Eagers Automotive Limited (APE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eagers Automotive Half Year ' 25 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Keith Thornton, CEO. Please go ahead.

Thank you for joining us for our half year 2025 results briefing. Sophie Moore, our CFO, joins me this morning. And together, we have the privilege of presenting the company's results. Our results pack, including the slides for the presentation has been lodged with the ASX and should be visible via the webcast. On Slide 2, we provide the agenda for today's briefing. We will touch on an overview of the performance, talking to financial, operational and strategic highlights before Sophie will talk us through the P&L, balance sheet and funding in more detail. After that, I will talk through the business performance and strategic updates before providing our outlook for the second half of 2025 and beyond. There will be the opportunity for questions after the presentation. So let's start with an overview of the financial results for the half year. The company has delivered strong revenue growth again in the first half of 2025. Total turnover increased by $1 billion on the previous period alone. This is an 18.9% increase on the first half of 2024 to a total of $6.5 billion. This growth is well ahead of our outlook, which guided to $1 billion or more in revenue growth for the full year of 2025, and we've achieved that in the first half alone. The underlying profit before tax result was strong, up 8.3% on the first half of 2024 to $197.7 million, an increase of $15.2 million. This strong result was up on guidance we provided at our AGM, reflecting robust May and June trading and foreshadowing improving industry conditions for the second half of 2025. Removing the impact of the current interest rate environment and noncash depreciation, we produced a record ever half year underlying EBITDA for the company of $296.7 million. This was 11.6% or $30.8 million up on the first half of 2024. And when we normalize for OEM one-off year-end payments, it's circa $20 million higher than the previous best half year recorded by the company. Now in a half that's still characterized by an industry in trough margins, this is an incredible result and demonstrates the growing strength of our underlying business. The company remains very well positioned with gearing ending the June half down 7.9% on 2024 first half to 0.82x. Again, I think it's noteworthy to be able to reduce gearing while growing top line revenue by $1 billion as we have done in the first half. This demonstrates our growth is a healthy balance of organic and acquisitive and our unique opportunity to leverage our market position and grow material share. An interesting statistic that I'd like to share. Since 2020, which marked the beginning of the new merged Eagers Automotive after A.P. Eagers took over AHG, we have grown the business by 201 additional dealer points in that 5-year period. 121 have been organic or greenfield and 80 via acquisition. This is almost an ideal 60-40 split. Underpinning this strong financial result was a number of operational and strategic highlights. Starting with the operational highlights. In the first half of the year, we grew our new car deliveries by 22% and our used car deliveries by 16.7%. This growth in new car volume translated to material new car market share growth, up 2.7% from 11.1% of the new car market this time last year to now 13.8%, and we're on track for more than 240,000 new and used cars sold this year, almost 0.25 million new and used vehicles sold in Australia in 2025. Growth in the overall business, when combined with our obsession with productivity improvements, delivers a lower relative cost base. When measured as a percentage of sales and excluding interest and depreciation, the first half of 2025 recorded our lowest cost base by this measure in our history. Growing our share allows the cost base to be fractionalized, which supports a more resilient and defensive business throughout cycles. As a reminder, in a rapidly evolving and consolidating industry, Eagers' unmatched scale provides compelling operating leverage and unique strategic leverage. In tandem, this underwrites both short- and long-term value creation. It means our structural advantages continue to grow with our performance simply aided by and not dependent on the cyclical tailwinds the industry is expected to benefit from. Turning now to some of the strategic highlights of the first half of 2025. And Eagers Automotive is committed to a clear, consistent strategy. While any strategy needs to evolve over time to be relevant to current challenges and opportunities, we believe one of the key fundamentals to Eagers' growth is disciplined execution of a well-understood strategic direction. Our Next100 Strategy has been in place for close to a decade, which means that it's been executed over multiple years to build a business fit and getting fitter for the times we currently face and times that we largely anticipated almost a decade ago. Slide 6 highlights continued progress on this front. The evidence of our sustained execution is clear, whether it is record productivity now at almost $1.5 million sales per person per annum, a dominant plug-in or new energy vehicle market share, our easyauto123 profit up 22% on last year, which was already operating at better than global benchmark or the continued consolidation of our like-for-like property footprint, we continue to build a more productive operating model, which in turn becomes an ever-increasing competitive advantage. Before I hand over to Sophie, I'd like to present our half year scorecard, and it's something we present at each half year. We at Eagers never profess to get it -- always get it right, but we'll never shy away from being transparent and accountable. On this scorecard, we've highlighted the industry dynamics and the outlook we provided earlier this year for the first half of the calendar year 2025. Each item is then marked as either ahead of with a green tick, in line with marked by an orange dash or behind expectation with a red cross. At the bottom of the scorecard is our summary of the guidance we provided for the half. We provided guidance to grow our business materially. We expected to pass through trough margins at some point during the first half of 2025. We highlighted that we thought it would be a challenge to match our strong half 1 2024 result, but that we expected to build momentum into the second half, all while maintaining our competitive advantage relative to the industry and peers. Our results have shown that our full year revenue guidance was exceeded in the first half alone. The first half profit exceeded last year, which was better than our expectations. Industry headwinds of the first half have shifted with green shoots of tailwinds evident even before June 30, and we continue to leverage our competitive advantage with our message being that consistent structural improvements to the business beat cyclical rises and falls every time. So with that very pleasing scorecard, I'll now pass over to Sophie.

Thank you, Keith. The headline numbers that Keith has highlighted is a strong result and demonstrates the growing strength of our underlying business. Today, I will focus on some of the further key insights into the financials. In a company that has expanded by over $3.6 billion in turnover in 2.5 years since January 2023, it is crucial to provide detailed commentary around the various moving parts to accurately assess business performance. As Keith recalled earlier, Eagers delivered record revenue for the half, up 18.9% to $6.5 billion, exceeding the $1 billion full year growth target we foreshadowed in February. Our underlying EBITDA reached a record $296.7 million for the 6-month period with an EBITDA margin of 4.6% compared to 4.9% in the first half of 2024, but still well above the long-term average of 4.1%. A key highlight is that, underlying costs before interest and depreciation relative to turnover are the lowest ever recorded. On a reported basis, including acquisition, this cost leverage, excluding interest and depreciation as a percentage of turnover was 12.1%, a record low and well below the long-term average of 13%. This reflects the benefits of scale with the combined growth of our overall business, an optimized operating model and a relentless and sustained focus on productivity and cost efficiency. To measure cost control, we focus on like-for-like performance, removing the impact of acquisitions and divestments. On a like-for-like basis, excluding interest and depreciation, our controllable cost base increase was restricted to 3.8% or $25.4 million on the prior period. Excluding our fast-growing retail joint venture, the same like-for-like cost base increase was $12 million or only 2%. Slide 36 in the appendix includes a reconciliation of statutory to underlying EBITDA and profit before tax. In the first half of the 2025 financial year, statutory profit before tax was $193.4 million, slightly lower than the underlying PBT of $197.7 million. The $4.3 million difference primarily relates to items beyond our core underlying operations, which primarily includes AASB 16 and business integration restructuring costs. Eagers remains in a strong financial position, supported by a substantial property portfolio and asset base. Our approach to capital management links back to our culture of business sustainability, growing the group's profitability while also strengthening our underlying asset base. One should not and has not come at the cost of the other. We are well positioned to continue to fund future growth with strong gearing capacity and a disciplined approach to capital deployment across multiple funding sources. The group's total liquidity capacity is backed by $1.6 billion in committed core debt facilities with maturities extending from 2028 to 2044. As of June 2025, corporate debt was $447.2 million net of cash, down from $813.1 million in December 2024. Excluding a one-off working capital benefit, the corporate debt net of cash at hand was still only $653 million. Our long-term debt supports our $891 million property portfolio, anchoring our presence in key strategic locations. As at 30 June 2025, we held significant equity in property portfolio of $319 million and $254 million in inventory, reinforcing the strength and resilience of our asset base. Most importantly, Eagers continues to focus on its proven track record of executing a balanced capital management strategy based on 4 key pillars: investing in our business through capital expenditure, growing our people and proprietary technology to drive organic growth, which is seen in the first half result this 2025; disciplined acquisitions, maintaining a rigorous approach to identifying and executing strategic opportunities and the property-backed balance sheet, supporting our transformation strategy with strong asset-backed financial flexibility. This approach reflects our long-term commitment to make continual meaningful progress on sustainable, material and accretive optimization and growth opportunities. This will continue to ensure we deliver the final pillar, rewarding our shareholders with strong returns, which we address on the next slide. Keith highlighted several of the Eagers' financial, operational and strategic highlights, which have continued to strengthen during a rapidly evolving and consolidating industry landscape. Importantly, this highlights our long-term demonstrated ability of delivering returns for our shareholders through all economic and business cycles. The company declared a first half dividend of $0.24 per share, maintaining the prior period record. Over the past 10 years, we have delivered an 8.2% compound annual growth in the Eagers earnings per share. Furthermore, we have consistently delivered more than 9.8% compound annual growth in dividends, demonstrating our strong track record of business growth and shareholder returns combined. This reflects, again, our commitment to rewarding shareholders while maintaining the flexibility to capitalize on the strategic growth opportunities, which Keith will talk through later. But now I will hand back to Keith to talk us through the operational highlights.

Thanks, Sophie. Let's move to the business performance and start with some observations on the industry environment. The new car market in Australia remains resilient with the number of vehicles delivered cycling against a record first half in 2024. The first half of 2025 was the second strongest industry on record, only marginally down on last year. When looking at respective monthly performance, March was a record ever for that month, while February and June were the second best recorded for those respective months. The momentum has continued into the second half with July a record ever July and the year-to-date gap to last year's record now only 0.5% of 1%. And as we have pointed out many times before, there is still a 125,000 car gap to the pre-COVID new car delivery rates in Australia. So when you combine this with more normalized supply and the tailwinds expected to eventuate from RBA rate cuts, there is no reason to see any fall away in the demand for new vehicles. I'd also like to point to the comment to the right of Slide 13. Automotive retail is a much more balanced and resilient business than many observers give it credit for. Automotive retail transacts in mobility, whether it be providing new mobility, selling a new car, maintaining and repairing existing mobility, which is looking after used cars or existing cars in our workshops, financing and ensuring mobility or even subscribing to used mobility. And mobility is a fundamental need, irrespective of macro conditions. To be mobile is not a discretionary decision, how you consume mobility is. When you operate at the scale Eagers does, we provide material mobility solutions throughout cycles and are a much more resilient and defensive business than our consumer discretionary classification may lead casuals to believe. Coming back to the headline new car market performance and now looking more specifically at Eagers. The slide in front of you demonstrates how Eagers quite uniquely is both hedged in tough times, yet equally able to leverage tailwinds through our scale, the quality of our partner portfolio and the unique businesses we've built over recent years. Eagers' order write has outstripped vehicle deliveries in the first half of 2025 by 10.1%, with this dynamic continuing into July. This order write reflects our overweight position with the highest quality OEMs in Australia. We are the largest partner for 13 of the top 20 brands in Australia. Plus, we have a unique position with fast-growing recent entrants. We've matched strong demand with disciplined inventory management. But despite returning to a more normalized supply environment in the industry, we are very pleased to report that our stock position remains at only 58 days, which is ideal and supports strong margin outcomes. Noting 58 days, our measure includes all sold, all unsold cars, all demonstrators, every car that we fund. Eagers still maintains a material order bank running at a factor of 4x pre-COVID levels, which further underpins our margin profile and our confidence in the outlook. So looking now to see how this has translated into market share outcomes. And this slide is one that rewards those that give it closer attention to fully understand how Eagers Automotive will be a continued net winner during industry transformation. We've regularly communicated that in Australia, the consolidation, which means less dealer owners and dealers being consolidated largely through M&A, through evolution and by that, we talk about a change in go-to-market models that's been forced in this once-in-a-generation transition from combustion engines to low-emission vehicles and rationalization where some OEMs are taking an approach where they need to rationalize either dealer points and/or owners. These 3 themes will accompany the journey to low emission vehicles. And it's a journey that will be characterized by a material share of plug-in or new energy vehicles referred to as NEVs. We've also consistently communicated that Eagers will be a net winner in this transformation with market share gains, not solely achieved through acquisitions, but also through greenfield and organic share growth through new market entrants and consolidated OEM business partner approaches. So at a consolidated level, we have grown our overall new car market share in Australia from 3.7% in 2020 to 13.8% in 2025. But on the right side is an even more interesting representation of how Eagers will be positioned into the future. And you can see in this graph how the company has become a material net winner as the NEV, the plug-in segment of the market grows in materiality. The NEV segment share has grown to be 12% of the total market in Australia. Of this segment, Eagers delivers 34% or more than 1 in 3 of all plug-in cars in Australia for the first half of 2025. Now as I said, this is a notable slide to review and understand in terms of Eagers' unique position to continue outpaced growth in share. It's also a key pointer to our strategic growth optionality in the future. Continued growth in our top line revenue, combined with continued execution of our business optimization has delivered a record low in our costs as a percentage of sales, which finished for the first half at 12.1%, down from our previous all-time low of 13% in 2024. Gross profit percentages from our core franchise automotive business have remained broadly stable. But as our retail joint venture and easyauto123 business has grown to be a larger part of our overall business, it has impacted gross profit percentage. And I would note this point, it would be a bad misread to look at the reported gross level and see that as a significant drop in our core franchised automotive business. It is a change in mix and it relates to the dynamics of those 2 business units I just referred to. Our Next100 Strategy has been primarily focused on growth and productivity. It's critical to understand that the expense base, which benefits from revenue growth, it benefits from optimization initiatives and it benefits from disciplined management, and that is the key to support our competitive advantage and produce a net profit return on sales margin well ahead of the industry and peers. Turning now to examine this return on sales performance and Slide 17, I think it's 17, demonstrates exactly this dynamic. The consolidated net margin was 3%, down from 3.3% at this time last year. Pleasingly, however, when adjusted to include annual incentives, our overall margin remains at 3.3%, which is in line with the second half of 2024 and supports that trough margins have passed during the '24-'25 financial year period. Our core franchised automotive business, which is circa 76% of our total turnover remains at a very strong 3.7% return on sales. We continue to highlight that there is more than $50 million per annum in profit upside via the integration of acquisitions and lifting the performance of those recent acquisitions to Eagers' core returns. Our easyauto123 business improved to 4.3% return on sales, outperforming even our expectations and evidencing both the benefits of scaling on a largely fixed cost base and the continued margin and cost initiatives being executed successfully. Okay. Moving on to our strategy. On Slide 19, you will once again see our Next100 Strategy that drives transformational productivity improvements by optimizing our property footprint, our people and processes, our finance, insurance and ancillary income performance while continuing to deliver on our intention to be a leader in valuable innovation. We don't innovate for the sake of it and all the while focusing on disciplined capital management and sustainable growth. It's a well-communicated strategy that we remain driven by every day. A straightforward way to think of this strategy is that, we continue to optimize the existing core franchise business. We develop and grow unique businesses such as easyauto123, all the while using disciplined capital management to reinvest in accretive growth. On this Slide 20, you'll see the title Strategy in action. And with the completion of our AutoMall development in Osborne Park in Perth, we thought it would be useful to show how our Next1 (sic) [ Next100 ] Strategy comes to life in reality. Slide 20 provides a visual of this project where we exited 7 external leases and consolidated onto 1 single owned property. Now before I go on to the next slide, and I'm sorry if it moved on your screen. I just wanted to paint a picture for you. I'm totally off script here, but that site that you see on the screen used in 2015, so go back 10 years, was a single Holden site. It only sold Holden. It sold used cars out the front. It had a Holden workshop at the back and it had a parts department behind it. The site took up 21,000 square meters. Now imagine if in 2015, you were standing across the road and you made the comment that, that site in 10 years' time will no longer have Holden. In fact, Holden won't even exist anymore. What it will have is Ford, Mitsubishi, Nissan, Subaru, GMSV, BYD and Denver, 7 franchises on 1 site. It won't have a service department. It will have a service factory that accommodates 7 brands. It will have a PD facility behind it. All of the trade-ins from those 7 brands will go to our single national fixed price used car brand, easyauto123. Our productivity from our people will be 90% better than industry benchmarks in 2015 and that our profit will be 2.5x better than what we would make in our best years there as a Holden dealer. That's what has been executed on this site. And the next slide now will show some numbers. So as you can see on this table, we moved from 7 external leases that occupied 45,000 square meters to one 21,000 square meter site that we bought in 2020. Our property costs reduced by $3.5 million per annum and the rent to gross metric, a key number in automotive retail, dropped from 11.2% down to 7.8%. As I said before, the productivity per person has increased by 90% above industry benchmarks. And the total sales now delivered because we have got 7 brands there, and we've managed those -- that portfolio will increase from 2,800 across 7 sites to more than 4,500 per annum from a single site. In combination, this strategic delivery and execution will deliver return on sales that will lift from 2.8% to 5% as all brands come on stream. It's a compelling outcome. What's been hard to articulate in the past is how our so-called property strategy enables all the other parts of our Next100 Strategy. By consolidating onto a single property, we've allowed consolidation of roles and headcount reduction. We've allowed the ability to grow our partner representation with OEMs with better flexibility as brands evolve over time. It's facilitated the ability to roll out tech initiatives across a single site, which drives better customer experience, better employee experience and better productivity outcomes, all the while crucially linking hand in glove with our Eagers auto123 inventory sourcing solution. And in Australia, a market that is hypercompetitive where you have 77 brands today and more coming competing for 1.2 million. These sorts of innovations, these sorts of executions are critical to long-term sustainability. The next slide provides further evidence of these initiatives at a group level. And while I'll not go through this slide in detail, it is provided to reiterate, this is a multiyear transformation that continues to make our underlying business stronger as we scale and as we successfully execute. On the next slide, I want to return to this NEV transition, and it's a key part of Eagers growth plan to use our strategic leverage that comes with our globally unique scale. And this scale that we have is incredibly powerful during a once-in-a-generation transition in powertrains, accompanied by or in many cases, driven by the influx of new market entrants. So any EV vehicles, and just to be clear, that's any vehicle that can be plugged in, includes both full BEVs, battery electric vehicles and plug-in electric vehicles are now 12% of the total market in Australia, up from 1% as recently as 2021. The contribution of total sales is growing fast, particularly plug-in electric vehicles, and it's likely to be a major part of the total market into 2030 and beyond. Now, Eagers operate with circa 14% of the total new car market in Australia. And we often refer to it as our globally unique scale, but I think I need to just stress the context behind that phrase. The largest automotive retailer in the U.S. has under 2% of the new car market in the U.S. The largest automotive retailer in the U.K. has less than 4% of the new car market. As Eagers has 14%, it is why we constantly refer to globally unique scale. This scale has allowed us to be the winner in the transition to NEV vehicles with Eagers representing a staggering 34% of all plug-in vehicles. And when you take out Tesla sales, which are direct-to-consumer, we are 42% of all plug-in cars sold via franchise dealers in Australia, which is quite incredible. I stress again, it's a powerful example of the strategic leverage available to our business. Speaking of strategic leverage, easyauto123 remains the biggest strategic growth opportunity for Eagers Automotive. As a pure-play used car business that sits inside Eagers overall business, it is uniquely positioned even when compared to U.S. pure-play used car retailers, Carmax and Carvana. The unique advantage is the incredibly powerful inventory sourcing advantage that Eagers has built into the easyauto123 business via our globally unique new car operations. No one else in the world does this and very few could even if they wanted to. Our sourcing is linked to the best source of profitable used inventory, that is new car trade-ins. And as we scale our new car franchise business, we scale our easyauto123 advantage. I'm pleased to report this business unit continues to gain momentum with a record profit for the half, up 45% on 2024's previous record. The business is benefiting from strategic scaling, gross profit improvements and ancillary sales and a fractionalized cost base. The metrics on this slide you see are exceptional. Key lead indicators such as days to sale, gross profit per unit are well ahead of industry metrics, and this is delivering a net profit per unit of $1,526 per unit. That's net profit. That's a new record and above global best practice by 56.8%, with the outlook for the remainder of 2025 extremely positive. This next slide highlights the medium- to long-term opportunity in this business. And the title of the slide really says it all. The opportunity is massive, execution is key. To this end, we've highlighted what we call a 5x5 plan, which demonstrates the 5 compelling thematics that drive this strategy linked to the 5 key execution opportunities. The investment thesis is really easy. The used car market is huge in every mature market in the world, 3x new in Australia, and that is a consistent metric around the world. The competition and the market is extremely fragmented. Even at the global level, the circa $40 billion market cap Carvana only has 1% of the U.S. used car market share. This business lends itself and benefits from proprietary technology, which Eagers has. This business is driven by unique big data sets, which Eagers has. And this business is a capital-light scalable growth model with no reason it cannot be replicated in other markets as long as access to profitable sourcing is achieved. The execution plan is easy or at least on paper, it is, and that is to scale our unique sourcing advantage, roll out optimization across the entire business, expand the footprint, evolve the business model and build Australia's most loved brand. Another way to put it, we are going to leverage our unique advantage. We are going to accelerate our first-mover advantage, and we're going to build a deep moat around this business. We plan to outline each of these key steps at our planned Investor Day sometime early November. The date is still to be set. But before we move on from easyauto, I did want to provide an update on our Cars for Good initiative, which was announced at our recent AGM and is a foundational piece to building Australia's most loved brand. Cars for Good was born out of an internal aspiration at Eagers to be a company of good people doing good things. The simple but powerful ambition that aligns our people and provides a North Star for both culture and performance for all our stakeholders. Cars for Good is our easyauto123 community-centric initiative to deliver on this. Each month, our easyauto teams nominate a person or family or cause in need of mobility in their community that they operate. easyauto will then donate 1 car per month to these communities we operate in. It's our way of delivering mobility solutions to our entire community, including those who need it most but may be able to afford at least. This initiative will be the foundation for the culture and personality of this brand, a brand that genuinely gives back and has your back. We are very passionate about this initiative and also about the future of this business that is the true hidden gem within the wider Eagers Group. Finally, before we go to our second half outlook, we wanted to touch on key growth opportunities highlighted previously. We are active in all 4 categories on the slide in front of you with progress ranging from early stage to well progressed. One particularly important enabler to our future execution in these areas is the recently announced strategic alliance with Mitsubishi Corporation. It's important to note that while we are a proud Mitsubishi Motors partner across Australia, this alliance is with Mitsubishi Corporation, which is a totally independent company. Mitsubishi Corporation is a Fortune 100 company operating in 90 countries with turnover of more than $130 billion per annum, larger than any Australian company by about 50%. The alliance will focus on opportunities across all parts of the Eagers business and global mobility ecosystem. However, we will not focus on new car franchise retail business. We are very honored to partner with such a global powerhouse and look forward to communicating more as this alliance progresses. Turning to the outlook. But just before we provide our outlook for the second half, I wanted to touch on this next slide, which is an especially important one. On occasions, companies and investors tend to get so focused on short-term results or key growth plans that they fail to really understand what matters inside a company. That is how does the company behave behind closed doors when they're not publicly reporting to the market. Eagers is proudly a culture-driven business. It's a foundation to everything we do. From great culture, we can build a more sustainable, resilient company. We can optimize our existing business to constantly improve and outperform. And if we do these things, we earn the right to grow in an accretive and sustainable way. Without great culture, we cannot achieve any of these objectives. At times, our focus may shift between sustainability, optimization and growth, but it never ever wavers from protecting and enhancing our culture. And I highlight this today because it matters to Eagers, and it should matter to investors, but it really gets the scrutiny it warrants. So finally, our outlook for the full year 2025 specifically. On this slide for today, you'll see our expectations for industry dynamics for revenue, margins and business units for the year ahead. With regard to the industry, generally speaking, we've seen conditions trough in the first half of 2025 with improvement post the election and further momentum after the recent RBA cuts. [ Within to ] a strong industry, we expect to continue to grow share. Our revenue has already grown by $1 billion in the first half, and this will continue. We expect our core should be consistent at current return on sales margin levels with improvements coming through in our acquisitions in our greenfield businesses and in easyauto123. Most importantly, for long-term investors, we'll continue to make progress on sustainable, material and accretive optimization of our business, and we are actively reviewing meaningful growth opportunities. In summary, we continue to be equally obsessed with building a better business at the same time as making it bigger. Before we open for questions, I'd like to recognize the tremendous efforts of the entire Eagers Automotive team. It truly is a privilege to work alongside you all, be part of this team and be able to report your great results and hard work. So on behalf of Eagers Automotive, I'd like to take this opportunity to thank everyone for your interest today and now open for questions. Thank you.

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

Congratulations on a really strong result. Just on Slide 16, I just had a couple of questions there. So firstly, just on the gross margins. You've articulated sort of that mix shift, in particular, from the retail joint venture and easyauto. Just given how well those businesses are performing, is it fair that we should continue to see that gross margin moderate perhaps a little bit further going forward? Is that a fair summary, do you think?

Phil, nice to hear from you. I think it's more an issue around those businesses. Well, easyauto has got a totally different model because it's mainly -- well, it's entirely a front-end business. So it only sells used vehicles. Used vehicles, broadly speaking, operate at about a 10% gross profit margin compared to our overall business running at about 17% or 18%. Now remember, the gross profit margin of 17% to 18% is made up of new vehicle margins, used vehicle margins, very high-margin finance, 75% to 80%, service at 65% to 70% and parts at sort of north of 20%. And it's the blend of all those margin dynamics that give you 17% to 18%. So easyauto will never produce a margin profile that matches the rest of the business. In terms of the retail joint venture, it's early stage, and it is heavily overweight on new vehicle margin. Again, let's say, 10% as a sort of a pool of gross margin there. It's got very early stage back end, so limited service, limited parts. And it's also because it's largely an NEV brand or is an NEV brand, it's got a high percentage of novated sales, which means it's finance under-indexes compared to the rest of the business. So it's going to be -- it's more a timing issue as that business matures over time. It could be another 2 years before it fully comes through. But our overall franchised automotive business now, which includes the retail joint venture is still -- while that gross is down, importantly, our net margin is still strong.

Yes. Understood. Just turning to the cost side of things again on Slide 16, just that chart showing the cost base margin continuing to decrease. So well done on achieving 12%. It's quite an impressive performance ahead of my expectations. Again, we're never satisfied, let's talk in general terms. What should that look like going forward? Is there significant gains to go here? Is it -- I mean, again, a really impressive result. Just trying to get a sense of directionally where we're going here.

Yes. There's actually a slide I'm trying to -- with the upside in our Next100, which shows that there is in the midterm, and let's work on mid time 3 to 5 years, Phil, there is 2% upside in net margin. Now that 2% upside is a combination of gross profit improvement out of finance of about 0.5% of greater productivity in headcount of about 1%, property of about 0.3% and there's probably another 0.2% in interest. So the reality is, if you look at the way that our net profit should go to a mid- to long-term 5% return on sales, the majority is through cost out, higher productivity with people, higher productivity out of property, interest rate benefits as a more normalized interest rate. And then the gross profit lever, particularly in Australia, is around finance, insurance and ancillary income. So I haven't necessarily said what 12.1% should be 11.5% or 11.4%. I focused on what really matters from our perspective, and that is the net what we can bank, and it's a combination of gross and cost out. There is no doubt that a big part of that drive down in cost as a percentage is scaling our business. And I think the thing about Eagers that we've demonstrated is that, in the last 3 years, we have delivered $1.3 billion in growth, $1.3 billion in growth. And this year, we'll be north of $1.8 billion probably in growth. So we are -- we've demonstrated over and over that this business has the ability to materially grow. And that is the thing that assists or helps. It's not the only thing, but it certainly assists that cost base.

Your next question comes from Peter Marks from Barrenjoey.

My question is just on the margin outlook for the underlying core business. I noticed you still got that as a neutral. Just wanted to check my thinking there. Should we have that improving into the second half on the first half? Just thinking we should be past trough margins now and, I think, a 0.3% impact from annual incentives and I guess, a couple of interest rate cuts. So just -- yes, am I got my thinking right there in terms of the second half margins?

Peter, thanks for the question. There's certainly the opportunity for it to be better. We don't expect it to fall down. So we basically said we've gone through -- we did see trough margins in the first quarter. Margins on vehicles improved in the second quarter. Our used car margins have been up all year, but I think that's more around our business model than the market. So your thinking is not necessarily wrong. And I would say there's an argument to say that we could have said that's tailwinds there. Eagers like to be reasonable and relatively conservative. We think we're operating at a pretty strong margin profile, particularly relative to the industry, and we don't want to get ahead of ourselves. So your thinking is not necessarily -- it's hard to argue with your thinking, but I think this is a conservative place to be. Maintaining our current strong core return on sales level will be a great result for us. If there's upside, that's great as well.

That's great. And then just on the M&A, I guess, the acquisitions that are in the business overall, like the margins on those businesses bounced pretty strongly in the first half versus second half. Are you still confident you can get those businesses back up to, I guess, where the underlying core margins are and how long you are you thinking that might take? And it would be good just to get a general update on how you're thinking about M&A. You still got more in the pipeline in ANZ and an update on your international thinking with the new Mitsubishi partnership?

So Peter, first question you asked is the acquisitions, 100% confident. It's just the timing. At the moment, our core margins are across circa $8 billion worth of turnover. So we've proven that we can get the business to those returns. It's just a matter of integrating, and it takes a little bit of time. We've got a large-scale acquisition, which was in Victoria, which has been challenging, and that's geographic. It certainly hasn't helped down there. The Victorian market has been challenged as everyone has noted. One of the more recent ones up here in Brisbane is starting to see some really positive momentum as well. So very confident that they will reach the core level because we've done it across such a large sample size. So it's just how quickly we can do it. In terms of acquisitions and the pipeline for acquisitions, it's really strong. It's really strong here locally. There is plenty of great opportunity that we're working through here. We continue to progress our review of overseas markets. The one thing I would reiterate and make sure that every investor felt confident about is that, if and when we do go offshore, it will be done after a lot of due diligence, and we'll be feeling very confident about anything we do offshore, but we'll take our time. But yes, there's absolutely no shortage of opportunities. To be quite frank, at the moment, it's a case of picking the best opportunities. And that's one thing that is really incumbent on us because, again, I use that phrase strategic optionality. Eagers size in the market and how we position ourselves means that people are knocking our doors. The inbound options now are really unprecedented. And that's great. And we should feel very honored that people knocking our door and want to do business with us. But equally, we've got to be very careful with shareholder money, and we've got to make sure that as a team and as a Board, this company invests in the right acquisitions for the long term, not just any. They've got to enable the total business. Simply buying a business for earnings is not exciting to us. Buying a business where we can add value and they can add value to us, where we can learn from them and we can perhaps teach finding the right partners, whether it's locally or overseas, that's critical. They're the things that Eagers obsess over. And I guess, over time, that's what we'll be most focused on.

Your next question comes from Scott Murdoch from Morgans Financial.

Just firstly, I guess, a little bit more on easyauto123. You obviously see a lot of upside on that. Just, I guess, a 2-part question. Just interested in what scope you see left in Australia. You said before it's not really a rollout strategy. And just on your comments around in offshore markets or in other markets, access to profitable sourcing is key. Can you give us an idea of how you execute on that given in Australia, you've got that 14% market share to sort of work with in offshore markets or other markets, you've effectively got 0?

So Scott, all will be revealed when we have the time to talk through it at the Investor Day because that's -- both of those are really big questions. It's not necessarily simply a rollout strategy in its current model evolution. But we've sort of, I guess, dropped some breadcrumbs as to how the business -- how we're thinking about evolving this business model going forward. There is still tremendous upside in Eagers. As we scale, there was a comment I made, and it's a really important comment. As we grow our new car business, we grow the opportunity in easyauto. This year, we'll do the best part of 200,000 new cars in Australia. That means that somewhere between 800,000 and 1 million people have come to Eagers in an old used car to talk about selling it to us. Our penetration rate on those trade-ins on the total opportunity on the 800,000 or 1 million is really low. But we are building tech and we're rolling out tech and our penetration has ramped up considerably in the first half of 2025. And that's been a big part of the story in terms of growing both the existing operations we have, but also pointing to us expanding the footprint. We're likely to open another 5 or 6 stores in the next 12 months. They will be linked to where we can get profitable sourcing. There was an interesting comment by one of our guys who runs that business, who said something to us when we're talking about expanding footprint, he said, we need to have stores where we've got access to inventory. Let's go where the inventory are rather than looking at a map and saying this is where the people are. Because when it comes to used cars, people chase the car, not the brand or anything else. So it's all about inventory. So I guess, Scott, what -- where I'm leading to there is that, the way this -- the way easyauto will scale in Australia, we'll talk to at the Investor Day. It's reasonably complex, hard to do in a 2-minute answer. In terms of overseas, you're exactly right. We start with 0. But when I just answered the question that Peter asked me was when you're looking at overseas, how progressed, are you on overseas, what I referred to is that, when we look to go overseas, we're going to look to see how we could partner with people that maybe are going to add to our strategy and who may be able to benefit from our strategy. So that's something that we'll consider when we look in different markets around the world. So both of your comments and your questions are totally valid, but hard to answer quickly in this call or in this forum.

Okay. Just another question on the theme of the Chinese OEMs entering Australia, just I guess, it would be pretty obvious that they're looking at how you've executed on BYD and would probably be interested in talking to Eagers. So, I guess, 2-part question. I mean, I guess, how do you look to take on other partnerships with some of these emerging OEMs? And do you see them as competition to BYD or more competition to the legacy OEMs?

First off, Eagers is proudly represents, I think it's 52 brands, and we've done that for 100 years. So actually, if someone asked us what your expertise is, our expertise is to be a valued partner to these global automotive OEMs. And we do it in a way where we've always had to juggle those partnerships. And our skill, I think, Scott, is that we are always totally devoted to producing the best possible outcome for every OEM we represent. In fact, internally, we talk about our task is to be a preferred partner. When there's an option to be made or a decision to be made, OEMs prefer to deal with Eagers. So that's our overall philosophy. So managing whether it's another Chinese brand coming to Australia compared to another Korean brand or an American brand or a Japanese brand is something that is -- it's sort of part of our industry and it's part of the Eagers model. And I think we've got a really good track record of showing that we can manage that. So in terms of any brands coming to Australia, we will manage how our relationship is best, I guess, delivered and manage any of the politics, et cetera. But ultimately, the more important part of that, Scott, is that you need to go with the highest quality partners. And that's really, really, again, a key skill for us in automotive retail. And that is who do we partner with that are going to be here for the long term, who are going to behave in terms of looking after customers in Australia, they're going to invest properly. Our job is to deliver for them. So we need to make sure that our partnerships are the best they can be. So long and short, there are more Chinese brands looking to Australia all the time. To be fair, the really large material ones have already, not shown their cards, but they're already active in Australia talking to the marketplace. And as we said, we believe we'll be a significant partner to all the highest quality OEMs no matter where they make their cars.

Your next question comes from John Campbell from Jefferies.

Congratulations on the Cars for Good initiative. Keith, that sounds terrific. Just sort of further to that discussion, you're a big part, obviously, of the BYD distribution and sales in Australia. Is it -- and I know this is sort of your DNA that you have to juggle competing brands and et cetera, et cetera. So I understand that. But does your very large share of BYD, does that make it especially difficult in terms of this whole NEV sort of evolution, I guess, we're seeing?

John, not really. I think the answer I gave to Scott is probably along that same sort of line. We -- as I said before, we have to manage our relationships with all our OEMs. One of the things I'm going to point out is that, if you look at our investor packs, we steer away from talking about any OEMs at all. We do not refer to OEMs by name, and that is very deliberate. And it's because we -- our job is to be a really valued partner to all of them. So talking about the specifics of our relationships with one partner, whether it's Toyota or BYD or Porsche or anyone else is not something that we like to do, and we don't think it's valuable, and we don't think our OEMs appreciate it either. And I think now BYD, because your question is about BYD, we're now 4 years into the partnership with them, 3 years, 4 years. 3 years into that. We've been fielding questions on how to manage it all the way through, and we've said we're working through it. I think we're seen as a very valued partner to them and others, particularly new entrants into Australia is because we've got a lot of expertise down here. We've obviously got a lot of infrastructure. We're well connected. We know how to operate down here. And hopefully, we've got a great reputation as well. So I think that adds value. And if you're a valued partner, people tend to stick with you, particularly if you deliver results. So it's hard for me to answer your question specifically, particularly publicly, but I think we're pretty comfortable in managing the intricacies of the relationships.

Got it. Yes. And just another one. In terms of your technology and sort of leveraging your scale, which is -- gives you the opportunity to develop technology that many others can't. Can you just give us an indication on what the sort of initiatives that the focal point of the tech development at the moment is and maybe over the next year or 2, what -- where you see the real bang for your buck in terms of tech spend?

The tech spend, we're probably 50% proprietary tech that we're developing ourselves and 50% tech that's being developed for the industry that we're leveraging and we're integrating. The most important thing around tech, and it's interesting because we're not a tech company, and I'm never going to try and frame it otherwise. We are not a bunch of developers here. The reason we invest in proprietary technology is, if we believe we can generate a unique competitive advantage and/or we cannot get a like-for-like piece of tech in the market that integrates into our DMS because one of the problems with tech is most dealerships have so many computer systems that it just slows productivity. They layer upon layer upon layer. They haven't got APIs that talk to each other. They're not integrated, and it actually slows down progress even though on the surface, it's sold as a tech initiative to speed you up. So we've got a really talented team that work with Edward Geschke, our COO, in the operations team to make sure that our tech is always driving higher productivity. Now, in terms of your question, there is a heap of different things that we're using at the moment. We've -- and again, there's -- our tech stack that we've rolled out over the last couple of years, whether it's our 10-minute sales app, whether it's our upsells in the workshop, whether it's using RPAs, robotic process automations to close down invoices, EasyQuote, which is using data and analytics to value cars. They're all in place, and they're still being rolled out. There's -- it's -- everyone is talking about AI now and how to use that. We're certainly looking at that. It's early stages. We're using AI on things like writing descriptions on how vehicles are advertised online. We're using AI to be an automated lost lead system at the moment. We've got a pilot in place in easyauto for that one. So there's a whole heap of tech that is in train, in development, in pilot. There's a whole heap that's already been proven up, and we're just rolling that out further. The key to it, though, John, from our point of view is, tech has got to make the customer experience better and the employee experience better and then produce a productivity outcome. It can't be the other way around. It can't be -- we do things with less people and we do it faster, but customers have a terrible experience and our staff hate doing it. And that is so, so critical to know that the focus is customers' employees for the techs ever embedded in our business.

Yes. Great. Look, last quick one. You showcased what's happened at Osborne Park, which is very impressive over that 10-year period. And the AutoMall in Brisbane as well, I think. But just around the Sydney and Melbourne markets, is it a lot more challenging to do that sort of property -- given the nature of those 2 markets, the property -- I don't know, I'm trying to think of a way to express it, but the upside that you guys can generate in managing your real estate portfolio, is it more challenging to extract that benefit in the Sydney and Melbourne markets?

Not necessarily, John. So the best way to think of this is now, first off, I do want to make the point, this is a dynamic that is sort of unique to Australia. Australia is almost ground zero for a hypercompetitive market. Maybe China is a more competitive market than Australia, but there's probably no other market in the world that has so many brands competing for a new car market the size of ours. So what we deliver there in that Osborne Park example is very much responsive to the dynamics we see in play in Australia. That's the first point to make. The second point to make is Osborne Park, we use as an example because it's -- we've done that almost as a clean sheet of paper. And if we had a clean sheet of paper approach across Australia, we do that everywhere. What actually happens is that, there are a couple of large-scale developments we've got on the go. One is in Victoria that is exactly like an Osborne Park type scenario, exactly the same. But the reality is, we do components of what's occurred in Osborne Park all day in every different way across sites all over Australia. So whether it might be just putting 2 brands together and getting out of lease, whether it's closing down a used car operation to put the trades into easyauto at another location, whether it's putting 4 brands together and rolling out a tech stack across that 1 site. So we do components of that Osborne Park example in sites every day in every way. And again, our operational team are all driving that. So the reality is there are a couple. One of them -- yes, there's 2 at the moment that I'm aware of that are much more large scale in size. But again, I can't really talk about them because we've got leases in places, and we need to formulate exactly what OEMs we've got to talk to. There's a whole heap to go and to be done. But long and short of it is, that will be done. That's an example of how we improve our business in every way across the whole business.

Your next question comes from Sophia Mulligan from Macquarie.

Can you hear me all right?