Edited Transcript of AMA.AX earnings conference call or presentation 24-Feb-21 12:01am GMT

Half Year 2021 AMA Group Ltd Earnings Call Sydney, New South Wales Feb 24, 2021 (Thomson StreetEvents) — Edited Transcript of AMA Group Ltd earnings conference call or presentation Wednesday, February 24, 2021 at 12:01:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Carl S. Bizon AMA Group Limited – CEO & Executive Director * Steven Becker AMA Group Limited – Group CFO ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Ladies and gentlemen, thank you for standing by, and welcome to the AMA Group 2021 Half Year Results Presentation. (Operator Instructions) I would now like to hand the conference over to Mr. Carl Bizon, Group CEO. Please go ahead. ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [2] ——————————————————————————– Good morning, everyone. Thank you for joining the webinar this morning, my first as CEO of the AMA Group. My transition to CEO has been smooth, benefiting from my prior role as a nonexecutive director of the company for the past year. I have had my feet under the desk in this role for approximately 3 weeks, and during that time, I have undertaken an induction into the detailed operations of the company and its performance, the priorities and challenges of each of the businesses for both the near and longer term. Over the next few months, my focus for the businesses will be improving overall operating performance, driving longer-term growth and performance strategies for the business for beyond financial year ’21. You all will have access to our investor presentation which was uploaded onto the ASX platform this morning. If you could turn to Slide 6, I’ll provide a broad overview of the activities and performance of the half year and the activities and outlook for FY ’21 and beyond, and then Steve Becker will take you through the financial results of the business. Considering ongoing and intermittent lockdowns in key metropolitan areas, the first half of FY ’21 delivered solid results in line with our expectation. Total group revenue of $434.2 million and normalized EBITDA of $46 million was positively impacted by the full 6 months’ earnings of acquisitions, notably the Capital SMART and ACM Parts businesses, which completed in October 2019. We are pleased to have delevered by $76 million while at the same time funding acquisitions and earnouts of $6.5 million. The group remains cash flow positive and, as at 31st of December 2020, had net debt of $151.1 million. The strategic divestment of the ACAD businesses on 31 December 2020, for gross proceeds of $70 million importantly enables the group to focus investment on the main panel repair businesses and associated parts supply, the core skill and capability of the group. Due to the continuing uncertainties brought about by COVID-19 and ongoing lockdowns imposed by government, prudently, the Board has decided not to declare a dividend for the first half. The Board intends to revisit the potential to declare a dividend for the full year once those results are finalized. The business has received $30.7 million in the half from JobKeeper, which allowed us to support and retain our employees during the peak of the pandemic. This placed the business in a best position to retain key skills, reopen and restart as quickly as possible following the lifting of restrictions and the resumption of normal trading volumes. COVID-19 impacted the volume of vehicles through our network and with our Vehicle Panel Repair businesses seeing a 27% year-on-year decline. Individual states were impacted at different levels as state governments enacted various responses to the pandemic. Most notable was Victoria, where we experienced a 48% decline in repair volume over the prior year comparison period. Turning to Slide 8. Following the acquisition of the Capital SMART business in October 2019, a notable highlight for the half year is the transition to BASF paint supply in the Capital SMART network. Barring 2 sites in New Zealand which have not transitioned due to travel restrictions, the transition is now complete and fully operational. The business has also transitioned to our AMA program of direct-sourced consumables. And subject to volume returning to pre-COVID-19 levels, the $17 million of planned synergies based on a normal annual full run rate is on target to be achieved by financial year ’21. During the reporting period, the group completed 2 acquisitions, the first being the acquisition of Western Trucks, which is AMA’s eighth heavy motor vehicle operation, a key growth area for AMA. This addition to our portfolio increases our heavy motor vehicle footprint and service capability in the Victorian market. In October 2020, the group acquired Perth Parts Solutions (sic) [Perth Brake Parts], an auto parts recycling operation in Perth. This acquisition expands AMA’s geographic reach for the supply of recycled auto parts. I will now hand you over to Steve to take you through the key financial information. Steve? ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [3] ——————————————————————————– Thanks, Carl, and good morning. The financial results of the group at the half are set out on Slides 10 to 19 in the presentation. On Slide 10, you’ll see normalized EBITDAI for the half came in at $46 million. As Carl mentioned, this result includes a full 6 months of Capital SMART and ACM Parts. Normalizations for the period were $9.4 million, and these relate solely to the termination costs associated with changing Capital SMART’s paint supply to BASF. There were no other normalization for the period. Slide 12 sets out the group’s summary financial position. This remains strong, noting that it has been impacted by the divestment of ACAD at December and the paydown of debt. On Slide 13, you’ll note that the group’s net debt position, excluding any deferred contingent consideration, was $151 million. This is a reduction of approximately $76 million over the half. This reduction was funded by a combination of operating cash flow and proceeds from the sale of ACAD. Our liquidity remains strong, and importantly, we’ve met all of our banking covenants. Cash flow for the group is set out on Slide 14. Obviously, the cash flow and final cash position of the group has been impacted by the sale of ACAD and also the repayment of debt facilities. However, operating cash flow and cash conversion for the half was strong. In the prior year, the group adopted the new accounting standard for leases, AASB 16. Although this standard doesn’t have any cash impact, it impacts the statutory results, and Slide 15 sets out a reconciliation and the impacts of these. I’ll now hand back to Carl to take you through the divisional results and the strategy and outlook for the group. Carl? ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [4] ——————————————————————————– Thanks, Steve. For performance of the divisions, I’ll refer you to Slides 16 through 19. Despite COVID-19 impacting vehicle volume through the period, the Vehicle Panel Repairs division delivered revenue of $405.7 million, benefiting from the full 6-month operation of Capital SMART and 9 other sites acquired during the period. As referred to earlier, heavy motor is a strong performer for our business, delivering 15% EBITDA in the period. Other key areas of note for the division is the transition of AMA’s paint and consumables supply into the Capital SMART businesses. Revised terms from our insurer customers to offset the operational and financial impacts of COVID-19 contributed to supporting our profitability in the period. Management remains live to ongoing cost increases experienced in our industry and continues to engage with our insurer customers to ensure vehicle repair revenue received from our customers are reflective of any industry changes. The result on Slide 19 reflects the continuing operations of the automotive parts and services division. The division delivered a positive EBITDA of $1.5 million for the period. (inaudible) reported revenue to the full 6 months trading from the ACM Parts business acquired in October 2019. ACM Parts also pleasingly reported a profit for the period. A key focus for the business in the second half of FY ’21 is to explore synergies between the remaining APAS businesses and increased revenue opportunities with the panel repair divisions. Now turning to Slide 21. My immediate focus for the group is to drive organic growth, acquisition growth, margin expansion and operational excellence (inaudible) volume through our network, increased revenue and improving operating margins. The business sees enormous opportunity in selling its extensive service offering from the SMART low-severity model and capability to Heavy Hit high-severity capability with broad geographical reach and a one-stop-shop solution for all types of vehicles through our broad base of customers. The group has been successful in expanding into strategically targeted greenfield sites to further increase our market penetration. Our auto parts and recycle business has increased opportunity to service the entire panel repair industry in a market that is currently experiencing supply constraints. Australia’s vehicle repair marketplace is estimated to be a $7 billion industry. Our live, near-term pipeline of opportunities approximates $100 million in revenue, and we are committed to further — we are committed to pursuing further market consolidation. With a targeted focus on the capabilities and revenue drivers in our business, we aim to add both SMART and panel locations to our already sizable portfolio. In addition, we see further opportunity in independently owned panel businesses impacted by COVID-19 and the increasing challenges of advanced technology and vehicle complexity. As referred to earlier this morning, AMA views heavy motor vehicle capability as a growth area. And in line with our growth strategy, in February 2020, we acquired the group’s ninth heavy motor vehicle operation and our third in New South Wales. This acquisition is based in Newcastle and services the Hunter Valley, Central Coast and Sydney markets. AMA is a significant group now comprising around 180 sites and 3,700 employees, and as such, the group will continue to capitalize on scale benefits afforded by the size of the broader group. We are focused on reducing costs and expanding margins via operational excellence. During the year, the business adjusted to the trading environment we faced and implemented operational and cost management efficiencies to offset the impact of the pandemic. The focus is to expand and improve on these efficiencies and manage cost to achieve sustainable margin improvement. The group has identified a number of initiatives, including optimizing capacity and labor utilization, realizing synergies, reducing overheads and driving branch performance through people development, benchmarking and implementing best practices aimed at achieving operational excellence. To ensure our acquisitions deliver the desired return on investment, the business will ensure new businesses are seamlessly integrated into the AMA network and monitor operational and revenue outcomes against our investment expectations. We will continue to monitor our site operations to ensure optimal capacity and efficiency is achieved throughout the group. Our workforce compromises (sic) [comprises] of highly skilled professionals and operating technicians who drive our performance outcomes. AMA is committed to ongoing investment in our employees to develop, retain and attract key industry skills. We are investing in programs to develop our apprentice base, a strategy that is integral to the future of our business and developing the workforce of the future. My background in fixed operations and large corporate businesses will see the transition of the business from an entrepreneurial and big-picture-leadership style to one of strategy, operations and outcomes. My background also includes a focus on governance and cultural transformation. So there will be an increased attention to further development of appropriate policies, systems, processes, controls and risk management expected of an ASX 300 public company. Now turning to Slide 25. As I view the shorter-term outlook, the business continues to manage the challenges faced by the reality of ongoing COVID-19 outbreaks. The impact on the operational environment, reduced traffic volume and changing traffic patterns, stay-at-home or work-from-home mandates all have an impact on vehicle repair volume. Our businesses are designed for high vehicle volume throughput, which subsequently drives optimal efficiency. Ongoing restrictions affect kilometers traveled and our ability to realize these scale efficiencies. The increase in advanced driver assistance systems in new vehicles reduces the number and extent of vehicle collisions. Repair costs for modern vehicles with advanced technology is also increasing. To ensure AMA maintains appropriate profitability, management will focus on adjusting our insurer-customer agreements to ensure the average repair price from our insurers provides for these increasing repair costs whilst we simultaneously position the business to repair these systems cost-effectively. Variable trading conditions as a result of COVID-19-induced travel and border restrictions impacted our performance in December and January. The business, however, remains resilient to these challenges and continues to benefit from increased traffic volume as a result of reluctance to use public transport, a condition we expect to increase as employees return to work. The rollout of the COVID-19 vaccine will speed up the return to normal life as we knew it. Our international border is expected to remain closed for the foreseeable future. And with an inability and subsequent reluctance to travel by air, more Australians are taking domestic driving holidays, increasing kilometers traveled. The forecast weather conditions from La Niña weather conditions have historically resulted in increased repair volumes for the business. As a market leader in the vehicle panel repair and associated automotive parts industry, the business is well positioned to capitalize on acquisition opportunities, including those presented by independent panel businesses affected by the trading impacts of COVID-19, increasing the opportunity for further industry rationalization. In closing, I take this opportunity to thank management and all our employees for their ongoing dedication and commitment to our business and adapting and responding to the ongoing challenges that COVID-19 has delivered and to ensure quality service to our customers is maintained. ================================================================================ Questions and Answers ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [1] ——————————————————————————– Thanks, Carl. We might turn to questions now. (Operator Instructions) I might kick off and I’ll read some of the questions that have been put to the group and answer them. One question was around government subsidies by [Alexander McLean] asking what portion of the $30.7 million of JobKeeper subsidy was paid to our workers. The simple answer to that is 100% of it. Our employee entitlement expense was about $170 million and all of the JobKeeper went to that. I also should add that we also used the JobKeeper subsidy to subsidize things like 457 visa holders, which we have approximately 300 of, which weren’t eligible for any funding under the JobKeeper. Another question was around how many apprentices do we have. And are we eligible for any government subsidies on apprentice booster? We have approximately just under 300 or 200 — just under 280 apprentices on our books at the moment. And obviously, we look to benefit from any government schemes that we can. But apprentices are obviously a very important part of our workforce, and it’s something that we obviously look to expand and train as we go through. A question from [Samantha Street]. How many sites did we close in the last 12 months? We closed 2 sites in the last 12 months. A question I might hand to Carl from Tim Plumbe. And Carl and I are in separate places, unfortunately. So apologies for any lag in the questions here. But Tim’s asked, can you talk about traffic volumes over both the Christmas period and also January and February? How has this flowed through to the work pipeline? And how does that compare to the same time last year? Secondly, how should we be thinking about EBITDA margins in repair panel for the second half? And is there further margin expansion to think about beyond that? Carl, would you like to answer that question? ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [2] ——————————————————————————– So in the comment about traffic volume, I think we saw a reasonable return of volumes to normal life as we came through the back half of the calendar year. The snap border closures around the country certainly impacted some of those traffic volumes. I think Victoria obviously was the most heavily impacted, but we are seeing a general return to normal volumes in various states obviously impacted by Christmas holidays. With the borders being closed, we saw more domestic driving holidays. And I think anyone who tried to book a campsite or a campground over the Christmas period would have seen that there was quite a bit of domestic travel activity going on. So we did see a return obviously impacted by the snap border closures around recent outbreak. Margins, I might kind of hand back to Steve. ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [3] ——————————————————————————– Look, I think on margins — and there’s been a further question from [Alex] that also asked a question around margins for the second period and our previous stated 9% to 10%. I think as Carl has talked about, our target is still to target around that 9% to 10%. We’re still confident of getting back to those margins and more over time as volumes do continue. So I think it’s fair to say where we had good margins to December and we are still confident of maintaining those in the long term. But certainly, volumes — our business is very driven by volumes and consistent volumes. So it’s caveated by those things. Alex had also asked about January and February compared to last year and the state. I think Carl sort of covered that. Volumes certainly in January was — January was sort of still subject to some snap lockdowns, especially around Victoria. So volumes probably weren’t as high as they were in last January, to be fair. We had a good January, but this January probably wasn’t as solid as that. But we are seeing things improve, again the caveat being COVID and just what that has done to people’s travel patterns both positively and negatively. There’s a question on — a question from [Glenn Morris]. It says in relation to amounts being sought from Mr. Hopkins, any details on the formal process to recover the amounts? Is further legal action planned? I might throw it to Carl on this one. ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [4] ——————————————————————————– Thanks for the question, [Glenn]. The company is taking appropriate action to recover funds that we believe the company is owed. And I don’t really want to go into further details on that. Obviously, as that matter unfolds, we’ll provide an update as and when appropriate. But rest assured that we are doing everything that you would expect the company to be doing given the circumstances. ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [5] ——————————————————————————– A question for Carl from [Joshua Tan]. So his question to Carl on margins, glad to see your focus on operations, how much do you think margins can theoretically go up by if you do realize all efficiencies you’re aiming for? ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [6] ——————————————————————————– Thanks for the question, Josh. I think as I get my feet further under the table and spend more time around the network, I’ll be able to crystallize a view on that. I think everybody kind of looks at the Boyd Group as a bit of a guide in terms of what might be possible. I would like to see us improve our margins. Whether we can ultimately get to the sort of margins that Boyd have produced in the U.S. market, I think would — is yet to be determined. But one thing I can guarantee you is the quest for margin expansion never ends. So whatever is available at whatever time frame, we will be going after. It is a never-ending search for margin expansion and to retain as much of that in the company as possible whilst pragmatically gain sharing those with insurers if they’re part of those gains. So I guess I’ll provide more detail of that over time. And hopefully, you’ll see it in our numbers. ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [7] ——————————————————————————– A question from Warren Jeffries. Carl, I might get you to cover this one, too. With regard to Page 7 of the presentation and volume declines, how are those volumes now state by state and the current level of decline versus pre-COVID? I know you’ve covered some of that before, but did you want to add any more on that one? ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [8] ——————————————————————————– No, Warren. I don’t think I’ve got any more to add on that at this point in time. ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [9] ——————————————————————————– I think that’s our last question. So I might just hand back. Given there’s no other questions, I might just hand back to Carl for any closing comments. Thank you from my side. ——————————————————————————– Carl S. Bizon, AMA Group Limited – CEO & Executive Director [10] ——————————————————————————– Thank you to everybody for joining the call this morning. I look forward to meeting some of you in person as we go through our investor presentation. And again, thanks for joining. ——————————————————————————– Steven Becker, AMA Group Limited – Group CFO [11] ——————————————————————————– Thanks, everyone. We’ll close the call now. ——————————————————————————– Operator [12] ——————————————————————————– Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may now disconnect.