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Edited Transcript of IGL.AX earnings conference call or presentation 27-Aug-19 12:30am GMT

Full Year 2019 IVE Group Ltd Earnings Call

HOMEBUSH WEST Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of IVE Group Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Dunkley

IVE Group Limited - CFO & Company Secretary

* Geoff Bruce Selig

IVE Group Limited - Executive Chairman

* Matthew Aitken

IVE Group Limited - CEO

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Conference Call Participants

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* Hamish Murray

Bell Potter Securities Limited, Research Division - Analyst

* Jonathon Higgins

Shaw and Partners Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the IVE Group Limited FY '19 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Geoff Selig, Executive Chairman. Please go ahead.

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [2]

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Thanks, Ashley, and good morning, everybody. I'm joined here this morning by our Chief Executive Officer, Matt Aitken; and Chief Financial Officer, Darren Dunkley. And we'll be sharing the presentation this morning, full year results presentation as loaded up to the ASX. Well, as you know, we are coming up to 4 years since we listed on the ASX in December 2015, and we, as a business, well documented, have invested significantly since then across a range of strategic initiatives to further broaden and expand our business and to strengthen our market position. It will be fair to say, as we did at the half year, that FY '19 is the cleanest year we've had since listing in December 2015. It's been a good year for us to focus on a number of important initiatives across the group that we'll touch on throughout the course of the presentation and also just to the final bedding down and unlocking of value on the back of the most recent investment phase, particularly the Franklin WEB New South Wales facility.

The first half of FY '19 for us was strong, and it would be fair to say that the second half was a little softer than we had expected. And we'll touch on that through the course of the presentation as well. But in saying that, we are pleased from our perspective with the results. We feel it's a solid result with all key metrics up over last year. Revenue up 4.1%. EBITDA are up just under 10%, and that has translated to a 4.4% increase in NPATA and a 5.2% uplift in our dividend per share.

You'll see from our EBITDA margin, it's up on FY '18. But as we referred to, or as I just referred to earlier, a little bit down based on our expectations as a result of the second half but still certainly up over FY '18, which was 10.5% for the full year, the EBITDA margin. So if we just took a financial performance snapshot for the year just gone here, solid results from our perspective, with all key metrics up over last year.

So at this point, I'll hand over to Matt to walk us through the year in review, and then Darren will pick up on Page 9 being the beginning of the financial results. So over to you, Matt. Thank you.

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Matthew Aitken, IVE Group Limited - CEO [3]

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Thanks, Geoff, and good morning, everyone. So as Geoff just covered a number of the key financial highlights, I just wanted to draw your attention to the minimal restructure and acquisition costs sitting within this result, and that was foreshadowed by Darren and Geoff and Warwick during the half year. It's at $3.1 million, and you can see that in the appendix of this document accordingly. So a very clean result that just sits accordingly. A number of key operational milestones achieved during the year, in the June year, of our Franklin WEB New South Wales as this has been well spoken about previously with our investors. We completed the final installation of the capital program there in H1 FY '19, and that concluded a $53 million investment phase for us into what is ultimately a world-class large-format web offset facility in Western New South Wales, Western Sydney here in New South Wales.

In addition to that, we completed the installation of the high-speed continuous inkjet platforms into our Blue Star DIRECT businesses at an investment of just around $6.4 million, which has really taken our capability from the personalized communications space to another level in the Australian market.

And towards tail end of the financial year, we ultimately took out plans and lease on a new 15,000 square meter Victorian facility for our Blue Star CONNECT business, which is our logistics business. This is a part of our business that we have seen significant growth in, in the last 3 to 4 years. And the fact that we are now moving to a brand-new 15,000 square meter facility in Victoria is just significant of the opportunities we continue to see in that business. Finally, just in and around our senior debt facilities, and Darren will touch on this a little bit more, we refinanced those for a new 4-year term.

At the half year results, Geoff and Warwick foreshadowed that we will be looking to explore brand changes for the business as we enter calendar 2019. And we have just recently communicated to our staff and a select number of customers that by November this year, we would cease using the divisional brands that we have in the business being Kalido, Blue Star, Pareto and IVEO and move to one single brand being the IVE brand. That announcement within the business has been very well received, and the team are well advanced in the development of what that new brand look and feel will look like, and there will be a formal launch to the market in November 2019.

Turning to Page 7. We already touched a little bit on paper, but we also want to note that it doesn't affect every part of our business. We have experienced significant volatility in the global markets around paper during FY '19 and meaningful increases in paper prices as part of that. Those price increases are being driven by a range of factors, primarily pulp increases and the tightening of supply from mills in Europe and North America. And you'll see that played itself out when you look at the inventory levels we carry in the balance sheet, where we took on more inventory to ensure we shored up supply for the business through FY '19.

We have seen some improvement in recent months in and around paper pricing and some stabilization. We expect that to continue for the balance of FY '20 as we would expect the inventory levels to reduce accordingly as well.

From a revenue perspective, and as Geoff said earlier, we had a strong year with good momentum on the revenue front and organic growth of circa 2.4%. We've had no meaningful customer loss at all and continue to win new business and execute contract extensions accordingly in the market.

We would say, however, though that we've continued to be disappointed in the performance of our Kalido business in Asia and through this result, have realized a number of bad debts and write-offs associated with that operation up in Asia during FY '19.

Finally, and again, I think it's been foreshadowed in previous discussions that we're going to embark on a group-wide MIS upgrade. So the group has grown a lot organically and through acquisition over the last 5 to 6 years. And that's put parts of our business and processes and resources -- made them quite stretched at times. So we think it's really important, and it's a very significant CapEx investment that we explore and deploy brand-new MIS technology right throughout the group to deliver the efficiencies the business needs moving forward.

At this stage, I'll hand over to Darren to take you through the FY '19 results.

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Darren Dunkley, IVE Group Limited - CFO & Company Secretary [4]

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Thank you, Matt, and good morning, everyone. I'll take you through the financial section of our presentation pack. If you just look at Page 9, I'll take you through the profit and loss.

Our revenue increase of $28.8 million, which is up 4.1% over the prior period. Organic growth, as Matt touched on, of 2.4%, driven by new client wins, ongoing success of growing share of wallet, cross-sell to existing clients, a number of key contract extensions over the period with no material contract client losses to now. Gross profit margin of 47.9%, 48.7% in the prior period. As Matt had raised, the paper cost increases in Franklin WEB have negatively impacted margin, particularly in the second half of the year. And this is partly due to timing as well as the current competitive environment.

Pleasingly though, gross profit in the other areas of our business has remained stable and in line with last year. Production and administration costs are all lower as a percentage to revenue than prior year, and this is due to ongoing disciplined cost control, further acquisition synergies as well as efficiency benefits from the group's investment in Franklin WEB New South Wales. EBITDA of $80.4 million is an increase of 9.8% on prior year. This does include a write-off of the prior period bad debts relating to Kalido Asia. However, it was offset largely by the reversal of the deferred goodwill in other income.

EBITDA margin of 11.1% is up from the prior year of 10.5%, as Geoff had already discussed. This reflects increased revenue and efficiency gains, offset by paper cost increases and continued absorption of higher energy costs, which has had an impact on our business over the last 3 years. And NPAT, net profit after tax, of $33.8 million is 4.5% increase over last year. That has also been impacted by depreciation due to the Franklin WEB New South Wales facility being fully operational for the period.

Just turn over the page to capital expenditure. The group's total capital expenditure of $29.3 million for the year includes final phase investment of Franklin WEB New South Wales, high-speed inkjet supporting our expansion into personalized communications post the SEMA acquisition and group-wide investment and maintenance as well as the first stage of our MIS upgrades and renewal. As Geoff had already discussed, IVE has invested heavily over the last 2 years, and FY '19 now concludes our significant growth capital investment program. This is reflected in our FY '20 and '21 capital expenditure outlook. With reduced spend, it is expected to be circa $8 million to $10 million annually excluding the MIS upgrade that Matt touched upon earlier.

Our net debt is set out on Page 11. Our net debt of $143.7 million to pro forma EBITDA of $80.4 million is 1.79x. As a metric, it is the same as last year. However, it should be viewed in the context of the funding of our growth capital investment program has now concluded. Further funding of high inventory in Franklin WEB in order to lock down supply in a period of volatility, which was the right thing to do by our customers and the business. This increase can be viewed as temporary with the lower holdings forecast in FY '20.

An increase in equipment finance relates to investment in the personalized communications strategy discussed in our CapEx. The group recently refinanced its senior debt facility for a new 4-year term. This has resulted in additional facility and covenant headroom and improved pricing benefits of which will be seen in FY '20 and beyond. A pleasing outcome for the group.

I'll just finish up on Page 12, cash flow and dividend. Pro forma free cash conversion of 81.7% was lower than expected, and that was impacted by our higher working capital balance than historical for this time of year, again, mainly due to the temporary increase relating to our inventory holdings, which we expect to come down in FY '20. As discussed, we have now concluded our capital growth -- our growth phase capital investment program with annual expenditure to reduce significantly on prior periods. During the period, final deferred goodwill consideration paid in relation to SEMA acquisition, and it is important to note that no further deferred consideration is payable for prior acquisitions.

Final dividend of $0.077 per share, fully franked, and a full year dividend of $0.163 per share, fully franked, and a payout ratio of 71% of pro forma NPAT.

I'll just now hand it back over to Geoff.

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [5]

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Thanks, Darren.

So if I just move to the final page ahead of the appendices, Page 15 of the deck. If I could just, before touching specific on the outlook, refer to the most recent -- our recent leadership change. We, early August, announced the resignation of our Managing Director of near 5 years, Warwick, and the appointment of Matt as the CEO of the business. And certainly, it's very comforting to be in a position from a succession planning perspective to be able to appoint someone into the role of CEO that's been in the COO role for 5 years and with the business for near 20 years. And I would just say before talking more about numbers and the outlook that, that leadership change has been incredibly seamless and extremely well received, both internally and at a customer level. And I think if there's a way to do things around these types of things, we couldn't have done it any better. So I just wanted to make that point before moving on to the words that are on the deck.

So a few context, the outlook statement with everything that we've said through the course of the presentation this morning. We would expect the solid performance of the business to continue over the year ahead. This will result in us once again generating a high level of free cash flow. Our working capital, as Darren just touched on, will return to more normal levels as the inventory holdings settle back down over the course of the next 6 months and the stabilization of the global pulp and paper markets. Our CapEx comes way down from where we had been over recent years and certainly over FY '19 down to $8 million to $10 million of targeted and maintenance capital per annum excluding our MIS upgrade, which is $3 million to $4 million over the full period of that rollout.

We have no further deferred consideration payable for any prior year's acquisition, $6.1 million in FY '19. We don't have any more of that moving forward. And as mentioned right at the beginning, significant items or our restructure costs are expected to be very minimal. So we'll have more to say at the AGM in November around capital management and matters like that, but from a balance sheet perspective and a cash perspective, we remain in a strong position. And our outlook for the year ahead is once again for solid performance of the business. So I think I'll leave it at that.

Ashley, I'm happy to take a few questions if anyone have any, and thank you again to everybody for participating on the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jonathon Higgins with Shaw and Partners.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [2]

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Best of luck in the new managing -- the new CEO role. Sorry, Matt.

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Matthew Aitken, IVE Group Limited - CEO [3]

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Thank you.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [4]

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Just a couple of questions from me this morning. Just firstly, just interested just in your commentary, Geoff, talking towards you had a bit of a softer second half than what you might have otherwise hoped. Are you able to just sort of expand on that? Are you talking towards the group margins and the volatility we saw there or the last quarter performance? Or is there a particular operating division you'd like to call out if you're able to...

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [5]

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Look, probably we would point to 3 things, Jonathon. The first thing, the lead up to the federal election or through that period, a couple of months prior to that. I don't think it was just IGL. I think across the board, there seemed to be this malaise at a macro level across sort of the economic activity that played itself out in a number of ways. So that's the first thing we'd point to. There was a little softer retail trading conditions through that period. And then thirdly, the volatility in the pulp and paper markets also was at play. So look, there was another increase in energy costs in our Victorian business, which is unhelpful. But we had a view that the energy situation, power and gas when I say energy, is stabilized at this point, which is a good thing given the increases we've seen over the last [4 years]. But they principally would be the 3 things we would point to.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [6]

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Just secondly, just around that margin. So you've ended the year obviously with a larger sort of inventory run rate in the next year, and I think Matt spoke towards -- that you expect that the volatility in the last couple of months lead, in a sense, lower. And you expect it to stabilize. Should we expect into next year that -- you guys have been pretty good at managing gross margins in the past, that we should see gross margins possibly rise a little bit and normalize post the second half of '19 across both gross margins as well as run rating a better EBITDA performance?

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [7]

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Yes. Look, that is a difficult question to answer for the obvious reasons. I mean we didn't foreshadow quite the increase in paper cost that we've experienced. That's separate to the -- I suppose, the supply of paper where we're sitting on inventory levels, and we just would make the point again that paper is paper. It's not a perishable product. So it will be converted to cash fortunately. It's not green tomatoes as we've said before. But in terms of the gross margin, there are some elements of that, that we can't quite control. But we have a very strong track record, as you know, and Darren made the point, that outside of the large-format web offset business, our gross margin has remained once again, for the fifth year in a row, quite stable.

We just need to monitor closely the paper costs in the context of gross margin before we could form a clearer view on how that might play itself out.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [8]

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And do we -- typically, with the catalogs business now you have that sort of that first half skew. Are you able to give us a bit of an idea around the skew into next year?

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [9]

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We'd expect the skew to be similar to the year just gone in terms of the H1 versus H2, H1 being more heavily weighted than H2. H2 though in FY '19, for all the reasons we've talked about, has probably made the weighting of H1 a little bit higher. And this is by now bleeding obvious. But we would expect the split to be not dissimilar to previous years.

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Jonathon Higgins, Shaw and Partners Limited, Research Division - Analyst [10]

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Perfect. And last one from me, and then I'll jump back in the queue. For Darren, sorry. You've refinanced the group's facility. Are we out -- what are we expecting around? Are we sort of expecting a homogenous rate from what was in the second half moving forward under the current sort of swap rate? Or has there been any material change there?

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Darren Dunkley, IVE Group Limited - CFO & Company Secretary [11]

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Look, the pricing for our facility is -- we're in a better position than we were previously. So we should see benefits from that over the 4-year term of the facility. Jonathon, as I alluded to previously, the new facility gives us a greater facility headroom as well as more covenant headroom so just gives us more -- the business more flexibility moving forward, which is a good thing for our business.

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [12]

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I think the other point to make on that is -- and we'll touch on more at the AGM is that if we were to be asked a question about acquisitions and funding generally, the business is in a position now that should we explore an acquisition, even a quite meaningful one, if that business is EBITDA positive, that we're in a good position to fund that without the need for any capital raise at all. We've done 2 capital raises since we listed in December '15. We haven't completed an acquisition since late 2017. So coming up to 2 years now, acquisition, if were to contemplate an acquisition and there's still some good opportunities around, albeit we did say at the AGM last year, we would take the foot off the pedal, we're in a very strong position even prior to the refinancing to be able to fund that outside of the need to raise capital, which is an important -- from our perspective, an important point to make.

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Operator [13]

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Your next question comes from Hamish Murray with Bell Potter Securities.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [14]

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Congratulations on the result. Just two quick ones from me, if you can. I was just wondering in regards to the paper costs you've called out, which were pretty recognizable in the market anyway, is there any -- what part did the fall in AUD have in that? Does it have much of an effect? Is there a rough ballpark that you can attribute to that? Or is it all just that underlying paper cost that you were alluding to?

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Matthew Aitken, IVE Group Limited - CEO [15]

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So through F '19, Hamish, this is Matt, the currency definitely played a role, particularly the U.S. dollar played a role in where we sourced the paper from, and we had to back out of North American mills for 2 reasons. One was the foreign exchange rate challenges that we were seeing. And secondly was that those mills were constraining supply down onto this part of the market. And we put a lot more of our eggs up into the European mills, to our traditional long-term supporters of the Australian market both from a supply perspective and a price stability perspective. And clearly, the Australian and euro at that point in time was much more controlled than the Australian versus the U.S. dollar. So that continues to be sort of a pretty fluid strategy, but most of what we're doing is either with the European mills or with the local low-cost mills in here on an AUD basis.

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [16]

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Okay. And then just the second one from myself. And I appreciate that it's not always the easiest question to answer, but from the organic growth rate that you called out, is there any way, and I know the margin at the EBITDA level, you've sort of called out Franklin as being the major detractor from the margin. But at a top line perspective, that new contracts you're calling out -- you're bringing on and some of the cross-sell, is there a certain area of the business that's skewed to? Or is it pretty even across it?

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [17]

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Look, we've -- it's Geoff here, Hamish. We've continued to see good momentum in our IVEO business. As Matt said, we haven't lost any material contracts within the IVEO business. We've picked up a couple of meaningful contracts, and we've got a couple of other larger ones on the go at the moment that we're feeling optimistic about. But if you have to pinpoint an area, I suppose at a general level, even though it's not quite a simple answer because there's a lot of moving parts and customers across the group, but we certainly continue to have good momentum in our managed solution part of the business.

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Matthew Aitken, IVE Group Limited - CEO [18]

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I think whilst the divisions and the business units have performed very well on a new business level, on a stand-alone basis, Hamish, the cross-sell across the group of all of the products and services to our 2,800 customers just continues to have phenomenal momentum in terms of the approach of the sales teams towards taking the broader value proposition to those customers and the traction that we're getting with those customers on selling more of what IVE does today to those customers. So it's really a two-pronged approach, [these different facilities].

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Hamish Murray, Bell Potter Securities Limited, Research Division - Analyst [19]

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Yes. And just one more from me. Just one more from me. Well, Geoff mentioned the retention of all major contracts, and I know you guys basically never lost a major contract since listing coming up in the coming years, is there anything major sort of contract roll-offs that you need to renegotiate? Or is it pretty right on?

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [20]

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I think, Hamish, it's the same answer as last time we were asked this question. We always do have contracts rolling over or coming to the end of their term in any given year. There will be in the coming 12 months. We are focused on performing for our customers and take the view that performing and making sure that we're delivering and got a sharp commercial proposition at the end of the day and engaging with them the right way is the best defense in terms of rolling the contract.

And that's proven to serve us pretty well over the time. So there will be contracts that are rolling over. And in saying that, we have seen longer-term contracts over the last 5 years. Customers moving, clients moving to longer terms, which is a good thing, more strategic partnerships. But we will be defending over the next 12 as we always do at the end of the day.

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Operator [21]

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(Operator Instructions) Your next question comes from [Jonathan Rabinowitz with Ethical Investment Services].

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Unidentified Analyst, [22]

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Congratulations on the solid results. Just a tiny question from me. Whenever I hear about MIS upgrades and I see you're spending $3 million to $4 million, which is described as a significant CapEx investment for that, I just get a little bit nervous because history has suggested that often technical upgrades take longer than expected and often costs tend to -- [rather] cost more than expected. Can you give us a little bit of comfort around what you're doing and the execution or step marks around that if any?

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Matthew Aitken, IVE Group Limited - CEO [23]

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Yes. Sure, Jonathan. So it's Matt here. So we commenced the program about 8 months ago, and we've already taken the first part of the business live on the new platform on budget and on time. So I hear your comment on that, but so far so good on that front. We've got a very disciplined project management team sitting across the top of this. The technology that we're looking to deploy in the business is specific fit for the parts of the business that we deploy it into rather than sort of a blended platform trying to sort of do a square peg in a round hole into all parts of the business -- but it's all present technology that exists in our part of the industry. They're global technology partners that we've got long-standing relationships with and significant trading relationships with where we're in most instances, part of their largest customer in Australia or in some instances, their largest customer in the Southern Hemisphere. So in terms of the program that we've laid out over the coming 2 to 3 years to completion, we're comfortable with what we're seeing take place currently and we've got a very dedicated and specialized team on the program.

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Operator [24]

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

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Geoff Bruce Selig, IVE Group Limited - Executive Chairman [25]

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Thanks, Ashley. Look, thank you again everybody for making the time to dial in this morning. And for those that we will see on the roadshow, we will see you in a couple of weeks' time, if we don't speak before. Thanks again. Good morning.

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Matthew Aitken, IVE Group Limited - CEO [26]

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Thank you.