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Edited Transcript of ECX.AX earnings conference call or presentation 12-Nov-19 11:00pm GMT

Full Year 2019 Eclipx Group Ltd Earnings Call

Sydney Nsw Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Eclipx Group Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Muhs

Eclipx Group Limited - Acting CFO

* Julian Russell

Eclipx Group Limited - CEO

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Conference Call Participants

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* Josh Charles Kannourakis

UBS Investment Bank, Research Division - Research Analyst

* Paul Buys

Crédit Suisse AG, Research Division - Head of Research and Director

* Tim Lawson

Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research

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Presentation

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Julian Russell, Eclipx Group Limited - CEO [1]

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Good morning, all. And thank you for joining this call. We've been in regular contact since I joined in May, and much of this result has been preannounced.

2019 was clearly a disappointing year for the group driven for the most part by underperformance of our noncore businesses. As you know, we've made very good progress with corrective actions under our Simplification Plan. And I'll update you on that as we go through the slide deck.

But first, I'll move to Slide 4. The core business has delivered a solid performance against a difficult market backdrop. The capital structure has been strengthened in the period, which provides us with execution and flexibility to implement our Simplification Plan. The noncore businesses, Right2Drive and Carloans, have underperformed in FY '19, and we expect to sell or restructure these in FY '20.

Let me go into group performance on the following slide. The core business was solid half-on-half, but net operating income and end-of-lease income have shown improvements in the second half, while core OpEx is down 5% year-on-year. We did have marginal cost overrun in the second half related to novated investments, executive overlap and insurance.

In relation to our noncore portfolio, we did sell Grays and AreYouSelling in July and Commercial Equipment in September. As you are aware, we are taking corrective action on the residual businesses, both Right2Drive and Carloans. Jason will take you through the details of those shortly, but let's first look at the core performance over in the next slide, Slide 6.

Let me start with operating leasing where we are leaders in our own market. On average, our retention rates are 97%, reflecting the customer stickiness on our quality service proposition. Our customer Net Promoter Score has jumped in the second half, reflecting our reordering and reprioritization of the group back into our core. As a lead indicator of new business writings, we look at our short-term order pipe. Notwithstanding the muted economy, our short order pipe is at a 3-year high, which is pleasing and gives us confidence at the very least for new business right into the start of FY '20.

We have a number of strategic priorities in operate leasing for this financial year, including straight-through risk processing and the evolution of our target market, which I'll talk about again shortly.

Before that, I'll turn to Slide 7, culture in novated business. The novated business now represents roughly 30% of group's new business writings, which is up from about 20% a couple of years ago. An acceleration in writings against a backdrop of low new car sales is a very good achievement. We've done 12% year-on-year in new business growth, but in the second half versus the first, we've had acceleration of 20% growth. This reflects recent and ongoing investments made in the product and the team. We have a number of opportunities here, but in terms of penetration in our target employee base, but also enhancing our automated risk decisioning.

The objective of automatic risk decisioning is to improve the overall conversion rate in novated. Basically, we're moving the friction from the process and increasing our speed to approval. We expect this will distinguish us from many of our peers, who solely rely on third-party bank credit departments to do the work as well as the bank's credit appetite.

Now let me turn to Slide 9 to give you an update on our simplification progress. We're very pleased with the progress we've made against the Simplification Plan to date. However, we still have major priorities to work through.

Firstly, our noncore divestments. We intend to sell or restructure Right2Drive and Carloans during FY '20. In relation to our balance sheet, we are targeting an Australian ABS issuance during the year. This is off the back of the successful NZ ABS trade we did in September. We're focused on gross debt reduction and adjusted leverage ratio getting below 2x, which influences our dividend payment capacity.

Our focus on cost optimization is an absolute priority with a target of 45% cost-to-income ratio by exit FY '21. I will speak to our core strategic intent in a few moments.

In the first instance, let me turn to Slide 10 to filter our residual noncore divestment plan. We continue to work through the Right2Drive restructure. Many of the historical control issues have now been tidied up, and our new management team are heavily focused on collections of the debtor book. This had initial transaction, and we are seeing a reversal of the debtor book for the first time ever in the first -- in this half.

We've also reduced the Right2Drive branch network by 30% in the second half of FY '19. The absolute priority for Right2Drive is to contribute in that capital bucket of group. And this will be further assisted by the landmark New Zealand High Court ruling in favor of Right2Drive and against the general insurers, which is announced on Monday this week.

In relation to our strategic alternatives Right2Drive, we've looked at a number of options. But our intention as we sit here today is to sell the business to a more logical owner.

Likewise, with Carloans, while this is a good business in its own right, our priority is getting back to basics in the fleet business and not in consumer. Any proceeds from these business sales will be applied to a reduction in our gross debt, which is outlined on Slide 11.

As we mentioned in September, we have amended and extended our corporate debt facility. This provides us with flexibility to execute against our plan and stabilizes our capital structure.

Our net debt at the 30th of September was $189 million. We made progress delevering our gross debt by $85 million in the half, which is down now to $265 million.

Our intention is to take this gross debt down to $175 million in a steady state. This will be done through a combination of asset sales, panel capital release by Australia and ABS, a scheduled amortization and broader portfolio optimization.

As I mentioned, we want to take our gearing down below 2x for 2 consecutive quarters, to recommence dividends or any other capital management initiatives. Organic capital generation is a function of cash ROE, and this will be enhanced by cost optimization, which is outlined on Slide 12.

One of the drivers of the Simplification Plan was to remove complexity from the portfolio of unintegrated businesses within Eclipx. With portfolio complexity, Eclipx had a starch cost overruns and saw an annualized expense growth rate of over 30% for the last 3 years.

With the recent asset sales of Grays, AreYouSelling and Commercial Equipment, our pro forma cost base is down to $141 million at FY '19, a number we spoke to previously in our strategy presentation in September. This cost base includes stranded cost of $9.4 million related to group shared services, which is driven by historic group complexity. If you back out OpEx of the noncore businesses being Right2Drive and Carloans, you're left at a core at $90.1 million or $99.5 million, if you add back stranded costs. The objective is to take down stranded costs immediately and some additional costs. In total, a net reduction of $15 million.

We are currently in the process of tackling this as part of our previously announced cost optimization plan, which is outlined in more detail on Slide 13.

Our ultimate group target is to bring cost-to-income ratio to 45% by the exit of FY '21. We've laid out clear analysis and a description of the sources of the cost optimization and the timing thereof. There's been a lot of work done here in planning, and it's been reviewed and verified by an independent third party.

In parallel with this cost optimization, planning and work, we're using FY '20 to reshape the core business, which we've outlined in more detail on Slide 14. We're very focused on capital utilization and generating a good risk-adjusted return on capital.

We are fortunate to have a diversified funding model that enables capital allocation and in a selection of appropriate risk for the group. A unique advantage that we have in our core is treasury and risk, but this has never been used to its full potential.

In the first instance, we're building straight-through risk processing for novated, which is already showing early signs of success. In addition to this, we regard SME, the SME market as a highly attractive place for our product and capabilities. We intend to continue testing this market, and we'll move conservatively into this underrepresented marketplace, commencing in FY '20 and then into FY '21 but without losing sight of our core and novated priorities.

Let me turn to Slide 15 to summarize these priorities for FY '20 and our broader outlook. This slide provides -- Slide 15 provides a very good summary of the remaining steps and priorities for FY '20 to bring the company back to a steady state.

We look forward to talking to you about the progress against these goals that we've set over the coming year.

With that, I'll pass across to Jason to go through the FY '19 results and drivers in a bit more detail before I come back and expand our outlook.

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Jason Muhs, Eclipx Group Limited - Acting CFO [2]

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Thanks, Julian. In focusing on our core fleet and novated innovative businesses, we're looking to become a stable, predictable business, focused on delivering top-line growth whilst lowering our cost-to-income ratio and strengthening our balance sheet.

I'd now like to go through the performance of our results in some detail, beginning with our core business on Page 17. Looking at our new business writings in the core, it can be seen that the continued investments in the novated leasing has led to a strong new business writings growth over the last few years, resulting in a 15% CAGR to $234 million in FY '19.

The ongoing investments into educators continues to support increased lead generation, which, along with our NPS of plus 59, has seen a rapid outperformance of novated leases against the new car market over the last 18 months.

Turning now to fleet. After adjusting for the loss of volume associated with a change in focus away from lower-yielding panel business, fleet new business writings of $538 million was a 5% decline compared to FY '18. Positive signs, however, in fleet include the record NPS of plus 47 across Australia and New Zealand; a fleet retention rate of 97%; and a short-term order pipeline, which has hit a 3-year high of $102 million, which provide good momentum heading into FY '20.

I'd now like to turn your attention to our assets under management of finance and fleet sizes on Page 18. As I mentioned, novated continued to enjoy strong performance, delivering an 11% growth in its fleet to 14,700 in FY '19. The impact of the change in focus away from the panel business and managed-only services can be seen in the group's VUMOF numbers.

Funded fleet remained stable at 56,000 vehicles, whilst our managed-only services fell 4,200 to 29,000 in the year. Pleasingly, however, is that VUMOF in the core continues to perform solidly, delivering a 4% growth in FY '19 to $2.1 billion. This performance is a reflection of the quality of service proposition, and our unique business model continues to deliver value to customers.

I'd also like to point out that the renewed focus on the efficient use of capital has resulted in increased use of third-party funded facilities to fund low ROE government assets, thus releasing capital for the group.

I'd now like to turn to Page 19 to discuss some of the half year events. As we previously communicated, this page highlights the stable, predictable nature of our core.

Key points to note include the core momentum in our novated lease business helped underpin an increase in the core NOI in second half '19 to $71.9 million. Second half saw a 6% improvement in our end-of-lease profit per vehicle to $2,287 per vehicle compared to first half of '19. This is due to new initiatives designed to increase the amount of vehicles sold through retail channels such as easyauto123, thus capturing additional EOL margins.

Second half OpEx increased compared to first half '19 due to investments into our novated business, nonrecurring professional fees, increased D&O insurance and executive overlap. Notwithstanding these increases, OpEx in second half '19, overall OpEx in the core had fallen in FY '19. The reason for this reduction was due to the consolidated -- the consolidation of fleet sales teams and cost initiatives in our corporate and shared services.

As Julian mentioned earlier, OpEx remains a key focal point for the business as we target a cost-to-income ratio of 45% by exit FY '21. As a result of the items above, EBITDA in the core was $40.6 million and broadly in line with first half '19 of $41.3 million.

Focusing now on the overall financial performance of the core on Page 20. Strong growth in novated new business writings helped the core achieve a 4% growth in AUMOF to $2.1 billion, which, in turn, led to NOI stability before end-of-lease during FY '19. As previously flagged at the half year, end-of-lease was softer this year primarily due to a change in vehicle mix, resulting in fewer heavy commercial vehicles and light commercial vehicles sold throughout the year.

Total operating costs fell 5% to $90.1 million, which reflects the consolidation of our fleet leadership and savings in corporate and shared services. As a consequence, EBITDA fell 5% to $81.9 million in FY '19.

Worth noting that the increased interest on corporate debt, additional share-based payments and higher effective tax rate in FY '19 all contributed to culminate in a 19% fall in cash NPATA to 46.5% in the year.

As Eclipx continues to dispose of its noncore businesses, we've added an illustration on Page 43 to show the pro forma earnings of the group, including the impact of our stranded costs if all noncore businesses had been sold prior to 30 September 2019.

I'd now like to turn your attention to the group's income statement, Page 22. Despite the stable earnings profile of our core, the group's financial performance has been very disappointing in FY '19, adversely impacted by the performance of its noncore businesses.

Key points to note include the core has remained stable in the second half of the year. As previously highlighted, end-of-lease income in the second half was in line with first half '19. An increase in the profit per vehicle in the second half reflects a sustainable basis for future years' performance. The structural changes throughout the year saw a reduction in group OpEx to $196 million. These changes, along with the other initiatives outlined in the group's cost optimization plan, creates a credible pathway to a 45% cost-to-income by exit FY '21.

Eclipx has replaced cash-based incentives with equity remuneration to enhance the alignment between staff and its shareholders. Noting that Eclipx refinanced its corporate debt facilities in October, the higher interest on corporate debt reflects an increase in the drawn balances throughout FY '19. As previously mentioned, we've already commenced initiatives to reduce our overall level of corporate debt.

And finally, an increase in prior period CapEx investments resulted in an increased level of software amortization in FY '19. Given the complexity of the group's FY '19 results, we've also included additional detail on the group's impairments and nonrecurring items in the appendices on Page 44.

Turning our attention now to the group's balance sheet on Page 23. You can see here that there's been a significant amount of change to the group's balance sheet. This change is a reflection of previously announced goodwill impairments associated with Grays and Right2Drive; loss on sale associated with the disposal of Grays, AreYouSelling and Commercial Equipment Finance; and the reassessment of the carrying value of acquired intangibles software and the determination of Right2Drive as an asset held for sale.

To assist in understanding many of these moving parts, we've provided additional disclosures and net asset bridge in the appendices on Page 42.

Despite these changes, it's pleasing to see that the continued growth of novated and the ongoing stability of the core fleet business as reflected by the 4% growth in AUMOF to $2.1 billion in the year. The reduction in balance sheet-funded lease receivables throughout the year reflects the disposal of our Commercial Equipment Finance business in September and the transition in our fleet volume on lower ROE government accounts from the balance sheet to third-party funded, bank-funded facilities.

As Julian mentioned earlier, the group is committed to strengthening of its balance sheet. In the last 6 months, this has taken place through the refinancing of our corporate debt, the sale of noncore businesses with proceeds used to pay down our debt. In addition, Eclipx has looked to optimize its funding facilities to support enhanced capital efficiency and the release of capital to the group. As we look forward, the changes we have implemented throughout FY '19 will position Eclipx as a simplified and more transparent business.

Turning now to the group's cash flow on Page 24. Pleasingly, the group generated $35 million in free cash throughout the year, ending the year with an unrestricted cash balance of $97 million.

I'd like to highlight 4 key points in the group's cash flow. Firstly, as previously mentioned, Eclipx has managed to reduce its corporate debt through the sale of noncore businesses and enhancement to the capital efficiency of its unique funding model.

Secondly, a more disciplined approach to its CapEx program has resulted in a significant reduction in CapEx to $11 million. This represents a sustainable level of investment into FY '20.

Thirdly, the increase in cash reflects the suspension of dividends until such time that the group's leverage ratio falls below 2x. Any excess cash will be used to accelerate the repayments of corporate debt.

And finally, throughout the year, the group has incurred a large number of one-off transaction and restructuring costs associated with the mutual termination of the MMS transaction, costs associated with the sale of noncore businesses, costs incurred from the consolidation of its fleet and the restructuring of a number of its businesses. Details of these have also been provided in the appendices on Page 44 for your information.

I'd now like to turn your attention to some of the group's core competencies, starting with credit and risk management expertise on Page 25. With over 32 years of credit and risk expertise, Eclipx has been able to establish a comprehensive data set that provides unique customer insight. These insights enable Eclipx to continue to refine its scorecard in order to support straight-through processing and 24/7 approvals. This creates a key point of difference for Eclipx in market.

Eclipx has a proven -- Eclipx has proven its ability to deliver sustainably low arrears and credit losses over the long term and has enabled us to create confidence with debt investors. This generates strong demand for Eclipx ABS issuances in Australia and New Zealand. These capabilities optimize the capital efficiency of our funding facilities whilst ensuring we continue to access low-cost funding on an ongoing basis.

I'm now going to talk to our residual value setting processes on Page 26. As previously communicated, we have a well-developed processes around the management of our residual value risk. We use comprehensive range of data to analyze new and used car trend in support of our RV setting.

Our processes have been well-established for more than 30 years and has enabled Eclipx to conservatively set and manage its residual value position. Mirroring the trends in the used car prices, you can see that Eclipx residual values have remained stable over time. This stability enables us to deliver sustainable end-of-lease profits over the long term.

Before I hand back to Julian, I would like to comment on the performance of our 2 remaining noncore businesses, Right2Drive and Carloans, beginning on Page 28. Right2Drive has clearly experienced a challenging time during FY '19. This has culminated in significant EBITDA loss of $14.1 million. This loss is a result of a revised assessment on the collectibility of Right2Drive debtors as part of the adoption of the new accounting standards, process areas relating to noninsured and insured no claims segments and increased collection and legal costs.

Greater emphasis on the collection of its existing debtors has also led to an increase in the level of discounting throughout the year. In response to these challenges, we have significantly restructured the business, which has involved 3 key changes: firstly, a reduction in hires to the uninsured and insured no claims segment to the market; secondly, a rationalization of the Right2Drive fleet and branch network, designed to lower our cost base and improve the utilization of our fleet; and finally, greater focus on the collection of the outstanding debtor book.

You can see from the chart at the bottom of the page that we continue to make solid progress on the cash collections over the last 6 months. Notwithstanding their success is Right2Drive -- sorry. Notwithstanding this success, Right2Drive has remained a noncore asset of the group, and it remains our intention to sell this business during the year.

Let me conclude by commenting on Carloans -- on the Carloans business on Page 29. The introduction of new third-party partnerships, such as Kogan has led to a modest increase in Georgie sales volumes of 5% to $55 million in the year.

Carloans has undergone significant structural change throughout the year. Carloans remains subscale and is not a strategic fit for Eclipx and has other more logical owners. There is an opportunity for these new owners to fund the consumer finance and insurance business whilst continuing to expand our buying services.

I'd now like to hand over to Julian to recap and comment on our outlook.

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Julian Russell, Eclipx Group Limited - CEO [3]

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Thanks, Jason. Let me move over to Slide 31. Before going into our outlook, I wanted to recap on the relative merits of our fleet platform.

The group has maintained its market-leading position in upleasing despite a tough market and competitive environment. Novated has accelerated in the second half with 20% growth versus the first, and that's against a challenged new car market. And despite all of the noise associated with Eclipx over the last sort of 12 or 18 months, the core fleet business has performed and maintained its focus on delivering items for our customers. This is reflected in our very high NPS outperformance, our customer stickiness, which is reflected again in our 97% customer retention rate.

I'll turn to Slide 32 and talk to our new target market priorities. Beyond our existing corporate target market, SME represents a large and underserved opportunity. We are currently testing this market, and we're building our operating match fitness to move into this higher-margin segment. While this may take some time, we are enthusiastic about the opportunity and what we're seeing, and we feel that we have the right team in place for execution.

I'll turn to Slide 33 and talk briefly to our sector outlook and the group outlook. While we're in a transitionary phase, the company is currently working through of simplification, we're not going to provide earnings guidance for FY '20.

In terms of sector outlook, it's fair to say the regulatory and political inquiries into financial services at first give us confidence, and they've caused a credit squeeze, which has broader economic consequence. This has been passed on to consumers, which is evident in new car sales numbers.

And notwithstanding this, novated buckets trend, and we remain competitive in our operating lease business.

As it relates to the sector more broadly, we have 6 established players operating in a pretty mature market. We remain supportive of sector consolidation and recognize the industrial and financial logic of this.

But notwithstanding this, as we move to FY '20, we remain very focused on the task in front of us, which is implementing the Simplification Plan. And we will update the market as we progress through these major milestones.

On Saturday, it closed in a much better shape than it was 6 months ago, and we have plenty of more work in front of us. I'll pause there and hand back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Paul Buys from Credit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [2]

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A couple of quick ones from me. Just firstly, on end-of-lease income. Looks like prices are holding pretty consistent with the state of the used car market. I just was wondering if you had any comments on firstly, mix given that mix, I guess, moved against you in the last period. I just wanted to get an idea as to whether or not there will be stability in the mix going forward or any foreseen changes?

And secondly, just a view on volumes, given the trends in new business writing. I just want to understand how you see volumes of fleet coming off over the next year or 2?

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Jason Muhs, Eclipx Group Limited - Acting CFO [3]

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Thanks, Paul. This is Jason here. I might fill that, if that's okay. To your observations on mix, I guess, our view on mix is that what we have experienced in the second half of the year is probably a sustainable basis to be able to model the business going forward. So the 22 87 that we previously mentioned really reflects the mix of business that we've got today, which I think should be used for FY '20 and beyond.

As it relates to the volumes, I think you're absolutely right. Our expectations on the volumes of number of vehicles sold into FY '20 would reflect the volume that we had done primarily during '16 and '17, which would have been up on the prior period. So we would expect the higher volumes to be sold through FY '20 when compared to FY '19.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [4]

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Okay. Thanks, Jason. Second one just on, I guess, as you go further down the path of simplification, you've clearly articulated all your aims there in terms of cost out. I just want to understand, I guess, a view on one-off, further one-off cash costs to achieve some of those to achieve your plans from a cost-out perspective?

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Julian Russell, Eclipx Group Limited - CEO [5]

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Yes. Sure. Thanks, Paul. It's Julian here. In terms of the -- you can see on the deck and that we've outlined cash costs of about $10 million, $15 million, which is probably conservative at the top end, overly conservative at the top end. But it's probably somewhere in that range over the next FY '20, FY '21.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [6]

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And last one, just on Right2Drive. Understanding that it's pretty clear about it being up for sale. Notwithstanding that and assuming that on the chance that it takes longer for you to achieve that outcome you would like, do you have a view on kind of some sort of future steady state of the business compared to the reasonable losses that it's making now? And I guess, allied to that question, I mean, do you see it going to profitability? Or if the sale proves increasingly hard to achieve, is this a case of kind of putting it into some kind of run down and closing down the book? I just want to understand the potential outcome.

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Jason Muhs, Eclipx Group Limited - Acting CFO [7]

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Yes. Thanks, Paul. This is Jason here. I think that it's a good question. I think as it relates to Right2Drive, firstly, looking at FY '19, worthwhile pointing out that the performance of Right2Drive was impacted by the increased discounting that takes place. As part of the increased discounting, that culminates in an application of that increased discounting across the entire portfolio is the reason for the NOI being reduced in FY '19. Clearly, that's not really a sustainable base for us. It would be our view that the overall contribution from Right2Drive throughout FY '20 would be more neutral to the group's P&L breakeven at a sort of EBITDA level. And that certainly reflects the expectations that we have of the business and reflects also a number of the structural changes that we've done to improve the effectiveness of that operation and also collect on the existing debtor book.

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Julian Russell, Eclipx Group Limited - CEO [8]

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The answer to the second part of your question, Paul, I think the -- we've looked at a number of scenarios, as you'd appreciate for Right2Drive in terms of selling the debtor book, add sourcing the book, creating a forward flow. I'm running the business off. So we have all of those options in front of us with third-party providers in the event we can't sell the business. But where we sit right now, our intention is to sell the business.

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Operator [9]

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(Operator Instructions) And your next question comes from the line of Josh Kannourakis from UBS.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [10]

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First question, just on the core. Obviously, you made some context around the improving pipeline of opportunities there. I was just hoping you could give a little more context of how we should look at that in terms of relating to your outlook for new business writings, et cetera? And also with context to just inertia in the existing book as well?

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Jason Muhs, Eclipx Group Limited - Acting CFO [11]

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Thanks, Josh. It's Jason here. I guess the way that we tend to view the pipeline that we've made reference to here is there confirmed orders that are, in all likelihood, going to settle with a high degree of confidence over the next sort of 2 to 3 months.

Obviously, that's a bit of a lead indicator for us. What you can see is that, that pipeline has continued to trend up, notwithstanding the fact that we've made the conscious decision to try to exit some of that panel business. That gives us a reasonable degree of confidence in the short-term new business writings and the momentum in our fleet business. And I guess should be viewed in that kind of context.

As it relates to the second part of your question, inertia. You're talking about what our views are with regard to the overall number of customers in inertia or...

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [12]

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Yes. That's right. And just any -- I know there's obviously some delayed decisioning over the last 12 months in terms of new agreements signed and sort of inertia in existing agreements. I'm just wondering whether you've observed any change in that?

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Jason Muhs, Eclipx Group Limited - Acting CFO [13]

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What was sort of announced at the half year was that there had been some delays in some of those orderings, particularly out of New Zealand for some of our larger corporates that had delayed their purchasing decisions for various reasons. What we saw through the second half of the year was the correction of that. They had reengaged and begun ordering new vehicles as they've resolved their internal views.

Overall, across the entire sort of core, we haven't seen any material change in our extension in inertia volume over the last 6 months.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [14]

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Okay. Perfect. And just while I've got you on the call, can we just maybe get a few high-level thoughts around the current industry structure and thoughts around industry consolidation? Any updated thoughts around that from your perspective?

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Julian Russell, Eclipx Group Limited - CEO [15]

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Sure. Clearly, I mean, if you look at the global fleet markets around the world, usually you have 2 or 3 players in any given market, in any given Western or Chinese market for that matter, probably 2 or 3 players. We've got 6-plus large players, all with varying different strategic initiatives going on at the moment. Clearly, 6 players seems like a crowded marketplace, particularly for Australia, where financial services is a bit more consolidated. So we do expect, if I read any of our previous commentary as well, I think generally there's an expectation that consolidation will happen over time. And like I said, we're supportive of that consolidation. I mean you just need to look at the numbers that MMS announced when they announced the Eclipx merger back in November 2018 of sort of $40 million to $50 million of pretax synergies to see the financial mirrors associated with consolidation in a mature market.

So we are supportive of that. And we -- right now, we're obviously just running our own race with simplification. And we'll do whatever is best for our shareholders.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [16]

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Okay. Perfect. And just one more, just on the New Zealand High Court decision and Right2Drive, quickly. So how -- or if any, impact -- or sorry, should I say, what impact do you expect that may have on maybe the existing data book in New Zealand and also, I guess, just the ability to sell the business as a going concern?

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Julian Russell, Eclipx Group Limited - CEO [17]

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It's been helpful and timely obviously with that announcement on Monday coming out of the New Zealand High Court. The context for that is we had won that appeal. We had won that case initially in 2018 and -- early in 2018. And there's only 2 major insurers that is in Australia as well over there, which is the same guys. And they've appealed that case and have lost, and the judge -- the judgment is written on one of the slides in the deck. It's quite a long judgment, but it's fair to say, given New Zealand's a Commonwealth Country, Australia and courts will observe New Zealand's high court decision in reverse flow order as is always the case. So we expect that to be quite beneficial for the treatment of insurers versus Right2Drive going forward. So we think it's a net positive. And obviously, we'd expect that to give buyers confidence in and around the asset as well.

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Operator [18]

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And your next question comes from the line of Tim Lawson from Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [19]

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Just 2 questions for me. On the stranded costs, I mean, how much of those just roll off in a sort of passive sense? And how much you actually have to be active? So a bit more detail on the stranded costs, please?

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Jason Muhs, Eclipx Group Limited - Acting CFO [20]

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Yes, Tim. It's Jason here. I think obviously we've called out the amount of stranded costs that are associated with our divested and noncore businesses as at FY '19.

Worthwhile pointing out that as we think about those costs, that is various aspects to that. One is shared services, which is credit, risk, finance, legal, HR, all those sort of things, which is obviously shared across the entire organization. Other aspects there would be the group's property footprint and also the executive, which is sort of held in the corporate center and therefore, allocated out to the various businesses. Obviously, as we've made change to renew the executive team and also moved to consolidate our property footprint as we talked about in the cost optimization plan, a lot of that will result in savings in the corporate and shared services areas, of which will actually naturally lead to a reduction in the overall quantum of those costs into FY '20 and beyond.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [21]

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Okay. Just in terms of the credit fleet and credit impairment. Can you just talk about the second half in that? Because it seems that it was a bigger number in the first half versus the full year?

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Jason Muhs, Eclipx Group Limited - Acting CFO [22]

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Yes. I think the changes to the impairment really is the reflection of, I think, 2 things: firstly, the improved performance of the business, lower arrears, which is always low, but it continues to be sustainably low; the exit of our noncore or divested businesses such as commercial equipment. All of which are sort of impacted by the adoption of the new accounting AASB 9 as well. So really, you've just got some movements there that relate to that, which caused a little bit of lumpiness. But overall, I guess what it highlights is the robustness of our overall credit and arrears management.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [23]

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So that effectively write-back in the second half, was that related to actually certain credit becoming performing? Or is it related to the restructure?

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Jason Muhs, Eclipx Group Limited - Acting CFO [24]

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No. Generally, it's got to do with -- when you look at the adoption of the standard, it's like a forward-looking view. So you start to look at what debt roll from sort of current 30-day, 30 to 60, 60 to 90 and ultimately then result in write-off. So as you start to improve the overall quality of your arrear, then you reduce that, then you get a positive impact back through the P&L.

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Operator [25]

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(Operator Instructions) I have no further questions at this time. Please continue.

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Julian Russell, Eclipx Group Limited - CEO [26]

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Thanks, Myles. I think we'll finish it there. And thanks, everyone, for joining the call this morning.