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Edited Transcript of NEC.AX earnings conference call or presentation 21-Aug-19 11:30pm GMT

Full Year 2019 Nine Entertainment Co Holdings Ltd Earnings Call

Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Nine Entertainment Co Holdings Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greg D. Barnes

Nine Entertainment Co. Holdings Limited - Former CFO

* Hugh Marks;CEO

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Conference Call Participants

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* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Entcho Raykovski

Crédit Suisse AG, Research Division - Research Analyst

* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Fraser Mcleish

MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Lucy Huang

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Hugh Marks;CEO, [1]

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All right. Well, good morning, everyone. I'm Hugh Marks, the CEO of Nine Entertainment, and I would like to welcome you to the company's FY '19 results briefing. Greg Barnes, our CFO, is also here with me today.

In terms of the agenda for this call, I'll touch on our operating results for the past 12 months before handing over to Greg to go through the results in a little more detail. And I'll then speak further to what we've achieved with the merger and how it's already delivering on our strategy, positioning Nine for the media landscape of the future. And to this end, I'll also briefly discuss our recent offer to buy out the minorities in Macquarie Radio. I'll then update you on current trading and the outlook for financial year '20.

Operationally, FY '19 was a very strong year for Nine. Our overall pro forma EBITDA growth of 10% is a testament to the portfolio of assets we put together and the operating strength of our businesses and our people, all against the backdrop of a cyclically weak advertising and property market.

From a Free To Air perspective, Nine performed well. In prime-time across the year, Nine grew rating share across all key demographics on both the network and primary channel basis. In fact, in the 6 months to June, not only did we grow audience by 5.3 share points, but we grew audience in thousands as well. Measured against that most important ad segment of the TV market, main channel, prime-time, 25 to 54 year olds. And we achieved this with a 4% lower cost base. Not only this underpin an increased share of market revenues across the year, but more importantly, it really sets us up to grow our revenue share further in financial year '20.

The performance of our BVOD business 9Now was also outstanding, with 51% growth in revenue and just under a 50% share of the market. And with more than 80% of that growth translating to profit. Metro Media exceeded our expectations, with growth across both key lines of revenue, advertising and subscription. And with a cost base that continues to decline in FY '19 by a further $21 million. And with more than 1.7 million subscribers, Stan not only reached profitability, but in fact, recorded its first-ever 6 months of profit in the June half, which, again, was ahead of our expectations. And Stan is well placed for future growth in both subscribers and in profitability.

Demand has had a tough period against the backdrop of an unprecedented downturn in property, particularly in Domain's core markets of Melbourne and Sydney. The business has done a good job focusing on yield and managing its cost base, and is well positioned to bounce back when the property market stabilizes. And of course, we remain excited by the opportunity presented by the Domain-Nine combination.

And finally, Macquarie Radio, which has been hurt by the advertising market overall in this latest half as well as some poor internal operating metrics. However, audiences have remained strong. And with Nine's focus, we anticipate an enhanced ability to convert audience success into revenue. In this regard, you would all be aware that we've recently announced an all-cash, off-market takeover offer for the outstanding shares of Macquarie Radio, and I'll touch on this a little later.

So despite a cycle which worked heavily against 2 of our key businesses, broadcasting and Domain, we're very pleased to report 10% pro forma EBITDA growth for the group. It's a clear validation of our strategy and the operating performance of our business units. And against the backdrop of a major merger midway through the year, the ability of our people to remain focused on operational effectiveness is something of which we are very proud.

Now the chart on Page 5 shows the key contributors to our profit growth. As you can see, it was driven by strong growth in Digital & Publishing, a marked improvement in Stan and a $20 million reduction in corporate expenses resulting from the merger.

Turning to Page 6. What this means is that in FY '19, Nine's traditional broadcasting business contributed just over half of group revenue, down from 84% the year before. Now this is a real change in the drivers of our business. And therefore, almost half of our revenue is now sourced from strong growth segments: Stan, Digital & Publishing and Domain. If you look at the split another way, post-merger, around 15% of our FY '19 group revenues were derived from subscriptions, up from less than 4% in FY '18. Another pleasing trend as we diversify our revenue base away from pure advertising. Our strategy is to leverage the strength of our media assets to drive digital video and digital verticals revenue, and increasingly, on a subscription as well as on an advertising basis.

In an evolving media market, we have a unique suite of complementary assets that enhance our ability to create the best content, to leverage that content across as broader audience as possible and ultimately, to monetize that audience in a manner that represents the way that the market is changing.

So at this point, I'll hand over to Greg to talk through the financials, the result in greater detail. Barnesy?

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [2]

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Thanks, Hugh. Good day, everyone. As you all know, the merger between Nine and Fairfax was implemented on the 7th of December 2018, and this again is going to add a lot of complexity to this set of results. I'll step through the statutory numbers very briefly before moving into pro forma results presented as they were in the interim result. We've also included a series of reconciliations in the appendices that will assist with your modeling.

Now the statutory results, as shown on Slide 9, they include the results from the traditional Nine business for the 12-month period as well as results for Fairfax and Stan since the transaction was completed. Now clearly, the FY '18 comparisons don't have any contribution from either Fairfax or Stan. The discontinued business line reflects the performance of ACM, it's our regional business; and events up until the date of completion of their respective sales. It also includes the performance of Stuff New Zealand, which remains held for sale.

So on this basis, Nine reported group revenue of $1.8 billion and net profit after tax of $187 million from continuing operations and before specific items. We also reported net favorable specific items of $29 million, resulting in a statutory net profit for the year of $217 million.

Now on Slide 10, that details the composition of our specific items. These were favorable for the year. The accounting gain associated with the profit on the theoretical sale of Nine's original interest in Stan as part of the Fairfax acquisition accounting process was the single-biggest contributor. Obviously, restructuring and transaction-related costs make up the bulk of the rest of the spend. The second half spend included further restructuring and transaction costs as well as the acquisition accounting adjustments related to CarAdvice's script-based acquisition of Drive of $18 million.

For the rest of the presentation, we're going to focus on the pro forma group results, which are presented on a continuing business basis. They are presented prior to the purchase price accounting adjustments to best reflect underlying performance of the group. Now PPA adjustments are presented against pro forma results in the appendix, Appendix 1.

So on this basis, as shown on Page 12, Nine reported revenue of $2.3 billion, that was broadly flat on the prior comparative period. Group EBITDA of $424 million equated to growth of 10% and was in line with our guidance given at the half year. It's a strong result given the advertising and property listings markets were much tougher than we anticipated at the time this guidance was given.

Our pro forma group NPAT was $198 million for the year, up 16% year-on-year. We've declared a final dividend of $0.05 per share, which results in a full year dividends of $0.10 per share, consistent with guidance and with what Nine shareholders received in the prior year.

If we switch to Page 13, that shows the pro forma divisional results for the merged group. That's -- there is a summary, but I think I'll go straight to Slide 14 to talk through the divisional results.

Nine's Broadcast division comprises our Free To Air business and the consolidated results of Macquarie Radio. Together, they contributed 54% of group revenue on a proportional basis for the year. Macquarie Radio reported a couple of weeks ago, the 17% decline in EBITDA was disappointing and reflecting the weak second half radio market and poor operating metrics despite a backdrop of consistently strong audience performance. And Hugh will talk to that again shortly.

On Page 15, each steps through the performance of our Free To Air television business. Television revenues were $1.1 billion, which equated to a decline of 6%. But this result somewhat masked our share outperformance. The loss of trading of 1 week and the NRL sublicense revenues accounted for nearly half of this decrease. The balance being the 5.1% decline in the ad market. About half of which we accounted with -- by Nine's gain in revenue share. Nine's share of ad revenues for the year was 39.6% and included a second half share of 39.9%. That was up 2.9 points on the June half last year. This meant Nine achieved the #1 revenue position in each half and for the year overall.

Our Free To Air costs were down by just over 4% or nearly $40 million year-on-year. The switch from cricket to tennis being the primary driver, notwithstanding a full investment in local content across the year. EBITDA for the year was $213 million. So while the market was challenging, our ratings, revenue share and cost performance, that is those components that we had control over, were all markedly improved year-on-year.

Page 16 gives a little more color on Nine's premium revenues. Across the year, premium revenue was marginally lower due to the switch from cricket to tennis, a decision that improved profitability and increases the flexibility of our spend over time. Export premium revenues were up by 20%.

If we move on to Page 17. The Digital & Publishing business comprises Metro Media, 9Now and Nine Digital. Together, these contributed around 30% of group revenue and 31% of group EBITDA for the year. Importantly, we saw growth in both revenue, and particularly in EBITDA, which was up 56% across the period. And you can see a further breakdown on Page 18.

As you can see, there was growth in both advertising and subscription revenues across the year, which together with productivity initiatives and merger synergies, resulted in 65% growth in EBITDA for the year. That's a terrific result. The business has changed enormously over the last 5 years. And subscription circulation now accounts to more than -- more of our masthead revenues in advertising.

Our print revenues were broadly flat. Pleasingly, we've seen a real stabilization, I should say, in the print advertising side of the business, reflecting the benefits of being part of the broader Nine group. Metro digital revenues continue to grow strongly, up 9% for the period, accounting for 37% of total Metro media revenues. Digital subscription revenues grew by 10%, with growth across all major milestones. Overall costs declined by 5% or $21 million, benefiting from the merger as well as the print-sharing agreement with News.

Okay. On Slide 19, you can see it was another very strong growth period for 9Now, momentum accelerating through the second half. In a BVOD market that grew by 38% across the year, 9Now outperformed with revenue growth of 51% to $62 million, which equated to a market share of 49%. 9Now delivered EBITDA growth of 87% for the year. So from incremental revenue of $21 million, EBITDA are increased by $17 million, which is a flow-through of more than $0.80 in the incremental dollar across the year.

Of course, Domain reported last week, and Page 20 summarizes these results. It was a challenging year for Domain given the cyclical property environment and Domain's exposure to Melbourne and Sydney markets. That said, Domain continued to grow yield and depth penetration in its core residential listings business, resulting in revenues which were close to flat despite the impact of double-digit declines in listings in Domain's markets. Total costs declined by 7% in the second half. The group did a good job managing its cost base for difficult operating conditions, with savings in print costs and other efficiency measures, while continuing to invest in growth initiatives. This resulted in an EBITDA decline of 15% for the period.

Turning now to Stan on Page 21. As Hugh mentioned earlier, it's been a very strong period for Stan, with active subscribers growing to more than $1.7 million (sic) [1.7 million]. That's growth of $600,000-plus -- 600,000-plus subscribers since the last -- this time last year. Stan's leverage to subscriber growth is again evident with revenue growth of 62%, well in excess of costs, which grew by 23%. This led to significant improvements in operating performance and resulted in a June half that was both profitable and cash flow positive for the first time. That's a great effort for a start-up of this scale.

Okay. Appendix 7 shows the results from the businesses that were sold or held for sale during the period, namely ACM Events and Stuff New Zealand. We completed the sale of ACM on 30 June. Key sports-related events were also divested during the period, where the balance being reintegrated into our Metro business from 1 July. We continue to hold Stuff New Zealand for sale. Well, the market remains challenging in New Zealand, and this has played out in our results. We are pursuing a number of profit initiatives in parallel with the sale process.

Okay. Now we move to cash flows on Page 22. We've provided an estimate of pro forma operating cash flows on a continuing business basis. In this slide, we're focused on the wholly owned business, so it ties into the wholly owned net debt, which I'll talk to in the next slide. In short, underlying operating cash before accounting for the final payment to Warner Bros. of $33 million was $269 million or 89% of EBITDA before associates. Towards the end of the financial year, we saw our typical seasonal building working capital. In addition to the strong June sales month and the associated impact on receivables, our inventory increases with shows like The Block being filmed but not broadcast by year-end.

Just turning to Page 23, we've reconciled the net debt position of the wholly owned group. We've done this by walking forward the combined opening debt of Nine, Fairfax and Stan of $101 million to closing net debt of $121 million for the wholly owned group. Before -- beyond the operating cash flow movements, the combined business distributed dividends of $170 million to shareholders and spent $110 million on acquisitions and CapEx. We completed the sale of a number of noncore assets, including ACM and Events, that resulted in total cash inflows of [$166 million.] You can also see $130 million in cash consideration as part of the Fairfax acquisition, including transaction and restructuring costs incurred by those businesses.

So in summary, the balance sheet is in great shape. On a wholly owned basis, our leverage is about 0.4 of return of EBITDA. Our programming schedule rebuild is behind us, leaving us with more flexible cost base and a more predictable set of cash flows. We've also resolved a number of legacy obligations and worked through the key costs associated with the merger.

Looking ahead, we expect to continue to generate strong operating cash flows. That said, we do expect tax payments to increase by around $60 million in FY '20. We've got a catch-up payment for FY '19 of about $30 million, and we are now working in the monthly PAYG system, which will bring forward FY '20-related payments.

From an investment perspective, we recently announced a bid to acquire Macquarie Radio minorities for 100 -- for $1.46 per share. Now this represents an outlay of $140 million, which will be funded from existing facilities. Investment in the relocation of our head office to North Sydney will also step up in the period and adding an incremental spend of $60 million to our typical CapEx spend in FY '20. With that in mind, net debt will step up in FY '20. And we expect to exit the year with wholly owned leverage of around 0.8 of a turn of EBITDA, inclusive of the full year MRN cash flows from the date of acquisition.

Now before I hand back to Hugh, I want to just bring your attention to a couple of accounting issues that are highlighted in the appendices of the results pack. They cover both the impact of AASB 16 and the purchase price accounting adjustments on our reported results.

I'm going to leave it at that and hand back to Hugh to update on the merger, and I'll be back for questions. Thank you.

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Hugh Marks;CEO, [3]

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Well done, Barnesy. That was a marathon. Well, it's been a big year for Nine, no doubt, one that's continued to reshape our business. Nine today has a clearly diversified earnings base, with 4 key operational pillars. All at different stages of their evolution, but all scaled businesses in their own right.

Page 25 is broadly a repeat of a slide we've shown you before. The core businesses are broadcasting in Metro Media, continue to focus on the efficient creation and delivery of premium content. This content not only fuels those businesses but adds to the whole group both in terms of distribution that content as well as ensuring we have an effective promotional platform.

Over the last couple of years, we've reshaped both Free To Air and Metro Media through the recognition of an profitable focus on serving our core audiences. We aim to at least hold the profitability of these businesses through the cycle while continuing to maintain our investment in original content. Using the cash flows generated and the content and promotional platform of our traditional assets, we've built a portfolio of growth businesses: 9Now, Stan and our broader Digital Publishing assets, with which we aim to command an increasing share of the $4 billion digital video market to increase the contribution from our businesses which are in emerging high-growth markets. And Domain, which has a significant opportunity to extend its scale beyond its traditional markets of inner city, Sydney, Melbourne and Canberra, a strong position in the digital property market, which we believe we can replicate in other spaces like automotive.

Together, these account for just over 1/4 of pro forma group EBITDA today, but we expect this proportion will grow significantly in the coming years. With this portfolio of businesses, all of which are today cash generating, we remain very focused on shareholder returns. With our low level of debt and strong and growing cash flows, we'll continue to pay healthy, fully franked dividends and of course, look to further increase returns to our shareholders.

Two weeks ago, we approached Macquarie Media with a proposal to buy out the minority interests. This is really about taking our strategy just that one step further. We've learned through the merger and the revenue impact of the Metro Media business that Nine's strong relationships in the ad market positions us as a desirable media partner that can deliver advertisers, engaged audiences at scale across all major media segments. As a result, we believe they're not only significant cost synergies, but also a real opportunity to lift Macquarie Radio's share of major agency radio revenues, which represent about half the overall radio market, from the current level of less than 7% to closer to its audience share, which is 18%.

Nine also knows news, and there's a significant opportunity through resource and talent sharing and cross-promotion to further entrench Nine's already strong position in the news category. We came to get this structure cleaned up to enable us to maximize the return from the Macquarie Radio business and ensure its competitive market position is further enhanced.

Coming back to our results. On Page 26, we show the key drivers to our results going forward. Digital & Publishing will be underpinned by the ongoing success of 9Now, which we expect to continue to attract a strong share of a growing market segment, while the Publishing segment of the business should continue to stabilize. 9Now has achieved a great deal in less than 4 years. And the opportunity from here is really significant. Not only does the broader BVOD market have capacity for substantial growth, but it's a subset of what is the burgeoning digital video market. As I mentioned earlier, a $4 billion market.

Cost measures continue to be reflected in increased profitability across all of Digital & Publishing, and we believe there is more to be done, as well as the benefit of the merged group synergies that will flow through over the next 2 financial years. And we expect Stan to consistently grow its profitability through 2020 and beyond. Stan has built itself a powerful market position, and it continues to be the partner of choice for major content suppliers, as you will see, including the recently announced output deal with Paramount. We expect Stan will move strongly into profitability through financial year '20.

Domain is well positioned to benefit from a stabilization of the extreme housing additions experienced in financial year '19. And it's also a clear opportunity to grow outside of these cyclical impacts through broadening of its geographic performance and continuing to build on its product and service offerings to enhance yield.

In terms of current trading and our outlook, FTA markets remained weak in July, but Nine certainly seeing some improvement in August and currently sees further improvement from September onwards. As a result, well, Nine expects its FTA revenue in the current quarter to be down around 4%, conditions are expected to improve into quarter 2. Over the year, Nine expects the FTA market to decline by low single digits, and this was partially offset by growth of at least 1 share point. In FY '20, costs in FTA are expected to increase by around 4%, driven by factors, including contracted sports rights inflation of $27 million and incremental costs of $15 million associated with The Ashes and the World Cup cricket. Overall, non-Sports Free To Air costs are expected to be no worse than flat in financial year '20, and this is notwithstanding us maintaining a relatively high level of investment in local content that will enable Nine to continue to capitalize on our current ratings and revenue share momentum.

Digital & Publishing is expected to continue to grow in financial year '20, driven by both the expectation of top line growth despite a weaker start to the year and further cost efficiency gains in Metro Media and continuing strong growth, of course, at 9Now. As Domain commented over the result last week, the short-term outlook remains defined by growth in yield and lower listing volumes, albeit there being some encouraging signs of activity in the first weeks of financial year '20. Domain will remain disciplined to manage its cost base to take account of the trading environment while continuing to invest in its growth initiatives. On the back of the increasing subscriber numbers and the recent price increase, as I said, Stan expects to move strongly into profitability through financial year '20.

So in terms of the FY '20 result, assuming the market conditions above and incorporating previously detailed merger synergies, Nine is expecting to report pro forma group EBITDA growth on a continuing business basis in financial year '20 of around 10%. This is prior to the adjustments detailed in Nine's presentation pack related to the fascinating implementation of IFRS 16 as well as the impact of purchase price accounting.

So I think I've said enough now, and I'll open the line to questions. Over to you, operator.

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Questions and Answers

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Operator [1]

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Your first question comes from Kane Hannan with Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Just 3 from me, please. Just firstly, Stan exiting the year at over $200 million revenue run rate, I mean, how should we be thinking about that earnings delta into FY '20? I mean do you see Stan behind that $30 million comment made at the Macquarie Conference? Then secondly, the obvious question around Disney+ launching end of this year. Just comment on how you think about that potential impact on Stan and whether do you think your subbase will continue to increase through their launch? And then finally, your adjusted gearing 0.8x post-MRN. Just remind us of your capital allocation priorities for Nine from here and what your target gearing range is?

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Hugh Marks;CEO, [3]

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Yes. Okay. Well, look, how do you think about the Stan business going forward? I think just looking at the divergence between what the growth in costs and what the growth in revenue has been, and even the difference between half 1 and half 2 in the year we've just been, we just saw a $20 million effective turnaround in Stan's performance. So I think just gives you a guide to where you're getting that real leverage coming through from subscriber growth.

So Stan's in a market, and I'll go on to effectively move into question 2 at the same time. There'll be a lot of noise in this market, particularly -- and some from people that are probably much informed. But as I said in the presentation, Stan continues to be the partner of choice for international studios looking to come into the Australian market in the SVOD space. We've seen that with the recent Paramount deal. Almost every major studio that operates in the market, Stan has a relationship with. So -- and if you think about that going forward, as well even in the Showtime context, we've still got some years -- a couple of years to run on that Showtime agreement. And remember as well, as I've said before, we've got life of series commitments on anything that we get supplied from Showtime through that period. So again, think about it in another context. Again, as we've said before, of the top 20 shows on Stan, 11 -- or they come from 11 different suppliers. So I'll talk about Disney in a minute. But that just gives you a context to Stan's position as an aggregator, and its success and its ability to be able to build relationships, as I said, with every major studio that supply and content in this market because it's a growing market that those studios want to be a part of. They have concerns about dealing with Netflix globally taking away their business, so they're looking for opportunities to build supply relationships with businesses like Stan, which, mind you, is pretty unique on a global basis.

And when it comes to Disney. Look, Disney -- we've had a great relationship with Disney, and we're very hopeful that we can continue to grow that relationship. So the launch of Disney+, as you'd expect -- Disney is a very clear brand. It's had many years of investment in what that clear brand is. And they're, of course, going to want a very similar user experience anywhere around the world for that Disney+ brand. But Disney is a much bigger company as well than just the Disney content. You've got Hulu, you've got Fox. There's a range of content there. And that's not to say as well that there won't be some relationship between Disney and Stan as well in the future. As I said, we're looking to continue to grow that Disney relationship. So again, I think it's just a factor of we will continue to have relationships with every major content supplier. And Stan will continue to perform its role as an aggregator of the market. It went into the year before the Disney acquisition with already strong subscriber growth. And it will continue to go beyond with strong subscriber growth, and as I said, with those great operating metrics. So that digital video market that I spoke about, $4 billion, about $3 billion of that is advertising, about $1 billion of that is probably subscription. We're in both parts of that business, and we're going to look to continue to aggressively grow our revenue share in both those market segments.

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [4]

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Hi. And I think the third question was on gearing. And you're right. I mentioned earlier, we think we'll exit the year at around 0.8 of a turn of EBITDA. That's driven by 2 things. We had a tax catch-up payment this year of about -- for FY '19, we're paying FY '20 for around $30 million. And the balance is just going to now a full year of the PAYG system where we're paying monthly. So we'll cycle out of that as we sort of work through the catch-up payment into FY '21. We're investing in the relocation to North Sydney. That's about $60 million of incremental CapEx. That will be a similar number again in FY '21. You've got to remember, we're now relocating what was the Fairfax business into that site as well, which sort of brings forward that spend. And we're naturally going to bring forward some technology spend to just make the relocation happen while we continue to get aware on our current sites. So that gives you a bit of a feel, for obviously, Macquarie Radio is $140 million. Now as we cycle through that acquisition, that's a cash-generative business, I think that will further strengthen our balance sheet. We get through the relocation, and we're in pretty good nick. We've built -- all our programming build is done, so we'll start to throw off quite a lot of cash.

Your question is specifically around sort of future gearing. Look, I think this sort of business needs to keep itself relatively ungeared, so you wouldn't want to be sort of too far through, say, a turn of EBITDA on average through a cycle. So I think somewhere between half a turn and a turn is where we will want to operate longer term. But of course, that gives some room for flex as the cycle moves around and also as opportunities arise. So that's how I think about that.

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Operator [5]

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Your next question comes from Eric Choi with UBS.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [6]

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Firstly, just on the sports costs. I guess, there are $40 million headwind in '20. But just thinking in '21, given there's more contracted step-ups in that one-off stuff sort of falls away, does that $40 million headwind become a $15 million tailwind in '21, or is there other moving pieces we need to think about?

And then just secondly, on your guidance. Can I clarify that it excludes any synergies from the MRN merger? And if it does, maybe if you could help us with potential phasing of those synergies.

And then just lastly on market share. I think you guys are guiding to a bit under 41, Seven's guiding to 39, which means Ten (inaudible) do a 20 versus the 21.6 it did in '19. I guess just how confident you are in achieving that? And I guess is there danger to that if Ten sort of does a bit better than what we're implicitly expecting?

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Hugh Marks;CEO, [7]

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Thanks, Eric. Look, sports costs -- a few of the sports we have now come from what are part quite long-term rights agreements. So in FY '20, we've got The Ashes and I guess, the last bit of the World Cup cricket. Actually, in FY '21, we have the rights to the 2020 World Cup that's going to be held in Australia. That will happen over the end of that calendar year. So we do have a couple of rights agreements that flow through those periods. I guess, if we were performing more weakly than the rest of our schedule, we'd be converting those rights agreements better to revenue. You could argue at the moment that we're not quite converting those to growth in share given the rest of the schedules performing so strongly. But nevertheless, that's just led to that increase in '20 and '21. You will see that then drop off in '22 when then you then go through the renegotiation of rugby league and other arrangements. So we will see a step up, as I said, in this year. And there will be, I guess, another factor in 2021. And you've also got, I guess, the NRO rights that have increased in price through that period. We also made the decision, and I think this points to our strategy as well. Rather than sublicensing some of the tennis rights, which we have the right to do, we made the decision that long term for our business, I think if we're going to really benefit from sports, exclusivity will be important. And it talks to how we really think about the business and our ability to take that advertiser relationship, not only from the big broad rates of Free To Air television but into a more conversion world in digital. And that's going to have a $10 million impact in the financial year in '20. We could have sublicensed those rights. But again, we have just taken the view that we're better off at this point in time holding on to those rights, maintaining our investment in content, maintaining that momentum that we've got while we see other elements in the business continuing to grow. And of course, the Free To Air segment continuing to support that. So hopefully, that gives you some context for sports rights. Again, our philosophy is being wherever we can probably do less, but of what we do, do exclusively.

In terms of the MRN merger. I think it's right to say, Barnesy, the guidance doesn't include the MRN synergies. So that is something, of course, we'll be focused on delivering as quickly as we can. That transaction has a little time to play out. Obviously, we're in the context of an off-market takeover offer. And then potentially, if that is successful, and we get above the threshold through to moving through the compulsory acquisition of minority, so that has some time to play out. So you'll probably see the bulk of synergies in the next financial year rather than this financial year, but that's a response to that.

And your third question, in relation to our Free To Air market share. We feel very confident about our market share position. I won't comment on the other 2 broadcasters. They've always been strong competitors and will remain strong competitors. But if you see our share this year in terms of audience, particularly in that prime time main demos, we're at 39.6%, I think, in audience, that's translated to our long-term discussions with media agencies and advertisers. And those discussions are playing out now for effectively next calendar year. All of those discussions support basically our buildup of a market share for our Nine Free To Air business of at least the number that we have sort of guided to. So we certainly feel quite confident about our position. And as you see, I think if you're a study of writings, the performance of our business generally across the year, we've got very consistent, strong audiences pretty much every week of the year in more than just sport. And I think it's that momentum that's supporting our confidence and our ability to continue to grow share as the market moves forward.

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Operator [8]

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Your next question comes from Lucy Huang with Merrill Lynch.

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Lucy Huang, BofA Merrill Lynch, Research Division - Analyst [9]

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I just have 3. Firstly, in relation to Stan, on the agreement with Paramount Pictures. Just wondering if you can give us a feel for what the contract term looks like? So perhaps maybe the number of years? And maybe if the cost of the contract is -- whether it's quite similar to the previous Disney deal or not?

And then secondly, just in relation to Stan again. If you can provide some color on your thoughts around costs moving forward into FY '20. What are your thoughts around marketing spend and also content costs?

And then just thirdly, if you can provide some color around the progress with the New Zealand media divestment. Do you think that's imminent, or do you think we'll see in New Zealand remain on the books for quite some time?

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Hugh Marks;CEO, [10]

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Everyone's got 3 questions. That makes the job tough. Thanks, Lucy. Look, Paramount -- look, we don't disclose the detailed confidential terms of contracts. But it is an output deal with what I would say reasonably medium-term horizon. And interestingly, if you look at that contract and you look at the sorts of shows that we're going to get, there are some shows that are being produced by Paramount for Hulu, some that are being produced by Paramount for the new HBO Max service. So it kind of gives you a bit of an idea of what's happening with that world. There's a lot of people reentering the television content production space. A lot of studios who had been out of it are now back into it. It's becoming a very vibrant market, with a lot of high-quality production coming through, particularly from that U.S. market, but also the U.K. And that's what's giving Stan the ability to be able to build relationships with a number of these different suppliers. So we don't expect -- because the volume of -- it won't be necessarily as significant as what Disney has been. But remember, even in the Disney context, we probably only had about 1/3 of what Disney currently has available. But the Disney+ service is -- there's a lot of content that's going to be produced new for that service. A lot of television, in particular. So that's going to come with a very heavy cost into this market. They have bigger ambitions for that service as they should. It's a fantastic brand. So Paramount certainly won't be going forward anywhere near the cost of what you would expect from a Disney -- a full output deal with Disney. That's for sure. Not that we can get that, but that just gives you some context.

So our midterm agreement. An interesting range of supply coming from different -- one producer, but for a number of different networks.

In terms of Stan, look, marketing costs, again, something that I think is important for people to know. We continued our run rate of program expenditure and marketing into the full year result. It wasn't something that we backed off to achieve an outcome. And Stan's marketing and content costs have been increasing within our expected range. But of course, we had the additional Disney cost in that year. So basically, the result of Stan was achieved, notwithstanding that continued investment. And we expect to see that continued investment go into the current year. The fact is the costs are growing at a much slower rate. On the revenue side, you're getting that -- the jaws effect coming through in that business where our profitability starts to turn from growth in cash flows. And as I think the earlier speaker or the earlier question said, that $200 million exit run rate for revenue coming out of FY '19 really puts Stan in a strong position to be able to continue to build a sort of content relationships coming forward into the coming years. So we feel Stan is in a great position. It's got a very strong marketing spend. It's been able to continue to grow spend in content costs. But again, prudently and reflected effective, we also -- I believe it is time for that business to move strongly into profitability.

In terms of New Zealand. Look, it's a process that continues. Best I don't give a guidance on when that might roll out. But as I've said in the media, if we don't get an outcome that we think reflects good value for shareholders, then we're quite prepared to step in and operate that business. Myself and Chris Jones has spent quite a bit of time over the last month or so just talking to the management team in New Zealand about some simple operating metrics or behaviors that, again, Chris has learned from his experience with Metro Media that I think we can -- the New Zealand business can benefit partly from our relationships with agencies and partly, from that experience. So as Greg mentioned in his presentation, we've done quite a bit of work to ensure that we can improve the financial performance of that business going forward into this year. But it still remains held for sale, and we remain hopeful of achieving an outcome.

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Operator [11]

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Your next question comes from Entcho Raykovski with Crédit Suisse.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [12]

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I've only got 2 questions, and hopefully pretty straightforward. Just the first one around the guidance for flat or broadly flat nonsports costs in TV. Should we read that as meaning that you're close to the end of the available cost reduction opportunities, or is it because you're targeting revenue share gains that's driving a level of investment in FY '20? I guess, just to help our thinking what is FY '20, where do you think there's further room to go?

And then secondly, on Stan. As you're seeing growth in active subs, is the conversion of active to paying subs stayed pretty stable over that period?

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Hugh Marks;CEO, [13]

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Yes. Well, I think on the second question, yes.

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [14]

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Absolutely.

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Hugh Marks;CEO, [15]

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We -- the metrics of that business, when you look at -- and the way that Mike looks at how he operates the business and the subscriber profile, in particular, we've actually got great confidence that those metrics have started to form real consistency, again, as the business gets more scale. So that's a different. Yes.

In FTA costs -- so I think the point here is we've certainly made a decision, both with maintaining the all rights in tennis, maintaining our -- what is a relatively historically high level of spending in our entertainment, our local content. And as well, if you think about the Free To Air business, we've also carrying 3 studio deals at the moment because we did a Free To Air deal with Disney to support the Stan transaction. Obviously, it benefits Free To Air as well. We've had The Wonderful World of Disney back on air. But that's pre-other studio deals of the past necessarily rolling off, particularly I'm talking about movies here. So we're actually still carrying a very high level of investment into FY '20. Now we could -- and again, we're very early in the year. We'll wait and see how the year rolls out about whether we overachieve on that guidance or hit that guidance. We could have pulled back on some of that investment. But we feel that at the moment, with the momentum that we have, and we're seeing the profit drivers coming through the business end, that it's wise to maintain that investment at this point in time. You'll also see -- I've referred a lot in the note or in this presentation to this digital video market. And if you look at any global market around the world, the digital video market for advertising and subscription are the highest growth markets, and that looks like a very long-term trend. Maintaining our investment in content, particularly for the benefit of 9Now as well as Stan, I really think positions us to really take an aggressive approach to that digital video market. We would argue -- I think, if you look at Facebook, Facebook video and there's that PwC report scandal that was out some time ago, I think if you look at the Facebook video market, we don't really know the number, but we think it's about $150 million, something thereabouts. And if you think about the BVOD market being $120 million, if you actually look at the PwC report, there's more minutes consumed in BVOD than there is in Facebook video. And I would argue, significantly higher engagement and significantly a better advertising environment. So I think we really need to focus on what is the role of our content in that broader digital video market, how do we aggressively pursue it beyond just 9Now, including into our digital publishing platforms. And even in 9Now, what are the steps we can take now to really just not accept that, that market is going to continue to grow at the rates that we've seen, but potentially, really take a much more aggressive approach in that much bigger market. And I think that's an opportunity generally for our industry, but specifically with, obviously, the leading position we have at the moment, for Nine to continue to really go out aggressively. So again, content spend is kind of related to that. Obviously, it supports Free To Air and our momentum and our share there. But as we've said in the presentation, that content spend does benefit the whole group.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [16]

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Right. And actually, I do have a follow-up question on that, sorry.

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Hugh Marks;CEO, [17]

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You had to go to 3, Entcho. Yes.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [18]

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Just -- I mean, just the Paramount deal. I thought it was interesting timing given the parent is going through a merger. I mean does it just show that for those guys, it's business as usual? And what's happening at the parent level, it doesn't really impact these sorts of decisions? And does -- is that any sort of read-through for the Showtime renewal given that effectively, it will be owned by -- studios will be owned by the same entity?

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Hugh Marks;CEO, [19]

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Yes. Look, I think what you've got to divide is you've got to divide the U.S. market and the rest of world, right? So in U.S. market, again, it's been -- always been historically a different market. Consumers there are used to aggregating a number of different services that they get through their relationship with whoever their Internet provider is. And so in the U.S., every studio is looking to build more of a direct-to-consumer business. But that's pretty much the history of the U.S. market in some ways anyway. Then you get a business like Disney. Obviously, very defined brand value. Everybody around the globe -- or not everybody, but a reasonably high proportion, would have a really strong perception of what that Disney brand value is. Again, very great for family viewing. Not necessarily great for all the family, but great for family viewing. That's going to be a service that has a very defined proposition. And again, with that brand history and legacy and the way that, that brand has been built over multiple years, and the leadership of the team there now, you can see that service rolling out and that obviously got a clear strategy globally. But if you look at a lot of the other announcements coming out from other major studio heads, yes, they talk about direct-to-consumer, really, first focus being in the U.S. If you look at a lot of the commentary in relation to international markets, they talk about working with their partners, which is a mixture of free TV, obviously SVOD, Pay TV, maximizing the revenue that they can get out of a market for the content that they're producing and competing for in that massive U.S. market. So we've talked about this before. The ability of people to come into this market -- put aside Disney for a minute with the strength of their brand. For other people to come in this market, they had to build a substantial scale, direct-to-consumer business that would replace what we can offer those parties in terms of revenue through the business interests we already have. I feel confident that our business can continue to have those relationships and play that aggregator role in the smaller market that's Australia. And if you look, again, at the level of that commentary, it supports that, that is a theory that's worth us investing in and should play out.

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Operator [20]

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Your next question comes from Fraser Mcleish with MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [21]

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Just another one on Stan. And great numbers from Stan, by the way. But we've got this -- obviously, this sort of global streaming land grab going on, huge amounts of money looks like they're being invested. Stan is potentially very valuable to any global player wanting to enter this market. And is there any thinking, Hugh, that, that volume might be maximized by maybe selling it now? Or do you still think this is maximized by continuing to own and operate? That's my first one.

And then if I could just ask one other one on print and advertising. You've had a sort of substantial one-off or sort of uplift since the merger. Is that kind of one-off because of some of the things you're doing with agency? Or do you think we can actually see print continue -- print advertising continue to grow or be flat going forward?

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Hugh Marks;CEO, [22]

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Yes. Look, I think in terms of Stan and its asset value, look, we obviously have a view, as you would expect, on what its asset value is. It has a really strong position in this market and is very valuable if you think about where revenues and growth are coming from in Australia. So does that mean that we would never transact the asset? Well, of course, for our shareholders if we would receive anything that made sense for the company to follow through on that was ultimately reflected good value for shareholders, we'd consider it. But we're very confident that Stan fits within the operating environment we have where we're acquiring or producing content and distributing that over multiple platforms into multiple markets. So going forward, anything is always possible. But we know that we can continue to benefit, and Stan can continue to benefit from being part of the Nine group.

In terms of the print advertising market. It's been really interesting journey, the Metro Media business. I think before we bought it, the team have done a great job repositioning that business for what the future of that business looks like. And I guess our experience over the last 7 or 8 months, when we've been, I guess, actively running that business is to understand what its future is. And its future is a mixture of stabilization of advertising, probably continual shift towards digital in terms of any growth. But stabilization, I think, is certainly a line we use in terms of the advertising thing or our position of that business because we can see the market segments that are really benefiting and using that business. So again, if you look at the travel category, or if you look at the difference between print and digital in terms of the advertising basis, they're completely different customers. So the business has adjusted well to what its future is, and there is certainly market segments that benefit from using print from an advertising basis.

But if you think about that business going forward, and if you think about the content and where we're investing, and there is a little bit of investment for us in that business this year, and that investment really is in what the future growth of that business will be, which will come from those digital subscriptions, which we've seen very strong growth in all publications over the course of this year. And that's obviously a target for us to continue. And the content that you create for a digital subscriber is often different to the content you might create if you look at the business through an advertising lens. So I think the business has done a great job editorially and operationally, translating to what that new environment looks like. And as I said, we're very encouraged by what we're seeing in that growth in the digital subscriptions part of that business. So there will be a continual shift in the revenue lines of that business. And obviously, any further action we can take just to gain efficiencies in noncompetitive cost areas, whether that be printing, distribution, areas like that, you'll see, there's been a few announcements around that recently, those are opportunities that we'll continue to take so that we can maximize our investment in what that future is, which is growth in subscriptions and of course, the digital advertising environment.

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Operator [23]

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Your next question comes from Brian Han with Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [24]

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So the market turned out to be a lot tougher than when you last gave that guidance, and yet, you hit that guidance. So can you please elaborate on the main areas you were able to extract those earnings to offset the market condition?

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Hugh Marks;CEO, [25]

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Yes. I mean, I was really happy about -- I think, I might get Greg to talk about this in a minute because I'm doing a lot of talking. But just the composition of the earnings, I think, changed. Certainly, the FTA business, I think, held well. As I said, we didn't really move the cost needle significantly at the end, but we continue to try and get efficiencies where we can. So that helped in television. But if you look at the composition of the earnings, I think it was Stan coming through stronger, and the Digital & Publishing business coming through stronger, that's sort of made up for a bit of weakness in Domain and a bit of weakness in Macquarie Radio. So that's kind of the mix. I think Greg...

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [26]

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Yes, I think that's a fair comment. And then we also delivered a really strong audience outcome in the second half in television, which I think helped the sales guys pick up in the spot market. So a combination of that -- I mean, as Hugh said, Stan, 9Now all performing. And I think what it does show is really underpins the strategy in what we've done here around how we've diversified and the sort of the mix of assets we've got, that they can grow and outperform when others are facing sort of tough sort of cyclical time. So I think it's a strong result. It is what are agreed into it and goes to the strategy that we set out to achieve.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [27]

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Okay, Greg. I do have a question for you, if I may, Greg.

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [28]

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You may.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [29]

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Is your resignation something that's been in the works for some time? Because at least to me, it was a little abrupt. And are you confident of the systems and controls in place so that those promised synergies will come through in the numbers without getting lost in transition?

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Greg D. Barnes, Nine Entertainment Co. Holdings Limited - Former CFO [30]

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That's an interesting question, Brian. But in terms of the question, so -- but yes, look. In terms of my timing, I guess, there's 2 parts of the timing. Hugh and I have talking about this for a little while. So from our perspective, it wasn't abrupt at all. I think we've been sort of talking about it, and I've been sort of foreshadowing. Potentially, my intentions, we just didn't never formalized it. And I wanted to give the best opportunity possible for the business to transition. You've seen an announcement today around Paul joining, which I think is a terrific time to be joining Nine.

So from a systems perspective, I think the systems are robust. We've obviously got some work still to do as a company in terms of integrating Nine and Fairfax. But from a synergies perspective, like, which is specifically to your point, I'll say to you outright, we've been managing that to the penny. We're tracking it month in, month out, and have a very clear road map to how our synergies will be delivered. And frankly, what we have communicated are really that $50-plus million has already been executed and is now just the case of run rate. So I wouldn't read anything into my move other than a good timing for me personally, and nothing more than wishing the business all the best.

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Operator [31]

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There are no further questions at this time. I'll now hand back to Mr. Marks.

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Hugh Marks;CEO, [32]

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Okay. Well, thanks, everyone. That wraps up our full year results briefing. Thank you for your continued interest in Nine. We look forward to reporting back to you at our next result, which will be in February. And again, no more 3 questions. We're going to limit people to 2 next time, I think. So thank you, everyone. And I hope you have a good day.