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Edited Transcript of SDF.AX earnings conference call or presentation 21-Aug-19 12:00am GMT

Full Year 2019 Steadfast Group Ltd Earnings Call

Sydney, New South Wales Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Steadfast Group Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Bernard Kelly

Steadfast Group Limited - Co-Founder, MD, CEO & Director

* Stephen B. Humphrys

Steadfast Group Limited - CFO

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Conference Call Participants

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* Jason Palmer

Taylor Collison Limited, Research Division - Equities Analyst

* Scott Lyndon Hudson

MST Marquee - Senior Research Analyst

* Siddharth Parameswaran

JP Morgan Chase & Co, Research Division - Research Analyst

* Tim Lawson

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

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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 notice of Steadfast for FY '19 results and conference call. (Operator Instructions)

Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, the Managing Director and CEO, Robert Kelly.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [2]

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Thank you, Grace. And welcome, everybody, to our call for the FY '19 results and our equity raising investor presentation. Just before we start, there's just a little bit of a legal verbiage I have to say to you because of the equity raising.

Due to legal restrictions, we're unable to discuss any details around the equity raising other than the basic terms referred to in the announcement. So please just respect our position here. It's a legal one, and refrain from asking any questions about the specific deals of the equity raising as we're legally restricted from answering both on this call. Thanks very much for your forbearance on that on that, it's really good.

If I can just then get -- refer you to the presentation pack, the investor presentation pack and ask you to go to Page 5.

So the FY '19 performance and guidance. Our -- we had a strong FY '19 performance with 17.8% underlying EBITA. So this was driven both by the organic -- by organic growth of 10.9% and our acquisition growth of 6.9%, with record premium for both Steadfast Network and the underwriting agencies. We continue our record of value-accretive transactions, a $136 million gross acquisition spend in FY '19, including the IQumulate, formerly Macquarie Premium Funding, CBN and HMIA acquisitions. We also announced the takeover offer and the possible Steadfast Professional Service Fee Rebate acquisition transaction. The final FY '19 dividend of $0.053 per share, fully franked, is up 12.8%, and the total FY '19 dividend of $0.085 per share, fully franked, is up 13.3%.

Our FY '20 guidance is in the $215 million to $225 million in underlying EBITA and $100 million to $110 million in underlying NPAT and 5% to 10% growth in diluted EPS or NPAT. Proposed fully underwritten placement is to raise $100 million and accompanying share purchase plan. So that's Page 5 dealt with everybody.

So just going over the financial highlights on Page 6. It was a strong performance in line with our upgraded guidance. And as we always do, we keep the market informed all the time when there's anything happening in our business. So underlying earnings, EBITA, plus 17.8% to $193.3 million; NPAT, plus 19% to $89.2 million; NPATA, plus 17.3% to $114.1 million; diluted EPS NPAT, plus 16% to $0.1127 per share; final dividend, up 12.8% to $0.053 per share; total dividend, up 13.3% to $0.085 per share. The FY '19 statutory earnings, NPAT, plus 36.9% to $103.8 million.

So if you have a look at the bar chart on the right that tells really the story of the start of our -- from floating in 2013 and where we're landing in FY '19. If it was a set of stairs, you'd be very happy, you would have liked the first 3 stairs. And then if you hold, you would have been disappointed with having to climb so high up the remaining one.

Now I will turn you to Page 7 and the operational highlights. The network GWP was up 16% to $6.1 billion. Outstanding. Driven by price and volume increases, growth from authorized representatives, the AR network and our new network brokerage. We had 6% organic growth for the year following price increases in business pack, ISR and professional risks; 398 brokerages in the network, excluding IBNA, plus 21 compared to the prior period. It's an outstanding operational structure that we've been able to put together to attract people.

Takeover offer for IBNA could add up to 79 new network brokers and $125 billion (sic) [$1.25 billion] of GWP if the IBNA transaction completes with 100% acceptance. Steadfast Client Trading Platform, the unique and groundbreaking back-office system and contestable platform that we've developed over the last decade. FY '19 GWP top-down of just over $440 million or plus 91% compared to the prior period.

What we've done with IBNA as well, which we should mention here is that the deal relies on us buying out their marketing and administration fee that they normally would got back in cash and paying out. We also then, at that stage, decide that we would do the same thing for the Steadfast brokers as we were converting them from M&A into a professional service fee structure. Now we're waiting the outcome of that. That will reach a maturity over the next probably 60 days. If you want to understand why we're doing that, we're looking at commissioned and high-end view on the way we should structure our remuneration. And instead of bringing in funds and then paying them out, we've decided that we will actually buy those funds out and use the money within instead of getting it in by way of M&A. And this will be, I think, a more clearer and transparent way of explaining to a regulator and the general public how we operate.

Again, on the right, the gross written premium, starting at $3.9 billion, ending at $6.1 billion is indicative of how the markets move in general insurance. And you'll see it was static for a while during the periods of the early period where we're in a soft market, and now as the markets hardened and we've got volume increase and premium increase, the steps start to get higher.

So just going to Page 8, talking of the Steadfast underwriting agencies, and it's always a good conversation to have with Simon Lightbody who heads this up. It's not a bad result, up 28% to just on $1.2 billion in GWP, outstanding results. 22% organic growth by price and by volume uplift mainly led by the property and business lines who the insurers have been burning their capital on for the past 5 years and finally decided that the market should respond by putting appropriate pricing into the market. Price rises by insurers created significant opportunities for the agencies. The agencies, if you listen to any of my calls over the past, do well in hard markets because they are more agile and they are better priced in their operational structure to take advantage of that.

The London super binder, which we worked on very diligently over the last few years, took some pressure on remuneration as did the entire LLoyd's market. We were very able, but because of the success of this binder to offset any remuneration losses by being able to write more turnover by more allocation of capital. For those who understand the market, that's an indictment on some of the rest of the market who are having capital pulled off them while we actually maintain more capital. And that mean we were able to put more turnover into the market. Four of the London super binder insurance classes are now also live on the Steadfast-acquired trading platform. And as we move more into the automated side of placement, those binder businesses will start to write more business through that. Increasingly, return from greenfield agencies with innovative products are also a highlight of what we've done.

Again, you can see the steps to the right. And it's interesting to look at FY '16 and '17, where there was not much thematic change there. That's when the market started to think about that the pricing was possibly wrong.

So if go to Page 9, and this is our insurTech page. It relates around the Client Trading Platform, the virtual underwriter and what we've done on IT division. So 8 business lines, 13 insurers and underwriting agency partners are now live on the Client Trading Platform. The Steadfast Client Trading Platform delivers strong client outcomes, addressing several issues raised by the Hayne Royal Commission, it's genuinely a contestable marketplace. It's generating improved pricing competition and coverage and marketing each time a policy is quoted and renewed. It also has a flat commission rate for everybody, no matter what you do with it. You do $1 or you do $100 million, you pay the same remuneration to the group.

80% of Steadfast Network brokers' GWP could potentially be eventually traded on the Client Trading Platform. And our aim is to -- in Australia. And our aim, of course, is to get about 60% of that in the next 4 years. Potentially, the additional of 79 IBNA brokerages and another $1.25 billion of GWP for the Australian network expands our potential user base for the Client Trading Platform, if IBNA completes with 100% acceptance.

The Client Trading Platform usage is up 91% over 300 brokerages using the platform over the prior year. The latest development, our friends at Allianz are now live on the biz pack. It's been a considered approach by Allianz that's taken 3 years to reach fruition. Berkley are live on the liability and done very well. They're -- they had just come out of Australia with this, and they have an automated system which the brokers seem to like and they're doing very well. And Chubb is in pilot on business back, and we expect that to be in -- to start to roll out somewhere around the 30th of September this year. Investment required to develop auto-rater for insurers for liability and PI is something that we're -- we have decided to do. The initiative we take there is to make sure that we actually can provide that system to them rather than them going out to build the auto-rater. And of course, rolling out the SCTP to New Zealand is well underway.

The INSIGHT, which is the CRM and back-office system for brokers. There's 112 live on the system. There's now over 2,500 licensed seats operating with an additional 34 brokerages committed to migrate on to INSIGHT and ongoing discussions with 88 more brokerages. Again, if you have a look at the Client Trading Platform, you'll see that in its infancy stage, it's starting to build with great gusto. I'm expecting that in FY '20, is that you're going to need a ladder to get up to the next pile rather than a very broadened wide steps.

So just at this stage, I hand you over to Stephen and refer you to Page 11 of his financial summary. Thank you very much.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [3]

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Thanks, Rob. So FY '19 was, again, a very strong set of results with record earnings from quite a number of our businesses. So the group results show EBITA up 17.8%; and NPAT, up 19%. This drove our earnings per share of $0.1127 per share which is up 16% for the year. As you know, we acquired some mark-to-market, our investment in the Johns Lyng Group. So to compare the business on a like-for-like basis, we've shown revenue and EBITA without this favorable adjustment but keeping the bottom line NPAT inclusive of cost.

The company's results are in line with the guidance, which you will recall, we upgraded at our AGM in October 2018. And that $89.2 million NPAT is at the top end of that guidance. Our NPATA was $114.1 million, up 17.3%, which fully converted into the cash flow for the business. For a full reconciliation of our statutory earnings to the underlying earnings, you can go the analyst pack in pages 47 and 48. In particular, we recorded a step-up profit for businesses that have moved from associate or JV to a subsidiary, where in essence, we adjust the value of that original equity stake to the current value which is higher. And that profit is being dialed out of the earnings as being a nontrading item. There are no impairments of any assets during the year, and only minor adjustments to earn-out estimates to have to reverse through. While through on the topic of earnings calculations, there have been a few accounting standard changes which impact Steadfast this year, principally the revenue standard and the financial instrument standing -- standard. From an earnings perspective, they had a little impact on FY '19. In fact, it actually brought our numbers down about $400,000 on the NPAT. We will discuss some of the issues that flow the way through to FY '20 shortly.

But let's consider first what drove the uplift in earnings. And if you move to Slide 12. We break out the EBIT growth between all the different componentry. The businesses we owned this time last year delivered 17 -- just over $17 million EBITA growth, up 10.9%. The market hardening continued which provided impetus for our businesses, and the volume growth, particularly in our agency portfolio as we reported in our first half, continued all the way through the second half. We are benefiting from increased volumes on the SCT Platforms but continue, of course, to apply our resources into the technology, the net spend being in line with our budget and the capitalized IT was at similar levels to last year at circa $12 million.

On top of our organic growth, we've continued to invest into our industry in levels well in excess of our free cash flow, $136 million this year we've spent on acquisitions, $417 million if you net off divestment step down type transaction, adding a further $15 million of earnings when you reverse course the impact of the RBUA closure, which held that back $4 million. The acquisition multiples has not changed significantly really this year for the businesses we bought. If the regular type, what am I call regular-type size business, the 7%, 7.5% figure is still quite relevant. If it's a larger business, then you're looking at heading towards either -- or above for those particular larger-type businesses.

Page 13. Remember, we analyze now the performance of the equity brokers, which contribute 48% of our earnings as if we own them 100%. So you can really see what's going underneath the figures. We have around about 50% equity interest in our broker portfolio and about 90% for agencies. So for equity brokers this year, we saw about 5% organic revenue growth derived from our traditional brokers, broadly in line with the GWP growth that we saw across the network there as we saw the effect of the hardening commercial markets flow through to our income.

Our broker revenue continues to trend at circa 70% commission, 30% fees. There was even higher revenue growth for our non-traditional brokers, especially our AI network and trade credit broker, meaning that our total revenue for all brokers was actually up 7% and that's flowing through to our bottom line, organic growth of $7.3 million, up 6.3%. On top of this, there was the acquisition growth in the broker portfolio, resulting in a total 10.5% uplift in our broking division.

If I move to Slide 14 for the agencies, which represents around about 44% of our profits for the group. Again, continued strong uplift in earnings for this portfolio with $18.7 million additional EBITA, up 25%. So as previously noted, the competitive advantage of our agencies in a hardened market is evident. The growth was heavily weighted towards organic growth with like-for-like businesses recording an additional $15.8 million in earnings as they capitalize on the multitude of additional opportunities in the market. I know for all the -- our agencies dialing in, they'd love me to call all of them out. But unfortunately, they've all had a spectacular year, large and small. So I'm not going to call anybody out. They all performed fantastically well. The acquisition growth, of course, has nearly impacted that closure, that builders warranty, which meant that we had a -- that $2.9 million we showed there was actually -- it would have been $6.9 million if have -- that not have happened.

Moving to our balance sheet on Slide 15. We now have, as you know, over $1 billion in net assets. We increased our corporate debt facility during the year from $285 million to $385 million and have now extended our debt facility out until August 21. With $19 million of debt funding at 30 June '19, we had a gearing ratio of 23.9%. And obviously, we'll come to the impact of the placement, et cetera, and commitments later and take us to where that flows.

Before we do that, I wanted to move to Slide 16 and just provide some flavor around what our balance sheet is about to change complexion but I'd argue, not in commercial substance with the acquisition of the further 50% of IQumulate or our -- the Premium Funding normally known as -- previously as Macquarie Premium Funding. As you'd be aware, we used to have a 50% interest in this business, and so the full financials were never shown line-by-line in our balance sheet. With the acquisition and the changing to the funding model there, whereby the financier is now IQumulate itself as opposed to being an originator, the loan book and the accompanying receivables will now merge onto our balance sheet. This has started with some business written in late June but will fully emerge through this next half. So I want to give you a feel for the pro forma balance sheet that you'll see in December '19, if this was the only thing that changed. You'll see that we've shown the additional premium funding receivables and accompanying debt coming onto our balance sheet, assuming we fully utilized the borrowing capacity, and of course, they have seasonality. So it will depend on how that work through at particular date.

The debt itself, for the premium funding is ring-fenced. That is -- it's completely separate to the Steadfast corporate facilities. The receivable book and other assets of IQumulate is the security for the IQumulate debt. Within IQumulate itself, the credit risk is mitigated through various means, including the fact that policies are cancelable, for the most part. And with insurers -- and by the trade credit insurance. Our financial covenants for our corporate debt facility exclude IQumulate, there is no cross-collateralization. Our exposure remains on the premium funding book, which, of course, is extremely well managed. It was always there and continues to be there but it's isolated to within the IQumulate business itself. Going forward, we will continue to separate the balance sheet so you can unpack this, as otherwise would appear that our gearing ratio has changed drastically. Our gearing ratio has, and will continue to be, exclusive of the premium funding loan book.

From a P&L perspective, the changes in accounting standards for the revenue recognition, together with the changing of the funding model, will actually have an impact on next year's statutory earnings. In FY '18, we recorded income over the life of the loan book, typically under a year. In '19, we recorded income on more on the upfront basis as a new standard required us to because they are more of an originator at that time. In FY '20, as we write loans under the new financing model, we revert back to recording income over the life of the loan book. The first change we made in '19 was recorded as retained earnings. The second will work its way negatively through the statutory P&L. But to ensure that we have consistency of reporting across the years, we will report underlying earnings as if there was no change in the accounting treatment. That is as if the income is spread over the life of the loan. I hope that's clear. We can come back later if we need to.

Slide 17. We're excited, of course, about the 2 initiatives that we've recently announced for the market, being the IBNA proposal and the capitalization of rebates offer for the Steadfast Network brokers. We are today lodging the bidder statement, which allows each IBNA brokerage to consider the swapping of IBNA shares to Steadfast shares using the $3.28 share price that we previously announced. This could potentially add up to 79 brokerages into our network and provide us with earnings accretion from the increased professional services fees, for which we have agreed no forward rebates back to the brokerages. It's an exciting development for us and testament into the amazing array of services that those brokerages seek, including of course, our technology suite. The new brokers can instantly access our SCTP technology, and we will seek to roll out INSIGHT to the standard network. Given the network were required to relate their shareholding 2 days ago prior to launching our bidder statement, and we understand that was passed unanimously indemnity.

We've also sought interest from our Steadfast Network brokerages as to whether they would convert their rebates in the shares of cash, as Rob explained, again, using the $3.28 share price reference point. We have still to complete the final rebate data prior to making that formalized offer. As you know, we've sold sought the expression of interest. Our guidance for FY '20, underlying earnings, assumes that these proposals do proceed and we have assumed a minimum 80% IBNA take up, and we've assumed a minimum 33% take up for the Steadfast Network PSF proposal.

From an accounting perspective, there are some unusual implications for our statutory count that I just wanted to provide upfront commentary on. Typically, when you buy a business, you know that the consideration is capitalized on the balance sheet. Typically, for us, it's goodwill and customer lists. Under Australian Accounting Standards, these transactions may not technically qualify as assets and therefore, expensing the P&L. So we anticipate there could be a statutory expense, equivalent to the value of the shares that we issue on the cash we pay in relation to the 2 transactions. This expense, we will normalize in FY '20 to derive our underlying earnings and that we've contained in our guidance statements. Our corporate debt finances have acknowledged that any such add back would be appropriate to normalize for the purpose of calculating our financial covenants. Our ability to pay franked dividends through FY '20 is unaffected given the accumulation of past profits.

Talking to which Slide 18, just reconfirming what Robert's previously talked about. The Board's declared the increased final dividend of $0.053 fully franked taking the full dividend to $0.085 per share, up 13% on the prior year. The dividends continue to be fully franked.

The chart on the right there shows our continued growth in earnings across the years, which, of course, is our key objective, keep growing earnings per share on a sustainable basis through organic growth initiatives or through quality and strategic acquisitions.

And at this point, I will hand back to Rob to talk through the guidance and, I guess, commentary on the equity raising.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [4]

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Thanks, Stephen. Thanks very much. Yes. Look, that's a fairly impressive pack that Stephen's just gone through there, and it's a result of a lot of hard work by a lot of people. So just -- we're looking at FY '20 and our outlook and some assumptions. The major assumptions out of our strategic partner continue to drive moderate premium price increases. I think we would definitely be able to say that they're definitely going to be in the 5% to 7.5% range, which is pretty good when you consider what's been going on for the last, probably 18 months. So if we can get 5% or 6% compound over a 3-year period, we're starting to get back into technical rate. But I can tell you, they're not a technical rate, there's still a long way from technical rate. Also, we would expect the guidance to take into account the increased contribution from our insurTech, the uplift we're getting in the take up on the Client Trading Platform. And also, our ongoing technologically -- technology investment. And I just -- we are now looking at the IBNA situation into what may occur there. We're just around town or around Australia, and they're extremely interested in our IP. And that's been sitting on legacy systems, although performing, okay, they are systems that were developed 30 years ago, not 2020. We're also -- the guidance includes the -- as Stephen's alluded to before, an 80% acceptance of the IBNA takeover offer. And that 30% -- 33% of our Steadfast brokers will take -- will get rid of the Professional Services Rebate and probably 20% of that would be in cash. And of course, completion of the fully underwritten placement to raise approximately $100 million and the accompanying share purchase plan.

So guidance: EBITA, $215 million to $225 million; underlying NPAT, $100 million to $110 million; and underlying diluted EPS NPAT growth of between 5% and 10%. You know we always give you a range, and the reason we give you a range is that there are variables that could come in and there's -- and you have to think about this business now in terms of, if the IBNA deal goes through, and if the vast majority of them want us to convert their legacy systems into the revolutionary system Client Trading Platform and INSIGHT, we're going to have to dump a whole lot of cash into doing this over this next 12-month period to 18-month period all the way to fruition.

Go ahead, Simon? Okay. So my special counsel is pulling faces at me at the moment because I've gone off script. I'm sure you know that nobody will rush out to buy our shares on the fact that I've -- okay.

So if you go to Page 21, and you're thinking about investing in our company, and you're wondering what we've done, have a look at the charts there. I'm a simple man, I know if one starts down low and ends up higher, that's probably going to be a pretty good deal. So if you have a look at the chart, I'm sure these were -- the numbers speak for themselves, low to high. And so -- from the bottom right corner, more INSIGHT brokers, more GWP, more Network brokers. Above that, on the left-hand side in the middle, underlying NPAT, look at the chart, underlying EPS NPAT, look at the chart, dividend per share -- cents per share. We've done what we said we'd do in 2013, we've increased with you. Above that, underlying EBITA, absolutely outstanding. Steadfast underwriting agencies, we said to you in terms of when people said they're only going up 2% and 3% a year in a soft market, that's outstanding, in a hard market, you will see the fruits of their labor in there, and you're seeing it now. And then, of course, the network on the left-hand top going from FY '13 to where it stands today. So if you want a snapshot of what we've done and what we're doing and how we operate, it's on Page 21.

If you go to Page 22 and the critics in the audience there will go, this is engineered. It's not. The Steadfast Group has got a proven track record of completing strategic acquisitions. We've got established capabilities to evaluate and execute our M&A opportunities for long-term growth, including brokers, agencies and any complementary businesses that we think are sympathetic of the way we work. Our due diligence criteria includes a cultural and strategic fit as well as a financial fit. So you may see the odd piece of business that may leave Steadfast and go elsewhere, there'll be reasons for that. There'll be reasons on our side mainly.

So the financial year FY '18. Go there, we did acquisitions, $136.1 million free cash flow of $33.6 million and acquisition spend of $102.5 million. Interestingly, FY '19, we did, in fact, did the same amount of numbers. And yes, I know you're sitting back there saying, that's impossible. But I can assure you that's what it worked out to be. Kept free cash flow up from $33.6 million to $50.3 million and acquisition spend in excess of the free cash flow of $85.8 million. So guidance contains no acquisitions. We do this every year. So unless we've got a contract or something signed, it's not in there. The placement reload, it gives us some agility in acquisitions and it tops us up. It's not a traditional black box build. It's because we can see in the future that it's nice to be agile and have some funds, and we always like to keep some money to do this.

So I'll refer to Page 23 and the use of the proceeds from the equity raising. We expect to have a further $89 million available for future acquisitions following the placement. Steadfast's potential acquisition pipeline is strong, with group activity, considering a number of M&A acquisitions, both in broking agencies and other businesses. We main -- Steadfast now remains a natural acquirer of Steadfast brokers -- brokerages. And if IBNA transaction goes through, we think that the IBNA guys are very well suited to come in if they want to take a succession plan or want to get rid of some of their equity that we'd be a natural applier -- acquirer of those based on really our track record of what we've done over the past 6 years.

So the Steadfast offer is -- that's set to our guys is probably somewhere around cash of 20% and 80% shares in that line. And the final numbers of the Steadfast brokers that's going to take that will probably reach fruition over the next few weeks. On the right-hand side, you can see the potential use of their funds, consideration for the professional service rebate, okay, $8 million; cost of the transaction, $3 million; available for a committed expenditure, future, $89 million, so there's $100 million. So it's not an equity raising in vain. It's an equity raising with detailed and planned reasoning behind it.

So just go over the Page 24, the -- it gives you the pro forma debt capacity available at the 30 of June '19, as you can see, you're going to read the numbers $90 million, $90 million, $90 million. Drawn down for acquisitions and corporate activities since then is $31 million, and net debt, $31 million is made up of 2 tranches. A series of $16 million was spent and some $15 million that we will put into the premium funding company over the course of the next period of time that by way of capital against the debt line. And the preferred -- the net available from the first...

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Stephen B. Humphrys, Steadfast Group Limited - CFO [5]

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[By the end of that] arrangement.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [6]

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[By the end of that] arrangement.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [7]

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Yes.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [8]

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Yes -- as well included in that. So that's what that $31 million made of.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [9]

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Rob, it's $34 million.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [10]

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Sorry, $34 million. Net available from preferred placement will be $89 million. The pro forma available 30th of June, as you can see there. And gearing ratio runs from 23.9%, it goes up to 27.2% and comes back to 21.2% after the equity raising.

Page 25, the equity raising. Do you want to run through that?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [11]

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Look, I think the main key issues here. We just try to put out the 2 components. The first part is the, I guess, is a key offer and [rationale] of the $100 million placement. And the share purchase plan being for the retail offering that the $20 million capital that we've got there. We just thought you'll need to see some of those specifics. I don't think we need to work with particularly through this call. I think...

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [12]

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It's all in the details there.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [13]

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I'm staying with the timetable that's self-explanatory.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [14]

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Timetable, please. So the Appendix is at the back. So I think that's it. So that completes our briefing on -- it took a little bit longer than we expected, I'm sorry. But there's a lot to do. This is a vast business with a huge amount of people pulling to make it successful. So I'll hand you back to Grace for Q&A. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first questions comes from the line of Tim Lawson from Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [2]

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Just the FY '19 result was obviously a little bit higher than I think people expected on revenue, but also a little bit higher on cost. Can you just talk about the cost growth as a sort of DAU growth versus new opportunities, in particular, on the Client Trading Platform with a number of people you're bringing on?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [3]

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Yes. First of all, I will say, if you're looking at the IFRS numbers, you do have to, unfortunately dial out the fact that you've got some businesses moving from associate and JVs into the actual consolidated numbers. So that does -- unfortunately, make it look like expenses can go up quite significantly. I think the better way to look at it, the cost that comes through on the aggregate level, where we've tried to show the brokers and specifically how the margins are all there and the agencies. The brokers are trading at, give or take, what they were last year, just a slight touch up and the agencies, as you can see, has improved significantly. Obviously, with the increases in volumes in the agencies, we are putting, obviously, extra resources into managing the additional workflow that is coming through there. In terms of the technology, yes, we are constantly looking at how we roll out the additional products and the support thereof, et cetera. So do you want to talk more about technology roll out part of this?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [4]

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Tim, thanks for the question. Look, I think you've got a -- the technology rollout is really crucially important. And we've got to be very conservative in this upcoming FY '20 period to take into account a bigger pressure that's being put on this on us to roll out our technology quicker than what it is. Now that means that, on top of that, we've got the added exciting opportunity that many of the IBNA brokers have shown incredible desire to get onto our technology platform. So we've got to be conservative about what we're putting out as our advice because we may have to spend a bit of money this year in rolling out our technology. But I must say, it's not money that's ill spent. It's money that's spent absolutely to gain efficiency and further uptake in our Client Trading Platform.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [5]

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So the other thing I'll just quickly mention is, of course, we have a additional amortization that comes through of previously capitalized IT. And so obviously, just thinking forward for a moment under FY '20, there is an additional circa $3 million pretax, call it $2 million post tax that, of course, we have to factor in, if you like, to get to the, call it, the refreshed starting point of where do we start. So that's obviously the headwind you have to chase to start with.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [6]

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Understood. A couple more. In terms of the client trading platform, you called out Allianz and Chubb is taking a little bit longer. Is there anything else that's taking longer or sort of holding back at all the growth in the Client Trading Platform.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [7]

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Tim, we're up 91% period to period. What do you want? Blood.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [8]

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Not sure anybody else can say $440 million for Insurtech PI GWP.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [9]

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How many insurTech start-ups in 2.5 years can do $440 million worth of turnover?

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [10]

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All right. I'll try my luck with the third question then. The variables, you specifically called out in the guidance that there's -- the ranges because there's some variables maybe talk through us what you specifically think is the key things that have got a bit more uncertainty. And then just if you could help us with the contribution from acquisitions annualizing into FY '20. In particular, I'm thinking about CBN and the timing of when that might come to sort of a more full run rate given that's AR coming in at a little bit -- a few different systems and just the thinking around that, please.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [11]

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Why don't we start with the later part which is the CBN, which we, of course, we acquired in October? So we have about 9 months work results in the '19 numbers. So only 3 months ago in the run rate, but it's particularly that CBN.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [12]

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I mean Tim, with CBN, I mean it's a -- it sounds, I think, about $540 million. It's a massive boost. It's got a fantastic group of people involved in it. And I think being owned by an insurer, they didn't have the -- they didn't have the feel for distribution we've got. So when we bought this, we said in the first 12 to 18 months, we're going to do a lot of restructuring, not in terms of the volumes are there, that, for instance, the compliance that we demand in this organization wasn't as good as what we would have done under the control of an insurer. Now we've rejigged that and we've put in a whole training regime for them. And I must say we put in one of our senior people some work in that business. And I should say, we changed the CEO there. So this first 6, 9 months has been really just aligning the way we think about running businesses with the way CBN has to change to us. I mean -- and the cost to do that is quite high. So we're not expecting to do brilliantly out of that business for another, probably until this time next year.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [13]

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Okay. And going back to your original part of your question, which was to do with the perhaps some of the more key variables or assumptions that could float the numbers around a little bit. First, I'll just say on the Johns Lyng, we've -- it just assumed a flat share growth, obviously, for the year, that will go up and down. The IBNA transaction, we've tried to give you and the Steadfast -- rebate transaction, we've given you what the minimum number is, of course, there could be a factor there. And there's a whole process, for instance, on the IBNA, the takeover process we have to go through this next month. For those 2 particular factors, obviously, as we get probably more close to the AGM, we'll have, obviously, and well, we'll keep updating the market. But I think that'll allow us to have a better final visibility on what that would mean for our numbers ourselves as we get to the close of the AGM. And so I think that could be an interesting point of cleansing, if you like, of where we're up to. Obviously, we've talked about the pricing and the movements and the opportunities. I do think that for the agency side of things, as capacity constraints and that type of thing, we've had amazing year coming in '19. We can't assume that that's going to continue and so much in '20.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [14]

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I think most -- Stephen's absolutely right. I think if you get a big uplift for this, then you go to another level. You're not going to continue to get that sort of growth every year because the market stabilizes, the amount of business that you can actually get, you maintain it. So you set a higher level. And so we wouldn't expect the agencies to have the same gigantic growth that they're experiencing at the moment as it continued in -- over the next couple of years. We would expect accretive growth and good growth, but not as good as what we've got there because we've actually climbed a couple of mountains to get to that level.

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Operator [15]

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The next question comes from the line of Jason Palmer from Taylor Collison.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [16]

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I've got a couple of questions. The first one on -- Stephen, you're talking about the impacts from the Macquarie Funding Premium product on the NPAT. Am I correct in saying there's a $3 million impact headwind to FY '20 outlook? Or has that been excluded?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [17]

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Yes. So let me just clarify. There will be a $3 million impact on the statutory accounts in '20, but we will normalize that so that it doesn't impact our underlying earnings. So it's not a headwind in our underlying earnings. So thank you for the clarifying question.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [18]

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Yes. No worries. And my second question is just in respect to the outlook. And if I look at the take-up rates, which you specified for IBNA and the Steadfast Network broker take-up of the PSF, it implies, I think, somewhere between $11 million and $12 million EBITA, which would equate to roughly $7.5 million NPATA. Am I correct in saying that your assumptions then assume organic a -- sorry, organic impact growth of closer to 5%? Am I missing something here?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [19]

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Yes. We do it -- yes, thank you for your question, Jason. Particularly with the IBNA transaction, it doesn't, obviously, of course, start on 1 July. So we need to wait for a few months before we get it through. So that's just May. I think May just dialed your numbers just down a touch. And then, of course, we want -- I called out there before the amortization of the software, which will also add -- and don't forget the capital raise as well. So you've got probably 3 factors that might just dial the annual starting position because obviously the capital raise itself will dial down the earnings per share growth. The start of the IBNA is a little later, and the amortization of software also is a headwind that we have to counteract to then come up to the final overall figure that we've quoted.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [20]

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Right. So just going on from that, I think it's -- in the last few presentation decks, you put out some implied volume sort of the client trading platform. It looks like you're broadly in line with where you said you would be from a GWP perspective. I think you'll be...

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [21]

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That's probably a little bit behind. But I mean basically, that was a twofold thing really. I think we were -- the estimates we put in include probably 3 to 4 months of trading on Allianz and probably the biggest trading months for -- we didn't reach those. So in terms of -- when I normalize that, I'm pretty happy with the client trading platform, the way it's going at the moment from that point of view.

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Jason Palmer, Taylor Collison Limited, Research Division - Equities Analyst [22]

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Yes. Okay. What can you say to the question which is in respect of the earnings impact? I think you said the extra amortization is 3. I think the implied jump up in volumes then gives EBITA of 3. Are you saying the net impact for '20 is nil on -- from the client trading platform at an EBIT line?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [23]

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We're not saying it's nil. But we are putting additional resources and assuming that -- so we've called out the EBITA number as if we've got the full earnings streams coming through. But the additional IT support that we need would need to come through as well. So that -- EBITA numbers we've quoted is just simply that, if you like, the P&L that we take over before we then look at the results when we're putting into the IT there. So that's why we're just going to be, again, be careful on. When I talk about SCTP contribution, I think that not just there, but also how insight and everything else rolls its way through. So the combination of those, there is some timing, but we want to factor that in, assuming we have some spend there.

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Operator [24]

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The next question comes from the line of Scott Hudson from MST.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [25]

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Just 2 for me. Just in relation to the, I guess, from Macquarie Funding acquisition, what's the incremental benefit through FY '20 that we should factor in from full ownership of that business?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [26]

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Yes. So I'm just trying to figure out, I don't think we have actually revealed specifically what the profit has actually been before.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [27]

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We've never ever revealed profit before, okay? What you're asking is how much extra is going to go into the T&I. That's the...

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

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What I'm saying is what sort of tailwind you'd expect into '20 in relation to full ownership of that business.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [29]

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The -- no, we know that.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [30]

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But we're not prepared to release to the market...

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Stephen B. Humphrys, Steadfast Group Limited - CFO [31]

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We know that. I think it's...yes?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [32]

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Market sensitivity.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [33]

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It's a bit market-sensitive, okay, Scott? However, right now I'd like to try and answer your questions really directly. So it's good. But yes, we know exactly what that is, that it's a bit market-sensitive.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [34]

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But yes, there is some cost.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [35]

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Yes. There is some.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [36]

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In relation to the SCTP, is there anything that you see in relation to, I guess, broker take up that would suggest that the take up will be greater than what you're expecting over the longer term?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [37]

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Look, I -- it's quite amazing sometimes to have a look at the month, like if you'd have a look at what it's doing at the moment. It's everything just a tad under -- somewhere between $45 million and $50 million a month of this particular time. But if you look and then go backwards on that and you go, well, hang on, we were doing $20 million a month or we're doing $15 million, exponentially, signed or developed. So I think that this FY '20 year is going to be a really fascinating year because we've got the bases loaded with the insurers on there. We've got the Berkley auto-rater coming on the Miramar, which is the London auto-rater coming on, and they can exponentially really accelerate the take-up. So it's an interesting and fascinating time. It's a -- sometimes -- some -- we can have a month where we do an amazing amount of business and a month where we just do ordinary business on it. So I know that sounds like waffling. It's really difficult to predict at the moment really, really. But the fact that we've got 2 of our major, SME underwriters at the moment, Chubb and Allianz coming on. It will create its own vortex because some of the others that are on that maybe a little bit timid will start to become very sharp and very, very aggressive on it. So yes, we think it will be pretty good this year.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [38]

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And in terms of the, I guess, the IBNA book, is there anything that would suggest that the ratio of take-up of that GWP onto the SCTP would be different to what I guess you're targeting from the existing network?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [39]

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Look, I've just been all around Australia, speaking to in every capital city. I didn't do Hobart -- the IBNA brokers. I can tell you there was an excitement there. So the -- we gave them after our normal network broker meetings, we gave them a full, we brought our IT team down and to all around Australia, show them what the client trading platform is, let them see it live, and they loved it, absolutely loved it. Okay. The client trading platform and [off-value] system we have in the market. Okay. And I can tell you, their excitement to get onto it was really, really very good.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [40]

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Okay. And then lastly for me, just in terms of, I guess, the overall rate environment, any sort of view on duration of the cycle?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [41]

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Yes. Got 18 months to go at least. Write it in your book. I haven't missed any of my predictions when the cycle would turn over the last 5 years, so we can put it in a book. You won't get any hardening for 18 months.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [42]

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You will have [public fragments --] will get softening.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [43]

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They won't get -- won't get softening. Okay.

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Operator [44]

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The next question comes from the line of [Chris].

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Unidentified Participant, [45]

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I'm just one of the quiet majority at the -- as a private investor. You don't need to be insurance expert to say that you've built a terrific business here that spins off a lot of cash. I do know an insurance broker who is in the group and he speaks very highly of you and he can't wait to get your software fully finished. He think it's just going to be fantastic with more insurers and things like auto quotes, so he thinks that's kind of -- just help this business. My question is just your attitude in the gearing level, say, just a recession proof the business. It's great to see you building from our perspective, building the business with equity. But what's the -- what's an appropriate -- what's the maximum gearing ratio you would allow to because that's -- going too high would make you vulnerable in a strong recession in my opinion? But also, finally, the new leasing standard that's coming in, what would that do to you -- to gearing ratio?

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [46]

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Yes. Firstly, Chris, thank you for participating in the call. It's really exciting to have somebody that we get a lot of corporates to come on this. So thank you for your interest, and thank you for your intelligent question. I'll hand you over to Stephen...

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Stephen B. Humphrys, Steadfast Group Limited - CFO [47]

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I'll try and give you intelligent answers...

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [48]

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But I do the peripheral questions. He does the really important one. Okay.

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Stephen B. Humphrys, Steadfast Group Limited - CFO [49]

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On the gearing levels, we do have a maximum Board mandate of 30% position. And you're right, a part of today with a placement is to ensure that, that will come down to pro forma 21% debt that we show. We don't have a lazy balance sheet, but we also, as you say, but don't want to be completely debt laden as well. So it's getting that balancing act constantly go through our thinking and around the Board table. So that's -- we think that's not an unreasonable level.

The leasing standard, we're going to -- we show in our accounts that the impact that it has is around circa $40-odd million type of assets and liability that goes on to the book. The way that our financial covenant with the banks will work is, one, we have plenty of headroom, but we really are saying that the accounting standard change shouldn't make an impact. We will look at our business on the assumption that, that standard has not actually been put into play. The rent really is an operating expense. It's not an asset that we actually have the ownership of per se. It's a right to use asset. So we want to, if you like, consider our financials through that old accounting lens, and our financial covenants at this point are aligned to that.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [50]

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Chris, if I could just -- I hope that helps you in answering your question. What I can say to you is in my career in insurance, I've been through 3 recessions and I continue as insurance brokers, for the most part, do really well in recession. Contrary to what people think sometimes is people won't spend. People actually make sure they're fully insured in recession times. So they're not -- I wouldn't say they're recession-proof businesses, but they're certainly not businesses that are optional buys. They're businesses that people consider that they have to have insurance during recession time.

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Unidentified Participant, [51]

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Although the building sector has been tough, hasn't it? Still done those numbers.

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Operator [52]

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The last question comes from the line of Siddharth Parameswaran from JPMorgan.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [53]

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Just had a couple of questions just on the results. One is just on the organic growth that was there for the brokers. It seems to have come back in the second half. I think in the first half, you quoted growth of 8.9% for EBITDA on an organic basis, and I think you're quoting a number, which is around 6.3% for the full year. So just wanted to understand if there was any change in the broking business in the second half and also...

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [54]

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I said that there was in one. We moved some people out of one of our broking businesses, okay? We'll continually -- we continually reassess the people that operate our businesses. We continually -- we have a very high standard, I think you know that, of the way we believe businesses should be operated. And from time to time, we move people out. When you do that in certain areas, sometimes, you're going to lose a bit of business. But we look at that for the whole effect rather than the short-term effect. So that was impacted in 1 area.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [55]

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Okay. Fair enough. And just -- what did you see in terms of premium rate increases? I know you got -- you said 5% to 7% in your outlook, I think, was what you're assuming. But what did you actually see in -- for the half?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [56]

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Yes. So we actually across the year have around about 6% growth, which was not relatively different than the first half. It was quite consistent. It might have been a touch down but we're talking about a very minor touch down in the second half compared to first half. All the premium rates are showing quite consistent, in that range of 5% to 7% type, I think, as we look at every month. It's that type of event.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [57]

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Yes. You've got to take an average over some time. Sometimes it's high and sometimes it's low, and the average falls around those figures.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [58]

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Yes. Fair enough. Okay. And just my last question, just on the SCTP, I think given some guidance, I mean it was aspirational as to what you'd like to see in terms of EBITDA contribution. But I think you were -- you previously guided that you were hoping for about $5 million in '20, but you're flagging some increased depreciation costs coming through. So I mean can you give us some idea if we're still on track for that $5 million in your guidance or...

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Stephen B. Humphrys, Steadfast Group Limited - CFO [59]

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Yes. So the depreciation, we knew would be coming through. That was -- that doesn't change the environment at all. It's really now -- it's 2 things for me is to continue to get the rollout across all the classes. And Rob walked through the total -- I guess mechanisms we're putting in place to continue to progress that rollout. And then there is, of course, what's additional standards, and of course, sometimes, like, for instance, having additional brokers coming through, but you might have to leave that a little bit this year to have the additional support ready to go. So that just -- that changed the infrastructure, the environment just a touch.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [60]

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I think we'll be able to do bit closer than that when we do the half year because we'll have known what's happened with the -- even our brokers, what's come through and also the way the -- these [step up] brokers selected to go about their professional service fees. And yes, I think we can give you -- at the half year, we're going to give you a good view on that.

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Siddharth Parameswaran, JP Morgan Chase & Co, Research Division - Research Analyst [61]

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But what have you assumed in your guidance?

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Stephen B. Humphrys, Steadfast Group Limited - CFO [62]

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We haven't particularly specified that this year as part of the whole blended -- the growth there. But of course, we are looking forward to that this year.

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Operator [63]

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We have reached the end of question-and-answer session. I would like to hand the conference back to the management for closing remarks.

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Robert Bernard Kelly, Steadfast Group Limited - Co-Founder, MD, CEO & Director [64]

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Okay. Thank you, Grace. Look, I just -- I know it took a long time. I just like to say, what a wonderful organization this is, and the people that work in it work so hard to make sure that the reputation that we've achieved in the public environment over the last 6 years. Everybody takes pride in that. Everybody wants to make sure that what we say we do, and we've been able to keep our management team intact through this whole 6 years. We've been able to attract people at the highest level, and our Board is very understanding about how to run this business and how to make the shareholder returns stand up. And I'm very proud to be able to stand here and present those figures to you with the assistance of Stephen, who is an outstanding contributor to this business as the CFO.

So I hope you like what we've presented because I can tell you everybody in this organization likes it and is very proud of it. So thank you for your time.

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Operator [65]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.