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

Thank you for standing by, and welcome to the Peter Warren Automotive Holdings Limited H1 results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Weaver, CEO. Please go ahead.

Thank you, Cher. And good morning, everyone, and thank you for joining us to discuss Peter Warren Automotive Holdings First Half 2024 Financial Results. My name is Mark Weaver, your Chief Executive Officer. And joining me today is our Chief Financial Officer, Victor Cuthell, who will assist me in presenting our results. This presentation along with the financial statements have been lodged with the ASX for your information and can be found on our website at www.pwah.com.au. On Slide 2 of today's pack, you will find our agenda. I will shortly present an overview of our first half results and our activity during the half, before providing a brief snapshot of our expectations of the period ahead. Victor will then provide further detail on our profit and loss performance, our cash flow and our capital management position. We'll then close with a detailed outlook for the remainder of FY '24. We will be delighted to take any questions you may have at the conclusion of our presentation today. Let's move then to the results highlights. On Slide 4 presented is a summary of our first half financial highlights. Our total revenue came in at $1.2 billion for the half year. This number represents a strong growth of 20% on the prior period. There were many initiatives behind this number, including successful acquisitions and organic activity. And I will elaborate on these in a few slides. This revenue growth enabled us to deliver underlying EBITDA of $71.3 million, marginally up on the prior year and reflective of the contraction in gross margin, the ongoing impacts of cost inflation and our efforts, importantly, to manage those costs. Moving on to the top row, our PBT was $34.4 million, representing a return on sales of 2.9%. We faced rising interest rates and increasing supply during the period, but we're pleased with this overall outcome, which reflects our initiatives to manage our cost base and increase leverage from our scale and growing technology capabilities. Our Board has approved the payment of $0.085 per share fully franked dividend for the period. Victor will cover the details of that dividend later in the presentation. Finally, on this page, we show our net debt to property ratio of 24%. This provides us with considerable debt capacity to deliver on our acquisition strategy. We are highly focused in this area, and I'll expand on that in a few moments. I'll turn now to Slide 5, which lays out a bridge of our underlying profit before tax. Moving from left to right, you can see in the EBITDA box the positive contribution from the Toyota and the Volkswagen acquisitions, which were completed in early July 2023, with these dealerships now fully integrated and performing ahead of our expectations. Next on the chart is the impact of lower gross margin dollars as vehicle supply returned and added competitive pressure to the market. Our GP margins are a focus for us, and we'll talk about that a bit more. Finally, in that EBITDA box, the last bar shows increased operating expenses due to cost inflation. OpEx is another bigger area of focus, and Victor will cover that later in detail. This shows just how strong our revenue growth has been to more than offset these factors to deliver stable EBITDA, up $0.7 million period-on-period. Moving to the right. The next bar shows increased interest costs of $7.9 million. There are a few factors in here, which we will cover off later in the presentation, but it's clear it has had a sizable impact on our PBT and remains a focal point for management going forward. Lastly on this slide, the depreciation and amortization component includes $1.2 million of AASB 16 impacts and the amortization of intangibles from our recent acquisitions. Overall, despite the contraction, we are pleased with our ability to hold our EBITDA performance and the extensive growth in revenues, cost control initiatives and cost recovery measures enacted. On Slide 6, I'll cover the key highlights for the first half and talk briefly to our outlook. Overall, on the left-hand side, the strong revenue performance was very pleasing and offset some of the margin pressure I mentioned. And we have taken a very disciplined and proactive approach to cost management and cost recovery to help combat inflation with an annualized benefit of more than $7 million. This is while maintaining our excellent customer service standards. We've been exceptionally pleased with the performance of the 3 acquired dealerships, which are tracking ahead of expectations. Our order book remains strong and will continue to underpin revenues for the period ahead. And finally, on the left, we've been proactive in focusing on loan repayments and strong inventory management as the interest rate environment evolved through the period. Moving on to the right with our outlook. We anticipate volumes and revenues to continue to grow, underpinned by our strong order bank. While margins in new cars may further taper, we expect margins to remain stable across our other business lines, and we continue our focus on cost reduction programs and leveraging our costs. Delivering brilliant basics remains a key focus for us, which I will touch on again shortly. And finally, on this slide, we remain focused on acquisitions with a strong balance sheet and infrastructure in place to support our active consolidation strategy. Turning to Slide 7. Let's move now to explore some of the influencing factors in the current environment and the steps we are taking to address or make the most of these. The top chart on Slide 8 shows national new car volume data since 2015. The significant decline in volume during the pandemic caused missing vehicle sales as estimated in the shaded area. 2023 saw a record volume of vehicles delivered and we expect 2024 to be very high as well, recovering some of these missing sales. Our business achieved this revenue from multiple sources as customers pass through their customer journey, and service is a key element of that. One significant tailwind unfolding in the current period is shown here in the blue box on the top right. The box reflects the 3- to 4-year service car parc, a period when retail dealers like PWR holds the vast majority of servicing work. As that box moves to the right through time, the lower volume years of 2019 and 2020 are replaced with the higher volume years, including the latest record year. That increases the 3- to 4-year car parc by several hundred thousand vehicles. This is promising for our service environment, which is a higher-margin part of our business and is good for parts as well. The bottom left chart of orders and deliveries shows that supply is normalizing and indicates the shortfall in supply versus orders reverses in the last quarter. We are well placed to benefit from the supply normalization given the diversity of brands in our portfolio. And pleasingly, January was stronger with order right and deliverables, so deliveries just 6 units apart as demand picked up. On the bottom right, you can see how the order bank is consistent with the prior corresponding period and up slightly from the year-end. The acquisition added considerably to our order bank in July, and those brands experienced significant increases in supply, enabling the benefit of deliveries under our ownership. Overall, the order bank remains strong and will continue to support volumes through 2024. With that backdrop, I will take the next 4 slides to highlight our key areas of focus. Firstly, we remain laser sharp on doing the basics extraordinarily well to drive organic growth and better efficiencies. The second is remaining very disciplined in our approach to acquisitions, a fundamental part of our growth strategy and a substantial opportunity for us. And thirdly, as the automotive industry experienced significant change, we have a number of proactive initiatives that allow us to lead our competitors. I'll cover each of these focus areas in more detail over the next few slides. Starting on the core business on Slide 10. Organic growth is a key focus and an area in which we deliver exceptional performance. Our goal is to provide a consistent customer experience through all of our sales channels, in person, online, self-service, call center and chat capabilities, all driven by our desire to provide customer choice. Our first-class customer engagement continues to be a differentiator for our business, and after 65 years, we are pleased with our continued growth in this area. Keeping the balance of increasing customer engagement while we adjust the changing costs and industry dynamics is a priority for us. In order to meet the changing needs of customers, we are constantly looking at ways to improve both our physical and digital offering. We continue to invest in technology to provide our customers with 24/7 access to our products and services, which has in turn helped drive our per order growth, particularly in service. As we scale, we are focused on maximizing our throughput and delivering further cost efficiencies. This scale also gives us more leverage underpinned by our hub-and-spoke approach through the centralization of our support functions. This has led to a number of benefits, including stronger revenue growth, more effective lead management and improved transparency for customers, as well as improvements in the customer engagement I mentioned. As we scale, so too does our ability to get better procurement deals in addition to greater leverage in establishing favorable terms. I know you are keen to understand our gross margin experience, so I want to draw your attention to the boxes in the middle of the page. It's worth calling out that many of our revenue streams are not impacted in the same way as the new vehicle supply chain, and we have been disciplined in our approach to identifying substitutional growth opportunities in the face of new car margin contraction. In used cars, for example, we are seeing a steady recovery in gross margins following a restructure of our inventory last year. We've set better processes for pricing strategies and our pipeline, which will allow for growth going forward. The strong growth in our service business has been driven by technology investments, strong cost recovery measures and improved process flows. Service grew like-for-like 20.2% in the first half, outpacing inflation and delivering strong gross margins. With the likelihood of an increasing car parc and the depth of our brand portfolio, it is expected to deliver strong outcomes going forward. Similarly, the parts and accessories with growth well ahead of inflation and deeper scale efficiencies achieved. Alongside strong management of GP, inventory management is a key to success in the current climate. Optimal inventory materializes both stable margins and lower interest costs. While we are obligated to some extent by our OEM partners, we have improved the management of the stock, utilizing the tools at our disposal to focus on holding costs, gauge the market, third-party pipeline management and inventory allocation. At the foot of the page, you can see our diversity of brands across all segments in the market. The mix of geographic locations and blend of revenue streams will continue to support our growth and remain a key differentiator for our business. Slide 11 shows our strong acquisition track record. The features of our approach to acquisitions are listed on the left-hand side and underpin our disciplined approach. We carefully consider these prospects based on EPS accretion, sustainable margins, availability of local market share, and of course, strong operations and teams that fit with the Peter Warren culture and values. The opportunity for synergies is a key element of the success of this strategy, including features such as geographic location and operational alignment. The chart in the center of the slide shows acquisitions have been a key contributor to our growth over the last 7 years, including some of the more recent ones highlighted. Our Penfold acquisition in 2021 established our beachhead in Victoria, reflecting our strategy to broaden our footprint across the Eastern Seaboard. This has provided a strong platform for further growth in the region as we build on this important hub. Another more recent example is the Macarthur dealerships, which we announced earlier this year, subject to OEM approvals are expected to complete in the coming weeks. This is close to our existing hub in Western Sydney and is expected to deliver strong geographical and operational benefits with the addition of key new brands. We have a strong infrastructure in place to support further inorganic opportunities supported by a substantial property portfolio. There was a large cohort of midsized dealers that naturally become the likely target for further growth, and there is lots of opportunity as vendor expectations continue to reduce. We are always looking both proactively and assessing inbound opportunities as the more onerous operating environment puts pressure on subscale businesses. Moving to Slide 12. This demonstrates our willingness to be at the forefront of leading industry change. Firstly, down the left-hand side, as I mentioned earlier, our goal is to provide a consistent customer experience through all of our sales channels, in person, online, self-serve, call center and chat, all driven by our desire to provide customer choice. We are leveraging technology to step towards greater consumer transparency, which will yield benefits in reducing the labor intensity of inbound inquiries, driving cost efficiencies and enabling resources to be directed towards lucrative revenue generation activities. Dealers remain today the key retail point of sale for the vast majority of new vehicles introduced into the car parc, and so we are constantly looking at ways to leverage our shop window. For instance, we continue on our work on extending our EV capability at our locations, with charging networks established across our sites and opportunities arising from the ecosystem these changes in underlying product creates. Finally, on the left-hand side, we expect the existence of various sales models to continue to emerge with some agency models working alongside franchisees. With many of these models now fully operational, Peter Warren is well advanced with our adoption and coexistence of these alternate approaches to market as we look to partner with OEMs to find the best solution for both parties, and importantly, the end user. The center of this page shows how we are well positioned for the ongoing transition to new energy vehicles. Sales of battery, electric and plug-in hybrid vehicles continue to increase. The EV market has seen a second wave of activity as more and more NEV models enter the market. Our top priority here is providing consumer choice of fuel types, ensuring we have a wide variety of models available. We have a vast range of new energy vehicles with 71 models available in our current line up, and this number grows month-on-month. Peter Warren is well positioned in the second wave of EV adoption and we expect the early market leaders will be naturally diluted as the supply lag continues to improve across a wider group of variants. The phase-in period of the recently announced new vehicle efficiency standards provides a significant tailwind given our wide variety of brand presentation. Our focus is on supporting our OEM partners as these models are supplied, and I'd like to emphasize the diversity again across the segments with strong representation in each of the volume, prestige, luxury and super luxury market to provide vehicles for all budgets. The transition to EVs present benefits to our other income streams. We envisage an increasing 3- to 4-year car parc with higher retention as vehicles become more complex and specialty skills and training cannot easily be replicated by the independents. We are positive about the opportunities that lie ahead and are well positioned to capitalize. I might take this opportunity to hand over to Victor, who can talk us through some more detail on our financial summary. Thanks, Victor.

Thank you, Mark. Turning to Page 14 first, and you can see that we have increased our revenue by 20% from $999 million to $1.203 billion, which includes both inorganic as well as strong organic growth. That organic growth occurred all across new vehicles, used vehicles, service, parts and aftermarket products. This reflects our focus on the brilliant basics that Mark has talked about. In addition, we benefited from the industry growth in volumes sold and also from the growth in our 3-year car parc. Looking forward, we expect these trends to continue. We were very pleased to see our EBITDA grow to $71.3 million, in the top right chart. This reflects the hard work put into inventory management, gross profit management and cost reduction. Our results also include our acquisition of the Toyota and VW businesses, which have performed above our expectations. These businesses are now fully integrated, and we look forward to more acquisitions, with the next one expected to be completed in the coming weeks. Our EBITDA did not translate into PBT growth and our increased interest costs were significant, although this was mitigated by our inventory management. We ended the half with a PBT of $34.4 million. Turning to Page 15. We have our P&L, which starts with that revenue growth of $204 million. Our gross profit percentage reduced to 17.6% from 19.6% in the prior corresponding period. This reflects the very high margins achieved, especially on new vehicles in that period, and it reflects our acquisition, which was GP percentage diluted. GP percentage is a big factor in our results, and I'll bisect that area on our next slide. Our operating expenses have seen a huge focus, and we are pleased to see that as a percentage of revenue it has reduced from 12.6% to 11.7%. That reduction reflects both our strong cost control and our leveraging fixed OpEx as we grew volumes and revenues. In a few minutes, I will talk in more detail about our cost control. We have also called out 3 areas of one-off expense: acquisition expenses, legal costs and restructure costs. We were pleased to see a small increase of $0.7 million in underlying EBITDA shown at row 4. This has been the product of that organic revenue growth, acquisition growth, margin management and careful cost control. We're not immune, however, to rising interest costs and our total interest expense rose by $7.9 million. This splits into the 3 components shown here, and you can see that the rate increase was the largest factor at $3.9 million. Our inventory balance is the most controllable of these areas, and we manage this very carefully. Our bottom line PBT has reduced from $43.2 million to $34.4 million on an underlying basis. Looking forward, we would expect a continuation of some of the factors here, continued revenue growth in all departments, continued cost control and continued leveraging of the P&L OpEx. Turning to gross profit margin. Slide 16 dissects the movements in our business in recent periods. The top chart shows that our GP percentage has reduced to 17.6% from the peaks achieved when new cars were in very short supply and effectively selling through our [ RP ]. We are in a period of stronger supply with more competitive activity having an effect on GP percentage. GP percentage is an important area that is heavily managed, and so I have dissected our GP percentage in a waterfall chart at the bottom of the page that shows the movement from H1 FY '23 to H2 FY '23 and onto H1 FY '24. The left-hand side of that chart showS the new car margins were the largest factor from H1 FY '23 to H2 FY '23, and that contributed a 1% reduction in our gross margin. The new car margin reduction slowed to a 0.3% reduction over the last 6 months. The right-hand side of the chart breaks down the last 6 months. In that period, the acquisition has diluted our gross margin by 0.8%, reflecting the lower margins in that business, which is a high new car sales mix and a strong element of fleet sales. The business has over-performed in revenue and PBT terms, but the GP impact is dilutive. We also saw a small improvement in used car margins by 0.2% in H1 FY '24. This reflected our improved process and our management of the used car inventory, which has delivered good results after the market began to change in H2 FY '23. In other departments, service, parts, aftermarket, finance, insurance, we are seeing steady or improving margins. We expect good margins to continue in all of these areas. Slide 17 shows our OpEx. Our cost base has been a huge focus in the business given the margin pressures that exist. Cost inflation has been significant and include a 5.75% increase in the award wage from 1 July, 2023. Our cost reduction program has saved us $7 million per annum and incurred one-off costs of $0.7 million. We also had a cost recovery program, which has seen revenue increases in selected areas. And lastly, we have been highly focused on leveraging our P&L and pushing more volume through our business with minimal increases in headcount and other costs. The end result has seen our OpEx as a percentage of revenue reduce from 12.6% down to 11.7%, and our like-for-like OpEx increased by 5%, which is $6.3 million. We are pleased with this outcome and intend to continue our work in this area using the same 3 methods: cost-out, cost recovery and P&L leverage. Page 18 shows our operating cash flow as the floorplan interest increased by 21% to $44 million. This was after incurring $7 million more in floorplan interest and after a normal seasonal cash outflow on customer deposits. Our favorable cash flows helped us with our acquisitions and helped us invest $5.4 million in dealership CapEx. That amount included CapEx as part of our EV readiness program, and this positions us well as our EV sales grow. We also took steps to manage our interest costs, and we repaid $16.5 million in borrowings, some of which were short term and acquisition-related. Turning to Slide 19. We show here our corporate debt position and our capacity. Our net debt to property value is currently only 24%, and our net debt to EBITDA after floorplan interest is 0.5x. The property on our balance sheet gives us significant borrowing capacity, and it also offers attractive rates of interest given the security it provides to our lenders. The chart at the bottom shows our capacity remains high even after borrowing for our recent acquisition. This sets us up well for more acquisitions, although we will continue to be disciplined and look for opportunities that represent a good buy. On dividends, the Directors have declared an interim dividend of $0.085 per share. This will be fully franked and paid on 27 March, 2024. I'll now hand back to Mark to discuss our outlook.

Thanks, Victor. Now to close off then on Slide 21. As I've talked to, we expect revenues to continue to grow, both organically and through acquisition. Margins in new cars may taper further given the supply increase, but we expect margins to continue to be good in the other key revenue streams. We continue our focus on careful inventory management, which in part supports margin stability and interest expense reduction as well as the continuation of cost reduction programs and cost leverage for the remainder of FY '24. Our strong order bank will support volumes during 2024 and underpin revenue. And whilst we expect interest costs to increase, we envisage the increase will be lower than in 2023. And finally, the strong acquisition pipeline should deliver continued disciplined expansion of the Peter Warren portfolio. Our group is well placed to take advantage of this market and continues to act as a consolidator and we have the capital management capability to execute when required. So that concludes our presentation for today. As a reminder, there is more material in the appendices to this presentation deck, including our balance sheet and a number of P&L reconciliations for your reference. I would like to take this opportunity to thank our team for their ongoing efforts and drive to grow in this changing economic environment. I also wish to expand my thanks to our numerous business partners that support our journey and shared ambitions for the period ahead. Finally, to our investors, thank you for your continued support, and we appreciate your time today. Victor and I would now be delighted to take any questions that you may have. Thank you. Cher?

[Operator Instructions] The first question comes from Tom Chapman with Jefferies.

It's actually John Campbell. I think -- I'm not sure how that came about, but Tom does work at Jefferies.. Mark, just in terms of the order book -- and, obviously, order book that you presented at 31 deck includes the recent acquisitions of Toyota and VW. But what's your sense on the runoff of the order book given that we expect FY -- or calendar year '24 to be another good year of deliveries and underlying demand as per what you were saying in terms of underlying demand. So how do you sort of see that order book running off over -- or at least returning back to a more normalized level?

I do wonder why Tom had replaced John for a second, but I could hear your voice. And you're quite right. We -- when we acquired the Toyota and Volkswagen businesses in very early July, that did indeed increase our order book as part of that acquisition. Just as a side note, Toyota have had a very strong -- in fact, Volkswagen as well, but Toyota have had a very strong second half of calendar year 2023. When I -- if I remember right, when I looked at the December [ VPAT ] number there, volumes in the second half versus the first half, we're up around about 33%. So what does that mean? We've enjoyed the benefits of delivering those vehicles. And the consequence of that is, obviously, we're reducing that order bank that we acquired. Going forward, I'm still firmly of the view that our order bank will play a significant role in underpinning our revenue through the bulk of 2024, and I mean calendar year 2024. We see that in a sort of good to softer month moving by around about sort of 2% to 6% in any period. And so if you modify it that in months, that suggests that we've got somewhere between an 11 and, what, 23 months runoff period here. So it has still got quite a tail. The second part of your question is, where do we think it will land? I'm still very much of the opinion that putting an order in for a vehicle and a rational approach to supply chain management will suggest that we're probably in the sort of 8- to 10-week category as a normal wait time, which suggests that the order book will come back to around 2 months or thereabout. It is still up closer to 4 at the moment. And so I think we've still got a long way to go. And certainly, as I said, I see an underpinning of our revenues certainly through to the end of FY '24, I would probably predict well into the end of calendar year '24 and potentially even to a few months around next time.

And so, hence, obviously, I presume you're fairly confident that gross margins remain somewhere around where they are at the moment for the bulk of calendar '24?

Yes. It certainly has helped us in the past, John. And of course, remember -- I mean that order book is not static. It is constantly emptying and refilling again. As Victor demonstrated on his slides there, we saw a fairly big contraction in the first half of calendar year 2023. That slowed in the second half. I'm hoping that will start again now. But we are -- as I've called out previously, we are expecting it to taper again just slightly in this second half of this financial year. But yes, the order bank will clearly support our gross margins.

Yes. Very good. One last question for me and then I'll pass it back. Obviously, your OpEx management has been very, very strong, and we continue to see that ratio to revenues coming down. Do you -- I mean, do you see any obvious -- and I'm sure the answer is no, but any obvious low-hanging fruit to sort of continue to drive that margin down because it's at 11.7%, so it's a very good level. Yes. So just whether there's any future initiatives that you -- that are -- you can convey to us that might see it go down further?

Yes, John. That's an area I get heavily involved in. And I think what we see there is that our cost reduction strategies and our programs are not complete. We have a few work streams in place that delivered for us in the first half of the year, and we're looking to continue that and see more delivery in the second half of the year. I'm not sure I'd call it low-hanging fruit. I think in 2024 most businesses are already running pretty efficiently. But we do look to achieve more, yes.

Yes. Very good. And the recently acquired Toyota and VW businesses, I mean are they already at the -- I guess at the Peter Warren sort of levels? Or do you see that there's more to do there?

And those have been fully integrated now and the synergies are -- have been extracted out of that already. So I wouldn't see that as a particular source of efficiencies. But again, we do look to achieve more efficiencies and cost reductions over the coming year.

The next question comes from Sarah Mann with MA Moelis Australia.

First question just on GP margin again, sorry. So clearly, supply has come back pretty strongly in the back end of calendar '23 and inventories increase, et cetera. Just wondering, I guess, how the approach from the OEMs has changed compared to pre-COVID? Like, do you think they're still being more rational in terms of, I guess, kind of preserving GP margin? Or how far back towards kind of the supply push model have we moved with supply coming back?

The question is an interesting one. Look, it is varying brand by brand at the moment. And what we're seeing play out in the marketplace right now is a number of brands that have picked up on the supply shortage and probably overcooked it to the extent that they've obtained production slots, got their logistics in order, got cars into Australia, fulfilled the order banks and then been left with hundreds, if not, in cases thousands of similar modeled cars scattered around dealership yards and in fact their own holding yards across Australia. So I think those that have gone early with that are probably reflecting on that, saying, well, that has got us back to something of a supply push environment on particular models. There are other brands that are very carefully managing that process and have learned a lot through this COVID period. I think, honestly, it's pretty challenging to answer that question definitively when you've got such a wide portfolio of brands. But my sense is those that have gone earlier and presented the supply push environment are looking very hard to sort of correct that position in this early period. But I would note, I mean, if you look at the size of our order bank and you modify that by all the dealers in the country, there is still a sizable order bank. It still sits somewhere in the sort of 4-month typical supply category, I would imagine, nationally. And so there's still quite a lot to do to get cars into the country. But getting that balance right is going to be a bit challenging. So that's why we've got some confidence that GP margins will start to settle. But honestly, I mean, we're still calling out that we think that they may well taper a little further before they find the sweet spot. But I'm still of the view we're not going to end up in that overstocked environment that we found ourselves back in 2016 and 2017.

Got you. Because the other, I guess, piece to it is like the Chinese OEMs clearly took a lot of market share while some of the incumbent brands were supply constrained. And so just interested like in terms of what you're seeing around what they're trying to do in the market to kind of retain that market share? Or do you think kind of that fell back down to a level below the market share that they were kind of enjoying during the supply constraint period?

Yes. Again, a pretty challenging question for us. We're just about to endeavor into a number of those Chinese brands, and so really out there doing our homework on those at the moment. I'd probably put it in this form. Those that are slightly more mature and have been around a little longer have probably got the confidence to apply stability to the inventory channels and bring cars in to meet the market. Those that are sort of a little bit newer kids on the block are clearly trying to grab market share and trying to time how well their product is going to go. Some are going to get it right, some are going to get it wrong. I think out of those more mature Chinese brands, I'm not seeing the similar patterns to those long encumbered brands that we're all used to seeing on our streets. So I don't think it's a one size fits all. But yes, I hope that those sort of more recently introduced challenger brands coming into Australia can get the supply right and not to start writing price points for certain segments and certain models that are going to make it very difficult for others to challenge it. But we shall see, Sarah. That's very crystal ball activity there.

Understood. And then just the new vehicle emission standards. Like if that does come in at current form 1 Jan, clearly Australians like you, et cetera -- are the OEMs doing anything in this kind of 12-month period or 10-month period now before that to try and, I guess, get some incremental sales into Australia ahead of that? I'm saying in general. Yes.

Yes. So yes, a very generalistic question. I certainly think they're doing a lot because if you could imagine sourcing the materials to manufacture a car and getting that through a production cycle and logistically passing that globally around the world into retailers' hands -- and we take 30, 60 days to find a home. Time is ticking if the 1st of January is genuinely the intended first adoption point of those standards. So the OEMs, I'm sure, are out there right at the moment contemplating what all this means for them and their product line up. In terms of the push that may happen beforehand, I think that's very possible. I kind of liken this to a huge tax change. If there was a big incentive that was about to end, we would no doubt see manufacturers and retailers like us trying to ensure that people got the opportunity to do that. So I think that will be a -- that may well be a natural tailwind for 2024 that volumes will increase and possibly some of those heavier emitting vehicles may end up on the road before the 1st of January. But it is early days, and that's still going through various submissions from the various parties. Naturally, Peter Warren is a big fan of reducing emissions. We're a little concerned by the time frames, like many people in our shoes. But we think that will play around a little bit with supply and particularly demand towards the very end of the period, if that change of the date is the 1st of January.

Okay. Last question from me, just on the finance. Just interested in terms of why the like-for-like F&I growth has come down and why penetration appears to be lagging relative to sales?

Yes. I'll start this. Add any comments, Victor, as need be. F&I penetration has certainly been under pressure. We are not running at the penetration rates that we have been in recent years. From my discussions around the industry generally, I still believe that we are at the top end of sort of benchmark levels, and we've got strong performance. We get data there from other dealers and from the financers themselves suggesting we're going okay. Is it where it should be? No, because we know we've been in an economic environment that has provided stronger penetration. We've got plenty of things in the wings, though, and in action at the moment to try and improve on that. But it has been a challenge. The rising interest rate environment has scared some people to do probably crazy things like put their car on the home loan, for example, because the home loan has got a naturally lower interest rate and weekly repayments look considerably lower. I'm not sure they're thinking about 5-year terms versus 25-year terms. But yes, that's what happens with irrational thinking sometimes. And so we've unfortunately experienced that. And I'm expecting our fellow dealers out there to experience the same thing.

I might add there, Mark. I think I see there will be continued opportunity in this area as we go through 2024 and 2025.

The next question comes from Ed Woodgate with Jarden.

A great result. Look, if it's not too specific, could you provide some color as to where your new margins are, new car margins in the first half relative to pre-COVID levels? Just trying to get a sense of -- like they've obviously fallen. And you have a great performance in the rest of the business and on the margin front. But can you just provide some color as to where your new car margins are relative to COVID levels?

Yes, I'll start. I'll let Victor jump in as well. On Page 16 of the slide deck, there is a chart there which shows our overall GP margin. There's a few signals in this page here to say that most of the margins in the other revenue streams have been stable or growing. So clearly, a lot of that impact that you see on that gross profit margin chart would be arising from new vehicle margins. Where is that relative? I mean it is a blended business and we do earn our revenues from lots of different sources, equally we did back in 2016, 2017 as well. So I'm not going to break down individual margins. But as a general rule there, you can see the very high peaks on Page 16 that we experienced back in H2 FY '22, where we're in an environment of very little discounting, full recommended retail pricing and 0 supply. That is about as good as it gets. The position in COVID was down as low as about 16%. So there is still a significant gap between the current performance and the low point, if I could call it that. And I don't believe we're going to go there. But yes, Victor, I don't know if you have anything else to add on new vehicle margins. But we're not...

I was going to say the relatively same thing, Mark. We don't expect to go back to the pre-COVID levels because of the circumstances that I cited.

And then I guess in relation to the cost recovery and pricing, how do you -- it sounds like you're having good -- making good strides there. But how do you think the broader market is behaving right now and how rational is the pricing environment?

As to cost recovery measures, I mean, clearly, one of our biggest expenses we have in our P&L is labor. And labor cost naturally has gone up. We employ a vast majority of our people under award arrangements, and those award arrangements have increased. We set those at the 1st of July, and they do apply for the full financial year. So we don't have step-ups during the middle of a financial trading period. Obviously, where we can, we are -- particularly in those labor-intensive environments like service, we do lift our labor rates to ensure that we can recover as best as we can those costs. And labor rates means everything from retail labor on the repair that we're doing through to warranty work, through to fleet servicing, et cetera. When I say we do our best, there are some cap price environments, though, that are set upon us by the OEMs. And so those unfortunately don't necessarily increase. So we are aware in some of that. But I think we've done a good job in that area. And from what I see, our pricing here is relative to our peers out in the marketplace and consistent with what we see. I don't know, Victor, if you got anything further you want to add to?

Yes, just in terms of how rationalize is the market, I would say that the market is rational in this area. Peers are moving prices as -- and charges as well. And customers have some level of understanding that it is an inflation environment. And of course, we're pushing up these charges in line with the costs, but we're not over pushing them.

Yes. And of course, it's a highly competitive environment. You can service your car with us, you can service car down the road. People will work out what labor rates are and shop accordingly. So we've got to stay within the competitive set. And again, we're not here to try and gouge anybody. We really want to -- if we've got an increase, we're looking to pass some of that on as part of our recovery measures.

Yes, of course. Yeah. Well, that's helpful. And then just in relation to the new acquisitions, so like we understand you've invested a lot in technology that's helped you integrate businesses quite quickly. Can you just give us an update on how the integration of the car dealership is going and how the tech is helping with that?

It's not going yet. It's due to complete shortly and will happen inside the next 4 to 5 weeks. But we are quite excited around that opportunity. So to give you an example, we're talking about full digital technology plays now. So when a customer rolls into a service lane way, they met with an iPad, not a piece of paper. We are able to get them to check in like you would in an airline before they arrive. They can add comments. They can book a service on their own car. They can ask for a lift down to the local shops. And then as we go through the service process -- we're applying that digital thinking right the way through. So if we noticed if the brake pads are worn, there's a technician taking a video, "Here's what a full brake pad looks like. Here's yours." The micrometer is next it, so you can see the genuine evidence. And it's signed on screen and replied directly to us. So we are reducing the amount of interaction we are physically having with consumers and moving that to a technology-based solution. And on top of that then, you get all the follow-up and pieces that resonate post event if the consumer doesn't take that up. So we are excited about introducing that into each acquisition that we do, and we've done that successfully with the Toyota and Volkswagen acquisitions in July. And we will look forward to that integration once we get to the finish line on settlement with MacArthur.

[Operator Instructions] The next question comes from Kieran Harris with E&P.

Just on [ previous questions ] that has been asked. Could you just comment on new vehicle inventories? It seems like it [indiscernible] up again and just after sales. So any color you can provide on potential areas of oversupply expectation for the second half?

Yes. Forgive me, Kieran. I just missed the first part of that question. I heard the oversupply. There was the first part of that question which was a little hard to hear.

Apologies. I was just referring to new vehicle inventory. So just a [Technical Difficulty] slight elevated relative to sales just coming off of FY '23. Just any color you can provide on that? And then expectation for the second half.

Yes, certainly can. I think I mentioned earlier, perhaps in John's question, it has been patchy. It's not been consistent. We've got a vast array of brands that we play in across a very diverse mix of segments. Some brands have been able to secure, for example, production slots on one particular model because there could be 800 backorders on this vehicle. So they've gone and made 1,500. The 800 come in, the orders are fulfilled, and suddenly, there's 700 almost identical models in the marketplace all at the same time. And with relatively high interest rates, dealers are looking to move those on as the retailers would. There are certainly pockets of that, and that has led to increasing inventory and some pressure on margins. In contrast -- smack right next door is another brand where we can't get vehicles in. Everything is on an order bank. I've got nothing in the showroom to show people, bar a few demonstrators. And we're waiting 5 to 6 months. So how do I see that playing out? I think those that have brought a lot of stock in have probably realized that they've overcooked it and are slowing down some of that production in order to get through the inventory on ground at the moment. And you've seen from our elevated inventory levels, we're subject to that obviously. Others continue to try and command production slots in a very busy factory in Japan or in Europe when little or all of Australia is trying to compete on a global scale. And so I suspect that those have bought some in will taper off, and those that are still struggling to supply will lift up. My sense is that this current dynamic will carry on for some time. And certainly, I expect that the current inventory levels to be there or thereabouts through to the end of the financial year, remembering, of course, we've got an acquisition coming, so our inventory will certainly increase from our current position. Our job, though, is to make sure we're managing pipeline and getting allocations right where we can, trying to readdress the pipeline to a certain customer set. Where we've got 4 or 5 dealerships, can we share inventory where possible to fulfill orders where in other places it might be stocked? That's the benefit of scale for us. But I suspect that climate we're in at the moment in terms of inventory supply will continue at least for the next 6 months, Kieran.

The next question comes from Sarah Mann with MA Moelis Australia.

Just a couple of follow-up questions. So just interested if you could provide some color on, I guess, either the PBT contribution from the Warwick Farm and Bathurst acquisition? Or at least just some kind of comparable number back to what was provided in the independent expert report, where it looks like in F '23, you guys did $8 million to $9 million of EBIT for the full year period?

Yes. Sure. So that's correct. That is what we put in the -- was included in the independent expert report that came out. And I think our headline would be that we are over-performing in that business. We're very pleased. It's been a very good buy for us. I won't come back and quote an actual hard PBT for the first 6 months on that business. But on Page 5 of our presentation, you can see that we quote $8 million of EBITDA. So you can -- just to get some order of magnitude, you can probably deduct a little bit off of that for pro forma interest and other things and get down to a PBT out of that $8 million.

So you did almost close to a full year's earnings in the half year?

That's an EBITDA number, not a PBT number.

Yes. So PBT, I think, in the independent expert report was getting on for $9.0 million. EBITDA for 6 months is $8.0 million. But you would have to deduct off of that interest amortization, which includes AASB 16 amortization. And so it has not -- it's not doubled, no. But it's up in terms of percentage points, yes.

Got it. Okay. And then in terms of the acquisition environment, clearly, you've -- likely you've got balance sheet capacity and that you've always wanted to acquire. Can you talk a little bit about, I guess, the level of activity that you're seeing at the moment? And what kind of vendor expectations have been or how they're moving given that the GP margins, et cetera, are coming off and it's becoming a bit of a tougher environment?

Yes. Yes, I certainly can. Certainly, relative to the couple of years, the environment out there is buoyant. There are significantly more opportunities arising in the last few months than we would have seen, say, in the same few months 2 years ago, I think that's probably quite natural, though, given the COVID example there. So perhaps that period is not the best comparative. But there is plenty out there to consider. And we are presented with opportunities as well as the ones that we're pursuing on a regular basis. In terms of expectations, certainly, they've come back. I think the last time we would have spoken, Sarah, I probably would have made the comment that expectations are still quite high, and there was a considerable gap between vendor and purchaser. My view now is that those expectations have certainly reduced, and we find ourselves in a situation here where we're even able to apply our own financial consideration set over others. So for example, our return on sales, if that's the measure you want to use, is not where it was during COVID. And so if that's come backwards 25%, we can very easily demonstrate to a vendor that -- we're naturally expecting theirs to have done the same in the current climate. And certain expectation for the future. So certainly, are the questions around, "Will you pay me 8x my 2021 profits? The answer to that is, no, those conversations aren't happening any longer. It very quickly gets into it, "Let's talk about sustainability." And of course, we can use ours and other public data to demonstrate that the days of 5% internal sales are not with us in the current climate.

Got it. Okay. So in theory, the pace should be able to kind of speed up a little bit given that the increased volume and price expectations are a bit more reasonable?

Yes. We're always going to call out that we're going to be very disciplined around things that we buy. And I think the latest announcement on Macarthur is a good example of that. It is in our sweet spot. It's an area we know there are synergies available to us given its geographic proximity. Yes, that's a perfect example of ticking 9 out of 10 boxes. And the one that isn't ticked, for example, we can overlay ourselves. Not all acquisitions are going to have that sort of profile. And so we'll continue to be very disciplined around that. But yes, there is plenty of opportunity for us and plenty to choose from in the current climate. We just want to make sure we keep delivering on the good ones and keep demonstrating that we can outperform once we have acquired.

Sure. Okay. Cool. Last question from me, just back on the new vehicle emission standards. So if it does come in 1 Jan, '25 -- like, clearly, they're trying to push a lot more EVs into the market. It sounds like you've done the work on the CapEx side of things from your dealership perspective to be able to service that. But just interested in terms of like what you're doing to try and transition your workforce as well. So they have the capability to service EVs in that pretty quick time frame?

Yes, gladly. I genuinely think we have been leading the way here. I mean we called this EV transition out 3 years ago during COVID when we had a little bit less throughput and a little bit more time on our hands. And for example, at that point, every single person that finished in an apprenticeship inside our business was offered the electrical -- auto electrical equivalent to learn more on that side. So this has been a long journey for us, that those people have now come out of that journey and now double qualified in apprenticeships in both the mechanical and the auto electrical side. We continue to invest in the infrastructure on our business. We've carried out audits of our capacity management to enable us to be able to have 20 charges. It's even possible we can pull that sort of power down from the grid. We've replaced distribution boards and boxes, et cetera, to enable us to do that to be ready. And in a lot of environments, we've got the charging infrastructure on-site and we're ready to go. And we've got the teams equipped and trained. And really thoughtful what we see is a still significant increase in the number of electric vehicles. So yes. In answering your question, we are well prepared, well versed. And with 71 current models available, we feel like we're in a really good position to ensure that consumers don't get 1 or 2 choices out there, which has been the pattern for the last couple of years, but they get 70 choices. And we can offer an opportunity at all budgets across lots of different segments and lots of different brands.

There are no further questions at this time. I will now hand the call back over to Mr. Weaver for any closing remarks.

Thank you, Asher, and again, to everyone, thanks for taking the time to join us this morning. I hope you enjoyed our presentation and we certainly appreciate your continued support. Enjoy the rest of the day. Thank you.