AMA Group Limited (AMA) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the AMA Group Limited FY 2021 Results Webcast. Leading the webcast today will be Carl Bizon, Chief Executive Officer; and Steve Becker, Chief Financial Officer. [Operator Instructions] And I must advise you that today's conference is being recorded. But without further ado, I'll hand the conference over to our first speaker for today, Carl Bizon. Thank you, and please go ahead, Carl.

Good morning, everyone. Thank you for joining us this morning as I present the Full Year 2021 Results for AMA Group. I have now been CEO of the group for around 6 months and have spent the time laying the foundations for the business to grow into 2022 and beyond. You all will have access to our investor presentation, which was uploaded on to the ASX platform this morning. If you could turn to Slide 6, I will provide a summary of the FY '21 results and operational highlights for the year. Steve Becker will then take you through the financial results of the business. And I will finish off with a review of the outlook for the business before we open for questions. It is fair to say that FY '21 conditions were challenging with various levels of restrictions and snap lockdowns in states across Australia, as well as in New Zealand. In particular, Victoria remained in lockdown for most of the first quarter. With prudent and proactive measures taken, the group reported revenue and other income of $919.9 million, an increase of 11% on the prior year and normalized EBITDAI of $71.5 million, an increase of 35%, largely driven by the full 12 months earnings from Capital SMART and ACM Parts acquisitions. We are pleased to have reduced net debt by 24%, leaving us with net debt of $173.3 million at year-end and nearly $60 million in undrawn facilities with all banking covenants met during the year. The strategic divestment of the ACAD businesses during the period allows us to focus on the collision repair and associated parts supply businesses, which I will discuss in more detail later in the presentation. The Board is committed to delivering shareholder value while maintaining the ability to invest in the growth of the business. As such, the Board has not declared a final FY '21 dividend. Now turning to Slide 7. Following the acquisition of the Capital SMART business in October 2019, the transition to BASF paint supply across the network was completed during the year including the 2 sites in New Zealand, which had not transitioned at the half year results. Business has also transitioned to direct sourced consumables in line with the rest of the AMA Group collision repair businesses. Subject to volume returning to pre-COVID-19 levels, the $17 million of planned synergies based on a normal volume basis is on target. During the year, the group completed 3 acquisitions. The acquisition of Western Trucks and National Trucks brings the total number of Heavy Motor businesses to 9 and increases our Heavy Motor vehicle footprint and service capability. In October 2020, the group acquired Perth Parts Solutions, an auto parts recycling operation in Perth. This acquisition expands AMA's geographic reach for the supply of recycled auto parts. We are also pleased to report that the auto parts business experienced a turnaround from a loss making to a modest EBITDAI profit, and we look forward to this business -- we look forward to this part of our business becoming a more significant part of our strategy. I would now like to draw your attention to Slide 8. We are currently working through some key metrics and how best to keep the market updated. We expect these metrics to evolve over the coming periods. However, I want to put a peg in the ground today to demonstrate our commitment to accountability and ongoing improvement. I'm sure everyone would like to know what our target numbers are, and we will update the market on this in due course as we reach normal operating cadence. You will note the top measure in the table is safety. Safety is our top priority, and we will not compromise here. Earlier in my career, I personally witnessed the effects of poor workplace safety measures, and this is an area I'm incredibly passionate about. I'm pleased to say that this is reflected across the entire leadership team, and we're aligned in ensuring that all our employees have a safe place to work. Over FY '21, the group more than halved LTIFR. This reflects new health and safety measures put in place across the business, which we expect to continue to drive improvements. You can see a significant difference in the turnaround times in Capital SMART at an average repair time of 3.6 days, the Panel Division at 9.3 days and Heavy Motor at 12.5 days. These differences highlight the reasoning behind our new structure announced in July, which I will talk about a little later in the presentation. This new structure will allow us to maximize knowledge sharing among sites with similar operating structures and improve the operating efficiencies and service delivered. The average repair days have been impacted by delays in the receipt of parts, symptomatic of the impact COVID-19 is having on the automotive parts supply. Our commitment to quality and service is clearly demonstrated here with the transparent reporting of rectification percentage and customer satisfaction. Over time, we look forward to sharing with you what good looks like and continue to develop these metrics and focusing on the service which we provide. Now referring to Slide 9. The business received $30.7 million of government weighed subsidies, which rolled off in the first quarter. These were fully paid out in wages to support our staff. This place the business in the 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 with a volume decline of 17% across the Vehicle Panel Repair businesses during the year, even in comparison to the year prior, which was also COVID affected. Individual states were impacted to differing levels as state governments enacted various responses to the pandemic. Most notable was Victoria, where we experienced a 48% decline in repair volume for the first half of the year relative to the prior year comparison period. With this background in context, I will now hand you over to Steve to take you through the financial information.

Thanks, Carl. The financial results of the group for the year are set out on Slides 11 to 16. On Slide 11, you'll see normalized EBITDAI for the year came in at $71.5 million. The increase in revenue and EBITDAI benefiting from a full 12 months of trading from Capital SMART and ACM Parts. Normalization for the period were $10.2 million. These relate predominantly to termination costs associated with changing Capital SMART's paint supply to BASF. Slide 12 sets out the statutory financial performance of the group. This shows a net loss for the year of nearly $97 million. This result was impacted by the nearly $90 million in impairment charge taken against Capital SMART and also the impact of supply and termination payments and the impacts of AASB 16. The group's summary financial position is set out on Slide 13. This remains strong, noting it's been impacted by the divestment of ACAD division in December, the pay down of debt and the impairment of Capital SMART. On Slide 14, you'll note that the group's net debt position excluding any deferred contingent vendor consideration was approximately $173 million. This was a reduction of $54 million over the year. This reduction was funded by a combination of operating cash flow, the proceeds from the sale of ACAD. And also, it should be noted that we also funded acquisition and earn-out payments during that period of approximately $18 million. Our liquidity remains strong. And importantly, we've met all our banking covenants. Carl will discuss the current impacts of COVID-19 and future funding strategies in more detail later in this presentation. The cash flow for the group is set out on Slide 15. Obviously, the overall cash flow and final cash position of the group has been impacted by the sale of ACAD and also the repayment of debt facilities. The comparative period also contained additional items such as the receipt of the market incentive payment and also related inflows and outflows associated with the acquisition of Capital SMART and ACM Parts. However, operating cash flow and cash conversion for the year was solid. In the prior year, the group also adopted the new accounting standard for leases, AASB 16. Although this standard doesn't have a cash impact, it does impact the statutory results and Slide 16 outlines these impacts. Going forward, it should be noted we only report on a post-AASB 16 basis. I'll now hand back to Carl to take you through the divisional results and the strategy and outlook for the group.

Thanks, Steve. Now please turn to Slide 18. Despite COVID-19 impacting the vehicle repair volume during the period, the vehicle repairs division delivered revenues of $855.3 million, benefiting from the full 12-month operation of Capital SMART plus the full 12 months of operations of the additional 10 sites acquired in financial year '20. Heavy Motor remains a strong performer for our business, delivering 13% of the normalized EBITDA for the -- in the period despite representing 5% of the sites by number. Management remains live to ongoing cost increases experienced in the industry and continues to engage with our insurer customers to ensure repair revenue received reflects industry changes. The result on Slide 20 reflects the continuing operations of the Automotive Parts and Services division. The increase in reported revenue is attributable to the full 12 months trading from the ACM Parts business acquired in October 2019. And pleasingly, the division delivered a positive EBITDA of $1.6 million for the period, a turnaround of $6 million. Now turning to Slide 22. My immediate focus for the group is to drive the business through 3 key dimensions of value, which I will talk to in greater detail over the coming slides. Now turning to Slide 23. I'll cover off on procurement and partnerships in a little more detail as we progress. However, we'll take a moment to run through the newly aligned production business units now. The realignment of our production business units is reflective of the substantial operating differences in each of these 3 areas and the important contribution each brings to the group. The Drive business unit includes repair sites, which handle comparatively minor damage, which can be turned around quickly in a highly efficient, streamlined manner to make sure the customer gets back on the road as quickly as possible. The Drive business includes our entire Capital SMART network and will soon include the rapid repair sites, which were previously part of AMA Panel. We are working towards the transition of these sites, and we look forward to borders opening so that we can truly begin to leverage the knowledge held across our network of rapid repair businesses. Our Non-Drive network handles cars with more significant damage, the cars that quite often arrive on site on the back of a tow truck. These require more complex bespoke repairs. And our aim is that even though the last time someone saw their car, it was a mess, we want to hand it back looking just as good as the day it was purchased. In addition, we have a number of dedicated prestige sites, which have been accredited by the OEMs to repair luxury vehicles. Our Heavy Motor business unit deals primarily with trucks and buses from small trucks all the way through to prime movers. During FY '21, AMA Group acquired 2 additional businesses, expanding the Heavy Motor network in Victoria and New South Wales. This continues to be an area of focus for the group. Now turning to Slide 24. Taking a procurement view, our Supply business offers an opportunity for margin expansion through sourcing. While we already direct sourced paint and consumables, part sourcing remains largely intermediated. Spending around $350 million on parts in a normal year, we see an opportunity to expand the benefits of strategic sourcing. While we are still in the early stages of the strategy development, we look forward to exploring this opportunity further. Now turning to Slide 25 and the production side of our business. We see enormous opportunity to grow organically, leveraging the group's unique value proposition. AMA Group has an extensive service offering from the smart low severity model through the heavy hit high severity repairs, spanning everything from family vehicles to heavy haulage. With the largest network of sites spanning Australia and New Zealand, AMA Group offers compelling capacity to our insurance partners across the full spectrum of their collision repair needs. Further, by the sheer nature of our scale, we are well placed to embrace the opportunities presented by a rapidly changing market with the continuing evolution of technology, which requires investment in training and technical tooling to deliver a comprehensive and quality repair service. The group will continue to explore opportunities for acquisition growth over the medium term across Drive, Non-Drive and Heavy Motor, as well as our Supply business unit. We are focused on reducing costs and expanding margins via operational excellence. A lot of work has already been done in this area as the business adjusted to the challenging trading environment faced given COVID-19. We will continue to expand and improve on these efficiencies and manage costs in light the challenges posed by the current COVID-19 lockdowns to achieve a sustainable margin improvement in the longer term. Now turning to Slide 26 and partnerships. The trusted relationships between AMA Group and our insurance partners is key to everything we do. Through these relationships and by delivering the entire breadth of the AMA Group offering through one economic entity, we are uniquely positioned to deliver insurance partners' best-in-class higher repair volume capability. We continue to work with our insurance partners to ensure contracting arrangements tie to work performed and key quality outcomes and to mitigate the impacts of current labor and parts availability. Turning to Slide 27 now. You will see the enhanced Board structure, noting that Leath Nicholson is not depicted here as he will be stepping off the board at the November AGM. We have engaged with his firm, Nicholson Ryan Lawyers, to retain his services as the outsourced General Counsel for the group. This appointment will allow Leath to focus his efforts on the group's legal requirements and leverage his wealth of knowledge of the business. We are currently recruiting for an additional Independent Non-Executive Director, further strengthening the breadth, independence and diversity of the Board. We are continuing to enhance our policies, systems, processes, controls and risk management. Turning to Slide 28. You can see the strengthened leadership team, which brings a blend of skills, experience and depth to facilitate the execution of the strategy. The senior executive appointments reflect the centralization of several roles, which were previously -- which previously existed within individual areas of the business and the new team is commensurate with the group's current size and future potential. The promotion of Dave Marino, Campbell Jones and Darren Wales supports our new business structure and reflects the outstanding skill and knowledge held by each of these individuals. We are continuing the search for an EGM of our Supply business, which Campbell Jones continues to manage in the meantime. Turning to Page 29 now, and the most important part of our business, our people. With approximately 3,700 staff across nearly 180 sites, we are committed to the creation of One AMA. In a practical sense, we are dedicated to ongoing investment in our employees to develop, retain and attract key industrial skills. We are investing in programs to grow our apprentice space, a strategy that is integral to the future of our business. We currently employ over 300 apprentices, further emphasizing our commitment to the workforce of the future. We expect that the reopening of international borders will alleviate some of the workforce pressures with a deeper talent pool available. Turning to Slide 30 now and our operational priorities. Through our trusted partnerships, we are focused on ensuring that we have mutually beneficial customer contracting arrangements, which reflect the current operating environment. We are also committed to pursuing margin expansion and securing access to parts through the growth of our Supply business unit. We will continue a measured approach to the exploration of complementary growth opportunities across all areas of the business and continue to monitor and embrace technical innovations within the industry. Finally and most crucial to the success of our business, we will continue our people focus and continue the ongoing effort to position AMA Group as a Great Place to Work. Turning now to Slide 31 and the outlook. We are still facing significant headwinds largely in the form of COVID-19, which continues to impact our business. These headwinds are importantly situational and not structural. Snap lockdowns and border closures mean decreased kilometers traveled and therefore, lower repair volumes in affected areas, with New South Wales down as much -- down to as much as 70% unutilized capacity in our Non-Drive business in mid-August. These decreased repair volumes affect both site productivity and our ability to absorb fixed overheads. If you turn to Slide 32, you will see that we are actively managing sites experiencing lower volumes. By hibernating or partially standing down impacted sites, we maximize the operational efficiencies at sites which remain open by aggregating repair volumes. Of course, we have a continued focus on both efficiency and cost management across the group. Our insurer partners are supportive of the business and are working with us to adjust revenue structures to reflect the current circumstances. At mid-August, we had a total of 190 staff temporarily stood down, and we continue to support these staff to maximize retention to ensure we can return to normal operations quickly. While things are tough right now, we have seen this before in the depths of the early waves of COVID-19 experienced in 2020. We know that repair volumes return rapidly as restrictions lift, and the group has demonstrated its ability to respond as repair volumes return. Now turning to Slide 33. In 2020, all our hopes were pinned on a vaccine being developed. In 2021, the vaccines are a reality, not a hope, and we have seen overseas that high vaccination rates substantially increased mobility. So we expect the vaccine rollout to hasten the return to normal life. This natural uplift in mobility is expected to be supported by increased demand for domestic driving holidays while international borders remain closed. AMA Group is uniquely positioned to respond to increased repair volumes as life returns to normal. Now turning to Slide 34 and our capital structure. During FY 2021, we proactively managed our capital structure to reduce leverage and focus on operating performance. We have continued cost and cash management initiatives into FY '22. We are currently undertaking a capital structure review to manage the short-term disruptions associated with COVID-19 as well as to best position the company for growth. We may undertake capital markets initiatives in order to enhance balance sheet flexibility, diversify funding sources and extend duration. Our banking syndicate remains supportive, and we have agreed to covenant waivers through to 31 December 2021. I would like to take this opportunity to thank management and all our employees for their ongoing dedication and commitment to our business. I would like to recognize the challenges everyone continues to face on a personal level during this time as we continue to experience snap lockdowns and border closures. I hope that everyone stays safe and well. I will now address questions and please note that you may submit your questions through the webcast facility.

Thanks, Carl. I might just cover off a couple of questions that have been raised. We might group these because they're coming through and some of them are similar. We had one from James Ferrier, just around clarifying panel volumes and making a comment that's saying that some of the insurers have indicated that claim frequency had returned to more normal levels in the second half of '21. I think that was true, James. But certainly in the first half, as outlined on -- this is for the full year, of course. And obviously, the first half was quite severely affected. And Slide 9 sets out some of that. You can see in Victoria, there was about a 48% decline in volumes in that first period. So certainly, there was -- it did start to return. But obviously, with restrictions and lockdowns, there's a direct correlation for us between cars on the road and, obviously, accident frequencies. Another question asked was around Panel margins and current cost pricing and those sorts of things. Look, I might get Carl to talk to that one in terms of cost pressures and margins.

Thanks, Steve. There certainly has been cost pressures in the business as a result of supply chain difficulties with collision parts. I think everyone has experienced in their life in various ways an increase in price of various products and the auto parts collision industry is no different. So we are experiencing pressure in that regard. And obviously, as volumes are affected through the various shutdowns, we obviously have a varying impact to absorb fixed overheads. So yes, it has various impacts, but we're managing through those pressures as required.

Carl, I might get you. A few people have asked about insurer negotiations and discussions in that context as well. There's a few questions just about how they're going and how those negotiations typically are moving forward.