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Edited Transcript of CAR.AX earnings conference call or presentation 20-Aug-19 11:30pm GMT

Full Year 2019 Carsales.Com Ltd Earnings Call

Hawthorn, VIC Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Carsales.Com Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Bhatia

carsales.com Ltd - MD of Consumer Business

* Andrew Demery

carsales.com Ltd - CFO

* Cameron McIntyre

carsales.com Ltd - MD, CEO & Director

* Paul Barlow

carsales.com Ltd - MD of International

* Simon Ryan

carsales.com Ltd - MD Commercial Business

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Conference Call Participants

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* Entcho Raykovski

Crédit Suisse AG, Research Division - Research Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Fraser Mcleish

MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst

* Gareth James

Morningstar Inc., Research Division - Senior Equity Analyst

* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Paul Mason

Evans & Partners Pty. Ltd., Research Division - Research Analyst

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Presentation

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [1]

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Thanks, Rochelle. Morning, everyone. So in the room with me this morning, I've got Paul Barlow, who's our Director of our International business; Andrew Demery, who's our Chief Financial Officer; Simon Ryan, who's our Managing Director for our Commercial business; and Ajay Bhatia, who's the Managing Director for our Consumer business.

What I'll do this morning, as per usual, I'll just run through a quick 30-minute run through of the slide deck, and then we'll save 30 minutes for Q&A. I'll also just call out the page numbers that I'm on as we sort of get through it.

So maybe let's just quickly start with Slide 4. And so I guess, look, in summary, the results, they demonstrate the benefits of our leadership and strength. The strength of our diversified business in what's been a tougher domestic automotive market, particularly in new cars over the past 12 months, but very pleased with how we've performed. Our core business operational metrics have also performed very well. Our International business continued to build momentum towards the expectations that we've got for it in the longer term.

Just looking at some of the highlights, just running through those, very pleased to see the growth that we got in audience throughout the course of the last 12 months. Our vehicle inquiry volumes for dealers also grew nicely over the last 12 months, too. We had good depth penetration usage, particularly in the Dealer space. We had good time to sell. Our time to sell came down quite considerably over the last 12 months, which meant better outcomes for our Private sellers. And we saw yield expansion in our Private business through price optimization and an increase in premium penetration there. We launched some new car products earlier in half 2, and we saw good responses from OEMs and dealers in relation to that offer.

Just looking at our International highlights, and very pleased to see the look-through revenue growth that we got, up 39%, and the EBITDA look-through growth that we got, up 29% on pcp, and the double-digit underlying currency revenue growth, all -- actually, in all of our classified International businesses was very pleasing.

Just onto Slide 5. And just looking at the carsales business today, we continue to build equity and market-leading position here in Australia. And it is nice to see our traffic and engagement metrics all well up on pcp over the past 12 months. We've continued to leverage the carsales brand and our brand strength and capability, and a good example of that has been the fact that we rebranded tyresales in the last month or so, and that's been successful for us. You can see that on the left-hand side of the slide there.

We've also been working on a program, as many of you know, to globalize our technology, and that's been there to really try and make our technology more flexible and scalable and support the growth that we have in our existing and new geographies with also our other domestic verticals as well, such as bikes, boats, caravans, et cetera.

Just looking at the controlled entities on the right-hand side of that slide. And again, seeing those businesses continue to develop with solid growth across all the key operational metrics from traffic, leads and listings, which has been pleasing.

Onto Slide 6. Just to continue the theme around operational metrics, and we have continued to strengthen our brand and customer engagement over the past 12 months and pleased to see many of our operating metrics really kicking up and reinforcing why we are one of the biggest digital automotive advertising businesses in the world. Good example of that were the fact that we've now reached over 1 billion sessions per annum across all of our sites around the world. Our customer base, our dealer customer base, in particular, has grown, and we now have over 32,500 dealer customers around the world.

Just looking at the right-hand side of the slide there, and you can see a lot of our local traffic metrics have grown nicely, too. So we're now 2.47x more time spent on carsales than our nearest competitor in Australia. And the other stat that we're very pleased about is the one down the bottom there, which is the independent research dial that we've put together about the site preference for buying and selling. And we've seen that, that obviously strengthened, as well up, it's now 378% of our nearest competitor, which is also good.

Just looking at our group financial performance review. So on Slide 8, and you've got the 3 charts down the bottom of the page here, revenue, adjusted EBITDA and NPAT. The company has continued to deliver long-term shareholder value through the development of our domestic and -- domestic market capabilities. While at the same time, we have been investing in and continue to deploy new product and service into our high-growth international markets as we look to power them for long-term future growth. And while there has been some challenges throughout the year, I think, we, as a business, we're very well positioned to continue to deliver shareholder value into the long term and moving forward as well.

On to Slide 9. So Slide 9's, just looking at our revenue and EBITDA performance. I won't spend any time looking at -- talking about revenue because we will dive right into that as we go through the slide deck. But just quick highlights on adjusted EBITDA, you can see there, up 7% to $210 million. Now the online advertising segment was flat year-on-year, and that was due to the lower Display revenue, which was partly offset by some cost discipline that we had through the business throughout the year. We saw margin expansion in our data and research business segment, which reflected the continued focus on our ability to leverage costs. And we also decided to exit some low-margin or very, very low-margin product and contracts that we had as well throughout the year.

Just looking at the International business segments. So again, we saw strong international result, with look through EBITDA, up 29%. And that was obviously underpinned by the performance that we had in Korea and Brazil. And carsales Asia was driven by -- largely by the SK Encar acquisition. And we continue to invest in our Lat Am businesses in Mexico, Argentina and Chile.

On to Slide 11, and the charts down the bottom here are our look-through revenue and adjusted look-through EBITDA numbers. And again, pleased to see the green part of those bar charts growing. And again, it demonstrates the strength of our diversified business model as we continue to grow that -- those parts of the chart. And it was nice to see that in terms of International in revenue, it's -- International now accounts for about 22% of our look-through revenue. And at an earnings level, EBITDA level, International now accounts for about 16% of our look-through EBITDA. And those growth numbers that I talked about before, the 39% and the 22%, respectively, were, as I said, very pleasing.

Onto Slide 12. So this is just looking at adjusted net profit after tax. And really, the story here is largely about the full year ownership of Encar, which you can really see flowing through our depreciation and amortization line and net finance line and profit from associates line there on the table on the left-hand side. The other thing, I guess, to point out here, down the bottom on the right-hand side, you can see that the Board's declared a final dividend of $0.25, and that represents a 5% pcp increase on our dividend. And I guess the other thing that really reflects is the positive outlook that we have on the business going forward. And it's also underpinned by the strong cash generation and cash conversion that we have as a business, too, which I'll now talk about.

So onto Slide 13, and debt and cash flow. On the left-hand side there, you can see our cash flow position has recovered in 2019, FY '19 as a result of, we implemented a new ERP system, as you -- as many of you would remember, in 2018, and we had some data collection issues, which we've now fully resolved. And those cash conversions are back up to where they need to be.

Just looking at CapEx. So CapEx, you can see, grew by 32%, and that's the result of largely the consolidation of SK Encar for the full year, along with what we've been doing in terms of globalizing our platform and what we've been doing with the likes of our apps and so on over the course of the last 12 months.

Just on the right-hand side, looking at our reported leverage, you can see that we're well and truly nicely sitting under 2x, which is always a good place to be.

Moving to the carsales Australia. So let's go to Slide 15. And yes, as I mentioned earlier, over the past 12 months, we've really seen our leadership position continue to strengthen over the course of the year against our nearest competitors. And it's really reflected here, looking at the average daily unique audience and our market share thereof. You can see it's grown quite nicely. And what that really reflects is sustained investment that we've had as a business in technology and developing our user experience over many years, which is part of our strategy and how that's really held us in good stead, and particularly in times like this where the market is a little bit more challenging. So again, pleased to see those steps.

On to Slide 16. And just talking about our Dealer business, and our Dealer grew by 7% on pcp, and that continued to demonstrate the resilience of the used car market in spite of the fact that there has been a little bit of softness in the new car market over the past 12 months, although July did look a little bit better, which is hopefully a positive sign going forward. In terms of H2, so H2 -- this is H1. For H2, we did 6% Dealer growth. The split of that growth, where that growth came from, there was about half or 3% was price. You'd remember that we did a lead fee increase of $2 in March, and we also did some other minor price changes over the course of the last 6 months. Lead volumes were up. They reflected in 2% of that 6% growth, which is good. So used was up nicely. New was down a little bit, but as you know, new is a very small part of our business, and depth made up the remainder of the growth.

On to Slide 17. So looking at Private performance. And there's quite a few moving parts here, so I'll just skip through them. But overall, we're very happy with the resilient performance of our Private business, and there's some quite good takeouts here. So if you look at the -- think about the core business, which is the core advertising business, we continue to grow that. We grew that by mid-single digits, which is in line with what we've been doing recently. And that was, as I mentioned at the start, through improving yield performance, increasing depth or premium advertising, which was good and a good outcome for private sellers because we saw time to sell come down quite considerably over the past 12 months.

Instant Offer, which is a product that enables consumers to sell their cars instantly to a partner of ours, that was flat during the course of the year. As you may recall from the half year, we talked to you about how we changed the product, and it wasn't quite working for us. So we -- the team pivoted that again, which only was put to market in May. And as you can see from that diagram on the right-hand side of that chart, look at the tag down the bottom there, the immediate impact that that's had, we've seen significant uplift in that product, too, which has been fantastic, and it really sort of sets us up for a good FY '20 with that one.

tyresales was mid-single-digits growth, and for us, over the past 12 months, the story around tyresales was really trying to balance our profitability. So not trying to -- trying not to overinvest in price, which would have been a big drag on our EBITDA, so that was more about that. And over the course of the last month or so, we've done other things like the rebranding of tyresales, and we've also rebuilt the tyresales website, and they're both providing us with good performance improvements.

The other part of Private is the RedBook Inspect business, and that was pretty flat on pcp, which was, I think we talked about this at the half year, was a policy change with 1 of our ride-sharing customers, and just the way that we're handling that. But over the last fortnight, we were pleased to been awarded quite a reasonable contract, which should play into our performance in half 2.

Onto Slide 18 and Display. So as you remember, we reported in February, the ad market has been challenging over the last 12 months, and that's largely been as a result of weakness in the F&I part of the market as a result of things like the Royal Commission. We've also seen some weakness in new car sales. We've had changeovers in OEM marketing and agency people, which has made things a little bit more complex for the team, but pleased to say that we've seen clear improvement in the business in H2. And in particular, in Q4, which we again alluded to at the half year, that's come through. But it still is a challenging ad market. So some of the things we've been doing in the Display area. We have made some changes to the team pretty much top to bottom, which has been positive. We've been focusing on our new car offerings. Video has become a bigger part of the business, and there's more product to come there. The upfront execution this year was much better, and we're doing better with things like sponsored content. Our analytics and insights are playing a key role in the value that we're delivering too. So in summary, the team's got more to do. And the ad market is still challenging, but I think we're in a better position to leverage improvements in the market as they evolve over the coming 12 months.

On to Slide 19. So just quickly looking at Data, Research and Services. So you can see there revenue was up 2%. But as you might remember from the start of the call, I did mention that there was some product that we deliberately stopped selling, and there was a contract that we stopped as well. And they were not making us any money. So if you look at the underlying revenue growth in this part of the business, it was running at around 9%, which is pretty consistent with how it runs. We did see strong demand for our proprietary data research products. We had good growth in our appraisal business, which you can see on the right-hand side, there is a screen shot of that. I mean our RedBook business continues to record pleasing revenue growth as well. So overall, underlying, our data and research business is performing and on track.

Just looking at Slide 21. So maybe if we turn to our International businesses and start talking about those. So look, I guess, the summary is we had excellent progress this year on our -- in our International portfolio. And we really see that we're building size and significance into the company overall that's coming from these businesses. We obviously had the consolidation of Encar in here and our 100% ownership of that. And these -- all these markets that we're in, they're all good, long-term fundamental -- they all have good long-term fundamentals, although Argentina is a little bit more interesting over the last week or so, but we're very much focused on achieving market leadership in each of these markets.

Brazil, down the bottom on the left-hand side there, you can see on a constant currency basis, revenue and EBITDA growth there was once again fantastic, up 35% and 54%, respectively. And that really does demonstrate what we've been able to achieve from a position of market leadership, particularly when we moved that business to a leads based model 2 years ago, but I'll talk a little bit about with both in a second. So yes, the summary around revenue is strong reported revenue growth there reflected in the -- reflecting the acquisition of Encar. We had double-digit local currency growth in all of our International-classified businesses. And in terms of EBITDA, look-through EBITDA growth of 29%, really reflected the strength of Encar in Brazil, and we continue to invest in our other LatAm businesses.

On to Slide 22, which is SK Encar. And yes, first year of ownership of that business, we're pleased with how things are going. Dealer, Private and Display parts of the business all performing. Revenue was up 13%, EBITDA are up 13% on a local currency basis. In terms of where the performance is coming from, we've seen strong take-up of our premium listing products, particularly our Encar Guarantee vehicle inspection service that we have, and we've been rolling out more branches outside of -- or inside the key dealer complexes in other major cities over the past 12 months, and they're yielding good results. The other area of strength, particular strength over the last 12 months has been in Display. We made some changes in the Display team 12 months ago plus and really started to see the benefits of that coming through, particularly in OEM and finance and insurance.

Just looking at the comment on H2. A couple of things to say here. So in H1, there were some tax changes that were made in the current economy, which we didn't really expect at the time that probably dragged a little bit of revenue forward into H1, which has had a slight impact on H2. And obviously, the trade issues, the trade dispute with Japan over the last couple of months has probably slowed things down a little. But in saying that, yes, we're very, very confident about the long-term upside that remains in Korea for us, particularly with those value-added services. And many of you will be pleased to hear that we've actually done a price rise in Korea on our -- all of our Guarantee inspection products, and that was effective from the 1st of August, and that's gone very well from talking to management and was about as well received as you could possibly get with the price rise. But that's the first one we've done in well over 2 years now, probably.

Onto Slide 23. And again, the opportunity we've got in Encar is significant. The Korean market is substantially larger than ours, and we're very keen on delivering the prospects that we see that, that business has. The Dealer market, as many of you know, isn't that digitally mature. And as a company, over time, we look at continuing to build on our yield and deploying more inspection and other type of services across the market, and we're very -- also very keen to keep pushing on Display. We think there's good opportunity there, particularly as the market continues to open up to foreign manufacturers.

Onto Slide 24, looking at Webmotors. And as I mentioned before, excellent result for Webmotors. Overall revenue, up 35%; and underlying EBITDA, up 54%. Just looking at the highlights, so we saw 25% growth in Dealer revenue as a result of increasing our customer base, with the deployment of Cockpit has been very helpful in terms of continuing to help in acquiring new customers and growing that Dealer part of the business. The other significant part of that growth story over the past 12 months has really been our finance insurance. Our finance insurance revenue has grown. We've integrated Santander, which is our partner there into our Cockpit product for finance, and we've seen that really take off. That's now probably accounting for around about 10% of our revenue coming out of Webmotors, and it was next to know where that part probably 12 months ago. So very impressive, and we've also seen margins, as a result, continue to expand from 38% to 43%, great operating metrics to inventories up to -- up 38%, it's over 0.5 million cars now, and our dealer customer numbers are up 14%. We've got over 13,000 dealer customers in that market, and that just continues to build.

Looking at Slide 25. So again, just quickly on Webmotors, just like to create an opportunity. We really see the upside that we've got there and how we intend to grow it. The technology side of things is working really well. As I mentioned, those operating metrics are really driving forward nicely. And the charts down the bottom on the left-hand side there, I really like because what they've really started to demonstrate now is how we can accelerate revenue and EBITDA growth, as we've continued to deploy the IP and the technology that we have. And this is largely post the implementation of the lease model a couple of years ago, which is great.

On to Slide 26, which is the other Lat Am businesses that we have, and we've continued to invest in these businesses over the last 12 months. And we're pleased with the progress that we're making on the ground in each of these markets in setting ourselves up for long-term growth. The investment's been around introducing new products to these markets. We've done quite a bit more marketing, particularly in Mexico and Chile. And head count has built up a little bit as well as we try and drive operational performance, particularly around leads and listings and customer acquisition.

Onto Slide 27. So I thought we'd just give you a quick -- sorry, Slide 28, which is a bit on strategy. So over the past 12 months, we have really looked at our strategy. We've spent a lot of time with the entire carsales team and repositioned ourselves somewhat. So just the top there, you can see our purpose is to empower people to move fairly through our world-leading marketplaces. And what we've really got driving at our 3 strategic pillars may be reasonably familiar to some extent to some of you, but the first one there is that digital marketplaces. So it's about how do we grow our global leadership in our digital marketplaces around the world and provide excellent classified solutions to all of our customers. The third (sic) [second] strategic pillar is about value-added services and how we build out our competitive ecosystem in those services that provides support to our dealers and our OEMs and our corporate and private consumers when they go to buy, sell and own their vehicles. And the third pillar, which is a little bit different and new is where we're really starting to think about future horizons and how do we leverage on our consumer insights and our industry trends and how do we see the opportunities in our core and adjacent markets and beyond, and how do we leverage them over time. And I guess what underpins all of that is our data. And yes, we are very much a data business, our people and our technology. And that's all supported by our business culture and our values.

Before I go to the -- get to the outlook statement, there's a couple of other things that we've added this year around, which I think provide much better context about sort of how we're thinking about the coming year. And so what we've tried to do is add some color on many of the key focus areas in FY '20 to give you a little bit more insight on some of these.

So on this slide, we're -- what we're really talking about here is where we're going to be focused in terms of our strategic objectives in Australia. And the focus areas, these focus areas, they aren't intended to be exhaustive, and many of you will be familiar with some of them, but there'll be some here that will be a little bit new to you, like for instance, the fact that we've just launched an integrated finance product for dealers inside the last week, which enables dealers to integrate their vehicles -- the vehicles they're selling with their finance offering, and we've just started trials on that with a number of dealers.

On to Slide 30. And this slide is going to be, again, a little bit familiar. But we like this slide because it really demonstrates and calls out the enthusiasm that we have about the significant opportunity that we've got in our international markets and our ability to develop strong market-leading positions in each of these markets, and we think we're in a great place to achieve that over time.

Onto Slide 31, and this is similar to the domestic slide. Again, it's that's just talking about where our key focus areas are going to be in our international markets. So as you can see, in Korea, over the coming 12 months, it's going to be about continuing to build out our Guarantee products with new extensions, such as Encar home product, which we've just launched, and that effectively provides a home delivery service. And we're trialing, we're putting more branches in the dealer complexes, which is going to continue to build out our premium service offerings that side of the business and increase our listing volume. It also makes us much stickier with dealers. The price rise is important to us over the next 12 months, and we'll be -- continue to execute well in Display.

In Brazil, it's going to be more of the same, looking for improvements in Display and what -- we've had some challenges there over recent years, but looking for some improvement there. And with our Latin American -- Brazil and Latin American businesses, it's about a big focus on getting new product offerings out the door, which we're starting to get some momentum behind, which is partly the result of the talent that we've got on the ground there and partly because we're starting to deploy carsales products into these markets as a result of the globalization efforts that we're putting in with all of our technology.

So onto Slide 32. So just on the globalization efforts that we're making. So the effort here is really about trying to build scalability into our technology. It's about trying to build speed to market in terms of product. It's about realizing cost synergies and not having to deploy the same product multiple times and really duplicating effort. And it has, so far, been a very collaborative effort between the technology team that we have in Melbourne and the technology team in Lat Am. And there's more to come here, but we're very, very pleased with how this is progressing over time.

So onto the FY '20 outlook statement. And yes, I'll just say that coming into FY '20, we really believe that we're well positioned to execute on our strategic priorities that we've just talked about across our domestic and international businesses. I don't think I'll read out the outlook statement because I'm now 3 minutes over my allocated 30 minutes. And I think what we'll do is we'll go now to questions.

And so, Rochelle, if we could open up the line for Q&A, that would be great.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Entcho Raykovski from Crédit Suisse.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [2]

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If I can just start with a question on Display. I mean I know it's been a big topic of conversation over the last 12 months. Are you able to first tell us what the run rate was in Q4 of revenue growth?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [3]

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Yes. It was better than the run rate in Q3 and better than the run rate in Q2. So yes, I mean it's much, much better than where it was. I really -- yes, I don't want to give you the exact number, Entcho, because I've -- we're pleased with how it's progressed, particularly in Q4. The team has done an excellent job. We've -- as we've talked about over the last 12 months, our upfronts execution was very good. So we're pleased with how we're set up.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [4]

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And I guess, I mean I don't know if you can answer this question, but can you still conceivably see a decline in revenues in the first half, for example? I'm just conscious that the comps are so much easier, given you had a pretty tough pcp.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [5]

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I guess as we get closer to December, I'd be happy to answer that question. I mean we've got 5 months to go, and things are looking pretty reasonable at the moment. So I think it's probably too early to make that call.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay. Cool. And just -- you've spoken before around the upfronts and trying to get a greater share of wallet from the OEMs. Are you feeling that that's happening right now? Because we -- I mean we're getting feedback that auto advertising is pretty challenging now, the medium. So just interested in whether you think you're getting a higher share.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [7]

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Yes. I'll get Simon to answer that question.

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Simon Ryan, carsales.com Ltd - MD Commercial Business [8]

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It's Simon Ryan. Yes, we had got some very, very good relationships with the OEMs. Our upfronts, we've gone in with a (inaudible) strategy. We are the market leader. And as a result of being the market leader and then looking at where the competitors sit, I can't go into absolute detail, obviously, but what we're getting and how we're working with the OEMs is considerably better. And the extraction that we're getting from the OEMs is improved and in line with market share. So we're very happy at this point.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [9]

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Okay. Cool. And if I can ask a follow-up on Korea. Could you tell us the quantum of the price increase for the Guaranteed service and also where penetration sits for the product at the moment and where you think it can get to conceivably longer term?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [10]

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Yes. So price rise is 10%. And in terms of penetration, I mean, it's complex to complex, to be honest, Entcho. So some complex, it's mandatory. And you'll walk around the complex. And every car on it, as some of you have seen, has an Encar Guarantee sticker on it. But it's complex to complex. I'd say to you, there's significant opportunity to keep growing it. So we're nowhere near where we need to be in terms of penetration. And what we'll be doing is rolling out more branches over the course of the next 12 months, which will, again, increase our penetration.

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Operator [11]

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Your next question comes from the line of Fraser Mcleish from MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [12]

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Just on the Korean price rise again. Did you -- you talked about price rises in the next 12 months, was it -- were you referring just to that? Or is -- do you intend to go a sort of broader price rise across all the inventory as well? That's my first one. And just my second one, Andrew, I think the costs in the core domestic business were down 2.5% in FY '19, which is obviously quite a big change from the sort of mid-single-digit growth you've run at historically. Can you just give us an idea of where -- how you achieved that and maybe some sort of idea of what to expect? Are we going to be back to cost growth next year? Or are we -- do you think it'll be cost down again next year?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [13]

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So Fraser, look, just on the price rise first, so the conversations that we've been having with Encar has been about we want to get to a position where we're trying to do more regular price rises. So yes, we've got this one away. In terms of the timing of the next one, I don't know, but there'll be -- we'll be looking to make them more regular going forward because our cost base grows in that business. We want to make sure our revenue is growing even faster, and part of that is about regular price rises like we do here. So don't want to have to wait 2 to 3 years in between price rises going forward.

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Andrew Demery, carsales.com Ltd - CFO [14]

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Yes, Fraser, on costs, a decent portion of that is some of those low-margin contracts that -- and services that Cam talked about in Data, Research and Services, so they come out of revenue, but they also, obviously, come out of cost when you stop doing those activities. So that's one of the major reasons for a cost decline across the course of the year. And you'll start to see that unwind mostly in the first half of next year in terms of the run rate of getting out of those contracts as they're sort of exited on an annual basis. I think the other thing I'd say is our marketing spend, particularly in the second half, has been much more effective. We talked about traffic has been at record levels and really strong, and that's just allowed us to be even more effective with how we spend our marketing dollars, I think. So I think underlying, there's pretty low single-digit cost growth in the business. And I think that's probably what you'll see in the first half. And as I think -- if the economy improves, is sort of the base case assumption, then that might step up slightly in H2.

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Operator [15]

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Your next question comes from the line of Eric Choi from UBS.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [16]

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I just had 3 quick ones as well. First one, just on dealers, just wondering if you can comment on how many of the dealers are using that automated debt product now and maybe sort of what uplift for Dealer you might be seeing there. And then just secondly, on Private, I might be calculating it wrong, so I apologize. But if I strip out tyresales and RedBook, it looks like the revenue growth was pretty flat second half. So just wondering if you could talk to the drivers there. And then just on the costs again. Outside of the nominal dollars, I guess, if you think about percentage margins and if I think about the stuff that might rebound next year, it's probably Private and Display, which is the 2 highest margin divisions. So should we be thinking like those core margins really expand next year? Or as you say, costs come back in a sort of temporary expectations?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [17]

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Ajay, will talk to you about the debt.

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Ajay Bhatia, carsales.com Ltd - MD of Consumer Business [18]

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Yes, I'll do the debt and Private.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [19]

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Yes.

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Ajay Bhatia, carsales.com Ltd - MD of Consumer Business [20]

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Thanks, Eric, for the question. On debts, so firstly, there's 2 sides of it. One side of it is the discretionary spend has been a lot harder for us to get from dealers, and debt sort of sits in that category. So increasing penetration significantly has been hard for us. But what we had successfully done is converted a lot of the customers from self-service to automated debt. What that has then done is improve yield and retention rate. So the quality and the profile of that debt revenue is a lot better than last year because we're getting better retention on it and a better yield on it. So effectively, look, it's more of a yield uplift story in the last sort of 6 months around debt rather than necessarily a huge increase in penetration. We -- used car volumes are very robust at the moment. That then means that dealer stock need not to necessarily spend as much money on discretionary debt, so we find that if used car volumes were down, debt grows. We had those 2 levers, which kind of works well for us.

Around the second question, around Private, I'm not sure how you're calculating this, but core Private grew mid-single digits, if that's the sort of thing you are after. And RedBook Inspect was flat. So if anything, it dragged us down rather than pull us up in core Private. So Instant Offer, unfortunately, didn't grow fast at all. It was flat year-on-year, as Cam said, [had it not grown] faster, you would have seen core Private growth even faster. Does that answer your question?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [21]

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Tyresales is probably the drag in the second half because it was comping some pretty high comps, I think, Eric. That was probably the issue.

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Ajay Bhatia, carsales.com Ltd - MD of Consumer Business [22]

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Yes.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [23]

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Okay. Good one. And then on margin?

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Andrew Demery, carsales.com Ltd - CFO [24]

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Yes. Our margins, I mean, we look to get margin expansion every year. All of our core businesses is pretty high margin. If you work out what the margin was for Private, Display, Dealer and our data services, they're all very high on a sort of a unit -- what's the unit cost to deliver a unit of individual revenue for that. So it was a very large shared cost base. So and -- but we sort of manage within that envelope, I guess. So we've got the highest margin expansion in the core business that we've seen for quite a while across the course of this year, getting them from 60% to 61%. So we want them to continue to trend up over time. But I guess we're also conscious that we need to continue to invest in making sure we're the best place to buy and sell cars, new products and [sell another] dealer finance that we're rolling out. You've got to even make sure those products are right. So I wouldn't be guiding towards stepping up significant margin expansion over the course of the coming year.

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Operator [25]

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Your next question comes from the line of Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Just a couple for me. Just firstly, on Korea, again, just interested in terms of, I know you're saying you're not expecting the macro to deteriorate any further, but given you put a 10% price rise through in August, I would have thought the growth potentially would step up on that level in '19. Just interested if you walk me through on the moving parts there in terms of penetration and macro and then how that plays out. And then just on Display, just comment on if what you see is the potential revenue opportunity from that change you've made with the new car offering that's obviously getting some pretty reasonable traction. Just...

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [27]

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Do you want to do this, Simon?

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Simon Ryan, carsales.com Ltd - MD Commercial Business [28]

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Sure. Thanks for the question. It's Simon. Look, on the new car and Display, I mean we are working very closely with the OEMs and the dealer groups on, obviously, getting more volume up on site. Connecting to that is, obviously, a Display strategy, which is being rolled out and a number of marketing initiatives aligned to the audience growth for the business also. So we are seeing some positive revenue signs as a result of new car. And again, as I said before, to Entcho's question, it was also around the alignment with the OEMs and us being a market leader. So I hope I'm answering your question right, but in summary, we are seeing a significant uplift in discussion with the OEMs around new car and how that supports Display.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [29]

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PB, you want to talk through.

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Paul Barlow, carsales.com Ltd - MD of International [30]

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Yes. So from a current perspective, the structure of the market is such that the guaranteed -- the Guarantee product that we have plays a really important part in the complexes and the way the complexes are set up. So as far as penetration is concerned, we got a lot of room to go in a number of complexes that we have to go into as well as the cars and deals within each of those complexes. So from a growth perspective and where we want to go with that Guarantee product, it gives us a good basis for uplift, but also to make sure that we get a good penetration across the dealers and the complexes throughout Korea. What we're seeing is that the Guarantee product is becoming a -- it's a form of currency from not only an offline perspective but also on online perspective with the dealers and with the consumers. So a lot of our growth expectation is sitting around that Guarantee product. And then as we migrate dealers over to that, we can -- the growth will expedite from there.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [31]

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And just a little bit of context. So the value of a Guarantee inspection or the price of a Guarantee inspection is about 4x that of a listing phase. So the price rise associated with that is, yes, it's reasonably material.

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Operator [32]

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Your next question comes from the line of Eric Pan from JP Morgan.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [33]

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Just on the UM Private businesses, do you have plans to put in another price increase in the next calendar year? And if so, what magnitude can we expect? And then can you comment on the current premium ad penetration level on private? And how much room do you think you have to grow? And then lastly, how much of the growth in revenues from Korea in fiscal '19 came from expansion of dealerships versus the growth from the Encar Guarantee?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [34]

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Yes. So on dealer price rises, Eric, as you know, the process that we go through is to regularly review where we're at, what's the value that we've delivered to dealers over the past 12 months, how are we performing, are we -- are they getting more value from us in terms of more lead delivery, what's conversion doing and how are we performing overall, and that helps inform any price decision that we make. And we don't assess that regularly. We only assess that a couple of times a year. So I can't tell you what that is because we haven't made that assessment yet.

Did you want to talk about premium, Ajay?

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Ajay Bhatia, carsales.com Ltd - MD of Consumer Business [35]

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Yes. So on Private, look, we sort of look at Private revenue as a combination of Instant Offer and Private listings. And you saw in the slide pack, Eric, that Instant Offer has done us really this financial year. So we have got good growth drivers in Private out of Instant Offer. In terms of the penetration of premium, that's higher than last year. It's sort of late 20s in percentage in terms of penetration. And will we do a price rise on Private was the other question. Well, with the growth in Instant Offer with improving yield anyway, we're not desperate to do a price rise in Private. We did change some price brackets recently over the last month. We combined a couple of higher price brackets that gave us a small yield uplift as well. So there's bits and pieces we can do on Private uplifting yield, but I don't see us doing a major price rise in the next 6 months.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [36]

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And in terms of the Guarantee inspection, question around how much came from expansion of the dealer branches and how much was Guarantee inspection, well, they're one and the same thing because those inspection centers have the Guarantee product in them, so hard to separate the 2. But the other major source of growth is Display. And that was -- that grew very healthily and private was okay, too, private was up as well year-on-year, but those Guarantee inspections and dealer parts of the business, the premium-type services, that was where the growth came from.

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Operator [37]

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Your next question comes from the line of Paul Mason from Evans & Partners.

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Paul Mason, Evans & Partners Pty. Ltd., Research Division - Research Analyst [38]

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Just a couple of questions for me. So the first one is just if you could give us an update on the progress in executing on the divestment of Stratton, like how far through the process you are. Second one is, if you can maybe give us a bit of an overview on the broader economics of the new delivery product in Korea in terms of like what sort of uplift in revenues and then an uplift in cost per ad that, that involves. Third question is around what sort of revenue uplift you get on a car when it goes through Instant Offer now that you've redesigned Instant Offer versus just standard private advertising? And then lastly, if you could maybe make some comments on your plans around dynamic pricing in Private. You made that comment in the strategy slide, and I was interested in your thoughts around the business model that you're going to introduce there potentially.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [39]

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So quickly, I'll do the Stratton execution piece. So we're reasonably advanced in that process. We're not committed to any time frame around it, but there is a process as we've informed the market of. So as things change there, we'll certainly keep everyone updated on that. The broader economics of the Guarantee inspection product, do you want to answer that, PB, or...

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Paul Barlow, carsales.com Ltd - MD of International [40]

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Yes. So the Guarantee inspections, we have a capital outlay to get them going, which is not insignificant, but from an ongoing perspective, as Cam said before, we charge, the price is around 4x the normal listing fee. But certainly, the costs -- we have increased costs in delivering that product, but they're not the same proportion. At the moment, we have around 20 branches in complexes around -- mainly around Seoul. We're aiming to add another 12 to 13 this year. So from an outlook perspective, we envisage our penetration to -- it's going to increase by 50% there. And then the cars and dealers within each of those complexes, we're looking to increase as well, which will drive our growth from a revenue perspective.

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Paul Mason, Evans & Partners Pty. Ltd., Research Division - Research Analyst [41]

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Sorry, I might just -- sorry, my question was on the new home delivery product.

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [42]

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Yes, yes. So that is only in pilot at the moment. So there's quite a bit to play out there. But the economic -- the new economics are that the dealer will pay for the transportation effectively, and we take a margin of it. We throw in -- effectively, it's a bundle of Guarantee inspection plus transportation equals the product that we're selling. But the good part about that product is, one, the convenience for the dealer because, yes, they don't have to do it themselves. It's a one-stop shop, and there's consistency in message and brand. So yes, just part of one of many services that the Encar business is actually trialing at the moment. And then dynamic pricing, Ajay, do you want to talk about that?

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Ajay Bhatia, carsales.com Ltd - MD of Consumer Business [43]

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Yes. He asked 2 questions on Private. One was around Instant Offer, how much yield do we get from it. So it's a multiple of the yield we get on standardized. And on dynamic pricing, we are testing dynamic pricing as we speak. We're doing an AV test on a site right now to assess what sort of impact it will have on conversion, what sort of impact it will have on several things. It's a baby test at the moment. I expect us to continue to test that over the next few months. There's a bit of a technology build around it, too. And we've got to, I guess, learn from these tests before we implement it. But we certainly have an intention of moving in that direction.

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Operator [44]

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Your next question comes from the line of Gareth James from Morningstar.

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Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [45]

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I just wanted to clarify regarding the weakness in the Display advertising. Is there any element of structural weakness there? Or is it all cyclical? And then secondly, just on the exiting of the Stratton finance, could you clarify what your strategy is going forward for monetizing the automotive finance sector?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [46]

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Yes. So I'll do Stratton, and then I'll let Simon do Display. So the strategy for monetizing the finance sector in a world where we may not own equity in Stratton doesn't change enormously because today, Stratton is a customer of our business, and they advertise around private seller vehicles, which doesn't compete with our core customers, which are our dealers. So what would happen in that environment would be that they go from being an internal customer to being an external customer, and we would recognize the revenue that we currently earn from Stratton there. The other elements in terms of how we're thinking about finance, as we sort of talked about in the presentation, was we're really trying to define solutions for our dealer customers where they can get their finance offerings in product consumers because what they really need to do is to try and prequalify purchases of cars further up the funnel, so the more information they can get, whether it be through application form, the better they're likely to be in terms of selling a finance product. So that trial that we're running, what happens is the FSP, or the financial service provider, that works with the dealer gives us the finance office for that particular deal, and we load it into AutoGate. The dealer then can apply the finance offer to the relevant vehicle that they want to apply, and then that gets published on the site. So the consumer can see what the cost per week would be of that vehicle with all the relevant terms and conditions and really gives the dealer a much better qualified opportunity to sell a car. So that's our thinking. So nothing changes in Private, but trying to find ways to help our dealers. And Simon, do you want to talk about Display?

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Simon Ryan, carsales.com Ltd - MD Commercial Business [47]

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Sure. Yes. To answer your question, I think it's a little bit more cyclical. I think we've got the right structure. We've spent a lot of time this year making the adjustments to the commercial team. We've got the right structure, the right strategy. We're connecting very well with the OEMs and the agencies. So I think it's more of a market dynamic than anything else. We're best suited now to compete in that market. And there's a majority market of shareholder in that space, where we're driving the appropriate outcomes. So structure's right. It's more about the market is cyclical, but we're fighting against that and, in fact, doing that. And so happy with that.

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Operator [48]

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Our last question comes from the line of Ivor Ries from Morgans Financial.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [49]

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Cameron, 2 questions, if I may. One, just on Brazil. Obviously, the EBITDA margin expanded quite nicely this year. Is that sort of a little bit one-off in the extent that your dealer revenue grew much faster than you expected? Should we see the margin come back to more normal levels going forward? Or is this new margin sustainable? And the second question is around the capitalization of IT spend, about just under $18 million last year. Should we expect sort of similar numbers this year?

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Cameron McIntyre, carsales.com Ltd - MD, CEO & Director [50]

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Yes. So PB will talk about Brazil.

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Paul Barlow, carsales.com Ltd - MD of International [51]

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Yes. I think that's the new norm as far as margin expansion. I think we can expect to see maybe some more as we continue to get products and services. Yes, we're seeing the benefit now of the investment that we've put into Cockpit and into the business model, so. And also, too, we're starting to see our finance revenue increase and revenue diversification, so that's as a result of the Santander integrations that we've got in Cockpit, which just -- that revenue just falls through.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [52]

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Yes. So that's pure earnings, the finance part of the business, that new revenue stream. So just on capitalization of cost, so look, I guess from our businesses perspective, you're aware, we -- if you think about revenue to CapEx, really, the CapEx is relatively low against peers. And as a business, we capitalize things that are going to add incremental value to us as a business. So if you look at the things that we've been doing, the globalization of our tech stack, what we're hoping to do over time is, if we get that right, it means we're not having to invest in CapEx in each of the different countries in which we operate and effectively replicate that CapEx spend that we've just incurred the one time. So that program is about not having to go over the top in terms of CapEx and replicating things. So I guess you'll see it continue to grow, Ivor, as the business continues to expand, and we look to developing new products and services. But I don't expect to see enormous step-ups from here, unless the things that we'd call out.

Okay. Thank you, everyone. Thanks for joining the call today, and look forward to see -- we all look forward to seeing you all over the next few days as we get around the trap. So thank you. Thank you, Rochelle.