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Edited Transcript of AHG.AX earnings conference call or presentation 24-Feb-17 12:00am GMT

Thomson Reuters StreetEvents

Interim 2017 Automotive Holdings Group Ltd Earnings Call

Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Automotive Holdings Group Ltd earnings conference call or presentation Friday, February 24, 2017 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John McConnell

Automotive Holdings Group - CEO

* Phil Mirams

Automotive Holdings Group - CFO

* Stephen Cleary

Automotive Holdings Group - CEO Logistics

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Conference Call Participants

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* Martin Byers

UBS - Analyst

* Paul Buys

Credit Suisse - Analyst

* Sarah Mann

Moelis & Company - Analyst

* Wassim Kisirwani

Deutsche Bank - Analyst

* Chris Savage

Bell Potter - Analyst

* John Stavliotis

Morgan Stanley - Analyst

* Jo Little

Morgans - Analyst

* Stewart Oldfield

Field Research - Analyst

* Sean Smith

The Western Australian - Journalist

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the half year results conference call. (Operator Instructions). I must advise you this conference is being recorded today, Friday, February 24, 2017.

I would like to hand the conference over to your speaker today, Mr. John McConnell. Thank you sir. Please go ahead.

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John McConnell, Automotive Holdings Group - CEO [2]

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Good morning. Thank you for joining us today and thank you for your interest in AHG. With me on the call are Phil Mirams, our Group CFO; David Rowland, our Company Secretary and Stephen Cleary who is our Chief Executive of Refrigerated Logistics.

You'd be aware by now that the Company has announced an operating NPAT for the six months to December 2016 of AUD43.9 million which is down 11.3% . That result is in line with our expectations and with the Company update we delivered at the Annual General Meeting in November.

Statutory NPAT for the half was AUD38.7 million compare to AUD48.2 million for the previous half year.

During the six months in review we saw very strong automotive revenue and earnings growth in New South Wales and New Zealand and above budgeted results in Queensland and Victoria. Those returns, combined with the contribution of our recent acquisitions produced increased automotive operating EBITDA of AUD88.6 million which was up 10.3%.

It's notable that the diversified brands and locations within our automotive portfolio have allowed us to deliver growth, notwithstanding the significant downturn in the Western Australian economy. It's also notable that the broader automotive market is still showing record new vehicle sales in both Australia and New Zealand.

As expected, the first half result was impacted by the performance of Refrigerated Logistics, but we're working hard to continue to cut costs and to implement initiatives that are expected to deliver stronger earnings in the second half. The revenue run rate has stabilized in the Refrigerated Logistics division in the period and as we said at the AGM, we expect to deliver revenue growth in the second half of FY17.

We have a clear plan to achieve these objectives which will improve our operating performance and financial returns through a combination of cost savings and margin improvement initiatives together with increased revenue from new contracts. The Board is determined to ensure that the Refrigerated Logistics division deliver the best value outcome for our shareholders.

The Company is focused on value growth and cost management and we will continue to monitor underperforming businesses with a view to turn around or divest. We have a track record of successfully turning around individual business units where required and we'll continue that process alongside a disciplined approach to the employment of and return on capital.

The Board has declared an interim dividend of AUD0.095 per share matching the previous half year dividend.

I'll now ask Phil to discuss the specifics of the balance sheet and cash flow slides in the presentation pack. And then we'll give you an update on our outlook and take any questions that you might have.

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Phil Mirams, Automotive Holdings Group - CFO [3]

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Thanks John.

Operating cash flows for the period were AUD17.1 million, which while ahead of the prior period is actually lower than we've historically seen. The reasons for this cash flow are primarily driven by two factors.

First of all, profitability in the first half was lower than the prior year and that's directly impacted the level of cash flow generated over the half.

Additionally, we had a significant timing impact from a larger than expected working capital position and there were a number of contributors to this. We made a conscious decision to prepay our full year premiums for insurance and this effectively meant we had a 12 month cash drain rather than a six month cash drain as those premiums were paid upfront. We did this consciously to take advantage of a lower interest rate but that has had an impact on our cash flow.

We also had a number of -- and we continue to see a number of automotive manufacturers who have transitioned their incentive programs to annual programs rather than monthly or quarterly structures. And this has meant that a larger proportion of our automotive profits are paid on in a cash sense on an annual basis which has had some impact on operating cash flow comparisons.

There was a couple of other issues that we had that were specific. Two significant tax -- sorry, two things. A significant tax refund was not received in the period that we were initially expecting and had historically been done so. And we also had a large client who had had a major system implementation upgrade and they were delayed in paying their on time payables at that time. That has now been received and has righted that position.

But overall those factors and a general build-up in our working capital meant that we were probably approximately AUD40 million lighter on operating cash flow than we would probably historically have expected.

And turning to the balance sheet, that has basically meant that the balance sheet is effectively fairly similar to June, following the settlement of approximately AUD65 million in acquisitions in recent months that we alerted to the market over our full year results.

While the recent equity raise last year funded the acquisitions, our December balance sheet reflects the higher working capital that I mentioned earlier and ultimately the lower cash flows during the period. The reversal of this working capital position will occur over the second half from an anticipated stronger second half as we see improvement -- and would expect to see improvement in our net debt position leading into the full year.

Just to point out, CapEx in the first half was AUD54 million when you net out the disposals that we had over that period. And we probably expect to see that slightly lower in the second half maybe around about AUD40 million to AUD45 million. So overall, an expected CapEx spend of approximately AUD100 million in the year which is really to complete property developments, fund the replacement of our fleet and also complete the technology investment in the Refrigerated Logistics platform.

I'll now hand back to John to talk through our outlook.

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John McConnell, Automotive Holdings Group - CEO [4]

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Thanks Phil.

We remain confident on the second half. We have some continued headwinds in the form of WA auto sales, but this is counterbalanced by strong activity in other states and New Zealand.

We expect the Australian automotive market to show low growth during the second half of FY17. We also expect to see continued growth in the New Zealand market and we'll see the expansion of our easyauto123 fixed price retail format to target growth in used cars.

Refrigerated Logistics remains a work in progress, but we are on track to deliver a better second half and a much better performance moving forward. We anticipate a solid finish to the year from the other Logistics division underpinned by the performance of KTM.

And the current ASIC and ACCC reviews, finance and insurance commissions, once finalized will most likely lead to industry-wide changes to the revenue mix at dealership groups.

As you'll be aware, there are a range of levers that dealer groups, especially large groups, can pull in response to any changes driven by these reviews. They include vehicle sales margins, finance and insurance penetration rates, aftermarket, vehicle servicing and in addition we're also undertaking a review of our cost base in the business. We expect any changes to commence across the industry after the current financial year and with an extended transition period.

People will continue buy vehicles, finance and insure that purchase and seek after sales support and AHG will continue to command a significant share of that activity. AHG is Australia's largest auto retailer and one of the best places to buy a new or used vehicle, as a consumer along with convenient complementary products and strong after sales support and customer connections.

As announced ahead of the November AGM, the Company continues to expect to deliver a full year operating NPAT outcome ahead of FY2016.

On that note, we now welcome any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Your first question comes from the line of Martin Byers from UBS. Please ask your question.

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Martin Byers, UBS - Analyst [2]

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Hi guys. Can you just provide a little bit more color on the unusual items that you've taken, I think more specifically around the AUD5, AUD5.5 million in the Logistics division please?

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Phil Mirams, Automotive Holdings Group - CFO [3]

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Yes, sure. Thanks Martin. So the primary amount in there was the consulting fees and work that we did through the first part on Refrigerated Logistics and that was basically the set-up and delivery of the transformation program on Refrigerated.

There are also included in that a degree of redundancy costs that we have, although we'll see more of that in the second half as we complete that redundancy program.

The remainder is what we typically have, Martin in the sense of a smaller amount due to M&A costs associated with the acquisitions that we did through that period and divestments over that period. That's -- the bulk of it is relating to that transformation cost.

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Martin Byers, UBS - Analyst [4]

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Okay. And you just flagged there some continued unusual items in the second half. Can you give us a flavor of what you're baking in, given that you're obviously giving guidance of underlying net profit ahead of FY16, you must have some assumptions for the amount of unusual in the second half?

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Phil Mirams, Automotive Holdings Group - CFO [5]

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Yes. I mean it's hard to actually pin it down yet because we do have some turnover and we're obviously trying to reduce redundancy costs by allowing the turnover to actually evolve, so to speak. But you would still expect I would say AUD3 million or AUD4 million depending on whether we do another large acquisition over that period that incurs costs. But in terms of that expansion program, I'd expect another AUD3 million or AUD4 million.

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Martin Byers, UBS - Analyst [6]

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Okay, great. And then just one final one. Just in the operating segments, Note 2 of the accounts, just looking at the last line there, the acquisition of PP&E. Just noticing that the AUD72 million investment in Logistics which takes the consolidated number for the period to AUD98 million. Just two things. One, what's the investment in the -- particularly the Refrigerated Logistics division? And two, how does that reconcile to the AUD62 million of PP&E in the cash flow?

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Phil Mirams, Automotive Holdings Group - CFO [7]

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Yes, I can just -- I can explain that Martin. Just one thing out of that movement. We had the IT program that's been going on for the last -- quite a long period of time was at the corporate balance sheet because we did that with the assets under construction and we did that for some time out of the corporate.

At December we moved those into the respective business lines so that -- about AUD30 million of that was relating to just the move out of our balance sheet, not necessarily a CapEx related line.

So in the CapEx amount you've got AUD62 million and then we divested AUD8 million. So the net CapEx was AUD55 million. And about AUD20 -- I've got the numbers here. AUD23 million of that was replacement fleet in Refrigerated Logistics and about AUD5 million on the technology. So you've got about AUD30 million in Refrigerated related to CapEx. And the other amount was relating to that movement of the historical asset under construction into their balance sheet but not off the total Group's position.

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Martin Byers, UBS - Analyst [8]

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Okay, that's great. Thanks Phil.

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Operator [9]

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Your next question comes from the line of Paul Buys from Credit Suisse. Please ask your question.

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Paul Buys, Credit Suisse - Analyst [10]

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Morning guys. My question is just on, I guess the trajectory of vehicle sales particularly on that -- in the back end of the year and into January, with the sort of further weakness in WA and some weakness as well in Queensland. Just interested to know how you guys are going to see yourselves negotiating that going forward in WA and you said Queensland you're performing above budget. But just interested to see what you think in terms of the next 12 months.

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John McConnell, Automotive Holdings Group - CEO [11]

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Look, I think it's always dangerous to take one month in isolation especially the January month after an end of financial year with people pushing to close positions at December. So don't get worried Paul about over reading the first month of January in any year.

I think your comment though on the trajectory in WA, that has continued. I think we've had -- now I think it's 46 or 47 months of I think, consecutive decline year on year in WA, but we've been weathering that storm within our results over the past six months and indeed the last year.

And that is something that we continue to work on in WA. We continue to manage and look at the cost base. And we continue to do as much as we can in terms of negotiating the right level of targets for the coming year in terms of the ability to unlock the right level of manufacturer bonuses moving forward. So WA remains tough.

I think Queensland certainly for the month of January reflected a pretty [low] market. It was down I think almost 10% or 10 point -- Queensland down 8.6% in January. So the market itself was a bit tougher.

Obviously Queensland for us is a relatively smaller part of our overall auto portfolio. It's about 10% on a revenue basis of the overall automotive piece, so it's not our biggest and most material element. But we are mindful of the fact that we need to do the same thing that we're doing in WA which is aggressively manage the cost base and be very vigilant to trends in the market.

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Paul Buys, Credit Suisse - Analyst [12]

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Thanks John. And then just to your comment there on manufacturer targets and incentives, which I understand have been somewhat challenging certainly in recent times. So are you expecting an improved environment as regards incentives going forward?

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John McConnell, Automotive Holdings Group - CEO [13]

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Look, I think the ability to unlock targets is always the challenge and it's the impact in used car sales where you get the knock-on effect of chasing new car volumes. So we've seen some pressure on used car margins.

And the reality is I think people in calendar year 2016 were probably expecting WA potentially to have bottomed, but we continue to see an element of decline. So I think we have arguably a bit more realism in the 2017 targets as a consequence of the fact that WA didn't bounce in 2016.

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Paul Buys, Credit Suisse - Analyst [14]

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Okay. And then the final one from me I guess also just related to used cars. Just your national rollout of easyauto123. Just wanted to get an idea, I guess, of the CapEx or OpEx investment associated with that on the one hand and the expected contribution from benefits on the other.

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John McConnell, Automotive Holdings Group - CEO [15]

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Look, I think it's early days. I think for us in terms of investment on capital, it's actually a low capital investment for us. They are leased sites and we're floor planning inventory, so the net level of balance sheet investment in that is relatively low.

Similarly, given the fact that we will be in start-up with four additional sites in the second half of the financial year is going to mean that there's going to be very little impact in the short run in that. Obviously we're taking in the longer term a much bigger size of an opportunity, given the fact that we believe there's a great opportunity for the easyauto model in the used car space because it is an opportunity to build a strong national branded position. And that's what we intend to do.

We're not giving any forecast at that moment given that we are very early in the journey. But we have very strong hopes for where we're going to go in easyauto.

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Paul Buys, Credit Suisse - Analyst [16]

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Great. Thanks guys.

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Operator [17]

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Your next question comes from the line of Sarah Mann from Moelis & Company. Please ask your question.

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Sarah Mann, Moelis & Company - Analyst [18]

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Hi guys. Just a few questions from me.

So firstly, on market consolidation. Given that there's now three listed dealers and two private equity backed groups who all -- who want to grow by acquisitions, given that OEMs have traditionally had a 10% market share cap per dealer, as the market looks to consolidate a bit quicker, how do you think the manufacturers are going to respond to this given that it could imply a bit of a shift of power towards dealers and away from the manufacturers?

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John McConnell, Automotive Holdings Group - CEO [19]

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I think it's a good question. I think the reality is it's probably -- that's a question you should probably direct to the manufacturers.

But I guess from our perspective, I think it's not dissimilar to some other markets in the world where you see, for example, in the UK it's not unusual to have a few dealer groups having a very large position within the manufacturers' portfolio. It isn't a case of power balance, it's a case of alignment of interests.

Of saying there's a recognition that in today's consolidating world, there is going to be a recognition over time that the market will consolidate and therefore the choice for manufacturers is to find what is their best avenue to market. Can you do that by well-funded profitable strong groups and are they people that you would like to fundamentally grow with over time?

And I think we've got evidence in other markets where there are increasing levels of consolidation, higher levels of manufacturer share and I think that is something that will be a trend over time. But I think -- you know, that's my view, but I'm sure you'll have a chat with the manufacturers as well.

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Sarah Mann, Moelis & Company - Analyst [20]

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Okay, thanks. And then also just on consolidation again, Autosports recently did an acquisition in Victoria. Just wondering if you were shown that acquisition at all and can you make any comments about it?

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John McConnell, Automotive Holdings Group - CEO [21]

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Look I don't think we talk about any specific acquisition. I think Autosports has made it very clear with the recent float that they are actively searching in the luxury space. As you know, we have luxury opportunities within our portfolio and in turn we will look at opportunities in the luxury space as well. But there are quite a wide range of opportunities within Australia. So Autosports picked up one in Melbourne.

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Sarah Mann, Moelis & Company - Analyst [22]

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Okay, great. Thanks. And then just the last one from me on the regulatory environment specifically on add-on insurance as the ACCC came out the other way, going to oppose the 20% cap on commission. I read somewhere that it's been suggested that instead of the cap, a deferred sales model like the one on gap insurance in the UK may be a possible solution.

Given your experience in the UK, where it was implemented in 2015, can you share with us any insights that you might have around how it affected, kind of, gap insurance volumes and dealer profitability and anything that the industry did to mitigate the downside at all?

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John McConnell, Automotive Holdings Group - CEO [23]

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Look I think -- I think the reality is we in the UK at the time went through that relatively unscathed I have to say in adapting the model of selling F&I. I think what's more relevant is what's going to happen in Australia and what are we going to do about it here.

I think it's interesting as you say the fact that there was a plan that was then taken off the table by the ACCC and there remains significant uncertainty as to where that is going to ultimately land. I think for us we have a range of things that we will implement that will mitigate the impact of what is going to happen because we know one thing is probably certain and that is there will be change. We're just not sure what shape that is going to take at the moment.

But as I mentioned earlier, there are a number of levers that can be used to actually mitigate what we're doing including looking at the cost base and looking at various revenue drivers. And we will do that and we're planning to do that now.

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Sarah Mann, Moelis & Company - Analyst [24]

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Okay, great. Thanks so much.

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John McConnell, Automotive Holdings Group - CEO [25]

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No problem.

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Operator [26]

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Your next question comes from the line of Wassim Kisirwani from Deutsche Bank. Please ask your question.

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Wassim Kisirwani, Deutsche Bank - Analyst [27]

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Good morning guys. Just a follow-up question on the one-off costs and the redundancy costs within the Logistics business. What's the outlook beyond second half 2017? Can you sort of quantify at this stage what's left to do and can you put some sort of numbers around that?

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Phil Mirams, Automotive Holdings Group - CFO [28]

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Wassim, we're not really thinking there's a lot less after that. The major transformation program has been well underway this year and is continuing to execute in the second half. We're -- the target is to get to a run rate in June that then is contributing to that onward going. I don't see a lot of one-offs after that in that business.

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John McConnell, Automotive Holdings Group - CEO [29]

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No, I think we've talked about FY17 run rate savings of over AUD20 million. That's what we're endeavoring to unlock and Stephen can talk to potentially some of the initiatives. But we are continuing to make changes that will continue in the second half of FY 2017 and then we expect to take the real full benefit of that in 2018, so it is obviously a timing question of the ability to implement initiatives now, to actually realize the full benefit of those in FY 2018.

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Wassim Kisirwani, Deutsche Bank - Analyst [30]

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Sure. And Phil, just on the operating cash flow and you highlighted some of the issues there that were a drag on that number, but are you able to quantify some of those in terms of what some of the larger items, whether it be the pre-payment of insurance or the client that delayed payment, in terms of putting some numbers around that impact?

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Phil Mirams, Automotive Holdings Group - CFO [31]

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Yes, I can. I mean the insurance was -- we spend about AUD20 million a year on premiums across the Group and so if you do that, that's impacting your working capital by about AUD10 million in a half, because you're paying 12 months in six. So that's one example.

The client numbers -- I think it was about AUD4 million or AUD5 million. And the other ones are arguably around about AUD10 million as well. That's broadly it. I mean, there's a raft of things. We transitioned the team for refrigerated into -- as part of the transformation program, into a new unit. They got a little bit behind in getting those debtors back, but that's not unusual in that process. They're getting back on top of that now. So it was very much timing. That's the broad brush of it.

The tax refund was quite large too, certainly over AUD5 million. So those have an impact on us. It's disappointing. We obviously, like to get strong cash flow in every half, but as everyone knows, cash flow's a point in time and that it was very much a timing issue in the half.

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Wassim Kisirwani, Deutsche Bank - Analyst [32]

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Yes. Sure. And just a question on logistics in the second half. You've obviously, got refrigerated logistics, so you've obviously got some reasonable visibility over the cost that you're looking to get out of that business -- or the ones that will impact the second half, anyway. Just interested in where the risk is to -- you don't want a disappointing result in the second half logistics. Over the last few years the second half has disappointed several times, due to a range of factors, most often seasonal factors.

Just in terms of where -- how comfortable you are with your visibility over this business at this stage and where the most volatility remains across that division?

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Stephen Cleary, Automotive Holdings Group - CEO Logistics [33]

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Yes, sure, I'll answer that one. With respect to the transformation program, which is the program that's effectively going to extract the costs out of the business, it's a program that's made up of two streams, effectively. One's a headcount out, which basically comes from the fact that historically, the Rand Harris business, then Scott's and then JAT were all operated as independent businesses.

The program effectively puts all three businesses together under one operating model. Consequently, the headcount out results from duplication in roles. Three roles become one or two, and hence there's headcount out of that.

On the non-headcount side of the business, we've targeted -- once again, when you bring three businesses together, there are obviously, operational efficiencies that you can get from operating one, single business unit as opposed to three. And things, as an example, like line haul utilization, like property utilization, commercial issues around customers, all these initiatives are part of the actual ongoing transformation plan that delivers the benefits in the second half.

Now, we only commenced the program in September. Prior to that, we were in the planning phase, strategically setting the objectives, changing the operating model, and then we got to execution in September. Hence in the first half there wasn't a lot -- there was a lot of the cost, but not a lot of benefit. The second half delivers more of the benefit in the second half, obviously net of the redundancy costs.

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Wassim Kisirwani, Deutsche Bank - Analyst [34]

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Sure. And on the revenue side? I mean, over the last few years we've seen poor visibility over the second half for a whole number of reasons, whether it's a particular crop that hasn't come through -- I'm just interested in how much of that volatility remains on the revenue side, how much visibility you have over those second half revenues? If we're sitting here in six months' and cold logistics have disappointed again, where that likely culprit will be?

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Stephen Cleary, Automotive Holdings Group - CEO Logistics [35]

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Yes, well, obviously, we can't forecast the weather in the future, in terms of what may or may not happen there, but essentially, as John said, we've stabilized the revenue at the end of the first half, and we're forecasting the second half takes advantage of that first stabilization. And there's nothing on the horizon that's untoward that we can point to at this stage.

Save obviously, for February, as an example, where we had significant floods in western Australia that closed the rail line, so what that tends to do though is it might impact one month's revenue, but it doesn't impact the six months, and February revenue falls then into March, when the rail line reopens. But there's nothing that we can point to at this stage.

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Wassim Kisirwani, Deutsche Bank - Analyst [36]

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Okay, thanks.

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Operator [37]

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Your next question comes from the line of Chris Savage, from Bell Potter. Please ask your question.

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Chris Savage, Bell Potter - Analyst [38]

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Thank you. Good morning, guys. John, earlier on the call you mentioned, with regard to refrigerated logistics, it was turn around or divest. Have you got any time frame in mind for how long you'll give the business to turn around before you and the Board decide to pursue more a divest course of action?

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John McConnell, Automotive Holdings Group - CEO [39]

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I think they were separate comments. I think what I said was that we were driving a turnaround and a transformation program within the refrigerated logistics business. And then I said we would look at all aspects of our entire portfolio with a view to looking at under-performing assets, with a view to turnaround or divest. So there was no linkage directly to refrigerated logistics.

We are absolutely clear and we're absolutely focused on the turnaround plan that we have for RL and as Stephen has just outlined, a lot of those activities were initiated in the first half of FY 2017 and we expect, as you've seen in the outlook, to actually get the benefits of some of that in the second half, and then would expect to get the full year run rate pulling through into the following year. So we have a clear plan, Chris, to actually drive the turnaround position in RL.

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Chris Savage, Bell Potter - Analyst [40]

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Okay. And sorry for being granular, but the revenue growth in the second half for RL, is that versus first half, or versus PCP?

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Phil Mirams, Automotive Holdings Group - CFO [41]

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Well, it'll be --

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John McConnell, Automotive Holdings Group - CEO [42]

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It was the first half, because we talked about FY 2016 in terms of where we were going with FY 2016.

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Chris Savage, Bell Potter - Analyst [43]

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So you expect to do better than the AUD286 million in the first half in the second half?

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Phil Mirams, Automotive Holdings Group - CFO [44]

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Yes, it should be slightly ahead of that, Chris, that's right. But what we're saying is from the beginning of this year, all the way through the revenues have been climbing, and then we'd expect that to continue through the second half. So on a PCP comparator it will be well ahead. On a first half/second half, it's probably a bit more in line. It might be slightly up, is what we're trying get to.

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Chris Savage, Bell Potter - Analyst [45]

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Okay. And in RL, I know Woolworths, you lost as a customer, or lost most of the business. Is that one of the clients you've got back and is helping to fuel that growth?

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John McConnell, Automotive Holdings Group - CEO [46]

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Obviously, we're not going to talk about, obviously, our client base, but at the end of the day we've had some -- as you would expect in the business, some losses. Some of those are actually conscious losses, where Stephen and the team have identified the fact that we actually weren't making the requisite returns that we wanted.

So we, as part of the initiatives, have been looking at raising some of the charge-outs to actually make sure that we're driving a profitable business, moving forward. So in some instances, they're actually conscious management changes of actually trying to bring about a better outcome for RL.

So yes, we will have lost some, but equally, Stephen and the team have been driving it, looking at new acquisition and new account conquests, so what we're talking about is net of those, Chris, such that we still deliver growth, but we will be reconfiguring some of the customer base.

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Chris Savage, Bell Potter - Analyst [47]

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Sure. And last question from me, back on to ASIC reviews. Is there any update on -- well, what's your expected timing on it? I mean, the timing's been somewhat of a moving feast, so what's your updated thoughts on when we might get an outcome?

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John McConnell, Automotive Holdings Group - CEO [48]

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To be honest, if I knew the answer to that -- I honestly couldn't tell you, because I came back in on board here in the end of August and in every month it's been a moving feast, to be honest, with a continuous change. I don't even want to speculate, Chris, at the end of the day, because it is just such a moving feast, as you know.

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Chris Savage, Bell Potter - Analyst [49]

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Okay. So we were expecting the new flex commissions or the new policies around that to be in place by July 1 this year. Is that -- that's looking increasingly unlikely, surely?

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John McConnell, Automotive Holdings Group - CEO [50]

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Look, as every day goes by, it's going to get increasingly unlikely. So yes, the reality is, as you saw with insurance, things that people thought were going to happen got completely overturned and it was back to the drawing board. So, I don't know where these are going to all end, at the end of the day. I think at some point these will land. I think it's an inevitability that we're going to have some change. I just can't put a finger on when.

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Chris Savage, Bell Potter - Analyst [51]

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Sure. All right. Thank you for your time.

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John McConnell, Automotive Holdings Group - CEO [52]

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No problem.

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Operator [53]

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Your next question comes from the line of John Stavliotis from Morgan Stanley. Please ask your question.

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John Stavliotis, Morgan Stanley - Analyst [54]

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Good morning, guys. Most of my questions have been answered, but just there's a comment around pressure on F&I with the media surrounding ASIC reviews in the note, in the presentation. Can you just elaborate a bit on that, what you've seen in that market from the finance suppliers, et cetera?

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John McConnell, Automotive Holdings Group - CEO [55]

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Look, I think what we're seeing at the moment is actually that some people have -- on the insurance side -- have changed some of their structures. We've seen finance houses tighten their lending. And it's been one area of the business that's actually been under pressure, more -- notwithstanding the fact that we've had reasonable revenue growth, we haven't actually seen the same level of growth in F&I.

So the conditions are tighter. I think equally there's greater consumer awareness around the whole subject, given that it's been so high profile in the media. So I think those things have been conducive to an environment that has seen us already begin to absorb some of the rollback on F&I by virtue of the fact that the conditions are tougher in the market.

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John Stavliotis, Morgan Stanley - Analyst [56]

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Okay. And in terms of consultation with ASIC with the industry, there hasn't been any more discussion on potential changes or potential capping of flex, like any update on that?

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John McConnell, Automotive Holdings Group - CEO [57]

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No, look, yes, we obviously, input to that via the AADA, along with some of our colleagues in the industry, and we, in turn, try and put the dealers' view into those discussions, via the dealer association. So that's what we inject into the debate.

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John Stavliotis, Morgan Stanley - Analyst [58]

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Thanks. And just lastly -- I think this was mentioned, but I missed the numbers. Phil, can you break down the CapEx for auto and logistics?

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Phil Mirams, Automotive Holdings Group - CFO [59]

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Well, I didn't break down auto and logistics it was mostly RL. But the majority of the logistics is in RL it was about AUD30 million this year, AUD25 million - round numbers or AUD24 million in plant and equipment and about AUD5 million in technology. And the balance is spread across the automotive businesses, mostly around property and a bit of plant and equipment and IT development that we have as normal through the year.

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John Stavliotis, Morgan Stanley - Analyst [60]

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Okay, and in terms of the second half CapEx numbers that you've mentioned, the AUD40 million to AUD45 million, I think it was, is that mainly the same sort of split between logistics and --?

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Phil Mirams, Automotive Holdings Group - CFO [61]

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Yes, similar sort of split. I mean, their replacement fleet is obviously the biggest part of that, but that's pretty ongoing. And we've still got the remainder of the technology spend and the refrigerated that'll be finished this year.

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John Stavliotis, Morgan Stanley - Analyst [62]

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Okay. That's all, thank you.

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Operator [63]

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Your next question comes from the line of Jo Little from Morgans. Please ask your question.

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Jo Little, Morgans - Analyst [64]

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Hi. Thanks very much. Good morning. Just back on the finance side of the business, can you just let us know what your average interest rate was in the period?

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Phil Mirams, Automotive Holdings Group - CFO [65]

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Well, our average write rate for finance, Jo, has been around about 8.9% for some time. I haven't analyzed that in the half. I don't think it will have materially changed as a write rate. That's a pretty reasonable average, so I think that's still consistent.

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Jo Little, Morgans - Analyst [66]

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Okay, thanks very much. And John, just in your first few months as CEO, and looking at the automotive cost base, if we just set aside any potential regulatory changes, are there quite clear and relatively easy wins on the automotive cost base?

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John McConnell, Automotive Holdings Group - CEO [67]

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Look, I wouldn't say there's ever easy wins. I think we are the biggest retailer and have had reasonably decent returns. I think there are always opportunities and I think, to be fair to the team, in markets like Western Australia, we've been already reacting to the dynamics in the WA market to lower the cost base.

But yes, there are things that I can see that we will be targeting that give us -- gives me the opportunity to say we can continue that journey. And as we said, look to mitigate any potential impact that changes in ASIC might bring as well. So there are opportunities.

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Jo Little, Morgans - Analyst [68]

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Okay, great. And just in terms of in the last question you mentioned finance houses tightening up lending, have you noticed discernible difference between the financial institutions versus the manufacturer finance businesses?

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John McConnell, Automotive Holdings Group - CEO [69]

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No, I think it's probably across the board.

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Jo Little, Morgans - Analyst [70]

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Yes. Okay, great. And just lastly on cold logistics, potential divestment or not. So just to be clear, there is no divestment program under way. I think in the past you mentioned some interest previously. Are interest levels still there, broadly speaking? Or you just not willing to be drawn on that?

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John McConnell, Automotive Holdings Group - CEO [71]

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Look, I just don't think that that's the right focus for the moment for us. Obviously, as a Board, we would be obliged to entertain any offer that was made in the normal course of business, as you would expect us to do.

But equally, we're firmly clear on our direction of travel at the moment, and as Stephen outlined earlier, we are very clear on driving a turnaround in performance, because we believe that's fundamental to the creation of value for AHG shareholders.

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Jo Little, Morgans - Analyst [72]

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No problem. Thanks so much.

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Operator [73]

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And your last question comes from the line of Stewart Oldfield for Field Research. Please ask your question.

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Stewart Oldfield, Field Research - Analyst [74]

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Good day. John, just on acquisitions, a question earlier about now having three listed players in private equity in the space, but you've also got Chinese money investing in Sydney dealerships. So what sort of discipline or caps are you putting on multiples you're willing to pay for acquisitions?

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John McConnell, Automotive Holdings Group - CEO [75]

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Look, at the end of the day, we will remain disciplined on opportunity and those multiples will continue to be relevant and different, as we look at different brands in different geographies. And there isn't a one size fits all answer. I think it is fair to say that the level of broader competition in the market has probably increased, which is right and that's probably driving up multiples a bit.

But at the end of the day we're about creating value and in the right location with the right brands, with the right synergies and benefits, and we'll in turn choose to pay what we think is right -- that drives the right sort of value for us, moving forward. But the dynamics have shifted a little bit of late.

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Stewart Oldfield, Field Research - Analyst [76]

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Got you. And can you just remind me what the stance is on giving (inaudible) a board seat?

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John McConnell, Automotive Holdings Group - CEO [77]

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Look, at the end of the day, that's -- they're not asking for one.

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Stewart Oldfield, Field Research - Analyst [78]

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They haven't yet?

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John McConnell, Automotive Holdings Group - CEO [79]

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Well, you'd have to ask them.

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Stewart Oldfield, Field Research - Analyst [80]

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Got you. All right. Thanks for that.

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John McConnell, Automotive Holdings Group - CEO [81]

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No problem.

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Operator [82]

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And your next question comes from the line of Sean Smith from The Western Australian. Please ask your question.

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Sean Smith, The Western Australian - Journalist [83]

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Hi, gentlemen. Sean Smith from The Western Australian. Can you flesh out a little bit what you're seeing in that foundation side for easyauto123? Just in terms of the consumer demographic there and what's driving it?

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John McConnell, Automotive Holdings Group - CEO [84]

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Look, I think the -- in the format is arguably what's driving it, where you have an offering, Sean, to consumers, of an easy differentiated way of selling that's no hassle in terms of no haggling on price, that enables someone to come in, in a one-stop environment, to look at different brands sitting side-by-side in a very convenient, well-positioned from a cost perspective, format, with easy finance and no pressure selling.

So I think that actually appeals to consumers. And there's circa 300-odd cars that we have sitting in a large warehouse. And when you walk through there, you'll see a wide variety of people who are coming in to buy. There isn't a single demographic. You see some consumers in with kids. You'll see elderly people in, looking to buy cars as well. It will appeal to a broad demographic that wants choice, in a different format of selling that's not into a negotiation.

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Sean Smith, The Western Australian - Journalist [85]

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And John, you're still quite confident that it's not going to cannibalize sales, obviously?

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John McConnell, Automotive Holdings Group - CEO [86]

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No, I think -- that's a good question, Sean. No, I am confident it's not, because the range of cars, typically, are probably a bit older than that which you would see in our traditional franchised business. Therefore there's no cannibalization of the existing franchise business. Rather it's an incremental play into the broader used car space, without the cannibalization of our existing franchise footprint.

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Sean Smith, The Western Australian - Journalist [87]

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And just given the economic softness here, are you still quite happy that that model will migrate elsewhere outside of WA?

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John McConnell, Automotive Holdings Group - CEO [88]

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Yes, I think so. And that's exactly what we're set to test. But I think the format you would have seen through the likes of CarMax and others in other market. It's a similar type proposition and those have been very successful models elsewhere in the world. So I've got no reason to disbelieve that the consumer in Perth is any different to that on the east coast. And the format in and of itself is appealing. So I think it bodes well for the future for us.

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Sean Smith, The Western Australian - Journalist [89]

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And just excuse me, two more quick questions. You mentioned cost savings. You referred to that a couple of times and I think the last answer was you've got some things in mind. Can you talk a little bit more in detail about where -- what you're looking at there, John?

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John McConnell, Automotive Holdings Group - CEO [90]

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I don't think that would be appropriate, to be honest, to talk about where we are going to take costs out, given that we would not have had those conversations internally.

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Sean Smith, The Western Australian - Journalist [91]

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And just a related question then, how have your job numbers changed here in WA over the past, say, 12 months?

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John McConnell, Automotive Holdings Group - CEO [92]

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I haven't got the exact number off the top of my head, but they will have come down, as we would have looked at driving productivity in a declining volume market. We've taken and reduced headcount in Western Australia, in line with the contracting market, as you would expect us to do.

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Sean Smith, The Western Australian - Journalist [93]

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Percentage wise, though, off the top of your head?

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John McConnell, Automotive Holdings Group - CEO [94]

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I don't have it off the top of my head.

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Sean Smith, The Western Australian - Journalist [95]

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All right. Thanks, gentlemen.

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John McConnell, Automotive Holdings Group - CEO [96]

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No problem.

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Operator [97]

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There are no further questions at this time. I would like to hand the call back to John for closing remarks.

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John McConnell, Automotive Holdings Group - CEO [98]

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Look, thank you very much. Nothing more from me, but thank you for your time and interest in AHG.

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Operator [99]

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Ladies and gentlemen, that does --