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Edited Transcript of AMA.AX earnings conference call or presentation 26-Feb-20 12:01am GMT

Half Year 2020 AMA Group Ltd Earnings Call

Sydney, New South Wales Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of AMA Group Ltd earnings conference call or presentation Wednesday, February 26, 2020 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Hopkins

AMA Group Limited - Group CEO & Executive Director

* Steven Becker

AMA Group Limited - Group CFO

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the AMA Group 2020 Half Year Results Webcast. (Operator Instructions) Please note that this conference call is being recorded today.

I would now like to hand you over to our first speaker, Mr. Andy Hopkins, CEO and Executive Director. Please go ahead, Andy.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [2]

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Good morning, everybody. Thanks for joining the webinar this morning. You will all have access to the investor presentation uploaded on the ASX this morning. I don't intend to take you through each page of the presentation. I will provide a broad overview of the activities for the half year, the factors that impacted the half and the outlook for financial year '21.

The first half year to December 31 was significant for the business and all stakeholders. In line with our strategy and plans to grow the business, the acquisition of Capital SMART and ACM Parts at the end of October was a key milestone and a massive achievement for the business. It almost doubles the size of the business and sets AMA up to achieve the revenue projection of over $1 billion in financial year '21 with an EBITDA of over $100 million.

It's no small task putting these 3 businesses together, so I appointed a dedicated integration director and team to complete the integration. The integration is now well progressed on all fronts, and I am pleased to note that the group will deliver in excess of $17 million of synergies in FY '21. Recognizing the overall benefit of acquiring and integrating Capital SMART and ACM Parts into the AMA business, it has caused some distraction in the first half. But I can assure you all that our teams are now completely focused on the ongoing performance of our businesses in this half and into '21.

Having relocated our head office to Bundall early in 2019, the ongoing establishment of the corporate head office with the key corporate roles located in Bundall continued during the latter half of the year. In addition, changes to the Board with the appointment of Anthony Day as Chair of the Board in September 2019, we also appointed 2 nonexecutive directors in Nicole Cook and Carl Bizon, and a new company secretary. They all bring considerable expertise and industry knowledge to the Board, placing it in a fantastic position to deliver on our key strategies.

We also appointed a new CEO in AMA Panel in the first half, Mr. Steve Bubulj, who brings immense industry knowledge after many years in the insurance industry. And finally, in line with the growth of the business, we appointed new auditors, KPMG.

So as you can see, the business materially changed in the first half of 2020, as we set ourselves up to be one of Australia's great success stories. But it's fair to say that the results for the period were mixed. Whilst delivering on our strategy to grow the business, our financial results fell short of expectation. Slide 8 provides the detail of some of the impacts of the first half. But this was mainly due to the unseasonal prolonged dry weather towards the end of the period, which resulted in a lower-than-expected volume; also, static repair prices with rising costs mainly associated with the significant increase in new vehicle technologies, primarily the ADAS technology, which had a larger and more rapid impact than originally expected.

Lower margin of Capital SMART also impacted our results in the half. This margin will increase due to synergies on the new contract negotiations. We had a negative contribution from ACM of $1.4 million as well in the half, and year-on-year decreases in new car sales have impacted APAS. And also the additional cost of corporate costs and corporate governance, which coupled with the impact of the new lease accounting standard and abnormally high acquisition costs, resulted in a normalized EBITDA of $21.7 million.

Having said that, I am very confident and pleased to reaffirm our previous guidance for the FY '20 of normalized EBITDA in the range of $73 million to $77 million, and Page 9 shows how the divisions will achieve this.

The company has historically paid an interim dividend. In light of the first half performance and our robust future acquisition pipeline, the company has decided not to pay an interim dividend for the half year. We expect to pay a dividend in relation to our full year results though.

I'd just like to hand over to Steve to take you through Slides 8 and 9.

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Steven Becker, AMA Group Limited - Group CFO [3]

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Thanks, Andy. And Slide 8 shows a bridge of what our earnings would have been if we had achieved a margin of 9.4% based on the revenue for the period, $37.2 million.

The key impacts: As Andy have said, reduced volume impacted it by about $2.3 million. The effects of ADAS were about $4 million. The contribution from Capital SMART on lower margin was $3.5 million; CPI, about $1.5 million. APAS and ACM Parts, a decline of $2.5 million; and governance performance rights bridges us to the $21.7 million. So they were the key impacts that affected that, and we would have achieved the $37.2 million if our -- in our normal margins.

Slide 9 shows a bridge to lower end of our guidance range of $73 million from $21.7 million in the first half to $73 million. You can see there on the bridge on Slide 9 that we get some improved earnings from our existing businesses, Panel and APAS, with an expectation that they will have nominal improvements in their performance for the second half. We also get some contributions from acquisitions, largely in the Panel division, of about $5.2 million. This is both run-rated acquisitions and new acquisitions that are currently on our acquisition pipeline and also good growth from Capital SMART under our ownership. We'll obviously earn this from November. And for the 6 months, it's expected to contribute around $17 million of EBITDA, which is consistent with our expectations upon acquisition.

I'll now hand back to Andy to talk about some of the key deliverables as we move forward into 2021.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [4]

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Thanks, Steve.

Yes, the key deliverables to June 30 and beyond. The following plan that I'll outline now will place the group in a strong position to deliver on the FY '20 and FY '21 market expectation of $73 million to $77 million in '20 and $110 million in '21. So completing the integration of Capital SMART and ACM Parts, which is tracking in line with expectation, and we are confident we'll deliver the in excess of the $17 million synergies in FY '21. We will finalize the advanced stages of the commercial arrangements on new price and extra volume outcomes with all key insurers, which is well progressed, including Suncorp under their new 25-year contract, and I will update the market soon. We'll address the increased cost and complexity of the ADAS technology. This will improve margins and earnings.

We continue to make strategically aligned acquisitions, increasing AMA's footprint both nationally and via a wider service offering and skill base, which will improve earnings and more importantly, diversity, with the sole focus on operational excellence with best practice shared across the expanded group and realizing the group's substantial purchasing benefits now. The financial results are set out in the pack and provide explanations. We're happy to take questions on this at the end.

And the path to the growth is on Slide 23, if you want to have a look at that. But the market opportunity for AMA remains unchanged. We operate in a market worth over $6 billion, in which we currently only have a 15% share. We aim to continue our growth trajectory and remain focused on the key following strategies aimed at delivering shareholder and all stakeholder value into the future. The consolidation of the panel industry in Australia continues to be attractive, and we will continue this focus. We currently have only 188 shops and a strong pipeline of acquisition opportunities and seeing no slowdown in these acquisition opportunities.

We see a continued demand for greenfield opportunities both domestically and internationally now and we continue to identify and execute strategic acquisitions in the parts and accessories division. Expanding and strengthening our strategic partnership agreements with key customers and suppliers is key to our operations. An expansion of our customer base and diversifying our service offerings will continue to provide growth opportunities for our business. Last but not least, realizing the full potential of our teams and capitalizing on all the internal synergies and vertical procurement opportunities will provide growth in earnings and opportunity for our staff and into the future.

I'm happy to open it up to questions now.

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Questions and Answers

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Steven Becker, AMA Group Limited - Group CFO [1]

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We've got a couple of questions, which I'll cover. One is a question from Aaron Yeoh on the contribution from Capital SMART in the second half and what portion of this attributes to synergies?

Aaron, very little of that's to do with synergies. The majority of that is really about just the contribution that they're expected to do under the current contract and refinements to that contract. So most of the synergies will occur -- as we've said, there'll be some in this year, but most of those synergies will occur in the 2021 year.

Another question you had was around the uplift in APAS in the second half of $4.6 million. That was largely to do with the existing -- the old ACAD business improving. Now we're not expecting massive improvements in that business because of new car sales and also the turnaround in ACM Parts, which we -- it contributed a loss to us for our first 2 months of ownership, and we're expecting that to around breakeven for the second half. So -- and then moving into 2021, we expect that to turn positive. So that's the key thing there.

There's a question on acquisition costs and what they relate to, from [Andrew Brent].

They largely relate to -- and if you look into our accounts on Note 13, it gives a break-up and the business combinations of that. But largely, $6.4 million of that related to the acquisitions we completed. Most of that was Capital SMART and ACM Parts, and then the remainder of that related to Horizon Global. You may remember earlier in the financial year, we looked to buy Horizon Global, which was a $400 million-type business. So we incurred significant costs in that as well, although that was unsuccessful.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [2]

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Two questions from James Ferrier. Can I quantify the price increases that we've received from insurers?

Well, it's ongoing negotiations. It's different from every insurer, but there is no downward pressure on pricing at the moment. ADAS is a real issue, and it's a cost that the insurers are keen to absorb, and obviously, policyholders will absorb. So all insurers are happy to talk to us about that. The new pricing in the MRSA is more or less finalized with Suncorp. And as I said on the call, I'll do some announcements about the new pricing with MRSA Suncorp deal later on when I update the market.

Another one from James. What revenue did -- and EBITDA did SMART contribute in the first half?

Really, the revenue was $50 million. And the profit was next to nothing. It made a little bit in November and lost some in December. So I think that's why we've had pressure on the margin as well because we've had the revenue but we've had no EBITDA from SMART in the first half. But as I said, with the increased volumes, and interestingly, we've seen all the volumes come back quite well, and we're in green everywhere in January and February. So we've seen the volumes come back through SMART and through the AMA Panel business. I'm very confident with the volume and the pricing going forward, but there was really next to no contribution from SMART in the first half and quite a big loss from ACM, which has affected the margin.

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Steven Becker, AMA Group Limited - Group CFO [3]

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Aaron had a question on the uplift in Panel for the second half and what can be attributed to recontracting at favorable rates.

We have factored in some -- a little bit of that, but that will be ongoing in the second half. Now we expect that most of those favorable price rises will fall into the second half, but there is a bit of an uplift that's baked into those numbers.

The acquisition contribution, someone asked, about $5.2 million, how much is previous and how much is new?

There is probably -- roughly probably 60-40, 60 new and 40 old, so there's a bit of that. We've got some very close acquisitions, which will be significant contributors. So we're very confident of those as well.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [4]

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Chris Savage has said are we continuing to see an uplift in volumes?

Yes, we are. As I said, the volumes are back. We've got more volume now in January and February than we've seen since August last year. So we're very confident that the volumes -- that they've come back.

Can I talk about any benefit from the hailstorms?

Well, we've set up dedicated repair center in -- 2 actually, in Canberra, and we've seen an increased volume in repairs in Victoria due to the hailstorms. So early days, it's difficult to say what the margin impact will be, but it's definitely a positive one in this half. And we are active in the hailstorms in Canberra and in Victoria.

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Steven Becker, AMA Group Limited - Group CFO [5]

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In terms of price increasing, Tim has asked, how much increased price inflation has been recovered in new prices?

So really, where we've been negatively impacted is -- there's always a bit of price inflation. And normally, you can recover that. What the biggest issue has been is the parts mix shift. So that's increased by about -- so we're using 17% more parts, which is largely around the ADAS technology. So that's the bit that we need to get compensated for and we're slowly working for. Most of the contracts do involve parts inflation, which normally runs at 1.5%, maybe 2%, those sorts of things. So it's really around the ADAS and getting compensated for that.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [6]

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Chris Savage made a comment, is there any negative reaction from IAG post the acquisition of Capital SMART?

The answer to that is no. There is no negative reaction from IAG or any of the other insurers. In fact, I think it's been received very positively both in Australia and globally. So no, I think it's all positive.

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Steven Becker, AMA Group Limited - Group CFO [7]

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Warren Jeffries just asked about the normalizations going forward, greenfield cost, procurement.

So you see there on Slide 25, we've really made an effort to pull those back. So you'll see most of the normalizations we've made on Page 25. Really, you'll see there, we haven't put in procurement costs, IT, greenfields, site closures, those sorts of things. So most of them are really focused on what I would call true normalizations. Now we're always going to have acquisition costs, I get it. But then we did have significant ones during the period. But most of these are focused on things that most people would consider to be one-off or nonrecurring or abnormal, I suppose, is the best way to describe them.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [8]

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And then another question from Aaron here. "Have you seen a recovery in the underlying panel repair volumes?"

Absolutely. In the second half, we've seen very robust and as I said, more volume in January and February than -- since August last year.

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Steven Becker, AMA Group Limited - Group CFO [9]

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And another question was on gearing levels. Are we comfortable?

Yes. We're comfortable with our gearing levels. Obviously, as you know, we geared up for these acquisitions. And as we get the benefits from that, we'll delever into that in coming periods. So we are comfortable with that.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [10]

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[Michael Herskope], "How do you interpret the IAG setting up panel shops?"

Well, it's an interesting one. I can't understand really their strategy behind that while most insurers globally are selling off their panel shops. But there's 3,000 panel shops in Australia. IAG currently have 6 and I don't think there's too much focus on rolling it out. I'm not sure what their strategy is, but we're certainly seeing no effect from IAG at the moment in terms of our volume. In fact, our volumes have come back everywhere.

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Steven Becker, AMA Group Limited - Group CFO [11]

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A question was on synergies. What are our initial estimates on revised synergies?

Look, that's a work in progress. We're very comfortable with at least $17 million. We think there's more synergies there. Because most of that $17 million was based on sort of things like paint consumables, which were very easy to quantify. So we're very comfortable with more than that, but we haven't put a number on those yet. But I think it's safe to say that it's in excess of $17 million.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [12]

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[Andrew Brent] mentioned a question with Capital SMART made an EBITDA loss in month 1.

Well, there was no profit in month 1 and they made a loss in month -- in December. But the new contract in place and the new synergies will bring it back into profitability. Also, the distraction in the business when it's acquired can't be underestimated. It was a massive distraction for all the teams. I've personally been around and met nearly everybody now in the business. The whole Capital SMART has settled down. We're integrating it nicely. I'm actually bowled over by the expertise and the process and the quality of that business and the quality of the people and very confident on delivering the $27 million of underlying EBITDA for '21 and then on top of that, the synergies. So we think it'll do $42 million in the '20 year -- financial year '21 and very confident with that number.

Tim Plumbe has asked another question, what needs to happen to get to the top end of the guidance?

The revenue, I guess. But the -- as I said, the business, the volumes have come back nicely. Capital SMART is up to capacity. ACM is integrating properly. And the old objective, the ACM business is to save the company money. And when that's fully integrated and running really well, I mean, if we can take $50 off each repair costs through ACM, that's probably worth $20 million to the company. So there's some big opportunity with ACM and Capital SMART. And the revenues in the AMA Panel business, as I said, have all come back, Tim. So the top line, we're pretty confident with.

James Ferrier has asked the question, could we please explain the mix issue in Capital SMART?

So because it's an average pricing model, if the larger repairs percentage goes up, then obviously it puts pressure on the pricing. So what we saw is larger repairs in the first half than we'd anticipated. So the mix changed from -- it should have been 86-14, and it changed to virtually 80-20 in terms of large repairs being 20%, which has put pressure on the margin in Capital SMART. That's why we didn't see the profit in November and December, as we expected. That's been renegotiated now with Suncorp. And as I said, I'll do an announcement around that shortly, but we're very confident with that now going forward.

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Steven Becker, AMA Group Limited - Group CFO [13]

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Had some questions about, and I think this probably relates to the coronavirus. Are there any issues with expected supply chains or parts past month. At present, no. And we've got good stocks at both paint and consumables, not seeing any issues at the moment. But I think we're just monitoring closely like everyone else. I think at the moment, no issues, we've got alternate suppliers. But I think we just have to keep monitoring it.

James has asked a question about cash flow, deferred consideration payable to old supply agreements.

Now there will be -- when we do change older paint suppliers, and we're still finalizing all the negotiations on that, there's likely to be a payout, like some sort of break costs, which we foreshadowed in the capital raising. Deferred consideration, you look in the accounts, and you'll see the numbers, no big changes in that. But you'll see a breakdown of current versus noncurrent in that.

In terms of what Warren Jeffries had asked about current gearing covenants, so basically, we have a net leverage ratio where we can't exceed 3.25 in the first year. That doesn't get tested until the end of this year. And everything is on the basis of around run rate and those sorts of things. So we're comfortable with that at the moment. And based on those, so no concerns on that.

[Paul Giord] asked a question about expected benefits of Capital SMART, putting paint supplies and timing of that.

That's still consistent with what we said. That's set at $14 million, which we outlined in the investor presentation. That's still on track, and we still expect most of that to flow into next year. There will be some of that into this year but largely into next year, as we have foreshadowed.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [14]

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Tim has asked the question about -- talk about additional volumes from Suncorp.

Well, we've got certain streams of revenue from Suncorp. We've got the S.M.A. R.T and S.M.A. R.T. Plus and S.M.A. R.T extra. So the business -- and basically, it's out-of-scope repairs, and the Capital SMART business historically turned away the out-of-scope repairs. And we anticipate that's been about $50 million or $60 million of extra revenue in '21, which we will now capture and has been agreed to capture into the S.M.A. R.T business.

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Steven Becker, AMA Group Limited - Group CFO [15]

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And Aaron just mentioned about the key risk to guidance.

I think our key risk is like it's across the business, I suppose, in terms of it's really on volume and those sorts of things. But as I said, we're very, very confident about that range at the moment.

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Andrew Hopkins, AMA Group Limited - Group CEO & Executive Director [16]

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Okay, guys. Well, I think there's no more questions, but happy to take them personally. You've got Steve's number or my number. By all means, give us a call, and look forward to seeing you on the road over the next couple of weeks. Thank you.

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Steven Becker, AMA Group Limited - Group CFO [17]

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Thanks, everyone.

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Operator [18]

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Ladies and gentlemen, that does conclude our call for today. We thank you for your participation. You may now disconnect.