Peter Warren Automotive Holdings Limited (PWR) Earnings Call Transcript & Summary

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Thank you, John. And I would like to add my welcome and good morning to this year's Annual General Meeting. As many of you would be aware, Peter Warren has been operating in Australia for over 6 decades. And we have expanded our footprint, building a reputation amongst customers, OEMs and the broader automotive industry as a trusted dealership group, establishing a thriving network of over 80 dealerships across the Eastern Seaboard of Australia. As outlined in the company's full year results on 22nd of August, we were pleased to deliver a solid result. I would describe the period as one which demonstrated the diversity of our revenue streams and one which also validated our position as a dealer of choice for both our customers and the OEMs we represent. It also demonstrated our sustainable income streams despite some external factors influencing our ability to deliver vehicles. Our total revenue for FY '23 came in at a record $2.07 billion, up 21% on FY '22, $1.71 billion, remembering that this incorporates the added performance of the Penfold acquisition, which was acquired in the comparative period. During FY '23, we have demonstrated a proactive approach to driving revenue with double-digit growth in all key revenue streams. Underlying EBITDA grew by over $10 million or 8%, representing a solid outcome in the period in which we absorbed a modest contraction in gross margin and the impact of cost inflation. Our profit before tax was marginally ahead of our expectations for the period at $81.9 million. This was down around 7% on the prior comparative period as we, like many of our peers were faced with rising interest costs, but we are pleased with this overall outcome. Statutory net profit after tax was consistent with the results from the prior year, equating to earnings per share of $0.328. We paid an $0.11 per share fully franked dividend for the 6-month period in the weeks after our announcement, bringing our FY '23 total dividend to $0.22. This is in line with the prior period's total dividend and is a testament to our focus on delivering returns for our shareholders. We remain focused on delivering on our acquisition strategy and have the capacity to act when value-enhancing opportunities arise. At 4%, our net debt to property value, a key measure of our ability to acquire businesses closed in a strong position, and our net debt to EBITDA is a positive signal of our strong capital management strategy. On Slide 5, our highlights page for FY '23 draws on some key themes in the current climate. Firstly, we are not immune to the higher cost environment, and we continue to focus on strong inventory management and cost reduction measures to offset rising costs. We are encouraged by our increasing penetration and growth in Parts and Service. This has come on the back of investment in our processes and technologies to ensure we can maximize our throughput on a per order basis as well as through efficiencies achieved as we scale our operations. At the same time, we continue developing our digital offering and building upon our out of leadership capability, allowing our assets to work for us while the physical sites are closed. We have invested in technology to enhance our current revenues and provide our customers with 24/7 access to our products and services. This provides us with cost efficiencies and greater centralization. Our goal is to provide a consistent customer experience through all of our sales channels, in person, online, self-service, call center and via our chat capabilities. Our order book remains very strong and continues to provide a buffer against gross margin contraction in new cars as inventory supply improves. We anticipate a slow and steady unwind of that order book going forward. The group has actively pursued our growth pillars throughout the year, and our management team worked tirelessly on our organic growth as we focus on strengthening our digital capabilities, embracing the adoption of new energy vehicles and engaging with our suppliers in the shifting supply dynamics. I am delighted with the strength of the team and our collaborative approach to embracing these catalyst events that are changing the nature of the automotive industry, both in Australia and globally. We expect growth from a range of capabilities, including consumer-focused initiatives, technology-based solutions, cost reduction programs, cost recovery measures and an improving vehicle supply. Our group is well placed to take advantage of this market and continue to act as a consolidator of dealerships. We also have the capital management plan to execute acquisitions when required. We continue to adopt a disciplined approach to the evaluation of acquisition opportunities as demonstrated by the Toyota and Volkswagen dealerships after year-end. This has been a significant milestone for us, and we're delighted to welcome Australia's market leader into our stable of brands, and we look forward to pursuing further opportunities. Our industry will continue to change and evolve as with our customers' expectations. I expect the rate of change to increase further and our ability to remain resilient and adapt is vital to our success. This truly is an exciting time for our business, our partners, our people and our customers. On the right-hand side of the slide, there is some commentary on our FY '24 outlook. During FY '23, we experienced improvement in new vehicle supply in some brands, which has been a factor in driving our revenue increase of around 21% alongside growth in Parts and Service as we embrace new technologies and achieve scale economies in these operations. Challenges related to inconsistency of supply, port congestion and product mix remain. And whilst these are easing, they still hamper the accurate prediction of delivery schedules. In the 10 weeks since our update in August, we continue to experience a reasonable performance in an environment that is certainly tougher than 12 months ago. New vehicle supply has increased across most of the brands, albeit inconsistently, leading to higher volumes of vehicles delivered to our customers. This supported the continuation of the revenue growth we experienced in FY '23. Our customers have benefited from increased vehicle availabilities. However, increased inventory has also brought limited pressure on retail margins in some pockets as dealers manage stock and aim to match with customer demand. This is not across the board and appears limited to certain brands and models. From a demand perspective, interest rates are impacting customers with new vehicle orders, marginally below the peaks at this time last year. As outlined in August, we expect an increase in interest costs due to elevated interest rates and inventory levels. We continue to focus on inventory and cost management with significant cost reduction programs continuing across our business. These external factors are somewhat cushioned by the strength of our order back and by other revenue streams, including a strong Parts and Service business, which continued to grow. As FY '24 progresses, we'll continue to monitor and manage these external factors to maximize the trading outcome of the business. Our recent acquisitions are contributing to our revenue growth as these brands have enjoyed a period of strong supply. These dealerships are operating well, are largely integrated into our operating model and are performing to our expectations. We also envisage FY '24, we'll see further growth in the supply of new energy vehicles with a new wave of products coming to market. Our focus is on supporting our OEM partners as these models are supplied, and we have a vast range of new energy vehicles in our current model lineup to service the needs of our wide-ranging customer base. This range is expected to increase by around 90% in the coming 12 months, which will see our offering extends to 90-plus models. And I'd like to emphasize, we have a strong representation in each of the volume, prestige and luxury segments. Peter Warren is well positioned for the second wave, and we expect the early market leaders will be naturally diluted as the supply lag improves across a wider group of OEMs. Many of our facilities are new energy vehicle ready, and we continue our focus on opportunities arriving for complementary consumer products and adoption of new revenue streams through strategic partnerships linked to this growth. In closing then, I'm confident the group is well placed to take advantage of both organic and strategic acquisition opportunities that arise as the market conditions change. I'd like to thank our team for their dedication and determination, keep delivering in this changing environment. And I'd also like to thank our business partners and our investors as they continue to support throughout this period. Thank you. John, thank you. I'll hand back to you.

Thank you, Mark. We will now move to the formal part of the meeting. The Notice of Meeting updated the 28th of September 2023 was circulated to members, and I will take the notice -- Notice of Meeting as read. Before moving on, the various resolutions to be considered today, I will now briefly outline the meeting and voting procedures for today's meeting. When you registered your attendance this morning, you would have been issued with an attendance card. Only those with a yellow card can vote at the meeting. All resolutions will be determined by poll, and I appoint Link Market Services to act as returning officer for the purpose of the vote today. I'll put each resolution to the meeting in turn and shareholders will be given the opportunity to ask questions or make any comments in relation to those resolutions. After that, I'll put each resolution to a poll. At the end of the resolutions, Link will collect the poll cards from you. As Chairman of the meeting, I intend to vote all available proxies in favor of each resolution. The first item of formal business is to receive and consider the company's financial statements and reports for the financial year ending 30th June 2023. As set out in the annual report, a copy of the annual report was made available on the company's website, the ASX platform and was sent to all those shareholders requested it. This item of business does not require a shareholder to vote on the reports. I will take the report as read. I would like to take any general questions or comments about the reports or questions for the order of. Are there any questions on the financial statements or reports.

[indiscernible] have 4 questions. More about the presentation.

Sorry, [ Greg Hoffman ], proxy holder. I have some general questions about the presentation today, but I don't know if you'd like to take them at the end or whether now it's appropriate or just kind of general question.

At the end, we will have a general session for any of those general questions. But each resolution, you'll have the opportunity to ask any questions or queries that you might have. Thank you. Are there any further questions on the financial statements? No questions? Firstly, as this will be the last AGM, [ but Deloitte ] will be -- [ audited in ] our company, and they have boarded the company for the last [ 15-odd ] years. We'd like to -- I should like to record the company's [indiscernible] the Deloitte team. Deloittes have been our advisers for many years, and we wish them all well in the future. Thank you for your professional service. I appreciate it, particularly over of the period of the last 3 years, the IPO and the first few years as a public company. If there are no other questions, we'll move to the next item of business. We will now move to Resolution 1, which is for the reelection of Niran Peiris as a Director and is set out in the -- set out on the screen. Are there any questions on the reappointment of Niran Peiris? No questions? There are -- and here are the proxies are shown on the screen here. As there have been no questions, we'll move on to Resolution 2, it's for the reelection of Paul Warren as a Director and is set out on the screen. Are there any questions about the reappointment of Paul? The proxies are listed on the screen [indiscernible] If there are no questions, please now complete the voting card. Resolution -- we will now move to Resolution 3, which is the nonbinding and advisory vote of the company's remuneration report for the year ended the 30th of June 2023 and is set out on the screen. Are there any questions on the remuneration report? The proxies are shown on the screen behind me. There are no questions, thank you. Please now complete your voting card. Resolution 4 is the appointment of the auditor. We will move now to the Resolution 4, which is the approval of the appointment of KPMG as auditor and is set out on the screen. Are there any questions about this auditors appointment? If there are not, the proxies are shown on the screen. Thank you. Please complete your voting card. We will now move to Resolution 5, which is the approval of the Equity Plan is set out on the screen. Are there any questions with respect to the Equity Plan? The proxies are shown -- the proxy voting is shown on the screen for your information. If you have no questions, please now complete your voting card. As that was the final resolution to be considered at the meeting, I would ask you to hand your voting cards to Link representative. That completes the formal part of the meeting. We now move to general business, where I'll open the floor to any questions from any of the shareholders.

I have a few, but I'm happy to take some of them offline if you want to wrap the meeting up at any stage. I'm only relatively new shareholder. So I'm just still trying to wrap my mind around the business and the strategy. So that's really what most of these questions are about. Mark mentioned in his address about the recent acquisition providing further opportunities. Can you explain how that acquisition in particular -- is it just bringing the Toyota into the stable? Or can you just flesh that out a little bit in terms of the other opportunities that, that acquisition brings and what they are prior to that acquisition?

Yes, sure. So we were previously not able to bring Toyota into our stable as a result of having significant private equity participant on our share register. So that was something that was a legacy issue from when we IPOed. And wasn't specific to Peter Warren, they hold that as a set of rules for who owns and who doesn't own sort of dealerships across the country. Having seen Quadrant Private Equity was, in that case, exit the register, we would, of course, getting -- afforded the opportunity to go back to Toyota and ask for their consideration. So we acquired the business that was privately owned by the Warren family. So we acquired that business. There were 2 [indiscernible] one in Liverpool or [indiscernible] where our sort of motor-ship operations are [indiscernible]. The significance of that and the milestone event is that, that was really a passing through of Toyota's set of rules and standards. Are we a suitable participant to go forward? So once you've opened that banner, then the opportunities with Toyota will carry on. So up until that acquisition, we weren't able to bring Toyota anywhere in the country. Now the -- I won't call it [indiscernible], but now that opportunity set is much larger. And so both Paul and I work very actively in the acquisitive space. In the management team, we're working very hard and looking at all opportunities in the market, but we're no longer prohibited from any other brands that have represented other than those that are directed to market like testing.

And like you said, Toyota was 24% of the market. So we did have one arm tied behind our back in our growth strategy as a result of that. So that's clear that logjam -- we think that's a potentially a very large improvement over the next 2 to 3 years, we can make.

Now this may or may not be appropriate, but I noticed the [ deal Eagers recently ] did. I know I don't have the Warren family's position, but are there other dealerships that the Warren family owns or are they all now within this group? Is there potential for more of those kind of transaction has to come from this channel or...

I'll give the answer to that. So when we IPOed, all of the Warren family's businesses -- dealership businesses were rolled into the IPO process far, anything [indiscernible] There was one Volkswagen business that sat alongside the Toyota business in [ Bafas ]. They are now all inside the operations. And whilst they have other interest in property, et cetera, outside, all of the distributors are interested now inside the public company.

If anybody else has any questions -- because I have a few. In the Board's view or management's view, what are the pitfalls and risks that you've seen when you look at other industry consolidators that are following this path, what are the worst-case scenarios with acquisitions? What are the problems people fall into? I guess you've done some kind of industry review and study and thought. What are the things to sort of watch out for and be careful of?

I'll just answer that and [indiscernible] then I'll hand it to Mark and Paul, who might have something to add to it. This is a very fragmented industry made up by families of Warren, but a multitude of small dealerships. We are in the hands, and we work very closely with our OEMs. The OEMs now are getting to a stage where they want consolidation. It's more discipline to [ the market. ] So there, that's what we believe consolidation around that [ East Coast bridge ] market, particularly added on to hubs where we have concentration, where we can leverage our distribution parts and other factors and add value to the business.

It's Greg. I would say the greatest risk would be falling out with an OEM. When I say falling out, them not liking our culture or our strategy or management style because they're very influential on the granting of those franchise and whatever. So I think to answer your question, I would say that one of the greatest risk is absolutely not having a good relationship with an OEM and, therefore, not having the opportunity of acquiring and getting approval. And I think as I think Mark and John have alluded to, the family and the management of this company have had a long relationship with all our OEMs and continue to grow those relationships, again, performing. Management has got to perform, but also as a culture and looking out to our customers, that's important as well. So hopefully, that answers your question.

I guess just one other aspect valuation. Are the valuations of these things change and is that fairly well established? Is that not typically a pitfall [indiscernible] to overpay.

Are you happy for me to answer this?

Okay. In the industry, there are established I guess, parameters or whatever. So you talk about what you call sustainable earnings, the first thing. So we do business and we say what do we think is sustainable over the next number of years. We probably don't worry about turnover too much. We think if you granted the franchise, the turnover will gradually increase. So we look at the sustainable earnings and then we look at a mixture of those franchises. In other words, what the normal return on sales are, what their futures are and then geographic positions in terms of the demographic and the management of that company. And that determines, I guess, the [ multiple should pay ] and how you get into that.

Yes. And if I can add there as well, I think that's a good summary. There are some areas like -- for example, we may represent Toyota in a certain location, but it's not a representation of total on a national scale. So that local representation becomes very important. And market share and concentration becomes very important. So if we are able to achieve another brand in one of our sort of auto more concepts where we can add $0.04, $0.05, $0.06, $0.07 more market share to an existing operation. We get huge scales out of the back end of these businesses through the centralization of reconditioning and predelivery our finance functions, et cetera. So we're able to achieve a lot of economies that some of the other smaller -- going back to John's point, more fragmented cottage industry, mum-and-dad investors just simply kind of change. Of course, there's always -- there's always a bit of execution risk as well. We do need to integrate and that's important. But having now set up our sort of Easter Seaboard strategy with major hubs in each of the key states, I think we're in a really place to keep executing on the kind of acquisitions [indiscernible]

Just giving you one example there, Greg, you talked about parts. So all of a sudden, you grab another Parts business. So you've got the one truck going out. You add another brand or two brands onto that. It's the same Parts manager. It's normally the same warehouse. It's the same truck. So that gets your costs down and get your economies of scale. So very important as well.

And when you look across the industry, when you're looking at acquisitions, is there a range of quality in terms of how some of these things operate that you can say, okay, we can add value to that. They're not doing this automated...

100%, certainly.

And there are great operators, there are some weaker operators. And I think some of that depends on location. I mean, for example, the same brand could become available to us in a stand-alone town, we'll call it, Newcastle, where we can't quite get the efficiencies as we would be able to in the [ Gold Coast or ] in Victoria and Central Melbourne, for example. So we would look at the strength of the management team. There's one of about eight criteria. One of them is certainly sustainability of earnings. Another one is the mortgage that we're paying. But there's a lot of other things the property set up, the brand mix, the market share, et cetera, that we would consider in each of those. And there's about 8 or 9 different criteria that we've measured against.

And other things being equal, would you prefer to own the property or...

Look, that's an interesting question. We have come to market with a view of consolidating. And so property has been instrumental in our ability to do that. We brought property into our balance sheet on day 1 we IPOed. That's quite strategic property. There are too much of operations, [ '22 and 8.5, 9 acres ], so that they are sizable operations. I think we'd like to have the ability to be able to consider properties in our acquisition journey if that was to [indiscernible] but it's not necessarily a key significance of ours. We'd like to invest in where we are going to get those scale operations in back of house, not necessarily in the stand-alone side of a major highway.

Greg, the only other thing I'd add to that is there's no secret that bricks and mortar businesses in terms of how it's set up now will probably change in the future. So if you've got a real what I call a hub in particular areas, I think that's an advantage in terms of the [ cost there. ] So I see that, but you've got to be strategic in terms of that property acquisition.

And also the land usage, land usage changes, it can get too expensive to operate those sites. So that's why the relationship with the OEMs is very important, knowing where they wanted you to be. So you might actually go [indiscernible] one e to sell more somewhere else further out, as I said, give a wider range of products on that site.

So when you say land usage charges, what are you referring to, rates or just the rent or...

Well, the OEMs have a plan themselves a footprint. They want to make sure they get in coverage in particular areas. We have to be aware of that and where we are and where the purchase is and where the opportunities over that site acquisition modeling.

Got a couple of more. One was around just higher interest rates. You did mention, Mark, in your presentation. I guess, when I just think about it from the outside, there's the impact on the economy, the consumer tightening up and the flow on of that is the corporate level debt. And then I guess the floor plan with finance. And are they the kind of major factors, that plan?