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Edited Transcript of ECX.AX earnings conference call or presentation 10-Nov-20 11:00pm GMT

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Full Year 2020 Eclipx Group Ltd Earnings Call Sydney Nsw Nov 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Eclipx Group Ltd earnings conference call or presentation Tuesday, November 10, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Damien Berrell Eclipx Group Limited - Group CFO * Julian Russell Eclipx Group Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * 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 * Wassim Kisirwani Jarden Limited, Research Division - New Zealand Technology and Software Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Eclipx Group FY '20 Full Year Results Presentation. (Operator Instructions) I would now like to hand the conference over to Mr. Julian Russell, CEO. Please go ahead. -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [2] -------------------------------------------------------------------------------- Thank you, Amanda. Good morning, and thank you all for joining our FY'20 results presentation. We're very pleased with the full year results and believe it reflects strongly on our business model and our team. With Simplification now behind us, the business is in a much stronger position to pursue profitable growth by managing our external risks. We have a very clear execution pathway to deliver growth in each of our target markets called Strategic Pathways. Now before I get into that in more detail, let's start with the results overview on Slide 5. We're very happy with our core performance, delivering growth in both EBITDA and cash NPATA, while proactively managing our way through COVID. As you know, COVID emerged late in our first half, and we acted quickly and decisively. Beyond staff well-being and maintaining our strong customer service proposition, our initial priority was derisking liquidity. Through lease extensions, cash and inventory management, we reinforced our liquidity position to $181 million. That's a net 70% increase in liquidity in just 6 months. We reduced our corporate net debt by 47% to $99 million. That's bringing our gearing down from 1.1x compared to 3x in FY '19. We have completed the Simplification Plan either meeting or beating all of our targets more than 1 year ahead of schedule. Let's start with closer look at the core results, starting with Slide 6. We delivered EBITDA growth of 4.3% year-on-year, which is outlined in the bridge here. NOI did see a marginal decrease largely due to the impact of COVID on new business writings. As it relates to our provisioning, we have adopted a more conservative risk overlay well above where we see current risk in our portfolio today. End of lease income outperformed given a supportive used car market and a deliberate reduction in our inventory holdings in the second half. In-year cost reduction was $6.3 million. Annualized run-rate costs are tracking circa $84 million, which is a net $15.5 million reduction from FY '19. We are really pleased with our execution here. Let me turn over to Slide 7 to walk through our in-year movements from core EBITDA to NPATA. We delivered core NPATA growth of 2.2% to $47.5 million. We think this is a very good outcome in the current environment. Net of the noncore businesses have been divested. There are 2 points to call out here in relation to stranded group costs. Firstly, at the bottom of the slide, we showed a relevant FY'20 stranded noncore costs. And secondly, just below that line, we point out our expectation of FY '21 group numbers for these line items inclusive of stranded costs. If you look at the first box, it shows depreciation and interest relating to our various rental properties. It's $5.3 million in FY'20, but as you can see, it's expected to be $4.5 million to $5 million in '21. A summary of our '21 expectations for these line items are contained on Slide 23, which Damien will go through shortly with the results. Since the start of COVID, we've sought to provide regular updates to the ASX to ensure maximum transparency in a time of great uncertainty. This included our progress with Simplification Plan, our [road in] liquidity position, our EOL performance as well as our extensions and new business writings. If I turn over to Slide 8, I'll talk through the performance of the latter 2 points in a bit more detail. New business writings have been impacted by the COVID environment for 2 primary reasons. Firstly, we deliberately sought to incrementally extend leases in order to avoid potential liquidity issues should the used car market is shut or being closed temporarily. These incremental extensions effectively replaced new business writings in the period. Secondly, new business writings have naturally seen some reduction in line with business uncertainty driven by COVID. While we have seen a resurgence of tenders and new business opportunities in the fourth quarter, business confidence remains volatile and business decision-making is largely slower than it was this time last year. The charts at the bottom of the slide show our average monthly corporate and novated volumes pre- versus post-COVID. On the 3rd of September, we disclosed to the ASX that we expected volumes to be 70% to 80% of pre-COVID corporate volumes and 80% of pre-COVID novated volumes. As you can see here, this is consistent and outperformed than the actual performance that we did in the period. Going forward, the new business writings task is very clear to us. Before I go into our growth plans through Strategic Pathways, let me summarize our journey to this point over on Slide 10. Post Simplification, the business is now in a much stronger position to pursue profitable growth while managing external risks. There are 4 component parts of Simplification: noncore business investments, balance sheet derisking, cost optimization and a strategic refocus on our core business. I'll talk to each of these briefly to set the scene for our next slides of strategy, starting on Slide 11. With the sale of Right2Drive in August 2020, we are now a pure-play fleet management platform. The divestment program is hugely important to derisking our balance sheet and removing noncore earnings drag. At the same time, these divestments allowed us to pay down our corporate debt with sale proceeds and debt to de-gearing profile is outlined on Slide 12. We've outperformed the initial balance sheet target by $20 million. We reduced our corporate debt from $350 million to $155 million in just under 16 months. This de-gearing was helped by the proceeds from our noncore divestment program as well as organic capital generation from our core business. The net debt-to-EBITDA ratio is now circa 1.1x, a huge improvement compared to more than 3x leverage in FY '19. The EBITDA part of our leverage ratio has been helped in part by the cost optimization program, as outlined on Slide 13. The group run-rate OpEx is currently $84 million, delivering a $15.5 million cost reduction compared to the reference points like-for-like in FY'19. There are a couple of points to point out here. Firstly, the run rate number includes all stranded costs. Secondly, it removes all nonrecurring benefits associated with COVID. For example, temporary salary reductions in the year. With the group cost base reset, the noncore businesses divested and a stronger balance sheet in place, our business Simplification targets have well and truly been achieved. This brings us to the last pillar of Simplification, which is to redefine our core focus, which I'll discuss on Slide 14. The execution of the simplification has given us great confidence in the strength and potential of our core business as well as our team's ability to execute on plan. The next phase of our strategy is called Strategic Pathways. It defines the focus and the initiatives required to drive growth in our 3 very large target markets. I'll expand on Strategic Pathways shortly, but first, let me pass across to Damien to talk through our FY'20 results in some more detail. -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [3] -------------------------------------------------------------------------------- Thanks, Julian, and good morning to everyone. I'll start on Page 16 with the group income statement. The successful delivery of the simplification plan, in particular, the divestment of noncore businesses and cost reductions, has substantially improved our earnings profile. Net operating income, including end of lease income and impairments, is down 29%. However, that is more than offset by the 44% reduction in operating expenses, which results in a 20% increase to EBITDA at $71.2 million on a pre-AASB 16 basis. Below the EBITDA line, you'll see the following. A shift towards share-based payments to better align our executive team with the shareholders. A step-down in our depreciation and amortization due to the impairment of assets in FY'19 and the subsequent divestment of noncore businesses. Thirdly, interest on corporate debt is down 19%, driven by the $131 million debt repayment this year. And finally, nonrecurring items are significantly lower in FY'20 and relate to restructuring costs, all linked to the Simplification Plan. These items walk you to a cash NPATA total of $33.6 million, which has increased by 41%. Having returned to a positive profit number in FY '20 helps to strengthen the balance sheet, which is a good segue into my next page. Eclipx has a much stronger balance sheet as a result of achieving the objectives set out by the Simplification Plan. Firstly, the liquidity measures taken by the group in response to COVID is reflected in the reduction of both trade receivables and inventory. Inventory is down 46%, as the business seized the opportunity to reduce the level of stock on hand by taking advantage of the really strong used car market. Furthermore, the group beat the leverage target as set out by the Simplification Plan by reducing corporate debt to $155 million. This represents a 46% reduction in corporate debt over the course of FY'20. Leases are down 9% as a result of lower new business writings and a slight shift towards principal and agency funded new business writings. In line with the trend in leases, our warehouse and ABS borrowings are also lower. Finally, net assets have increased by 6% over the year, up to $508.5 million. Turning to the page on cash generation. And with the divestment of the noncore businesses, the future cash generation by the group will be much more tightly aligned to its NPATA result. At the bottom of the table on the left, the cash movement for the period was a net cash outflow of $32.2 million. However, after adding back non-BAU transactions, such as the proceeds from divestments and corporate debt repayment, you can see in the table on the right that the organic cash generated by the group was $88.3 million. Comparing that against the NPATA of $49.7 million, the cash conversion this year was 178%. With regard to our overall financial performance and position at this time, we are confident that the simplification plan has delivered a less complicated pure-play fleet management business with a vastly stronger balance sheet. I would now like to turn your attention to the core business, starting with new business writings on Page 19. Julian has already touched on these results earlier in the presentation, so I won't repeat the message. However, to add to his comment regarding the headwinds that included higher extensions and lower business confidence, the business's deliberate strategy to exit panel arrangements is also a contributing factor to the 35% reduction we see in corporate against the prior corresponding period. That said, we have continued to see a rebound in new business writings with this upward trend evident in our October results. For novated, as Julian highlighted, the business saw a faster recovery in new business writings than initially anticipated. We expect this trend to continue as we increase the penetration of our existing employee base and expand that employee base by offering an industry-leading digital experience for our drivers. On Page 20, assets under management or financed remains stable, albeit slightly down for financed assets to $1.2 billion due to lower new business writings I just mentioned. The $61 million of additional extensions ensure our assets remain on book. However, as they will continue to depreciate from a lower starting point, they do not provide the same level of AUMOF replenishment as new business writings would do. With respect to vehicles under management or financed at the bottom of the page, the total size of our fleet is currently at 95,000 units, which is 5% down against the prior corresponding period. This is driven by our previously communicated strategy of migrating away from low-margin managed only units and exiting panel arrangements. Lastly, the trend of funded units is being driven in part by the significant reduction in our inventory stock on hand at year-end. It's worth concluding on this page by highlighting that 89% of net operating income before end of lease income and impairments is driven by our AUMOF balance. This is why we see a similar level of stability in our net operating income as we do with AUMOF, which leads me to Page 21. The key point from this page is that the successful execution of the Simplification Plan has positioned the business to manage the impacts from COVID and still deliver a profitable growth. Net operating income is where we saw the biggest impact from COVID, which was down 5% against FY '19. Linking net operating income to the drivers on the previous page, we saw that lower new business writings was driving a reduction in brokerage income and lower VUMOF of was driving a decline in management fees. The business also recorded an overlay provision on the impairment line, which was prudent considering the uncertainty surrounding COVID's impact on the portfolio. These headwinds were partially offset by expansion of our financing margins due to the securitization issuance in Australia and New Zealand in December 2019. A positive impact on our business from COVID has been the strong demand in used cars. This has allowed us to sell down our inventory levels to manage our liquidity while still realizing higher prices. In 2020, our average end of lease income per vehicle was $2,566,, up 15% against 2019. Operating expenses are down 7%. As Julian mentioned, our run rate today on a pre-AASB 16 basis is $84 million. This includes cost-out actions completely implemented during FY '20, on which we will realize the full benefit in FY '21. As a result of the above items and as we've managed through a challenging environment created by COVID, EBITDA was $85.4 million, which is 4% up on FY '19. Turning to Page 22. Our core business experienced solid growth in a challenging environment. Net operating income pre-provisions is $174.1 million, which is flat to FY '19. As indicated, the reduction to our upfront income because of COVID has been offset by higher end of lease income. The increased supervisions year-on-year is due to the business taking a prudent approach of recording a COVID overlay on the impairment line, considering the uncertain operating environment. These higher provisions result in a 2% decline in net operating income, which is more than offset by the 7% fall in operating expenses. This delivers an EBITDA of $85.4 million, which represents an increase of 4%. Finally, cash NPATA is up 2%. And after adding back stranded costs from the divested businesses, on a stand-alone basis, cash NPATA is $41 million, which is up 22%. With respect to how the business looks on a stand-alone basis, my last page this morning, Page 23, provides our expectations on a number of items. Whilst we're not providing guidance on net operating income, when we think about used car prices, we are anticipating a correction at some stage to the current historically high levels. With that said, because the increase in used car prices was a second half phenomenon in FY '20, on a full year basis, we see prices relatively stable in FY '21 on average. With respect to provisions, as mentioned, we are comfortable that our provision levels are adequate, meaning we do not expect an incremental management overlay in FY'21, provided the economic outlook remains unchanged. I've mentioned a number of times around our OpEx run rate this morning, which stands at $84 million, including all stranded costs on a pre-AASB 16 basis. Our expectations for depreciation is $2.5 million to $3 million and share-based payments is $4 million to $5 million. Interest on corporate debt is $10 million to $11 million, as the increase driven by interest previously allocated to the noncore businesses is offset by lower debt levels in FY'21. In summary, we think the business has stood out really well, not only to manage through a challenging environment driven by COVID, but also deliver a 4% EBITDA increase; and finally, also to reset the business, positioning it for sustainable growth in the future. The business is simpler, and the balance sheet is stronger. This places Eclipx in a great position to capitalize on the strategic pathways, which Julian will now elaborate on. -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [4] -------------------------------------------------------------------------------- Thanks, Damien. Let me start on Slide 25. So post Simplification, our platform is in great shape to expand while, at the same time, spending off potential challenges posed by economic disruption. There are 3 key points to focus on here. Firstly, we have comfort around NOI stability, given our annuity saw revenue, which is 89% in the second half of this year. Secondly, used car market has been strong. It supports our EOL profitably. It's played out well to date. We see strong structural tailwinds continuing in that market. And thirdly, we have a high-quality portfolio. We have great funder support. And combining that with significant liquidity, we're well placed to mitigate a range of downside stress scenarios. Let's first talk about NOI on Slide 26. NOI has been the most stable and consistent part of our income statement over the years, largely due to its annuity-like features. Another large contributor to our income statement is our end of lease income, which is discussed on Slide 27. End of lease income, or EOL, has outperformed this year with profit per unit of 16% PCP and 8% sequentially. Over the final 7 months of FY'20, we sought to manage COVID risks by balancing our EOL profitability with the management of liquidity risk. We continued to see solid structural tailwinds from ongoing supply constraints in the used car market. This tailwind is principally driven by the dislocation of new car sales for the past 2.5 years. This means that there will be a relatively limited supply of 3-year-old used cars from FY '21 onwards into the medium term, which is obviously a positive for our group. The performance of our EOL is dependent on our residual value setting methodology, which is outlined on Slide 28. Our residual value methodology is conservative, and the results are predictable. Over the last 16 months, Eclipx have disclosed more on our residual value performance and methodology than all of our domestic peers combined ever and, to the best of our knowledge, compared to all FMOs globally. The reason we do this is that we're exceptionally proud of this capability on the process developed over nearly 30 years. To give you an idea of the process, every residual value for every lease is marked to market monthly. Negative values go straight into a provision in our P&L, and for the avoidance of those, we do not add back positive mark-to-market to our P&L until the asset is sold and then it's recognized through EOL. RVs are set by a specialist risk function within our group that reports solely to our Chief Risk Officer. He's independent of sales. The chart on the right-hand side shows vehicles by lease vintage and the percentage of EOL versus carrying value. To illustrate those using some numbers, of the 2013 vintages you see on the slide here, 9,476 leases were all sold for an average of 22% above their carrying value. This infers that we continue to hold a large buffer to our residual position and, as you can see, it's quite consistent over time. That's asset risk. It's a big principal part of our portfolio. The other key risk component is credit risk in our portfolio, which is outlined on Slide 29. The risk taken in our portfolio is also conservative, and it has performed well through the COVID period. It's worth calling out the following points. Firstly, as Damien mentioned, we've taken substantial risk provision in overlay in FY '20. This adds a layer of downside protection given macro risk uncertainty in the current environment. The portfolio remains high quality and is performing well. To give you an idea, out of our top 20 exposures, 81% of our top 20 by dollar value are investment-grade credits. 95.5% of our total portfolio represents very low sector risk exposure. Our financial hardship or forbearance or customer assistance program, depending on what you want to call it, peaked at just under 2%. 88% of all of these contracts have now returned to full payment or have been terminated. At the end of September this year, only 30% of our portfolio remained within financial assistance. And to put some context around this market around this relativity, 30 basis points is materially lower than any other domestic class -- asset class that we are aware of. Having a high-performing risk portfolio supports our securitization programs, which I'll go on to on Slide 30. Our warehouse renewals in September provide a tangible and independent validation of the conservative asset and credit risk management framework that I just went through. In one of the worst economic environments in modern history, our warehouses were extended at no incremental cost of funds and with no requirements for additional credit enhancement. The group's warehouse credit writings were also reaffirmed for both Australia and New Zealand, and interestingly, some of our public notes in our Australian ABS last year were actually upgraded recently, reflecting their superior risk performance. The Eclipx group has the most diversified funding structure in our region. It has been developed over many, many years. We are the only issuer of op lease, novated ABS paper in this market. We have a well-established private warehouse program with multiple lenders in Australia and New Zealand that have been with us for decades. We also have an increase in line of new credit funders seeking to come into our private and public programs. We have capacity to meet our current growth plans for this year. And while we have no immediate access or needs to access ABS paper, we will always look at this market opportunistically. Going hand-in-hand with funding is liquidity, which is outlined on Slide 31. At the 30th of September, our available liquidity was $181 million. The liquidity position is now 70% greater than it was at the start of COVID 6 months ago. The excess liquidity provides us with a lot of comfort to accelerate our growth while providing protection from a range of downside stress scenarios. These can include unexpected blue-chip shock loss or a sustained dislocation of used car markets, for example. To be clear, these events are not anticipated, but we do remain cautious in the post-stimulus environment. On the right side of the page, you can see our corporate leverage is in great shape compared to this time last year. We'll continue to de-gear this facility and reassess facility sizing and the overall facility going into next year. Overall, as you've heard, the business is in a much stronger position to pursue profitable growth while managing our external risk. Now let me expand on our growth plans on Slide 33. Overall, Strategic Pathways, our new plan, is designed to grow new business through both digital and traditional distribution lines. The purpose of this is to enhance our customer experience and maximize our operating leverage to drive profitability. The flywheel here represents an illustration of how we think about this. Points one and two represent market capture by delivering a better user experience, driving both repeat and new customers and, therefore, accelerating our new business writings over time. And point three, the faster new business writings will provide more receivables volume for our securitization platforms. This will allow us to hit the ABS market and issue more paper more regularly, which overall will lower our overall cost of funds and expand our group margins. If we get our education, adoption and marketing right, outlined in point four here, we will drive more incremental penetration and a lower customer acquisition costs through our various existing and new channels. Finally, the flow of incremental customers will give us more data to enrich our predictive analytics. This, in turn, will further improve our own capabilities, our customer proposition and, ultimately, enhance the user experience and our Net Promotor Score. The size of the opportunity in each of our target markets is large, and I've summarized these on Slide 34. For corporate, there are roughly 2.1 million vehicles in corporate Australia. We estimate that only 50% of this market is currently outsourced to FMOs like Eclipx. COVID has changed the way many corporates think about management of funding in a fleet, and we see this as a good catalyst for the FMO market overall. In novated, our current penetration of 1.6% is very low relative to sector of benchmarking, and it gives us a very good runway for growth. We have roughly 880,000 employees in our existing base, where we are either exclusive as a novated provider or alongside other providers with those clients. Our 2 clear tasks here to improve this business are: one, penetrate much further into our existing employee groups; and two, we need to expand our target employees by winning new employees. We are currently positioned to execute both of these tasks very well, but we'll continue to invest heavily here because the opportunity is so great. As broader confidence reemerges, novated will provide a great tailwind for our business. Lastly, the SME market is effectively defined as businesses with less than 20 vehicles in their fleet. It is estimated to be only about 2% penetrated by FMOs in Australia to date. While the SME op lease market is not well contested, it's equally not well understood by SMEs, unlike the U.K. or Europe, where product penetration has really accelerated in recent years. Our 2 critical tasks in this space is to finalize our product's credit and digital deployment, and secondly, identify and select the best possible distribution partners for our product. Both of those tasks are well underway. Let me turn over to Slide 35 to talk to the implementation plan at a higher level. Across each of the 3 target markets, we have 3 common tasks. Firstly, we must refine our best distribution approach on partnerships with direct distribution lines. Secondly, we must continue to provide the best possible transparency in education to our customers. This is critical for our new, but also our existing customers. Finally, our tech stack is under development to enable the best possible sales approach and channels to deliver great experiences to our customers. Let me expand on this further on Slide 36. We're currently transforming our tech stack for long-term success. In the last 9 months, our new CIO has completely revamped the technology team, focusing on embedding our customer-first culture with modern PMO methodologies. At a very high level, we're seeking to develop digital native platforms. These will support both novated and corporate experiences. To do this properly, we're shifting the majority of our infrastructure to serverless cloud. This will increase our performance all time and further enable our digital native experiences to be deployed without friction to multiple partners. Let's turn to Slide 38 to wrap up this morning's presentation before you take it to questions. We are very pleased with our full year results and believe it reflects strongly on our business model and our entire team. With Simplification now behind us, the business is in a much stronger position to pursue profitable growth while managing any external risk. We have a clear execution pathway to deliver growth in each of our target markets. Implementation of the next stage of our strategy is already well underway and well developed. We feel very confident in the outlook for this business. We are carrying a conservative liquidity position given the current macro, and we expect solid organic capital generation in FY '21. We will, of course, always continue to assess the best use of capital, however, in regard to balancing our macro risks, our organic growth alternatives and, ultimately, seek to maximize returns to our shareholders. Now I'll pause there and pass across to Amanda to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Josh Kannourakis from UBS. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just a couple of quick points of clarification. Yes, good presentation, went through a lot of detail. Just on the cost guidance. So just when we're looking at that, you've obviously -- just trying to reconcile, you're talking about increased investment into the business. But if we put all of those together, it still looks like a $9 million to $10 million sort of benefit year-on-year. I mean I know you haven't given any guidance on the NOI side of things as of yet. But is that sort of the way we should be looking at? And what are the other sort of items reflect, I guess, within the cost profile moving forward in terms of risk, the upside, downside? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [3] -------------------------------------------------------------------------------- Josh, it's Damien. You're asking about other outlays. So the run rate that we called out in the presentation, $84 million, is the right number to obviously use and it incorporates all the moving parts that take you from '19 to '20 and to get us to the run rate today. In terms of moving forward, our objective is always to try to hold our cost base flat at that $84 million rate, and I think that's achievable over the next coming years whilst still growing the portfolio. Beyond that, obviously, yes, you will see costs grow up, but that's 2 to 3 -- in 2 to 3 years' time. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. Got it. But yes, so it's about -- yes, it's $9 million, $10 million delta, I guess, on that profile. And then the second point just on costs, I guess, above the NOI line in terms of the provision. Just in terms of that, I mean, can you give us a bit of a feeling in terms of what sort of the macro overlay is? And as we're going forward, what the sort of historical rate of provisioning has been and when you sort of think you'll return to that normality? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [5] -------------------------------------------------------------------------------- Yes. The approach we took on those provisionings on the credit side was really just to look, historically, at our portfolio what's the worst experience we've seen and that's what we used for the COVID overlay. And then on the operating side of things in terms of used car prices, again, we just looked at historically what's the typical sort of margin we make on the sale of a vehicle, and we assume going forward when cars start to return in 1 year's, 3 years' time, that it will return to that sort of level. In terms of going forward, we do have a page that Julian took you through on our credit provisioning, where we showed you the levels from FY '18 out to FY '20. I'd sort of say anywhere between FY '18 to FY '19 rate is probably what we will return to once we get through COVID and the world returns to normal. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Yes. Got it. And then so I just guess, as we start heading through '21 and if conditions look like they're improving, it provides a little bit of a buffer for you guys in terms of that provision or potential relief, I guess. -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [7] -------------------------------------------------------------------------------- Hard to say -- hard to predict, I guess, what -- how COVID is going to play out, the impact on the economy. I will say that as of today, in terms of the level of provisions we've got, we feel they're adequate. -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [8] -------------------------------------------------------------------------------- I think it's fair to say, I mean, we'd love to -- what we're cautious about, we don't see anything in our portfolio that gives us -- keeps us up all night. But the thing that we probably are more concerned about is when this stimulus rolls off and we're sort of (inaudible) last night, we do expect some stress to come through, broader unemployment and so on. And that's really how we've thought about our overlay this time around because it's not -- I wouldn't call it as buffer. I expect -- we've taken this provision because we expect -- what we expect from a conservative perspective in terms of potential losses in the economy going forward. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Okay. Great. And then just final one for me on the EOL income. Cracking result there. I mean can we just talk a little bit about as well moving forward? We know current pricing is strong. But in terms of how you guys have adjusted the channels that you're selling through in some of those relationships, has that also been a benefit? And just maybe in terms of as we're looking at moving forward, just your go-to-market strategy on the disposals going forward. And how that sort of has compared with history? -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [10] -------------------------------------------------------------------------------- Yes. Look, on channel, we -- I'll take that. I'll let Damien talk to the numbers. But I think in terms of channel, we've consistently applied the retail first channel, which, as we talked about before, is sort of like the [APE] big-box yards, which have continued to outperform in the last 3 months of this year when those yards got back to full operation. We did see some benefit from other sort of retail yards through COVID, which went well for us, which delivered the result we got. And obviously, we feel we could have done better, in fact, on our results, except we're obviously trying to manage our liquidity as we went through there because we didn't know, given the volatility of the various different states' decision-making, as to which market was going to be shut or open in any given week. So we tried to manage our liquidity and balance that out with outcomes. But we still see that market, that retail first strategy is working. About 70% of our distribution is going through nonwholesale yards and that's played out well for us in recent times, as you know. So we're pretty happy with that. -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [11] -------------------------------------------------------------------------------- And then from a pricing perspective, as I mentioned, the increase in prices in the used car market really sort of impacted us in the second half of FY '20. So the expectation is that, that will -- there'll be sort of a U-shaped recovery or (inaudible) indexed inverted decline into FY '21. So in the back end of '21, the used car price is expected to tail off. So on average, from a pricing perspective, FY '21 will be similar to FY '20. In terms of the number of units coming back, it should be high next year because of the amount of extensions we've seen in FY '20, but that will be offset by the fact that in FY '20, we did sell down a lot of our inventory, which we might be able to do it again in FY '21. -------------------------------------------------------------------------------- Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Yes. Got it. And then just final one for me, just around as some of those extensions, I guess, roll off into '21 or the inertia in those books and people to potentially re-sign those agreements. I mean how much of a benefit do you think that will be into '21 in terms of the initial fees and the upfront payments that you've, obviously, forgone within this period? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [13] -------------------------------------------------------------------------------- Yes, to the extent that it drives more new business writings, that will certainly give us an uplift from upfront fees that you mentioned. So as we called out, this approximately $61 million worth of new business writings, which were extended in FY '20, so they, in theory, were due to come back in FY '21. What I will say, though, is we are still seeing an elevated level of extensions at the moment driven by a different reason. In FY '20, it was because of the uncertainty driven by COVID. What we're seeing at the moment, though, is just with the disruption of the used car -- of the global supply chain around new cars and the delay in delivery times, we're seeing customers who have decided to replenish their fleets, but they just can't get the vehicles. So because of that, they've needed to extend their leases as well. So we are seeing higher extensions sort of bleed into FY '21. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from Wassim Kisirwani from Jarden. -------------------------------------------------------------------------------- Wassim Kisirwani, Jarden Limited, Research Division - New Zealand Technology and Software Analyst [15] -------------------------------------------------------------------------------- Can I just ask around the outlook commentary. You've really outlined the stability across the AUMOF and the net operating income inherent in your business and the dynamics in the used car market, which are sort of normally supportive of earnings growth into FY '21. But just sort of lack of any kind of guidance or directional guidance, just interested in, notwithstanding the environment we're in, but just a conservatism around that? -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [16] -------------------------------------------------------------------------------- Yes. Look, Wassim, I hope answer this question correctly, but tell me if I do not. So general directional guidance we're not giving. We've obviously given the expectations for some of the line items. We're not giving above line items just purely given the nature of the uncertainty in the current macro, and we certainly look at that again next year. But broadly, I mean, we feel okay about the outlook. We're winning at the moment. In the last 2 weeks, we've picked up a few very large, well-known brands -- clients, and we feel very good about that. But it's probably too early to call to give you an idea of directionally where we're going for this year. -------------------------------------------------------------------------------- Wassim Kisirwani, Jarden Limited, Research Division - New Zealand Technology and Software Analyst [17] -------------------------------------------------------------------------------- Okay. Great. And then just on the balance sheet, obviously, in a pretty strong position, likely stronger than it has been expected sort of if we go back sort of 6 months. Just interested in the comments here around optionality, whether there's sort of specific programs or uses for that capital that you're contemplating at this point. Sort of is M&A a possibility over the next 12 months? -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [18] -------------------------------------------------------------------------------- Yes. Look, there's a couple of uses for our capital. I mean, clearly, we'd like to de-gear below that 1 turn just because, I think, it's an environment where we need to keep our balance sheet low risk, and we've done a good job so far. I think the team has done a good job. As it relates to the uses of capital, we obviously want to invest in growth. We think we can deliver a better return for our shareholders by showing them growth over time. The second one is, obviously, has that growth achieved? Right now we've got a clear pathway for organic growth through our Strategic Pathways program, very large, unaddressed total addressable markets. So we feel the penetration there could drive incremental returns for our shareholders. And the second use of our capital is, obviously, some form of capital management at some stage later this year or next year, depending on how the Board think about it at the time, balance with macro risk environment. On M&A, look, we've been focused for the last 16 months on getting our highest in order, getting our ship points into the right direction, and we feel confident we've done that now. There's always opportunities out there, but the one thing I'll say is we will only ever stay on the fairway. We'll only be in the fleet space. And right now we could probably only see a handful of opportunities, none of which were immediately attracted to it at the moment. There's 1 or 2 that we would be attracted to, but currently not available. -------------------------------------------------------------------------------- Wassim Kisirwani, Jarden Limited, Research Division - New Zealand Technology and Software Analyst [19] -------------------------------------------------------------------------------- Okay. Great. And just a final one for me just around the comments around reviewing your sort of distribution strategy and partners and just interested whether you can sort of elaborate on that. What sort of incremental distribution partnerships you're contemplating? -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [20] -------------------------------------------------------------------------------- Sure. So currently -- last sort of 12 months, we've been testing our SME op lease product with a well-known Japanese OEM and that's gone well. We've learned a lot out of that. We've learned a lot of our customer base, the data, our credit tooling, our credit decision engine and so on. Before you dive into SME, you need to make sure your credit engines are up to scratch, and we've done a lot of work with the bureaus and that OEM partner. It also allowed us to work through sort of the native digital platform that we have. We've got a terrible name for it called Dragon Ball. The Dragon Ball is an effective interactive tool that either the customer uses or the partner uses and that allows a straight through process -- when it finalizes, it allows a straight through process from that dealership or group of dealerships into us or if you think of the third-party distributor, it's basically anyone who has an SME client base, for which there are many in Australia because 60% of people in Australia are employed by SME. So it's a very large market. We see a huge opportunity. We look at the U.K. Given my heritage, I look at it closely, but we look at Europe, and we've seen this product absolutely exploded in the last sort of 10 years. And the take-up there is very consistent. Once the person understands, once a business owner understands the proposition and the product and the payment profile of it, by far and away, took off, particularly Germany, France and the United Kingdom. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Paul Buys from Crédit Suisse. -------------------------------------------------------------------------------- Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [22] -------------------------------------------------------------------------------- Julian, Damien, first question just around new car supply, and you touched on this to an extent just talking about, I guess, what some of your customers are doing in terms of extension. But I guess I'm just keen to flesh it out a bit further. Obviously, you guys have got fairly low inventory levels. And as new business potentially kind of ticks up over the next 12 months as business confidence could return, just interested to understand what tightness in new car supply could mean in that regard? Obviously, on the one hand, it might mean more extensions, but what does it do in terms of your availability to actually meet new business? And what do you need to do on the inventory side as well? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [23] -------------------------------------------------------------------------------- That's right, Paul. So it certainly -- what it does is it delays that new business. So what will happen is our customers will either formally go into an extension, so will obviously rewrite that lease, or they'll go into what we call inertia, which is the same rental continues on. I guess what we've seen is in terms of the supply of new cars into Australia and New Zealand, they certainly did drop away throughout the COVID period. If you look at September, the numbers are sort of back to pre-COVID levels in terms of the imports. So the pipeline, if you like, is starting to be replenished. I think it will probably take probably until start of next year until we're back to pre-COVID levels in terms of the floor plans being fitted out with all the dealerships. In terms of our stock levels, I mean, you can't directly impact that, but what it does do is it just drives -- it sustains the used car prices that we're currently seeing at the moment. And then as Julian sort of hit on, to the degree that new car sales continue to decline, which they are, it creates a shortage in 3 years' time for used cars, which helps also sustain used car prices for us. -------------------------------------------------------------------------------- Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [24] -------------------------------------------------------------------------------- And then last quick one, just on the end of lease side of things, and you've given quite a lot of color on the various drivers. But just trying to understand that in terms of potential first half, second half, and I know it's getting a little bit granular, but it just -- you've made a comment on prices being similar, in your view, FY '21 over FY '20, but obviously, FY '20 kind of had the big pickup in the second half. Does that imply kind of your end of lease income being skewed a bit to first half next year? Or the other drivers have kind of given enough? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [25] -------------------------------------------------------------------------------- Yes. I think from a -- that's a fair comment from a pricing perspective per unit. So it's always -- obviously, it's something hard to predict, but logically, what we expect is once the government stimulus pack starts to run off, when we start to return to a bit more normality at the back end of next year, those -- the drivers, which are currently holding up those used car prices, will start to dissipate. So in the first half of FY '21 for us with either used car prices, it will mirror up the second half of FY '20. And then the good way to think about it is the second half of FY '21 for us will mirror out the first half of FY '20. -------------------------------------------------------------------------------- Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [26] -------------------------------------------------------------------------------- And does that all -- I mean should that be an all-else-equal flow through to end of lease income? Or are there other factors in terms of vehicles flowing off and kind of the first half likely being more of lease extension, but the second half maybe being new business? How does it... -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [27] -------------------------------------------------------------------------------- I think all else being equal, yes. So in terms of the number of units being sold, it will be fairly even in the first half versus the second half. So the driver in the total dollar amount will be purely that used car price. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Your next question comes from Tim Lawson from Macquarie. -------------------------------------------------------------------------------- Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [29] -------------------------------------------------------------------------------- Just in terms of the end of lease income, I appreciate there's been a few questions. But just the cash flow impact, so as you rebuild back some inventory and that inertia rolls off, there's obviously going to be some offsetting factors in that in terms of units. But just thinking about the cash flow impact, as you then, obviously, have to supply the new car? -------------------------------------------------------------------------------- Damien Berrell, Eclipx Group Limited - Group CFO [30] -------------------------------------------------------------------------------- Yes. So I think if you go to the cash flow page on Page 18, that cash conversion metric of 178%, that's certainly been inflated by the fact that we did sell down such a large amount of inventory. It's to the tune of $16 million, if you look at the balance sheet. So that's certainly a driver. For next year, I don't expect it to be the case. We're at historical lows in terms of entry level. So we have further to go. So that will mean our cash conversion next year will come down close to sort of around 130% mark. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- There are no further questions at this time. I will now hand back to Mr. Russell for closing remarks. -------------------------------------------------------------------------------- Julian Russell, Eclipx Group Limited - CEO [32] -------------------------------------------------------------------------------- Great. Thanks, Amanda. Look, thanks, everybody, for joining this call. I look forward to seeing everyone over the next next couple of days. Thanks, Amanda. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.