McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to McMillan Shakespeare Limited FY '22 Half Year Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, Wednesday, the 23rd of February 2022. I would now like to hand the conference over to your first speaker, Mike Salisbury, MD and CEO at MMS. Thank you. Please go ahead.

Thanks, Eva, and good morning, everyone, and welcome to our half year results presentation for the '22 financial year. I trust you're all well. My name is Mike Salisbury, and I'm joined this morning by our Chief Financial Officer, Ashley Conn. Firstly, I'd like to acknowledge the traditional custodians of the lands across Australia, and recognize their cultures and continuing connection to land. I'm speaking from Melbourne, which is the traditional country of the people of the Kulin Nation, and I pay my respect to their elders, past and present. Before we move to the details in the pack, I'd like to make a few opening comments. Firstly, we delivered an improved operating performance in the half, with revenues up 25.8% at $311.6 million and underlying net profit after tax of $40 million. This result was achieved off the back of strong customer demand, together with elevated yields benefiting novated leasing and our asset management businesses. In an environment of constrained new vehicle supply, delays in vehicle delivery have further grown our novated carryover volume to 7x pre-pandemic levels, equating to approximately $19 million in additional expected future revenues. Whilst the auto supply conditions are expected to remain for at least the balance of this calendar year, we continue to respond and ensure our businesses are best positioned to leverage off this ongoing dynamic. Importantly, we've continued to focus on our key priorities, including delivering strong organic customer growth in salary packaging, plan management and support coordination together with growth in novated lease orders and finance originations across our broker network. Our ongoing investments in our digital channels and complementing strong organic growth in our NDIS-related businesses with the successful acquisition of Plan Tracker, the diversification of our funding sources through the establishment of our own warehouse facility and further developing and executing on our sustainability initiatives. Additionally, in our presentation today, you will see our new segment structure for the group. With the growth of Plan Partners and following the divestment of our warranty business, we have realigned and simplified our business segments. Importantly, these changes better reflect our strategic priorities and enable greater segment focus across the business. As we move to the first half highlights, I'm very pleased with our performance in the period, the strength and diversity of our customer base, and of course, the ongoing efforts, commitment and engagement of our people across the group. Turning to Slide 2. And it's clear that, that diversity which sits across the markets and jurisdictions that we operate in, our customer and client demographics and our product and service offerings has heightened importance when we've been operating in such unique times. I'm confident that it positions us well for the periods ahead. And in focusing ahead, as a group, we spent considerable time revisiting our guiding principles, resulting in a revised purpose, vision and values for the group. Importantly, we've also furthered our focus on our sustainability and ESG-related initiatives, and I'll talk to both these initiatives in a few moments. Operationally, our GRS business experienced strong client renewals, retaining all key contracts and achieving significant new business wins, which contributed to positive salary packaging growth. Novated lease customer order rates remained strong, up on a strong first half '21 and increasing our carryover, which stands to benefit future periods, as I've mentioned. In our new Plan & Support Services segment, post the successful integration of New South Wales-based plan management provider, Plan Tracker, we continued to experience strong participation growth, up 69% to a little under 23,000 customers. In our asset management businesses here and in New Zealand and the U.K., with the global automotive supply dynamic and the demand for high-quality used vehicles, all experienced very favorable residual value conditions which are continuing. Our RFS business delivered 27% UNPATA growth from a 30% lift in net amount financed, whilst we also successfully completed the divestment of our warranty business in September '21. And as you can see, the group's balance sheet and cash position remains strong, and the interim dividend of $0.34 per share fully franked represents a payout ratio of around 66% of underlying NPAT. Now on Slide 3, I'd like to briefly touch on our new purpose, vision and values for the MMS Group. Our company purpose and values inform how we think and behave both with one another and in the marketplace. Just on 12 months ago, we launched a comprehensive review of our guiding principles as an organization with the aim of creating a new unifying platform for the next 5 years of MMS whilst ensuring that we retain and enhance the strong culture already embedded in the group. We undertook extensive consultation with both our people and our customers, starting with defining our core purpose, our fundamental belief. Whilst we looked at many themes and ideas, ultimately, we determined that making a difference to people's lives transcended and encompassed all others as it related to MMS and what we do. This thinking also helped refine and shape our vision and values, and we'll very much guide what we do and the way we act and behave as a unified group moving forward. Moving to Slide 4 now and our new segment structure that I mentioned in my introduction. You can see that we've instituted a platform across the group of 3 dedicated segments, namely Group Remuneration Services, Plan & Support Services and Asset Management Services. GRS or Group Remuneration Services, consists of our novated and salary packaging businesses, Maxxia and RemServ, together with our new novated financing facility, Onboard Finance. And as I referred to earlier, our NDIS and related businesses, Plan Partners and Plan Tracker, which previously resided in our GRS segment, are now reported in a new stand-alone segment in an exciting evolution for the group. Thirdly, our aggregation business now forms part of our broader asset management segment, together with our Australian and New Zealand and U.K. asset management businesses. We believe the realignment of our segment better reflects our strategic priorities, whilst enabling more defined segment focus over the long term. We've again included a group UNPATA bridge on Slide 5, which provides a summary of the UNPATA changes by segment against the first half of FY '21, and I'll talk to the individual segment performances shortly. Turning to the key operational dashboard on Slide 6. You can broadly see the performance across each of the segments. My key call-outs here are, in GRS, we saw a return to meaningful growth in salary packages under management with an additional 6,500 packages in the half off the back of both participation growth and new business wins. In novated, customer demand remains positive with orders up 4% and carryover levels up 154% on the same time last year and now over 7x first half '20 levels. Plan & Support Services, which contributed -- which continued to be mostly unaffected by COVID-19 and associated public health restrictions, achieved strong customer and market share growth. Customers up 69% through the combination of continued organic growth, together with the acquisition of Plan Tracker. We saw a 4% reduction in the overall fleet value in our asset management businesses, driven primarily by the runoff of our on-balance sheet assets in the U.K. Improved consumer and business confidence have seen increased activity and higher asset values in this period, reflected in the 7% lift in finance originations across the group to just shy of $1.5 billion. On Slide 7, we've once again provided our thoughts and expectations of the automotive sector and the associated vehicle supply challenges. I know that this is a topic that everyone is very familiar with, and I don't intend to talk in any detail to this issue today. A view around the normalizing of the new and used car market remains unchanged in that we're expecting auto supply to remain a challenge at least through the end of this calendar year with some improvement anticipated from early 2023. Just before I pass over to Ashley to speak to the financials in more detail, I'd like to spend a few moments talking about our sustainability strategy and the pleasing progress we've made during the period. This strategy responds to key environmental, social and governance risks and opportunities for the group, including taking action on climate change, supporting greater accessibility and social inclusion and our community engagement activities. In respect to taking action on climate change, we are pursuing our pathway to net zero carbon emissions across our own operations. During the period, we took a significant step towards reducing our emissions by sourcing 100% of renewable energy for all controllable Australian sites. Initiatives are also underway to support our customers in their transition to a low-carbon future, including our active promotion of low and zero emission vehicles across our brands. The health and well-being of our people remained a key priority for the group during the period as the vast majority of our staff continued to work remotely. We invested in the development of our leaders to enable and equip them to support our people. We achieved a sustainable engagement score of 85% in our last survey, which reflects the level of support provided, the quality and consistency in our communication and the focus on being embedded together through teamwork and collaboration. Furthermore, to support greater accessibility and social inclusion across our business and our communities, we are well progressed in developing our first Accessibility and Inclusion Plan and our first Reconciliation Action Plan. These plans, scheduled to be launched during FY '22, will drive our efforts to create better opportunities for First Nations Australians and for our people and customers living with disabilities. I'll now pass over to Ashley to speak to the company's financial performance.

Thanks, Mike, and good morning, everyone. Over the next few minutes, I'll be talking to the consolidated performance, balance sheet, cash flow and provide an update on the warehouse. I'll then hand back to Mike to speak in greater detail about the individual segment performance. I'd like to start on Page 10 that sets out, as Mike said, group UNPATA underlying net profit after tax and amortization of $40 million, which is an increase of 12.8% versus PCP, excluding the contribution from JobKeeper, which we are using for PCP comparative purposes. JobKeeper's impact was $7.3 million after tax in the first half of FY '21. The statutory net profit after tax was $30.1 million, which was up 66% versus PCP. This includes a $6 million impairment for the CLM business in the U.K., which has now been written down to its net tangible asset value to reflect the lower sales volume that the business is experiencing in this auto market. It also includes the loss and loan finance charge of $1.3 million relating to the disposal of the warranty business, which was previously announced and completed during the half. The details of these and other UNPATA adjustments can be found in the appendix. EBITDA increased to $59.5 million, up 3.2% for the half. The improvement was due to strong operational performance across the business, led by customer growth, elevated yields in novated and asset management and an improved performance from the U.K. business. Mike will walk through this in detail shortly. Underlying earnings per share was $0.517, which was up 12.9%. An interim fully franked dividend of $0.34 per share has been declared, which represents 66% of UNPATA. Free cash flow for the half was a strong $37.8 million or 95% of UNPATA, and I will discuss this in more detail in a few moments. Group return on equity and capital employed were 28.4% and 33.6%, respectively, as we continue to focus on capital efficiency. The balance sheet. Page 11 -- Slide 11 provides a breakdown of MMS' balance sheet as a group, and importantly, also splits between the asset management businesses in Australia, New Zealand and the U.K. and the aggregate position of our other businesses: GRS, and our new segment, PSS, RFS and corporate. We continue to have a strong balance sheet with a net cash position, excluding fleet-funded debt of $115.7 million, which has created capacity for future growth. Total debt is $229 million, and this includes lease liabilities and asset management's fleet-funded debt and results in net debt-to-EBITDA of 0.8x and gearing of 26%. Other leverage metrics, such as our interest coverage at 30.7%, are significantly within our bank covenants. In Asset Management, total debt is now $175 million resulting in a gearing ratio of 65% of written down value of the fleet assets, materially below our 80% bank covenant. Cash flow. Turning to the cash flow slide on Page 12, which splits out into our 3 segments plus corporate and unallocated. The group generated free cash flow before fleet funding of $37.8 million compared to UNPATA of $40 million, a 95% conversion, as I mentioned before. Capital expenditure for the half totaled $4.8 million. Net fleet assets on our balance sheet declined by $6.3 million. $20.1 million of cash was transferred with the sale of the warranty business in September 2021, and the net cash impact from our Plan Tracker acquisition was $10.7 million. Consequently, as a result of these sources and applications of funds during the period, our cash on hand now sits at $131 million. On Slide 13, I'd like to talk to the warehouse and provide an update in relation to where we are with the warehouse. We have the technology, systems and all necessary personnel in place for the warehouse to write its first lease, with the final important step being receipt of the credit license approval from ASIC. Our objectives, strategic rationale and implementation strategy all remain the same. This includes continuing to target a ramp up to 20% of volume through the warehouse, which we expect to hit during the first half of FY '23, although this obviously remains subject to the final timing of receipt of the approval from ASIC. Although we had originally -- our original expectation was to receive the credit approval by now, we are prepared to wait for the ASIC process to play out and have no reason to believe that approval will not be granted. We currently anticipate that we will receive the license in March this year. Importantly, the impact to UNPATA is assumed to now be between $2 million to $3 million for FY '22. We have previously stated that our assumption was $4 million to $5 million in FY '22. That's all for me. I'd like to now hand back to Mike.

Thanks, Ashley. Now turning to the specific segments and starting with GRS on Slide 15. At $100.5 million, our revenue was only marginally up for the half, which understates the true performance of the business. Activity has been strong in the period, as evidenced by the fact we have successfully renewed all key contracts during the half and grown our customers by around 6,500 packages. Pleasingly, we've seen a number of Tier 1 new business wins, which will support growth in the second half as they transition from 1 April. And notwithstanding the extended restrictions in New South Wales and Victoria, we've driven higher customer inquiry and increased our novated order rates by 4% over the same time last year, whilst also delivering higher average yields from the inflated retail pricing in the auto market. In contrast, auto supply continues to be a headwind. In the past 6 months, our forward orders have grown from 5x pre-COVID levels at the end of June '21 to 7x as of 31 December, with approximately $19 million of additional revenue to benefit future periods. The operating performance and profit in the period reflect the ongoing investment in growth in our core business and this deferral of revenues. We're showing the movement in orders, sales, carryover and yields on Slide 17. As we look to the outlook and on the basis of forward orders in the scheduled delivery dates, we expect to see a larger uplift in settlements in the second half than what we would ordinarily see in pre-COVID periods. Yields are also expected to remain at the current elevated levels. As mentioned earlier, our compliant -- plan management and support coordination businesses have seen the creation of a new dedicated segment, Plan & Support Services. This decision reflects the emerging and future growth inherent within these businesses and their contribution to overall growth performance. Plan management supports participants to manage their NDIA-approved budgets and assist participants to make the best decisions about their support with the help of our network and knowledge of local and national service providers. Support coordination works with scheme participants one-on-one to find and manage supports aligned to their individual goals. Both services are fee-based, funded directly by the National Disability Insurance Scheme. We note that the number of NDIS participants is expected to now grow to more than 850,000 people by June 2030, up from the 500,000 participants supported by the scheme at the end of the half. As reported recently in the NDIS quarterly report, there also continues to be a significant shift to plan management with an increasing number of participants choosing to use a plan manager rather than have the agency manage their plan. Over the past 2 years, the proportion of participants who use a plan manager has increased from 35% to 53%, respectively. Turning to Slide 19 and the highlights from the half in our Plan & Support Services business. Pleasingly, the business continued to gain market share with plan management customer growth of 69% to 22,729 customers by period end. Additionally, the business delivered around 26,000 hours of support coordination in the half, a 19% increase on PCP. Customer growth was supported by the acquisition of Plan Tracker on 1 July, '21 with the integration on track and progressing well. Revenue of $19.5 million was up 63.6% on PCP. UNPATA of $2.9 million was up marginally, reflecting significant investment made during the period in people, technology and brand to further expand our services to our customers and to generate future growth. It also reflects the inclusion of group overhead costs, which are now fully allocated to PSS. Looking forward, we'll continue to drive organic growth through customer acquisition and retention whilst investments in system integration across our Plan & Support Services brands to improve overall efficiency rates and margins will progress over the remainder of the calendar year. We'll also continue to explore appropriate M&A opportunities in this market as they arise. Turning now to Slide 21 and the performance of our Asset Management business, both here in Australia and New Zealand, which delivered a strong profit uplift. The business achieved revenue of $92.4 million and UNPATA of $9.7 million, an increase of 21.8% and 47.2%, respectively, on Half 1 '21. As we said at the full year and which remains the case, the restrictions in new vehicle supply are hampering current new business volumes, whilst presenting challenges in replacing assets that have reached their end of contract. By period end, our pipeline of vehicles on order had increased around 4x historical levels. However, and importantly, this dynamic continues to be offset by unprecedented demand for used vehicles, resulting in higher yields through wholesale and retail remarketing channels. The performance of our 2 retail yards in New South Wales and Victoria were strong contributors to the result, notwithstanding the impact of increased COVID restrictions throughout much of the half. As outlined on Slide 22, remarketing yields for the half were at 255% of pre-COVID levels. Vehicle return rates continued to slow during the period due to vehicle supply shortages, leading to a rise in extensions. And when combined with our average lead time to procure new vehicles, our overall written down value of assets under management remained flat over the half at $311 million. These elevated used vehicle yields and subdued new car supply are expected to continue at least to the end of the '22 calendar year. Moving to our businesses in the U.K., which have continued to witness a significant turnaround in performance. As a result of restructuring undertaken in FY '21 and the tailwinds from elevated used car prices and remarketing yields, our businesses experienced strong revenue and profit growth as the country moved out of COVID-19 lockdowns. Revenue of $74.1 million and UNPATA of $5.4 million were materially up on the previous period. It should be noted that the profit result benefited from a one-off tax credit of $2.4 million. The lifting of restrictions and the gradual improvement in business confidence contributed to a 2% increase in off-balance sheet originations in Anglo Scottish, just short of $400 million. On Slide 24, we've included a chart that shows the runoff of the Maxxia finance portfolio, currently at around $37 million, which has reduced by about half over the 6-month period. Much of the book is scheduled to run off over the next 12 months, which should see a continuation of strong remarketing revenue over that period. As Ashley has already spoken to, the recovery anticipated in the CLM fleet management business post the lockdown has not eventuated, given the business' strong reliance on vehicle supply to support their operating model. Given the expected headwinds from ongoing auto supply challenges beyond this financial year, an impairment of the goodwill associated with the CLM business has been recognized in the half. For the final time, I'll close the segment reporting with a snapshot of RFS on Slide 25. And as you can see, UNPATA at $2 million was up on first half '21. This result was driven by the aggregation business, which continued to perform well, with finance originations up 30% on PCP to $588 million, the highest origination level since acquiring the business in 2015. The increased net amount financed was in part generated through a higher average deal size, up 11%, again, a result of the buoyant new and used vehicle prices across the auto market. Aggregation UNPATA was up $0.5 million to $2.2 million on a stand-alone basis compared with first half '21. Also in the half, we completed the divestment of the warranty business. And whilst this result -- whilst this resulted in a loss on disposal of $1.2 million, this was an important transaction as part of our broader group strategy. In closing, the business continues to perform well, delivering an improved revenue and profit results for the half. Importantly, and despite the disruptions over nearly 2 years now to the way in which we work, our people are highly engaged, and we have a workforce who are aligned to our purpose of making a difference to people's lives. Our balance sheet and cash position remains strong with capacity for growth. Whilst as a group, we continue to pursue customer growth enhancements to our digital capability, diversification of our funding sources through the implementation of our warehouse and opportunities for acquisitions where appropriate. And of course, our focus on sustainability has never been stronger or more focused. Looking forward, the trading conditions related to constrained supply in the global automotive market are anticipated to continue through until at least the end of '22 calendar year. This means further benefits to the group in terms of expected novated lease yields and end of lease remarketing income. Significant new customer wins during the period in GRS will aid future growth across both salary packaging and novated leasing. In Plan & Support Services, we will continue to grow market share as the NDIS matures, with increased adoption of plan management and support coordination services. We will also continue to explore opportunities for further consolidation in this market. And whilst COVID remains a variable, the group and its people remain well prepared to respond to further changes in conditions as and if necessary. As always, we sincerely thank our people for their commitment and amazing efforts during what has been and continues to be a challenging time. I'll now hand back to Eva for any questions.

[Operator Instructions] Your first question comes from the line of Paul Buys from Credit Suisse.

Ashley, first question, just on GRS. I guess, as restrictions are getting progressively lifted across most states, I was just curious to know if you think the business needs to pick up any costs as the restrictions are lifted in terms of kind of changing dynamic with your sales force? Or do you think your cost base is right-sized for future conditions?

No, it's rightsized, Paul. We didn't have a lot of standdowns in the GRS business. We continue maintain that higher activity level. So we retained all of our people. So we don't anticipate any requirement to add a significant number of new heads into the business.

Got it. And then on the novated lease side, you spoke about the benefit you're getting from -- on the yield side from retail new car prices. Just curious to think about your outlook on yield specifically going forward. And I was wondering if -- so you're getting a new car price benefit on yields. Presumably the overall mix is a bit more skewed to used cars than it has been in the past, which I'd imagine provide some kind of offset, but just keen to put that to you and see what you think sort of the short- to medium-term outlook for yields would be?

Look, our yields, as we've got in the presentation, are up and have been significantly up over the last 12 months, really. And that's notwithstanding that there's a higher percentage of release volume or refinance volume in our book than what we would have had pre-pandemic. So we know we've got a higher percentage of used vehicles in the mix already, but that higher yield that we're currently running is very reflective of the increase in the retail price in the market. The forward orders that we have are on the basis of that higher retail price, which is our view around the ability to maintain those high yields at least for the balance of this calendar year, Paul.

Okay. And beyond that, Mike, no kind of -- I guess, I'm just trying to work out is, as the environment normalizes, you realize the kind of that order gap. And then we start trending to something more normalized. I'm just trying to work out if there's a kind of an offset through a significant step down in yields. That's why I'm just seeing what the current yields are carrying.

Well, so I guess that depends on how quickly the retail market adjust their pricing for a more competitive marketplace, Paul. We don't see that as being something that's going to happen overnight. It's going to be more gradual as volume returns across the different makes and models. So we would expect that at some point, the retail price might return closer to where it was historically. But we'd also anticipate that the number of new vehicles in our overall portfolio would increase as the refinances go back to normal levels. So we've given the comparison to '20 as to the movement in our yields. We've seen no change in our yields on the basis of any of the insurance changes. But as I said, the yields are currently inflated as a consequence of higher retail pricing, which is expected to be maintained for the balance of this coming year, at least.

Got it. And then last one for me. Just on PSS. Obviously, business is performing well, particularly strong revenue growth. But I guess not much translating to the bottom line in terms of an equivalent growth rate. You called out all the investment done in the business. Just wanted to get an idea of how much more investment you think you require in the business? And when do you expect to see some scale benefits in terms of some leverage, operating leverage in terms of that revenue flowing through to the bottom line?

Yes, quite a considerable amount of the investment in the first half, Paul, is one-off. And we would expect to see improvements in margin in the second half.

Your next question comes from the line of Phillip Chippindale from Ord Minnett.

Firstly, just on the GRS segment. Just wondering if you could paint a picture for us in terms of access to workplaces. Obviously, with restrictions starting to unwind, can you give us a sort of current state of play as to how good the access situation is in order to get access to employees so that you can happily sell them novated leases and the like.

There's probably 2 sides to that discussion, Paul. Firstly, principally, the health networks, the restrictions are still being maintained, understandably given the pressure on that network. In some industry, the restrictions have been lifted almost entirely. And we have protocols, both in an employer level, but also for our staff in regards to how each of us are required to conduct ourselves if we are going on site, which I don't think it would be a surprise to anyone. But there are certainly not the level of access today that we had pre the pandemic. But in contrast to that, our access via the digital channels is far advanced to what it was back in calendar year '19. So we have pivoted the way that we have continued to connect and educate the customer base, which I think is reflected in the higher order rates and increased opportunity that we're seeing through that channel. So we will maintain a higher digital contact structure with our client base moving forward, but also blend that with on-site access when restrictions lift.

Okay. Just turning to the plan part of the business for a minute. You've given us some numbers there with around 22,000 customers. So that looks like it's around 4% market share plus or minus. Just looking to the long term, do you have a target in terms of where you're trying to get to, could we see a doubling of that market share organically in the longer term? Or is that perhaps a bit too aggressive? And I guess part of that question is,really a reflection of the competition as well. So yes, just love some color around that.

Yes. Look, our ambitions, Philip, and I apologize for calling you Paul previously. Philip, ambitions are to at least double in size and then more so. So our ambitions are to be significantly the largest provider in this space and to be able to make a difference to the people who are participants in the NDIS. So you talk about a market share of the overall current participants as opposed to the market share of those who are being serviced through plan management. So we are enjoying the increase in customers who are seeing the value in outsourcing to plan managers like ourselves, and we expect that level of market share to increase as well as our own market share of those participants within the outsourced plan management space. So our organic growth anticipated to be very strong continuing, but we're also interested in supplementing that organic growth through M&A where appropriate as we did with Plan Tracker at the beginning of the financial year.

And just finally, I just wanted to touch on the warehouse facility. So this might be a question for yourself or for Ashley. Can you just maybe unpack why the delay? I guess, trying to understand is this about the timing of the submission? Or has it just been a delay on the regulator side? And then just a follow-on, after you get the credit license, are there any other items that need to be picked or achieved before you issue that first lease?

Let me -- it's Ashley here. Why don't I -- I'll answer the second part first, if I can. So there's nothing else that we need. This is the last piece of the puzzle. So as soon as we get it, we'll just push some details through the system, and we should be ready to go in a matter of days afterwards to write our first lease. So then just in terms of timing, as I said, we don't have any expectation that we won't get it. Unfortunately, it's just the way the process has played out and the ball is in ASIC's court. We continue to have a dialogue with them. There's no -- as I said, no reason to believe we won't get it. And unfortunately, it's just the way -- just the time that it's taken.

Your next question comes from the line of Tim Lawson from Macquarie.

Maybe a follow-up to one of the earlier ones. Just you called out the sort of one-offs in that, the PSS segment. Can you sort of quantify that and whether you think that, that will flow through to profitability in the second half?

Yes. Look, we're not putting a dollar figure on it, Tim, but you will see a stronger second half profit performance and improvement in margin. Some of that is coming directly from one-off expenses not being repeated in the second half, but we'll also see improvements in the Plan Tracker margin, which was part of the attractiveness of the opportunity with Plan Tracker, both from a cultural perspective, that they are very aligned with the business that we've built and built a successful business, but we also saw opportunities to bring their margins to where Plan Partners margins currently are. So work's being done over the last 6 months, which will see benefits flow in the second from that aspect as well.

Okay. And just on the end of lease income, just the numbers in the U.K. look a bit unusual with the number of units in the first half '21, materially above first half '20. But the profits indexed to first half '20 done the opposite and then the second half '22 sort of reversed around? I'm just trying to understand what's happened there? And also just in Australia as well. Can you talk more about the contribution? Obviously, you've given percentages here, that unless I'm unaware of it, we've never had an actual net number of contributions. So I'm not sure how helpful these percentages are.

In the U.K., the biggest difference between the beginning of '20 and the beginning -- the beginning of '21 and the beginning of '22 was that U.K. was in lockdown in the prior year, and we had accumulated around 400 assets from our clients in the peak of the first lockdown in that marketplace. And there was no avenue to dispose of those assets. So we really accumulated significant volumes. The markets were deflated. And when the markets did open, we moved those assets at certainly a much softer yield than what we've done since the markets have opened up fully. And the demand for used cars has really replicated what we've seen here in Australia. And in the first half of '22, you see that we've had assets coming back from our clients, and we've been able to utilize channels to maximize returns. So that's the difference in the U.K. In Australia, we've shown historically a pie chart that shows the revenue contribution from residual value in the Australian and New Zealand business. We've done that again this half. So that gives you an indication of the contribution to the overall revenue in this segment, Tim. But as far as profit contribution, we haven't called that out previously. But you can expect, it's been a much stronger contributor to the profit in the last 12 months than it has historically.

Yes. That's good. And then just the $19 million on the novated sort of carry on, how do you actually calculate that? What assumptions underlie that?

So the $19 million represents the increase over what would ordinarily have been a normal pipeline pre-COVID. So this is over and above the carryover. And it reflects the orders that are in the pipeline today, so finance approved and orders placed with dealers. We've applied our 2% to 3% cancellation rate to those numbers. So that's incorporated in that $19 million calculation, and then it's effectively the unit number by the yield that is based on the financed amounts for the retail price of those cars, which are locked in. So fortunately, in the consumer behavior that we've seen, as demands remain strong and there hasn't been any change in that cancellation rate really over the last 18 months, so customers have been very sticky.

Okay. And you note that the 87% increase in NDIS in that sort of longer-term estimate from original expectations, do you anticipate that the structure of the NDIS will change in response to that? And how do you think that your position is placed with regard to potential changes?

We don't expect fundamental changes to the scheme, Tim. We're very engaged with the NDIA and also with the Minister's office, et cetera. It is a reflection of the need that exists within the country and an increase in those assessments by the NDIA over the last 4 years to provide the updated forecast. And look, we see our contribution to the success of the scheme has been significant, and we think the more participants that we can support through the program, the better the outcomes where that will be achieved. And that's certainly how we've positioned our discussions and interactions with the NDIA and with parties on both sides of the political fence.

[Operator Instructions] Your next question comes from the line of Richard Amland from CLSA.

Just trying to get a bit of a better handle on what to expect on the outlook for the U.K. business. It seems like you guys had a very good result, and that was a bit of a surprise to us and that buoyed the whole company results. So getting a flavor for what -- where we go to from here because I felt with the asset base of that business declining, that the business would shrink. So can you give us some ideas on where that's going?

Thanks, Richard. Yes, we provided the runoff of the on-balance sheet assets in the slide deck. So as I said, it's reduced by about 50% over the last 12 months and the book will largely run off over the next 12 to 18 months with the lion's share in the next 12 months. So whilst those assets come back from clients and the market stays bullish, then we expect to have strong residual value profits on those assets. But as you say, once those assets are all sold, then it's a non-repeatable revenue source for us because the book is being run off to 0. But certainly, over the next 12 months, we expect those returns to be in the magnitude of what we've been able to deliver in the last 6 months. As far as outlook for the rest of the business, the asset broking business, Anglo Scottish, continues to see improved levels of originations with SME and business confidence improving in the marketplace. And with inflated average asset prices as a consequence of the supply challenge, so we do anticipate Anglo's performance will continue to improve in the second half. The glaring absence in the second half will be any benefit from a revenue and customs tax credit. So we won't see that repeat in the second half, but certainly, the business performance is likely to be very similar.

Your next question comes from the line of Chenny Wang from Morgan Stanley.

Maybe just previously following up on your comment around the GRS cost base. You touched on that being rightsized from a sales force perspective. But just sort of can you understand a bit more about the reinvestment profile on digital and maybe some of the other initiatives and whether those components are already factored into that comment on the cost base being rightsized?

Yes, the cost for digital enhancements, Chenny, have really flowed through the business. And as you know, that's really been an OpEx expense rather than a CapEx expense over the last 18 months or so. And that really helped us transition from a workforce that was in office to a fully remote workforce over that period of time. So we continue to ensure that the way that we support our people and the way that we connect with our customers has enabled us to continue to do what we do. So those investments are made and are reflected in the cost base. The other components that are in there, some operational expense related to the development of the warehouse as well as we had a -- effectively a salary freeze in FY '21 as a consequence of the challenges from COVID. And with the current resourcing in the marketplace and the performance of the business, we've provided a, if you like, a reasonable increase in remuneration across our business in recognition of their efforts, but certainly a modest increase. But that's also reflected in the cost base.

Got it. That's really helpful. And then maybe just a bit of color on the decrease in novated participation in this half. I mean that held up really well over the course of FY '21 despite supply constraints. And yes, I can understand, maybe for the first half of '22, those supply constraints got to be incrementally harder. But yes, just sort of interested if you could provide some more color on that on novated participation move this half?

Yes. I mean there's no client loss in it, Chenny. It really just reflects the fact that the pipeline is significantly higher. And particularly in the last quarter, delivery times were pushed out with customers. So it reflects the percentage of the portfolio that would ordinarily come off lease which has remained relatively constant. But of course, we haven't had new vehicles in order for them to be able to be placed into. So with the new business wins that we've had through the end of the first half and those that will transition from the first of April, we're confident that, that number will be a positive growth number in the second half.

Got it. No, that's helpful. And then maybe just one last one from me. Just on the PSS business. And yes, we'll get used to calling that something other than Plan Partners. But you guys made that Plan Tracker acquisition. Can you just remind us how much that contributed? And also what the M&A pipeline looks like on that front?

The pipeline is -- it's reasonable. I mean we are engaging with other providers in that space. And as I said, where appropriate, we would be interested in growing the business through further acquisitions. So as you would expect, when you announce an acquisition, it does raise the interest of others in the marketplace. But -- and we're very happy to talk to other providers, but we're also very conscious of what we've built and what Plan Tracker has built and the alignment to our group. So we won't just acquire for the sake of acquiring. It's very important for us that acquisitions are appropriate to the group. But certainly, now as I said, there's good conversations that we're having with other providers in the market. In regards to contribution, it's relatively modest. The Plan Tracker contribution, I mean, as Ash talked earlier to this, some indicators as to the acquisition cost for the group in empowering Plan Tracker. We think the multiple that was paid on it was very reasonable for a business that has continued to demonstrate strong growth in customers. But certainly modest in comparison to some other acquisitions in the marketplace. But -- and as I said to, I think, Phillip's earlier question, the expectation is that, that margin improvement that was evident through the due diligence on Plan Tracker is already being seen and is expected to continue to improve over the next, really, 12 months as the integration is completed.

Got it. And sorry, just one last one for me. Yes, to one of the earlier questions on the costs and operating leverage in PSS, you sort of mentioned in the first half of '22, there were one-offs and some that won't be repeated in the second half. Just sort of interested to understand what those actually are, because I would have thought they would have been stripped out of underlying UNPATA if they were truly just one-off and not repeatable.

Certainly, the acquisition costs have been stripped out, as you say. But where there's costs that we think are part of normal operations of the business, whether they're one-off or ongoing, we've chosen to expense them as opposed to including them in UNPATA adjustment.

Sorry, actually -- no, I'm saying that just they are more operating in nature and we talked to you a little bit on Slide 19, without a few of the areas.

Your final question comes from the line of Scott Hudson from MST Marquee.

Just a follow up on the GRS cost base, is there anything one-off associated in relation to the warehouse facility that impacted the cost base through the first half?

There's certainly development costs that have been expensed that are one-off, Scott. Yes. In addition, there's some one-off costs in regards to the Westpac auto sale and the transition of finance here from West back to Anglo Finance. So those costs have been incurred in the half that won't repeat in the second half.

So the 10%, I guess, cost inflation, I assume the wage increases are much more modest increase relative to the overall inflation in the cost base?

Yes. So the wage increase is modest. The other component of the resourcing increases that we're comparing it against the period first half '21 that we still had people in partial stand down. So they're obviously not stood down any longer. So the overall FTE reflects having those people full time in the business this half compared to the first half. So there's some incremental increase as a consequence of just not having stand downs any longer. But as I mentioned, a modest increase in overall salaries given the price freeze or the salary freeze in FY '21.

Are you able to quantify that one-off costs associated with the Anglo finance and warehouse development?

We don't give them. I mean they're all sort of carved out in small pieces that start to add up rather than -- but we don't quantify them.

In terms of the -- I guess, you talked about increased settlements into the second half of the year, you expect the GRS margin to recover back to just more normal levels as quickly as that or will it take a little bit of time?

Scott, we have obviously very good visibility around the orders and the delivery dates that we have in the second half which is why we've got confidence of the volume that we should receive in the second half. And the biggest variance in the margin in the half just gone is the additional units that should have landed that got pushed out to the second half, the movement of 5x to 7x. If we had seen it remain flat at 5x, our margin would have gone up.

Okay. That's helpful. In terms of the Plan Partners or PSS business, how quickly do you feel that, that operational leverage will come through? And do you expect margins to recover to sort of first half '21 levels? Or does the increased sort of corporate cost allocation keep a lid on that margin recovery?

As I said, we'll see margin recovery in the second half. So I think the second half will give the market a much better appreciation of the business and what we've built and what it will contribute to the group moving forward. The corporate costs that we weren't allocating to the business when it was in start-up, we're not reverting to that position. But we certainly don't expect corporate cost changes to the -- similar to what we've had in recent times to repeat themselves. It is appropriately charged today -- so there shouldn't be any changes in that allocation moving forward.

Okay. And then just lastly, in terms of the longer-term strategy in relation to the U.K., are you still considering exiting that aggregation business in due course?

Look, as we said back in late '19, early '20, the decision was made to exit the U.K. We've had a couple of years of challenging environments and I think we need to understand the right time to review that decision. There's nothing that we've discussed at a group level that gives us a different view from where we were at the end of '19. But I think we need to appreciate the businesses need support at the current time, given the market challenges and at the appropriate time, we'll revisit it.

There are no further questions from the telephone lines. I would now like to hand the conference back to your presenters for closing remarks. Thank you, and please continue.

Thanks, Eva. And in closing, I would like to thank everyone for their time this morning and for your questions and for your interest in the MMS group. As I said this morning, we're very pleased with decisions we've taken in recent times and the consolidated performance of the group. And we look forward to talking with many of you in the coming days. Thanks again for your time this morning, and have a great day. Thanks, Eva.

Thank you. Ladies and gentlemen, that does conclude our conference today. Thank you for your attendance. You may all disconnect.