Having been out of circulation during August, I've only had a...

Having been out of circulation during August, I've only had a chance to reconcile the result this morning.

It certainly exceeded my expectations on a number of fronts, not necessarily at the top line, but in terms of the Automotive operating margins, which I thought had scope to soften further given the inflationary environment; instead the margin firmed at tad.

Margin surprise on the upside seldom happens to distribution businesses during inflationary business environments.

But the real positive surprise was in the working capital management, with Working Cap-to-LTM-Sales falling even faster than it had been since to supply chain impost induced by Covid":

Y/E Working Cap-to-LTM Sales (%):
FY2018: 31.6
FY2019:  34.9
FY2020: 37.4   [Covid]
FY2021:  33.1
FY2022:  30.8
FY2023:  27.3

The result of this was a monster cash flow generation ($160m, and I include lease payments within my Operating Cash Flow assessment, even if the accounting standards allow it to be classified as part of Financing Cash Flow):



(The second half was especially strong, with Operating Cash Flow coming in at a massive $120m.)

This superlative cash flow performance means the balance sheet is repairing itself a lot faster than the market had expected:  NIBD-to-EBITDA finished the year at 1.8x (down from 2.2x at end of FY2022). And with the sale of the Davey business going through next month, this debt metric will fall to around 1.3x when the company reports its FY2024 result.

That will be well below the group's long-term average and provides ample scope for accelerated returns to shareholders, including a return to 100% dividend payout ratio [*], which is what GUD's dividend policy has been historically.

[*]  Currently <60%

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