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Edited Transcript of BAP.AX earnings conference call or presentation 20-Aug-19 11:15pm GMT

Full Year 2019 Bapcor Ltd Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bapcor Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darryl G. Abotomey

Bapcor Limited - MD, CEO & Director

* Gregory Lennox Fox

Bapcor Limited - CFO & Company Secretary

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Conference Call Participants

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* James F. Casey

Baillieu Holst Ltd, Research Division - Head of Research

* Jordan Rogers

UBS Investment Bank, Research Division - Director and Small Caps Research Analyst

* Matthew Nicholas

Crédit Suisse AG, Research Division - Director

* Shaun Weick

Macquarie Research - Analyst

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Presentation

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [1]

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Good morning, everyone. It's Darryl Abotomey. Welcome, everyone, to Bapcor's sixth end of financial results presentation since listing on the Australian Securities Exchange. Greg and I are very pleased to present to you another set a record results in revenue and earnings that emphasize Bapcor's resilient in soft economic and trading conditions. We'll walk through the presentation pack and take questions at the end of our presentation. So Bapcor's results were lodged with the ASX this morning and are also available on the Bapcor website.

Now turning to Page 3 and the actual results. As I've said earlier, Bapcor achieved record results on all key measures. Pro forma continuing operations saw revenue up almost 5%, EBITDA up almost 10%, net profit after tax up 9% and earnings per share up 8%. However, when you exclude TRS, the business we divested in July 2018 from the prior year, the more meaningful data shows that revenue was up 7%, EBITDA was up 11.7% and NPAT was up 11.2%. So overall, another solid and credible achievement by the Bapcor Group in 2019.

Turning to the operational highlights on Page 4. The 2019 results were clearly in line with guidance. We couldn't have guided it any closer. The results reflect resilience to market conditions, and the market conditions last year were the toughest market conditions we have seen in the period since we ASX listed. Our 3 major segments of Burson Trade, Bapcor New Zealand, Specialist Wholesale, which make up more than 84% of our earnings, all recorded solid growth. The Retail segment was challenged in the -- and particularly in the second half due to market conditions and particularly the high proportion of immature loss-making stores. And I'll cover that a little bit more when we talk about Retail.

Intercompany sales grew strongly with a 35% increase. Our new Commercial Truck Parts business, which we created -- which creates another platform for growth for us, was greater when we acquired the Don Kyatt Spare Parts group and also the Japanese spare parts late in the year. We added a staggering 59 new company branch or store locations. And whilst we say in the details that there are now over 950 locations, in fact, there are over 1,000 locations, market pricing locations that Bapcor has around Australia, New Zealand and Thailand.

Our working capital management certainly improved in the second half compared to the first half, and we still have more work to do in that area. We've refinanced our debt with more favorable terms. We're doing major investments in the future -- for the future, and that's in upgrading technology through our new point of sale for the Autobarn business, new warehouse management system and investment in IT infrastructure. We also -- as those that were at the Investor Day on the 3rd of July will have seen, we've got a reinvigoration of our senior leadership team, and we do continue for all our team members to focus on training and opportunities for them.

On Page 5, we show the key financial highlights, which I've already mentioned most of them. Importantly, our dividend will increase by 9.7% to $0.17 for the full year, which includes a $0.095 per share final dividend. Page 6 shows our history of strong performance, and across all the key measures, we continue to perform strongly as we have since listing on the ASX.

Turning to our segment split on Page 7. You'll see increases in sales, EBITDA and EBITDA to sales in all segments except Retail, and we'll cover each of these segments separately and in more detail as we go through them. But as you'll see in all of the segments, they've improved. And even with Retail, achieving a 10.6% EBITDA to revenue in the retail environment is still a very commendable result.

Page 8 shows our revenue and EBITDA split, emphasizing we are a Trade-focused business and now generating 84% of our earnings from the Trade side of our business, and that's the combination of our Specialist Wholesale and our Trade-focused businesses.

So to put a little bit more color around each of the segments, we'll start with the Burson Trade and we'll start on Page 10. Page 9 shows the historical trends, but Page 10 is about the segment. And just as we go through each segment, this time, we're not only doing a review of 2019. We're also pointing out what we are going to focus on in our key priorities in each segment for the year that we've just started during financial year 2020.

So at Burson Trade, good revenue and EBITDA growth with same-store sales increasing 2.2%. And importantly, the growth in the second half was 2.5%. I'm pleased to say that, that growth has continued to increase into the current financial year. We did increase by 11 stores to 181, on our way to at least 230 stores. Our gross margin expansion continued, and that's largely driven by procurement initiatives. The market is competitive, and we said -- mentioned this at the half year, that it's been a fairly competitive market in the last 12 months and it's meant that we've only been able to do limited, in fact hardly any, general price increases throughout the period. So there's very, very little impact of any price increases through the selling price and through the margin. We would expect that in the coming year, because of the exchange rate implications, there has to be movement in the market to recover the impact of the exchange rates.

Equipment business. We've expanded by adding a major new product line, and I'll talk about that in a minute. And our business-to-business sales, so the sales we receive electronically via the Internet, exceed $80 million just in this segment. So it's quite a material amount of business that we receive electronically on the B2B platform that we operate and have operated for a number of years.

Moving forward to the current year, we'll continue to expand our footprint. And as we've always said in Burson, we'll probably add somewhere around 10 stores in the next year, and we're targeting that 230 stores over the next 4 years. Intercompany collaboration on own brands will continue. We want to increase our same-store sales growth activities. We've got a number of promotions and opportunities planned there is what we're going to do.

Growth in the new equipment ranges. So we've picked up the new Hunter wheel servicing range in the -- for the Precision business. That should add somewhere around $6 million a year in revenue, and capitalizing on that is a key focus for the Burson and Precision business.

Turning to Bapcor New Zealand on Page 11. Strong revenue and EBITDA growth in what is in New Zealand a softening economy, and we've seen this continuing softening economy since the change of government and that's continuing to show through. But even -- having said that, BNT had same-store sales growth of 5.3%. And importantly, again, in the second half, it was 5.9%. So a very strong performance in that business. We added 4 BNT stores, which took it up to 58 stores in New Zealand for the BNT business. We had great success in newly introduced own brand products in oil, suspension, brakes and filtration. Those -- we expect own brand products to strongly perform over the next year. And we started an equipment business, Precision, in New Zealand towards the end of 2019. And again, we expect that to contribute through -- starting in the 2020 financial year.

So looking forward in 2020, the key priorities are the footprint expansion to continue towards its target of 75 locations. They're very focused on price and margin management, leveraging the intercompany and own brand sales and particularly, the own brand products that were released in the last few months. And as I mentioned, to grow the equipment business which we started towards the end of 2019. So quite a lot of good opportunities there that aren't future opportunities. They're ones that have already started, and we're starting to -- we expect those to deliver throughout 2020.

Turning to the Specialist Wholesale business. In 2019, good revenue and profit growth here in this segment, particularly strong in the electrical and engine management business units, which you would expect given the proportion in vehicles that is electrical and electronic these days. They increased the sales that they make to our own businesses, particularly to our Trade and Retail businesses, by 35%. So it is a key part of our strategy is to continue to grow that. We created the Commercial Truck Parts group, as I mentioned, with the acquisitions of Don Kyatt and Japanese Truck. We now have 14 locations, and it is an excellent growth prospects for the segment. And we'd expect to have almost -- if you look at the strategic targets in the appendixes, we expect to grow this to more like 40 locations over the next 4 or 5 years.

So key priorities going forward is the development and consolidation of the market brands; grow the intercompany sales, particularly the footprint expansion, as I mentioned, in commercial trucks, but also in the electrical and engine management areas; and -- but also, we've got some particular targets to grow certain product ranges that are very specialists, such as the air conditioning. This is auto air conditioning, not house or office air conditioning. So we're expecting to grow that over the next year as well.

So turning to our smallest segment, Retail. So Retail was the one soft spot in the year and was impacted by both soft demand, high level of competition and the fact that we added an exceptionally high number of Autobarn company stores. We added 18 Autobarn company stores during the year. That was an extraordinary amount, and it's just the circumstances that you take them on there in front of you, and that's exactly what we did. The unfortunate part of that is in the initial phase and particularly the initial year, as is always expected, they've incurred a loss, and that's in the second half was an additional $1 million losses as in, in the start-up and turnaround phase. We expect that, that will improve in 2020.

Having said that, the same-store sales growth in Autobarn, so for the Autobarn company stores, for the year was a same-store sales growth of 5%, and in the second half, it was 5.7%. So it was a very, very good growth. Franchise stores were relatively flat, slightly positive, but relatively flat in the Autobarn side. We have a lot of initiatives that are underway in this group now in the retail, particularly the fact that we now have a new Executive General Manager who commenced in May, and he's doing a refocus on some of those businesses and the way they go to market.

So at the end of June, we have 134 Autobarn stores, which says that -- and of those, 49%, so nearly half, is company-owned stores, which gives us a really solid influence now on that market. We'll continue to grow the business, both online and bricks and mortar. Our online sales almost trebled, and that was partly with the introduction of click and deliver and that was added to our click and collect which we've had for some time.

Moving forward on the key priorities. In Retail, our real key priority over the next 12 months is to consolidate and optimize. You probably won't see a huge -- a significant number of stores being added to the network, but you will see a vast improved performance. And that is the focus we've done with the brand work announced to consolidate and optimize what we have and what we've now got as our platform in place. So you'll see improvement from the underperforming and immature stores, and that's particularly through doing store manager development and enhanced marketing and promotional program. So you'll hear the Autobarn name and even MIDAS name on radio and, depending where you are, TV, if you're in the countryside, on a much more frequent basis. Further develop our digital and online channels. So we're very much focused on our omnichannel and a real focus on growing same-store sales.

So Page 14 is our latest or newest segment, and that is Asia. So in 2019, we had a positive start to the expansion. We've now got -- currently got 4 stores. The disappointing part with Asia would be that it just takes so long to do rollouts, and we've had a lot of delays because of the sheer time it takes us to do simple refurbishments and to get the supply chain working properly. It marches to the tune of a different drum. So we just have to learn to deal with that, and that's what we're doing. So if we look -- and we've had very, very good progress in selling to chain workshops. So that's for the branded chains in Thailand. We've got some very good relationships there.

So as we look forward in this current year with Thailand, the key thing is to finalize the initial rollout, which is another 2 locations: 1 additional store and a sourcing office. So these will be up and running by October. We need to bid down our process and further develop people in our stores. One of the biggest things for us to do is to fine-tune the rollout of our electronic catalog. So that's our B2B system. It will be a first in Thailand, and we'll be providing it [also], a very similar system that generates over $80 million of the sales in Burson. We will launch into Thailand. It's already being used there, but not -- it's in a trial phase. It takes a lot of work to get all the data into these catalogs, and we're now pretty close to full launch and full rollout. It will provide the brand to continue to develop relationships with the key workshop chains, which is a big, big part of that.

Then we need to prove the concept that we will make a return on investment in Thailand. So once we get those couple of steps done that we've listed, we'll be focused on making a return and proving that we can deliver in that country. Once that is done and all signs are looking good at the moment, then we will look at launching a much greater rollout across -- particularly across Bangkok, but then to the rest of Thailand and potentially into other parts of Southeast Asia.

For more details on the financials, I'm going to hand over to Greg and he will walk through...

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [2]

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Great. Thank you, Darryl, and good morning, everybody. As Darryl's mentioned, we're quite pleased with the results in what has been a challenging market, both in terms of economic conditions and at times during the course of the year, with competition. However, despite this, the business has recorded very respectable growth compared to last year, and we have achieved our profit guidance of pro forma NPAT growth of 9%.

Looking at the P&L on Page 16. You can see that revenue has increased by 4.8%. And if we exclude TRS from the previous year, our growth in our continuing businesses grew by 6.9%. One of the features has, again, been our gross margin, and our gross margin percentage and our EBITDA percentage increased by 0.9 percentage points and 0.6 percentage points, respectively. All of our businesses -- all of our business segments, apart from New Zealand, recorded an improvement in the EBITDA percentage in the second half of the financial year compared to the first half. And on a consolidated basis, our EBITDA percentage increased from 11.9% in the first half to 13.4% in the second half, an increase of 150 basis points. The improvement in margins continues to reflect our focus on procurement savings, purchasing through our intercompany channels and ongoing pricing management.

Our finance costs were higher by $1.5 million in FY '19 due to higher debt levels as a result of acquisitions and an increase in working capital. In total, you can see pro forma NPAT increased by 9% and statutory NPAT from continuing operations increase by 14.8%. A pro forma NPAT to statutory reconciliation is included in the appendix to the presentation with the main difference in FY '19 being we excluded a book gain on the deferred settlement of an acquisition.

Flipping over to the cash flows on Page 17. You can see that our cash conversion ratio for the full year was 79.4%. This ratio is below where we've been historically for a full year and reflects the investment in inventory to support the large growth in company locations, and Darryl mentioned before, we've located -- we've got another 59 locations now than what we did last year. We've also invested in new product ranges to support our own brand expansion. And as well, we've got additional investment in new specialist product ranges, such as in our equipment offering to workshops and our expanded air conditioning program.

Further down the cash flow, you'll see a line titled cash generated excluding business acquisitions and divestments, and this shows a negative $4.8 million. This is the line where we typically target to at least break even, meaning we can fund our store expansion across Trade and Retail, fund our regular capital expenditure program and pay our taxes and dividends all from the cash generated from operations. In FY '19, this was slightly negative as a result of the investment in inventory I've just outlined. And in addition, our capital expenditure reflects $10 million of CapEx related to the WMS, point of sale and IT infrastructure projects. In addition, that capital spend, $58 million relates to acquisition activities, the main acquisition being the newly formed Commercial Truck Group, and the acquisition amount also included some deferred payments. We also received $14 million from the divestment of TRS.

Looking at the balance sheet now on Page 18. As expected, with the acquisition activity and investment in inventory, debt increased over the course of the financial year by approximately $47 million. Despite the increase in debt, we achieved our target to be under a 2x leverage ratio when annualizing impact of acquisitions, and our interest cover remains very healthy at more than 10x.

Working capital increased as a percentage of sales largely due to the increase in inventory for the reasons outlined earlier, and our working capital efficiency will remain a focus for us during the 2020 financial year. As previously announced, we will -- we successfully refinanced the business at the end of FY '19. And along with this, we're able to secure a 7-year fixed funding as well as improved terms of our existing banks.

In regards to the change in accounting standards for operating leases, please note, we have included a slide in the appendix to the presentation to provide some color on the expected impact on our financial statements and note that the impact of this has not been included in our guidance. And finally, from a -- we have declared a fully franked dividend that represents approximately 50% of our NPAT. This has a record date of 30 August, and we will again offer the dividend reinvestment plan to shareholders.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [3]

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Thanks, Greg. I'll now provide an update on our strategy and targets, so if you go to Page 20. And just to emphasize, there is no change to our targets. It's consistent, specific and measurable targets, and the detailed slide is actually included in the appendix and the normal form shows where we're at today and where we're targeting to get to. The key message is that we still have significant growth to come in this business. The formula that we use is not complex and applies to all our segments.

So first one is to grow sales organically, also through footprint expansion, and that's to get businesses like Burson to at least -- to 230 stores, New Zealand to 75, Autobarn to 200 and the commercial vehicle parts group to at least 40 plus. It's also to increase our multichannel, or omnichannel as some people will call it, plus our online B2B business.

In the margin side, varied -- range of initiatives that we have, particularly through pricing management, both increasing our own brand sales and optimizing intercompany sourcing projects. We also aim to improve our operating efficiencies, and I'll cover some of the projects on the next slide that we're implementing that should deliver in that area. And importantly, we consolidate and optimize what we have today.

We're always on the lookout for strategic acquisitions and expansion, but we look for the right opportunities, of which we have numerous at the moment. But we stick to our principles that we only want to focus within our core businesses and that whatever we acquire, we prefer it to be a good performing business and that it will add and deliver to our overall earnings and provide an increased shareholder return.

Just turning to Page 21, looking at some of the key projects that we have underway, and these are major, major initiatives and investments. In the warehouse evolution program, the feasibility and detailed planning's reaching conclusion, and we expect to have more detailed announcement probably around the AGM or at the AGM, which is on the 1st of November.

Our warehouse management system, which is installed in the Manhattan -- it's a top tier warehouse management system, the first location being our Nunawading warehouse in Victoria, will go live by October this year. And that is expected to deliver efficiencies in the second half. That will be live, and that will ramp up over time. And following the implementation in Nunawading, we'll then roll that out to the other existing warehouses, including the ones in Queensland.

Our point-of-sale system in Autobarn in the Retail business had been running on a legacy system, and there've been some delays in the software issues from the provider. It is a packaged system. But the full rollout is actually underway at the moment. We've got a number of locations operating on it, and we expect it to be completed during the course of 2020. And that's -- whilst it's delayed in timing, it's still running very much within the project costs that have been projected.

Our technology infrastructure is due to be completed in September. It's not that ever -- investment in technology infrastructure ever stops, but our upgrade of the systems to improve our redundancies, improve the issues with spend and the penetration that we want to avoid and improves the redundancy and stabilities, all due to be completed in September. And then we're also doing an increase in our data network to increase the size of what I call the pipes that go between each of our locations and the central computer systems. And we're -- as I mentioned earlier, we're always on the lookout for future acquisitions.

So probably one of the most important things is how's trading going so far this year and what's our outlook for the rest of the year. So for Bapcor, the market fundamentals and appropriate opportunities continue to drive our profit growth. We do not see this changing. There are a lot of opportunities both in our existing markets and in our new markets that we have.

Our first 6 weeks of trading, whilst we don't like to say 6 weeks makes a year, but the first 6 weeks have shown an improvement in nearly all our segments and particularly Burson, Retail and Specialist Wholesale above last year and looking promising and certainly performing well at this point in time. But just to emphasize, that's the first 6 weeks.

For 2020, we're anticipating mid- to high single-digit percentage increases in pro forma net profit after tax and additionally, that we expect our EBITDA to be a little bit higher, a couple points higher -- percentage points higher due to the increase in the additional depreciation from the investments that we're making for the longer term in technology and systems. So just being cautious that if some people are looking at it and we say mid- to high single digits, if they're going to go up by 5% to 7%, for example, then you'd expect EBITDA to be going up 7% to 9%. So just to make that clear.

So in summary, we had another record year for Bapcor, and we expect many more to come thanks to the dedication of our talented team members and franchisees in each of our businesses. We thank them, our customers and suppliers for their ongoing support.

So we'll go to Q&A. Rishi, we'll go to question and answers. So people who got question and answers, Rishi will advise you what you need to do. Thank you for joining us, everyone.

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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 Matthew Nicholas from Crédit Suisse.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [2]

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Well done on the results. Just the first one, just in terms of the guidance you put out. Could you give a bit of color as to what your base case is there in terms of competitive positioning? Obviously, there's been a lot of rhetoric over the last 6 months about enhanced competition. Could you just give a sense on what you're looking at now and how you're factoring anything going forward?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [3]

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It'd be fair to say, Matt, that we're not -- we don't see the market sort of getting easier, for want of a better description. So we haven't factored in a significant or much of a change in that competitive market side. Do we think we've got some things that sort of complete well because we have done some certain steps over recent times to address some of that? Yes. But if anything, we'd say that we're not assuming a significant change to the competitive market side in our forecast.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [4]

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Right. And just one on the cost front. I mean obviously you may have mentioned before, FX essentially driving through an environment for price rises this year. Just putting your cost of goods sold aside, if we just look at the underlying fixed cost base just in terms of labor and premises, how should we look at labor inflation or labor and premises inflation over the next 12 months?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [5]

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Yes, look, we wouldn't see labor going up by any more than sort of that 2% to 3% mark sort of whatever the average wage is, but 2% on average. 2% to 2.5% is probably about right. We do have [EBAs] in place, et cetera, that -- in some of our locations. So that 2.5% to 3% would be maximum. And also, even in our premises, we don't see any significant change. We're assuming that CPI essentially, so that 1.5% to 2% levels, it's be -- we've -- because of the number of premises we have, in some cases, we're actually seeing reductions. Other cases, there are slight increases, but nothing of materiality in any way.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [6]

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Okay. And just a final one, just on the cash flow going forward. Obviously, there's a lot going on here, I suppose, as you're doing more in-house brands. Is it still possible to go back towards your historical cash flow numbers or cash conversion numbers going forward just given the amount of moving parts going on with the internalization of supply?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [7]

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Matt, it's Greg. Yes, Matt, so we'd hope -- on that line I talked about in our presentation where it was a slightly negative 4.8% number, that's where we typically aim to break even. In the forecast, we'd expect that line to return to positive despite the investment in own brands. And that would include CapEx as around about $50 million, which is really a sort of a base run rate which is sort of $35 million to $40 million plus the additional around -- circa $10 million for the project-related capital expenditure.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [8]

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Just on the inventory, Matt, we probably -- whilst inventory has never been a big issue for us, we probably did get, in fairness, a bit of a wake-up call in December, even though most of it was to do with timing, but there is a massive focus in the organization now on inventory, in proving the levels and questioning things that have been done in the past. The introduction of the warehouse management system will help that. And I can tell you that every single senior manager have got part of their financial targets for this coming year around improvement in the management of inventory.

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [9]

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So probably to head off a question that will come anyway, our working capital sales percentage would be shooting at, at least a sort of a 1% reduction in that percentage over the course of F '20.

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Operator [10]

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And the next question we have is from the line of Shaun Weick from Macquarie.

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Shaun Weick, Macquarie Research - Analyst [11]

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Well done on the results. A couple things for me. Just if you could start at gross margin. The trend there in the second half obviously slowed a little bit in terms of growth. Is that a function of the, I guess, price competition and the competitive dynamics we saw in the market? Or are there other factors at play there? And how should we think about gross margins moving into FY '20 and I guess the underpinnings of that?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [12]

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Yes, so it's fair that we flagged that we thought the gross margin would slow in the second half because we did respond to some of those competitive pressures, and that's a real key for us. So we don't -- we still see some of our EBITDA-to-sales margin, as we've said historically, still improving 20 to 30 basis points over the next year, but we wouldn't see the sort of increases that we've had in the past coming through. That's all in the absence of major price movements and lots of other of things. But we don't assume that in -- when we do our management's forecast. So slight -- we expect to see a sort of 20 to 30 basis points improvement over next year, but that would be about -- and that's what we've always said. So we'd expect that over the next 12 months.

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Shaun Weick, Macquarie Research - Analyst [13]

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Yes, and just on the price rises, like, how are you thinking around timing now? Will that be a potential contributor to COGS improvement through the first half?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [14]

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Because we don't -- we don't have a -- in some ways, we don't have a significant control over some of those increases. What -- that will depend in what the suppliers are doing and what's been pushed through to the market. We're seeing some suppliers come through with some increases, but we're not yet seeing the market moving on a lot of areas. So I actually think that a lot of it might be more like in the second period rather than in the first. So...

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Shaun Weick, Macquarie Research - Analyst [15]

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Okay. And just on the guidance, obviously, there's a bit of a range there. Like, what are the key kind of assumptions or swing factors between, I guess, hitting the bottom end versus the top end of that guidance? And what have you included in there in terms of the incremental contribution from, let's say, top acquisition as well as some of those small -- smaller recent bolt-ons?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [16]

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I'll let Greg cover the contribution from the acquisitions. But the key thing that we're assuming in there is just at the bottom end, I think it will be that there's still very strong market competition, no improvement at all in [terms of] prices to any degree, et cetera. So it's almost a continuation of current environment. The top end is that there is a little bit of movement, and some of our businesses, particularly in Retail, start to improve more than what we've already assumed in our budgeted figures. [And cost --] full year contribution of the acquisitions?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [17]

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So yes, Shaun, that's $4 million to $5 million at the EBITDA level. So if you took our EBITDA guidance at -- our NPAT guidance of 5 to 9, you add 2% on that, so you have 7 to 11 increase in EBITDA. At the midpoint, 7. That would give you EBITDA of around about $180 million, which is a $15 million increase in FY '20. So nearly 1/3 of that would be due to the acquisition activity in FY '19.

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Shaun Weick, Macquarie Research - Analyst [18]

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And that's an incremental contribution?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [19]

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Yes. Yes.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [20]

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Yes, and the other thing that will -- is a big part of -- and even though we know that the first 6 weeks have been -- have seen a -- we've seen a lot of retailers, I think, is that -- or the economy generally, that it may have improved a bit. The question mark for us is still around so what is going on in the economy both in Australia and New Zealand, and we still don't really have a clear picture on what's going to happen. So we're just a little bit cautious. If things start to improve, then that will be -- that's where I would think we'll get to the higher end of our forecast.

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Shaun Weick, Macquarie Research - Analyst [21]

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Okay. Great. And just one final one on the warehouse management system. Implementation there, I think, was October. Is there anything included kind of in the guidance there around efficiencies you'd expect to come through the supply chain or...

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [22]

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Nothing of any substance because -- there'd be a little bit in the second half of the year, but it's not material in the earnings side. We'd expect that there will be some improvement that will drop into our working capital. But on the earnings side, we haven't built in much -- just because of the ramp -- you can actually have a -- initially, you're going to quite often get a negative and then it starts to pick up after that. So it looks like we'll get to ramp it up and people getting used to a completely different system in regard to scanning rather than manual accounting and [thinking all that] sort of stuff. So...

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Operator [23]

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(Operator Instructions) And the next question we have is from the line of Jordan Rogers from UBS.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [24]

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Just around the pricing side, so you mentioned it's a little bit -- partially it's supplier-led there. What about sort of the directly sourced portion of your private label? Where are you hedged at for F '20? And relative to the basic [needs], what price increases do you sort of need to put through on that?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [25]

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Okay. I'll answer that pretty easily. If you look at what's happening with the currency from January to June, it would mean that we'll have to do about a 7.5% increase in pricing if we were to stay and recover all of that -- the drop in the Australian dollar. Now whether that's practical, in some areas it will be. Other areas, it'll have to be spread out over a couple of increases. But all our businesses are looking at, at the moment, especially the Specialist Wholesale where they're importing direct, that there's strong [push out] increases [for a lot of that then].

Now the thing with that is that, yes, it might push up the sales line, but we haven't really factored too much in. We assume it's going to be neutral, as in we'll be able to recover the increase in currency. So that's the assumption we based upon is that we're getting -- we'll -- in our businesses that are importing, we'll recover the cost and that's just our structure.

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [26]

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The positive thing about it, Jordan, is that all of our competitors obviously import all of their products, so we're in the same boat. We hedge 100% of our commitments, our known commitments. So we have got a buffer in there for the upcoming payments that we may make. So there is a bit of a time lapse. We will be looking at opportunities though to potentially increase prices where we can in advance of that actually cost -- that higher cost in the business. So whilst there is a challenge for us to push prices through, there's also potentially an opportunity in the short term to have a margin benefit.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [27]

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[All right] and again, but that's presumably after the first round of increases [that will come this] Christmas [post any] hedges?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [28]

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Yes.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [29]

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And look, there is already some increases that have gone through and have been announced in some of the businesses already. Not material in the total sort of amounts, but some of this is already out there. And also, they're also watching to see what everybody else is doing. But everybody that imports [don't] have to push pricing [further]. Otherwise, you're just going to have to [edit] and we don't intend to do that.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [30]

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Great. All right. And the next question is around retail margin. Can you just give us a little more color around how much of that 1.4 percentage point change in the EBITDA margin is due to the immature stores versus the dilution of you increasing your company-owned versus franchised income and then versus sort of a like-for-like margin decline?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [31]

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I think the reasonable -- the exact figure's not off the top of my head. I can't give you -- and I don't think...

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [32]

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Maybe just ballpark, if you could?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [33]

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Yes, no, what I've said is that the vast majority of the decline is sort of the new stores added. I think that we've not -- we would not expect. Like, if you look at the previous period's EBITDA to sales, that's where we think it should be at this point in time. Now some of it -- a little bit of it is the competitive environment, and you could say maybe 1/3 of the reduction to competitive environment, the rest of it is the impact of the number of stores we've taken in and the impact of those stores and the underperformance in them at this point in time.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [34]

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Okay. Great. And then just last one for me around Asia. It's still a trial at this moment. How much data do you need, I guess, on the initial stores? Do you think you need another year or 18 months before you can say...

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [35]

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Oh, no. So it'll be -- probably, if we get -- assuming we get the other stores up, I'd say, 6 months from then, so it'd be by March next year at the latest, we're going to be in a position to make a decision. Or at the moment -- and we have sort of, I'll call them 4 different, not radically different, but slightly different profiles in the stores quite deliberately, and the fifth will be slightly different again to be testing all just the best -- which gets you the best results and the best area. Some of those already are quite [a bit] better at store level, so we've got a pretty good idea at this point. But we just -- one of the challenges that we've had is that your management team that's so focused on growing out new stores, getting the suppliers, getting everything set up, they haven't been focused enough yet on the [life] which we've got. So we just want to give them basically 6 months to just focus on optimizing the stores they've got. And I'd be very surprised if within that time frame, we can't make the decision. But it's going to work and we're going forward or we're not. And if it's not a formal decision, I'd probably be very surprised.

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Operator [36]

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And the next question we have is from the line of [James Bales] from [Morgan] Advisories.

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Unidentified Analyst, [37]

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First question's around the retail business and some of the sales growth metrics in there. So the service stores in particular, same-store sales growth you've seen there relative to Trade, so Trade doing 2% this year and sort of ran like 4% in recent years. Has this service business done something similar to that given Trade's effectively a supplier to that chain?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [38]

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Yes, I think it be fair to assume that our service business has underperformed in the last 12 months. It's not material in our overall results at this stage. We've brought a new GM into that business with good experience, and we're now focused on growing that and optimizing it. It's been sort of not focused on. It hasn't been given the focus that it needs to. It's not -- we've now got plans in place for the brands, how we're going to optimize the brands, et cetera. So we expect out of next year to see dramatic changes in service. But there was no real difference between what Trade grew and what service grew in our group. But in the market generally, we're going to also probably say from the work that we did on customer surveys in that the market itself probably went up a little bit less than what our Trade business did.

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Unidentified Analyst, [39]

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Right. So even though you feel that its performance is not meeting your expectations, you believe that it has outperformed the market?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [40]

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The Trade side, yes. The service side, no. Service has underperformed is the market full stop.

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Unidentified Analyst, [41]

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Okay. And then similarly on Opposite Lock, you talked a bit about Autobarn and particularly in the second half doing 5.7% same-store sales growth. Has Opposite Lock doing, given its servicing, slightly different segment of the market?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [42]

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Picked some of our weak points, have you? Well, Opposite Lock in the last -- of all the acquisitions that we have done, Opposite Lock is probably the one -- is one of the biggest disappointments so far. We've now made changes there as well. And when I say -- its performance year-over-year was okay, but it's not -- for a four-wheel-drive market, it just not -- it hasn't penetrated work what need to be and probably the issue we've had there is confusion as to was it what it does as in it's predominantly bullbars and canopies. You needed to be much broader than that, needs to be a four-wheel-drive supplier, and that's what is today our focus. So it certainly kept pace with its prior performance but it should have a significant upside. And that's one of our core -- one of our Specialist Wholesale Group, one of the newer managers, that is one of his key focuses, is to improve the performance of Opposite Lock. And realistically, if it doesn't make it, you've got to turn around and say, well, do we need to be in it? And the answer's probably, well, we can go either way.

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Unidentified Analyst, [43]

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Yes, okay. Just then following on from some of the previous comments and questions around pricing relative to the trading conditions and circumstances in the market you saw over the past 6 to 12 months, you seem far more optimistic around the industry embracing price increases in the next 12 months.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [44]

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Yes, yes. And I think that's fair. There's probably a couple of different things. If you go back up to December, even though there's been a reduction in the currency over the last year, we would have to increase price about 5% to stay level with the currency movements. Some of that probably did pass through over a 12-month period, but in the latter half of last year -- sorry, in the July-December period of the calendar year, things got tougher on the competitive front so we didn't see much movement. We -- because of what Greg said before, everybody is facing -- faces the same currency impacts.

And given that the majority of players in the market are profit companies, I would expect we just -- we're always seeing the situation in the past where everyone has to recover that. Otherwise, you suffer and we just -- it's just a general belief where we're starting to see some of those increases. We've seen some announcements go through. And what we really look for is one thing is to make an announcement, the other one is actually see the prices move. And that's what we're starting to do, and we just expect the competitors have to do the same thing to recover their pricing in the market.

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Unidentified Analyst, [45]

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Yes. Understood. Last question for me. Greg, just on the balance sheet, Slide 18, you talked a bit about the inventory increases and the reasons for it. Payables actually went backwards. Is there any reason why you wouldn't expect payables to sort of track a similar trajectory of increase with that inventory?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [46]

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The reason why it hasn't in FY '19 is really the mix of our supplier base. So one of the things that, as we go to more private label and direct sourcing is that there's a longer lead time for products, and at times, we need to pay for our products relatively more quickly than we received the inventory. We mentioned that in FY '20, working capital is going to be a major focus for us is these 2 elements. One is our inventory efficiencies and what we can do there. But there's certainly another element in that, that's our payment terms with suppliers and particularly those overseas suppliers. We may not have been sourcing from them for a long time. We've had to build up some history and now in a better position to negotiate extended terms. And we'll also potentially be looking at other sort of financial instruments we can use to assist in extending those payment dates.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [47]

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Also, it would be fair to assume that we would expect, while we do have a very big focus on payables, times we don't trade in terms across the board.

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Operator [48]

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We have the next question from [Richard Joe].

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Unidentified Analyst, [49]

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Just wondering, what do you see is your competitive advantage in Thailand?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [50]

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Relatively simple, there isn't anybody else doing it. The speed of service that we do, the way -- that catalog system where we can provide the workshops, the fact that there are a lot of company-owned workshop chains that are looking for a single supplier that can actually commit to them and we can work together is a big, big part of it because there are more company-owned workshop chains in Thailand than they certainly are in Australia, and what they don't want is each of the store managers negotiating with the local half dozen frames and part suppliers, and that's a big, big part of it. So when we walk into our group, we have a full product range across the entire range. We don't just have a certain range of parts. Most of the other suppliers will supply, say, braking and suspension but they don't do [down really] to other parts whereas we do the whole [box and bars], similar to what we do in Australia.

So there's a range of things that we have. And it's also our speed of the deliveries, that's the other.

It's really not a lot of different than what we do in Australia, but there it isn't anyone and a lot of the parts were, what I would call, [immaterial] with no ranges. And that's showing up to be the major competitive advantage that we're bringing there. When we launch the catalog fully, that will be a real test to see how the market responds because Thailand, strangely enough or not strangely enough, very advanced in a lot of the technologies they use and systems compared to some other areas or countries, including Australia.

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Unidentified Analyst, [51]

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And just in terms of staff there, do you have actual staff based in Thailand? Or do you rely on your partnership with SMN to provide all of that management? Do you manage from, I guess, in Thailand or from Australia?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [52]

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We've got one former Australian -- he's an Australian that heads up the business over there. He's the only Australian currently in the business. We have a couple of other next-level band, very high-caliber people for the locals. We don't see -- and all the people are sourced from the -- we've sourced -- as in the JV, sourcing from the local market, but we do manage the JV. It's 51% owner and we do manage it because we bring that expertise in the stores so all the other people are locally sourced. And we've got some really good quality people there.

The challenge we always have in depending which country like Thailand, you don't find a lot of, say, be it Australian or people in our industry who speak Thai. So when you're selling parts within a store, that's the absolute critical thing, is they have to be able to speak the local language and relate to the local people. So we don't see putting a lot of Australians over there as being the key thing. Putting our systems, processes and et cetera, that is the key thing, and we'll spend a lot of time and resource training people and bring them to Australia to train in our stores here, to train all our systems and then take them back over there to actually work in the business.

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Unidentified Analyst, [53]

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And in terms of, I guess, I'm gathering that all 4 locations are in Bangkok and you're talking about expansions. I mean I'm based in Thailand so I kind of know the country well. Where do you think the next expansion will be outside of Bangkok? Do you have any ideas?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [54]

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I think the next wave of expansion will actually still be within the greater Bangkok area. So we're currently in Bang Bon, Bang Na, Pathum Thani and Ramkhamhaeng. So when you look at the outer ring road, we're sort of around it. There are some -- we conclude in greater Bangkok there's potentially, say, 30 or 40 store potential, and then you go to some of the regional areas beyond that. It'd be the big regional areas that we'd be targeting. And we look at that number of people in each year and a number of mechanics that will be the determinant of all.

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Operator [55]

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The last question is from the line of James Casey from Baillieu.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [56]

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Two quick questions. Just with regard to the Retail business, is the right way to look at that is further cost of converting the franchise store to company-owned stores? And the dilutionary impact, should that have peaked now, and therefore, that will ease going forward? Is that the right way to look at it?

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [57]

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Absolutely, 150% yes. It -- because -- sorry, the worst of all -- most of the underperforming, for want of better description, so hopefully, were brought onboard that we intend to bring on board, and there will be some that will be in a client network but we won't even -- if we're underperforming, they may end up closing rather than us taking them on and that's sometimes a better way to go. But certainly, yes, we'd expect improvement from the current EBITDA to sales level going forward and that should not get any lower. And even when we start to acquire some additional stores, if that's what we do, that will lead to be actually positively profit generating. And even greenfields, they won't be the same quantum but impacted on this year and in any future year whatsoever.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [58]

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Okay. Great. And then the last question. Just with regards to CapEx, that $50 million that Greg mentioned during the call, is that inclusive of store openings?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [59]

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Yes, yes.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [60]

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Okay. And then what does it look -- does that -- sorry, go ahead.

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [61]

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Yes, both in terms of any acquisition price and inventory.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [62]

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Okay. And in the next couple of years, it is sort of around the same number?

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Gregory Lennox Fox, Bapcor Limited - CFO & Company Secretary [63]

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Yes, yes, it is. Yes, it is. So our new stores generally average around about $700,000 in the Trade and Retail each. So if you sort of multiply that out by sort of 10 in Trade and if we sort of do 10 in Retail again, you start to get sort of close to that number, plus 4 or 5 in BNT. We might see sort of 1 or 2 others, but we pay a bit more of a higher multiple because they're profit making and you sort of get to your $20 million there. And as I said, about $20 million in sort of regular run rate CapEx and about another $10 million on projects.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [64]

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Thanks, James. Rishi, we done with calls?

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Operator [65]

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We don't have any further questions from the line. Please continue.

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Darryl G. Abotomey, Bapcor Limited - MD, CEO & Director [66]

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Excellent. Thanks, everyone, for joining us. That's probably the longest call I think we've had in our history, but thank you, everyone, for joining us. We're pleased with the result, looking forward to the next year, and we look forward to our 45 one-on-ones and lunches that we've got over the next few days. Thank you, Rishi.

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Operator [67]

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