Edited Transcript of APE.AX earnings conference call or presentation 26-Feb-20 10:30pm GMT

FORTITUDE VALLEY , QLD Mar 23, 2020 (Thomson StreetEvents) — Edited Transcript of AP Eagers Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 10:30:00pm GMT

A.P. Eagers Limited – CEO, MD & Executive Director

A.P. Eagers Limited – Director & CFO

* Russell J. Gill

JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand

Thank you for standing by. And welcome to the A.P. Eagers Full Year 2019 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Martin Ward, CEO. Please go ahead.

Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [2]

Thank you for joining us to discuss A.P. Eagers’ results for the year ended 31st December 2019. With me today, I have Sophie Moore, our Chief Financial Officer. We have lodged our results pack, including the slides for the presentation with the ASX, which will be visible via the webcast for this briefing. Sophie and I will provide an overview of the result and then open up the line for questions.

Financial highlights in the context of A.P. Eagers’ 107-year history. 2019 was a transformational year for the company. The numbers we are presenting today are the first following our acquisition of AHG. I would like to remind everybody that we only crossed 90% ownership of AHG on September 16 and 100% ownership on October 24. Whilst the statutory financial outcomes for the full year paint a complex picture, reflecting one-off transaction costs, restructuring activities and the accounting treatment of our all-scrip takeover of Automotive Holdings Group, the overall financial health of the business remains strong.

Today’s result includes a $244.9 million noncash impairment to goodwill and assets from continuing operations, the result of acquisition accounting. AHG’s share price on the date of our original offer in April was $1.78 per share and has increased to $3.09 per share on the acquisition date. This resulted in a significant uplift in the value of the offer for accounting purposes. Specifically, on paper, the offer value was $245.6 million above our initial value. It’s this accounting anomaly that you see corrected by the impairment today, unfortunately impacting our statutory numbers. This is truly a noncash item as the all-scrip offer meant no cash ever changed hands. The results include the consolidation of AHG from the 19th of August 2019, the date at which the group’s ownership interest in AHG exceeded 50%. APE has achieved 100%, as I said, on the 24th of October.

On an annualized basis, consolidated revenue from continuing operations, i.e., without Refrigerated Logistics, is $9.2 billion, demonstrating our scale postacquisition.

Focusing on the underlying numbers. The group delivered a resilient performance in the face of challenging market conditions to record underlying operating profit before tax of $100.4 million and net cash flow from operations of $170.8 million. The Board has announced a fully franked final dividend of $0.225 per share, reflecting their confidence in the strategic direction of the combined business.

Strategic highlights. Moving on to strategic highlights where the major milestone was obviously the completion of the merger of AHG. The merger was established — sorry, the merger has established a clear leader in automotive retailing. It materially enhances our scale across a national footprint, providing stronger foundations to navigate through a period of unprecedented cyclical and structural changes.

As part of securing regulatory approvals for the AHG acquisition, we divested the Klosters business in the Newcastle and Hunter Valley region. We also acquired Adelaide BMW & MINI franchise at an attractive price and divested 2 operations, consistent with our active approach to managing our dealership footprint. We also continued to unlock value through our property portfolio, completing the sale and leaseback of several properties in Newstead as part of our strategy to transition to the Auto Mall in Brisbane. Furthermore, we acquired a key strategic site in Albion that will host a multi-branded service center, forming part of our omnichannel approach to automotive retail, which I’ll update you on shortly.

Both our parts and service businesses remain strong, demonstrating resilience in difficult conditions, and we’re also encouraged by the improvement in profitability across our used car business. That’s a quick snapshot of the financial and strategic highlights for A.P. Eagers this year. I’ll return to some of them in more detail later.

But in terms of the agenda for the remainder of the presentation on Slide 4, I propose to first discuss with you the current external conditions because they are both structural and cyclical — because there are both structural and cyclical dynamics at play that I believe are important not only in the way that you view our result but also in the context of the merger we’ve undertaken and The Next100 strategy we’re pursuing. I’ll then hand over to Sophie to provide a more detailed financial review, covering the consolidated financial performance of MergeCo, A.P. Eagers’ stand-alone financial performance for full year ’19 and AHG’s performance for the 4 months to the 31st December 2019. I will then take you through our strategic priorities and progress, integrating AHG before discussing our outlook. I promise to allow enough time for questions at the end.

So turning to Slide 6 and 7. The external headwinds facing the industry are well documented with consumer confidence and low wage growth contributing to 12 months of declining new vehicle sales. According to the Federal Chamber of Automotive Industry statistics, Australia’s new motor vehicle sales decreased by 7.8% in 2019 as compared to 2018. But as all of you or most of you know, at the end of January, this represented 22 consecutive declining months. Whilst cyclical, the sustained period of declined new vehicle sales is providing a catalyst for major structural change in the automotive retail industry. We will see a further rationalization of dealership locations, consolidation of ownership and the faster adoption of nontraditional methods of auto retailing. The global auto manufacturers are not standing still. They are investing in alternative fuels and recognize that the physical retail network cost base must be reduced.

Ultimately, A.P. Eagers stands to benefit from all of this industry change. By being responsive to accelerating industry transition and adapting faster to a retail model fit for the future, where there are fewer traditional dealerships and yet more touch points with the consumer online, in shopping centers and in service hubs, we can extend and grow our leadership position.

Regarding the announcement on Holden exiting Australia. You can see the news of Holden’s departure from the Australian market caught many by surprise. But whilst this news is sad in the context of a long brand affiliation between our 2 businesses, it was not unexpected given the pressure and pace of industry change. General Motors has indicated that it intends to outline proposed transition and compensation arrangements with each dealer on a confidential basis and that these arrangements will be fair. Regardless of negative press around compensation, we’re expecting General Motors to be fair and reasonable in relation to the transition and compensation arrangements. We’re confident that those arrangements will recognize our partnership has spanned 90 years and acknowledge the current commitments we have in place to represent them.

The operating performance and the share of the new vehicle market. Turning to the operating performance and our share of the national new vehicle market, which includes both cars and trucks. As I mentioned earlier, the national new vehicle market declined by 7.8%. That’s 90,000 fewer new cars that were sold in 2019. These challenging market conditions were experienced right across the Australian industry, with every state recording a decline on the previous corresponding period. However, as a combined business, MergeCo had 11.2% share of the national vehicle market, a clear leadership position.

And importantly, as you can see on Slide 11, there is significant opportunity to grow our market share across Australia, particularly in the largest new vehicle markets of New South Wales and Victoria, where we now have a strong presence due to the complementary geographical footprints of AHG and A.P. Eagers.

On that note, I will now pass you to Sophie to take you through the financials in more detail.

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [3]

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Thank you, Martin, and good morning, everyone. For the purposes of the call and our investor presentation, the analysis it’s focused is on an underlying operating profit from our continuing operations in revenue and profit, adjusted for significant items and discontinued operations. Discontinued operations are primarily the Kloster Motor Group divested on the 31st of October 2019 and Refrigerated Logistics. Martin has been through the highlights and some of the complicating factors behind the statutory result. So let me call out a couple of points on the MergeCo top line and our statutory bottom line. The result includes a 4-month contribution from AHG.

Revenue from continuing operations increased by 48.5% to $5.5 billion primarily driven by AHG’s contribution of $1.9 billion. Excluding AHG and on a like-for-like basis, total A.P. Eagers’ stand-alone revenues from continued operations decreased by 2.9% compared to the prior year, outperforming the national market. On a statutory basis, including discontinued operations, the company recorded a net loss before tax of $108.1 million for 2019 compared to a net profit before tax of $128.4 million in 2018. The statutory result was impacted by significant items totaling $163.7 million before tax. These are predominantly noncash impairment of assets, merger and acquisition costs, gains on the sale of assets and the impact of the new lease standard. The statutory net loss after tax, including discontinued operations for 2019, was $129.1 million as compared to a profit of $97.5 million in 2018.

If we now just focus on both the A.P. Eagers and AHG contribution to the result. Underlying operating profit before tax from continuing operations decreased by 3% to $100.4 million in 2019 compared to $103.5 million in the prior year. AHG contributed $17.6 million for the 4 months. Excluding AHG, profit before tax from continued operations decreased by $20.7 million compared to the prior period. The underlying performance was impacted by declining new vehicle volumes, margin compression, but this was partially mitigated by cost reduction, strong parts and service performance and the improved profit from used cars. AHG’s underlying performance was likewise impacted by declining new vehicle volumes and margin compression and a significantly underperforming region and also used trucks underperformance.

If we now have a look at the segment breakdown, with a focus on the — again, the underlying contribution from continuing operations. In the Car Retailing segment, underlying operating profit before tax was $97.3 million (sic) [$93.7 million], excluding one-off items totaling $207.9 million (sic) [$207.8 million], an increase compared to $85.4 million in 2018. The increase is from AHG contributing $22.1 million underlying operating profit, while A.P. Eagers was down $13.8 million on a stand-alone basis. The AHG 4-month contribution does include an uplift in trading profits resulting from sustainable ongoing impact from acquisition accounting. A.P. Eagers’ stand-alone underlying operating profit from continuing business was lower across all regions except for Tasmania.

In the National Truck business, underlying operating profit before tax was $7.8 million, excluding an impairment totaling $11.6 million, reflecting softer trading conditions and a $1.3 million profit contribution from AHG, with A.P. Eagers being down $4.4 million on the prior year on a stand-alone basis.

The Property segment underlying profit before tax was $8.9 million. It excluded gains on the sale of properties totaling $14.5 million in 2019. This result is down $1.9 million on 2018, which is driven by the reduction on the internal rental income from the properties divested.

The Investment segment registered a profit before tax of $139.6 million for 2019 compared to a loss of $171 million for 2018, which was a movement due to an unrealized revaluation gain on the AHG investment of $145.4 million, of which $65 million impacts profit before tax with the remainder taken to reserve.

If we focus on the balance sheet. It still remains robust with a substantial property portfolio and asset base, underpinning our company’s strong financial position. Net corporate debt marginally increased to $315.8 million as at December 2019, up from $295.1 million at December ’18. A.P. Eagers repaid significant debt during 2019, whilst the increase was due to the refinancing of AHG’s debt under the A.P. Eagers’ debt facility. The new debt facility realized cost savings, benefiting from A.P. Eagers’ healthy and flexible balance sheet. The company maintained a strong cash position with net cash provided by operating activities increasing by $56.7 million to $170.8 million in the 12 months to December 2019. Our healthy balance sheet and strong cash position underpins the Board’s decision to announce a fully franked dividend of $0.225 per share, unchanged on the prior year, while ensuring we have the flexibility to invest in growth opportunities.

As Martin noted earlier, the goodwill on the acquisition of AHG, combined with A.P. Eagers’ existing goodwill, was assessed for impairment at 31 December, resulting in a $209.2 million impairment recorded against goodwill and $35.7 million against property, plant and equipment in the Car Retailing and Truck Retailing segments. The noncash impairment resulted from the technical accounting for the acquisition of AHG with a high goodwill value recorded on the acquisition date due, as Martin mentioned earlier, due to the increase in the share price from the date of the offer to the date of acquisition. A $34.8 million impairment was recorded in discontinuing operations relating to the write-down of Refrigerated Logistics to reflect the market valuation at the 31st of December 2019.

The new lease standard impact. The application of AASB 16 has resulted in significant changes to the debt and liquidity ratios driven by the first time recognition of lease liabilities and rent expense on long-term leases now being recognized as interest and depreciation charges. AHG’s relative contribution to the impact of AASB 16 on the group is significant given the relative size and tenor of their external leased portfolio — property portfolio compared to A.P. Eagers.

For continuing operations, the total impact of the new standard on 31 December 2019 consolidated financial report is a recognition of a $1.192 lease liability and $1,013 million right-of-use asset and a deferred tax asset of $54 million, with PBT reduced by $11.4 million in 2019. It’s important to note, however, that the new standard does not impact underlying shareholder value, cash flows or the company’s bank covenants.

Thanks very much for your attention. Now I’ll hand back to you, Martin.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [4]

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Thank you, Sophie. Let me take this opportunity to update you on the strategic progress and outline some of our priorities for the merged group looking forward on Slide 21. Many of you will recall this slide from when we first announced the AHG deal. Our rationale for bringing these 2 businesses together was clear. The industry is undergoing significant structural change, and the national business’ scale will be better placed to compete and invest as the market continues to rationalize. The sources of competitive advantage outlined should be even more pertinent now, having taken you through some of the major changes playing out in automotive retailing earlier on.

Specifically on the synergies. Turning to the progress on synergies on Slide 21 and remembering that we lifted our target to achieve $30 million in 12 months from our initial announced $13.5 million when we launched the bid. I’m pleased to report the group has already delivered $20.1 million in annualized pretax synergies by the end of 2019, most of those at the end of the year. Post year-end, the group has realized an additional $4.1 million to the end of February and is well on track to surpass the total $30 million synergy target, as the combined business aims to deliver a more sustainable and productive cost base.

Overall, our integration of the AHG business is progressing well. And importantly, as we continue our efforts to restructure the business, the team is aligned behind our Next100 strategy. Our Next100 strategy has been in place for some time. But it is fundamental to how the combined group is responding to meet the challenges of the evolving automotive retail landscape. During the period, the company made substantial progress in a number of key areas. Rather than going through each element today, I intend to focus on the priorities in the first 3 areas of engaging our customers everywhere, redesigning our workforce and delivering optimized vehicle finance solutions over the next few slides.

Engaging our customers everywhere and redesigning our workforce are closely linked. Put simply, they are about providing a better experience for the customer, supporting more throughput on a significantly lower cost base. The improved customer experience will be delivered through the omni-retail approach I alluded to earlier, involving fewer traditional glass box dealerships but more touch points with the consumer online, in shopping centers, destination auto precincts and in multi-branded service hubs, all located conveniently with the customer at the center.

The reduced cost base is twofold. Glass boxes are expensive and require large teams to staff them. Supported by our extensive property portfolio, which provides significant flexibility, we can transition more easily from the traditional showroom model while ensuring our workforce is aligned to the channel. We are making good progress in each area, which can be seen in our sale and leaseback of our Newstead properties as part of the transition to the Brisbane Airport Auto Mall, which is illustrated on Slide 26. Our highly anticipated move to a major new automotive retailing and mobility hub on more than 94,000 square meters is progressing well. During the period, we purchased a Toyota franchise in Albion that will ensure the market-leading brand’s inclusion in our Brisbane Airport Auto Mall. We’re in the final design stages currently and expect to provide more detail at our AGM in May.

Finally, we continue to develop a complementary network strategy to the auto mall, including dedicated inner city service and shopping center auto mall concepts in final design stages. As part of this plan, we acquired a site in Albion, which will host this multi-franchise service center.

The omni-channel retail approach is equally important in used cars, and we’re very excited by the progress in our — sorry, just got distracted, is equally important in used cars, and we are very excited by the progress in our fixed price used car business. We now have national scale through AHG’s easyauto123 business, Zooper in South Australia and our Carzoos business in Queensland covering big box, shopping centers and online. To give you a sense of the pace of growth, the last 3 months, January, December and November annualized equates to 13,256 used vehicles just through this fixed price model versus 8,340 for the 12 months to the end of June, like-for-like facilities. That’s a 59% increase. Importantly, while volumes are increasing rapidly, the financial performance is also improving, edging closer to breakeven in January 2020, as the efficiency benefits and initiatives to reduce the cost base take effect.

easyauto123 is already Australia’s largest fixed price used car retailer, and it’s growing every month.

If we refer to the United States market landscape in fixed price used cars, it paints an attractive picture versus the market-leading traditional auto retailers. And while we are still in the early stages of capturing the growth opportunity in fixed price used cars, the A.P. Eagers business is unique as it holds a market leadership position in both the traditional auto retailing space and the emerging fixed price used car model.

Now moving on to the progress and priorities in financial services. Despite consistent headwinds in the financial services space not limited to just automotive, we have made progress towards our short-term target of 50% penetration in the second half of 2019. Significant effort in installing a panel of financiers and changing showroom practices has delivered green shoots. The reward is enormous, with each 1% of new vehicle finance penetration growth representing $2.5 million in revenue across the combined group. This underscores the potential. Our financial services toolbox can deliver unique solutions across a broad range of customer segments from prime to nonconforming customers. With the tool kit now fully developed and implemented, the focus now moves fully to the showroom process with expectation progress can be accelerated. Both Taurus and Modus both launched in January 2020 with upside to follow. Based on our observation of the U.S. and the U.K. markets, we know that penetration at 80% is achievable. We accept we’re still a long way away from that.

So moving on to the outlook before I open to questions. Following the merger with AHG, A.P. Eagers has the scale and competitive advantage to withstand the challenging external conditions and benefit from the accelerating industry transition. The underlying core automotive result for January 2020 demonstrated solid profit growth on the prior corresponding period, representing a strong start for the year for the combined group, particularly in the context of a reported 12.5% decline in the national new vehicle market for the same month.

In the near term, A.P. Eagers is focused on delivering improved operational performance through ongoing integration of AHG, including realization of its targeted $30 million in synergies, $24.2 million achieved to the end of February; divestment of noncore assets to improve the statutory result; and the effective management of the exit of Holden, General Motors from the Australian market.

In the short to medium term, we are focused on driving EPS growth by prioritizing the following initiatives: scaling our fixed price used car business; increasing financial services penetration rates towards levels present in the U.S. and the U.K.; unlocking value in our property, including transitioning to the Brisbane Auto — Airport Auto Mall to support enhanced customer experience on a lower cost base; restructuring; rationalization and consolidation opportunities.

With that, I’d like to thank you for your interest. And before I open for question, the reason I pause just now was the Refrigerated Logistics announcement is now on the stock exchange. And so that is something that if you haven’t picked it up, you can pick it up at the stock exchange and read it. So I now open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Paul Buys with Crédit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division – Head of Research and Director [2]

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Martin, Sophie, the first one has just to do with Slide 14. Just looking at your — I appreciate there are a number of moving parts and moving time periods here. But for starters, just keen to get a bit of context between the $17.6 million underlying operating PBT given for AHG for September to December. And just sort of overlay that against the $4.8 million that you guys gave in the November trading update. I guess, my underlying focus here was just to try to get a sense of what the underlying AHG number might look on a full year basis as we look forward to the year ahead, cognizant to that November trading update implied a pretty sharp deterioration in the AHG business.

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [3]

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Thanks, Paul. Well, yes, that was the 4-month period to October. Obviously, we’ve got November and December trading in there, but that does represent a reasonable picture for the 4 months. If we have a look, there is some benefits that we were able to deliver in the last couple of months of the year in relation to purchase price accounting. There is some depreciation savings in there as a result of that exercise. But if you look across the full 6-month period, there’s probably the trade — underlying operating profit result was close to sort of $21 million, $22 million.

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Paul Buys, Crédit Suisse AG, Research Division – Head of Research and Director [4]

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$21 million to $22 million. So representing what period?

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [5]

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Six months, July to December.

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Paul Buys, Crédit Suisse AG, Research Division – Head of Research and Director [6]

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Six months.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [7]

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The 4-point — whatever the number was, Paul, that was identified in November was a straight number taken straight off the AHG accounting process without any A.P. Eagers’ purchase price accounting structure to merge these 2 groups into 1. And so this is now the best figure for AHG for that 4-month period. They’re different 4-month periods, as Sophie pointed out. So one was June, July, August and September, straight off of their management accounts. And now you’re looking at the true result within A.P. Eagers in that 4-month period but, as Sophie said, including some benefits from purchase price accounting. Some of their assets were overvalued, such as depreciated assets. So when those are fair valued, then they don’t have as much depreciation. And they won’t have any higher depreciation moving forward because they’ve now been fair valued assets.

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [8]

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As you can see on Slide 17, as part of that noncash goodwill impairment, we did do a net asset adjustment of $147 million after-tax.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [9]

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So external people have helped assess the true value of those assets, and that has then resulted in this improvement in that underlying trading.

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Paul Buys, Crédit Suisse AG, Research Division – Head of Research and Director [10]

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And maybe just taking kind of a sort of a high level step back then and with the benefit now, obviously, of having owned the group for some months and had full access to the financial statements. And I guess, as you look at the underlying performance, it — again, as part of sort of that trading update, it sounded like there might have been some items — some earnings in the prior period for AHG that weren’t kind of completely recurring, for want of a better way to put it. As you look at it now and the timing, and as you look at the underlying performance of the group, just keen to get kind of your view on areas that were kind of a surprise to the upside or downside with having now owned the group.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [11]

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Look, the upsides and the downsides — sorry, the upsides for us moving forward, because this is the last time that we will be separating out A.P. Eagers and AHG results because we are now one company with one group of debt. Obviously, there’s been changes made into the management structure and the operational structure of the business. So it is actually almost impossible now to actually report the 2 moving forward on a separate basis because we’ve merged them into one company because we’re one company from January 1 effectively onwards.

So the reality is I’ve got to tell you that the upside is in F&I performance, in particular, in penetration. The upside is in the used car model. If you particularly saw on that Slide 27, I’ve given you the exact dollar numbers down the bottom that those combined 4 businesses lost $950,000 in January ’19 and only lost $150,000 in January ’20. That’s an $800,000 improvement in the month. And ultimately, it’s not going to be long before that is already profitable and moving forward.

The growth in that business is exponential, as you can see, and we are driving it really hard. And we are driving it as a combined business across — so whereas easyauto in the past was a separate stand-alone business left to fend for itself, it’s now an integrated part of the entire A.P. Eagers MergeCo’s moving forward operations. And so it benefits from the car dealerships. It benefits from its own business growth that Craig Bigley has built and has done a great job doing. And also, we’re lowering the cost on some of the things I mentioned in previous things where we’re exiting some ridiculously high leases to operate on a sustainable base moving forward. So there’s a whole range of improvements in those. It is — the $17.6 million is a real number for that 4-month but only after you’ve accepted the purchase price accounting fair value of the assets that they were operating.

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Paul Buys, Crédit Suisse AG, Research Division – Head of Research and Director [12]

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And in terms of the downside, Martin? I mean, I guess what I’m trying to get at here is the underlying level of that business, what you thought it was when you launched the offer. Because it just seems versus kind of previously reported numbers that we might have assumed at the time that there were some elements that weren’t fully sustainable, but it still seems that it’s lower than the original thinking might have been. But I just want to confirm that view with you.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [13]

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Well, Paul, can I just say as well, we’ve got individual meetings with almost everybody on this call over the next 5 days. And I do need to be conscious of other people wanting questions. But look, the reality is, it is what it is. And the reality is we’re reporting what we’re going to be able to improve and what we’re going to be able to move forward. And so the 2020, as I’ve already said in the words, was better than 2019 last year. I’ve just shown you one clear evidence of where it was better, $950,000 on one area, but there were other areas where we also improved as well. Well, we can discuss it further in your meeting.

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Operator [14]

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Your next question comes from Russell Gill with JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [15]

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I’ll try and sneak in a couple of questions. Just on Slide 22, when you’re talking about your synergies and your realized — realization number, is it possible to give us a feel for what’s actually in the reported numbers? Because obviously, the run rate numbers, just what was actually realized, clearly, FY ’19 was very much back-ended. That was a couple of million bucks benefit…

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [16]

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Yes. So the $20.1 million that was taken out in calendar year 2019, produced approximately $3 million worth of actual benefit in the 2019 number and costs approximately $3 million to create.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [17]

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And when we’re rolling forward, if you’re just assuming that $30 million, you’ve already realized $20 million now. Should be pretty fair to assume that you should be able to realize $20 million at least on an actual basis if you should move in at the midpoint.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [18]

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Well, hang on a minute. Don’t — well, don’t — Russell, please don’t put words in my mouth. We have $4.1 million until the end of February. So now it’s $24.2 million. So to achieve the number that we’ve said, we need another $5.8 million before 16th of September. Are we confident in delivering that? Yes. Do we think we might deliver more? Probably.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [19]

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Sure. I’m just talking about the actual number that we booked in your actual earnings this year because it appears that it’s very much front-ended at the beginning of this year. So you should be able to at least generate an additional $20 million of NPAT this year — of PBT, sorry.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [20]

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Okay. On a like-for-like volume with no further decline in the income that comes in the front door, then that full $20.1 million would flow through to the entire year. And then I have to recognize those, and that’s based on the same income coming in the front door.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [21]

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Which will come to my next question, just the cost to generate those synergies this year. You said $3 million last year. What cost do you think you’ll park below the line this year?

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [22]

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Look, in terms of the actual synergies, which essentially is the redundancy and some advise costs, was about $3 million. Obviously, there’s a number of other significant broader transaction and integration costs which are captured in those and excluded from the underlying operating profit.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [23]

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Yes. Look, moving forward, if this only cost us $3 million to deliver the $20.1 million of savings, I wouldn’t think there’s a material cost to deliver the rest, but it’s not 0.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [24]

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Okay. Great. And then maybe then talking about your January ’20 result. You are saying it’s a declining market, but you did say it was an improved result on the PCP. You had improvement, excluding acquisition accounting and excluding synergies. So if it’s just a dealership-by-dealership basis, are you seeing profit growth? Or are you talking on a postacquisition accounting, postsynergy basis?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [25]

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Yes. Look, it’s a combined company now with everything all in the whole melting pot. And I haven’t — we’ve been pretty busy recently. I haven’t stripped out all of the answers to that question to be able to tell you precisely which bits come from which. It was a positive result relative to the previous corresponding period, and we hope that continues. So…

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [26]

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And it was a combination — it would be a combination of trading results also of just, as I’ve talked about before, resetting baseline to move forward. And that is just, for example, the reduction in depreciating assets. That’s really just business as usual now from the 1st of January.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [27]

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Sure. Okay. And then on the P&L acquisition accounting, there’s a decent uplift in your provision lines. Sophie, you’ve got a $43.8 million in other provisions to talk — talking through buyback arrangements. Is that relating to, I guess, onerous leases? Or likely can you just talk through what those uplifts in those provisions are?

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Sophie Alexandra Moore, A.P. Eagers Limited – Director & CFO [28]

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Yes. No. It’s the buyback of — AHG did have some existing truck and motor vehicle buyback arrangements in place. So it is related to those arrangements.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [29]

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Okay. And the very final question, just on Holden. And obviously, you don’t want to give too much information. Can you just give us a feel for the number of dealerships you have, any integration of PBT to the group or the number of dealerships that were profitable or not profitable? Or any sort of detail we can work with?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [30]

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Yes. Look, we made $7 million out of Holden last year out of those 19 dealerships. But I’ll also highlight that we made $11 million in the parts and service division.

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Russell J. Gill, JP Morgan Chase & Co, Research Division – Head of Emerging Companies for Australia and New Zealand [31]

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Okay. Which will be ongoing for a period of time.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [32]

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For a period of time, yes.

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Operator [33]

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(Operator Instructions) Your next question comes from Sarah Mann with Moelis.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division – Analyst [34]

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Just a question on the market. So obviously, I mean, it’s been tough for a long time now, and you kind of alluded to some of the changes that the OEMs are talking to maybe in kind of more of the medium term. Can you talk to maybe some of the short-term changes you’re starting to see, particularly around kind of the volume targets and how you kind of expect this to develop into the future?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [35]

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Big question. The reality is that most manufacturers are adapting because of the 22 months of decline, and most manufacturers are adapting because with the exception of a few of them, which are large, there are some stresses in some of their business models. So one major top 10 manufacturer that used to operate a very aggressive volume-based target receiving business model is switching very soon to a similar model, to other [methods] that have no monthly targets, so those kind of things. Look, there’s a lot of the industry that’s moving away from the supply push towards the consumer pull model, which is certainly what we’ve been emphasizing to most manufacturers is that the supply push model is really a Ponzi scheme and ultimately doesn’t really work. And a lot of the manufacturers are looking at various ways to adjust their business model to improve the economics of their model regardless of the volume.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division – Analyst [36]

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Okay. Great. So I mean, aside from, I guess, some changes in terms of their business model, like the outlook for the targets, I mean, do you think they’re reasonable in terms of the business? I know, obviously, Toyota doesn’t do it, and that’s one of your biggest brands. But for the rest of your portfolio, like do you think it’s kind of looking a bit more reasonable?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [37]

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Well, so a statistic we don’t usually quote, but I will quote it, is there was almost 0 decline in the profits of our entire Toyota portfolio last year, almost 0 compared to all the issues that we’re talking about, F&I, all the issues of volume decline, et cetera, et cetera. Therefore, that is an extremely sound business model that is adapted over the last — well, it’s constantly adapting. But in particular, over the last 3 or 4 years, they have constantly adapted their business model to be able to adjust as the market conditions adjust. So we know it can be done. There are others that have done it well, and there are others that haven’t done it well. So we are pretty confident that the business models that are appearing will move more towards a less aggressive process of trying to push out stock that shouldn’t be pushed out.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division – Analyst [38]

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Okay. Great. And then just on F&I. Obviously, you’ve got some internal initiatives that seemed to be starting to work. Like one of the things, though, that people have commented in terms of overall new vehicle sales decline was just kind of the fact that credit availability has been tightening up, like, outside from your internal initiatives. Like, do you think that’s largely in the base now? Or do you think it’s getting worse?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [39]

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Look, the — on the new car side, we’re seeing a lot of green shoots in terms of the tools and the toolboxes — or sorry, the tools that we’ve created to grow the F&I penetration on new is certainly beginning to work and certainly started to work in the second half. It’s still because there was less volume, resulting in a total lower result on finance because we’ve simply sold less cars. But the reality is the income per vehicle retail in that space went up. There is definitely still a crunch in the regulatory environment on financing used vehicles, in particular. And that is an area that has seen almost no movement in the last 12 months. We’ve still got a number of tools that we are going to be using moving forward, including some tools in our own finance company, where we’re going to start to run a campaign on used cars at a certain interest rate. But there are still stresses in that — in the consumers being accepted under the responsible lending areas. The tightening — because the financiers are scared stiff of the regulatory — regulator reviewing them in the — after the event is still tightening credit.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division – Analyst [40]

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Okay. Great. Last one for me, just on the auto mall. So you mentioned you bought a Toyota dealership. Therefore, you’ll be able to represent that at the Brisbane Auto Mall. Correct me if I’m wrong, but I thought Sci-Fleet was going to be part of that. Does that mean they’re not who are clearly (inaudible) the Toyota dealership?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [41]

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We bought that representation off of Sci-Fleet.

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Sarah Mann, Moelis Australia Securities Pty Ltd, Research Division – Analyst [42]

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Okay. So they’re not going to be in the mall at all then.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [43]

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No. We are taking all of the brands to our — effectively, it will almost be our own mall. And given that Toyota’s 20% of market, we wanted to have that business ourselves at our mall rather than have a competitor with it there.

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Operator [44]

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Your next question comes from Chenny Wang with Morgan Stanley.

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Chenny Wang, Morgan Stanley, Research Division – Equity Analyst [45]

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I just wanted to dive a little bit deeper on the F&I penetration that you guys mentioned. That 1% incremental, equating to about $2.5 million worth of revenues, is that across A.P. Eagers or across the entire A.P. Eagers and AHG combined group?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [46]

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No. That’s across both. And just to clarify, that is only in new cars. So a 1% lift in new car penetration across the combined group represents $2.5 million of revenue.

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Chenny Wang, Morgan Stanley, Research Division – Equity Analyst [47]

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Sure. And then just on that 1% penetration, is that sort of based on the calendar year ’19 volumes or…

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [48]

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It’s any 1 — it’s 1% increase from where we are today. So I’m happy to give the numbers. We’re going to give it out throughout the week. So we finished the first half of calendar year ’19 at 36% penetration in new cars. And in the second half of the year, on lower vehicles, we increased the penetration to 40%. So there was an increase that then meant that when you took the 2 together, the year was a 38% penetration on new cars. So as we keep moving forward, the early indication on AHG, they report their numbers differently. We’re still getting to grips inside AHG on the operational lines of finance and what’s being measured and how it’s being measured. But the early evidence we have across the group is that AHG is performing at around about 3% to 5% on lower penetration on both new and used cars.

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Chenny Wang, Morgan Stanley, Research Division – Equity Analyst [49]

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That’s helpful. And maybe I’ll just take a step back as well and just on sort of the competitive environment. And obviously, you guys sort of have your hands full on AHG. But given that new vehicle sales have experienced probably the longest decline, at least on our data set, have you seen, I guess, greater sell out of the tail or some of the tail falling off?

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [50]

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I don’t know what you mean by the tail. What do you mean, greater? Sorry, I don’t understand the question.

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Chenny Wang, Morgan Stanley, Research Division – Equity Analyst [51]

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Yes. So I guess, given in the tough vehicle sales environment, like have you seen, I guess, competitive intensity decrease? Or — and I guess, in addition to the additional M&A opportunities that have come across the table, where people are saying, “This is too hard, and we’re either following up, or do you guys want to take us on?”

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [52]

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So look, we could — there’s a lot of things I could buy if I wanted it, if that’s the question. The changes that we’re talking about are going to change the way that things are done. So there’s no point in me going and buying a whole bunch of traditional dealerships if they’re not part of a plan to reset the things that we’re talking about. So the example I just gave earlier on to Sarah on how we went and bought the Toyota operation in Albion, which is run by Sci-Fleet, was a strategic intention to buy that because we wanted to take it to the Brisbane Auto Mall with all the brand — all the other brands that we’re taking there. The purchase of BMW & MINI in South Australia, the only BMW & MINI operation in the entire South Australian market, was a strategic move on that business unit. I don’t want to just go and buy a standard business that just happens to be for sale, even if it’s cheap, in any geographical reason. That’s not what we’re about at the moment. We’re about the changes that we’ve talked about, the going back to The Next100 in terms of the customers and the people structure and the F&I structure. At the moment, we don’t need to spend any money to grow the current business that we own.

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Operator [53]

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There are no further questions at this time. I’ll now hand back to Mr. Ward for closing remarks.

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Martin Andrew Ward, A.P. Eagers Limited – CEO, MD & Executive Director [54]

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Okay. Look, we appreciate that the financial numbers are a bit complex, and I’m sure we’ll be able to go through them over the next 5 solid days with you all individually. But thank you very much for your time this morning. We appreciate it, and we’ll see you all over the next 5 days.

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Operator [55]

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

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