Bapcor Limited (BAP) Earnings Call Transcript

Thank you for standing by and welcome to the Bapcor briefing to discuss the FY '25 trading update and review of balance sheet carries announced in this morning's ASX. This is a briefing for analysts and investors. We will not be taking questions from the media. For media, please direct your questions to the contact details on our ASX release. [Operator Instructions] There will be an opening comments from Executive Chair and CEO, Angus McKay, followed by a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to Mr. McKay. Please go ahead.

Thank you very much. Good morning, everybody. Let me just make some opening comments before we pretty quickly move straight into questions and obviously, answers from ourselves. So we've announced this morning a trading update, the outcomes of a review that we have carried out on our balance sheet as part of our closing processes and also announced some Board changes. Let me just quickly deal with each of those in turn. So we've announced a perspective on the second half trading and in particular, perspective on what was the May and June trading months. We've made the overall comments that the May and June trading months were harder and disappointing relative to our expectations. That particularly impacted our Trade segment. We've talked to disruptions across our wholesale network. Those disruptions, I suppose not unexpected given the quantum of change that we have deliberately pushed through those businesses over the course of the year. There have been in excess of 45 site closures and changes as we have eliminated sites that make no sense and look to consolidate the way those sites work through, particularly the big distribution centers. We've also commented on the integration of the Wheel Electrical Group and the disruption that, that has happened -- has caused at the customer level. Whilst we believe that is temporary, it has no doubt impacted our second half trading. Retail remains as challenging as it has been for a while. We are pleased ultimately with the promotional rotation changes we've made, but that environment does remain competitive. And New Zealand remains as complicated as it has been around the economic conditions in that marketplace as we deal with effectively good verbal news, but no action, I suppose, at the consumer trading level. We've also talked to the fact that as part of our half 2 results, there are a number of items around some supply disputes and receivables, where we've taken a view that the balance sheet values that we're carrying on those need to be dealt with in the current and what I describe as a pro forma year. We also just updated the market that consistent with what we have said through H1 and in part through H2, that the consolidation work that we're doing and thereby the savings that we're expecting to gain that range of $20 million to $30 million, we believe is secure and that we will deliver those and that the exit rates remain as discussed in prior conversations. The changes that we're making across the group are all around not just our technology systems or technology changes, it is around supply chain and that consolidation process. It is also around the implementation of the strategy that was announced in April of the current calendar year. At a gross level, if you like, our pro forma NPAT is expected to be between $81 million and $82 million. The second thing that we then have announced is that as part of that balance sheet review, we have done a piece of work looking at other adjustments that we need to make to our ultimate statutory profit and that we are recognizing those. We're taking the opportunity to recognize those in the second half and ultimately what will be our full year results. To be clear, the numbers that we're talking about here are all unaudited at this point in time. Obviously, diligence has gone into them, but they do remain unaudited and those processes will continue over the, I suppose, the 4 weeks to come ahead of our schedule announcement on the 28th. But in bottom line terms, we're announcing material items or significant items in the second half of between $43.3 million and $45.3 million at an NPAT level. For a full year, that will go up to $48 million to $50 million with the difference having already been recognized in the first half. There is a categorization contained in the release we've made. I won't go through that now. I'm certain I'll be getting questions on that, but I will -- those questions to -- I suppose, help bring that to light. But net, I suppose, an adjustment to our NPAT on a full year basis of $48 million to $50 million. The final thing we've announced is that we, again, based upon our review of the balance sheet, typically our review post all the consolidation work we're doing, that there are going to be 2 changes that we expect will impact the fiscal '24 outcome, i.e., that will change our comparatives. They, therefore, will not go through our FY '25 impact, but they will be a restatement to the prior year. In total, they are expected to be $24 million on a post-tax basis. They split between 2 items. One is restating some intercompany transactions, and that relates to trade and other payables across those 2 dimensions. And the second is an accounting policy change that we're instituting that go to the -- that effectively goes to the conclusions of the consolidation process we've made around our disparate networks and wholesale businesses into the major distribution centers, whereby we are aligning to a consistent inventory valuation process across both businesses. Both are obviously a material change. We don't walk away from that, but we both -- we believe they are necessary in terms of the simplification of this business. The third element of our announcement is we're announcing that 3 directors have tendered their resignations. So Mark Bernhard, Brad Soller and James Todd. They tendered those resignations yesterday. And just my announcement to you is that we already had a broad refresh process in place. That will now be accelerated in light of those 3 directors leaving the business. So I won't go on. I will pause. I'll hand back to the moderator to see what questions we can answer on behalf of analysts out there.

[Operator Instructions] Your first question today comes from Craig Woolford from MST Marquee.

I've got a couple of questions, quite a big announcement. Can you just clarify why the 3 Board members resigned? It reads -- I assume it's with immediate effect?

So Craig, yes, the short answer is it was immediate effect effective yesterday. They've come to their own conclusion around the tenure of Bapcor and decided that now is the appropriate time to step down. That's really all I can say.

Okay. And can you explain the restatement of earnings of $25 million post -- $24 million post tax. The thing that's running through my mind is that, that looks like a fundamental step down in the earnings power of the business. It says it's over a number of financial years. How many years was there the buildup of this overstatement of circa $24 million?

Yes. So I think we've described the nature of the 2 changes. So one is a restatement of accounting on intercompany transactions. The other is a policy change. You are right. It's $24 million at a net level, net after-tax level. It goes back many years. So when I say many, it spans '24, '23, '22, and I'll say there's elements of '21. But prior to that, frankly, the team have not booked. So it is at a gross level -- sorry, get my language right. At the $24 million level, it is a big number, but it does spread over 3 to 4 to 5 years.

And then on the operating side of the business, just on retail, my math would suggest that second half sales -- total sales for Bapcor retail was down 11%. Interested in understanding the components of that, if that figure is right, like how much of that would be attributed to store closures or other factors versus the same-store sales performance in that second half?

Look, so I don't have and we will clearly get the full year results go into a lot more detail by segment. So within retail, we've closed a number of stores, but equally, some of those closures have been just where we are moving a store. So net of 0. The core element of change within the sales revenue line in retail will be attributed to, one, a category shift that we've talked about for a while. So from discretionary to nondiscretionary and the other component will be the promotional rotation as we've moved away from these all store sales. That's probably all I can go into right now. We will obviously cover that in detail when we get to our full year announcement concept in 5 weeks' time.

Your next question comes from Elijah Mayr from Goldman Sachs.

Maybe just on the Trade segment and sort of noting how you were disappointed in May and June. Is that at a company-specific level or at an industry level? And can you maybe sort of detail, I guess, what specifically caused those disappointments through the May and June trading period?

At an overall company level, if I did say I was overall disappointed, I'd be not telling the truth. Probably the core element in May and June hurt us most was in Trade. May and June are the 2 biggest trading months of the year for that business. And whilst the performance wasn't staggeringly negative, it just wasn't at the expectation the business has set for itself. So that's our primary measure there. There are a number of key promotions in those 2 months that just did not fire for the trade business. The changes in the second half around Specialist Wholesale, we clearly hope we'd start to see greater traction. But given the number of changes in that business segment and specifically, that is around the warehouse and depot consolidation that we've been doing. I'm not surprised that we impacted ourselves that much, and we did. From an AEG perspective, the -- so that's the electrical group with the business. The other impact there was where we consolidated ERPs over that time, and that just made it more difficult for us to trade effectively. On the forward view, I would say, we have an expectation that those issues are self-inflicted, necessarily self-inflicted as we go through that consolidation process. And therefore, our prospects into the future look better, but they were necessary in order for us to effectively shift our way through what we've described in the releases of the 45 sites.

It seems a lot of the issues were kind of Bapcor specific rather than industry specific.

Sorry, could you say that last part again, please?

Yes. Sorry, it just sounded like that a lot of the issues through May and June were Bapcor specific rather than industry-wide specific.

So I would say that is absolutely the case for the Specialist Wholesale segment. I'd say for Trade -- sorry, as in they were Bapcor specific. For Trade, I would say it was -- it's market, it's competition. I would say that it's Bapcor problems. I think that would be an untrue characterization. New Zealand, it's market rather than ourselves and retail, our activity was very much by design. We knew it would have a, call it a sales impact as we changed our promotional approach and look to improve our margin structure in that business. So probably more -- probably a combination there of our own activity deliver to expectation, but a bit of a tough environment.

And maybe just secondly on the cost obviously noting that you're getting to the top end of that $20 million to $30 million range in terms of savings. I mean that's a gross number and then sort of immediately noting that there's obviously strategic investments in IT and other sort of supply chain and marketing costs. Can you just give us a sense of like is this the cost base in the second half that we should expect going forward into FY '26? Are there more costs to be going back into the business? Or can you give us maybe a sense of the magnitude or maybe even net cost impact, taking into consideration some of those savings, but also the investments that have been made during the half?

Yes. So let me just reiterate what we have said. So again, we expect to be that sort of top end of the $20 million to $30 million. We said at the half year and a couple of times in between that we expected our exit rate to be around 40%. We're not changing our point of view on that gross. We will be reinvesting in '26 around core processes, systems, et cetera. We have not disclosed what that will be. As we start to do those projects, we'll be quite transparent around them. But in terms of the activity to gain the benefits, that is well complete with the benefits are there where we now go to is investing that to drive the future performance of the organization.

And maybe if I can just squeeze one more in on retail. Just can you detail, I guess, what the change in promotional cycle means and sort of what the promotional environment is now within the retail segment?

Yes. So historically, we had favored all store sales. So discounting all store product by 20%, 25%. We changed that philosophy just prior to the December trading period, whereby we wanted to limit the number of all store sales and move to category-specific promoting. We said at the time that we knew that, that would have a sales impact on the business, but that we believe by moving to category-specific promoting that we would be supported by our suppliers that we would make -- that, that would be a more profitable way to promote. We said at the time that what we were doing was not a unique retail promotional strategy. That's what most retailers do. So we have done that. We'll go into the detail. But when we show you the full year results, you'll clearly see that whilst that change from all store promoting to category-specific has impacted sales, it has equally positively impacted our gross margin.

Your next question comes from Mitch Sonogan from Macquarie.

Just following on from Elijah there. Just -- I guess, just in the Trade segment, you've talked to May, June being below your expectations. Obviously, the first trading update you gave at the start of second half at the first half result, Trade was up 3.7%. So yes, just trying to understand, was it sort of tracking along at broadly those levels through until May and June. Is that when you saw the material underperformance or have been declining a bit through the half as well?

Make sure -- declining through -- just make sure I understand the full question.

Yes, sorry, yes, you started the half at 3.7% up in Trade. Just trying to understand the cadence through the rest of the period. Or was it really just an underperformance in May and June that dragged the second half result down?

Yes. So the answer, we're pretty happy with the Trade performance and then May and June came out and they were the 2 disappointing months.

Yes. And then maybe just on -- you've talked about the closing or moving of 45 sites. Can you maybe just talk or give a bit more color about the changes you've made there, what impact that might have into '26? And I guess, what other changes could be coming, particularly in the retail business there as well?

Yes. So the 45 sites predominantly relate to that Wholesale segment. So breaking that down in the main, that is within our Wholesale business. There have been site changes and consolidations within both electrical and trucking as well, but they're not the main game, excuse me. The changes represent us closing down distribution centers right across the country and consolidating those distribution centers in the main into our big capital city-based distribution center structure. So that would be the main. There have been other changes where we have consolidated smaller sites into, call it an intermediary site. Those consolidations have been driven, firstly, by economics, by moving the business to be more profitable and hence generate a large proportion of that $20 million to $30 million that we've talked about. The second component has been around safety factors and operational standards where we need to make changes there. But that is sort of the, I suppose, the headline of it. The logistics of that, though, therefore, mean we relocate stock from one place to another place. The disruption that occurs to that is obviously that in its own right is a fair bit of work. But equally from a customer perspective, we end up moving sometimes away from a localized area to being even 10 kilometers away from that area, and that can impact the customers' transactions with ourselves. But that's the nature of what we're doing. We look back at what we've done, and we firmly believe we've done all the right things there to do that quickly. It had to be done quickly, one, to the savings that we have profit. But to drag this out just means that we slow down progress around managing inventory and managing a more seamless logistics process to our customers. But I do acknowledge that in the immediate short term that, that does impact the trading relationships customers have had with us over many, many years. And as you appreciate, Mitch, some of these business cases, these are small or relatively small distribution centers that have been there for a long, long time. So without a doubt that change hurts. It is the right thing to do. It has set us up to allow us to play with the scale that we should be playing with rather than that fragmented base that we have. It's changed our profitability in that particular world, which is exactly what we intended to do. But importantly, from a group perspective, it has also changed our operations to move them closer to what is the required level of operation in a publicly traded company. So hopefully, that gives you a bit of a flavor.

Yes. That does. And just another couple of quick ones. Just on -- I guess, I know you haven't given color on segment margins, but clearly, the market focuses on the core trade business here as well and EBITDA margins in the first half were actually very robust and had some pretty material expansion. Are you able to give any sort of color about how we should be thinking about the margins in the trade business looking into '26?

So Mitch, I'm not going to -- either we'll get there when we get to the 28th announcement, we will go into that detail. All I'll say is we -- the market remains pretty competitive. We've been very disciplined in the way in which we want to operate right now. I'm not therefore foreshadowing change on what you would expect, but we'll go into that detail when we speak to you at the end of August.