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Edited Transcript of CSV.AX earnings conference call or presentation 20-Aug-19 12:30am GMT

Full Year 2019 CSG Ltd Earnings Call

Darwin Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of CSG Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley Conn

CSG Limited - CFO

* Mark Richard Bayliss

CSG Limited - Acting CEO & MD

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Conference Call Participants

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* James Bales

Morgan Stanley, Research Division - Equity Analyst

* Steven Fahey;LSND Holdings

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Presentation

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [1]

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Good morning, everybody. Sorry for that technical glitch just a few moments ago. And thank you all for joining us today on the CSG FY '19 Results Call. My name is Mark Bayliss, I'm the Acting CEO and Managing Director. And with me today is Ashley Conn, our CFO.

I would like to start by saying how pleased we are with this FY '19 result. A result which is the outcome of a significant strategic transformation program within CSG, a program we know as CSG 2021. The efforts of our team have made -- are showing benefits and we're building a stronger, more sustainable CSG, which is well positioned for future growth and profitability in FY '20 and beyond.

If you could turn to Slide 2. The CSG 2021 transformation program, we believe, is clearly delivering results. We've also delivered on the commitments that we made last year. We grew underlying EBITDA by 71% to $17.1 million within guidance. We successfully completed the $7.7 million of cost-outs promised, and we've reduced our inventory by just under $10 million. These achievements along with the successful capital raising of $18 million in September 2018 have also allowed us to repair our balance sheet. We reduced net debt leverage from 4.1x underlying EBITDA at the start of the year to 1.5x underlying EBITDA at June.

Our Technology as a Subscription model continues to gain momentum, achieving a subscription revenue growth of 17%, with seat growth of 18% and an increase in average revenue per user, or ARPU, of 10% to approximately $102.

We also launched our CSG 2021 culture change program. We've seen a significant cultural shift in our business, and this is key to driving the transformation of CSG. Part of this was the strengthening of our leadership team, and we appointed 8 key positions over FY '19.

I'm particularly pleased to announce the appointment of Mr. Gavin Gomes, who will be joining us next week as Executive General Manager of our Australian operations. Gavin was most recently the group Executive Director of Canon Australia and a key member of their Oceania Group leadership team. Gavin has a wealth of experience in print and technology and will add significant bench strength to the team in the key areas of customer and operational change and efficiency. So leading to that revenue and cost.

CSG 2021 underpins the improved financial performance in FY '19. And it positions us for sustainable growth in FY '20 where we are guiding to achieve double-digit percentage growth in underlying EBITDA.

If you turn to Slide 3. Slide 3 gives us some context for the markets in which CSG operates. Australia and New Zealand are nations of SMEs. There are 2.2 million SMEs in Australia, 0.5 million in New Zealand, and that represents a large target market generating a significant share of economic output. IT spend in Australia and New Zealand is growing. It's projected to exceed $100 billion in FY '19 with over 30% of this spent on IT services. And in addition, business use of paid cloud computing services continues to show significant growth particularly in the SME sector.

The SME segment is an attractive segment for CSG. This then throws us into the following slide, which is Slide 4. And this is why we positioned CSG as the leading Technology as a Subscription service provider to the SME sector in Australia and New Zealand. Over the last 12 months, we've simplified our business to focus on 3 core segments, being Technology; Print and Display; and Finance, services that we can provide uniquely to the ANZ SME market on one monthly invoice. We have nation-wide coverage across 27 offices in Australia and New Zealand, with leading partnerships with global OEMs, such as Canon, Konica Minolta, Hewlett-Packard, amongst others. We have a large existing customer base with over 10,000 customers who are predominantly SMEs, over 35,000 machines in field and over 24,000 technology seats, all underpinned by CSG in-house finance capability.

I'd now like to talk about Slide 5, which goes into a bit more detail about the CSG transformation plan, the plan we call CSG 2021, as I have just mentioned. We launched CSG 2021 back in October 2018. And as you can see from the visual, it sets out our vision and our mission and our three-pronged strategy of defending Print, expanding technology and extending through new solutions. Importantly, it also sets out, at the bottom of that uptick, the 5 values created by our people as to how we actually want to run our business on a day-to-day basis. We have 34 culture champions. These are champions that were nominated by their peers, and they are helping lead and drive the cultural change in our organization. They have and will continue to lead cultural workshops for employees, and all the CSG employees have now actually taken part in these important workshops. As part of the transformation, we've delivered a lot of operating changes in FY '19, and some of the highlights include, as you can see on the slide, moving to a 4PL logistics model in Australia; performing significant work on understanding the needs of our customers; implementing a marketing strategy; implementing a people and culture strategy; revitalizing the management team, which I'll come and talk about shortly; and also performing an in-depth view and review of our finance lease book. This has been done by our new General Manager of Treasury, Mr. Craig Bowring, who has implemented enhanced credit processes and dealt with some noncore bad debts. And I'd just like to take this opportunity to thank our shareholders again who supported us during the capital raising last year and also the support provided by our financiers with the recent extension of our banking facilities, which now put us in a much stronger financial position.

Slide 6 and 7 provide an overview of the significant changes I just mentioned to the CSG leadership team over the last year, creating a growing and sustainable business which is what I'm passionate about is all about having the right people. And I believe that we now have a strong and capable team. I just mentioned Mr. Gavin Gomes, but there are a number of other key appointments that you can see on Slide 6 and Slide 7.

At the bottom of Slide 7 is our most recent change, which is the appointment of Harold Melnick as our new General Manager of Marketing. Harold is an experienced B2B marketing executive, who's held senior roles at leading corporates such as Microsoft, Telstra and Vodafone. Harold joins us next week and he will report to Gavin Gomes and he will play a key role in driving forward our focus on the customer experience as we get into FY '20.

Lastly, I'm also delighted to welcome Raj Ray to our Board. Raj has more than 25 years of experience in senior management and CEO positions in the finance and IT sectors across Europe, North America, Asia and Australia, and he has a specific focus on SME and subscription-based segments. Raj is previously the CEO of the company called Class, which is a successful subscription-based fintech where he remains a Non-Executive Director and Raj will formally join the Board later this month. All of this means that we now believe we have the right leadership team in place to support the ongoing growth of CSG and deliver on that CSG 2021 vision that I've spoken about.

Slide 8. Our focus for FY '20 is to consolidate the changes we've made in FY '19 and build on our key accomplishments that we have so far delivered. On the left-hand side of the slide, you'll see the accomplishments that we've delivered during FY '19. And in the middle, you can also see the 3 key strategic pillars that are going to define our priorities going forward. And as I've already mentioned, they're defending print, expanding technology and extending the business through new solutions.

So on the right-hand side of the slide, our key priorities for FY '20 are as follows. To further improve our Print operations. To really drive our technology strategy in Australia and New Zealand, with the aim of accelerating growth and share of earnings in this important technology segment. Improving our customer experience, this is a major priority for this year and we will be implementing the marketing plan that clearly defines our customer value proposition. We'll also deliver the final stages of what we call Customer Hub and FinancialForce, which is our CRM and financial systems rollout to support the focus on customer experience and also to further streamline our operations. We will implement our people and culture plan. And importantly, we'll continue to focus on improving cash conversion and delivering working capital efficiencies. Our goal is to deliver double-digit percentage growth in underlying EBITDA in FY '20 as part of building a growing and sustainable business for CSG.

Thank you for listening. I'm now going to hand over to Ashley, our CFO. Ashley is going to take us through the financial results in a little bit more detail. And then I'll come back at the end and summarize. And we'll take some questions. Ashley, over to you.

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Ashley Conn, CSG Limited - CFO [2]

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Mark, thanks very much, and good morning, all. I'd like to start with looking at Slide 10, please. So before going through the detail of the results, I'd like to reiterate some of the key highlights that have driven our financial performance in FY '19. In particular, underlying EBITDA of $17.1 million, up 71% and within the guidance range. We achieved our cost-out program of $7.7 million and the inventory reduction of around $10 million. Leverage was materially reduced, as Mark mentioned, from 4.1x net debt to underlying EBITDA to 1.5x. And we've also been able to sign in principle agreement with the CBA to extend our debt facilities to August 2020. And we'll be coming to market with the refinancing process in the coming months.

On Slide 10, you can see that while CSG's revenue is down 3% to $217.6 million, a real positive in FY '19 is that technology continues to grow with subscription revenue up 17%, while display equipment is also up 30% compared to the prior corresponding period.

Print equipment sales were down 3.5% overall. A key driver of this would be the underperformance in New Zealand in the first half, which we mentioned on our last half year earnings call. New Zealand SME print equipment sales were down 11% for the year. However, encouragingly, in the second half, that increased 30% on the first half and marked 11% on the PCP second half from last year.

In Australia, revenue declined 1.8%, impacted by reductions in the enterprise equipment contribution post the closure of that business at the end of FY '18. However, importantly, Australian SME sales growth gained 11% during the year.

CSG was also able to renegotiate some unprofitable legacy Enterprise print contracts over the course of the year to assist with profitability. In terms of NPAT and earnings per share, these have also improved significantly in line with our underlying EBITDA. And our underlying EPS for FY '19 was $0.015 per share.

Moving on to Slide 11. So we've provided more details, giving an overview of the underlying EBITDA growth in FY '19. I would like to point out the EBITDA bridge provided on this page is the comparison that is between the different segments based on what we provided guidance in the FY '18 results.

The first major initiative we undertook during the year was to deliver on the cost-out, which enabled us to save $7.7 million. This was primarily driven by the reduction of labor following the closure of the Enterprise segment. And third, targeted reduction in headcount and logistics, which will provide ongoing benefits. However, this was offset by some one-off transition costs of $1.3 million for the year in people and operations as we rolled out the CSG 2021 strategy.

We saw underlying improvements in Australian Print and Display business, while New Zealand business underperformed particularly in the first half of the year, as mentioned. Technology continued to grow driven by annuity subscription revenue, which was up 17%. Finance was impacted by the APS 120 requirements and so has introduced a mezzanine investor to the New Zealand finance book and the decline in the lease receivables book of the lower print equipment volumes that we mentioned in recent years.

Turning to Slide 12. In terms of cash flow, we're pleased with CSG's strong improvement in operating cash flow, making a positive contribution in FY '19 of $10.4 million. Cash conversion was 80% for the year compared to 0% in FY '18. We reduced our inventory holdings, freeing up $9.6 million through improved operational management and forecasting in line with our targeted reduction of $10 million. Working capital improved from FY '18. It was negatively impacted by some one-off restructuring-related payments of about $2 million in the first half, $2.6 million in noncore bad debt cash impact for 3 customers that went into production following a detailed review of our lease book, some onetime catch-up payment from creditors off the back of the capital raise and the seasonal increases in debtors during our peak selling period towards the end of the financial year. We also did experience some billing issues that resulted in a buildup in working capital late in the financial year, and we expect that to be moved out over the coming half.

CapEx increased $6.1 million driven by the investment that we've made in our Customer Hub platform, which enables efficiencies in sales and operating processes while improving the customer experience. We're confident that CapEx will decline in FY '20 as we complete this rollout.

During the year, we made the final payment in relation to the acquisition of CodeBlue in New Zealand, which is the $1.7 million you see in payments to businesses. Financing cash flows of $9.7 million reflects the capital raise that netted $17.1 million, offset by senior debt repayment. Improving cash conversion remains a key major priority for us going forward.

Turning to Slide 13. Slide 13 and our balance sheet shows the significant progress that we have made to strengthen our financial position over FY '19. CSG finished with a cash balance of $26.6 million, up 88% on FY '18 as a result of increasing our earnings, inventory reductions and following the successful capital raise of $18 million. This allowed us to strengthen our balance sheet and reduced our net debt from $40.8 million to $24.9 million. The decrease in receivables reflects the focus on improving working capital management while the decrease in lease receivables reflects those reduced print equipment volumes compared to prior years.

Trade and other payables reduced $13.8 million due to onetime catch-up payments of creditors post our capital raise, a $5.5 million payout to the finance company relating to a material sale at the end of FY '18 and $2 million in one-off restructure-related payments. We leave FY '19 in much better shape than FY '18 and in a much stronger position to support our ongoing growth.

Turning to Slide 14, which shows the deleveraging in the business as of FY' 19 with net debt down to 1.5x underlying EBITDA compared to 1.4x (sic) [4.1x] underlying EBITDA at the start of the year. Further deleveraging is expected to occur in FY '20 by delivering earnings, lower restructuring costs, reduced CapEx and other working capital improvements.

I'll now review the business segments. So turning to Slide 15. I'd like to point out that this is the first time that CSG will report on its businesses in 3 key segments: Technology; Print and Display; and Finance. In order to present comparative information, we've prepared the FY '18 segments with consistent information to FY '19. Meaning, some figures might differ from what you've previously seen in FY '18 and our previous results presentations.

Moving to, first of all, to -- importantly to Technology on Slide 16. Technology as a Subscription. Our innovative Technology as a Subscription business continues to gain momentum with a year-on-year subscription growth increasing 17% and an underlying EBITDA up 20%. Subscription has now grown to a compound annual growth rate of 25% over the last 2 years. Technology equipment sales declined slightly, reflecting the overall transition to more cloud-based platforms that require less hard equipment sales. Earnings were impacted by the investments that we made in the Australian technology sales team after closure of the Enterprise business, but we expect this to significantly improve profitability in FY '20. We've commenced several initiatives to facilitate high growth in earnings with best practice sharing, standardizing customer solutions and consolidating operations the ongoing focus.

Turning to Slide 17. You can see how we've been able to grow our high-value seats over FY '19. And in particular, increasing our average revenue per user by 10% to over $100 to $102 per month. This has been driven by the sales focus on higher-margin Managed IT subscriptions, which were up 23% over FY '19. The strength we've seen is highlighted by the exiting monthly recurring revenue, which was up 17% to $2.5 million. We added net 3,689 new seats during the year, up 18%, adjusted for the sale of pcMedia and the transition of CaaS seats in New Zealand to a third-party support. The pcMedia sale is consistent with our focus on high-value SME seats. Pleasingly, churn also remains very low on the SME.

Moving on to Print and Display on Page 18. Underlying EBITDA increased $6.6 million in FY '19 as we delivered cost-out and focused on stabilizing print equipment sales. Australia continues its strong growth in the SME print segment growing 11.5%, and we were able to renegotiate unprofitable legacy Enterprise contracts to restore profitability, as I mentioned before. Whilst New Zealand underperformed in the first half, which contributed to the 11% decline in print sales during the full year FY '19, the second half saw a 30% increase in the first half and an 11% increase on the second half of FY '18, with new management and sales restructuring having a positive impact on sales performance.

Display equipment continues to grow strongly, with revenue up 30% this year to $12 million. While the print service revenue decline was in line with our expectations at minus 6.3%, we have a number of initiatives underway managing internal customer profitability to mitigate the decline and continue to remain strong print service margins. Our NPS score remained high at 74.

Turning to Slide 19 on Finance. As expected, with the decline in print equipment sales, revenue in finance was down 11%. EBITDA was impacted by the one-off noncore bad debt we mentioned and impacted finance of $1.3 million in the Australian lease book. We have a diversified industry and geographic exposure, which has resulted in underlying bad debts as a percentage of average lease receivables of less than 1.5% in FY '19.

CSG completed the restructure of its New Zealand lease financing facilities, with the introduction of a mezzanine capital investor to CSG Finance New Zealand Trust, as I mentioned. Existing facilities in Australia and New Zealand have $55 million of additional facility capacity available to new business and have been extended to April 2020 with a final maturity of April 2022. Together with Craig Bowring as Head of Treasury and Leasing, we're looking forward to pursuing further automation, operational efficiencies in the finance approval process through our Customer Hub platform.

Just briefly touching on Slide 20. We provided some additional information on the Australia and New Zealand on geographic performance. We thought it would be useful for investors, and I'll leave that for you all to have a look through.

Now I'd like to hand it back to Mark for some closing remarks.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [3]

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Thanks, mate. So we're going to close this off. And we're going to do that by looking at the last slide, Slide 22. So I think hopefully, as you've seen, it's been a busy year for CSG. We've delivered on what we said we were going to do, and we've implemented a new strategy. We certainly are very much focused on the SME market and it's guided by our three-pronged strategy of defend, expand and extend. We launched the CSG 2021 cultural change program. And that's starting to see some very, very good early benefits. We've met EBITDA guidance. We've achieved our cost-outs and the inventory reduction goal. Now I think we have certainly improved the overall position of the business. We still continue to see strong growth in technology. As we've talked about today, we successfully strengthened the balance sheet, reducing net debt to $25 million. And looking forward to FY '20, we see this very much as a year of consolidation to very much capitalize on those initiatives started in FY '19 and to build on the hard work done to really sort of try and position us more on this growing and sustainable business going forward.

Our focus is going to remain on accelerating the growth in Technology, improving the profitability there. As Ashley said, we're going to complete the rollout of Customer Hub and FinancialForce, which will sort of enhance shareholder value and also drive some more operational efficiencies. And an important point here, which I really want to stress, very much continue to work to further improve cash conversion and working capital efficiency across the business.

So achievements of last year, combined with what we both planned in the hopes of FY '20, very much provides the Board and the management the confidence to guide CSG, as I said earlier, to delivering a double-digit percentage underlying growth in EBITDA in FY '20.

Thank you for taking the time. And now we've run for about close to 30 minutes. And we'll now open it up for some questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from James Bales with Morgan Stanley.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [2]

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I'd like to start with a couple on guidance. Firstly, the subs growth guidance, is that pointing to more than the 17% delivered in FY '19 for FY '20?

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Ashley Conn, CSG Limited - CFO [3]

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James, it's Ashley here. We're not giving specific guidance down around subs growth. But I think we are pretty confident that we're on a pretty good trajectory. The momentum will continue looking pretty similar. I mean I suppose that's a lot of specifics on that. We -- what I would say is the monthly recurring run rate is at $2.5 million coming out of this month. So now that's obviously significantly up. So that should help, I think, give you a bit of flavor of where we're going.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [4]

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Just another point, I think in terms of the effect that, that has on the drop-through to EBITDA, James, I think we're going to see a fairly significant, certainly in percentage terms, increase in the EBITDA of Technology as we move into FY '20. So we're going to start to see some good momentum coming through on the Technology side.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [5]

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Right. Okay. So it's more about -- we can -- a large chunk of that is already achieved because of what you're currently annualizing, is the way to think about that?

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Ashley Conn, CSG Limited - CFO [6]

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Yes. And it will continue to build in FY '20 as well. Exactly, right. And as you say, the nice thing is there's a nice annuity angle to this, which is quite fast.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [7]

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And then my second question on guidance is -- I just wanted to understand that transitional expense of $1.3 million on Slide 11. And you said that they're one-off. Does that mean that, of fees of $1.7 million that you require to get double-digit EBITDA growth, $1.3 million is already lost away?

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [8]

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Yes, absolutely. The $1.3 million is basically in a nutshell, costs that we're really bringing in and setting up the CSG 2021 program. So there were some one-off consultancy costs there in terms of establishing the strategy and really sort of starting to build out the cultural thing that I know we've spoken about before. So those costs will drop away. But coming back to the guidance. The guidance is actually made up of a couple of things. There will be some costs that don't appear in FY '20, but there's also going to be some revenue growth in both Print and Technology as well. So it will be a combo of the 2.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [9]

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Yes. Okay. And then the net debt number looks like it was restated versus what you guys reported for last year. What's the reconciling item there?

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Ashley Conn, CSG Limited - CFO [10]

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I'll significantly provide you with detail. I mean -- there shouldn't be that much difference, James, with net debt one. Don't want to give you the exact numbers. I think that -- sorry, Mark...

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [11]

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Yes. I might just jump in here. I think what's happened here is in terms of cash compared to sort of what we were guiding for before, we've actually had quite a big buildup in working capital sort of particularly sort of through the end of the year, which is going to sort of reverse out. So you had a net debt number there about $25 million at the end of June. And a large buildup in the working capital will actually start to bleed out in FY '20. So if you kind of take what I'm saying and you combine it with the guidance, we're going to end up with a net debt number, June '20, sort of in the low teens. That's kind of sort of where I think this is going to drop at. And it will probably be very low teens. That's sort of where I think the net debt number will be.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [12]

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Okay. Great. And then just on the lease book. In the second half, the lease book working capital increased despite a decline in the size of the book? What happened there?

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Ashley Conn, CSG Limited - CFO [13]

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So the lease book, I think, has just declined in line with obviously the finding that we've said. There may be some slight movements in the working capital between the lease book and what we carry on the book, which really is what happens around the balance date. So it's only really some small timing issues around what's -- around cash conversion.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [14]

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And then -- and the restricted cash also increased. Why was that if the loan book is decreasing?

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Ashley Conn, CSG Limited - CFO [15]

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Well, it's just a matter of the timing of (inaudible) the asset, the cash and how the -- and when the deals are written. I wouldn't go too much into that.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [16]

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Yes. Agreed.

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Operator [17]

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(Operator Instructions) Your next question comes from Steven Fahey with LSND Holdings.

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Steven Fahey;LSND Holdings, [18]

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Just with the lease book, I'm trying to understand a little bit more. Is -- do you say that is profitable going forward or loss-making after bad debt sort of almost an essential cost to run the print -- to operate the print business? And is it possible to outsource the whole thing? Or is it integral? In other words, that's also the whole book, whereas it sounds like you've sort of gone one step in that direction.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [19]

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Okay. Yes. So Steven, Mark Bayliss here. There is a technical question in there. Yes. The lease book, as you know, it's kind of a bit like a supertanker. Now these things take, yes, quite a long time to sort of move around in terms of profitability. What's happened here is, as revenue has come out of the book called receivables or come out of the book that was put in there, up to 5 years of them have been replaced by sort of lower levels of revenue certainly in the last sort of 12 to 24 months, the receivables has come down. The lease book for us is a profitable, in fact, a very profitable part of our business. It's an integral part of our offering. I mean it really drives to the competitive advantage that CSG has. So it's an important part of CSG. In terms of outsourcing it, I can say now that we don't particularly have any plans there. It's an integral part of our business. And if anything, we're actually actively looking at ways to not only grow the lease book organically but also, we're also considering whether there are other, perhaps, inorganic opportunities that might present themselves. If they fit into the risk profile of what we're actually trying to do, remember, I just talked as well about those 3 areas of strategy, which is defending print, expanding technology and extending new solutions. The finance book, M&A-type opportunities, would very much fall into that last category, extending to new solutions. So we have a good book. We have some good experience there. But I think if I sort of look into the crystal ball, I'd actually like to see this part of the business grow. But it is profitable. It's an integral part of our business, and I think it will certainly be an integral part of our business going forward.

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Operator [20]

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There are no further questions at this time. I'll now hand back to Mr. Bayliss for closing remarks.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [21]

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Well, thank you very much, everyone, for taking the time. I know it's a busy time of year. So we look forward to catching up with shareholders over the next few days. And thank you for your time this morning. Thank you very much.

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Ashley Conn, CSG Limited - CFO [22]

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Thanks, everyone.

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Mark Richard Bayliss, CSG Limited - Acting CEO & MD [23]

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Bye-bye.