WHEN Eagers merged with Automotive Holdings Group, AHG’s big-box used car superstore   easyauto123 was a bit of a problem child for the investor community and they were pressing Eagers management for solutions.

At first sight it was not looking that good.

Taking easyauto123 and Carlins as a single independent used car operation, some $11 million of net operating profit went south during 2018 with losses of more than $1 million a month in eight months of the 2018 calendar year.

Given the announcement by Eagers Automotive in a recent investor briefing, that it intends to pursue independent combined online and big-box superstore used car operations on a very large scale in Australia, CEO Martin Ward, COO Keith Thornton and the head of easyauto123, Craig Bigley, recently set out to explain to analysts how they found hidden strengths and business potential in what was then an ailing enterprise.

Analysts were told that the losses of 2018 had continued with a further deficit of $5.6 million in 2019. Over the two years, pulling together the numbers between Carlins and easyauto123, the independent used car business had burned up a total of $16.6 million.

Keith Thornton told the investment analysts that there was no doubt a view amongst the investment community that “this business was impairing shareholder value inside Automotive Holdings”.

He said that when the merger was completed by the fourth quarter of 2019, “we got our first chance to really have a look at this business and look at it in detail”.

“In 2019 for the full year, it still lost $5.6 million dollars. Now in isolation, that number prompted many people to say: ‘How will Eagers deal with that loss maker’?

“But we looked past the loss of the $5.6 million and looked to the $5.4 million improvement year-on-year from 2018 to 2019, knowing how the business had been effectively set up in Automotive Holdings, and set up in a way that we viewed was significantly inhibiting its progress.

“So the question was not so much how do we deal with a $5.6 million loss, but how did this business drive a $5.4 million a year-on-year improvement? Was it sustainable and, in fact, could we accelerate it?

Mr Thornton said that a lot of the credit for the improvement was down to Craig Bigley who was brought in from Officeworks to run the used car superstores and that by YTD October 2020, the business had made $2.2 million.

“So it improved by a further $7.8 million year-on-year. That includes about a $3 million loss during the COVID period and it includes our Brooklands site, which is one of our major sites, one of our founding sites in Melbourne, effectively being locked for most of the second half of the year.

“So even with those significant challenges to the business, we’ve seen a $7.8 million improvement year-on-year. The business is now trading profitably,” Mr Thornton said.

“This is not prefaced on record margins in used cars. It is actually a fundamental shift in the economics of the model.”

Mr Thornton said that in March, April and May 2020 there were “significant losses” (around $3 million).

“At that time, we had a lot of equity in used cars and there were a number of cars that we basically sold for cash. We saw COVID, as most businesses in Australia did, as a liquidity challenge, not a profit challenge. So we effectively pulled some levers to cash those cars.

“But … what we are really focused on is what happened in the second half of the year.

“From July through the end of October, the business has made $2 million. And that compared to the previous corresponding period in 2019 with a loss of $2 million. So year on year, second half YTD versus last year, it’s a $4 million swing.

“And that’s an improvement that at this stage we’re comfortable with saying was a part of business improvements rather than extraordinary market conditions.”

By John Mellor