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Edited Transcript of ASG.AX earnings conference call or presentation 29-Aug-19 12:01am GMT

Full Year 2019 Autosports Group Ltd Earnings Call

Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Autosports Group Ltd earnings conference call or presentation Thursday, August 29, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Murray

Autosports Group Limited - CFO

* Nicholas Ian Pagent

Autosports Group Limited - CEO, MD & Director

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Conference Call Participants

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* Apoorv Sehgal

UBS Investment Bank, Research Division - Associate Analyst

* James Ferrier

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst

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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 Autosports Group FY '19 Results Briefing. (Operator Instructions) Please be advised that today's conference is being recorded.

And I would now like to hand the conference over to your first speaker today, Mr. Nick Pagent, CEO. Thank you. Please go ahead.

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [2]

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Thank you, and good morning. Welcome to the 2019 Financial Year Full Year Investor Presentation for Autosports Group. My name is Nick Pagent. I'm the CEO of Autosports Group. And joining me today on the call is Aaron Murray, CFO of Autosports Group.

This morning, we'll begin with a short presentation on the financial and strategic performance of Autosports Group over the financial year. And following the presentation, Aaron and I will open up the call for any questions. As we move through the presentation, I will, where possible, note the relevant slide number for those of you who are following our investor pack.

If we start on Slide #4. The 2019 financial year has been a challenging one for the new car market in Australia. Despite this, Autosports Group has been able to optimize its revenue, EBITDA, net profit after tax in a falling new car market. We've been able to grow our gross profit and grow our gross profit margins through an improved revenue mix. Over the year, Autosports Group was able to quickly adapt to market conditions. And the second half of 2019 was much better financially than the first half of 2019 financial year as we drive improvements in our inventory management and our operational expense ratios.

We're cautiously optimistic about the prospects for a gradual recovery in the new car market for the 2020 financial year as we cycle across some product delays from the 2019 financial year. Importantly, Autosports Group's Luxury & Prestige and East Coast strategy remains focused and relevant moving forwards. Within these markets, the consolidation environment is conducive to well-priced acquisition-led growth opportunities.

If we move to Slide #5, I'll summarize the main drivers of the 2019 financial result before asking Aaron to detail our financial trends, balance sheet and cash flows. On a statutory basis, revenue grew slightly at 0.01% (sic) [0.1%] to $1.693 billion. Gross profit grew by 3.6% to $275.5 million. EBITDA fell 15.2% to $50.5 million. And statutory net profit after tax was $15.9 million for the period.

In presenting an operational result for the period, we've included a small number of normalizations that are consistent with our previous results. These include a reclass of $66.8 million in revenue relating principally to OEM-based payments back from the cost of sale; $800,000 in acquisition and restructure costs across the period; and $800,000 in losses from our discontinued Fiat and Alfa Romeo franchise which have been excluded. We've again broken out the impact of acquisition amortization of $4.48 million for the period.

On a normalized basis, revenue grew in the business by 0.2 of 1% to $1.748 billion. As expected, revenue was primarily driven by the full year cycling of acquisitions. Gross profit grew 3.6% to $274.1 million. The gains in revenue and profit did not flow through to the EBITDA and NPAT lines during the period for a number of reasons. Firstly, EBITDA fell by 15.5% to $52 million for the period, impacted by OpEx increases of $19 million. This increase is related primarily to acquired businesses and the costs of facility investments and were skewed to the first half of the year. Net profit after tax declined by 32.9% to $22 million for the period, impacted by additional interest charges of $3.2 million and $1.9 million in additional depreciation.

On a like-for-like basis, our business outperformed the market, but it was not immune to the fall in Prestige & Luxury market. Like-for-like revenue was down by 4.1%. Like-for-like vehicle revenue was down by 9.7%. Service and parts revenue was up in the business strongly at 10.1% up. Operational expenses on a like-for-like basis were down by 0.31%.

If we move to Slide #6, we can see that 2019 financial year was a tale of 2 halves. The first half was affected by 3 nonrecurring events: the introduction in Europe of new real-world emissions testing procedures, WLTP as it's called, which led to some product delays and stop-sell orders. We're affected also by quarantine delays relating to the contaminated shipments from Europe and which also delayed products; and thirdly, in Sydney, deliveries were delayed by a hail event in December of 2018.

All these factors did having some impact in the second half, the second half saw clear improvements. 61.4% of the full year net profit before tax was generated in the second half of 2019 financial year. Net profit before tax margins improved materially from 1.3% to 2% during the period. EBITDA margins also improved materially from 2.7% to 3.2%. Interest costs were reduced by $1.8 million from the first half of the year to the second half of the year on improved inventory management, which saw a reduction in vehicle stock of $30.8 million over the second half of the year. Our disciplined OpEx management also helped the second half 2019 financial year. Our OpEx ratio improved to 12.5%. Employee costs reduced by 2.7%. Other expenses, also down by 0.4%, while occupancy expenses was stable, 0.2% up.

If we move to Slide 7. One of the clearest strengths of the Autosports business is our diverse revenue streams. Over the last 5 years, we've worked hard to ensure the business delivers a good and improving balance between the front end of the business and our aftersales back-end income streams. This balance drives resilience in a challenging market.

In 2019 financial year, we optimized the front end of the business and drove growth in the back end of the business. In the market that saw the East Coast Prestige & Luxury brands decline at 11.6%, Autosports saw a 4.1% decline in new vehicle revenue. Used sales held at positive 1.2% with retail stronger than wholesale in the used car area. Finance was in line with vehicle sales and largely unaffected by the ASIC changes in flex commissions. The back end grew by 0.2% on -- sorry, by 10.2% on a like-for-like basis driven by strong demand and our earlier investments in capacity expansion. Parts growth of 25.5% was particularly pleasing, supported by a 69% growth in revenue from our 5 collision repair facilities.

I'll now ask Aaron to take you through the financial trends, balance sheet and cash flow of the business.

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Aaron Murray, Autosports Group Limited - CFO [3]

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Thanks, Nick.

If you move through to Slide 9, it's a chart that show the historical strengthening revenue growth and EBITDA growth of Autosports Group. ASG -- Autosports Group revenue grew $4.1 million on PCP in what was a difficult new car market, particularly in the first half, as Nick explained. With the historically strong and robust overall revenue growth at 22% CAGR over the FY '15 to FY '19 year, new vehicle revenue is also running at 22% CAGR over the same period. The aftersales departments of service and parts continued a strong growth, supported by maturing dealerships and collision repair businesses. Service is running at a CAGR of 23% with parts running at a CAGR of 33% over the FY '15 to FY '19 period.

The group's EBITDA is running at a CAGR growth of 19%. Historical EBITDA has been supported by strong OpEx management ranging between 10.7% and 12.7% over the period. FY '19 saw OpEx increased to 12.7%, which was impacted heavily by first half inventory growth as a result of nonrecurring supply issues relating to WLTP and hail. OpEx normalized through the course of the second half.

If you move through to Slide 10, we have the statutory revenue bridge. Statutory revenue was in line with FY '18, with most of our revenue growth coming from prior year acquisitions which was offset by like-for-like organic declines.

If you move through to Slide 11, we have a historical chart showing our margins. Gross profit margins continue to improve as more revenue flows with the higher margins back in departments of service and parts and collision repair. FY '19 margins improved through the second half to finish at 15.65% for the full year. EBITDA and PBT margins have been consistent through the FY '14 to FY '18 period with FY '19 being impacted by a difficult first half. During the second half of the year, margins have returned to historical levels driven by expense reductions to improve inventory management and disciplined variable cost management.

If you move through to Slide 12, we have the cash flow for the year. The company generated strong operating cash flows of $23.1 million, which has allowed us to pay a final dividend of $0.03 per share, resulting in a full year dividend of $0.05 per share. We received proceeds from borrowings of $14.9 million. $11.7 million of corporate debt was repaid along with the dividend payment of $13.7 million. $1.5 million was paid for the acquisition of Mosman Smash. $14.9 million was spent on PP&E, comprising of $6.4 million of land on a neighboring block to our Macgregor Mercedes site in Brisbane; $3.2 million attributed to the fit-out of the Bentley and Maserati greenfield facility on the Gold Coast; $2.4 million of CapEx maintenance; and $2.2 million of capitalized service loan vehicles. This year's PPE -- PP&E, it is considered abnormal and will return to around $6.5 million for FY '20.

If you move to Slide 13, we have a snapshot of the group's balance sheet. Net debt is up $7.6 million to $67.7 million from $60.1 million at June '18. Overall borrowing is down $5.4 million coming as a result of a reduction of $10 million in floorplan usage offset by an increase in corporate debt of $4.6 million. Interest cover decreased to 3.21x EBITDA due to excess stock held during the first half of the year. Interest cover improved to 4x EBITDA through the second half as a result of the improved inventory management. The balance sheet has been strengthened with $18.6 million of land and buildings acquired over the past 2 financial years.

I'll hand back to Nick.

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [4]

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If I could, I'll just take a couple of moments to reflect and talk about the Autosports Group strategy and also touch on the new car market environment and the diverse revenue streams of the business.

Firstly, Autosports Group has a clear and focused strategy. That strategy remains constant and involves Prestige & Luxury car brands along the East Coast of Australia in the major markets. It focuses on continuing to develop the balance of our business between our diverse revenue streams and to look to consolidate what is and continues to be a fragmented market.

Within this framework, we constantly review and reevaluate the businesses that we operate. In 2019, we took the decision to close our loss-making Fiat-Alfa Romeo dealership. The decision was taken on assessing the current market conditions, the profit potential of the site, the future product portfolio of that brand and the alternate applications of capital. In 2019, the business lost $830,000. Looking forward, we plan to take advantage of the work that we've done in 2019 on inventory, OpEx and back-end revenue and take advantage of any improvements in the new car market, which brings me to Slide 16.

The environment for accretive acquisitions has improved. The challenging market has moderated vendor expectations and reduced the competition for assets. Over the last 2 months, Autosports has taken advantage of this environment and made 2 quality acquisitions.

Firstly, Sydney City Prestige. It fits nicely with our used car hub strategy in the North Shore of Sydney. It will help drive used car revenue growth. It gives us approximately an additional $65 million in revenue. We expect the business to contribute approximately $1 million in net profit before tax. The purchase price for the goodwill and assets, excluding vehicle stock, was $900,000 for the business.

Further on the North Shore, at a Mercedes-Benz Hornsby, this acquisition, which will settle in September of 2019, also fits well with our luxury brand and the East Coast focus. It is Autosports Group's first Mercedes-Benz site in Sydney. It further improves Autosports Group's revenue balance across the new car brands, which we'll see in a second. Turnover is expected to be approximately $50 million in this business. It is also expected to contribute approximately $1 million in net profit before tax. The purchase price for this business was $3.5 million for the goodwill and the assets of the business, again, excluding vehicle stock. We will continue to explore further acquisition opportunities on a selective and disciplined basis through the course of the year.

To look at the new vehicle market trends on Slide 17, I presented this slide at the half year, and as expected, new vehicle market conditions have remained challenging. Over the last 6 months, the market is down by 8.4%. We've now seen 16 months of straight decline equally for 2008 market decline. However, July did see a reduced decline of 2.9% for the month.

As we move to Slide 18, we see more relevance in the East Coast Luxury & Prestige for Autosports Group. The Luxury & Prestige markets in the East Coast space of New South Wales, Victoria and Queensland, 11.6% down in Luxury and 11.2% down in Prestige. Autosports Group outperformed these numbers at 9.4% down on a like-for-like basis. But within that portfolio, Audi struggled with minus 32.2%; Mercedes-Benz fell by 13.2%; BMW, by 4%; and Volkswagen, by 8.6%.

If I move through to Slide #19, we can see where some of these declines were driven. The first half of the year headwind that we saw are starting to ease. WLTP delays peaked in December. More has continued through the year. They are abating. Audi and Mercedes-Benz were the most affected brands on a WLTP basis. Through the course of 2019 financial year, Autosports Group carried $9.7 million in stock unavailable for delivery. This stock is now starting to unwind from August 2019 as those cars become available for delivery.

Quarantine delays resulting from the discovery of the Brown Marmorated Stink Bugs on vessels from Europe created a hold on deliveries through the first -- December and March quarters. This normalized over the second half of 2019 financial year, and we believe it's now cycling over on each other, and no supply delays exist anymore.

The hail from Sydney in December did affect vehicle delivery flow through the December and January period, but impacts have also normalized through the second half of the year.

2020 financial year shows opportunity for improvement. The July market for luxury vehicles grew 1.9% on a prior corresponding period against the falling market of 2.9%, the first growing market we've had for some time. The impacts of WLTP quarantine and hail, as I said, have abated, and external indicators such as interest rates and the property market conditions seem to be more supportive.

Moving through to Slide #20, to talk about our diverse revenue streams. In this environment, Autosports Group continues to be well positioned. We continue to improve our revenue mix across the Prestige & the Luxury segment. In -- besides Audi, Mercedes-Benz and BMW still accounts for 67% of the Luxury segment. However, in 2016, Autosports Group did not represent BMW. BMW is now our largest contributor at 30% of our new car revenue. The acquisition of Mercedes-Benz Hornsby will further improve the balance across our luxury brand portfolio.

An example of the ASG portfolio balance driving increased resilience can be found in the example of Audi in 2019 financial year. Unfortunately, Audi has been down 32.2% in the calendar year. 70% of that decline has come from the unavailable models of Q7, Q3 and A1 rather than market desirability. Whilst this affected Autosports Group's revenue and profit performance, we were able to cycle ahead of the market on new car revenue. In good news for 2020 financial year, the Audi Q7 has returned to the market in mid-August of this year. The Audi Q3 and A1 returned to the market in November. So the portfolio balance continues to improve.

Slide 21 shows the used car opportunity for Autosports Group. The Federal Chamber of Automotive Industries estimates the used car market is double the size of the new car market. Autosports Group operates a combination of used car hubs in Sydney and in Brisbane and, of course, traditional franchise outlets which gives us flexibility and coverage. Autosports Group's hubs are efficient for stock management and the concentration of personnel expertise and logistics.

Revenue grew by 1.2% in the 2019 financial year. The split between our franchise dealership sites and our hubs is almost even at 47%, 53%. And we believe the acquisition of Sydney City Prestige will unlock further growth in our used car business.

Our final and most resilient revenue source comes on Slide 22, which is the back end of the business, service, parts and collision repairs. The back-end revenue and growth continues to improve Autosports Group's strength, flexibility and resilience. From 2014 to 2019, the contribution of back-end revenue streams through our total gross has increased from 35% to 48%. This is significant as these revenue streams are more predictable, more maintainable and more insulated from new car fluctuations. Back-end margins were also materially higher and has contributed to Autosports Group's improving gross profit margin. In 2019, service grew 15%; parts, up 25%; and like-for-like was 10.2% up. We expect growth to continue in this area over the medium term.

To recap the results from the 2019 financial year. Revenue, EBITDA and net profit after tax were optimized in a challenging market. Gross profit and gross margins continue to grow on an improved revenue mix. The second half cycle is much better than the first half driven by improvements in inventory management and OpEx reductions. The Luxury & Prestige East Coast focus of Autosports Group remains relevant moving forward.

So outlook for 2020 financial year. Firstly, the new car market conditions are expected to gradually improve through to 2020 financial year. Autosports Group had like-for-like growth opportunities, especially in brands that were affected by WLTP. Service and parts growth are expected to continue in 2020 financial year. And Autosports looks forward to integrating the acquisitions of Mercedes-Benz Hornsby and Sydney City Prestige, improving our revenue and portfolio balance. We also believe that conditions exist for further well-priced acquisition opportunities.

If I now close the presentation and open up to any questions that anyone may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we have is from the line of Apoorv Sehgal from UBS.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [2]

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My first question is on Audi, impacted obviously by the emissions testing. Now you've mentioned that the diesel Q7 is back this month and the Q3 and A1 for November. So is it a fair base case that Audi can get back to growth from November?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [3]

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It's about 70% of the decline in the first 6 months of the year, as I've noted, so it certainly can track better. I do expect it to be cycling over some weak numbers through the second half of the year, might be consistent, but I expect growth is an opportunity for Audi in the 2020 financial year.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [4]

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Okay. Great. Second question on Mercedes, are there many -- should we expect many more acquisition opportunities within Mercedes brand given the sort of the current market environment?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [5]

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Well, first thing I'd say is Mercedes-Benz is an extraordinarily well sought-after franchise, (inaudible) motor vehicle, and really, it's right at the top in terms of being a premium brand. These opportunities don't come along that often. I think if you'd ask me the question, would I be interested in another Mercedes-Benz acquisition, which was supported by Mercedes-Benz earlier, I'd certainly look at any acquisition that was available in a major city, should they support it.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [6]

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Okay. Understood. Final question from me, please. Around the acquisition contribution of around $1 million PBT in the first half of '20, is it much in the way of cost savings or otherwise that can grow that run rate in the sort of second half '20 and to FY '21?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [7]

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Yes. So the Mercedes-Benz acquisition, if you're talking specifically about that acquisition, the business is a business with -- currently with 37 sales staff involved, we expect all those staff to come across to our business. We look forward to them coming to join us as they're high-quality level of people in that business has been running for 10 years and has high-quality operators and is already. There may be some synergies in terms of logistics, in terms of marketing cost base, potentially some supply synergies in terms of our bringing Autosports supply agreements across there. But basically, we're taking over the same, so marginal in terms of synergy.

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Operator [8]

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And the next question we have is from the line of James Ferrier from Wilsons.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [9]

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First question, if I just understood some of your earlier comments there around the business on a like-for-like basis, revenue was down 4%, and OpEx was basically flat. Did I hear you correctly there?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [10]

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You did.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [11]

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So just on that basis, if your revenue was down 4%, we would have thought you might have seen some marginally lower commission payments to sales teams, and therefore, your OpEx would have been down a little bit as well.

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [12]

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Yes. It's a fair assumption to make, James. And I think we did see that because, if you have a look at our personnel costs, our personnel costs did go down by 2.7%, which is pretty flush, I would say, to reflecting exactly what you suggest, 4.1% down in overall revenue. If we take a mix of base salary and commission, a 2.7% reduction in people expenses is appropriate. I would say, however, that the second half of the year saw a much better ratio for our OpEx. If you look at raw numbers, you'll see that the first half of the year and the second half of the year were almost identical in total OpEx. And you'll see that the gross improved significantly in the second half of the year which probably shows the work that we've done in this area to make sure the expenses are right.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [13]

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Yes, that makes sense. Yes. Following on from the previous question about the improved availability on some of the Audi models in particular, what was your expectation -- working off the sort of the current baseline of essentially nil sales on the Q7 and Q3, what's your expectation about how quickly they can return to the sort of volumes they were doing both from the perspective of consumer demand but also stock availability?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [14]

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So I'll try to do those in reverse order, James. Stock availability, we have availability immediately on -- in Australia to return ourselves to a sales rate which was -- which we're running at in the first half of the 2018 calendar year. In terms of bringing demand up to that level, we have not had that kind of market for 12 months, and it will be a challenge and will be work to get that marketing message out to drive demand. So I wouldn't expect us to go straight away to 100% volume. In terms of getting a 100% demand for the car, we are currently running through 2018 and 2019 model year cars. I'd expect demand to be at the maximum level when the 2020 model year arrives, which will be in first quarter of 2020 calendar year.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [15]

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Yes. Yes. Okay. Good to know. Looking at the other revenue line in your slides today, when you think about that as a percentage of sales, it was pretty flat through FY '18. It jumped up in first half '19, and then it sort of fell away in the second half '19. Can you talk a bit about that other revenue line in the context of OE incentive targets and sort of OE subsidy payments around some of the supply issues and how that's moved through the financial year '19?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [16]

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Yes. So yes, what you're saying is a fair reflection, James, of what went on during the year. It also shows probably -- and probably reinforces the message that I've been giving, that the second half was materially better than the first half, and the first half was where the material drop came in supply. And the OEMs -- well, some OEMs, 15 were to support the business where they couldn't supply product. So a more normalized level comes through the second half of the year and some support in the first half of the year, James.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [17]

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Yes. Yes -- no. That's encouraging to see the second half result. It didn't really have any of that subsidy type payment in it. So as you say, it was sort of a tangible claim, normalized-looking set of numbers. Where are you at on the contribution from your recent greenfield dealerships in the sense of the ramp-up in that profitability run rate?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [18]

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Right. So the -- if I go to our recent ones, which are the Gold Coast super-luxury businesses, that business drags about trade orders of 1% on margin last year, but it was improving through the year. The Bentley business is doing quite well there. Product is strong in Bentley, and deliveries will be solid through the second half of this year there. If I go back a little bit earlier, our Volvo Mt Gravatt business had its best quarter ever in the final quarter of this 2019 financial year and was profitable every month during that time. So they are our 2 most recent Greenfield sites. Almost all the others are getting towards the end of their, what you'd generally call, gestation periods, which are about 5 years of -- since the opening of those sites.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [19]

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Yes. Great. What's a rough estimate of what sort of inventory, what sort of stock you're buying with these 2 acquisition units?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [20]

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Yes. So inventory at the Mercedes-Benz site, I think you can work from $15 million in inventory. And you can work on $6 million to $8 million in inventory at Sydney City Prestige.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [21]

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Yes. Great. And final question, just on the used car side of things with this additional acquisition, can you just talk about the sort of the network you've now got on the wholesale side of things and how it all fits together and sort of whether you're done there and you see a step-up in profitability, or you feel like there's more to be done?

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [22]

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James, we see the used car market as one with tremendous opportunity, but we see it almost the same way as we see the collision repair market. It's -- the profit is generated largely by the quality of your operators. So whilst we see a great opportunity to go and expand and we see great -- and we see a huge market potential there, what we're trying to do is make sure that we grow with quality operators and a quality profit basis from each of the sites. So we'd like to go and integrate the Sydney City Prestige business, make sure that we're operating profitably. One of the reasons we bought that business was because the principles of the business are staying on with us and the principles of the business of people that we have known for over 20 years, and we know that they follow the operators, so them staying on was a big part of us buying that business as opposed to another one. We would look at another one, but we'd have to know that the business was going to operate well and within our boundaries pretty quickly.

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Operator [23]

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(Operator Instructions) There are no further questions on the line. I will now hand the conference back to today's presenters. Please continue.

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Nicholas Ian Pagent, Autosports Group Limited - CEO, MD & Director [24]

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Right. Thank you very much for your attention today, and we look forward to the 2020 financial year. Thanks for your time.

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Operator [25]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.