AMA Group has reduced its FY 2022-2023 guidance of between $70 million and $90 million to between $60 million and $68 million normalised post-AASB 16 EBITDA due to “ongoing margin compression adverse to expectations”.
In its Appendix 4C Quarterly Cash Flow and Activities Report, AMA said Q3 2023 volumes were up five per cent on Q2 2023, and down eight per cent on Q3 2022, reflecting significant network optimisation over that time combined with increasing repair severity and labour-related throughput constraints.
According to AMA, many industry contracts do not contain appropriate dynamic adjustment mechanisms that insulate parties from these types of external pressures such as inflation or increasing repair severity.
“Considering the labour and input inflation pressures, and delays in the Supply strategy experienced in the March quarter, and there being only one quarter of trading remaining for FY 2023, the Group finds it prudent to adjust and tighten the guidance range for the current financial year,” said AMA.
AMA ended Q3 2023 with a cash balance of $20.5 million and unused available finance facilities (undrawn bank guarantees) of $1.1 million. It generated net cash from operating activities of $0.3 million (excluding the principal elements of leases, which is reflected in cash flows from financing activities). According to AMA, this result reflects lower cash receipts than the previous quarter due to the normal trading recovery following the Christmas period, being more than offset by savings in payments to suppliers and employees.
The company spent $3.5 million on PP&E during the quarter, including $1.3 million invested in the South Australian Heavy Motor site and Arundel, Queensland collision repair centre. Make-good expenditure of approximately $1 million is also reflected in payments for PP&E, with three leases surrendered, which will deliver an annualised saving of $0.5 million in rent payments.
The report showed cash generated from operating activities of $0.3 million in Q3 2023, reflecting ongoing improvement in operations. AMA says this continues an upward trend in underlying cash flows over the three quarters from Q1 2023 (excluding corporate tax refunds and including the principal elements of leases) to Q3 2023, with a $20.5 million closing cash balance as at 31 March 2023.
The company confirmed that its covenant testing requirements for 31 December 2022 were satisfied and expects to satisfy its covenant testing requirements for 31 March 2023.
AMA says it has a strong forward workbook, but the industry-wide labour constraints present throughput challenges. Additionally, market dynamics have driven significant lateral hiring activity as industry participants seek to fill site vacancies from the scarce labour pool.
“This activity forces up labour costs without adding capacity to the industry. As a result, the Group has observed elevated employee churn during the quarter, which has contributed to higher than anticipated labour cost escalation and operational disruption at site level,” said AMA.
According to the company, the challenges posed by lateral hiring “at any cost” are ongoing. “While the Group is following market pricing, [AMA] seeks to mitigate some of this impact and avoid a ‘wages break-out’ through its employee offerings.
“These offerings include an employee share plan, an industry-leading commitment to training and development, mobility, and flexibility.”
AMA says it continues to focus on international recruitment to alleviate some of the labour supply constraints, although delays in mandatory government-managed skills assessments have impacted the arrival of international recruits under TSS 482 visa rules. There are approximately 100 skilled technicians in the pipeline, of which about half are expected to arrive in the next few months.
Additionally, the ongoing high inflationary environment and increase in severity of repairs continues to impact the cost to repair, since greater vehicle damage reduces motor vehicle throughput.
“This has further compressed margins in average repair cost revenue models, which do not adjust for increasing repair severity through the agreement period. AMA Group continues to engage more frequently with its insurer partners to ensure that the underlying commercial constructs and agreements keep pace with the ever-evolving car parc, repair requirements, and inflationary pressures,” said AMA.
Regarding the Supply business, ACM Parts’ parallel imports programme continues to produce record performance, but the aftermarket programme has experienced some delays affecting performance as the company seeks to significantly expand its existing aftermarket range, which includes core lines such as OES lamps and radiators.
AMA says it expects to be operating cash-flow positive for H2 2023 excluding principal elements of leases. The company will confirm or update FY 2024 guidance on finalisation of the outcome of Capital S.M.A.R.T re-pricing or upon FY 2023 results.
“We are disappointed that we no longer expect to meet the previously stated guidance range as a result of a number of short- to medium-term challenges,” said Carl Bizon, CEO of AMA Group. “However, we remain confident in the strategy in place, the fundamentals of the business and, consequently, the business’s ability to realise our medium-term operating margin target.
“We have made significant progress across all the areas which are key to the long-term success of the business after weathering the very real challenges of the COVID-19 period, and I look forward to the future of AMA Group.”