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Edited Transcript of SIQ.AX earnings conference call or presentation 18-Aug-19 11:00pm GMT

Half Year 2019 Smartgroup Corporation Ltd Earnings Presentation

SYDNEY Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Smartgroup Corporation Ltd earnings conference call or presentation Sunday, August 18, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deven Billimoria

Smartgroup Corporation Ltd - MD, CEO & Director

* Timothy Looi

Smartgroup Corporation Ltd - CFO

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Conference Call Participants

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* Andrew Swaffer;Taylor Collison Limited;Portfolio Manager;Analyst

* Paul Buys

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

* Phillip Chippindale

Ord Minnett Limited, Research Division - Senior Research Analyst

* Ross Barrows

Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst

* Scott Murdoch

Morgans Financial Limited, Research Division - Senior Analyst

* Scott Lyndon Hudson

MST Marquee - Senior Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Smartgroup half year results briefing. (Operator Instructions) I would now like to hand the conference over to Mr. Deven Billimoria, Managing Director and CEO. Please go ahead.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [2]

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Good morning, everyone, and thank you for joining us on the call today. My name is Deven Billimoria, and I'm the Managing Director and CEO of Smartgroup. Joining me on the call today is Tim Looi, our CFO. Tim and I will provide you with an overview of our financial performance for the first half of calendar year 2019 and take you through some key operational highlights. We will then take your questions.

Now let's turn to the investor presentation. As shown on Slide 1, Smartgroup delivered another 6-month period of continued financial growth and improved operational results. First, we delivered revenues for the half of $125.8 million and NPATA of $40.5 million. Top and bottom line numbers are up on the prior period by 3% and 5%, respectively. This is a pleasing result given the macro factors currently impacting private new vehicle sales. Second, we continue to grow Smartgroup's core packaging and leasing business organically while maintaining a stable level of fleet vehicles under management. Also I am pleased to add that during the period, we successfully renewed our contract with one of our largest customers. This was a competitive retender process. It has been secured until 2022 and represents circa 3% of group revenue. Third, we continue to build on our success in delivering multiple services to common clients across the group, and we are in the process of introducing a number of partnerships that may aid these efforts. Fourth, we continue to successfully integrate our acquisitions and make good process -- progress on consolidating our IT infrastructure and rationalizing our office footprint. And finally, we are pleased to declare a fully franked interim dividend of $0.215 per share. This is in addition to the $0.20 per share special dividend that we paid in May.

Turning to Slide 2. We see continued growth in revenues and earnings versus H1 CY 2018. Looking at the bottom table on Slide 2, we can see that both salary packages and novated leases under management continue to grow despite the slowdown in private new car sales.

Turning to Slide 3. You can see that our growth has continued since our IPO in 2014.

On Slide 4, you can see our salary packages and novated leases under management have increased as a result of organic activities despite the loss of 2 Victorian health contracts. While we were very disappointed to lose these 2 contracts, there are some minimum pricing thresholds that we will not go under. Pleasingly, our service offering continues to resonate with the vast majority of our clients, and we continue to add new services for our growing client base.

Turning to Slide 5. You can see that our salary packaging base represents stable growing sectors within the Australian workforce.

On Slide 6, you can see the relative performance of Smartgroup's novated leasing volumes compared with private new car sales over the past 6 quarters. While market volumes have declined year-on-year, Smartgroup has increased its share. Amidst this challenging operating environment, novated leasing deals continue to be soft as a result of the shift to lower-priced vehicles and diminished sales of extended warranties.

On Slide 7, we can see the long-term improvement in customer adoption of digital channels across Smartgroup. We also continue to work on our robotic process automation program that began 3.5 years ago. The robotic processes we have implemented do the work of approximately 50 full-time FTEs, augmenting the capabilities and enriching the roles of our talented staff, enabling them to deliver better customer outcomes.

On Slide 8. We continue to see success in delivering multiple services principally to our PBI clients. There has been 20% growth in the past 12 months in clients using multiple services. Currently, 162 clients use 2 service offerings, 15 use 3 service offerings, and 3 use 4 services.

On Slide 9, you can see some of our partnerships we have entered into. This is a growing element of our differentiated service offering to clients.

Turning to Slide 10, you will see a schematic of Smartgroup's journey since IPO. So far this year, we have acquired Mylease and Pay-Plan businesses and initiated a number of partnerships.

Now turning to Slide 11. We continue to consolidate our salary packaging service delivery.

Now let me hand you over to Tim, who will take you through the financial results in more detail.

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Timothy Looi, Smartgroup Corporation Ltd - CFO [3]

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Thank you, Deven. Good morning, everyone.

Turning to Slide 13. As Deven previously mentioned, the first half of CY '19 has seen Smartgroup record steady growth with revenue up 3% to $125.8 million and EBITDA up 4% to $58.8 million. Our financials have a level of noncash nonrecurring amortization from our acquisitions. As such, net profit after tax is not a relevant measure. The most relevant measure for Smartgroup is post-tax profits, is net profit after tax adjusted for the impact of this nonrecurring and noncash amortization, or NPATA. NPATA is up 5% to $40.5 million. The NPATA of $40.5 million excludes several nonoperational and nonrecurring items as they are not representative of our financial performance. A full reconciliation of these adjusted financials to their statutory audited accounts is provided in the appendix to this presentation.

On Slide 14. I'm pleased to report cash flow from operations was $41.7 million. This is 103% of our after-tax profits measured by NPATA. Our strong cash flow conversion is a result of our capital-light business model. Our recurring CapEx remains low at $200,000.

Turning to Slide 15 and our balance sheet. Our cash balance at the end of June stands at $28.2 million with our noncurrent interest-bearing debt at $60.3 million. As the acquisitions undertaken over the last several years have been asset-light businesses, we do not have -- we do have a high level of goodwill and identifiable intangibles on our balance sheet. The noncash amortization charge for the 6 months was approximately $10.4 million.

During the half, we made a special dividend payment of $0.20 per share which equated to approximately $26 million. Net debt for the half stood at $32.5 million, representing 0.3x of EBITDA.

Now I'd like to hand back to Deven for closing remarks.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [4]

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Thank you, Tim.

Before I provide my summary, turning to Slide 17, I thought it's worthy to highlight some of Smartgroup's new and continuing efforts that positively impact the community.

In summary, turning to Slide 18. Despite the slowdown in private new car sales for the first 6 months of 2019 -- sorry, the first 6 months of 2019 marks another period of growth across all key financial and operating metrics.

That concludes our presentation, and I thank you for taking the time to join us this morning. Before handing back to the moderator, I would like to thank all of our team members at Smartgroup for their continuing and considerable efforts.

Now let me hand you back to the moderator and provide you an opportunity to ask Tim and myself any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Phillip Chippindale from Ord Minnett.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [2]

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A couple of questions from me. Firstly, just on Slide 4, where you talk about the Victorian health contracts not being renewed, I understand that department is quite fragmented. So I'm just wondering about what that looks like going forward and your level of confidence about the other Victorian health contracts, so maybe you could just provide a little bit of color around that.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [3]

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Thanks for that question, Phil. Yes, so there was about 12,000 contracts that we weren't able to retain during the period. We have in total 13,000 Victorian health packages remaining. Of the 13,000, one client with 5,000 packages recently renewed for an extended period. And the balance 8,000 within Victorian health represent -- are represented by a number of smaller contracts that come up over the next period of time, none of which are in the current calendar year.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [4]

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Okay. Just in terms of your other revenue streams, could you just talk a little bit about -- you called out, I think, in the Director's Report the cross-selling of products. Could you maybe just give us a little bit more color on that? And I guess I'm also just looking at -- I think it's Slide 10 when you described some of the partnerships that you've entered into over the last 12 months or so. Just wondering if they're providing additional revenue streams for your business as well and maybe, again, just a little bit of color around those partnerships.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [5]

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Sure. So I guess the way to think of it is that the group revenues on an annualized basis are roughly $250 million. Of that, roughly $20 million is represented by the other businesses that we have, fleet management, the gas fleet solutions, payroll, share plan, workforce management setup. So it's plus $20 million. And about 40% of that or $8 million is -- comes -- of that revenue, of that $20 million, 40% of revenue or $8 million comes from salary packaging customers. And so that effectively represents overlapping clients that, as I think about it, when you go back to our IPO in 2014, we had exactly one client buying more than one service from us. And now we have circa $8 million of revenues represented by clients buying multiple services from us. Hopefully, that helps a little bit.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [6]

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Okay. And just finally from me, so volumes you've said on novated were flat versus pcp. When I look at the number of leases in that period versus this period, the average is about 5% higher this time around. So all else being equal, I typically expect volumes would be 5% higher on the back of that. So could you maybe just talk a little bit about why those volumes are sort of flat? Is it there's just less churn in the book at this time around? Or yes, could you just maybe expand on that?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [7]

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Phil, it's a couple of things. Our overall volumes -- as you know, just to kind of recap, the market for private new car sales was down 9% pcp for the half. Our volumes are up 2% versus the 9% down, so effectively a 11% swing versus pcp. So that's been the performance. And I suppose we take a lot of effort to try to do what we can to retain clients. And I think the biggest effort in retaining clients is as regards to providing a good level of service that they'd want to come back for a second and, oftentimes, a third novated lease. But there's nothing -- there's no major initiative but it's a sum of lots of little initiatives principally centered around service and customer deliveries that enabled us to hopefully retain a greater proportion of our clients coming to churn.

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Operator [8]

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The next question comes from Scott Murdoch from Morgans.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [9]

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Just I got a couple of questions, if that's okay. Just interested in any detail that you can give us. If we look at the group revenue uplift, it was primarily driven in the performance fee and rebate line in outsourced admin segment. It's obviously a big uplift not correlated exactly to the volumes you've spoken about. So if you could just help us with a bit of detail of what drove that and if that revenue line item is sustainable or recurring.

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Timothy Looi, Smartgroup Corporation Ltd - CFO [10]

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Thanks, Scott. It's Tim, here. Look, the outsourced administration performance fee and rebates line moved from $9 million compared to $7 million in pcp. The $2 million difference relates to increase in some rebates that we're getting from certain suppliers, right, firstly. And secondly, we do -- we are getting some additional fees from more services that we're selling right to the -- to our carpark. So again, as Deven said, it's not 1 or 2 initiatives that drive this, it's a multitude of initiatives that we're doing to keep -- to drive this overall.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [11]

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Okay. Just interested obviously you have a slide there on how the systems integration is going. Can you just sort of give us a bit more detail on exactly what's left to go in terms of where you want to get to over the next 12 to 18 months with the rationalization program?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [12]

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I suppose -- thanks, Scott, for that question. Yes. So you can see that the most significant integration we've done in the most recent period was the integration of Salary Solutions. They had almost 40,000 packages at acquisition in October '17. And today, that's all been transitioned across to the most fit-for-purpose service delivery. We have now decommissioned 4 systems: Salary Solutions, Aspire, Mylease and also the Fleet West system that had previously been decommissioned. As you can see, the Pay-Plan system is also on the verge of being decommissioned, that acquisition having just been completed a couple of months ago. We want to continue to consolidate the base. Today, 90% of our packages are operated by our 2 core packaging systems, and 75% of our leases are operated by our 2 core leasing systems. And so that's a reasonable level of consolidation, but we wish to continue down that path as safely and as securely as we can.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [13]

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Okay. Well, second would be about the novated leasing environment. Just interested in the package growth. Obviously, ex the contract loss, the actual organic uplift was pretty strong. Just interested in any trends in the book, whether the New South Wales contract that you've won, I think it was at last result, any insight into customer segments or geographies driving that particular strong number.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [14]

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Yes. I think the team works awfully hard to try to drive uptake. One of the things probably going in our favor besides their considerable efforts would be the fact that we are heavily skewed towards sectors that are either growing with population or potentially somewhat stronger such as the NDIS and aged care sectors. And so these are growing sectors, stable sectors within the Australian workforce. And so I think a bit of the growth comes from the tailwind impact of some of these sectors.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [15]

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Okay. Just the last one from me. Obviously, you gave a novated lease yield update to the end of May down 2%. No update for June in here. But just interested in how that looks at the moment. Is the current level of yield sustainable, or is there some upward or downward pressure from here based on what we know around warranties and everything else?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [16]

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As you know, Scott, we stay focused on past outcomes. And we advised at the end of May that our yields were down 2% versus Q4 2018 which we took as our benchmark. As we finished through to the end of June, our yield for H2 2019 are still down 2% versus Q4 2018.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [17]

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Okay. And just -- sorry, the second part of that, I guess, I know you don't give forward-looking statements, but just the comfort level on the prices that we've seen to create that 2% contraction are fully fleshed through, or is there a bit more to come?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [18]

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Well, maybe I'll give you some -- I'll answer that with some data that is -- Tim and I think about. And that is the extended warranty, 5-year extended warranty started being phased in through the course of -- mainly through the course of the second half of 2018. I think many of the major manufacturers like Mazda and Holden and Ford before them starting introducing 5-year extended warranties. And then Toyota, Subaru, VW all introduced 5-year extended warranties as standard for their vehicles on the 1st of January 2019. And so to the extent that we cross over that period -- we cover that period in total, then you won't see any further impact, I would have thought.

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Operator [19]

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The next question comes from Paul Buys from Crédit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [20]

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Just a couple of quick ones from me. Just part of this has been touched on, but just to the extent that you gave some updates to the market by conferences and such like in May, just interested to know how the business has tracked specifically on the novated leasing side, just focusing on the months of June and July and just to get a bit of color around how it's tracked in those months specifically.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [21]

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So we won't give you any commentary on July just to say backward focused for the reporting period. But we're pleased that June and May in total, I think long-term investors know that May, June 2018 were record months for us. And certainly, there was a lot of concern as to whether we can repeat that performance in May, June 2019. And pleasingly, in aggregate, May, June 2019 was as strong as May, June 2018 with regards to volumes. So that was good. In reference to your comment on July, I guess I'll just throw out a market number. And I think private new car sales for July 2019 were down, I think it was 2.8% versus pcp, so that was the slowest drop -- the smallest drop we've seen in a while. So I think it's -- that's just a market commentary, nothing to do with Smartgroup per se.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [22]

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Okay. And then just in -- back on those kind of Vic health contract is not renewed, which I think has obviously been covered in a bit of detail, but just want to get an understanding. So you obviously -- you spoke about the pricing point below which you wouldn't go, just wanted to get a sense I suppose of pricing on retained and new business as it relates -- or as this kind of compares to those contracts not renewed.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [23]

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Yes. Maybe just -- again, just without talking to any particular contracts, I think it wouldn't come as a great surprise that larger contracts tend to be priced at sharper price points than smaller contracts. And in the current period, as per the footnote on the bottom half of Page 5, we've noted that in -- the growth in the current period -- sorry, the bottom half of Page 4, we've noted that growth in the current period does not include any large contracts. In fact, a lot of the growth is within that PBI nonhospital sector, as I had previously mentioned.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [24]

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Okay. And the last one from me, just -- and again, there've been a few slides sort of highlighting this. But just looking at efficiency, which you guys continue to deliver efficiency gains, just looking on slide -- on Page 2, just with the kind of headline FTEs which has continued to come down and obviously come down against revenue on a per-dollar revenue basis as well, just keen to know if you can see further improvements in the FTE number on a go-forward basis.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [25]

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I guess we've -- again, not to provide any sort of guidance as such, one thing we can point you to is data that we have already provided and continue to provide, and that's on Page 7. You can see that our online uptake of our channels, this time, we represented all of Smartgroup rather than just Smartsalary. And so you'll notice that some of those graphs have actually checked down a little bit because some of our -- ticked down a little bit because some of our acquired businesses don't have the online uptick levels of Smartsalary. And so that's -- on the left-hand side, it's for the entire group. It does look like there's a ways to go. We have no idea how that will track going forward.

The other thing we did mention was our RPA program that began 3.5, almost 4 years ago now, that we now have -- as of period end, we had 44 robots that do the work of 50 FTEs. This really enables us to deliver -- our valued and talented staff to deliver better customer outcomes, just focusing more on exceptions and more on driving customer value rather than these repetitive process that -- processes that the robots take care of quite ably.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [26]

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And just to confirm, the 703 FTEs as of 30 June, that you've got the little footnote that said that includes the 2 recent Mylease and Pay-Plan acquisitions. Is it fair to say that you wouldn't really have applied any, at this stage, sort of major integration in terms of any potential employee count reduction to those businesses, yes?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [27]

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Well, as at period-end 30 June, that certainly would be correct in that, that we applied to 703. Actually, these are relatively small businesses, so we'll see how we go.

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Operator [28]

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The next question comes from Ross Barrows from Citigroup.

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Ross Barrows, Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst [29]

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Just a quick comment, I guess, on the organic growth. It seems to be very, very strong in packages, which seems like a great outcome. But just on the contract that was lost and not to revisit it too much, but 2 quick questions. One, can you just confirm was that lost at renewal, or was it actually mid contract?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [30]

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Both contracts that were lost were lost at renewal.

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Ross Barrows, Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst [31]

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Renewal, yes. Okay. And just the other question, could you talk a little bit about, I guess, how we think about pricing intensity in the market. Obviously, if someone competed fairly heavily on price or -- and/or other elements, I guess, to win those contracts, do you think it is indicative of future pricing pressures or more of a one-off either in Victoria or in other regions?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [32]

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Yes. I think that's right. The 2 contracts were both in Victorian health. What we find through the balance of our contract portfolio is that clients are much -- are quite focused on value for money. You have to be competitive. The value for money is very important. There are different dynamics in play in different sectors. And as a consequence of that, we've struggled a little bit in Victoria.

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Ross Barrows, Citigroup Inc, Research Division - Head of Emerging Growth Research, Director and Emerging Growth Analyst [33]

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And could you make any comments just around, I guess, the pricing competition generally outside of that specific observation?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [34]

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No. I think we'll let the -- again, who knows what the future periods will bring. But we've lost only 3 contracts since our IPO and 4 contracts of any size was of any significance whatsoever going back to 1999. And the 3 contracts we lost since our IPO were all Victorian health contracts. So maybe we just like to touch wood, but we'll see how we go going forward. But I think that we'll just let the record sort of stand for itself.

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Operator [35]

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(Operator Instructions) The next question comes from Scott Hudson from MST Marquee.

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

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Just a couple of quick questions. Are there any other material contracts up for renewal within the next 6 to 12 months?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [37]

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Yes. So I guess I'll cover up that. Thanks, Scott. We had previously announced that our largest and second largest contracts were renewed to '21 and '22. And now our third largest contracts, which represents 3% of group revenue, just under 3% actually, has been secured until 2022. As you know, Scott, the contracts are for the 3 to 5 years in duration and so you can expect 25% of them to come for renewal every year thereabouts.

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

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But your top 3 only represent 3% of revenue?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [39]

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The #3 represents 3% of revenue. The top 1 is probably still high single digits.

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

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Yes. Okay. Perfect. And then just in relation to Page 9, those sort of new partnerships, could you maybe give us sort of how the economics work on some of those partnerships? Or was it just sort of -- yes, just how the economics work on some of those partnerships?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [41]

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Sure, yes. So I suppose I'll touch upon EML initially. EML is essentially replacement revenue for the Westpac contract we had. I suppose we're pleased with it because we are now able to offer a better solution at equal economics for ourselves, and our clients would be very happy with the EML solution. So that's good news.

As regards to all the other offers, they either are just launched or recently launched and relatively small revenues associated with them or are yet to be launched. So these are really sort of future -- in future years, they may start to provide some significant revenue. But the main reason for us -- for our launch of these services is to provide more value to our employer clients and employee customers from differentiated offerings that they may not be able to get elsewhere in the marketplace.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [42]

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And lastly, I guess in relation to adjacent acquisitions, are you sort of shelving that to some extent? Or are you more focused on these new partnerships going forward?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [43]

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No. I mean we're always open to good opportunities. It just so happened in the recent period, the best opportunities that came to the floor were 1 or 2 of these partnerships. Of course, in the recent period, we also completed 2 small core acquisitions. So as opportunities present themselves, we'll continue to review them on their merit.

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Operator [44]

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The next question comes from Andrew Swaffer from Taylor Collison.

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Andrew Swaffer;Taylor Collison Limited;Portfolio Manager;Analyst, [45]

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Just in relation to the current provisions, they were steady on 31 December. In terms of the underlying breakdown, can we assume that employee benefits have been roughly the same or sort of the all components have been roughly the same to deliver basically the same level of provisioning?

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [46]

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Andrew, listen, the all components, they remain relatively same, right? There's no material shift in provisioning from June to December.

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Operator [47]

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Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Billimoria for closing remarks.

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Deven Billimoria, Smartgroup Corporation Ltd - MD, CEO & Director [48]

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Thank you, everyone, for your continued interest in the company. We look forward to seeing many of you in the coming period. Thanks so much.

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Operator [49]

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Thank you. That does conclude our conference today. Thank you for your participation.