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Edited Transcript of VTG.AX earnings conference call or presentation 22-Aug-19 11:00pm GMT

Full Year 2019 Vita Group Ltd Earnings Call

Queensland Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Vita Group Ltd earnings conference call or presentation Thursday, August 22, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Leyden

Vita Group Limited - CFO

* Maxine Joan Horne

Vita Group Limited - Co-Founder, CEO, MD & Executive Director

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Conference Call Participants

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* Shane Bannan

Bligh Capital Pty Ltd, Research Division - Head of Research

* Warren A. Jeffries

Canaccord Genuity Corp., Research Division - Senior 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 Vita Group FY '19 results announcement. (Operator Instructions)

I would now like to hand the conference over to Ms. Maxine Horne, Vita Group's Chief Executive Officer. Please go ahead.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [2]

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Thank you. Good morning, everyone, and thank you for joining us today for Vita Group's FY '19 full year results announcement. I'm Maxine Horne, the CEO of the Vita Group. And with me today as always is our CFO, Andrew Leyden.

Let's start with the FY '19 headlines on Slide 2. We achieved record revenues of almost $754 million off the back of another strong result in the ICT division. We also began to see our skin health and wellness division increasing its revenue contribution to the group. We delivered an EBITDA of $45.8 million for the 12-month period, which was 12% ahead of last year. This result is due to a strong performance from retail ICT, which includes our accessories brand, Sprout. I'm also pleased to say we have continued to see efficient cash conversion, enabling us to finish the year with no net debt, meaning that we have the opportunity to invest in our future growth.

Moving on to Slide 3 and looking at our 2 key channels. In FY '19, we saw our ICT division maintain momentum and deliver a great result yet again. The retail part of this channel led the way. The success here can be attributed to the team's focus on planned value, hardware, add-ons and accessories. At the support level, we continue to provide coaching, development, systems and processes, that enable the sales team to hone their consultative selling skills and in turn maximize their individual performance.

With regards to our skin health and wellness division, which we used to refer to as non-invasive medical aesthetics, or NIMA for short, we have made significant progress here, establishing a platform for growth as we work towards securing our long-term target of 70 to 90 premium clinics nationally. In the last 12 months, we've acquired 5 new clinics, opened 3 greenfield clinics, acquired Face Academy, which is a training organization as well as a medical proprietary software solution called Cosmedcloud. We also undertook the rebranding and refitting of our existing clinics. We did this to establish the brand of Artisan in the marketplace.

In addition to creating operations, education, and training structures, we have also established a strong governance model to our medical board. All of this not only befits our premium brand, but it is necessary when scaling the business.

While focusing on executing on strategy, we have finished FY '19 in a position that sees us well-placed for continued growth. And with that, I will pass on to Andrew, who will take you through the details.

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Andrew Leyden, Vita Group Limited - CFO [3]

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Thanks, Maxine, and good morning, everyone. In financial year '19, as well as presenting the financial statements, for the first time in a while, we will provide segmental information to assist in providing a better understanding of our businesses.

Our ICT business is a mature, profitable and cash-generative business whilst our skin health and wellness division is a young business poised to grow at pace. These businesses have different trajectories and operating characteristics, and accordingly, we felt it would benefit readers of our results to break these segments out.

Also in financial year '20, we will be adopting the new leasing standard, AASB 16, which affects all businesses using leased assets. Later in this presentation, we will share our estimates of the impact that adoption will have on our financial statements. But first, let's look at the group income statement for financial year '19 on Slide 4.

As you heard from Maxine, financial year '19 was yet another record revenue year. The group delivered $753.7 million, up 10% on the prior year. The highlight was the performance of the ICT business and in particular, the retail ICT division, which performed very strongly. In addition, the skin health and wellness division made a meaningful contribution to revenues as we added more scale to the clinic network. More on these segments later.

Gross profit was a little under $230 million, up 9%, as a result of revenue growth. The gross margin rate was slightly lower, but only as a result of the success we enjoyed growing device revenues, and in particular, smartphones and tablets, which carry lower margin rates.

Operating costs grew at significantly lower rates than revenues, up only 8%. The increase in operating spend was due to the investment made in supporting and rewarding our sales team for delivering strong results, inflationary awards, and also the cost of building and operating the medical infrastructure in our skin health and wellness division. So the core costs were flat, and overall productivity increased during the year.

As a result of revenue growth and productivity improvements, EBITDA increased 12% to $45.8 million, which sits very comfortably within the guidance range we provided to the market in June. Further down the P&L, EBIT and net profit after-tax were up 12% and 10%, respectively.

As a result of these solid earnings, the share of just over 15%, I'm pleased to announce another solid dividend for financial year '19. The Vita Board has approved a final dividend of just under $15 million, up 4% on the prior year at $0.092 per share. The recorded payment dates for the next dividend have been included in our ASX release and financial statements also issued to the market today. As always, the dividend payments will be fully franked.

Moving on to our first segmented income statement on Slide 5, our ICT division. The ICT division enjoyed a very positive year of trading. Revenues were a touch under $740 million, up 9% on the prior corresponding period. Most notably, ICT retail revenues grew 17% as a result of exceptional performance in what is a challenging market. The team delivered higher planned values and growth in hardware and adjacencies such as accessories, which includes our own proprietary brand, Sprout.

Business ICT revenues were lower in the period, down 42% as a result of several changes in the structure of that channel. These changes included the migration of small business customers into retail, which positively impacted the retail results and also changes in the size and nature of the business territories we operate in and the businesses that we serve in the channel. This segment remains in transition and we expect further evolution as these changes are embedded. However, retail ICT is the business that shapes our overall ICT results, and this business delivered outstanding outcomes in the year.

Gross profit grew 6% to $219.6 million as a result of the revenue growth we just alluded to. The gross margin rate was slightly lower, but only as a result of the success we had selling handsets, and that's a relatively nice problem to have. Operating costs grew were well below the rates of revenue growth at only 2.3%.

Whilst we spent more on rewarding our sales team for great results, the division delivered material improvements in productivity. As a result of revenue growth and productivity gains, EBITDA for the ICT division grew 13% to $79.3 million, a very strong result, thanks to the energy and the hard work and commitment of the whole ICT team and the quality and collaboration between the Vita and Telstra teams.

Just for noting, you will notice that our points of presence appear to be well down on the prior year, reducing from 128 to 107 points. This reflects some of the changes we referred to earlier as part of the transformation of the business ICT channel. These changes saw us closing our TBC network and establishing new format, Telstra Business Technology Centres, which reside in larger territories. The overall capacity of the retail store network was materially unchanged, but we did increase our productivity across the network.

Now on to Slide 6, the skin health and wellness segment, a business with significant value potential. Revenues grew 111% to $13.7 million in what is still a very young business. The clinic network was expanded to 13 as a result of acquisitions and greenfield additions, net of some clinic consolidations. Gross margins are high in this segment, which is one of the reasons why we entered the category, amongst others. $1 of revenue in this segment is worth more in profit terms comparatively than $1 of revenue in ICT. Gross margins was 71% in the period, marginally ahead of the prior year.

We made significant investments in the skin health and wellness business in the year. The Artisan Aesthetic Clinics brand was launched and rolled out in greenfield locations. Also, a number of existing clinics were closed for a period of time and rebranded in the second half of the year. Operating and medical structures were established, including the medical board, responsible for ensuring the highest standards of medical governance. In addition, we acquired a medical training business, Face Academy, and an industry-leading software platform, which we continue to invest in, to enable the best possible in-clinic experience for our clients.

As you will have seen from the group results, the net impact of these investments was absorbed in a very strong group result in financial year '19. While the segment recorded a loss of $3.7 million, the investments made provide a very strong platform for revenue and profit growth in financial year '20 and beyond.

Now on to the balance sheet on Slide 7. The Vita Group balance sheet remains in great shape and offers us significant investment flexibility. The cash balances were $26.7 million at the end of the period as a result of good cash generation and a balanced approach to investments, shareholder distribution and debt servicing. Current and noncurrent assets were up $20.1 million over last year. Inventory grew $5.1 million in support of revenue growth in both the ICT and skin health and wellness segments. In relative terms, inventory holdings remain low.

Intangible assets grew $6.1 million as a result of clinic acquisitions and capability investments in training and technology. Plant and equipment grew $9.3 million as the group invested in greenfield clinics and rebranded a number of other clinics in the network.

Current liabilities were up, with payables increasing $14.4 million as a result of higher investment in higher-priced devices than ICT, and consumables in the skin health and wellness segment. This was offset by lower noncurrent debt, which was reduced by $2.9 million, with bank debt being repaid during the year.

Noncurrent liabilities reduced by $3.6 million also as a result of bank debt being repaid. All in all, the group continues to enjoy a healthy treasury position, with no net debt overall, healthy cash balances and only modest bank borrowings.

Net cash was $18.1 million at the end of the period. This leaves the group with investment flexibility and good access to both the debt and equity markets to support our growth aspirations.

Now let's move on to Slide 8, the cash flow statement. Operating cash flows after-tax were $38.7 million, ahead of prior year, as a result of the solid profits cash generation that we've seen this year and tight working capital management in the year. Investing cash flows were an outflow of $23.7 million. $7.3 million was spent on skin health and wellness acquisitions, with the same amount again spent on Artisan-branded greenfield clinics and conversions.

$4.2 million was invested in new format Telstra stores and store expansion, whilst $5.5 million was spent on technology and equipment. $600,000 was realized from asset sales from the ICT network. Financing cash flows were $19.9 million, with $13.4 million representing dividend payments, net of normal dividend reinvestment proceeds, and $6.5 million spent repaying bank debt. Closing cash balances remain very healthy at $26.7 million at the end of the period. Now as I mentioned earlier, Vita will be adopting AASB 16, the new leasing standard from financial year '20.

Slide 9 outlines the pro forma impact on group financial statements from next year. Vita will adopt the modified retrospective approach to the standard, which basically means that financial year '19 comparatives will not be restated. Adoption will result in the following estimated impacts to the balance sheet. Firstly, Vita will bring into the balance sheet a fair value of the leased assets it uses, known as right of use assets, and we estimate that this will inflate assets by $38 million to $40 million.

Secondly, the present value of future lease payments will be brought on to the balance sheet, resulting in an estimated increase to liabilities of between $40 million and $42 million. The difference between the asset and liability adjustments will be taken to retained earnings, and this impact will be a reduction of between $0 million and $4 million.

As a result of the recognition of new assets and liabilities, the income statement will also be affected. From the 1st of July, 2019, Vita will begin depreciating leased assets and will recognize interest on leased liabilities over the term of the lease. As a result, we estimate that in financial year '20, EBIT will increase by between $0 million and $2 million. Net profit after-tax will reduce by between $0 million and $2 million as a result of additional interest charged. Cash flows and debt covenants will remain unaffected. Any updates to our estimates, which can move as our lease portfolio changes, will be communicated as we progress through the year.

So all in all, financial year '19 was a year of record revenues, solid profit growth, investment in progressing strategic growth opportunities, and the retention of flexible funding options.

And with that, I'll hand back to Maxine.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [4]

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Thanks, Andrew. For those of you who are following us, we're on Slide 10. Here, you can see the strategy house, which we use to articulate our goals for FY '20 and beyond. Our vision, as always is, to make Vita Group a great place to be, whether you be a team member, customer or client, partner or supplier or indeed, a shareholder. As a group, we focus on creating value for our customers and clients through the delivery of expert consulting as we truly believe that people don't buy on price, they buy on value. We do this across all of our brands since we know this is what differentiates us from our competitors and ultimately allows us to build sustainable, profitable businesses.

The other great asset that we have as an organization is our ability to execute because after all, you can have the best strategy in the world but unless you can execute it, it's worthless.

Let's take a look at the ICT lookout -- outlook, sorry, for FY '20 on Slide 11. Our partnership with Telstra remains strong and aligned. Telstra's recent introduction of casual, no lock-in plans enables us to provide simpler solutions for our customers and to capitalize on the economic gains that come from the sales of devices, accessories and other in-home add-ons.

As we disclosed to the market in June 2019, as part of negotiations with Telstra, Vita agreed to forgo some legacy remuneration components amounting to approximately $12 million to $13 million per annum. This is in exchange for an extension of tenure currently to the 30th of June, 2024, an annual performance-based extension mechanism, and an increase in the number of our stores out to 115.

We plan to address the removal of this bespoke remuneration with higher sales of hardware, accessories and other add-ons, coupled with higher levels of productivity, and of course, the optimization of our physical network. We've also seen the opportunity to create greater value from our own in-house accessories brand, Sprout. We will, of course, continue to deliver product innovation in this area.

When it comes to consulting, our focus is relentless. We know that this sets us apart from our competitors. Our focus on this will not change. We will continue to support our team members with proprietary tools and processes as well as coaching and developing to improve the organization's consultative selling capabilities even further.

The [present] business ICT channel is continuing to evolve in line with Telstra's strategy. It is a continued delivery of revenue from retail ICT division that allows us to develop our emerging brands, in particular, our skin health and wellness brand Artisan, which takes me to Slide 12.

As I mentioned earlier, throughout FY '19, we made significant investments in organizational capability, and as a result, we are well-placed to reach our target of 25 to 30 clinics by the end of this financial year. We have a healthy pipeline of opportunities and now that the infrastructure is established, we expect to see a higher incremental return on investment, especially as our portfolio expands.

As always, at the heart of all Vita brands is a focus on the customer, or in Artisan's case, the client, on their needs and their way of life. This division is no different from any other at Vita in that we will apply our proven operating disciplines and proprietary tools, which enable us to measure, monitor and reward success. This in turn drives performance and productivity.

This is an ongoing process as we've scaled the business. Running 1 clinic is very different to running 30, 50 or indeed 90 clinics. And every stage, we must ensure we have systems and processes which allow us to scale effectively, whilst maintaining the consistency and high levels of service expected from a premium brand such as Artisan.

Our track record on operational execution, combined with the best medical and clinical expertise, I believe, puts us in a unique position to disrupt and consolidate the premium end of this very fragmented category. We are well on our way to bringing the Artisan brand to life at a national level, delivering scale and driving profitability.

So to summarize, on Slide 13, our ICT division continues to create significant value, contributing strong revenues, profit and cash flow to the business. Our skin health and wellness division, now has the infrastructure in place to allow us to drive scale and profitability. As we expand, we will continue to apply our core competencies from ICT, which will maximize performance. These core competencies are well supported by the Vita team who continue to deliver time and time again.

And lastly, we have a strong and flexible balance sheet that enables us to invest in growing our business. In summary, I'd say our strategy is on track.

Before I hand over to questions, I would as always, like to thank each and every one of our Vita peeps. We've just come out of our annual conference where we get all of our leaders together to celebrate the year that's been and to plan for the year ahead. Every year, I'm amazed, overwhelmed and truly thankful to be surrounded by a group of highly talented, dedicated individuals that not only live and breathe our values but are extremely committed to achieving our vision of making Vita a great place to be.

We have a business that's agile, it's robust and flexible. Our team is extremely capable, it's driven, prides itself on doing the right thing, and importantly, can execute the hell out of absolutely anything. What a great position for a CEO to be in. I feel very privileged, and for that, Vita peeps, I thank you all. I'd also like to take this opportunity to thank our shareholders for their continued support.

And with that, I'll open for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Shane Bannan with Bligh Capital Securities.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [2]

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Can I just -- one question. Perhaps, I'd just like to understand, if we look to the skin health and wellness sector, and I appreciate you've been doing a lot of investment in there and that's been reflected in the negative EBITDA. But if we actually look at it as a standalone business, if we neutralize that investment as we sit at the present point in time, would that -- what would the numbers look like? In other words, how much have you plowed into the exercise of restructuring and rightsizing the whole business?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [3]

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Well, do you want to -- I think we mentioned that in the...

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Andrew Leyden, Vita Group Limited - CFO [4]

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Yes. So Shane, hi. Nice to talk again. Yes. So it's hard to say -- it's hard to represent a normalization of the business that's so young. What I can say though is that across our network, we do have some clinics that are obviously more mature than others. And we're starting to get an understanding of what we think the potential of a mature productive clinic can be.

And we think that a mature productive clinic can generate $2 million to $3 million of revenue and in turn an EBITDA margin of somewhere between 24 and 30 points. And our intention, obviously, is to get as many of our clinics as possible to that level of performance. So that should give you a sense for what we think the potential of this business is.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [5]

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I would add, though, it's a little bit like yesterday with Fone Zone. When we first started, you're growing the business, your average -- you spend a lot of little time setting up the infrastructure, getting the processes and the disciplines in place, and then you get to the point where you can really focus on tweaking the input that drives the outcome, and you would've seen that with the moving to the likes of the Telstra channel.

When we first started talking to the community, I think we would've said our average EBITDA per clinic would have been around $250,000 EBITDA, and clearly today, it's a lot more than that because we've been able to focus on those. So it is a building process. It's a 3- to 5-year plan. But we see the opportunity will we -- are we going to get there tomorrow? No, but it is definitely accessible. And what's very pleasing is the revenue generation. And obviously, the maintaining the high [growth] margin.

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Andrew Leyden, Vita Group Limited - CFO [6]

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Yes, I agree with you Maxine. It's like a day in the life from 5 years ago. It's -- if you think about the business that we're building here, Shane, clearly, scale plays a role. We've invested in the infrastructure that we've outlined in this presentation and that investment is now made. We will add to that infrastructure over time. But the majority of that investment is now made and provides foundation for us to build upon. So when we add clinics to the network, they will deliver incremental contribution, and that will pretty much flow down to the bottom line.

So it's a necessary thing to do to invest in new business, to put the foundation in place. We've got our operational structures in place, our medical infrastructure, the medical board is fully functioning, and basically, we've got that solid foundation now on which to build.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [7]

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The other thing that I would point out, Shane, is that particularly in a market that's so fragmented at that premium end, it was really, really important to establish a brand. You couldn't just buy up a number of clinics and let them continue to trend on the old brand. So it's really important there. And also, our expansion is a combination of greenfield and acquisitions.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [8]

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Yes. I appreciate the dynamic you're describing. I just wanted to understand what the metrics would look like. And I truly appreciate also they'll improve over time as you leverage the infrastructure you're putting in place.

But -- and from what you're saying, each of these clinics, when we put -- now as we think the dynamic forward, we're talking about sort of $2 million to $3 million in revenue and maybe an EBITDA of [despite of that], 20% in round figures.

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Andrew Leyden, Vita Group Limited - CFO [9]

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Yes. Sort of mid-20s to 30%, yes.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [10]

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Right. Okay. Could I also ask the shrinkages of points of presence with respect to the Telstra situation has gone from 128 to 107. I think if I recollect correctly, out of the new arrangement with Telstra, you were going to sort of build that back out to 115. So that presumably is going to be in train and we should start seeing the thin edge of the wedge of that in the current year?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [11]

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We do have the opportunity to grow to 115. As I said in the presentation, Shane, we will look to optimize the footprint. But again, we'll be very selective in making sure that it's right for our current infrastructure. We don't want to add more, I guess, expense into the infrastructure. But we have also identified, as always, through our scaled network, because it varies across the network. So it's a combination of addressing that variance, but then also there will be additional opportunities in the Telstra footprint.

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Andrew Leyden, Vita Group Limited - CFO [12]

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Yes. I think you'll see us nibble our way upwards, Shane, at the number of stores. And we executed a few transactions in the last few months. So yes, we'll probably slightly add to the portfolio. We are doing store enlargements and also consolidations of stores in similar locations. So whilst the retail numbers look relatively static, there's a lot of work going on to improve the quality of the portfolio underneath.

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Operator [13]

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(Operator Instructions) Your next question comes from Warren Jeffries with Canaccord Genuity.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [14]

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Guys, just looking at the ICT business and the growth in that this year and mindful of the commission cuts this year of $12 million to $13 million, it's too simplistic to look at what you've achieved last year and say, well, you've effectively grown your gross profit by about $12 million of, which 75% of that -- I mean, 36% of that converts down to your EBITDA number. Are you able to sort of replicate or do you have the capacity to replicate that sort of growth in the absence of those commission cuts? And if so, does that sort of give us a feel that there is a capacity here to at least hold a flat number going into '20?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [15]

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That's absolutely our intent. Yes. We've identified the areas of opportunity and that the operations team have done a great job in preparing for the change of plans. We started working on that back in the last March, and we've literally starting to see that happen. So yes, that's absolutely intent to continue to identify the variance across the network, the areas of opportunity, and benchmark best practice.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [16]

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And how is that playing out year-to-date? I mean, we're only a month or 2 of the financial year, but you've probably got a reasonable sample of -- you were managing to offset this, or is it that's still a work in progress?

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Andrew Leyden, Vita Group Limited - CFO [17]

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Well, the things that we said about where our value would be created and where our value would erode is exactly what we're seeing in the market. So we are seeing more valuing devices and we're selling more devices. We're selling -- we're seeing value in the broader ecosystem of products and services. So we're focused on that. There's a little less in connectivity as we've predicted. So the overall trends that we're seeing are pretty much coming to fruition. We're performing reasonably strongly, but there's a long way to go. We're literally just a few weeks in with the new plans. So too early to say what the net impact of all that is, but we did put in a lot of planning and preparation for all the change. And I think that's paying off. But there's a long way to go.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [18]

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And how much of that's going to be absorbed by further growth in the Sprout? I mean that revenue number's exceptional, and it's high-margin, high-profitability. Does that give you another lever to offset this?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [19]

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It's one of the levers, yes.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [20]

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Andrew, just finally, on the new division, can we get a sense of what that $13.7 million might look like on an annualized basis? Andrew, I know there's 3 or 4 or 5 new stores in there that are going to slowly ramp up. But how would that look on an annualized exit rate for '19?

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Andrew Leyden, Vita Group Limited - CFO [21]

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Yes. I can't give you a number right now, Warren. I will work to provide that. But obviously, we can have another chat in the Roadshow after this. But it's not just the additions to the network. We've rebranded, we've closed. We've moved some locations as well. And so there's a bit of work to do there to give you an annualized position. So -- but we will attempt to do that as we get to the Roadshow. But even our '20 numbers have changed again. So there's a lot of movement, there's a lot of moving parts. But to the extent we can provide you with a bit of clarity around annualized outcomes, we will.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [22]

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Yes. And what might that mix of growth, if you get -- you say, 25, get to the bottoming of that, that 25 by the end of '20, is there an idea on greenfields into '20? Is it a sort of do at least 5 a year and the rest will be acquisitions?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [23]

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Yes. Look, it's an interesting category because it's very, very fragmented and it's -- you would almost term it a cottage industry. So there's lots and lots of little small businesses. So part of the process and what we're finding is that no one quite has the brand and the look and feel of the clinics that we're producing. So it's highly likely that they'll be -- it's probably 50-50 greenfields. But even without greenfields, you'll probably have some small businesses within the territory that would potentially close down and roll into an Artisan clinic. Does that make sense?

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [24]

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That does. Yes. Yes.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [25]

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Yes. The market itself is consolidating. And look, it's very, very similar to the telco industry 25 years ago with high gross margins, lesser products and treatments coming down the pipeline. The broad -- the appeal of the treatments is broadening. It's highly fragmented. It's ripe for consolidation. That premium position is available to scale and most importantly for us, it's the ability for us to [under] our own brand. So it literally is like yesterday all over again.

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Warren A. Jeffries, Canaccord Genuity Corp., Research Division - Senior Analyst [26]

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Yes. Are you seeing other groups or private equity try and play in that upper end space? Because it slides down the chain a bit.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [27]

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Yes. There's a couple, Warren. But I think that the biggest thing that we have in our -- to our advantage is our ability to execute. And as you would have heard in my discussions, I'm very big on that, because if you can't execute it, then it's -- you might as well just keep talking about it.

And it's very, very different. It's very hard and it's very easy to sit and do a bit of a laptop analysis on how you can grow a business. But when the rubber hits the road and you actually get down to do it, it's hard to just run one business, let alone scale a business. And it's your consistency and high levels of service. So I think it's too hard for them to be honest.

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Andrew Leyden, Vita Group Limited - CFO [28]

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Yes, Warren, the -- if you -- I think it's too simplistic to say that Vita is only really operating at what we call the value end of the market. It's still very profitable of course. But it is genuinely more repeatable -- the model is more repeatable at the more value-oriented parts into the market. It's all about -- the premium market is all about intimacy, and difference, and locality. And therefore, it does become harder to execute on. And it's even more fragmented in the premium end of the market than it is in the value end.

So yes, as Maxine says, it's a lot harder to do, and you've got to be prepared for the hard yards that are involved in scaling. So it's a little more complex and it takes a bit longer. And probably for that reason, it suits us.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [29]

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Yes. And that's also the other way -- reason why I announced this very clear that this is a long-term strategy. This is like going back to when we moved from Fun Zone to Telstra. It wasn't an overnight process, and I remember the first 2, 3 years, the market just sat and watched what we were doing, waiting for us to show that we could actually execute it. This is the same thing. Of course, now you believe that we can do it.

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Operator [30]

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(Operator Instructions) Your next question comes from [Michael Montisof], a private investor.

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Unidentified Participant, [31]

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My question also relates to the skin health and wellness group. If you had the opportunity, I suppose, firstly, to acquire a business. And so you've had, I'm not sure how long it's been, 1 or 2 years, of running those businesses. And also, you've had the opportunity to run a greenfield for some period of time. I'm wondering if you could expand a little bit on those 2 journeys, the differences? And in particular, I'm sort of interested in the ramp-up, for example, for new -- for the new greenfield store, let's say, what's your ramp-up time looking like for customers getting to where you want to be for that particular store? What's been the experience? And what do you expect?

And the same sort of question with the existing stores. So what's your client retention like? What's your client mix change like? And how's that changed -- how has that been executed over the period you've owned those new stores? And what does that tell us about any brownfield acquisitions that are coming out?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [32]

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Okay. So maybe if I -- I'll potentially address the differences, and then explain how we are addressing them. So when you buy an existing business, particularly at the high end of the premium level in this category, they tend to be a small business. So the first thing that we're doing is coming in and obviously putting in a whole (inaudible) of disciplines that we need in order to scale the business.

There are some ways of working that don't necessarily work with corporate entities. So we have to make those changes. So really, it's a big change management piece as opposed to growing a brand. When we first took over a number of -- acquired a number of business, we've spent a good 6 months understanding the business, how it worked, where it got its revenue, operator's theory, et cetera, and then started to make our changes then. We started to put the disciplines in. Like for example, you've hit the nail on the head, rebooking KPIs, average business value KPIs, new clients, et cetera.

And then we just made the decision to rebrand because it's very clear to us that we needed to have our own brand. But the brand of Artisan has actually only been going since last November. So what's there, it's probably about 8, 9 months now. So they have a benefit, obviously, with the increased revenue. When you acquire a business, you've got the established revenue base and the established customer base.

The piece of work there really is about changing the ways of working, and also getting the team to understand what we have to do in order to enable you to scale a business. We've been very pleased to say that our client retention, since we've put in some KPIs, have started to increase. So we have an internal target of maintaining 85% of the database. And I can say that we are on track to do that. So we're very pleased about that.

And now to around making sure that we have -- we're selling all of our treatments and all of our products to our database. Not every single client will take them all, but it's very clear to me that the way your skin operates and the way that we age as human beings, that we all should be having at least 3 or 4 different treatments a year.

So those are some of the focuses that we have on existing business. So I guess in summary, the thing that we bring to a brownfield really is our discipline and our ways of working and our ability to absolutely measure and monitor a business and really drive its productivity.

From a greenfield perspective, the reason we've decided that we do need to do some greenfields is that there aren't any -- there aren't a lot of clinics that have the holistic approach to skin that we're wanting to adopt. For us, it's about the reason the channel is medically led is because we think it's really important that people understand that some of the procedures that we're having today, our -- they're virtually operations. And so it's really important that they're controlled, which is why we have a doctor-led model. We also have nurses in all of our clinics, and we have really highly qualified dermal therapists.

And the reason we have the 3 different skill set is because depending on where you are, your lifetime with your skin, you need different things. And we want to have a very holistic approach because we want our clients not coming to us just once a year, we want them coming monthly for facials and fortnightly for something else, and quarterly for their injectables, and once a year for their high-end [thread lift] or their high-end laser treatment. So it really is a very holistic approach.

A greenfield from scratch to, I guess, breakeven, we're estimating at about an 18- to 24-month period. But we have found ways of how we speed that up, and that is, I've mentioned it before to Warren, where within the locality, you might have smaller businesses where you potentially have got a clinician who's supported by another clinician and an admin person, and essentially it's a small -- a very small clinic. We would approach them and ask them to move into our clinic, bring in their database and shut their business down. And then that seemed to be working very well for us. So we are consolidating the industry, but not necessarily by buying a branded business. More along buying the assets of a business. Does that make sense?

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Unidentified Participant, [33]

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Yes. It does. Just if I could perhaps dig into that a little bit. Of your original acquisitions, I think Clear Complexions, I think, or something like that, was one of them. What's been your retention rate of the key staff in those businesses?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [34]

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It's fair to say that a number of the staff have left us, predominantly because they kind of like small business feel. And as much as we're not traditional corporate, we do have our obligations as a corporate entity, and we have to make sure that we do things the right way.

And it's an interesting, I guess, challenge that we have when we bring existing standards into the business or people that have established a business, it's taking them along the journey for them to understand, when you take a check, you sell your business. And along with that goes, I guess, rights to make the ultimate decision.

Having said that, we spend a lot of time engaging with the founders because that's -- they're the people who've got the expertise, the clinical expertise. We're the people who have got the operational and business expertise.

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Unidentified Participant, [35]

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Yes. Okay. And the final question for me is...

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Andrew Leyden, Vita Group Limited - CFO [36]

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Michael, just want to say as well, for the vast majority of businesses that we bought, the teams -- the founders and the teams have stayed with the group. And I think in the Clear Complexions case, we weren't successful in retaining everyone. But sometimes, that happens for the right reasons for both parties.

But in a vast majority of cases, retention rates were pretty high. And if you can find a way of working together, the 2 small parties, I think that's what we always trying to seek out.

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Unidentified Participant, [37]

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Yes. Okay. With regard to the change in remuneration from Telstra, one thing that's not clear to me, you mentioned $11 million to $12 million, but I'm not sure which line that belongs in.

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Andrew Leyden, Vita Group Limited - CFO [38]

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It's the fee income line.

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Unidentified Participant, [39]

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Sorry, the which?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [40]

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Fee income.

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Andrew Leyden, Vita Group Limited - CFO [41]

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The fee income line.

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Unidentified Participant, [42]

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The which income line?

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [43]

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Fee, F-E-E, fee income.

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Unidentified Participant, [44]

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Oh, fee income. Fee income. Okay. And so I haven't got the income statement in front of me. But where does that -- does that just come off gross profit? Is that what you're saying?

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Andrew Leyden, Vita Group Limited - CFO [45]

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So it will be commissioned revenue in the stat accounts.

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Unidentified Participant, [46]

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I would take that off gross profit?

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Andrew Leyden, Vita Group Limited - CFO [47]

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Yes. So if you have a look at the statutory accounts later, the line that you'll be looking at is commission revenue. That's the line that's affected by those remuneration changes.

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Unidentified Participant, [48]

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Right, and so that amount comes off that line?

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Andrew Leyden, Vita Group Limited - CFO [49]

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Yes. And what you'll see is, well, it's quite a lot of movement between those lines next year.

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Unidentified Participant, [50]

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All right. Well done on a great year, financial '19.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [51]

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Thank you very much, Michael.

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Andrew Leyden, Vita Group Limited - CFO [52]

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Thank you very much, Michael.

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Operator [53]

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There are no further questions at this time. I'll now hand back to Ms. Horne for closing remarks.

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Maxine Joan Horne, Vita Group Limited - Co-Founder, CEO, MD & Executive Director [54]

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Okay. Well, I'll let it be, and thanks for joining us on the call today. I hope that you're excited as us about the future of our go-forward plans. We're already well into executing the FY '20 plan. And of course, as always, I look forward to updating you on progress soon. Thanks, everybody.