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

Full Year 2019 Mcmillan Shakespeare Ltd Earnings Presentation

Melbourne Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Mcmillan Shakespeare Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Blackburn

McMillan Shakespeare Limited - CFO & Company Secretary

* Michael Neil Salisbury

McMillan Shakespeare Limited - MD, CEO & Director

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Conference Call Participants

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* Paul Buys

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

* Phillip Chippindale

Ord Minnett Limited, Research Division - Senior Research Analyst

* Scott Lyndon Hudson

MST Marquee - Senior Research Analyst

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the FY '19 results. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, CEO and Managing Director, to Mr. Mike Salisbury. Thank you. Please go ahead.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [2]

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Thanks, Kevin, and good morning, everyone, and welcome to our full year results presentation for financial year '19. My name is Mike Salisbury, and I'm joined today by our Chief Financial Officer, Mark Blackburn.

We included a significant amount of detail in our presentation today, much of it in a very consistent format to prior periods. We are conscious that this is a very busy period for you. So with that in mind, let's start on Slide 2.

The 3 key points I would like to emphasize today are that our core GRS business is outperforming and has started FY '20 well. The strategic Plan Partners and Beyond 2020 initiatives are increasing our growth and profitability, and we have significant capital management initiatives to enhance returns for shareholders.

For FY '19, we have achieved underlying NPAT of $88.7 million, at the high end of our guidance range announced on the 17th of June. Our core GRS business continues to perform well, with year-on-year growth in our novated business outstripping new car sales growth by more than 14%, and our salary packaging business started the FY '20 year with a significant boost, winning a cornerstone health client in Victoria.

Our focus on new opportunities to broaden our products and services is generating new profit lines for the group, with Plan Partners delivering its first year of positive contribution and scope to sustain growth. Through a disciplined execution of investments in Beyond 2020, we're driving novated leasing rates and improving margins, and our focus on capital management and enhancing shareholder returns has provided the impetus to announce our $80 million off-market share buyback.

Looking at some of the year's key financial metrics on Slide 3. Consistent with the first half, our revenue growth was modest at $549.7 million, the closure of our Money Now business at June 30 last year creating a delta of around $11 million when comparing the 2 periods. Excluding this, underlying revenue growth was 2.9%.

Expenses for the group has been well managed, up just 3.7% year-on-year. And if you exclude the additional cost invested in the Beyond 2020 and IT strategy programs, expense growth is below 3%.

The final dividend of $0.40 per share, fully franked, brings our full year dividend to $0.74 per share, a 1.4% lift on FY '18. The full year figure represents a payout ratio of around 69% of underlying NPAT, higher than in prior years and reflects our improved capital management but also the Board's desire to maintain dividend levels despite the reduced profitability in year.

Our underlying NPAT result is down 5.1% on the prior period, and we have included an UNPATA bridge to show the current performance of each of the segments. In GRS, our largest business, profits are up 3.1%, generated from positive contributions from both salary packaging and novated leasing as well as an improved performance by Plan Partners, and in FY '19, saw the start of our Beyond 2020 program, which I'll talk to shortly, you can see the additional $2.2 million after-tax investment in the results.

In Asset Management, Australia and New Zealand, the result is down $1.8 million. $1 million of this relates to the early termination profits generated in FY '18 that we flagged with you previously. The balance can largely be attributed to the general market conditions that have seen a reduction in our overall fleet size, a further aging of assets and the deferral of remarketing profits.

In the U.K., general business conditions have not improved, posting a $2.5 million fall in year-on-year profits. Given the expected continued growth of our business in this segment, it is particularly a disappointing result. And when viewed with the further loss of $3.7 million relating to a customer's insolvency, what should have been a circa $7 million profit contribution has actually been lossmaking for the year.

In RFS, the variance of $2.2 million reflects the combination of profit reduction from the closure of Money Now, the increase in claims cost associated with our redesigned warranty product launched early in 2018 and the strong performance of our aggregation business, with profit up 16%.

Moving to the key operational dashboard. You can see that the business has performed well, with continued growth in customers and assets across all segments. Growth rates in salary packaging and novated leasing were up 2.5% and 7.4%, respectively.

In Asset Management, we've seen the growth in the fleet continue, up 5.5% for the combined businesses, and our overall finance originations were up 3.5% to just shy of $3 billion. And in our newest business, Plan Partners, the annual funding we are now administering for our customers has grown to $269 million, up from $86 million last year, which is a very encouraging and a great lead indicator of future performance. The remaining measures involved our people and their commitment to our customers. Throughout the year, the number of our people has grown to accommodate our growth, with our investment in Plan Partners and the Just Honk car yards.

During the year, we also conducted our biennial engagement survey, and pleasingly, we achieved a 3 percentage point improvement in our overall sustainable engagement score to 79. And of course, our focus on service delivery is always a priority, and a key measure of how we performed, the Net Promoter Score, has been exceptionally good, with an average NPS of 53 for the year.

Before passing over to Mark, I'd like to spend some time focusing on providing an update on our key strategic priorities. Many of you will be familiar with these, particularly around the U.K., our Beyond 2020 program and Plan Partners. This year, we'd also like to talk briefly the current new car market as well as to provide you with more detail as to our pending off-market buyback.

On Slide 6, it's no surprise to anyone when I say that a buoyant new car market is good for our novated business. However, any thoughts that the retail performance can be directly compared to ours isn't accurate nor has it ever been.

Slide 6 includes 2 interesting graphs. On the left is the past 5 years of new car sales reported in financial years in order to better compare their respective performances. The current year-on-year fall in retail sales is 7.8%. At the same time, we've grown our originations by almost 5%, with year-on-year growth in the second half stronger than the first, which I'm confident we'll have outperformed the market. So while we're growing faster, arguably, customer mix may be affected, albeit our portfolios look remarkably similar. The reality is that we aren't standing still and hoping for a free kick from the new car market. We're proactively driving better outcomes, whether they be through our on-site activity, our social media and digital investments, our investments in our people and of course, through Beyond 2020.

The other compelling factor is demonstrated in the graph on the right-hand side of the slide, which compares the total new car sales to our novated lease sales indexed to June 2017. You can see that we were increasing our overall share of total market sales before the car market went into decline in April 2018 and that we had accelerated that growth in FY '19. Clearly, should there be a bounce in new car sales, the opportunity is for an even stronger result for the group.

This time last year, we announced our Beyond 2020 program with a strong technology focus targeting the delivery of improved productivity across our GRS businesses, increased novated sales conversions and enhanced customer experience and the upgrading of our core operating platforms and transition to the cloud. A 3-year program, we flagged the higher capital and operating expenditure required. In FY '19, that requirement was $6 million in CapEx and $3.1 million in OpEx.

During the year, the program started to deliver efficiencies with regard to segment operating cost while delivering increased efficiencies through enhanced digital capabilities. This is reflected in further increases to the take=up of online claims, up 4 percentage points to 86% across both businesses; the implementation of our first 4 robots to handle repetitive rules-based processes that were previously performed manually. Performance figures to date indicate that we've completed over 150,000 requests, saving over 19,000 hours of manual processing. RPA is expected to deliver additional cost savings in the order of $650,000 in FY '20.

In the year, we also enhanced our mobile applications, adding additional functionality and service capability. Today, we have more than 130,000 active app users.

Further highlights were the development of digital lead functionality for our on-site teams, digital finance applications and our successful implementation of a dedicated Dealer Portal for novated leases that are already driving more competitive pricing and faster delivery times for our customers. These initiatives have delivered an incremental improvement in our sales conversion rates.

Our largest investment has been the development of our new CRM platform for novated sales. And I'm pleased to say that in the last few days, we have launched the new platform in both Maxxia and RemServ. Our investment in technology in order to reduce costs and increase efficiencies remains critically important to the way we operate in an increasingly complex marketplace.

Turning now to Slide 8. Our newest business, Plan Partners, delivered its first profitable period in FY '19. The achievement of the business' inaugural profit is particularly pleasing, delivered in what is still an emerging market as the NDIS rollout progresses and reflects the emphasis the business has placed on building scale and creating a market-leading value proposition. The FY '19 performance was driven by the completion of our national expansion following receipt of our registration in WA. Our provider network has grown to more than 10,000, up from 3,500 in FY '18, underpinning significant new customer growth through our largest referral network.

As I mentioned earlier, plans under administration has grown to $269 million. Central to the business' capability to scale has been an investment in technology that significantly improves the level of customer experience. These enhancements include a range of self-service tools for our customers and service providers, designed to improve both ease of access to and the quality of user information. This ultimately provides greater transparency for our customers, creates a more efficient experience for our service providers and drives operational efficiencies in our business.

Our focus for FY '20 will be to drive further growth, including exploring opportunities for market consolidation.

The focus for the U.K. business is to build a sustainable high-quality business that consolidates broker offerings in a fragmented market, with a view to generating profitable growth and attractive returns. In FY '19, the business experienced a unique set of difficult economic and market factors which have impacted our market growth and margins. Coupled with our own governance failings that culminated in this significant client write-down, this has been a very disappointing result.

We will continue to assess the current market and economic conditions within the U.K. to determine whether our existing strategy continues to best address the opportunity. This assessment will include whether the current operating model is optimized for business as usual, but also whether there are opportunities for further investment or divestment.

I'll now pass to Mark to talk to our latest strategic priority in capital management and to present more broadly on the company's financial performance.

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Mark Blackburn, McMillan Shakespeare Limited - CFO & Company Secretary [3]

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Thanks, Mike.

On Slide 10, we outline our capital management strategy. An overriding objective is to maintain conservative gearing to ensure that we have plenty of operational flexibility to support our business model.

At all times, we don't want to be constrained in any way that would limit our ability to invest in capital that ensures we maintain market-leading systems to our customers that drive cost benefits.

We've made excellent progress towards our objective of taking 30% of our Asset Management financing off-balance sheet, and we confirm our objective to return between 60% to 70% of UNPATA to shareholders in the form of fully franked dividends.

We will maintain adequate balance sheet flexibility to ensure we can respond to compelling synergistic acquisitions. And finally, we will provide additional capital returns to shareholders if headroom exists. And this is the impetus for this announcement.

We have net cash, excluding debt for fleet funding, of $106.3 million, a franking credit balance of $128.7 million, fleet assets geared at 72% and net debt-to-EBITDA of just 1.4x.

The size of the buyback will be up to $80 million, with a tender discount of between 10% to 14%. The capital component will be $1.78 per share, and we expect the buyback to be EPS-accretive to the company and at the same time, very attractive to many of our shareholders.

We would encourage our shareholders to consider the offer document carefully and take appropriate financial and taxation advice to recognize their personal circumstances. The record date for both the final dividend and the buyback will be Thursday, the 29th of August. We expect the booklet to be posted on the ASX next Wednesday, the 28th of August.

As Mike said, on Slide 12, the group UNPATA decreased by 5.1% to $88.7 million for FY '19. This summary is broken out by business segment on Page 18. And in the appendices on Page 35 through 38, we've provided the half-by-half breakdown to facilitate your analysis.

Statutory net profit after-tax was $63.7 million, and the full reconciliation between statutory NPATA, net profit after-tax and group UNPATA is provided in the appendices on Page 34. Our methodology in relation to categorizing UNPATA adjustments was outlined on our June 17 market update. The main adjustment in FY '19 was a recognition of a noncash impairment of $18.2 million. The asset impairment relates to the write-off of all remaining intangible assets of the warranty and insurance businesses, which form part of the company's Retail Financial Services segment. Additionally, we had a one-off provision of $3.7 million in the U.K. that Mike spoke to previously.

Our consolidated cash flow was impacted by some large timing differences, which I'll discuss in a few moments.

The group's return on equity for FY '19 was 23.3%, and return on capital employed was 21.2%.

On Slide 13 is our balance sheet. This slide provides a breakdown of the MMS balance sheet between Asset Management and our other businesses. The other businesses include GRS, RFS and corporate. This provides greater visibility of the underlying gearing and strength of the MMS balance sheet.

From a group perspective, our balance sheet remains in a very strong position. Net debt-to-EBITDA ratio of 1.4x has reduced from 1.7x compared to last year. The overall gearing has decreased year-on-year to 34% from 39%, with net debt -- debt less cash decreasing by $47 million to $191 million. The interest times cover remains a very healthy 12.7x (sic) [12.4x] versus the bank covenant parameter of just 3x. Equity was steady at $371 million, the components of which was debt-free net profit of $64 million, less dividends that we paid of $61 million, a $2 million reduction to retained earnings with changes in the accounting standards and $1 million of share-based expense reversal in relation to the long-term employee incentive program.

The U.K. currency exposure is managed by ensuring at least 80% of the assets in the U.K. are funded with U.K. debt. MMS is exposed to movements in the U.K. exchange rate on its equity and its reported profits, excluding the Asset Management business, which we are net cash positive in that our cash position of $106.3 million outweighs the corporate debt on the balance sheet of $31.5 million.

Funded -- fleet-funded assets have reduced by $54 million to $431 million by a greater utilization of principal and agency facilities in Australia and by sell-down of books of financed assets in the U.K. Asset Management has net debt of $297 million.

The reduced book value of funded fleet assets has been geared slightly higher at 72% versus the PCP of 64% and still well under that covenant parameter of 80%.

Funding overview. The funding -- the group's funding overview is shown on Page 32 in the appendices. We've provided a table of the various loans, their purpose, their size, drawn-down and undrawn amounts as well as their duration.

During the year, certain tranches were increased and extended to March 2021 and March 2022, where others were reduced and not extended to provide our treasury operations with the best financial mix. This refinancing -- this restructuring more equitably diversified our funding channels, while also aligning with the maturity profile of our lease portfolio.

Three of the big 4 banks participated in our asset funding facility. Our Australian principal and agency facility has been expanded. Under this facility, the funder retains the credit risk of the customer, and Interleasing retains the residual value risk of the assets. And we receive a finance origination commission for assets financed on this facility.

Slides 14 and 15 relate to our cash flow. 14 shows our traditional cash flow performance by business segment, starting with net profit after-tax and then any impact noncash items. These noncash items, include impairments, depreciation and amortization as well as share option expense.

Slide 15 provides a waterfall analysis over 2 years, seeing the movement between permanent and timing differences. As you can see, we had an unusually high free cash flow in FY '18, with several favorable timing differences, whereas in '19, the timing differences were unfavorable but will reverse next year.

CapEx increased year-on-year by $5 million, in line with our spending on the Beyond 2020 project and the IT platform strategy, both of which were flagged to you last year. Tax refunds expected in FY '20 amount to $8 million in Australia and $3 million in the U.K.

In the U.K., fleet portfolio sales, they increased by $63 million over the prior period as we reduced the amount of our on-balance sheet funding, and we have reduced corporate debt by $13 million, in line with the amortization schedule of those facilities. And we paid dividends of $61 million. Group cash increased by $38 million to $138 million at year-end.

On Slide 16, this is our performance ratio chart, and it shows the 10-year historical performance measures, and FY '19 again, shows the strength and resilience of our business.

I'll now hand back to Mike.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [4]

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Thanks, Mark.

If we now turn to the individual segment performances, and starting with the GRS business on Slide 19. You can see segment revenue, which includes Plan Partners, was up 6.8% at just shy of $222 million. The core salary packaging and novated revenues up 4.1%. Staff costs were up more than 7%, which can largely be attributed to the growth in employee numbers in Plan Partners and the increase in OpEx costs from the IT strategy and Beyond 2020 program. The budgeted expenditure for Beyond 2020 in FY '19 was $5 million, split between $2.8 million in CapEx and the remaining $2.2 million in OpEx. We made the decision to continue with a slightly higher spend than planned and incurred an additional $600,000 in the year, which has brought forward the delivery of our new CRM platform for novated sales. The in-year benefit derived from the program to date is relatively modest, generated through the enhancement of the app and the introduction of the robotic processing, with the largest component of this spend in FY '19 being the development of our new CRM sales platform.

Excluding the contribution of Plan Partners and the net benefit from Beyond 2020, our underlying cost-to-income ratio has improved by around 2%.

The last 3 points I'd like to call out on this slide are that we had a positive start to FY '20 with a great new health client win in Victoria, transitioning more than 7,000 new packages in over 600 leases on the 1st of July. These numbers are not included in our FY '19 results.

We mentioned the yield pressure in our outlook commentary, which we believe is prudent given the broader market credit challenges and the potential for further reforms. Notwithstanding the raft of insurance changes we've implemented over the past 2 years or so, our average yield per vehicle was marginally higher than last year driven by higher-average vehicle value.

Turning to the key revenue drivers. You can see we have grown packages, I believe, by 8,200 to 343,000, which includes the loss of a New South Wales Health District post our unsuccessful tender earlier in the year. And as I mentioned earlier, our novated business continues to outperform, with the total fleet now more than 68,000 vehicles, around 7.5% growth on PCP.

FY '19 was a particularly busy year for contract renewals across our Tier 1 clients, with 7 falling due in the period, a testament to our team that we were successful in extending 100% of those contracts. This demonstrates the strength of our relationships and the quality of our service, and I'm very appreciative of all those involved in delivering a great outcome for the group. Pleasingly, we only have 1 contract due for expiry in FY '20.

The graph on Slide 21 we have shown for many years and reflect our performance against our stated objectives of delivering world-class service and driving productivity improvements, with the 2 key callouts being an outstanding NPS result of almost 53 and the 86% take-up rate of our online claims, which includes 100% of all claims received across both Maxxia and RemServ.

Turning now to the Asset Management business here in Australia and New Zealand. The off-balance sheet funding increased during the period to $69 million, our aim being to convert around $100 million by the end of 2020, and we are on track to do that with around 18% now off-balance sheet.

As a consequence, our return on capital employed has improved over the period, and segment UNPATA reducing to $14 million, which again reflects the competitive marketplace and the soft vehicle market more broadly. And again, when comparing the year-on-year performance, I'll remind you that the FY '18 profit result included the $1 million early termination contribution that we reported in our results presentation this time last year.

We recorded several new client wins in the not-for-profit sector, leveraging existing relationships in the GRS and Plan Partners businesses. Overall, this enabled us to achieve an incremental lift in the written-down value of our portfolio at $380 million.

The performance of our vehicle and marketing team was pleasing, with average returns at/or ahead of budget, the only limitation being the increasing contract and ownership from clients electing to extend existing leases. As I flagged at the half, we opened our second retail yard in September, adding a New South Wales site to our existing Victorian operations.

Several system enhancements were implemented during the period, including our new vehicle trade-in platform that allows novated lease consultants to assist our GRS customers to quickly arrange a trade-in value on their vehicles. This initiative strengthens the cross-sell opportunities and creates a platform for new revenue streams.

In the U.K., while the foundation platform established over the past few years has the business well positioned in the asset finance market, our FY '19 performance was impacted by a combination of factors that I spoke to earlier in the presentation. In particular, the external factors have placed price pressure on margins, resulting in a $2.5 million drop in our underlying net profit of $3.2 million.

In addition, the process failure has allowed contracts to be entered for short-term rentals with no break fees on heavy transport assets for a customer who is ultimately placed into receivership, requiring the $3.7 million after-tax provision that we flagged in June and again, earlier in this presentation. The vast majority of these assets have now been sold or placed in the long-term rentals with new clients. A full review of all remaining contracts is being conducted, and we are confident that this is a one-off incident.

Amidst the current economic and market conditions, we managed to grow the customer base, increasing both the size of our fleet by 17%, and the volume of finance originations up 11% to just shy of $1 billion. As a consequence of a slowing asset market, cheap money and aggressive competition, our margins have not been able to be sustained.

Consistent with our group capital management strategy, we were able to successfully sell down $165 million of the portfolio throughout the year, reducing the overall written-down value by 18%. I flagged that we are conducting a review of our existing U.K. strategy and expect to provide more detail on the outcome of that review at our half year results in February.

Now on Slides 26 and 27, I'll provide some commentary around the performance of the Retail Financial Services segment. Overall, UNPATA of $6.4 million. There are 3 key factors contributing to the result: the $11 million reduced revenues due to our decision to close Money Now; the higher claims cost associated with our redesigned dealer warranty product; and another strong performance by the aggregation business where net amount financed grew by 5% to over $1 billion in originations.

The performance of our aggregation business is particularly pleasing given it was delivered following one of the most significant changes in the asset finance industry in the last decade with the removal of flex commissions in November last year. Continuing strong partnerships with our large and diverse panel of lenders and brokers continues to be the foundation for our result as we provide an even greater breadth and depth of products for both consumer and commercial assets.

With the increased focus on diversification by our brokers, we saw continued growth in commercial lines introduced by our broker network. The outlook will again be focused around the evolving regulatory landscape, with both the proposed removal of the point-of-sale exemption and the removal -- and the review of responsible lending being of most relevance to this segment. Given the inherent uncertainty associated with the regulatory environment, the Board has determined to write-off the remaining goodwill in our warranty business that Mark spoke to earlier.

I'd now like to pass back to you, Kevin, for any questions for Mark and I. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question in queue is from Simon Fitzgerald from Evans & Partners.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [2]

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Thanks for the Slide 6 where you show the performance of the GRS division versus the market. I would like to explore that a little bit more. At the recent trading update, McMillans pointed to challenging conditions in the group's GRS business with the retail car market resulting in lower-than-expected volume and revenue growth. Even then, you produced a novated leasing revenue of plus 4%, which is pretty decent from my point of view given the car market. But those -- that sales decrease at a system level, down 7.8%, does look like a fragile environment. I'm just wanting to see if I can get some comments in terms of what the last few months of the year were like and potentially in July, just given the comments that you made back in the 17th of June.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [3]

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Yes. And those comments, Simon -- and thank you for the question, the comments were really around our original expectations for FY '19 growth. So yes, our growth has been sound for the year, but certainly, it was below where we had initially expected to be when we first established our budgets. Our growth in the second half, as I mentioned, over PCP was stronger than the growth in the first half. And we certainly finished every month in the second half higher than the prior year. So from that respect, it was particularly pleasing. And in regards to July, obviously, we're now cycling against a lower number from a year-on-year growth perspective for the retail market, but our growth has been strong in July.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [4]

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Okay. Second question relates to industry consolidation. I'm just interested to know from your point of you whether you still expect to see industry consolidation, whether you think McMillans would like to participate in. I know that Eclipx is rapidly getting its act together and divesting a couple of real problem childs that, at the time of the merger, that you mentioned previously were causing some big issues. Just interested in some comments there.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [5]

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Look, I still think there will be market consolidation in Asset Management. I think all of our conditions still exist for that to occur. And as we've always said, our Board is always interested in conversations around opportunities if they exist.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [6]

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Okay. That's helpful. Just also -- I've only got 2 more questions here. Just in terms of the Asset Management business in Australia, it does look particularly challenging and you talked about that asset inertia before. I'm just interested to know whether you can do anything to kind of stimulate customers to switching to new vehicles. Is there any sort of way you can try to drive that a bit harder?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [7]

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I can assure you our business drives that as hard as they can. At some point, the vehicles don't become economical to continue to run, so that is an obvious trigger for clients to replace those assets. And we are always working very closely with our customers about optimizing the use of their fleet.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [8]

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Great. And final question, just in relation to the money me -- Money Now brand that you closed. I was just wanting to get a sense of what the revenue headwind is in FY '20, Mark, if you could help me out with that. I'm looking at the commission -- brokerage commissions here of $36.5 million, but could you provide a little bit more information in terms of what we should be expecting to drop out because money me -- Money Now brand was closed?

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Mark Blackburn, McMillan Shakespeare Limited - CFO & Company Secretary [9]

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Simon, the total amount of origination that Money Now wrote before the business was completely closed, that landed in the '19 year is $15 million of finance originations, so very, very small. Largely, 98% of all of the revenues from Money Now were -- they won't carry into FY '20, so we wouldn't expect any change in the revenue number attributed to the closure of Money Now in FY '20.

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Operator [10]

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(Operator Instructions) Our next question is from Phillip from Ord Minnett.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [11]

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A couple questions for me. Firstly, I think you mentioned earlier, Mike, that you're experiencing high value of cars in the GRS segment. I hope I got that right. And if that's the case, I'm just wondering what's driving that. Is it a higher proportion of new cars being leased? Or is it the value of those cars in the new segment that may be a bit higher?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [12]

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Sorry to interrupt. Thank you. It's a combination of both. So we are seeing slightly higher average net on the type of asset with a particular push towards SUV, away from the smaller sedans. But we also, and particularly through the trade-in program that we are running on behalf of our customers, seeing more customers see the value of moving out of their old vehicle and re-leasing them into a new car.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [13]

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Okay. Just on the novated organic growth numbers in the second half. They were reasonably robust. Can you just make a comment as to what do you think is driving that? And I suppose more specifically, in terms of Beyond 2020, are you seeing any benefits from that flowing into improved conversion yet?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [14]

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Yes, we are. So our growth in the second half was stronger than our growth in the first. So overall, it was just shy of 5% for the full year. So it was better than 5% in the second half. And the initiatives that we had delivered through 2020, which were largely delivered by the end of the first half, we definitely saw improvements in conversion flowing. I would say about 1% of that 5% growth can be attributed to the system developments and the improved processes that Beyond 2020 has delivered.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [15]

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Okay. Great. In terms of if I can contrast the novated organic growth to salary packaging numbers, salary packaging was a little bit lower, assuming around the 4,000. Again, maybe you could just make a comment as to what was sort of the driver for that. And then going to FY '20, is 4,000 a half a reasonable sort of starting point for us to estimate in terms of organic growth?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [16]

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Well, I mean, we won 7,500 on day 1 of first half of FY '20, so I wouldn't use 4,000 for this half. And 8,000 overall was probably 4,000 less than what we would have expected, but we unfortunately lost that LHD in New South Wales, which equated for the balance of packages. So no, 8,000, we would say, is below our expectation and particularly in FY '20 with the start that we've had.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [17]

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Okay. Great. Final question for me. In terms of the RFS segment, you, I think, specifically mentioned that you're contemplating some additional products in that segment. Again, could you just give us a bit more color around the types of products that you're contemplating now?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [18]

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It's really an expansion in the commercial space, Phillip. We're now almost 50-50 on an asset split between consumer and commercial, which has been our focus. So as we broaden the offerings to brokers in that commercial space, we will see that amount financed number grow.

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Operator [19]

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(Operator Instructions) Our next question is from Scott Hudson from MST.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [20]

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Just a couple of quick ones for me. First the U.K., I know you've kind of state -- or highlighted that all options are on the table. Is there any way that you're leaning to at this stage?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [21]

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No. It would be premature for us to talk to that, Scott.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [22]

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And what would be required for you to sort of, I guess, hold the course in the U.K. and/or invest further money into that business now?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [23]

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Well, immediately, certainly, we'd want to see market conditions improving or at least the green shoots to say that that's not far away from improving and margins starting to kick back the right way, so that would be a positive influence on the review. And from an increased investment, it would be whether or not in the current circumstances there was opportunities to acquire businesses at much lower multiples than what have existed in the past.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [24]

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Okay. And is there any evidence of those green shoots at this stage?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [25]

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Look, I mean, we've outperformed system growth in the U.K. Our broker businesses have grown by around 11%, which is certainly well above the growth in the network or the overall finance asset space. So the businesses are actually performing well. We've had some areas in the U.K. that have been very disappointing as I talked to, but the broker businesses are actually servicing customers and growing their businesses, which is exactly what you would want to see. What we need is reward for that effort in improving margins, generating higher revenues and obviously, flowing through to the profit. So that's what we're looking for, and we are -- we're not seeing the overall market lifting in asset growth at this point in time.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [26]

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Just to clarify, I guess the retail section of RFS, I guess are the headwinds now -- have now abated? Are we sort of at the bottom with regards to that business?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [27]

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The only headwinds that I called out in the presentation was around the -- there's a positive opportunity through the removal of the exemption to the motor vehicle dealers for the finance broker businesses. And the review [ties pain] in regards to the deferred sales model is the only other consideration that we would see could create some headwinds for the insurance and risk side of the retail business. But given its overall profit contribution in FY '19 was negative, we don't expect for it to be material to the result.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [28]

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Right, so this sort of $10 million of EBITDA would kind of be the new base for the business going forward? Is that how I think about it?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [29]

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Yes. And we had pleasing growth in the aggregation business in the last 12 months, and we're particularly pleased with the way that, that business is performing. So we would expect that growth to continue.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [30]

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In relation to the, I guess, Beyond 2020 program, you put up some, I guess, steps there in relation to man-hours replaced, et cetera. Could you sort of equate that into an FTE equivalent?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [31]

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Look, a simple calculation I think on one of the slides, we talked to about 19,000 hours of work being saved. So we're a 7.6-hour workday at McMillan Shakespeare, so if you multiply it by 5 and multiply it by 48, then you'll get roughly 10 FTEs attributed to that particular function.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [32]

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Do you have a target on what do you expect the total program to deliver in terms of FTE replacements or...

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [33]

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Not necessarily just from an FTE replacement because, obviously, we want to continue to grow. So we're not making people redundant, we're actually moving...

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [34]

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I mean more as a FTE efficiency than a...

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [35]

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Yes. I mean, we called that out at the beginning of the program announcement last year in August, Scott, that we want to drive, and like-for-like at that point in time, $10 million of cost out of the business. That's the goal, minimum.

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Operator [36]

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(Operator Instructions) We have another question from Simon Fitzgerald from Evans & Partners.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [37]

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Just a really brief question on goodwill. The closing balance of $205.9 million, just wanting to know what part of that is attributed to the U.K. business if there is still goodwill there.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [38]

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In terms of goodwill, it's a very small amount, Simon. So it's a -- I think it's a negligible amount.

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Operator [39]

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And our next question in queue is from Paul Buys from Crédit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [40]

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Just 2 quick ones from me. Firstly just on the contract renewals. I think you mentioned, call it, 7 contract renewals, Mike, during the year. Just wanted to get an idea if -- on what kind of terms they're being renewed, if you're seeing those renewals on unchanged terms or if there's -- from a pricing perspective or if there's any change.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [41]

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Thanks, Paul. Yes, well, one of those clients is Queensland government, so we've been able to renew the 2-year extensions on both the salary packaging and the novated leasing contracts at no change. The other 6 are Maxxia clients or large majority in the health sector but also in the private sector. They've been extended for typically 5 years, including -- typically, they're 3 plus 2 or 4 plus 1s. They've all been renewed for that length of period. And in all of them, we saw some price reduction to the customer, which is fairly typical post a 5-year tender period.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [42]

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And that price reduction, would that have been on your -- on the standard salary packaging? There wouldn't have been any change on the novated lease side?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [43]

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Correct.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [44]

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Okay. And then the other one, sorry, and you did call this out, but I just missed in terms of your client win onboarding 1 July, I think you said 7,500 salary packages. I just missed the number of novated leases.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [45]

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600.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [46]

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600. Okay.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [47]

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And again, those numbers aren't included in their FY '19 results.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [48]

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Okay. I think I've told a small lie because I've got one more question. Just on novated lease yields, and you did speak about net amount financed and how that's increased for a couple of reasons. Asking for a little bit of crystal ball gazing, but just want to get an idea. Do you see, as you look into the year ahead, let's assume kind of no real change in market conditions, i.e., no uptick just yet and no downturn, would you say that you would foresee similar yields in the year ahead to the year just passed?

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [49]

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That's certainly our aim, Paul, yes, but I did flag in the outlook that there's always potential for that with the current situation around credit availability. I mean, I think everyone's seen a fall in credit approvals over the last 12 months. But in saying that, we've been able to grow our business at the same time. And the strategies that we're applying in helping customers get into new assets rather than extending old ones through the buyback, through better pricing, through the dealer portal means that we've been able to manage what would have been natural yield reductions with actual growth of the yield. So that's certainly our focus.

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Operator [50]

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(Operator Instructions) Seems like there's no further questions at this time. I'd like to hand the call back to the speakers for any closing remarks.

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Michael Neil Salisbury, McMillan Shakespeare Limited - MD, CEO & Director [51]

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Thanks, Kevin. And in closing, can I just say that the group's strategic direction remains focused on growing revenue while systematically reducing our cost to serve. This includes continuing our program with digital innovations and long-term investments in technology across core sales and operating platforms, driving growth from our new and existing clients.

In the face of the challenges presented in FY '19, we are committed to ensuring our value proposition remains compelling. To achieve what we have in the last 12 months is a credit to the team. We are committed, engaged and focused on delivering long-term value by generating organic growth across all segments by lifting our returns on capital employed, by developing new products like Plan Partners and enhance technologies within Beyond 2020 to deliver new revenues, better service outcomes and lower costs and deploying our capital management strategy to enhance returns for shareholders.

Thanks again for everyone's time and attention this morning. We appreciate it, and we look forward to seeing many of you over the coming days. Thank you. Thanks, Kevin.

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Operator [52]

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Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may all disconnect. Goodbye.