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Edited Transcript of CTD.AX earnings conference call or presentation 20-Aug-19 11:00pm GMT

Full Year 2019 Corporate Travel Management Ltd Earnings Call

Sydney, New South Wales Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Corporate Travel Management Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jamie Michael Pherous

Corporate Travel Management Limited - Global CEO, MD & Executive Director

* Neale James O’Connell

Corporate Travel Management Limited - Global CFO

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Conference Call Participants

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* John O'Shea

Ord Minnett Limited, Research Division - Senior Research Analyst

* Quinn McComas Pierson

Crédit Suisse AG, Research Division - Co-head of the Small Cap Research

* Tim Plumbe

UBS Investment Bank, Research Division - Director and Research Analyst

* Wei-Weng Chen

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Corporate Travel Management Limited Full Year Results Teleconference. (Operator Instructions)

I would now like to turn the conference over to Jamie Pherous, Managing Director; and Neale O'Connell, Global CFO. Please go ahead.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [2]

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Thank you, Ari. And good morning, everyone.

My name is Jamie Pherous. And with me is our new Global CFO, Neale O'Connell. And we are pleased to present our FY '19 results, which again is another consecutive record for the company.

So if we move to Slide 5, our group financial highlights. And I'll touch on this very quickly. Firstly, as you know, we guide to underlying EBITDA. And I'm pleased to announce that underlying EBITDA is up 20% to $150.1 million, which is a slight bit at the top end of guidance. Secondly, as we flagged, reported operating cash flow was over 100% or 113% for the year and 166% for the second half. We said it would be that because we know how timing works; and it's due to timing of payment cycles versus the reporting period date, as it always has been. Thirdly, our full year dividend is up 11% to $0.40, with the final dividend of $0.22 being 50% franked.

Now on to the highlights of this result that really underscore the strength of CTM's business model in the variable conditions we're facing. Firstly, we had very strong conversion of revenue to EBITDA due to the benefits of CTM's technology platform playing out, and I'll touch on that a little bit more in this presentation and share the competitive advantage we're really starting to achieve now.

Secondly, we've had continued strong market share gains, and it's achieved in all markets. So whilst TTV is up 30% to nearly $6.5 billion, ex the Lotus acquisition, TTV was up 15%, reflecting the strong market share growth we've achieved. In fact it was a record market share growth achieved this particular financial year. And again what makes this result so solid was it was achieved in a half impacted by a unique set of macro events outside our control, being of course no Brexit; the U.S.-China trade war escalation; the ANZ preelection uncertainty, when they thought there was going to be a government change; and of course, the Hong Kong demonstrations in June of this year.

So moving to Slide 6, the growth profile and the strategic opportunity for this company.

And now on to Slide 7. What this slide shows is the growth momentum maintained through our multiphase strategy, which I will talk to on the next slide. This slide shows the key metrics since our IPO in December 2010; and highlights TTV, underlying EBITDA and dividend growth over this period. And as you can see very clearly, CTM has delivered sequential growth in every year since listing in TTV, EBITDA and dividends. And underlying EBITDA has been growing at over 26x since listing, and this has been through variable conditions as well. And again this just reinforces this business can manage and adapt to the conditions.

If we go now to Slide 8 and just to give you an update on our strategic objectives. This slide really sets out our objectives and where we are in our trajectory. I mean a large part of our success has been our ability to not only set a sound strategy but execute year after year to that strategy, and the chart below highlights our progress to date and the next phase of our growth. So I want to walk through each item.

Firstly, there have been 3 phases. And if we touch on Phase 1. Phase 1 is all about establishing a global network. And we're going to do that, as we planned and as we flagged, by acquiring the best agencies we could, overlaying our business with our value prop and our business process and then leveraging the network we created through acquisition to start winning regional and global clients. And this is completed successfully.

Then we go on to Phase 2, and Phase 2 was all about getting each region above TTV or annual sales of $1 billion through organic growth. Now the significance of that $1 billion mark, which we've seen in the numbers in the last 2 or 3 years, is really about that's the optimized size to start leveraging the scale for improved EBITDA margins. Secondly, what we really want to do, we need to be nimble, we had to focus upon staff empowerment so we'd get that nimble decision making at local levels, and that was going to be our point of difference; and then to use the scale to support tech hubs in each region to ensure that our tech rollout was also nimble and innovative. So -- and that's been successful as well, and now we're into our third phase. And this phase is about growing a sustainable long-term business.

So the first point is we will continue to use M&A to rightsize our business. And rightsizing, as we say over and over and over, we'd like to be $3 billion in the U.S. and around $2 billion in Europe. And we think that is the right size to optimize organic growth. We also said that we're going to continually focus on tech innovation and our service proposition because we have a strong belief, to be successful in corporate travel, you need to be both -- you need to be successful at both. One supports the other and one doesn't work without the other. And this is one of our aspirations: We aspire to be the best in every single market we operate by having high organic growth, generating free cash flow with no debt for growth. And as we said before, we're targeting 15% organic EBITDA growth through this period, with acquisitions being additional. Of course, that 15% organic EBITDA growth assumes steady client activity year-on-year. And again I want to note that 15% was achieved in FY '19. In fact we achieved 16%, and if we go on to Slide 9, you can see that.

Okay. So if we go on to Slide 9, you'll see that the waterfall chart breaks down the growth into organic growth and acquired EBITDA, being the EBITDA at the time of the acquisition announcement. And as you can see, we've grown $24.7 million from one year to the other in terms of EBITDA. And as you can see, $19.7 million of that $24.7 million underlying EBITDA growth was organic, representing 16% of FY '19 underlying EBITDA, supporting our long-term strategy.

Okay. On to Slide 10, our technology competitive advantage. This is really important because we are spending a lot of money on technology, and we're really starting to see some great results in the company. As we've said before, technology is an important part of our client value proposition, and it is the #1 reason clients choose CTM over a competitor. So on the next 3 slides, I want to walk through our unique approach, the benefits of our technology strategy and the financial outcomes of this strategy to the CTM business model.

So if we go to Slide 11. This is the unique thing we're doing. This is what we are doing differently. Nearly every other competitor is doing it very differently. So what we're doing, okay, is that we're building our own client-facing technology. And we're not only just doing it. We're doing it in-region and in-house to address specific customer needs in each market and to maximize feedback loops, for not only speed to market, but high usability. And we'll touch on what high usability does for the metrics of the business. Where our competitors -- nearly every single competitor in the world is using third-party technology which is meshed together to form a solution which, quite frankly, is both expensive -- it's very difficult to update and stay abreast of market conditions -- and more importantly, it's very unproductive to support. There are very, very few that are doing what we're doing, but in every circumstance, they're building it themselves, but in HQ where it's outsourced. And from our experience, by doing that, because we've tried that early on in ANZ, when we try to do it for the whole world, it doesn't work because you miss valuable feedback for specific market needs and it makes it less usable. And that's a really important thing. So that's the unique thing what we're doing, and let's talk about how that's working for us.

So if we go to Slide 12, the benefits. There's 3 stakeholders here, there's CTM; the customer, of course, suppliers. So the first benefit, as we said before, for CTM is a commercial advantage. We don't have to pay third-party transactional costs, not just the booking tool, but across the whole booking ecosystem. That's a material cost advantage. Secondly, we're controlling our destiny. We can develop and deploy very quickly. We're not beholden to the slowest link in that meshed solution when we have it all ourselves, and we can develop very quickly for customer demands. And thirdly, we're using feedback loops with customers because -- we're not a software house because we've got the client base. We've got over $1 billion in each region. Those clients are giving us great insights for road map development, and we're building things that they need.

Now the customer benefit. As we'll see on Slide 35 and the survey, where we share our latest surveys of both staff and clients, 95% of our customers -- this is in ANZ and Europe, where the tech rollout is very mature. We've got 95% of our customers are extremely satisfied with CTM technology, which means the customer experience is high. And what does that mean for us? That means that you have got a very high uptake. And what we're finding anywhere we go in the world, the uptake on our technology is much, much higher than when we're using third-party tools.

Next, content is king. We talk to our customers all the time, and they don't care where we source content from. They just want to be able to see it all freely in their booking tool. And what we've done with our content layer is we can seamlessly integrate inventory from any source, whether that's hotels, GDS, the New Distribution Capability or APIs. And the good thing is we control that content so our customers can see what they want to see. And of course, we deliver that seamlessly now through CTM's Lightning online booking tool, which is now rolled out globally.

And lastly is the intuitive functionality that provides many features around the booking tool so that we can be agnostic if we have to. And that's things like the data tracking, the analytics, traveler safety and management, forecasting tools that help us demonstrate ROI.

And lastly, it's a supplier benefit. And you've heard a lot about the New Distribution Capability. The key point for us is that we are in a position to [together] display personalized supplier content tailored to CTM customers. And like the picture you can see on this slide, the example would be, for example, in the old days, you could go and search for the best fare from Sydney to Melbourne, which might be $345. Now we have the ability to identify and give people double status points or a premium seat, and they can do that in a bundled price. That's really valuable for the customer. And as we've said before, CTM is partnering with key suppliers all around the world to provide valuable content to different customer types. So we feel we're in a really strong position in terms of the way content is being delivered up.

Okay. Now on to Slide 13, the financial outcomes. This is where the rubber hits the road for CTM. The key outcomes here is that, when we have the technology rolled out, we get materially stronger market share growth in a region and we get expanding EBITDA margins. Let me explain why.

So if you look at these charts here. The left-hand-side chart shows improving productivity from FY '16 to '19. Why I've chosen this year band -- this is where our in-house technology started to really scale. And what you can see is that over that time period, productivity has improved by 30%, and this is really twofold. Firstly, it's -- supporting our own technology is much more productive and seamless for our staff than third-party technology because it's integrated. And secondly, because clients want to use our online booking for simple itineraries, they're choosing to do that instead of using our consultants. And what that means is that our staff time is focused on servicing the highly complex and high-demand itineraries that corporate travel is really all about. And they're not spending their time on nonclient or unproductive tasks, and that's why we're getting such good productivity. The right-hand chart shows the increasing profit margin over that same period per full-time equivalent, and that's up 66% in 3 years. And this is a combination of clients when they use our technology for simple transactions rather than our team, but also it's the very large cost advantage we have by not having to pay third parties for technology in the ecosystem.

So one of the end results is that we clearly win more clients. We've got strong market share gains because our technology is more usable and it's integrated to support. And it's -- than we do with third parties. And more importantly, we're getting EBITDA margin increasing through a combination of lower costs and better use of time of our staff on highly complex booking requests.

So we're spending a lot of money. So you can see that since FY '16 we've spent circa $47 million on client-facing CapEx, since FY -- that's client facing. That's not our whole IT, just client-facing technology, but if you do your math on the increasing EBITDA per person, you can see we've been [turning] incredibly good return on capital deployed so far. And the best part is, that way, whilst ANZ and Europe is well advanced, the future opportunity still exists in Asia and U.S.A. because we've only got very early uptake of our technology so far to date.

Okay. On to Slide 14, the regional performance. Now on to Slide 15. It's a busy slide, but the point of this is to show that we're presenting constant currency as well, given over 70% of our revenue is now generated outside of Australia and New Zealand, but let's go straight to Slide 16 and go through the regions.

Firstly, ANZ. We've got underlying EBITDA up 17% to $51.5 million on the pcp. Again there's not much more to say here than the region continues to win market share and outperform the market, and we've explained why. It is important to note that, the second half, the gloves came off a little. There was -- we did experience lower activity pre-election due to temporary uncertainty relating to expected change in government, but that has clearly since reversed. And in fact, we're just starting to see a little -- few greenshoots in Australia as well as of the last few weeks. Again this -- in terms of the quality of our business, we've won best national travel management company again, for the 13th time. And again what we're proud of is the way our management team can execute in variable conditions. We've had high revenue-EBITDA margin conversion. And that's because we're moving our clients from third-party technology tools to CTM technology, which gives us that productivity and profit gains during the year.

So in terms of outlook, we are experiencing slowing, but clearly steady. In fact, it's -- we won't be seeing little greenshoots in ANZ at the moment, which is a good thing to say. We've got momentum from record client wins in the 2H continuing. And of course, we feel we're very well positioned to leverage the industry change with the Qantas NDC capability.

On to Slide 17, North America, where we've had underlying EBITDA up 15% to $43.5 million. And again as we've previously flagged, we had higher-than-normal cost base because we're supporting legacy software until the last of the integration projects are complete, but what I can say is that our sales pipeline and clients picking Lightning and using the technology is very encouraging. In fact, last summer, we just saw the rollout through August, September, October. And it's clients starting very regularly, and this is because of the CTM Lightning online booking tool. So the good thing is we're starting to see the results we hope to get. And thirdly, we've really built a capable management team in the last 6 months, and we've built that team and we expect that team is now expected to take our region to a new level. And again what we're proud about is how we've -- how we can adapt to the market because we did experience a bit of a slowdown in the second H in client activity, but revenue and EBITDA margin increased as the benefits of the people and technology that we've seen in ANZ and Europe started to emerge. And we're getting a bit of buying power as well through the scale. So we've got these levers to pull.

And in terms of outlook, we saw slowing, but that client activity has steadied. And as previously flagged, if you look at this business, we expect a strong second half skew, and that's because we've got these expenses as we finish these projects that will roll off by the second -- by the end of this half. And then that's going to be combined with a real flattening of costs in 2H. With the results of the wins from the technology, that should see an expanding profit growth in the second half. And that's how we see that region.

On to Slide 18, Europe. Again, another stunning performance in this region. And it just backs up another stunning FY '18 as well, underlying EBITDA up 20% to $40.9 million on the pcp. And this region continually -- continues to materially outperform the market despite what we saw was a very challenging half when there was no Brexit resolution, it was kicked down the road; and yet the resulting effect that we've seen on investment uncertainty. Again we're really proud in terms of we've only been in this region for around 5 years. And it's the first we actually won best travel management company in terms of over $200 million (sic) [GBP 200 million] in sales in pounds for the very first time, which we're really proud of. It rightly represents the market share and the strength of our value proposition at market. And as previously flagged, we talked about the bank guarantees we took up in the first half to go direct with rail. We also talk about the NDC and what that meant in terms of how suppliers could tailor offerings to us. And we flagged that was going to be a good thing for CTM, and it's proven to be the case because, unusually, as we're getting bigger clients, our yield, which is our revenue-to-TTV margins, have actually gone up in the half because of those 2 outcomes, which is exactly as we flagged.

So if we look at FY '20. Again, we've had strong early client wins. It's been the reason it's won the most actually in the last few months, yes, in both clients and also government activity, which hopefully will buff the activity declines that we're experiencing because of Brexit. So what's really important here is that full year group guidance includes forecasting for Brexit uncertainty, but what we can say is that, any Brexit resolution, and it is scheduled for 31 October, it may have a positive effect on client activity and group EBITDA forecasts. And we say that on the basis that clients are telling us, "Once we've got some certain outcome, we can then understand how we're going to invest," and investment and travel are highly correlated.

On to Slide 19, Asia, where underlying EBITDA was up 27% to $24.7 million for the year. And if you look at the bottom left hand of that, of this slide, you will see we've reconciled what the organic EBITDA growth is when we back out Lotus at time of acquisition. And it's only plus 6%. And what's really happened here, there's 2 things I want to call out. Firstly, is the underlying business itself is performing very well. CTM technology is gaining momentum. In fact we've got key blue chip clients using Lightning OBT and using it on a global basis, which is very exciting for the business. And we've got improved sales pipelines, had a record year in new client wins. And secondly, Lotus Travel, it is fully integrated under one roof, as we previously flagged. And we talked about the savings we'd get. And what we're really proud to say is that we've got an additional $4 million worth of recurring EBITDA from the rent and staff synergies that are going to play in FY '20, which again will act as a good buffer to the activity we're seeing there at the moment.

If I look at the business itself and you look at the metrics. The decline in EBITDA and revenue/TTV margins is a result of the Lotus contribution, as we've previously flagged, Lotus acquired a lower margin, but as you can see, clearly we've had -- it's pretty obvious now that we've had challenging macroeconomic 2H due to escalation in the U.S.-China trade war after Chinese New Year, combined with the Hong Kong demonstrations. So that's affected client activity. And as we've said before, there's one part of our business that's a little more vulnerable to client -- sorry, to supplier payment. It's the wholesale segment of our business. And with Lotus under the roof now, that's doubled. And as you can see when you look at the numbers and you do some homework; and if you go to one of the appendices, last slide, Slide 36, we break down the first half and second half, you can see -- in our revenue note you can clearly see that what's happened in the second half is we've missed supplier payments. As a result of that -- and as we say, we adapt very quickly. We've already undertaken a strategic review in June to mitigate regional exposure to ticket price and activity on this segment moving forward.

So in terms of the outlook. As we said before, and people that know this business, we've reset supplier targets already for the first quarter to basically match the macro conditions, and we've got that same opportunity again to do it in the second quarter. And as we've said before, the integration synergies we found will buffer the reduced client activity, so in hindsight it's great we moved under one roof and it's great we had some redundancies. That was a great move by the business, in hindsight.

So in terms of the outlook, very clear that the full year group guidance, which we'll touch on with a bit more detail later in this presentation, includes forecasting for the trade war and the Hong Kong demonstration impact. But what I can say is that any trade war de-escalation and cessation of the Hong Kong demonstrations is expected to have a positive effect on client activity and group EBITDA forecasts. If you go back to the first half and the guidance and the color we were giving at the first half, Asia was our outperformer, so we are highly leveraged to a recovery should these things happen at all.

And now on to Slide 20. I just want to again reinforce and remind you that we operate in a growing global market estimated at $1.5 trillion, and it's growing at USD 40 billion per annum. And it's highly fragmented. CTM has TTV of $6.5 billion, and it represents well under 1% of global market share. And thirdly, we've got -- there's a real large barrier to entry to do what we've done. To go and build a global network, first, you've got to find great acquisitions. And we wonder if there's many left to set up a global network. And you've got to build client-faced technology, and you've got time constraints. We've been through that and that's a big barrier behind us. And lastly and most importantly, as we've said over and over, it's a compelling value proposition for the corporate segment. You must have strong personalized service and expertise for the complex travel, with technologies to deliver ROI. And we believe we're getting people to do all 3 in every region. So that's the opportunity ahead of us, and we've got a lot of growth to come.

Now if we move over to Slide 21. I want to introduce Neale O'Connell, to talk through our group financial summary. And we'll move straight to Slide 22. I'll hand over to Neale now.

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Neale James O’Connell, Corporate Travel Management Limited - Global CFO [3]

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Thanks, Jamie. And welcome to everyone on the call.

And I'll -- I'd just like to run through some of the financials.

On to Slide 22, which gives you a snapshot of the key financial metrics that underpin our performance. As Jamie has outlined, TTV up 30%, revenue up 21%, underlying EBITDA up 20% and underlying NPAT up 13%. We've also given and put in the appendix, on Slide 36, first half/second half comparatives, which demonstrates the resilience in the business model against the -- amidst the ability to mitigate macroeconomic challenges more in the second half.

Operating cash conversion for the year is 113%. As previously stated, operating cash flow conversion since the IPO has been near or nearabouts 100%. Bank guarantees increased in the first half following the Lotus acquisition; and have now reduced by a further $42 million since the first half, which includes a $27 million reduction since year-end. This is in spite of TTV increasing by 19% versus the first half. So you can see there's no correlation between bank guarantees and TTV.

We go to Slide 23. We are paying a final dividend of $0.22 franked to 50%, resulting in a total dividend for the year of $0.40.

Total debt has reduced. And the results, we need to point out, is -- includes an FX gain to our forecast rates of a favorable $4.8 million. The gain mainly came in the second half with a weakened global environment. CapEx on technology rose to $18.8 million, which is in line with our guidance. And during the year, we -- during the -- post year-end, we took the opportunity to renegotiate the group finance facility due in August 2020. This has resulted in a broader diversity with banks, improved rates and flexibility.

I also need to point out the new leasing standard will have a positive impact, in FY '20, on EBITDA of circa $10 million but a negligible impact at the NPAT level.

You turn to Slide 24 and the P&L. TTV growth remained strong at 30%, and 15% growth excluding Lotus demonstrates strong market share gains across the group. There was a slight decline in EBITDA margin primarily due to this Lotus contribution. Amortization of client intangibles have fallen by $3 million year-on-year to $5.6 million. You will note that NPAT growth of 13% versus EBITDA growth of 20% relates to 3 things: a higher effective tax rate of 26%, where the prior year was 22.3%; higher software amortization, a result of the CapEx investment; and a higher depreciation via the Lotus combination. You'll also note nonrecurring items tax affected -- the nonrecurring items of $5.1 million tax affected.

So turning to the next slide, Slide 25. The major nonrecurring items here are highlighted. The major item is the Hong Kong office restructure costs following the acquisition of Lotus. There was a consolidation of offices and redundancies, which have now been finalized. These totaled $4.2 million, including $2.7 million of office -- triplicate office rent, as previously flagged; and an additional $1.5 million in redundancies which were identified following that consolidation. We expect to see a benefit of approximately AUD 4 million EBITDA in the coming year with the streamlined operations.

If you turn to the balance sheet on Slide 26. The balance sheet remained strong. The balance sheet movements were largely affected by the Lotus acquisition with an increase in intangibles and an increase in receivables and payables. Just as importantly, receivable payables were also impacted by the normal timing cycles.

If you turn to Slide 27 and the operating cash conversion, you'll see that coming from a business with myself, with operating cash cycles where cash conversion can vary depending on the reporting cutoff, it's not unusual to see this cash conversion grow. The cash conversion ratio for this year is 113%. And the second half is showing a ratio of 166% on the back of the first half being 45%. As you can see from the graph, these fluctuations are not unusual and relate primarily to air and rail fixed payment cycles that vary with the reporting cutoff. These timing differences are short term and are industry-wide. You will continue to see these type of fluctuations moving forward.

Turning to Slide 28, the cash flow summary. We reported, we've reported a strong cash flow from operations. And the change in working capital relates to a combination of timing and the acquisition of Lotus Travel in October 2018. Technology CapEx for the period, as I mentioned, is flagged at $18.8 million as we continue to invest in our most volatile asset. We expect CapEx to be around $20 million in FY '20, as much as the heavy lifting is complete, and we'll use the base to continue to innovate. It is worth noting that we have a partially franked dividend this year, and we expect that to continue with the expected increase of generation of offshore profits.

I'll now hand you back to Jamie to update you on guidance and closing remarks.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [4]

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Thank you, Neale. On to Slide 30, if we can, just the guidance update.

So FY '20 underlying EBITDA guidance. We expect to be in the range of $165 million to $175 million. And to make it very, very clear: This excludes the impact of AASB 16, the leasing standard. If we include that, underlying EBITDA will be an additional $10 million, which is $175 million to $195 million (sic) [$185 million]. Again just to make it very clear, it will add a $10 million impact to EBITDA but negligible to NPAT, assuming no changes to lease portfolio during the year.

So what are our guidance assumptions for this year? We set out the FX cross-rates there and what each movement does. And as you can see, again we've got a bit of a tailwind from FX, and that tends to correlate at the moment with uncertainty. The -- a strong U.S. dollar means the rest of the world is uncertain. So clearly got a tailwind today. It excludes any future potential acquisitions. And I can say, in terms of acquisitions, they're all back on the table. We've been sitting back watching valuations get a little heady -- they've [turned on] a dime in recent times. So we'll see where we go this year with that in terms of how we execute.

And thirdly, I want to really spend a little bit of time on our activity assumptions in terms of what's going on around the world. We've spent a lot of work in terms of proofing up our guidance. As you know, we have a history of under-promising and over-delivering. And what we can say is that we'll continue to reassess the macro impacts that are clearly outside our control. We've talked about Brexit, but we know that this, hopefully, has still a -- there's still an outcome 31 October. We know about the trade war and, of course, the Hong Kong demonstrations. What I can say is that an early resolution to any or all of these issues, with the demonstrations being the worst, is expected to provide investment certainty. And we know in our business investment certainty means higher client activity, and I want to remind you that we're highly leveraged to economic and client activity recovery, okay? So in terms of -- just to clarify, in terms of the guidance, the lower end assumes, the whole half, there's no outcome. What we're doing today and what we're seeing today continues all the way through to December 31 in Europe and Hong Kong, okay, but any resolutions are going to be upside to that lower end, okay?

And lastly, again the impact of AASB 16, the leasing standard, we'll show it separately to allow comparison to prior year so it can't be confused.

Okay. Just to sum up now, on Slide 31. If you go to that summary slide, I just want to touch again on the business. We have a track record of strong performance and execution. So this is our 25th year of operations, so we're not a fly-by-night startup. And since listing in 2010, which is nearly a decade ago, CTM has delivered TTV, EBITDA and dividend growth in every year, in all economic conditions. And to remind you, EBITDA has grown 26-fold since we've listed in 2010. Secondly, don't lose sight of the huge untapped growth opportunity. Corporate travel is a huge and fragmented sector estimated at USD 1.5 trillion. And CTM, although, it's [motoring along] very nicely at $6.5 billion in TTV. We represent well under 1% of the global market. And next it can have value proposition that we know is compelling to the corporate market. As we've said over and over, to be successful in corporate, you must be able to combine highly personalized service and expertise with technology and deliver return on investment. And we strongly believe we've been able to demonstrate in every region we can do all 3, and I think that's the hardest thing for competitors to do.

And we've touched on our unique technology competitive advantage. We've given you a bit more flavor in this presentation. We're building our own client-facing technology. We're doing it in-house, in-region, in conjunction with clients; and that's what makes it unique. And that large investment has delivered very strong returns in return on capital that's flowing through and organic growth in EBITDA margins ANZ and Europe. And we've got the opportunity in U.S.A. and Asia to come, which are only early adopters. And lastly, we aspire to be a company that's recognized as the very best in every market that we operate. We want to be known as a company that achieves high compound organic growth. We can generate free cash flow, and we don't require debt to generate growth.

So that's the summary. We'll hand over to questions shortly. Before I do, I just want to point out that there are some appendixes here. The first one is just revenue segregation which you can see in the accounts, in the revenue note, touching on the leasing standard AASB 16 and the effects. Just again just reminding you we've been going for 25 years and how far the company has come. And lastly, what we have done, we split first half and second half growth by region. And we split out Lotus so you can see not just the macro impact on the business, but more importantly, how well CTM, the management team, can execute and their ability to use levers to perform so, in good and bad times, we can still grow.

Now over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from John O'Shea of Ord Minnett.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [2]

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Jamie, just a few questions from me. Firstly, on the tax rate, I just wonder if you'd give us some guidance around what that looks like in the next couple years. Secondly, the first half-second half skew, just sort of a bit of a sense in quantum terms what that might look like. Lastly, some feeling around -- obviously you've assumed in the first half that conditions remained pretty tough in those regions. That's the lower end of your guidance. What if those conditions continue into the second half? What -- has that been factored in? I guess that's the final question from me.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [3]

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Okay. Three questions. I'll hand over to Neale for the first, on the tax rate and where it's going to look like moving forward.

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Neale James O’Connell, Corporate Travel Management Limited - Global CFO [4]

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Yes. No problems, Jamie. The tax rate of -- compared to last year. Last year had some benefits in it, 22.3%, of the changes in the U.S. tax rates. And in the current year, we had -- there are some -- a little bit of tidy-ups on some deferred tax balances as well, but going forward, around the 25% is what we factor in.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [5]

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In terms of the 1H, 2H, I'll take that back over. We may as well go to Slide 36 there. What we've tried to do, it pretty much sums it up for you. So you can see we've tried to back out Lotus. And you can see that, the first half -- I guess, John, what we've seen -- since we've listed, we've never seen client activity outside of a band of plus or minus 3%. The only exception since listing is this second half, and it's primarily Europe and Asia. So Europe has been a stunning outcome because of all the business we're winning. And of course, as we've said before, we're leveraged to government, which currently is spending more money and is expected to spend more money given what they'll have to do, [if] they're made public with Brexit and trade and so forth. But if you look at Asia, you can see, as we've said, we've grown really well. We still had strong loan growth, but it's the revenue line where we got stung with overrides. You go away and do the work. It's pretty obvious. And you can see our revenue -- we disaggregate revenue now. You can see what that's done to the numbers, but we tend to think that's -- we've resolved a lot of that through June. So you can still see what this slide tries to show, that -- 2 things, that even in really tough times in the second half was -- we still not get double-digit revenue and double-digit EBITDA growth. And we also talk on this slide specifically what we've done to shape the business because we've got more levers. We've got buying power, scale benefit, technology and productivity that can play out on top of organic growth. What -- that slide also showed that -- just how well we're growing at the top end. We are winning a lot of business. There's no doubt about that. When you come to what you said before, I mean it's a good point. I mean we can only look at what's in front of us, right? I mean I don't have a crystal ball. You don't have a crystal ball, but what we do think is that, I mean, the riots, we don't know how last -- how long they can last. School is -- pretty much goes back now, so -- and we'll see how that pans out, but that's a fact. Brexit, as far as we are aware -- and we talk to our customers. We talk to government. It looks at this point there is going to be an outcome of some sorts on 31 October. And from our point of view, and the customers' and the government, for that matter, that -- an outcome is good because it tells people then how I'm going to invest. Do I invest in Europe, or do I go to the States and Asia? And just on that, again I can't underestimate how well Europe is going for us. And also it's been made very public in terms of what's going on from government in terms of the new trade missions, how they're going to spend money in a business. And we're very fortunate that we manage all of that travel particularly. So I don't know what's going to happen. It's -- it can happen. We're going to keep looking at that, but a -- I think the key point is we've got a number of opportunities. We've got a lot of investor presentations leading up to the first half. We've got our AGM late October, early November. We've got a lot of time to give an update to the market. I hope that helps.

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Operator [6]

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Our next question is from Quinn Pierson of Crédit Suisse.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [7]

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Jamie, Neale, maybe just firstly on North America. Could you, I guess, talk us through how many customers or what percent of customers in that region you've gotten on to the new technology and how to think about that mix shift playing out over FY '20?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [8]

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Yes. It's only early days, Quinn, as we've said. I mean it's mostly the pipeline. We had a look. Just actually, as I said, there's a lot of new clients coming on now in the next 3 months but again it's a journey for us. We know what that journey looks like because we've seen it in ANZ and Europe. And I think as we said before, structurally there's -- if you look at what we've got in North America, it's about 30% online and it's all using third-party tools. And some of those clients will stay with those third-party tools, but there's no structural reason why over time we can't get to 50% or 60%. And that's the opportunity.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [9]

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Yes. And staying in the Americas. So 1H '20 profit flat on the pcp. Could you maybe just talk us through a little bit in terms of those building blocks in terms of what -- kind of what additional kind of operating costs have had to go into the base versus kind of growth from the existing customers? Because that was -- I was under the impression that in the second half '19 we were cycling most of that step-up in cost base. So that kind of surprised me to a degree.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [10]

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Yes. I think we're just -- we're still -- some of these projects are still going on. We just want to finish them, and we've really built up that management team now. We feel comfortable we're in a good place to grow finally. And I think we've structured that team similar to what we've done in other regions to make sure that, that growth is not just -- it's not just sustainable but scalable. And again, we will see where we go with that. So we've got a wider management team that we flagged to support that growth. And again, it's a long journey for us, but as we've said, we expect the second half costs to be flat at best. That might even cycle out and be lower than the second half of '19. When you get the momentum of the wins, you can appreciate then what that does to EBITDA growth.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [11]

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So extra costs went into the second half '19, kind of higher, and then we annualize that into 1H '20. And then 2H '20 we start cycling kind of a cleaner cost base. Is that accurate?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [12]

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Correct. It's our expectation, yes.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [13]

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Okay. And then just lastly for me, can you maybe talk us through, I guess, the early thinking on the strategic view to the wholesale business in Asia? And kind of your expectations that, following this -- I guess, some of the resets on supplier arrangements, kind of the ability to get that supplier revenue back to where we saw it kind of in the last half and FY '18.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [14]

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Yes, yes, sure. I mean I think 2 things. I mean obviously the Hong Kong demonstrations. And seeing it result -- is pretty public. We had office closures there. [The airport] closed. It was pretty -- a pretty interesting thing. We -- still just to make note that we do negotiate with suppliers and we've got to go through that price issue as well. But I think some of the things we've done. We've split out corporate from wholesale. And we've got that arrangement with our key supplier, that's really very important, so that we're shielding the rest of the business that gets caught up in this. That's step 1. And step 2, as you'll see again, you look at our revenue disclosure, how disaggregate. It's very clear that we've got more variable revenue in Asia, which is predominantly the wholesale the way it's set up. We're working very, very hard to change that so that, like the other regions, there's a lot more fixed and less variable, which again just cushions us from these sort of quick and -- quick effects that we can't control. So they're the things we've worked upon in the last quarter which will play out, yes.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [15]

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I mean, do you have to reduce some of your profitability in that region to have a steadier base going forward? Or is that the way to be thinking about it?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [16]

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No, absolutely not. I mean we've worked really swiftly to get the Lotus integration done. So if you go out to that area -- it's a brand-new office. It's a great office and it's huge. And we've taken out a lot of -- what it -- the office merge identified was the ability to -- we had a lot of people, really excess personnel, which we've cleaned out. So the business is really -- is in a really good place. And that buffers us for this year. So we're taking a $4 million benefit in, but secondly, Lotus is very, very manual. We're very, very highly automated. And in the business plan, as we go through this half, that's continuing. So there's a lot of levers we can pull. And again I cannot stress how well Asia was going until late March through to June and beyond. So again don't forget we've got the same buying power. It's the same business. It's just that we're mitigating the risk that we've (inaudible) specifically in that region of [power overrides]. And I think what the guys have done up there is really good.

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Operator [17]

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Our next question comes from Tim Plumbe of UBS Investment Bank.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [18]

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Just a couple questions from me. A couple of them have already been asked, but just in terms of market conditions in the second half, Jamie, do you have any sense for kind of market growth rates in Europe, Asia, et cetera, second half; and how we should be thinking about your result compared to the market?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [19]

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I just think you have to see the rest of the market. I mean we saw Expedia come out with 2% revenue growth, and they're predominantly U.S. We'll see Flight Ease. We'll see some others out of Europe. I can't help but think we're going to be a material outperformer, but we'll have to wait and see. Like I said, we flagged the first half being the same as it is. So we've been very prudent and conservative. And like I said, in Europe we've got -- we're very lucky that we've got a couple of things going. We've got the government. We've got the -- actually we flagged that we've won a lot of business, obviously. And again don't forget we've got geographic diversity. So from what we can see today, and again we see it earlier, ANZ and U.S.A. tend to be pretty shielded from everything, so far. And in fact I'd even argue, the last week even, there's been some greenshoots in both regions, but we'll wait and see. So for us, Europe, with -- like I said, I can't stress -- it's pretty public what the government have said they're going to do to stimulate the economy should there be an outcome 31 October. And the good thing for us is we manage all of that. So I just think we're going to be in a much better place than others. Let's not forget -- sorry, let's not forget, too, we've got opportunity for market share. The tech is rolled out. You can see that -- we had a really great year in wins. I mean you can see the TTV.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [20]

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Great. And I think you touched on earlier with Quinn. I recognize it's early days, but can you maybe talk about post rolling out the tech stack in the U.S., what sort of portion of your clients -- the client wins that you've had since rolling that out have taken up your technology versus taking up third party? Maybe are you able to just talk about have you seen any improvement in terms of win rate post tech versus pre tech rollout?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [21]

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Yes, yes. We -- there's no doubt we've won stuff because of the tech, of that, there's no doubt -- I mean, look, we're more excited by what we're seeing. Like we've got customers -- like I said, we just saw the list for the next quarter of who's rolling out. And there's clients rolling out every day, which is really positive. So again, it's early days. It's a journey, but we know what it looks like because we've lived it in ANZ and Europe. So it's going to be a journey. It's not going to happen overnight, but there's going to be customers that like their current technology. And that's great too because we've got to be agnostic, but there's a lot of customers that want really simple technology, which technology in the U.S. is very complicated, very robust and very expensive. And don't forget it's not just tech people want the ROI. They want the service. And it's just not about an OBT. It's that whole wrap-up is what we do very well. So we -- look, I'd say finally we're in a good position there.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [22]

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Great. Just the other one. Apologies because I've been going between 2 calls, but you touched on bottom end of guidance, incorporating a continuation of uncertainty around Brexit. Just to clarify, does that mean that the bottom end assumes that, that 31st of October gets pushed out further? And maybe can you talk about what needs to happen to get to that top end of the guidance?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [23]

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Yes. So we've just written off the half. So we've essentially said that whatever we're experiencing today with Brexit stays to 31 December. We're experiencing Asia, which is, in order, is the Hong Kong demonstrations and the trade war, stays till 31 December. I mean that's all we can do in terms of -- and we'll just see how it goes, but I think that's pretty prudent. And if we're going to knock out double digits to do that, that sort of says [there is synergy to the] business, right? Secondly, you asked about what's going to be more at the upside. I think it's recovery in any or all of those things. I, we don't know what's going to happen with Brexit. No one does. And we can't be sure, but history tells us, and we've been doing this for 25 years, that economic certainty drives investment travel. And that's what recovery in travel looks like, certainly. Secondly, more importantly, ticket price and those sort of things are okay. So that's everything steady. It's just a matter of what happens with that activity. So we'd expect -- if there is a Brexit outcome by 31 October, we don't know. And what we do know in Asia -- Hong Kong riot, I mean, demonstration resolution, that will change on a dime activity. The other thing we don't know about, about Brexit, but everything it tells us is that any outcome 31 October -- and again, we're speaking to our clients, right? And they're all saying, "Once we know, we know how we're going to invest." Like if you dumb it down, whether it's the government or corporates, corporate is saying, "Well, are we going to invest in Europe or invest in Asia and America?" The government is saying, "What do we have to do to stimulate the economy? What do we have to stimulate to get trade deals going?" There's a very large contingency of people ready to do that. So we don't know, but we think there should be hit in travel. But we're being very, very, very conservative.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [24]

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Right. So should we take that as the top end of that guidance assumes an improvement across the -- all the regions?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [25]

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I think any or some would be a good start.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [26]

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Okay. Great. And just lastly from me. The $2.7 million double rental costs, is that for the entire 9 months? And did you back out the 3 months out of the first half EBITDA number, or has that just being backed out of the full year number?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [27]

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I don't know what -- I think we said that was -- yes, that was a nonrecurring cost in FY '19, but that steps down. There's not a cent of it left. So we've got a $4 million benefit into FY '20, which again in hindsight is a great move because we got that to buffer the activity in Asia. So we've got a $4 million upside already built into the -- to Asia that we're going to carry forward because of work we did in the fourth quarter...

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [28]

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Okay. But the -- I think you guys reported $12.5 million of EBITDA for Asia in the first half of '19. Did that include $900,000 of double rental costs, or was that excluding $900,000?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [29]

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No, no, no. The rental costs -- no. The rental costs all came in the fourth quarter. So we moved it. We moved in April. And it's what we were paying April, May, June. That's now cycled out. Does that make sense? We were still paying rent over May, June in 2 other offices that we vacated -- well, 3 other offices, actually, we vacated. Does that make sense?

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [30]

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Kind of. Sorry. I thought you're paying double -- I thought, when Lotus moved in -- so for the first 3 months, you will have been paying double rent, which fell in the first half of '19.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [31]

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No, no. It's just that business. We didn't -- we had separate offices at that point. So we just inherited the business and now we're operating. It's we -- just to go back. We went into one office in April, okay? And that benefit is that combined it's much lower rent moving forward, but we had rental, rent that hadn't come off yet that was cycling off in April, May and June; and extra rent from the out -- office premises of our business, the office premises of Lotus.

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Operator [32]

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Our next question is from Wei-Weng Chen of JPMorgan.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [33]

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I just had a couple questions for me -- from me, sorry me. So just any comments that you can provide for what FY '20 cash conversion might look like and particularly of sort of half-to-half? I know that FY '19 was pretty lopsided. Is it going to get more or less so in '20?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [34]

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I'll hand that over to Neale, actually, yes, yes.

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Neale James O’Connell, Corporate Travel Management Limited - Global CFO [35]

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Yes. As we sort of pointed out, we're going to continue with these sort of cycles, depending on the payment cycles. And where we expect the first half to end up will be something similar to the first half last year, at the moment. So just begin -- because of those payment cycles. But as I stressed, and you look at that long-term graph, the conversion, it is a normal part of the cycle, normal part of cash conversion, for it to go up and down and depending on the reporting dates. So to answer your question, in the first half, we expect to be similar to the first half last year.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [36]

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Long term still 100%, near 100%. Nothing changes, just there were just what we have to do on that actual reporting date.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [37]

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Okay. Great. And then we're seeing also a number of acquisitions by Flight Centre in that corporate space in the last year but nothing from yourselves. Just wondering if you'd comment on what's happening on that front for you guys. Also note that you guys confirmed early-stage discussions with Capita in March, but we kind of haven't heard anything since then. And to my knowledge, it hasn't been sold either.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [38]

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I think, as I said before and I flagged very clearly, we've got a strategy and we're going to execute to that strategy. The reality is that we're very fussy. We're fussy on valuation and fussy on outcomes. And I think, across the board, valuations got a bit ahead of themselves, but I think that's turned on the dime at the moment. And I can tell you we're doing a lot better than anyone we're looking at because of our growth model and our levers. And I think we've seen a return to what I'd call better values pretty quickly, and you can read into that what you will.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [39]

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Okay. Great. And then just last question from me. In your nonrecurring costs you had $1.2 million in activist response costs. What were those costs?

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [40]

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Just...

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Neale James O’Connell, Corporate Travel Management Limited - Global CFO [41]

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That was -- the activist response cost is predominantly accounting and legal costs associated with those responses.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [42]

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Yes. Okay. And they were purely incurred costs, right? They didn't incur -- they -- sorry. They didn't include like lost earnings or anything like that.

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Neale James O’Connell, Corporate Travel Management Limited - Global CFO [43]

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No, not at all, no.

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Operator [44]

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Thank you. Due to time constraints, I'd like to hand the call back to Mr. Pherous, Mr. O'Connell. Thank you.

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Jamie Michael Pherous, Corporate Travel Management Limited - Global CEO, MD & Executive Director [45]

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Again, thank you, everyone, for this morning. Again, we're on a road show. If we missed anyone today, please feel free to call us. We'd like to speak to everyone, and we can one-on-one.

And have a good day. Thank you.

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Operator [46]

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Thank you. That concludes today's call. Thank you for joining us. You may now disconnect your lines.