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Edited Transcript of SGF.AX earnings conference call or presentation 22-Aug-19 10:59am GMT

Full Year 2019 SG Fleet Group Ltd Earnings Call

PYMBLE Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of SG Fleet Group Ltd earnings conference call or presentation Thursday, August 22, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin V. Wundram

SG Fleet Group Limited - CFO & Executive Director

* Robert Pinkas Blau

SG Fleet Group Limited - CEO & Executive Director

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Conference Call Participants

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* Paul Buys

Credit Suisse Emerging Companies (Australia) Pty Limited, Research Division - Head of Research and Director

* Ross Barrows

Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth 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 SG Fleet 2019 Financial Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 22nd of August 2019.

I would now like to hand the conference over to your first speaker today, Mr. Robbie Blau, CEO. Thank you. Please go ahead.

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [2]

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Thank you very much. Good morning, everybody, and thank you for taking the time to join us in what I think is a particularly busy reporting day today. My name is Robbie Blau. I'm the CEO of SG Fleet. And with me, as usual, is Kevin Wundram, Group CFO. For the benefit of those on the call, I'll keep referring to slide numbers as I move through the presentation.

If you please move now to Slide #3 for a general overview. As I've said at the half year, the first 6 months of this year was certainly a tough period for the business with a perfect storm of external factors impacting particular areas of our business. I think I also said at the time that I wasn't happy with the performance and that we would proactively deal with a lot of those challenges in the coming period. And I'm particularly happy today to say that the concerted effort to deal with some of those issues has produced a better performance in the second half. Unfortunately, the improvement did not come on the back of a more benign environment. For most of the period, conditions remained pretty challenging. It's worth saying that some improvements in the conditions towards the back end of the second half and safely at the start of this year, we've seen some improved conditions. So that certainly bodes well to complement some of the initiatives that we are undertaking, which I'll talk about a little later in the presentation.

But I think through the half, we've been bent at growing our customer book. We're certainly better penetrating our customers with additional products and services, you've seen that line increase, and efficiencies have also improved in the way we operate and bring products to market. I think all these advancements are here to stay. They'll continue to have a positive impact on future periods. And we'll certainly spend a long time during this presentation talking about the future.

In financial terms, we've been able to keep revenue roughly stable in what I said was not an easy environment. Second half underlying profit has done better in comparison to pcp in the first half. And that is an improvement that we're very pleased with. Just to point out, the difference between underlying and reported profit is a noncash impairment related to our move to a single brand in our consumer business that I flagged at the half and will now gain some momentum.

Looking ahead, we're rolling out a number of initiatives to build a stronger, more resilient business with stronger income streams less beholden to the sort of external impacts that we saw in the first half and that did impact our business. We think this will all produce a business that is much better positioned to compete in what is a very rapidly evolving environment in our space. We're creating lots of opportunities in that space of varying sizes. And again, I'll spend some time talking about those through the presentation.

I'll now do a quick run-through, as I usually do, by market and then ask Kevin to take you through the financials. Thereafter, I'll return and talk about some of the major initiatives that we're undertaking in the business.

So turning now to Slide 4 for a general review of the period in Australia. As I've said earlier, little improvements in the external environment other than towards the back end of the half, certainly a temporary bounce in business sentiment in the aftermath of the election. And then the interest rate cuts have started to bring some benefits through towards the back end. Consumer sentiment has failed to massively build on some brief positives. Retail conditions, pretty much for the half, were pretty tight. As I've said, starting to see some improvements in those as we move forward. New private car sales, again, for the full financial year, down about 10% on F '18. I'm really happy that our numbers are nowhere near those. And in fact, we improved our relative numbers over the half, which, again, I'll talk about.

Industry environment certainly remains competitive. So we work with that environment, again, to improve how we penetrate customers and benefit from that. As observed before, weak consumer sentiment does bring a healthy second-hand car market, and so residual values have remained strong. And that's been a real positive for us in the business, and we see that continuing for the foreseeable future. We saw a little bit of mix weakness in our second-hand side over the half. And so having more prime movers in the mix meant that even though it's only a small part of the mix, it somewhat affected second-hand profits, which was still really, really strong, but a slight mix variation in that half.

Our consumer business, we've certainly made lots of progress. We've worked with our -- and the industry improved credit approval processes, which I spoke about as being very cumbersome in the first half. There's certainly some improvement there. But there's no doubt that it's still somewhat of an environment that impedes our ability to close deals at the pace we want to close them. So some more work to do, but certainly an improvement on that front.

From a product perspective, we've seen a spike in interest in electric vehicles, both from government agencies and corporates, but excitingly, also from our novated drivers. We've done a bit of very interesting work in that space, and I'll come back to that a little bit later, talking about our solutions in that space.

I think our Corporate business, despite a mixed environment, as I've said, has repeated its good performance from the first half and some clear progress in the Consumer business from the first half. So I think, again, demonstrating the structural trends supporting demand for our outsourced services are very much present and growing. I think the need for our product suite is actually spreading. And again, I'll talk about what we're doing to break them to create -- to widen the break for the products we're offering later on in the presentation. Conditions have been not perfect, but we still generated very healthy profits. And again, I'll talk a bit more on how we are planning to improve that over the coming period.

Moving now to Slide #5 for some focus on our Corporate business. The Corporate business has continued its positive performance from the first half. We continued to record wins across a range of contract sizes and industries, further diversifying what is already a really well-diversified and quality customer book. Particularly happy with how the direct business has gone, showing strong growth in the half. And very importantly, we continue to retain and re-sign a large number of customers, both big and small, in our Corporate business as well as in the novated business actually. So customer retention has again been really strong with some biggies staying on the book, so we're very, very pleased about that. Plenty of opportunities about. Our tender book remains as busy as it's been ever. But again, decision processes are slow in the corporate side. So it's definitely taking longer to get things over the line but with a very busy pipeline, so happy to report that.

On the product front, penetration trends continue to accelerate. And accessories income is growing strongly, and we're generating considerably more revenue per vehicle in the Corporate business from additional products and services as is evidenced in that income line that Kevin will talk about a little bit later. I think the value-add to our fleet and the theme of adding value to our customers' fleet through additional products and services is steadily increasing. The customer demand for these additional products and services is growing. It's allowing us to offer a more sophisticated product to our customers, which is obviously beneficial in the long term for stickiness, customer retention and obviously profit, but more on that later again. It's -- actually, an interesting trend has developed. In the last period, we've actually won a number of contracts that are for specific add-on services, not necessarily for base fleet management services. That's a real opportunity for us because, ultimately, we can convert all those customers into fleet management and leasing customers as well, so a really good trend for us there. As I think we've talked about for some periods, we're seeing more and more than pure fleet numbers are not the sole determinant of our revenue growth anymore. It's as much about products as it is about number of vehicles on the book.

If you now take Slide 6 for some comments on our Consumer business. Again, I'm pretty happy with our business' ability to take on what have been some tough conditions, particularly in the first part of the half. We're proactively dealing with a lot of the challenges we faced, and that has certainly yielded progress in this half. We've seen an improvement in the business' performance. Again, while overall private new car sales declined sharply at the end of the January to June period, decline in our sales was much more limited to 2%. Now again, I'd much rather see that as growth, not any decline at all. But certainly, we've started to arrest the decline, and that bodes well for the coming period as well. And again, while there is a net decline, we're also growing the revenue we made from add-on products and services, so all in all, certainly a better half. While that alone will not instantly restore business levels, we're making sure that we're in a position to take full advantage of any improvements as sentiment improves. By growing our pool of employees, as I've said, we're certainly winning new customers and gradually growing the range of add-on products. So in summary for Australia, incredible performance and an improvement on the first half despite what remains -- remained a challenging environment for that period.

Moving now to Slide #7 and a review of the U.K. business. Interesting time for us in the U.K. business. General confidence remains poor. As you all know, there's uncertainty around Brexit. This morning's press now has conjectured that there will be a deal again. It's certainly a very much an on again, off again affair. But despite all of that, we've actually managed to grow our business pretty well in the U.K., and we're very, very happy with how that's going. And I think some of that is about the size of the market and the kind of customers we try and work with there. They're largely British customers, not pan-European customers, and that strategy has worked really well for us. There is some talk about Boris Johnson wanting to kick-start the economy. And so that -- those sort of growth tangibles certainly helped our business.

A mixed message on vehicle registrations across the market there. Consumers are a little bit hesitant, but corporate has remained steady. Certainly, lots of resilience in fleet registrations and in vans, and that's a particular market that we focus a lot on in the U.K. So we continue to have success there. The rollout of EVs there has gone well for us. There are more tax changes in the U.K. They incentivize low-emission vehicle use. There's certainly a growing range of models in that market, and so the interest continues to grow as does our book in that space.

We're onboarding a lot of new customers that we won in the first half. We're pursuing a lot of additional opportunities in both the tool of trade and personal contract hire spaces. The personal contract hire space has gone well for us, particularly in relation to the affinity schemes that we've been selling. And so we're pursuing those opportunities again. So further growth expected from a number of newly signed customers as they roll on to the book there. And so all of this means that after a significant profit increase in the first half, we've made further progress in the second half. So very happy with how that business has gone, and more to come in the coming period with that done. Obviously, with our eyes wide open to the environment, we're certainly not blind to it, but we're certainly trying to take advantage of the pieces of the economy that we can take advantage of in that environment.

Turning now to Slide #8 and some comments on New Zealand. Not entirely surprising, after the consistent economic growth over the last few years, economy slowed down a bit with slight declines in business confidence. For us, again, that has not dented demand. Our industry services -- demand for our industry services sure are still growing. Tender activity is holding up well, particularly in the private sector. We've also got some really interesting government sector work on the go as we speak, and some of that work bodes very well for the start of this financial year. More to come on that as things develop.

So our business is doing well there. We've again been successful in converting fleet management, fleet managed customers to funded customers. We've won some additional managed and fleet business over there. Our business is seen as a high value-add provider, as I've said before. So even -- despite its small size, we are seeing some very large opportunities in the context of the size of that business over there, and we expect to make good progress in the current period on some of those opportunities. So all in all, happy with how that business has gone. Another property improvement from that business, albeit off a low base, and that really is a summary of the New Zealand business.

I'll now ask Kevin to talk about the financials, and then I'll return after that. So over to you, Kevin.

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [3]

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Thanks, Robbie.

If you turn to Slide 10. At a high level, net revenue decreased by 1.2% and underlying NPAT decreased by 4.5% versus pcp as the business felt the impact of lower new vehicle deliveries, particularly in novated deliveries as well as pressure on margins. Fortunately, the impact of lower deliveries was somewhat offset by strong accessory income.

Turning over to Slide 11 and looking at the fleet size. You will recall that we previously announced the loss of the WA government contract with effect from 1 July 2018, which reduced our opening balance by 7,153 vehicles. The soft new vehicle sales in Australia obviously had an impact on us. But notwithstanding the reduction in new novated deliveries, our total fleet size remained broadly constant for the year.

Turning to Slide 12 and looking at the fleet mix. Our fleet continues to be well diversified, and our fleet mix has not shifted materially in the past 12 months. We funded 61% of the vehicles on our fleet, and 39% are managed but not funded. We carry a residual value risk on 29% of the vehicles, and novated leases make up 34% of the fleet.

Over to Slide 13 and looking at the key categories of revenues. We were able to grow our management fee income, notwithstanding the lack of fleet growth, by increasing the average fleet per unit. Maintenance revenue remains under pressure as customers opt for doing charge or budgeted maintenance products and also because we had to defer a greater proportion of maintenance income to the balance sheet than was the case in the prior year. We achieved good growth in accessory sales through higher penetration, notwithstanding the lower new vehicle volumes. This drives the increasing additional products and services revenue. Our funding commission income felt the impact of the soft retail car sales environment, private passenger sales -- passenger car sales in Australia declined by 10% for the financial year. In this environment, our novated deliveries declined by 3%. We continue to experience margin compression on novated leases.

Turning to Slide 14. In FY '18, end of lease income was exceptionally strong, and we were able to repeat that in FY '19. Market conditions for end of lease passenger vehicles remained supportive, and the average profit per vehicle was materially higher than last year. In the first half, commercial vehicles performed really well, but in the second half, less well primarily due to a product mix that was weighted towards prime movers. Our TradeAdvantage product also continues to perform well.

Net rental income reduced as a result of a reduction in the on-balance sheet lease portfolio in the U.K. We took a strategic decision to dispose of our owned short-term rental fleet in the U.K. and migrated to an aggregator model for the short-term rental business. This model operates on tighter margins, but we don't carry the depreciation cost on underutilized assets. Fleet management costs increased as a result of the growth in accessories revenue, but this was partly offset by a decrease in vehicle maintenance costs.

If you turn to Slide 15 for a look at the net revenue position after deducting direct costs. On an overall basis, as I've said, net revenue declined by 1.2%. We saw a slight improvement in the split in net revenue, with less income being generated upfront and more generated over the life. Our strategic objective is to continue growing the proportion of annuity income in our business. From a product point of view, our retail business contributes 53% of net revenue, and our corporate leasing business contributes 47%, which is consistent with the previous year.

Looking at the OpEx on Slide 16. Operating expenses decreased by 3.4% as a result of lower employment costs and occupancy costs, offset somewhat by an increase in technology costs. We will obviously continue to focus on reducing our expense lines. Occupancy costs decreased as a result of the impact of the new leasing standard in terms of which we capitalize on the balance sheet the right-of-use assets of $11.1 million at the beginning of the year and created a corresponding lease liability. We then depreciated the right-of-use assets and expensed interest on the lease liability, which is the primary reason for the increase in our depreciation and corporate interest costs.

Touching on the balance sheet on Slide 17. The group has net corporate debt of $38.8 million at 30 June versus $31.1 million 12 months ago. Our corporate leverage stands at 0.3x and our total leverage, including the lease portfolio, stands at 0.6x. The slight uptick in leverage and the reduction in cash conversion is as a result of the fact that we had an unusually high cash balance at the end of the previous financial year.

I'll now hand back to Robbie to provide an operational update.

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [4]

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Thanks, Kevin.

If you could please turn to Slide #19. I'm going to spend some time talking about the future now and what we're doing to build a more resilient and stronger business. I'm excited about these initiatives, they're bold moves, the decisions we're taking for the long term to do the right thing and grow the business through multiple cycles, not just the kind of cycles we're involved with right now. And so I think these are completely well thought through and exciting initiatives, which I want to take you through in some detail.

So as you know, we've spoken before about diversifying our funding model and getting a greater degree of balance sheet funding going in our business. It's always been a strategic objective of ours, and we're now implementing those processes to achieve that. In addition, we flagged at the half year that we'd be looking at our portfolio of add-on insurance products and that we proactively address the challenging conditions we faced in the novated market. I think the outcome of all of this is that we're launching a redesigned protected lease product. This product will generate strong annuity income for us. We're also taking the opportunity to further improve the value we offer to our novated customers. This creates opportunity for us to achieve better penetration and grow revenue overall in that space. I think this will also be well supported by, what I've said earlier, an improving environment right now. So overall, that's a significant objective of ours over the coming periods.

Together with the continuous rollout of a number of other new products and services, which we'll talk about a little later in the presentation, predominantly with an annuity profile, the goal is to further reduce sensitivity to external factors such as the ones recently encountered in our Consumer business and create a more stable and lower risk revenue profile, as Kevin just alluded to earlier. So I'll come back to a number of these new products in a moment.

So in terms of revenue profile, these initiatives will lead to a spreading out over the life of a typical lease what previously would have been upfront income reflected entirely in the year of origination, as we often referred to in our one-on-one meetings, the sugar hit. So we've decided to spread the sugar hit now over a number of periods, so that becomes much more a regular annuity income and creates a much more stable annuity revenue base for the long haul. As a consequence of this, we estimate that between $15 million and $20 million of FY '20 income will now shift into future years. It's really important to note, and I want to pause here to make the point very carefully, that this is a spreading of income over the life of a secured lease. It's not a loss of income. It's a beneficial conversion to annuity revenue and a stabilization of the same revenue streams.

Of course, we target a good level of organic growth on an ongoing basis on top of any of this. The objective of these initiatives is to augment that organic growth further by improving the positioning of our products. Again, a more benign environment will be very helpful to this objective. So we are dedicated to make sure that much more of our revenue moves into the annuity top line than used to be the case, much more visible, much more stable and so I think, long term, very much the right thing for the business. Obviously, once we pass this initial period, you'll see a growth on our normalized book, and this growth will therefore compound annuity income streams. So we'll see the opposite effect of what we have to go through in the first period as it comes off when it starts coming on again together with normal operational and organic growth in the business. We think the greater revenue stability achieved through these initiatives will create a much better platform on which to grow and invest in our business and expand our offering in what, as I said earlier, is a rapidly changing environment. And we're generating an increasing new number of opportunities in that environment.

Turning now to Slide #20, talking about our products and services. As I said earlier, the introduction of new products and services, which mostly have an annuity income profile attached to them, is supporting our strategy to improve the quality and resilience of our income streams. Of course, these products also increase the spend from existing customers, they make them more sticky as we increase the number of touch points we have with those customers, and they also open a number of doors of prospective customers to help us grow our market share. And we're actually seeing, as I've said earlier, that coming through. We're seeing a number of customers approach us just on these so-called add-on products, and that gives us a chance to sell the whole suite. Whereas 3 or 4 years ago, when I was talking to you, I would have said should we go in with our core products and try and sell add-ons. The conversation is definitely changing and become very, very exciting. With the creation of a dedicated innovation team, we're now able to produce a steady stream of these new products. I think the key message from this slide is that we're producing a large number of new revenue generators that have a great impact on our additional products and services line, as you've seen in the financials. And 3 years ago, I would have been standing in front of you talking about 1 or 2 or 3 products, as you know. It's great for me and exciting for me to be able to say that close to a dozen new products have been produced in the last 12 months, and all of these are well away from reaching their full revenue potential. So a lot of upside to come through over the coming years.

Some examples of these products, just to put some meat on the bone for you, our Inspect365 product, which is essentially a safety product in the heavy commercial space, is gaining lots of momentum with some very significant customer opportunities. Ultimately, this product is borne out of legislation and the need for our customers to better regulate their use of heavy commercial vehicles. This product will catch on dramatically over time. It is just a matter of time given the legislative environment we find ourselves in.

The DingGo repair portal that we invested a small amount of money in some months ago is going really well, opening lots of doors for us. We were able to bring them a very interesting customer base. And again, spreading the way, we use technology to provide a seamless service to our customers. We now are starting to provide this product to our customers through our suites of intelligence products, seamlessly branded -- co-branded with our name, so very positive.

TradeAdvantage continued to make a meaningful contribution to end of lease income. Again, the more we can use our online tendering system for both the corporate and novated side of our business, the more seamless and exciting the product becomes for our customers. Our car share solutions are certainly gaining momentum. And as I've said, the redesigned protected lease product I just mentioned we certainly think is a winner. There's a significant amount of value for customers in that product. The way we're charging for it is interesting for customers. And we think that certainly will be a winner.

I said to you earlier that I'll come back to our eStart product, which is the product we're selling in the electric vehicle space. This is essentially a consultancy product where we're going into customers and helping them design their strategies for alternative powertrains. Both government and private sector are using us extensively to help them develop their EV planning efforts. It's a great door-opener. It allows us to sell a number of other products to those customers. And certainly, the spike in EV interest is making this product very, very viable. That spike in EV interest is also spreading to individual drivers now. We're getting lots of inquiries from novated drivers. The launch of the tester fleet into this market has certainly sparked interest in this market, and we've seen massive benefit out of that sort of product in the U.K. market already. So those allow us to bring lots of new products to the market, broaden our offering. When we get involved in the electric vehicle space, we've got to think about how to help our customers recharge -- charging costs for EVs to the right cost centers, to the right individuals. All of those are opportunities for us. Tracking solutions for finding charging stations across the country are really interesting opportunity for us. So everything we do with the data we're collecting from our customers is allowing us to broaden the product suite.

We're spending a lot of time in the innovation team looking at additional applications for our booking intelligence system. Further telematics analysis advances and mobility-related technologies are all growing on a daily basis. I'm really happy to report that booking intelligence transaction numbers had doubled in the past 12 months, and this product is really coming to its own as a resource management tool now for our car share solutions. So although, again, largely, they're only used internally by our customers in regards to their own vehicles, we have significantly more shared vehicles on our booking intelligence system than any of the vehicle sharing operators in this country would have on their fleet by a significant multiple.

So the growth of these products is allowing us to create further penetration and growth in what has been a pretty stable fleet environment, as Kevin reported, and really, I think, illustrates this evolution of transport and the associated demand that we've been talking about for some time to you. This transformation continues to open up very attractive opportunities for us. We're actively appraising a number of investments and partnerships in the sort of new vehicle technology and associated technology space. Watch this space for further developments from us. And so a very exciting time for us in that space. And I guess, coming full circle, these investments are made possible by building a more resilient business with better adds on the income flows as discussed by me a few minutes ago.

If you could now turn to Slide 21 for a summary, please. So just to sum up, across the entire business, the second half has certainly seen improvements across a number of areas in the business. We've continued to grow the customer book. We're creating and selling more additional products and services as you've seen in that line and certainly improving the way we are delivering to our customers. The Corporate business has continued its good performance, taking advantage of some of the new products to open new doors. Importantly, our Consumer business has, to some extent, offset the external factors and delivered an improved performance in the second half, which we were very happy to report. Both the U.K. and New Zealand have increased their contribution to group profits, and we think much more to come from these businesses in the future. As I've explained in some detail a few slides ago, we are taking advantage of this environment to build a stronger business, a more resilient business by redirecting our income streams and targeting market share gains with some of these redesigned products. Again, the more benign environment will help us with targeting these market share gains.

I think spreading out the income, there's obviously some initial pain when you do these things. But certainly, we think it will progress in a much, much more competitive position for the longer term. It does give us alternatives, and we're excited about that opportunity. We're creating new leverage, new streams continuously through our innovation team. And as this transport and mobility space evolves, we will start to develop more and more breaks in that space, in our business.

Of course, alongside those small-level opportunities in the emerging mobility space, we continue to monitor significant inorganic growth opportunities. And you know our view on that consolidation we think still will happen in this industry, and so we certainly continue to monitor the opportunities in that space.

So I think all in all, after what hasn't been the easiest of view as ever, we're entering a very exciting stage in the evolution of SG Fleet: an increased rate of innovation, a large number of successful product launches. We're strengthening our position in the industry with our vision for what we want to build in the mobility space. We're creating further opportunities for us in that space, and we think the measures we're taking to improve the quality and resilience of our revenue streams will certainly benefit us in the long term.

That really is all for me in the formal presentation. Happy to take your questions. And again, thank you for your time in what's a very busy day.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question 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 in regard to the new insurance probably talking about spreading out over the life of the lease, can you just confirm the amount you said the impact would be on FY '20?

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [3]

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So what I've said was the combined impact of those insurance products, and that's starting to fund on balance sheet, the rate we've given you there -- and then please, remember that, that is a combined number, it's really important that that's a combined number, is in the range of $15 million to $20 million.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [4]

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And that -- do they come through -- and that's a pretax number?

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [5]

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Pretax number, and that's to come through over the typical life of a lease.

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

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You're right. So what sort of period would you expect that to sort of season out over?

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [7]

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Well, typically, our leases are 3 to 4 years in the passenger space.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [8]

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And in terms of the contracted nature of those ultimate -- revenues ultimately ceasing out over that 3- or 4-year period, particularly it's locked in with the lease, so there's no issue with sort of occurring year 1 and then not occurring thereafter?

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [9]

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So that's a really important question. They're locked in as they are today on the first day we sign the lease. It's security income in respect of every lease. So as we lock the lease, that income is secured. It's just recognized over the life of that lease.

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Operator [10]

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(Operator Instructions) There are no questions at the moment -- oh, we have Paul Buys from Crédit Suisse.

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Paul Buys, Credit Suisse Emerging Companies (Australia) Pty Limited, Research Division - Head of Research and Director [11]

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Just a quick one, a follow-up to that, if I may, just to -- on that -- the new products when they shift out, is -- just confirming that the cash matches the income. Or do you receive more of the cash upfront but you're deferring? Or is actual cash flow and income are spread?

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [12]

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Cash flow matches income.

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Operator [13]

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(Operator Instructions) Your next question comes from the line of Ross Barrows from Citigroup.

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Ross Barrows, Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst [14]

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I apologize. I just jumped on now, so you may have answered a bit. Would you mind just elaborating on the $15 million in terms of where that gets spread out, at what specific line in the P&L?

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [15]

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Yes. So it's 2 lines. It's essentially funding on balance sheet, so spreading the spread on that funding and also in the additional products and services line through some of our insurance products.

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Ross Barrows, Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst [16]

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And the split between those are expected to be...

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Kevin V. Wundram, SG Fleet Group Limited - CFO & Executive Director [17]

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Look, I think it's early days to get into the script, Ross, because there's still a few moving parts. Hence, the reason we've given you a bit of a range, but they're largely work impairment.

Sorry. If you just jumped on, probably just worth reiterating that it's a spreading of income that we'll earn on the day we write any lease rather than -- so it doesn't change the risk profile of that income pertaining to any lease. It's just a spreading of that income and the cash flow.

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Operator [18]

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(Operator Instructions) We have a follow-up question from Paul Buys of Crédit Suisse.

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Paul Buys, Credit Suisse Emerging Companies (Australia) Pty Limited, Research Division - Head of Research and Director [19]

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Sorry, I just changed my headset. Sorry, just taking advantage of the fact that it seems to be a bit quiet. I just wanted to understand in terms of this product, I mean it sounds -- presumably, this is -- your anticipation is that your customers really appreciate this because obviously they gain the benefit of, I assume, of the spread. Presumably, part of what you're doing, I understand that the annuity components and how that improves stability of your earnings profile, I mean what kind of -- how do you see this resonating in terms of potential increase in market share and penetration of the products as a whole?

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [20]

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That's a good question, Paul. So again, we do think that increased value and benefit for our customers in the way we're going to do this. So we do -- we're certainly aiming to improve penetration and get growth out of this new product suite.

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Paul Buys, Credit Suisse Emerging Companies (Australia) Pty Limited, Research Division - Head of Research and Director [21]

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Is it fair to say this would be -- you guys are up-front here? Or are there any other products out there that you're aware of that are going to be doing this or are currently doing this?

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [22]

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Look, I think there are other products out there that are probably similar. But we -- obviously, given that we are creating some new products, we're trying to create absolutely best of the best.

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Operator [23]

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And we have another follow-up question from Tim Lawson of Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [24]

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So my follow-up question was just answered.

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Operator [25]

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(Operator Instructions) There are no further questions at this time. Presenters, you may continue.

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Robert Pinkas Blau, SG Fleet Group Limited - CEO & Executive Director [26]

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Thank you very much, everybody, for your time. Again, we'll be seeing some or all of you over the coming days, so certainly happy times for the questions as it happens. And again, appreciate you taking the time. Have a good day.

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Operator [27]

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Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now disconnect.