now whilst this period certainly has seen a large number of deliveries from industry record order banks as supply is returned in many of those OEM brands, the underlying demand has been surprisingly resilient. In the period since July 2023 on a like-for-like basis, we've taken more orders than the record number of vehicles delivered over the same period. In June 2024, the delta was 9.7% more orders than deliveries for this month alone. But having said that, there is no doubt that monetary policy has worked to dampen discretionary spend from the elevated order writes of 2022 and early 2023. What is apparent in the order write that we are seeing is a shift towards value and affordability and a move towards what we see as need buyers rather than the want buyers, and these are characterized by a move towards fleet. So to be clear, on an overall basis, demand is depressed from recent years' elevated levels, but still strong relative to historic norms. Our net order bank remains at a factor of 5 times as large as any period prior to 2020 with strong embedded growth, underwriting resilient new car vehicle margins. There has been some cycling of this order bank as it has reduced even in a period where orders and supply have pretty much matched each other. At the current runoff, however, the order bank will still extend into the first half of 2025. Although our expectation is that it may moderate at a level higher than pre-COVID a new norm. And this is based on the positive actions and commentary from some of the major OEM partners. So let's move past the new car market alone, and we always need to highlight the resilience of the total automotive retail model, which is made up of a number of large departments, which each operate in large addressable marketplaces. The economics of automotive retail will shift in any given cycle. Gross profit levers in used cars, parts, service and finance and insurance will often be stronger in a cycle when the new car business is challenged or under pressure. Now, this is a key factor as to why automotive retail, while always subject to cycles is such a resilient business model. And it's how Eagers Automotive has been able to pay a dividend every year since listing in 1957, 67 years of continuous shareholder returns. We've seen these resilient dynamics at play in the first half of 2024. And as we projected in our outlook for the year, there is tangible evidence of tailwinds across several of these margin levers. Like the different dynamics at play within the overall automotive retail model, within the Eagers Group, we have different business units represent different gross profit opportunities. The margin opportunity within our retail joint venture, our maturing greenfield businesses and our independent used car business is lower than our mature franchised automotive operations due primarily to the limited contribution from parts and service. Now, as our independent used business and our retail joint venture become an increasingly larger share of our total overall business, the total reported gross margin for Eagers as a group is skewed by this reduced margin profile in these operations for at least the short to medium term. So why are we highlighting this? Well, it's really simple. In our case, do not over-index any reduction in total gross profit margin as simply being a new car margin decline, that wouldn't be correct. It also highlights the material challenges that we have needed to absorb in the first half in our overall results and certainly that the outlook for these business units when added to the core business is positive. Okay. Let's move on from gross profit and look at expenses. And Eagers remain successively focused on disciplined cost manage in parallel with a very deliberate productivity driven and structural change to our cost base. So looking to the expenses that we can control. And I'm pleased to report, and Sofie just mentioned that on a like-for-like basis, before interest and depreciation, expenses have declined in the first half of 2024 compared to 2023 when measured as a percentage of sales. Further, when we compare this to historic performance, again, take out interest and depreciation, our current cost base as a percentage of sales is the lowest ever recorded. Now this reflects, again, Sofie pointed this out, it reflects the scale of the Eagers' business these days. It shows our leveraging of the operating model, our relentless focus on a productive and a more efficient cost base. So, looking at the possible upside going forward from further optimization, and the company has demonstrated that once fully integrated, we are able to extract benchmark returns from businesses we acquire. But it is important to highlight that this integration and optimization is not an overnight process. Inside the company, we talked to a 3-year time frame to embed the right systems, the right process, people, along with being able to leverage the scale benefits from the existing Eagers operations. The slide on the screen demonstrates the material upside evident in key parts of our business. While splitting out these business units, we're also able to demonstrate the drag on our core operation in the first half. This is important to highlight as there's a risk that any change to our overall total margin, whether at a gross or a net level, could be interpreted simply to industry cycles outside our control, and that's not necessarily the case. But first, on the left, you noticed on a like-for-like basis, the impact of economic and industry headwinds on our core franchised automotive business was a decline in return on sales from 4.7% in the first half of '23 to 4.1% in the first half of 2024. This excludes acquisitions over the last 3 years and also excludes year-end bonuses from OEMs. Moving across the page, you'll see that our acquisitions, which reflect everything acquired in the last 3 years have further material upside to achieve benchmark performance. So in other words, the core Eagers franchise automotive business post AHG, about 70% of our business is at 4.1% return on sales, acquisitions over the last 3 years are running at 1.9% on sales. Greenfields represent an immaterial part of the company's current turnover. But traditionally, these businesses take some time to become profitable depending on what cost base you attach to them. Among the greenfield business are a number of new OEM partners launched into the Australian market over the last 3 years, noting that all start with 0 service and parts businesses. Our retail joint venture underperformed relative to expectations as excess inventory was cleared during the first and early part of the second quarters. In May and June, with this inventory cleared, profit rebounded very strongly indicating a positive second half outlook. And finally, our easyauto independent used car business has performed at record levels for the last 12 months. But looking at these business units, the total upside from these segments by lifting to the performance achieved in our core business is AUD 43 million per annum. So you can imagine this is something we are very, very focused on and something that can be achieved without any further growth. Okay. Let's move to strategic priorities and provide some specific updates. Many of you will be aware that we hosted an Investor Day on June 11 this year, which provided us with the opportunity to outline progress in much greater detail than our regular 6-month market updates allow for. Given this recent Investor Day, for the purposes of today's presentation, we will only touch on a few key strategic items. So just for context, we have our NEXT100 strategy outlined on the slide you see now, and it's easy to summarize Eagers Automotive strategy, that is to optimize the business and grow sustainably. That's it in a nutshell and probably no difference to the strategic ambition of most companies. Let me touch on some highlights for the first half. There are 3 key return on sales margin levers critical to optimizing performance in automotive retail. Starting with property, we continue to target acquisition of strategic property with further committed acquisitions in the second half expected to take a total property portfolio to more than AUD 780 million. The property we've committed to in the second half will represent 37,000 square meters across sites in Northern Territory, ACT and in Queensland. To support the productivity benefits of reimagined and consolidated property footprint, we continue to develop our proprietary technology stack. At the recent Investor Day, we outlined in detail a number of technology-based initiatives that provide an enhanced customer and employee experience while generating significant productivity gains across our workforce. Our higher productivity while delivering a better customer outcome is a measurable and highly valuable competitive advantage. Our progress in these areas is evidenced by 2 key measures: headcount and revenue per employee. A key measure of productivity, revenue per employee is up 6.2% to circa AUD 1.3 million per person per annum compared to the same time last year. And on a like-for-like basis, our headcount is down by 233 people or 3% over the same period. Finally, moving to Financial Services, our key margin driver. Eagers' relative outperformance to the industry continued. This is evidenced in both penetration results and our income per vehicle retail compared to industry averages. Income per new vehicle retailed was 62% higher than industry averages, while income per used vehicle retailed was a staggering 110% higher than the industry. These results are generated by our higher penetration performance, combined with growth in our ancillary income strategy. The performance of our Car Care business continues to be a standout, recording 17% growth for the half and 58% growth on a per unit basis since we merged in 2019. Financial Services will continue to act as both a margin offset and an opportunity in 2024 as industry dynamics continue to evolve. Looking now to the retail joint venture. And as we've already mentioned, results from our retail joint venture would have pressed in the first 4 months due to the excessive inventory that needed to be cleared rapidly in anticipation, I'll get there, of new models arriving. Pleasingly and once complete, profit immediately returned to run rates achieved prior and through most of 2023. We expect this to continue to be the case during the second half of 2024. Demand has been strong on the back of new model releases and 2 further key models are due later in the year. The national network footprint will expand to 56 retail sites by the end of 2024, supporting BYD ambitions for growth. Finally, the business has pivoted to a combination of new energy vehicle product, comprising both full EV, full battery electric vehicle and plug-in super hybrid technology, which is a key advantage for this business. Since its recent introduction into the market, over 45% of the order right mix is plug-in hybrid, and this will continue to grow with new model introductions incorporating both powertrain technologies where available. This business will continue to be a leader in affordable BEV, while also capitalizing on volume opportunities in the hybrid segment, which represents the fastest-growing segment in Australia and is arguably the sweet-spot for the foreseeable future in the low emission transition. Moving on to Australia's leading independent pre-owned brand, easyauto123. And on the screen, you'll see an overview of the business provided at the recent Investor Day. The fact that we dedicated an entire session of the Investor Day to easyauto123 demonstrates again the unique opportunity we see in this business to drive future growth and shareholder value. There are several slides in today's presentation, which provide an overview of the business and its unique competitive advantage. However, for the purposes of today's update, we would like to focus on the key operational and financial metrics for the first half only. So let's look at results for the first half, and you'll see that we are poised for a record full year 2024. In the last 12 months, since July 2023, the business has produced AUD 18.2 million in total PBT. So easyauto is becoming a substantial and material business in its own right. 2 key metrics worth highlighting is our stock turn, which is materially better than the average days of sale for the national used car market and our growth per unit, which remains consistent regardless of movements in used car residual values. These 2 metrics work hand-in-hand. Quick stock turns maximize return on equity, while also eliminating the risk of market movement influencing gross profit return. The fact that our net profit per car retailed is higher than the global leader Carmax is further evidence of how we can leverage the unique sourcing benefits of Eagers' large-scale franchise new car business to build an optimized independent used car business, even when you compare it to global best practice standards. The key metrics driving the profit per unit include gross profit, our cost base, our finance and ancillary ancillary income performance and productivity. And all of these are demonstrated in the bottom right-hand side of this slide and show levels and performance well above franchised used car performance. I won't go through this slide in detail, but the easyauto123 business has a competitive advantage or competitive advantages very difficult to replicate. On the slide, you see the unique and compelling ecosystem that supports easyauto. easyauto will continue to be a material growth engine over-time for Eagers Automotive as a whole, while in the near-term, it is perfectly positioned to act as a hedge against new car market headwinds and to capitalize on a more value-conscious car buyer. Okay. Finally, turning to our outlook. And looking ahead into the second half of 2024, we expect the market to continue to be challenged with excess inventory and continued downward pressure on new car margins. Now combined with an inflationary environment that has been very slow to ease, the second half of 2024 may actually represent the bottom of the cycle in terms of external challenges. Having said that, the resilience of the automotive retail model and Eagers' best-in-class productivity makes us a stronger business than ever before to weather this sort of environment. Looking to the industry, the dynamics we expect to see are continued strong new car delivery is broadly in line with the second half of 2023. We do expect continued pressure on new car profit per unit as supply remains elevated in a number of brands. Market share competitiveness has returned for some brands. Discretionary buyers are becoming more value-conscious and deal-conscious and the order bank slowly unwinds. However, we do see benefits from used car volume and used car growth, which we can see will continue to benefit from this new car volume environment. Service and parts will also benefit from the last 12 months of record debris. And lastly, but never least, we still believe finance penetration will start to grow. So, the total industry outlook still provides a platform to produce strong results. Specifically looking at Eagers Automotive business and the second half outlook for our business, we will be cycling a record second half of 2023. 2023 in the second half, Eagers produced AUD 226 million worth of profit, so a year-on-year comparisons may be challenging. However, we do see a number of positives. Firstly, our core franchise automotive retail business is benefiting from the multiyear productivity improvements that we have put in this business. It has been a case of developing good habits in good times, and that's something we're very proud of. Our retail joint venture is trading strongly. The excess inventory is now clear. Demand is growing. We've got a strong order bank and there are critical new models coming late in the year, likely to benefit us early in 2025. Our easyauto123 business is trading exceptionally well, and we expect it to be a perfect landing place for many buyers as affordability becomes a key characteristic in the current economy. Finally, we expect the recent acquisitions to benefit as we accelerate integration into our existing operations. But these comments refer to the second half only. And to be frank, Eagers take a much longer-term approach to the business than half-to-half. Our strategy continues to be executed to deliver long-term value through building a bigger, stronger and more sustainable business. This was presented in detail at the recent Investor Day, and I would encourage anyone that's interested to refer to our ASX release on June 11, 2024 to understand these additions in more detail. Eagers Automotive is already uniquely placed and likely to be a net winner as the industry continues to evolve. It's highly likely that both consolidation and rationalization will continue and possibly accelerate. And as this scenario develops, Eagers Automotive will continue to make sure we have an optimized operational model and that we work hard to be a preferred option for OEMs, while continuing to explore the enablers and the adjacent industries within the automotive ecosystem. Demonstrated on this last slide on the left-hand side is the material margin improvement modeled through the execution of the NEXT100 strategy through property, people, technology and finance. In other words, it's how we will optimize this business. On the right-hand side is our strategic ambition. And again, this was presented with some context so that it made a bit more sense than perhaps it looks to someone looking at it for the first time now at the recent Investor Day. But what we wanted to convey through this slide is 3 key points. Eagers Automotive is an ambitious company with clear opportunities, plans and ability to grow sustainably. Eagers Automotive is a disciplined company. We understand that growth is only earned and sustained from a strong, profitable core business platform. And Eagers Automotive remains totally focused on delivering for all our stakeholders, whether it's our staff, our customers, our business partners and the communities in which we operate. We know that if we deliver for our stakeholders, ultimately, shareholders will be the ultimate beneficiaries. So before we open for questions, I do want to recognize the tremendous efforts of the entire Eagers Automotive team. It's a privilege to work alongside you all and be able to report your great results today. So on behalf of Eagers Automotive, I'd like to take this opportunity to thank you all for your interest in today's update, and happy to now open for questions. Thank you very much.

Thank you. [Operator Instructions] Your first question comes from Phil Chippindale with Ord Minnett.

My first question, can you just make a comment on the trading performance of the business for the first 7 weeks of the half. And specifically, could you just touch on the retail joint venture and how that's progressing?

Yeah. First 7 weeks of the second half have been broadly in line with the first half. By that I mean, the underlying demand is pretty stable. The first half of this year, we saw demand about 10% down on last year. So this was the comment that we made earlier that it's down from elevated levels. Having said that, it's still running -- we've got a big enough sample size to sort of back-calculate it. We still see demand running at north of AUD 1.2 million at the moment in the marketplace. So demand is there. Demand as we sit here today or yesterday was 1% down on a like-for-like basis compared to this time last year. So having said that order write in the second half of 2023 had come down a little bit. So demand is there. There is still further further pressure on new car margins. So there is no doubt you will hear it from the 3 listed that excess inventory across many brands exist, and that is putting pressure on new car margins. So that is still the case, but the rest of the business is tracking as per the update. Used car performance is fantastic. We've got some work to do ahead of us in getting all our acquisitions over the last 3 years up to the core Eagers' performance level. And finally, the retail joint venture has traded very strongly in July, and we expect that to continue. We had a fantastic sale event just on the weekend, and we've got new models coming. So that, again, as per the update Phil is expected to be positive in the second half.

Okay. Just on Slide 24, the table on the left-hand side where you've given the second half '24 outlook. I just want to make sure I understand this correctly that those sort of indicators are relative to the second half of '23. Is that correct?

That's correct, Phil.

Okay. And then maybe just last 1 for Sophie. Just Slide 14, the performance on the operating cost side of things has been very strong. Sort of on a 12-month view, would you expect that percentage to continue to trend down slightly.

Look, we would just hope to keep it consistent with where we're at the half year.

Your next question comes from Russell Gill with JPMorgan.

A couple of questions. Wondering if we just talk through the GPU. And I appreciate it's going to vary a lot by OEM, but I guess more of a broader comment. What you're seeing, I guess, on the GPU outlook for that second half? And maybe if you can probably compare it to what GPU you're realizing in the order bank, has it gone down relative to new order write? And how both those sit relative to pre-COVID, just as a benchmark.

It's a good question, Russell. It's probably the hardest question to give a really, really clear answer because it's made up of so many moving parts. But the reality is, in the first half of this year, we made a comment that we were surprised by how strong our reported pool of growth. So pool of growth is the margin on the metal plus finance plus any KPIs or other income. That's the way we look at it in new cars. It was down only 2.3% on the first half of last year. Now, that's incredibly resilient. It probably does evidence the order bank still flowing through in the reported results. The second half, we expect a slow move towards more cars being delivered out of stock as in cars sold not from the order bank relative to the cars sold out of the order bank. What we're seeing in the order bank is really strong margins still. And the order bank is still materially large, it's north of [AUD 30,000 per car]. So we still see that order bank supporting our results in the second half to a certain extent. But to your point, there will be more cars delivered from stock at a lower margin. Now, it's almost impossible to give you some sort of view on that without going into a brand by brand specific. There's probably 50% of brands at the moment that has got too much stock relative to the demand profile and how much stock they should be holding and 50% that are okay. A couple of the major brands are being very disciplined with stock, and that's great. And we're seeing -- and in their brands that are well established, have great underlying demand from customers and customers have gone through a period probably the last vehicle they bought where they waited a long time, and they're happy to wait some time for a new car. So we have broken that expectation that you walk in and you can have a car in 2 days. So that's good. So that means we think the order bank will actually moderate at a much bigger level than pre-COVID. Now, the margins we're seeing at the moment are still nowhere near pre-COVID. But pre-COVID is an interesting period. The 2 years pre-COVID '18 and '19 were as bad as we've ever seen. Pre-COVID, if you looked at the 2013 to 2019 period, Russell, which is a fairer period, and I think that's a more normalized period. We are still above that, but we're not materially above that. Does that help?

Yeah, absolutely. Just a clarification on when we say GPU, that's the entire growth in there because it would appear your, I guess F&I might be underperforming relative to our expectations. So not just purely on the metal per se, but the overall GPU, you're saying on new order right now across the book is still well above pre-COVID, but the pre-COVID levels were '18 and '19 were international market from a GPU perspective.

Absolutely. And just to be clear on that, while we're talking about the total pool of gross debt, the 3 buckets in it, the metal margin, if you like, the finance and the KPI, they're broadly similar. They don't move that much. But the reason we always look at it together is they tend to offset each other. As the metal margin starts to get pressured, we get more KPIs because the OEMs put money below the line to incentivize us and as supply returns, finance penetration goes up. So we've always looked at it as a pool. But even so, even within that, it doesn't drop dramatically. If you look at the 3 -- if you collocate the sections, that'd be pretty similar over a decade.

Great. And 2 more questions. Just on Slide 15, when you talk about the, I guess, the turnarounds across the different buckets, retail JV, easyauto123, the acquisition margin turnaround, that's a big uplift. Obviously, doubling of the margin you anticipate to get out of that. What sort of time do you have that, because obviously, integration, I think there's some brand relevance that do influence that as well. But can you talk around the timing, I guess, that you think you can achieve that?

Yeah, you're spot on. There is some brand relevance and there's some geographic relevance in those. So I mean, in those acquisitions, you've got everything from an ACT acquisition, which we bought 2 years ago where we bought 35% of -- we bought [Nick Politis] business, which is 35% of the market. That's been a standout. It has been record performance since we bought that business. So that's very much a good brand and a good geographic mix. So that's already performing very well. We've got some challenges in a business we bought in South Australia. The business we bought in Victoria recently, also from Nick is a large scale, but it's only very early in its integration cycle. And because it's so big, it's literally got some brands that are performing exceptionally well and some that fall into that very challenging bucket. So we think that [1.9%] will edge up over time. By the end of 2025, it should be performing within 75% of the group. But I'm not going to sit here Russell and say we'll be 4.1% or whatever the core like-for-like number we've got there on the immediate left by the end of next year, but it will certainly be trending towards that. These businesses do get better every year as we integrate them and as we take cost out. I've got Edward Geschke joined us here today, our COO, and he's working very closely on the integration in Victoria at the moment, and I know what's happening in the second half of that this year. So that we'll see benefits from that in the second half. So hard to say. I'd like to say, by the end of next year, you'll see a material lift-up from there, but it won't totally close the gap.

So it's fair to say the retail JV and easyauto123 is a bit more immediate relative to the other 2?

I agree with that. That's exactly right. You'll see the retail joint venture left in the second half. easyauto will slowly lift that and plug that gap. That business is performing exceptionally well. But it does have a slightly different margin profile because there's no service in parts, but it still should get to that 4.1%, whereas the acquisitions, greenfield is immaterial, that represents AUD 80 million turnover in the first half of our total AUD 5.5 billion. So it's very immaterial. And the acquisitions is probably the biggest opportunity for us to integrate and get some upside. But it will be slow progress over the second half of this year. We'll see more next year.

Just last final question. Just on how you're thinking about capital allocation going forward because you highlighted the amount of capacity you have as a business. You've gone out and deployed a bit more into property. Obviously, there could be a pain in the industry over the next 12, 18 months if interest rates don't come down and the current dynamics continue. How are you thinking about, I guess, current allocation around share buybacks relative to property acquisitions relative to, I guess, other inorganic acquisition opportunities?

Yeah. Again, a bit of an evolving answer to that question, Russell. We've always, and we continue to this year, we've renewed our buyback provision. So if we see value in our own shares, and I've noted over in the U.S., this has been a little bit of a commentary in some of the U.S. listed as well, where they talk to the fact that -- well, they talked to 2 things. They talked to the resilience over there as well, how resilient the automotive retail businesses is able to make money even when things get challenging and the cycle tends to get overdone. And they're talking about actually buybacks as well because they can see better value relative to maybe some private sellers' expectations that are not realistic relative to listed entities, ability to buy back their own shares. So we've got it in place. We'll certainly look at buyback where it makes sense. The comment we made around the debt refinance and the AUD 800 million worth of capacity or liquidity that we've got now is 2-fold. We do want to be fortified. We want to be a strong business. It's never stressed or at risk, but we also are going to see some opportunities over the next couple of years. We've already seen some opportunities. So there is a lot of M&A activity that still exists. And again, we continue to explore this sort of -- talk about the automotive retail ecosystem. There are businesses around ours that we can invest in, can look to, that can make our business stronger in the future, and we'll continue to look at those as well where it makes sense. And in the past, Eagers has had -- we have invested in different listed companies with the view to understand those opportunities better and see whether there's something that we could do and don't read anything into that. That's just to support what you're saying that we've got multiple things we can look at.

I'm definitely going to read a lot into that.

You'd be wrong, but.

[Operator Instructions]. Your next question comes from Scott Murdoch with Morgans.

Just a question around the OEM supply, not to really dwell on new car margins, but just interested in your view, obviously, from the OEM supply perspective, you've mentioned at least probably 50% have some form of oversupply. Just interested in how you think they viewing their inventory and supply management in the coming, call it, 6 to 12 months to correct that if it needs correcting, in light that we still have really strong demand, we have had oversupply from that strong demand. So when do you think they correct that, and will that help fix, if you like, the new car margin perspective?

Scott, I think they will correct it over the second half of this year. I think you heard Lawrence talked to this the other day that they expect it to slightly get better over the second half of this year. Those, call it, 50% for the sake of these or demonstration of the OEMs that are overstocked at the moment. None of them are happy they're overstocked. It makes their life more stressful, means that they need to put tactical campaigns in, they need to market heavily. It costs them more to clear the stock. It's not just a case of selling it to dealers and sitting back and waiting for the stock to go because the pipeline back to the sourcing country of where those cars are made, doesn't stop. So it's not an easy thing to answer, because, again, we represent 15 OEM partners very proudly, and each one of them has different circumstances. So it is literally brand by brand, has a different circumstance. The comment you or the part of the question you asked, which is interesting is that the demand in the market is still reasonably strong. Let's say, last year was, I think, 1.216 record ever market. This year, it might be the same, might be a little bit more, might be a little bit less depending on what the second half looks like. That's a pretty strong market. These OEMs in Australia, the national sales companies, do report into their global parent. The global parent is looking at supply and demand and market opportunities around the world. So the decision on supply in Australia is never made 100% in isolation. It is always linked to what the global picture look like. And this is where it's very hard to answer the question because sometimes I look at that and say, okay, there's a strong market in Australia. We want to strategically chase the Australian market because maybe our product is not selling so well in North America or in Europe or in China. So it really is almost impossible to give an answer. I think as a generalization across the whole industry, the general feeling is that most OEMs understand that they are overstocked. That's highly stressful. They've got dealer networks. In some extreme cases, saying they want to go on manual release. They've got dealer networks asking for floor plan relief. None of that is what they want in their business. It's not healthy. They do need to create a strong economic model for their franchisees. So they will be looking to bring our supply down. We expect real land. So the numbers we've got, we've got 42 days unsold and 22 days of sold cars waited to be delivered. That's an unusual call-out for us, but we are in a slightly different environment. We've got a big order bank and a big part of that order bank is dual cab utes and SUVs that need to be built. And by that, I mean, trays and fit-outs and accessories. The other thing is that there's a number of cars going to fleets are novated and they've got longer delivery time frames. So we've never had so many cars in our inventory that are actually sold, not yet delivered. So there's a whole heap of things at play. Simple answer, I could have made it a whole lot shorter, and that is that we think the number of days supply will hit come back to around 60 days in total over the course of the second half of the year, which is about normal and it will play out there.

Just my second question, just easyauto123 or independent used, that seems like the most sort of upbeat area of the business at the moment from its lower base. Just interested if you can give us a quick reminder of, I guess, the top line opportunity just in terms of obviously, the cycle is helping, but you've got, I think it's 10 locations. Is that the geographic spread you need? Is there further sort of bottom-up areas here where you can really drive the presence and the revenue top line opportunity?

Yeah. easyauto will benefit from a rollout in physical stores at the right time in the right way. But it is a bit of an omnichannel approach, and this is not a store rollout story, where we're going to open 40 stores next year and 60 stores a year after. That is not how easyauto will win. Having said that, further presence will benefit this business and it will be multi-format presence. There will be large mega stores like we've got here at [Hunter] and Brisbane or over in WA, and there'll also be smaller format stores as we roll this out. But with the growth of this business, so the economics inside this business have never been better. They really are so strong and credit to the team that are running that part of that business. One of the reasons they're so strong, though, is that we are trading more cars. And when you trade more cars, you can be more selective on the cars that you put into easyauto, as in, you put the right stock that is bought in right way that has the right demand and has, therefore, we retain the right margin. That's a critical thing. Now that, as a general industry dynamic, that's going to continue. With a strong new car market, we'll get benefits in our independent used car business. The unique part of Eagers though, is that we sell, this year, we will sell around 140,000 new cars. We see approximately 4 people for every car we sell. That's 4 people coming in with an old car. They need to trade in to buy a new car, whether it's a new used car, a new car, or new demo. That's almost 600,000 people that come to Eagers without us advertising, with an old car that is potential inventory for easyauto. That is totally and utterly unique. So all we need to do and if you do the calculations on even a 1% or 2% and 10%, which is what we did at the Investor Day, our trade ratio as in trading more of those cars to go to easyauto, that is how we will succeed in putting more stock in, which drives demand, which drives sales, but most importantly, it's more stock going in at the right price with the right margin. I think at the Investor Day, we called out some metrics around increasing the revenue by AUD 1.3 billion in that business. This year, the business will produce somewhere around AUD 500 million, AUD 600 million turnover. So that is a material material uplift.

Your next question comes from Sarah Mann with Moelis Australia.

Just wanted to ask on the retail JV firstly. So, you saw a significant improvement in May, June, in fact the inventory was good. Can you just quantify, I guess, how that performed relative to the PCP? And then I guess, just looking into the second half with the new models launching as well, are there any early indications in terms of, I guess, preorders if they've launched yet? And how we should think about whether that's going to be incremental versus cannibalization of fusion models.

Sorry, that last part of that question, Sarah. Just repeat that again or cannibalization of --

So when you launch new models, how much of that do you think could cannibalize some of the existing models versus should all just be upside?

No. Okay. So I'll just answer that last. There is an element of that. There's no doubt. There is a big part of the business. One of the things with these early adopters with EVs is they buy EVs, they don't necessarily buy a sedan or a hatch or an SUV. And there is an element that when the latest model EV comes out, they want the latest model EV rather than saying, oh, I really want that car because its a 7-seater or a 5-seater or a coup or an SUV. So there has been an element of some cannibalization, but that happens across most large brands with large models. The thing that is incremental as these models come to market is the fact that the BYD have pivoted to this hybrid powertrain, what they call their super hybrid. And I think that's a critical piece to their story. So they are not a 1-trip or a 1 powertrain model like Tesla, for instance, where Tesla don't have that ability to pivot towards hybrid and having hybrid and full battery electric powertrains in the models they bring to market, I think, is going to be a really unique opportunity for that particular brand going forward. So that's the first part of that. In terms of the first half of this year versus the first half of last year, I'm just quickly doing the numbers, I think we ended up at about 50% of what we made in the first half last year. Sophie, just check those numbers. So the reality is we made AUD 1 million in the first 4 months, and then we made the rest in May and June. We think May and June's profit will continue to run -- so what is that one, Sophie?

75%.

Of the first half last year?

Yeah.

Okay. So our profit in the first half was 75% of the first half of last year, Sarah, and we expect the run rate of May and June to sort of continue over the remainder of the year.

And then just my second question on F&I. So what do you think has led to kind of a penetration not starting to normalize given lead times, vehicles have started to come back, like, is that mix shift or are there any changes around, I guess, finances tightening up lending conditions or anything like that?

No. Funnily enough, that's not an issue, that last condition. In fact, most of the financiers are looking to grow their books pretty aggressively at the moment and they're paying to do so. So that is actually not the issue. It's a little bit of a mystery. I think there's a couple of things at play. There's no doubt that if you're coming in as an existing car financed customer at the moment and you come in to finance in U.K., you're getting a little bit of a sticker shock when it comes to the interest rate. So you financed your last car in a very low rate environment and rates at the moment are obviously a lot higher than they were, say, 3 or 4 years ago. So I think that's one of the issues. We simply have not seen the return of the captive finances, I guess, tactical campaigns like they've done in the past, low rate campaigns, GFCs. Those campaigns, while a couple have come back and they've been incredibly successful, one of the, I think, Nissan ran one in February, I mean 80% penetration. In the main, for some reason, even with excess inventory, the captive finances have been a bit reluctant to embrace finance campaigns just at the moment. We think that will change because it is a key advantage that any brand that has a captive financier can leverage that in a period where they want to push volume. So the lack of captive finance company campaigns, a little bit of sticker shock on interest rates. The other thing, Sarah, which is probably supporting underlying demand is the wealth effect of property prices in Australia shouldn't be ignored. The new car demand is resilient. I think property prices have always had a direct correlation to that. And even though the general economic condition is tough, homeowners and people with equity and property, are feeling wealthy therefore, they're buying the car, but a lot of them are redrawing on their mortgage and taking equity out of their property. So I think it's a combination of those factors. We're still a little bit surprised. Still confident it will come. And the performance we're getting at the moment is really credible compared to that environment. We just thought that tailwind would come faster.

Your next question comes from John Campbell with Jefferies.

Just to clarify, that slide on Slide 25, the optimization upside slide, that excludes the acquisitions, the upside from the acquisitions that you've described earlier.

Slide 25, yes, it's got nothing to do with that. So on the left-hand side of that, John, is just the margin. So the upside out of executing our property strategy, our people in tech and F&I has got nothing to do with the acquisitions. On the right-hand side, we talk about X,Y, and Z, which is ex-turnover, Z margin in whatever time frame. So you'll see the turnover there. That's where we get the benefit out of the acquisitions in high turnover at high margin.

Yeah, got it. And second question, Keith. Just in terms of now that the retail market is more competitive and a bit of return to sort of deals and discounting. Has there been any pickup in the order cancellation rate?

It's more like, yes, the order bank is being cycled, John. It's an unusual dynamic. When we're taking more orders than vehicles delivered, there is no doubt that there's an element of people cycling out of order bank. So there's probably some flat-out cancellations, and there has been for probably 12 months where people have come and so now I've been waiting too long, have done something else, don't want to, our rent has gone up, whatever. So there is an element of that. But there's also an element of people that are sitting in that order bank that are cycling into something they can do a deal on a car today, they have seen something on TV that's picked their interest in terms of a price or a finance offer or whatever it is, and they're cycling out of our order bank. So as much as there is an element of that, the order bank is still pretty sticky, and we're seeing the order bank growing in some brands. So we've been surprised at the runoff in how strong and how slow the runoff has been and the fact that it's still going to run into 2025. We've been talking about this order bank run-off for a number of years now with yourself and others, and it's still there and it's still forming a part of our month-to-month new vehicle deliveries and part of our new car margin profile. So there is an element of cancellations. There's also an element of cycling where people are moving out of it into [indiscernible].

Yeah. And generally speaking, if it's a cancellation, it's likely that it remains within Eagers, I mean the eventual sale remains within Eagers.

Sometimes it does, John, but sometimes it doesn't. But equally, sometimes someone might cancel an order or the deal down the road and buy a car from Eagers. So to be honest, net to net.

Your next question comes from Jack Dunn with Citi.

First one, just on BYD. Are you able to touch on how many of the 56 locations are going to be through the retail partner model and then how the economics will work with this model.

I'm looking across to know the exact number. I think the number that will be out of the 56, there might be 10 or 12 that are partner models that it doesn't. So 44, let's say, I need to have the exact number. Because it's a moving target, we're filling out this network. There'll be more again next year will be Eagers' owned model. So the other partner models will effectively work as a retail agent to us. The economics is that they will sell cars. The contract will be written by us to the individual or will be issued by us to the customer, and they will get a fee for delivering that car.

Okay. Perfect. And then last one, just on inventory levels. I know it's been touched on a bit and things should improve in the second half this year. But if we look into 2025 and this comes in, how do you sort of view this and the potential impacts of some of the OEM partners spending more inventory and to avoid the penalties?

We don't think that will happen because the penalties are likely to be placed on the OEM at the point of importation rather on the point of sale. Sorry, the other way around. So basically, that was raised with the government to make sure that there wasn't a case of where there was stock brought in to beat the NBS scheme. So it's been highlighted by industry to the government. The second thing is the way NBS will work is highly complex. You got 2 years to pay your debt, you have 3 years to use the credits that you generate. And whether you generate credits or you buy credits, it's going to be highly complex. When we spoke to the OEMs as part of this and we were reasonably involved, they were very clear that on January 1, 2025 or when NBS comes into effect, you will not see an immediate change in price of cars. They need to see what their portfolio looks like, how many cars are they selling that are above the threshold, how many are creating credits below the threshold. They need to see what the price elasticity is on a car that's a high emitter, how much can they move the price up by, how much will customers absorb. It's going to be a really, really complex transition to this NBS. We're not expecting there's going to be some sort of dumping of cars into into Australia to beat the emissions, the NBS scheme. So we're reasonably comfortable with that. At the moment, we're well placed. It doesn't matter as a dealer. The issue is for the OEM in terms of the penalties that you incur, the AUD 100 per gram above the targets. But from our case, I mean, we're incredibly well positioned on this. We're currently selling 18% of all EVs in Australia through Eagers. And if you take out the direct-to-consumer ones being Tesla and Polestar, we're running at circa 40% of all EVs sold through a dealer network are coming out of Vegas, which is a phenomenal number. And we've always positioned ourselves to be at the forefront of this EV transition. There's no doubt that some of the heat has gone out of that EV transition and people are moving towards hybrid, but it doesn't really matter we'll be well positioned regardless because of our brand portfolio and the way we're positioned.

Thank you all for all your questions. We have now exceeded our allocated time. I'll now hand back to Mr. Thornton for closing remarks.

Thank you, everyone. We will talk to a number of you in the coming days. We look forward to a second half where we'll continue to execute against our strategy. We do see some challenges in the second half, which we've pointed out today. But as we continue to say, Eagers is very, very well positioned to ride-out both any challenges, which we see perhaps in the second half, but also capitalize on any tailwinds that we see in the future. So thank you for your attention today, and we'll be in touch with many of you in the coming days. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.