FleetPartners Group Limited (FPR) Earnings Call Transcript & Summary

Thank you, Izzy. Good morning to all. And thanks for joining this call. We've made really good progress in the last 12 months, which is reflected in this first half result. The business has been strengthened under the simplification plan. As a result, we are well positioned to meet the risks posed by COVID. Slide 4 provides a good summary of what we've achieved and the strength of our position in the face of COVID. In the first half, our core business outperformed every major line item, growing EBITDA by 10.6% half-on-half. In relation to simplification, we've executed well against the plan. We sold 5 of the 6 noncore businesses. We've delivered annualized savings of $12.5 million against our $15 million target. And we've reduced our corporate debt by 38%. As it relates to COVID, we have a broad risk mitigation strategy with liquidity management at the core. Liquidity has been preserved through active lease extensions as well as OpEx and CapEx reductions. At the end of March, we had $106 million in liquidity access. This provides us with multiples of coverage against our model's downside cases. Last week, we announced a covenant relief package which provides us with further flexibility in the face of COVID. Putting this all together, we are comfortable with the precaution reactions that we've taken to date, and we are confident in the sustainable performance of our underlying core business. Let me turn over to Slide 5 to talk to our group performance highlights. The core fleet business has achieved EBITDA of $45.7 million, up 10.6% on the first half last year on a like-for-like basis. Adjusting for AASB 16, EBITDA was 48.4% in the half. In relation to our noncore businesses, despite a negative EBITDA movement, Right2Drive delivered a positive cash contribution of $5.6 million in the half. By comparison, 1H '19 saw a negative $5.8 million cash drag. We settled the sale of CarLoans and Georgie last week, and we are targeting the sale of Right2Drive in the coming half year period. On Slide 6, we have outlined what our core results would have looked like without the noise of the noncore businesses. In this bridge, we have adjusted core EBITDA for the remaining legacy noncore cost allocations of $1.8 million. Illustratively, without any legacy, our group NPATA for 1H '20 was $22.3 million, a step-up of 29% versus this time last year. Our new CFO, Damien, will go through the group results in more detail shortly. But let me first talk to our progress against simplification over on Slide 8. We are really pleased with the execution of simplification. In 12 months, we've sold 5 of the 6 noncore businesses. We have stabilized our corporate debt through the covenant relief package announced last week. This has further reinforced our balance sheet and liquidity position. The cost optimization plan has gone very well to date. We have achieved $12.5 million of the $15 million target reduction, well ahead of the end of FY '21 timetable. I will speak to our core strategic intent shortly. But first, let me turn to Slide 9 to talk through Right2Drive. The business is now being managed for capital while held-for-sale. Over the last 9 months, under the new management team, Right2Drive has been meaningfully restructured. Inefficient branch network, management, staff and products have all been cauterized. Operational processes and controls have been overhauled and remediated, and the employee culture has seen a serious uplift. The restructuring has been positive, with the business generating $5.6 million in net cash contribution for the group in 1H '20. That is a significant improvement compared to any prior period. Our redefined collections approach has seen a 33% reduction in the debtor book over the last 12 months. In the month of April, and regardless of COVID, a further $7.2 million is collected compared to the $5 million in a normal operating environment last year. We've also taken a much more collaborative approach with some of the general insurers including the establishment of some commercial partnerships in recent months. That's really good progress, and it puts us in a great position to exit Right2Drive by the end of FY '20, consistent with our simplification plan. The proceeds from any sale of Right2Drive will be applied to the reduction in our gross debt balance, as outlined next on Slide 10. Over the last 12 months, we have cut debt by 38% from $350 million to $225 million. We remain laser-focused on our gross debt target of $175 million. That target will be achieved through a net $50 million reduction from the sale proceeds of Right2Drive, the scheduled cash amortization payments and our organic capital generation. As a result, we are confident of achieving the steady-state debt profile that we outlined to you previously. Like our gross debt reductions, we've also sought to get ahead of plan in our cost optimization program, outlined in Slide 11. We have previously laid out a clear analysis on the sources and timing of cost optimization in the quarter. There has been a huge effort put in here, and naturally, we sought to derisk this exercise well early on in the piece. Our target [ on-site ] was a net $15 million reduction in the core by September 2021. At the end of March, we're tracking to $12.5 million of annualized reductions, so we feel pretty well progressed. Let me step through these cost and cost movement analysis in more detail on Slide 12. This chart shows the bridge of our total group OpEx in FY '19, down to our core OpEx base in 1H '20. If the 1H '20 cost base is annualized to $87 million, you get a core cost base that is $12.5 million lower than the core cost base of $99.5 million in FY '19. This puts us well ahead of our initial plan. For the avoidance of debt, this annualized reduction is permanent and excludes recently announced COVID reductions, which are temporary in nature for the purposes of liquidity preservation. Let me turn to Slide 13 to talk to our core refocus. The next couple of slides are interesting because they go to the heart of our core business, operating leasing and novated leasing. While we maintained our market share and operate leasing, our new business writings in 1H '20 were marginally lower than PCP as we near a low point of the renewal cycle and extract less profitable business out of our portfolio. We saw new business activity slowing in late March and into April, given the COVID disruption. Regardless of this disruption, we have managed to increase our Net Promoter Score in the period currently at 66 compared to 36 this time last year, which is a substantial increase. In the coming half, we expect new business writings will be substituted in part by lease extensions for the purposes of our liquidity management. This will keep revenue-generating AUMOF stable, but I'll get to that later on as well as the development opportunities. Let me first turn over to Slide 14 to talk through novated. Novated is on track to deliver another solid growth outcome, but writings were rapidly disrupted by the emergence of COVID-19. A lead indicator of novated writings is our daily orders in dollar terms. April was about 40% of normal operating run rate. But this has steadily increased to a run rate of about the mid-60s today. We continue to invest heavily in novated for the long term, given the organic growth opportunity in our existing client base and some new clients. The broader development of our core is outlined on Slide 15. This is a good summary of where we are going with our business. Let me touch on our 3 key priorities. One, we are prioritizing capital allocation into quality new business writings. Secondly, in the period, we launched a series of upgrades and specifically to Nitro, our industry-leading fleet user experience. This user experience, when combined with our CRM, our data analytics capabilities and our automated balance sheet decisioning, provides us with a strong competitive differential over our peers. Regardless of near-term impacts from COVID and our tactical responses, we feel really confident in the long-term strategy, and we're really excited about the opportunities in the front of us in the core business. In recent weeks, our new CFO, Damien Berrell, joined us from a domestic fleet competitor. Damien has great sector insights and really strong experience. He adds further bench strength to our strengthening executive team, and we're delighted to have him onboard. I'll now hand over to Damien to introduce himself and to talk to the financial results for 1H '19 -- 1H '20. I will then come back and talk through our response to COVID-19, our outlook, and then we'll go back to questions afterwards.

Well, thanks for that kind introduction, Julian, and good morning to everyone. Given this is my first investors call for Eclipx, I thought I might kick off to say how happy I am to be joining the company. As you can imagine in my last role, I kept a pretty close eye on Eclipx and I've admired, over the last 12 months, the progress that Julian and the team have made. One of the reasons I joined to Eclipx was to be part of this simplification plan. I've been here now for 3 weeks, and I've had the opportunity to see things on the inside. And I'm happy to see that it's consistent to what I was expecting. And I'm keen to be part of the success of this business going forward. So with that said, I'll start with Page 17. The key message from this page is that despite the headwinds driven by the noncore operations, the business has still been able to deliver a solid financial performance for the group as a whole. Starting with the table on the top right, and for ease of comparison, we've added a middle column, which illustrates what the income statement would look like had AASB 16 not been adopted. Just quickly on AASB 16. This is a new accounting standard being introduced for the first time. It has the effect of moving off-balance sheet leases onto the balance sheet and it pushes lease expenses or rental expenses below the EBITDA line in the form of a separate interest and depreciation expense. I'm sure you've already seen the impact of AASB 16 on most published financial statements. So with that said, EBITDA for the group was $33.9 million, which is up 6% on the first half of 2019. There's a lot of noise in these results driven by the disposition of some of our noncore businesses in the first half 2019. However, if you just think about the core business, its EBITDA was $45.7 million, which was an increase of 11% on the first half 2019. I've got a few pages to follow with these pages just to take you through the noncore business in a bit more detail. Below the EBITDA line, you'll see an increase in share-based payments to better align our executives with that of the shareholders. This was more than offset by a material reduction in impairments in the first half 2019 associated with noncore operations that won't -- that haven't repeated in the first half 2020. So that leads to a cash NPATA of $15.5 million, which was up 12%. With respect to the bridge at the bottom of the page, it's important to highlight that although Right2Drive was an accounting loss of this half, it was cash flow positive during the same period, just repeating on Julian's earlier comments. Page 18 shows the group balance sheet, and there are a few items worth calling out. Firstly, net debt is down $44 million as the business continues along its path of deleveraging. We've also done a good job in holding inventory flat, where actual fact is actually down slightly, despite our further move in the retail space to sell our cars. The operational rigor and skills to deliver this outcome on inventory is going to stand us in good stead over the next few months on COVID-19. Thirdly, AASB 16 has brought operating leases onto the balance sheet in the form of a $24 million right-of-use asset and a $27 million lease liability. And finally, pulling all these together, net assets have increased by 5% to $504 million. Compared to last year, the balance sheet in the first half 2020 is a lot more stable and has a lot less fewer moving parts than what we've seen in the past. The next page is on cash generation. The cash movement for the period was a reduction of $16 million. However, when you add back corporate debt repayment, the cash flow was positive by $44 million. Cash is obviously a key area for our business. So we have taken a number of steps, and we'll continue to take actions to tightly manage our cash position. These steps include: extending lease end dates where it is beneficial for both the customer and the business; temporarily reducing salaries; restricting all nonessential OpEx and CapEx; and finally, upgrading the treasury function. As I flagged earlier, in addition to the cash-generating performance of the core business, Right2Drive was also a cash tailwind for the group. In summary, we are confident that we have the right people and processes in place to rigorously manage the company's liquidity. It's an area that has a lot of focus from the company and something that we stress test over multiple scenarios just to ensure that we stay ahead of all possible outcomes. Turning now to the core business performance, and I'll start with new business writings on Page 21. The key message on this page is that our novated business has continued to perform strongly from a volume perspective, offset by the headwinds from corporate being at the bottom of its replacement cycle and also our strategy of moving away from the low-returning business in panel. Novated is up this half as our investment in novated continues to drive growth. What underlines the significance of this performance by novated is the fact that this growth over the last several years is in an environment where new car sales in Australia have been on the decline. With respect to corporate volume, the majority of new business writings today represents the replacement of leases that were written 3 to 4 years ago. Therefore, you can get a sense of your entitlements for new business writings this half based on what you did back in 2016. For the first half 2020, that means looking back to the first half 2016 in the chart below. As a result, and as Julian highlighted, the slowdown in new business writings is largely driven by the business being at the bottom of its replacement cycle. If you refer to the chart at the bottom, you can also see the impact on panel volume from our previously communicated strategy of exiting the low-margin business. So in summary for new business writings, novated is going along nicely, and we will continue to be disciplined around prioritizing price over volume in the corporate space as we ride out the bottom of this replacement cycle. Turning to vehicles and assets on the next page. With respect to vehicles in the top chart, the novated business continues to grow its vehicles, driven by the success we saw in new business writings on the last page. Offsetting this is the strategic reduction of managed-only units as we move away from low-returning business. With respect to assets in the bottom chart, they remain stable. This performance reflects the quality of our service proposition and our unique business model that continues to deliver value to customers. This means we benefit from a sticky customer base, evidenced by the high customer retention rates. Finally, we are confident that our funding structure is the right model to have heading into the next period under COVID-19, which Julian will elaborate on later. Turning to Page 23, which looks at 4 key metrics on our income statement. The takeaway from this page is that the business has delivered on its simplification strategy for this half. The half-on-half results showed positive jaws of increasing income and decreasing expenses. On the income side, net operating income grew this half, driven by margin in New Zealand and brokerage fees in novated. This was partially offset by lower management fees as the business moved away from managed-only units. We also saw end-of-lease income increased by 9% as we maximized the sale price of more cars down the retail channel. The operating expenses represents a really successful execution of management simplification plan. This is indicative of the discipline and focus of this area within the business. We saw a reduction of cost of 6%, excluding the impact of AASB, which was largely driven by the rationalization of our workforce and rooftop consolidation. So as a result of those above items, EBITDA was $48.4 million for the half, which was up 11%, excluding AASB 16. These results demonstrate that the company's ability to accomplish what it sets out to do. And no doubt, this is going to be an important attribute to have as we navigate the next few months under COVID-19. My last page before I turn back to Julian is Page 24, which pulls all the key metrics together. So running down the table on the top right. And whether it's the OpEx reduction of 6%, EBITDA growth of 11% or the 9% cash NPATA growth, it all points towards a really strong half year performance for the business. Just to reiterate what I said on the previous pages, Eclipx has seen stable net operating income as it transitions the portfolio towards more profitable business. End-of-lease income remains robust and is reflective of our safe residual values. It also demonstrates our ability to maximize the vehicle selling prices. Finally, OpEx management is a big focus for the organization as we remain determined to reduce our cost-to-income ratio. As we think about our priorities in the second half 2020, our focus will be on continuing to ensure we are well prepared to tackle the impacts on the business from COVID-19 and building on our momentum around the simplification plan. Just to wrap up my section. I'm sure every CFO out there would love to have a crystal ball to see how COVID-19 is going to play out in the coming months. What I think is more important is to ensure your business is match-fit and resilient to handle any conditions under COVID-19 that might occur. With that line of thinking, I am satisfied that the fundamentals of this business had us well placed. And this is exactly what Julian will take you through now.

Thanks, Damien. I know the impact of COVID is on everybody's mind. So let me turn to Slide 26 to talk through our ongoing risk response. Our response has been a broad and flexible mitigation strategy. There are 3 key points to call out. First, we have comfort about our NOI pre-EOL given our annuity-style of revenue which is about 87% in the first half of '20. Secondly, we have a contracted buffer in our EOL profits to mitigate in part potential movements in the used car market. And thirdly, we have sufficient liquidity to address any expected inventory buildup in this low-use market. In our most severe downside case, we are still 2.2x covered from a liquidity perspective. This liquidity position is further reinforced by our recent corporate debt amendments and the strength of our risk portfolio. Let's first talk about NOI pre-EOL on Slide 27. The principal risk for NOI pre-EOL is economic disruption, which could slow demand for our products. This line item has been the most stable part of our income statement over the years, largely due to its annuity-like features. In 1H '20, the annuity-like income was 87.3% of NOI pre-EOL. This is supported by a $1.4 billion funded book. Another contributor to our income statement is end-of-lease income, which is discussed on Slide 28. In relation to EOL income, you'll see that we experienced half-on-half growth rate of 14% per unit. EOL income is made up of 2 parts: the disposal profit, which is about 40%; and the contracted unfair wear and tear charges, which is roughly 60%. The risk to EOL income is the dislocation in used car pricing and is mitigated in part by the fact that 60% of our income is not related to the disposal price. This is illustrated in the chart on the left-hand side. The 60% charge creates some buffer to earnings in the event used car prices fall, illustrated in the sensitivity table on the bottom right-hand side of the slide. If you turn over to Slide 29, I'll talk to what we're actually seeing in the used car market. In Australia, we saw a rapid slowdown when restrictions commenced. Despite this, we did 250 units in the month of April, which is about 25% of our normal run rate. While volumes were lighter than average, it was much better than our initial expectations, and EOL profit was consistent with 1H '20. Sales volumes in May have seen a recent uplift to about 70% of our pre-COVID operating run rate. Our New Zealand channel, AutoSelect, reopens tomorrow under level 2 restrictions, which we expect to further improve our sales volumes. Let me talk briefly to the right-hand side of the page to inventory and how it relates to our liquidity. When end-of-lease cars are returned to us, they sit on our balance sheet as inventory and act as a temporary liquidity drag until they are sold. This drag is dependent on how the lease is funded, as is summarized on the page here. The sales of used vehicles clearly help liquidity. But when immediate sales are slow, lease extensions can help mitigate this risk. Let me talk through this on Slide 30. We've modeled out inventory liquidity cases based on a range of assumptions and across the spectrum from base case to a severe case. The chart on the left shows these case sensitivities to our lease extension rates. Our base case reflects expectations for extensions to the end of September. Based on our current liquidity position of $106 million, we have circa 2.2x to 3.5x liquidity coverage across a range of cases, as is outlined on the right-hand side of the page. This is a very comfortable liquidity position. It's been further derisked by recent amendments to our corporate debt agreement, which I'll set through on Slide 31. When COVID emerged, we proactively sought covenant relief. This has significantly enhanced our risk position relative to the debt package that we agreed back in October 2019. You can see on the left-hand side of the chart the major changes include a slower reduction of the leverage covenants and a slower increase of the ICR covenant over time. We also sought to remove the negative noncore LTM EBITDA drag for the purposes of calculating covenants. This removal has had a meaningful impact on our covenant's headroom. These amendments provide us with significant operational and strategic flexibility. Slide 30 talks -- Slide 32 talks of why, in part, our corporate lenders are comfortable with our business, namely our underlying credit risk portfolio. From a credit perspective, it is worthwhile noting the composition of our risk portfolio. 83% of our top 20 exposures by dollar value are investment-grade credit counterparties. 94.2% of our total portfolio represent low-risk exposures. Think of them as largely essential services. The sectors that are at risk from COVID are a small proportion of our portfolio. As COVID restrictions commenced, we saw an initial step-up in forbearance request from these at-risk factors. Notwithstanding this, we have seen a tempering of request in recent weeks. You can see on the slide, our total forbearance gross exposure is about $30 million. However, it's worth noting, our net exposure is only a very small fraction of this given our underlying security position. As we mentioned here previously, we can choose to seek forbearance relief from the AOFM, the details of which are summarized in the appendix. In summary, as we work through our COVID-19 mitigation approach, you can see that the early and ongoing steps taken have been proportionate and that we are well placed to manage through this crisis. Let me conclude with Slide 34 and our outlook. We are very pleased with the interim results and believe it reflects very well on our business and the strength of its underlying fundamentals. Simplification has progressed very well and has put our business in a much stronger position to manage COVID risks. In terms of COVID impacts, we have sought to conservatively preserve liquidity, which has given us confidence in our liquidity coverage. Further, the recent amendments to our corporate debt covenants provide us with significant operational and strategic flexibility. The used car market disruption has not been as severe as we had initially expected, and we're watching our sales volumes very closely, which have improved in recent weeks. Some of our expected new business writings in the second half will be temporarily deferred as leases coming for renewal are purposefully extended out by a half or 2 under our lease extension program. Notwithstanding this, our VUMOF and AUMOF should otherwise stay stable, providing us with annuity-style revenue. As for Right2Drive, we are targeting an exit of this business during the second half. And on the topic of M&A, as we work through the finalization of our simplification program, we will consider looking closely at sector consolidation opportunities where strategic and financial merits stack up. So in summary, we're very pleased with what we have achieved to date, and we are confident in going into the second half, notwithstanding COVID. Thank you for your time. And with that, I'll pass across to the operator for questions.

[Operator Instructions] Your first question comes from Paul Buys with Crédit Suisse.

Julian, Damien, a quick one, maybe just to start on novated leasing. I'm not sure how easy it is going to be to answer this. So I was just kind of positively surprised by, I guess, the extent of the recovery in recent weeks. I don't know if this has got a calling, as you mentioned earlier, for kind of crystal ball gazing. But I was just wondering if you could give any insights as to kind of the very sharp recovery in recent weeks from novated leasing given that we've only kind of entering into easing of restrictions in the last week or so?

Paul, I'll take that. Thanks for that. Look, in terms of novated, it's really early on in the piece. And so it's hard to comment, as you said, crystal ball gazing. All we can comment on is what we can see in front of us. And we did see a severe dip in March, as we discussed before. There was a marginal uptake in orders in April, and you can see there's a bit of momentum going into May. But it's early on in the piece. So we're watching it very cautiously for.

Okay. Just second one, kind of an accounting-type question. Just interested in your fleet and credit impairment. It was a good result, it didn't move much. As one looks ahead into kind of dislocation in used car markets and again, I think some things are going better than you expected. Is there -- I just want to understand if you think there could be an imperative in terms of any fleet revaluation? Given that if you were to place used cars, you might get a worse result even though your profit has been standing up. Is there any potential accounting impasse, for want of a better word, that could be occurred down the track?

Yes. Paul, it's Damien. I can answer that one. So what we did at the end of March was we took a management overlay, which you'll see in our fence stats around our credit risk and impairment risk. As you know, we -- every month, we do an impairment assessment on our fleet, and we'll continue to do that. So as Julian said, it's hard to sort of know what's going to happen over the next 6 months or so. But every month, based on whatever the environment is showing us, we'll continue to impair the fleet based on that.

Right. So by implication, certainly nothing is evident in March, even though there would have been some signs of dislocation then?

We took a management overlay for an impairment there. So a couple of million bucks. You'll see it in the fence stats. So we've done what -- we've made the impairment at this stage based on everything we knew.

Okay. And then, 2 other quick ones. One, just on Right2Drive where, obviously, positive result in terms of cash flow. I just -- I guess I want to understand if you were to back out the -- I suppose, the recovery of debtors, and that's a good thing, by the way. So -- but I just want to get a sense of how the underlying business is tracking from a cash flow perspective, excluding the data rundown? I guess I'm trying to work out if it's being run, still on a kind of a continuous basis or it's just being run more on a book rundown basis?

No. The guys have done a good job, and we've spent, as you know, Paul, a lot time on Right2Drive. And the business is run on a continuous basis. It has been turned around. It will continue to turn around. And we're only sort of halfway through that in terms of earnings progression and cash progression. What we're seeing in the back book is the trend. If you think the backlog is the first 90 days, that early recent sort of invoices that are written are getting collected at a very, very high rate. And that's going quite well, and that's a very positive sign for the business going forward. As it relates to the older data books, they keep attacking that data book and they're taking it down. Some of it's quite aged, but they're still collecting reasonable rates that are somewhere between 70% and 80% on the dollar. So we're pretty pleased with how that's going at the moment.

Got it. And then the last one is just a quick one on the slide on cash flow. I just noticed that the cash flow was supported by a reduction in balance sheet leases. And I just want to get an understanding of the driver there, if that's a slight shift to more P&A? It didn't look like the mix had changed much. Or I guess what the driver and the sustainability in terms of that support level for cash flow.

Yes. So that reduction in leases, that was just the net difference between the new business writings we did and end-of-leases that came off that -- for that half. In terms of the go-forward, in terms of the impact to cash flow, typically, what you'll see is it will be a net neutral position if leases run off between the borrowings coming down and also the leases coming down.

Okay. But I guess, are you -- I mean, is that a natural flow? Or are you kind of managing that a little bit to support your cash? I guess I'm trying -- and it's a small number. I'm trying to work out if there's a little bit towards -- in which case, you're kind of sacrificing a little bit of sort of future new business to help cash line up.

Yes. No, Paul. No. That's just BAU. So there's been no change in strategy in terms of pushing more to P&A at this stage around managing cash.

[Operator Instructions] Our next question comes from Johnny Anke Wang with Morgan Stanley.

Just the first one, looking at your New Zealand business, that saw, I guess, massive uptick in your NOI pre-EOL margins. Can you give us a sense of what drove that?

It's Damien. Yes, that was largely driven by the ABS issuance we did at the back end of last year. So that obviously gave us some relief on the cost-of-funds line, so that helped pick up the NOI in New Zealand.

So basically, when we place that ABS trade, you're effectively -- you've taken it out of your warehouse, which is quite expensive because it's in a liquid, unlisted security pool. And you put it into a listed security pool when rates are near all-time lows, or they were near all-time lows as we thought at the time. And certainly, that ABS trade was probably the cheapest trade we've ever done in our corporate history. So you can see that...

Yes. Cool. And just on the, I guess, extensions where you guys are at the moment of 13% in April and looking to get that from 13% to your 35% to 45% target. Can you give us a sense of what needs to change for that to happen?

Yes. Sure. It's pretty interesting extensions. It's something I talk about every single day with the team. So basically, the way it works is we look at cars that are due to come back to us in sort of the next 6 months, 12 months, and we contact each of the customers. So you can appreciate, we started that as COVID sort of started emerging. And we started making those calls. We called every single customer, we gave them contract extensions, the actual formal contract. And those customers, as large blue-chip corporates, have bigger priorities at the time, such as just getting their staff enabled to work from home and so on. And so we probably had about 13% takeup, which you can see on the page, as at sort of the end -- sort of April, I think it was. Now as we look at it today, those corporate customers are now getting back into their normal operating rhythm. So we're seeing -- and we expect the uptake of extensions to be quite significantly higher. And that's certainly the trend that we've seen so far in the month of May. But we obviously watch it very closely.

Great. And maybe just one last one for me. And I just want to, I guess, make sure that my understanding of this is correct. But on the AOFM relief. I guess, first of all, is that applicable to both principal and interest payments? And I'm guessing, because it's from a warehouse perspective, also put forward to both fleet and novated?

Yes, great question. So the AOFM is incredibly complicated, but I'll try and simplify it. So if you have a customer and they come into us and they say, "We'd like a payment hold there for 3 months." The payments, call it, like $1,000 over the 3-month period, what we do, we would lose -- we'd otherwise have to pay that $1,000 into our warehouse or kick it in. The AOFM instead will pay 90% of that, and that's into a warehouse or ABS structure. The 90% will be supported by us, putting in a 4% first-loss piece. And the AOFM were repaid at a cost of funds of 5% over a longer period of time. So effectively, the excess spread that comes out of our warehouse and ABS repays the AOFM at a cost of their capital of 5%. And for us, it reduces the risk for us of an immediate cash call. Although what I will say about forbearance is it's very low relative to what we thought it was going to be. We watch it very closely, and we're cognizant that there could be second waves of COVID and that could cause more disruption. But right now, it's much lower than we had initially expected. So at the current levels, we probably wouldn't even bother going to the AOFM because the numbers are so small.

Your next question comes from Shane Bannan with Bligh Capital Securities.

Just 2 quick things. One was the, I guess, the benchmark price, looking for Right2Drive, is the net of the assets classified for sale. So about $28 million. Is that a fair interpretation of just looking at the balance sheet?

Yes. Look, that's a fine interpretation. I mean, I leave that to yourself. I mean, obviously, we're going to -- we're running a contested sale process. So I won't speculate on valuation. But clearly, that's where we wrote it then. That's more of a function of [ 0.47 ] in the dollar in the debtor book, which is a completely convoluted NPV analysis.

Right. So I think what you were saying earlier, I mean, the debtor book has been written heavily down. And you're collecting 75% to 80%, if I understood your earlier comment, Julian, in which case is every expectation of a decent-sized premium on that $28 million?

Look, I won't comment on that because I think the bidders for Right2Drive are probably dialed in on this call. But we expect to get fair value for that business to reflect both the debtor book, but also to go forward going concern of that business.

Okay. The other issue you touched -- I wouldn't mind if you'd put a bit more color around it. If I understood you correctly, you said that you've got strength for balance sheet when it comes to M&A, where you're going to be looking out there to acquire things. Can I just get a sense of, are we talking about something like small bolt-ons? If so, in what area? Or are we talking about something potentially transformative? I just want to understand the scale of your thinking, if you wouldn't mind.

Yes, no problem at all. So I think the -- my key point there is -- and our key points as a group, as we work through and we've rebuilt our executive, rebuilt the business, and we go through simplification, which is scheduled to end by the end of FY '21. At that point, or shortly -- prior or thereafter, we'll start relooking at potential bolt-ons and more transformative industry consolidation. But only after we've got our simplification in better progression.

Your next question comes from Josh Kannourakis with UBS.

Great. Just a couple of quick follow-ups. Firstly, just on the cost front. Can you just talk about what costs within your $15 million target remaining? And just also a little bit about the COVID-related liquidity measures and cost down, just in terms of what's the -- what I guess is the free hand for putting those costs back into the business? What's the operating performance has to be for those to go back into the business?

Yes, sure. I'll take the first one, which is really what's left to go in sort of that annualized $12.5 million, and then we're left at about $2.5 million. I mean, senior management renewal, occupancy, this approach has gone to the residual stores are really simplified productivity and group discipline. And by group discipline, I mean more robust discipline around professional services, which would make good track record and so far. Simple things like T&E and doing the basics very, very well. There was historically a big overrun in those expense lines, so we're really managing that closely. And then productivity, as we work through COVID and we look at all the various different opportunities for COVID, we will naturally probably find some pick up in our productivity, and it's a big planning piece that we've been through prior to COVID. But post COVID, we see some opportunity there as well. Sorry, in the middle of COVID as we are today. But going forward, after COVID, we'll see opportunity. As it relates to the second part of your question, Josh, I think in terms of what we've given in the deck, we've sort of said that if you take just the employee reductions, Board reductions and KMP or executive reductions, you're looking at about a $1.4 million per quarter. So call that $2.8 million, obviously, in the half and in the coming half. It did start early on in April, so you get the full benefit in that 6 months. The reference points, what are we looking at? Probably most likely liquidity used car market performance, which drives liquidity, extension rates, which is drive liquidity. And all those factors as well as just general macro performance would help us understand better when we can ease those sort of temporary restrictions on our employee base and staff. As it relates to existing other costs in addition to that $2.8 million for the 6 months, there's not just things that aren't happening right now. People aren't getting on planes. We're not traveling. We'd like to see some reemergence of that. But I think post COVID -- and Microsoft Teams and the various different work-from-home technologies have been quite effective. So I'd say we'd see a pickup in terms of that sort of T&E expense line as people rely less in domestic and international travel.

Got it. That's great. And just in terms of the extensions, good progress to date, and obviously targeting a lot more for the half. Can we just talk about what that means for that NOI as well? Just in terms of as those leases go into inertia, I think it's just a benefit. But just to talk through the accounting of that as you sort of move into the next period?

Yes. Josh, it's Damien. Yes, from an NOI perspective, it will be relatively flat. From a profitability perspective, if you think about it from a percentage, the underlying pool of data decreases. So from a percentage perspective, we should see a little uptick. But from a -- just from a dollar amount, you can probably expect just to be flat half-on-half.

Okay. Great. And just final one. Just on the P&A funding side, can you guys talk a little bit about the cross-sell please? And novated, just the bank's appetite to lend in the current environment and just whether that's how that's sort of impacting the competitive dynamics of those markets?

Yes. Sure. I mean, P&A funding is largely out of our -- not always, but it's largely out of our fleet plus banner. And certainly, the appetite from the banks has been good. What I will say is there's been a slowdown with India and Manila shutting down. That's impacted some of the banks because they do the credit underwriting in the P&A because they earned that credit risk. So that certainly slowed their progress. That has impacted probably our novated writings a little bit, although COVID's probably overwhelmingly impacted that. But P&A appetite is still there. We haven't seen any major disruption to that. It's probably just more of an operational process in the bank's end because naturally, like everyone else, they're trying to move their staff from home, and it's not a -- like everybody, it's not perfect.

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

Thank you, Izzy. And thanks, everyone, for joining. I appreciate that. I look forward to catching up with you all, albeit remotely, over the next couple of weeks. Thanks.