AP Eagers boosts efficiency

Chief executive Martin Ward said that while sales of new cars dropped off as soon as the crisis struck in 2008, tougher financial conditions forced the company to improve efficiency throughout its 90 franchised car yards on the east coast - moves that should have been made years before.

The gain from this pain was evident earlier this month, when the car dealer upgraded its forecast annual profit for last year to $61 million, from $45.3m in 2010 and ahead of October market guidance of $54m-$57m.

The audited results will be released late next month. The immediate effect of the guidance was to boost the company's share price from $11.80 to a high of $12.60 but since then it has dropped back to $12, still 20c above where it was before the announcement.

The better result was achieved without selling any more new or used cars, which is the company's core business. Sales of new cars in Australia fell by 2.6 per cent last year, and Eagers shared in this pain, although there were signs of recovery in the second half.

Mr Ward said there were two main contributors to Eagers' better result: the company's acquisition of South Australia-based Adtrans last year, and a better performance from the existing businesses - not from extra sales, but from greater efficiency.

The listed car retail sector is not large. Automotive Holdings Group is the biggest company, but it is also involved in logistics in areas such as cold storage. The next two were Adtrans and Eagers.

Eagers held about 27 per cent of Adtrans until it bought the company outright in 2010 in a scrip deal worth $100m. At the time, the purchase was described as ``a good buy with low mileage and one careful owner''.

In many ways, AP Eagers' growth in the past few years has tracked several other Queensland companies that have expanded from state to national operations.

Eagers is an established Queensland company that has operated in Brisbane for 99 years. It started selling cars almost as soon as they became commercially available. The company has been listed since 1957 - and as Ward was quick to point out, has paid a dividend every year.

Until six years ago, it operated only in Queensland. Eagers operates on a franchise system. From 2005, about the time Mr Ward started with the company, it started growing interstate, but the big leap was the Adtrans acquisition, which provided an entry into South Australia and Victoria and increased its presence in NSW, giving it an entire east coast presence.

Eagers now has 45 per cent of its operation in Queensland; 24 per cent in NSW; 19 per cent in South Australia; and 6 per cent each in Victoria and the Northern Territory. Adtrans is the largest car retailer in South Australia and a major truck retailer in NSW, Victoria and South Australia.

Mr Ward said the acquisition occurred in late 2010, and it was only last year that the company started seeing real gains from the purchase.

"What we've been able to do there is eliminate one whole layer of public company administration for one smaller company and combine it into a larger company, things like payroll,'' he said. "After you make an acquisition it takes a while to bed it down, and we're seeing the benefit from that now.''

Mr Ward said that almost exactly half of the projected upgrade in profit this year was due to the Adtrans acquisition, but the company had also found efficiencies in its operations. "This is a game of inches. It's an industry where a lot of people are on commission, and margins are always tight,'' he said.

He said AP Eagers used accounting firm Deloittes to benchmark the company's performance every 90 days and that gave the company the capacity to identify problem areas very quickly.

"So if we're not performing in an area, we can identify it and can take steps quite quickly to address the issue,'' he said. "We did a lot of things in 2008-09, which in hindsight we had been putting off for years, but the GFC really pushed us to do something about them.

"What we've been able to do is lower our cost base, which before 2007 had been getting bigger. In some cases, that has involved moving to lower-cost facilities, where we get the same exposure but pay less.''

A good example of this is in Brisbane, where the company operated Ford and General Motors dealerships in two high-profile but expensive locations. They have now relocated, cutting costs, and added a Mitsubishi outlet as well.