McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the McMillan Shakespeare Limited Half Year Results FY '23 Call. [Operator Instructions] I would now like to hand the conference over to Mr. Rob De Luca, MD and CEO. Please go ahead, sir.

Thank you, Karl. Good morning, and thank you for joining us for the MMS half year results presentation for the 2023 financial year. My name is Rob De Luca, and I'm the Chief Executive Officer of MMS. I'm joined today by Ashley Conn, our Chief Financial Officer and Company Secretary. I would like to start by acknowledging the traditional custodians of the land on which we meet and pay my respect to their elders, past and present. This morning's presentation will largely be focused across 5 areas. I will firstly talk to our market position and operating and financial performance highlights across the half whilst providing an overview of some of the key themes and issues that drove these outcomes and which more broadly inform our strategic focus. Secondly, with a somewhat longer-term lens, I will take the opportunity to share with you our clear strategic priorities focused on MMS delivering sustainable growth. Ashley will then take a deeper dive into the financials, which will then be followed by me talking to our respective segment performance. I will then conclude with an overview on our outlook and strategic priorities. As we move through the presentation, we will be referring to the slides that were released with our results this morning, and both Ashley and I will be happy to take questions at the conclusion of the presentation. Turning to Slide 2. In the first half of FY '23, the group experienced strong ongoing momentum in customer activity, leading to growth in our key operating metrics whilst we continue to navigate complex market conditions. The period reinforced that our businesses are well regarded as trusted partners to governments, businesses and individuals holding strong market positions. Our focus on the customer, which has underpinned recent client wins, together with an increase in customer demand, saw growth across novated lease orders of 9.4%, salary packaging customers up 6.1% and plan and support services customers increased 27.6%. We achieved underlying growth in our financial performance with normalized EBITDA UNPATA, EPS and ROCE, all up on a prior comparative period basis. I take the opportunity to remind you that we are using the term called normalized, which refers to adjustments made for the negative earnings transition period of the funding warehouse onboard finance. Our disciplined approach to capital management and commitment to improving returns to our shareholders saw the group deliver a 100% payout ratio of normalized UNPATA, declaring a fully franked interim dividend of $0.58 per share. We also successfully completed our 10% off-market share buyback during the period. Finally, as I mentioned at the outset and combined with recent decisions to simplify the group, we have spent time in recent months to clearly define our strategic priorities. Our strategy specifically focuses on our position as a trusted partner in helping our customers to make their complex matters simple through the solutions we provide. To best enable this focus, we have aligned our strategic priorities across the group, namely: firstly, excelling in customer experience; secondly, driving technology-enabled productivity; and thirdly, delivering competency-led solutions to deliver sustainable growth. We are excited by the opportunities enabled by these priorities, and I'll touch further on these in a few moments. Slide 3 details our key financial metrics for the half and the uplift achieved off the back of growth in our core operating performance. Group normalized EBITDA of $67.2 million increased 5.7%, while normalized UNPATA of $40.4 million increased by 0.3%, with improvements in Group Remuneration Services, Plan and Support Services and Asset Management ANZ business, offset by a decline in the Asset Management U.K. business. To this point, if we exclude the U.K. where we have previously communicated exit options are being considered, normalized UNPATA for the half increased by 8.5% on a PCP basis. Our interim dividend was 100% of normalized UNPATA, as I've mentioned, whilst our normalized EPS grew by 4.1% and return on capital employed increased to 38.7%, a 4.5 percentage point uplift for the half. Turning to Slide 4. I will now spend some time talking to our strategic focus to deliver sustainable growth. In considering the opportunities for growth, it's important to recognize that we are starting with a strong and unique platform. Our business model comprises 3 business segments, namely: Group Remuneration Services, which we refer to as GRS; Planned Support Services, which we know as PSS; and Asset Management Services, known as AMS, each of which are well regarded as trusted partners to governments, businesses and individuals, providing solutions in making complex matters simple. These trusted positions are underpinned by our common core competencies of managing enterprise to business to consumer relationships in broad ecosystems, navigating complexity in regulated and government environments, claiming and payment processing at scale, leveraging technical systems and data, and managing a broad range of benefits arrangements. Over time, each of our core businesses have continued to deliver high levels of customer satisfaction, hold strong positions in a number of key markets we operate within and, combined, have favorable financial characteristics, namely attractive margins, strong cash generation and high returns. Now moving to Slide 5. Having a strong platform, there are a number of key macro thematics, which are shaping the MMS group and have guided our strategic focus. These include: increasing government spending in areas like health and aged care is driving an increase in related employment where our businesses are already well positioned and exposed; ongoing growth in the NDIS with an increasing shift towards planned management as a preferred model by participants and a way to support the government's financial sustainability and integrity objectives; increasing momentum towards decarbonization with emerging policy settings and targets to favorably support Australia's transition to low and zero emissions vehicles; organizations continuing to consider an increased focus on their own core competencies and how they best achieve operational efficiencies; managing and benefiting from the complexities of economic conditions like higher interest rates and inflation in a tight labor market; the increased digitization and use of insights to create enhanced customer experiences and revenue opportunities from the personalization of services; the emergence of new vehicle distribution models, which provide opportunities to leverage our competencies in relationships and collaborate to play important roles along the value chain opening new avenues of growth; and accelerated use of technology, AI, robotics and data analytics to drive greater efficiencies and standardization across our operations. Overall, we are well and uniquely positioned to take advantage of these opportunities for our businesses. Now turning to Slide 6. Recognizing our purpose and harnessing the strength of our unique platform and core competencies, our vision is to be the trusted partner providing solutions in making complex matters simple. In order to do this and to take advantage of the attractive opportunities presented, we are focusing our efforts across 3 strategic priorities, as mentioned earlier, namely: firstly, excelling in digital and insights-led customer experiences to enhance our market position; secondly, driving simplicity and technology enablement to increase productivity; and thirdly, leveraging our culture and competency-led solutions to extend and enhance value. This strategic ambition has clear intent to deliver increased productivity whilst continuing to earn customer advocacy through strong NPS, further elevate the group as an employer of choice whilst generating high return on capital employed and earnings per share growth. As a group, we are excited about executing on our strategy to deliver sustainable growth and look forward to providing further detail as we progress. Ashley Conn, our CFO, will now go through our financial performance in more detail.

Thank you, Rob, and good morning, everyone. Turning to Slide 8, first of all. Once again, this half year, we've included a group UNPATA bridge, which highlights a 1% improvement on normalized revenue to $314.8 million; normalized EBITDA up 5.7% to $67.2 million; and normalized UNPATA increasing by 0.3% to $40.4 million; and normalized earnings per share of $0.542 per share, up 4.1%. As Rob has mentioned, our financial results are presented on a normalized basis. Normalized refers to adjustments made for the negative earnings across the transition period for the implementation of our funding warehouse onboard finance. It normalizes for the warehouse's in-year operating and establishment expenses and provides an adjustment for commissions that would have otherwise been received in period had the sales been financed through a principal and agency funder rather than through the warehouse. For clarity, the first half normalizations to UNPATA were $3.3 million and $4.7 million to EBIT. A reconciliation of NPAT to UNPATA and normalized UNPATA is included in the appendix of the presentation. Moving to Slide 9 and our balance sheet. Our balance sheet remains in good shape with a net cash position, excluding fleet funded debt, of $43.7 million. Total net debt to EBITDA now stands at 1.1x, reflecting the additional $60 million corporate debt facility that was announced with our FY '22 financial results, and taken on to support working capital requirements post the successful completion of the off-market share buyback. Our interest coverage is at 39.1x. All of these have significant headroom to our covenants. In Asset Management, total debt is at $164 million, resulting in a gearing ratio of 68% of the written down value of the fleet assets, materially below our 80% bank covenant. Turning to the cash flow slide on Slide 10, which highlights our ongoing cash conversion and ongoing return of surplus cash to shareholders. The group generated free cash flow before fleet funding of $48 million, which was a 129% of UNPATA cash conversion. This cash conversion continues to benefit from the tax instant asset write-off, which will unwind in future years. As Rob announced, the interim fully franked dividend of $0.58 per share, reflecting a dividend payout ratio of 100% of normalized UNPATA. This is consistent with the capital allocation and dividend policy that was announced with our FY '22 results, which stated a targeted dividend payout ratio of 70% to 100% of UNPATA. Including the interim dividend and the off-market share buyback completed during the half, $130.6 million of capital will have been returned to shareholders over the half. The full details of our cash flow are included in the appendix, which showed group cash now sits at $114 million. I'll now hand it back to Rob.

Thanks, Ashley. I will now take a look at the operating segments. Firstly, our largest segment, GRS, on Slide 12. Total normalized revenue for the half for the segment grew by 9.9% on the previous period to $110.4 million. GRS revenue growth was driven by an 11% increase in novated lease sales compared with 1 half FY '22, an additional 22,149 salary packages by period end, representing a 6.1% increase and an uplift in interest received. Novated lease sales momentum benefit from ongoing customer and client focus and recent new client wins, with total novated lease units rising by 3.3% to a record 74,090. The uplift in salaried packages was attributable to both the transitioning in the period of recent client wins achieved in FY '22 and growth through the increased penetration of existing clients. Normalized EBITDA increased by 7.2% to $40.4 million, which reflects a 3.4% reduced average yield from the increasing proportion of re-leased sales as customers continue to wait for vehicle deliveries. Expenses were higher to support the successful transitioning of new clients as well as increased and unfulfilled order levels, resulting in elevated carryover during to ongoing extended wait times for customers on new vehicles. Additionally, the segment continued to invest in digital and data analytics to enhance the customer experience and support future productivity improvements. Moving to Slide 13. At the end of the half, I'm pleased to report that novated lease activity levels were strong across the period, with novated lease leads up 13% and orders up 9%, with an increasing use of digital sales channels. In terms of new vehicle availability, while some stabilization in vehicle supply occurred, ongoing constraints resulted in a continued growth of novated lease orders carried over beyond 1 half FY '23, albeit at a lessening pace, with total carryover revenue to benefit future periods as at December 31, 2022 was $27.4 million, up 7% as at June 30, 2022. Now moving to Slide 14 and our warehouse facility, Onboard Finance. We have made progress with our ramp-up of novated lease volumes in the first half. The warehouse has now funded $22.6 million of leases up to 31 December and remains on target to achieve the financing of 20% of our novated lease volume by the end of 2 half FY '23. Onboard Finance secures and diversifies our funding mix. It creates a new, annuity-style income source where we will be able to capture more value from each transaction that uses this financing facility. The financial impact of Onboard Finance is now expected to be approximately $10 million UNPATA. The slight difference reflects experience to date across a number of factors, including refinement of our processes and the timing of GRS clients' approvals of Onboard as a financier. Now turning to Slide 15. In our AMS segment, whilst our Australian and New Zealand operations benefited from elevated used vehicle pricing, with revenues up 16.3% to $107.5 million and UNPATA up 5.6% to $10.3 million, in the U.K., challenging conditions impacted activity and overall segment performance. This resulted in total segment revenues being down 6.2% to $179.7 million and segment UNPATA down 13.7% to $14.8 million. Asset Management ANZ benefit from the profits on expiration of larger customer contracts and new client wins, and it experienced the stabilization of remarketing yields whilst they remain elevated. In the U.K., NAV grew against an environment of rising interest rates and challenging economic conditions affecting business confidence. Re-marketing yields remained at elevated levels while the continuing runoff of the Maxxia portfolio and associated on-balance sheet assets resulted in reduced sales opportunities as expected. These factors, together with the previous corresponding period, having the benefit of a non-reoccurring $2.4 million taxation credit, saw a decline in the segment's U.K. revenue and operating profit, with revenue down 28.7% to $52.8 million and UNPATA down 52.7% to $2.5 million. As stated in our FY '22 results, we continue to consider exit options for our U.K. operations. Our aggregation business benefit from an expanded lending panel and achieved increased commercial volumes, driving an 11% increase in NAV to $654 million at period end, with total revenues up from $18.6 million to $19.4 million. Turning to Slide 16. We have sought to provide some insights around the new vehicle market and related supply in the Australian market, together with what we are seeing post the passage in December last year of the EV Fringe Benefits Tax Exemption Bill. During the half, total new car sales in the Australian domestic market returned to pre-pandemic levels, albeit with a greater skew towards private buyers rather than fleet. Settlement delivery times also stabilized. However, such stabilization isn't consistent across all makes and models. We also witnessed during the half the stabilization of used car pricing. However, prices remain at elevated levels compared with their pre-COVID equivalents. In relation to EVs, during the half, the federal government legislated an exemption from fringe benefits tax for eligible low and zero emissions vehicles. The new law helps to address the higher cost of EVs and fuel-efficient cars, which has acted as one of the key barriers for Australians when considering making the switch to an EV or more fuel-efficient car. Under this legislation, organizations will have greater financial incentives to transition their fleets to EVs in line with their sustainability commitments. Similarly for novated lease holders, they will now be able to own and operate an eligible EV at a cost which is in line or potentially more favorable to comparable traditional internal combustion vehicle. This represents a significant change in the Australian EV landscape. Whilst the EV legislation only became law on December 12, 2022 and is retrospectively applied from July 1, 2022, the group saw strong uplift in EV inquiries with close to threefold increase in the percentage of novated lease EV orders from customers in 6 months to December 2022 compared with the PCP. While supply limitations extended to EVs and currently, they have a limited model range, although quickly improving, MMS remains well positioned to capitalize on these changes. We look forward to playing a key role in helping our clients to meet their sustainability commitments and assisting our customers transition into low and zero emissions vehicles. In relation to MMS' own sustainability commitments, I'm pleased to report that the group achieved an uplift in its Morgan Stanley Capital International ESG rating from BBB to an A rating as announced by MSCI on February 7, 2023. Now turning to Slide 17. During the half, PSS continued to invest in delivering a scalable platform for future growth, whilst being well placed to assist the government optimized outcomes for both individuals living with disability and the broader national disability insurance scheme. Importantly, we note the growing take-up of plan management as a percentage of all plans being supported by the scheme, now at 58%, up from 53% on PCP, reflecting the ongoing and increasing recognition of its value in helping participants to manage their payments and navigation of the NDIS. PSS segment revenue was up 19.9% to $23.4 million, with EBITDA and UNPATA up 9.1% and 8.6%, respectively. Revenue uplift was primarily attributed to strong customer growth, with a 27.6% uplift in plan management and support coordination customers, and a 45.1% increase in support coordination billable hours. Margins in the segment were impacted by change to NDIS client renewal policies and support pricing, which saw no annual fee increases, together with ongoing investment by PSS in technology and digital tools to enhance the customer experience and deliver a scalable platform for future growth. Migration to a common technology platform across the planned tracker business was completed, assisting with the segment in the delivery of future efficiencies. Before Ashley and I answer any questions you may have, I would like to spend a few moments looking at the outlook for MMS and our strategic priorities, as outlined on Slide 19. Whilst we have commenced the second half of FY '23 with approximately $27 million in novated lease carryover revenue from the previous period, we expect that many of the trading environment experiences for the first half of FY '23 to remain similar for the remainder of FY '23, including environmental factors of rising interest rates, competitive labor market conditions and inflationary pressures. In terms of vehicle supply, whilst we have witnessed signs of stabilization, we think it is unlikely that we will experience any significant change for the remainder of the FY '23 period. Business momentum is expected to further benefit from our ongoing customer focus. Growth in our GRS segment through the transitioning of recent client wins will provide further momentum, whilst we continue to focus on upcoming client renewals and ongoing tenders. Our AMS segment will continue to benefit from elevated remarketing yields whilst constrained supply continues to impact fleet renewal. For our U.K. operations, the exploration of suitable exit options will remain a key focus as we simplify our group. Across both the GRS and AMS segments, we will focus on the increasing opportunities and customer demand for transitioning to EVs and how we best support them as part of our commitment to a low carbon future. We are aware that this is a critical part of the automotive and wider mobility sector and we'll seek to play our key role as it evolves at pace. Within the PSS segment, we will continue to drive organic growth considering nonorganic growth opportunities and focus on the completion of the planned tracker integration to drive future efficiency benefits. We will also continue to invest in technology, data and digital tools to improve the customer experience and aid growth whilst contributing to the efficacy and longer-term sustainability of the NDIS. In relation to our funding warehouse, Onboard Finance, we will continue to progress its ramp-up as we work towards our target to achieving financing 20% of our novated lease volume by the end of second half FY '23. Finally, but not least, our focus will be on executing on our key strategic priorities to drive sustainable growth, which to reiterate: firstly, excelling in customer experience; second, driving technology-enabled productivity; and thirdly, delivering competency-led solutions. In closing, I want to reiterate the strength of the underlying performance of the business across the first half, and I remain excited by the opportunities which lie ahead as we pursue our strategic priorities to deliver sustainable growth. I also want to thank our loyal clients and customers, the dedication of our people and our committed shareholders for their support. Ashley and I will be happy to answer any questions you may have. Thank you.

[Operator Instructions] The first question comes from Phil Chippindale of Ord Minnett.

Rob, Ashley, a couple of questions from me. Firstly, just this change to the warehouse funding impact for FY '23. I think, Rob, in your commentary, you said that you referred to your experience to date, so potentially, it's a little bit slower in terms of the rollout. But you mentioned some timing around the onboarding [indiscernible]. I don't quite understand what you're referring to there. Could you just unpack that for us?

Thanks, Bill, and thanks for your question. Yes, so our experience to date, obviously, a new platform and a new operation for us and you go through the usual process of experiences of how it works. With respect to the onboarding of clients with many of our clients, particularly our larger clients, governments and large organizations, there's a process for them to have approved the finances on their panel for their employees. So obviously, it's a new offering to our clients. And so we need to go through processes to get that approved on their panel to have Onboard Finance as a financier option for their employees.

Just turning to the novated lease business. It's obviously performed pretty well over the last 6 months. Is that balance of 74,000, that's a growth of just over 3,000 in 6 months. But can you just tell us what the amount is relating to the Victorian contract that you've won earlier in the year? Just trying to understand what the organic change was there?

Yes. So I think when we put out the release around the Department of Education and Training, I think we stated it was around 9,000 employees had salary packages and around 4,000 employees had novated leases. The numbers that transitioned was slightly less than that. So in terms of the net increase, obviously, DT is the largest proportion of that increase, and there's a little bit of increase through organic and some other clients, but DT would be the largest proportion of that. Obviously, when it transitions across, we take on the administration of it. We don't get the financing of the net amount financed until there's a new lease.

Okay. Last question for me. Just on this U.K. business, you've been considering these exit options for some time. Is there a time frame that you've got in mind here for when we could potentially hear the outcomes for that? Is it fair to assume perhaps [indiscernible]?

Yes. Thanks, Phil. Yes, obviously, when we announced this in August, there's been a substantial change in the U.K. environment, post announcement in August last year, obviously, which we didn't foreshadow and foresee. But we're still working through it. The conditions late last year were challenging, and so we kind of held off late last year. What we're hearing from our advisers and people on the ground is the market is stabilizing a bit more now in the U.K., so we'll continue to pursue it. Exact timing, it's a bit hard to tell at this stage, it will depend on the outcomes in terms of the approach we take with the 2 assets there and the market. But it's a key focus for us during this period.

Your next question comes from Scott Hudson of MST.

Robin, Ashley, just a couple of questions for me. Firstly, can you make a bit of color on the margin volatility in the GRS business has kind of gone from 37 to 42.5 in the second half of '22, and then I guess, back down to somewhere in the 30s. Just maybe understand what are the pluses and minuses impacting that margin portfolio [indiscernible]?

Scott. Yes, so certainly, as you can see in our results, our revenue has gone up, but our EBITDA margin hasn't increased at the same level. A number of factors for that. I think one which we've previously called out is the cost you incur as you bring on orders in terms of novated leases [indiscernible]. Our carryovers increased. So there's a cost pre- actually getting the revenue. That's continued, but not at the same level that it was in previous period. And the second is, and we outlined this in our FY '22 results, obviously with the transitioning of some large clients, we're in on additional resources and costs for that transition period, and so that impacted margins. And third factor is we've gone through a remuneration review period with the Fair Work Commission, which went effective July 1, which was a 4.6% increase plus the super 0.5 -- 5.1% uplift. That's attributable to across MMS, about 88% of our workforce and very large portion in GRS and our PSS segment. So both those factors have had an impact on margins. And over and above that, we've continued to invest in digital and data analytics, which we expect will start to play some pace and dividends in future periods.

Is that -- those additional resources for the transitioning is that now done? Does that come out the cost base or?

Yes. So there's probably 2 parts to it, Scott, that there's one, which is contractors, which are short term in nature for onboarding and getting all that information into our system and welcoming customers on board, as well as getting out and on the ground cost associated with getting in front of the people in the schools and government. The second part is, obviously, there's always a little bit of variable cost that goes with as your book grows. But obviously, large proportion would be short in terms of contractors doing that.

In terms of the bigger strategy that you have announced today, could you just sort of maybe give us a little bit more color on, I guess, how you deliver on those 3 objectives that you've highlighted?

Yes. Sure. Thanks, Scott. So outlined in the strategy, obviously, 3 key areas. For us, we see the first one really about investments in building excellence in digital and data to improve advocacy for our customers and look for greater opportunity to do more business with our clients. So in terms of outcomes, obviously, advocacy means improvement in retention of clients and customers, as well as more opportunities with them. The second part, and the second strategic priority around increasing productivity, obviously, through investments in technology and simplifying the business. We certainly see improvements over time across a number of productivity metrics, but in particularly our margins, which you've alluded to. And in terms of competency-led solutions, obviously, leveraging our capabilities and competencies that we have, the relationships we have in the ecosystems to grow our business more broadly and hopefully deliver ongoing EPS growth. We've also outlined in the calendar that we're going to do an Investor Day in May, which will allow us to give greater detail.

Is there a, I guess, a time frame when you should expect to start to see some of these benefits start to hit the bottom line?

Yes. I think progressively, Scott, in terms of different metrics will change over time at different levels. In the outcomes, we've obviously got already a very high return on capital employed. But in terms of delta, we would see over the coming years, increased productivity and improvements in margins to help support our ongoing EPS growth.

And then lastly for me, just in terms of, I guess, the broader portfolio, are you not considering any other portfolio changes outside of the U.K. exit?

Look, at this stage, we've stated that we want to simplify our group. Obviously, the U.K. is our key focus in terms of our portfolio. Our focus is continuing to explore what the opportunities are in the markets we operate to deliver on the outcomes. If for whatever reason, we determine that they're a better path for them, we'll consider that. But our focus at the moment is delivering on the strategy.

Your next question comes from Richard Amland of CLSA.

A couple of quick questions on the financials. Interest income, that went up quite a bit. Can you just walk us through what's driving that? And is this the run rate that we should expect going forward?

It's Ashley here. I'll take that. Yes, interest revenue, particularly in GRS where I'd focus on in the appendix, we break out what the extra contribution is from our interest income, which is about $4.1 million for the half, which I think was -- is up about $3.3 million, $3.4 million. So -- and that's a pretax number. It's fair to say that if you compare it with PCP, over the last 12 months, we've had the equivalent of 12, 25 basis point movements by the RBA. And so we've obviously seen benefits from that in terms of the interest that we receive on the cash from our float. So that rising rate environment has helped the contribution, particularly in GRS. There are lots of variables that go into that number, including any arrangements that we have with our customers. It includes also how much is passed on to us. And it's something that we do try to actively manage as best we can within the constraints of what we can do with the cash.

So should -- I mean, should we anticipate that continuing to go forward in the current rate environment, we're not going backwards in rates anytime soon, it would appear?

It will be a benefit for us if rates continue to increase in interest revenue as a market expectations. So yes, and we'll obviously, we'll have the full -- going forward, we'll have the benefit of the rate -- the full period benefit of the rate increases that have already happened as well.

Thanks, Ashley. The next question, just on the new claims, net claims incurred line that's gone to zero. Is that also going -- is that what we should be looking at going forward? Has there been a change? Is that driven by insurance [indiscernible] coming down? Or what -- can you talk through that?

Yes, I'll take that one. That's basically the divestment of the warranty business as you compare it against PCP. So the warranty or lease refer to it sometimes as the retail business, so that's, that line coming out.

Very good. Let me see, the U.K. tax credit, $2.4 million, how was that accounted for? Is that included in the Asset Management U.K. EBITDA? Or does that impact somewhere else?

Not in EBITDA. It's in the U.K. Asset Management in the U.K. business, but it's obviously -- it's in the tax line. So it impacts UNPATA rather than EBITDA. So just to be clear, that was in the PCP, right, the prior period.

The on-balance sheet financing rollout, how is that impacted by the rising rate environment? Is there an impact? Or has the movement -- yes, the cost has just been brought back in the context of a slower rollout?

Yes. So two pieces. Well, particularly from the asset management point of view, we have facilities in place. As they roll off, they will be repriced. It's fair to say that when we're pricing with our customers at the moment, we've already taken into account where the rate environment is. So capturing what is going to be an increasing rate environment going forward. So that's just the commercial situation for our asset management businesses. But it will be based when the maturities roll off.

Okay. But it doesn't make a -- the rising rate environment doesn't make a change to the costs that you're incurring through the build-out of the book, is that correct or incorrect?

So then I'll talk about the novated lease piece. So that is obviously the warehouse that we've set up. So we have debt facilities that we'll be drawing down as the book grows. We obviously changed pricing based on where interest rates are that we reflect with the customer. And then once any leases are locked in, we also enter into interest rate hedges to be able to protect our position as well. So there's a matching of rising rates and what happens with pricing. And then we protect ourselves on the cost side as well.

Okay. So the net-net should be no real change. Okay?

Yes, correct.

And then the last question for me, in the PSS business, since the last earnings result, there are 2 acquisitions done by competitors, IFM and NIB. Can you just comment on what sort of -- what the shape of that space is that you're seeing, and your appetite for further acquisitions going yourselves?

Yes. So as we've, I think, previously outlined, we certainly see consolidation happening in this space over time with, I think, there's now over 1,500 plan managers to support almost 330,000 participants. We'll continue to assess opportunities as they arise from a nonorganic perspective, but make sure that they align from a strategic fit, cultural and risk appetite perspective. And we'll continue to look at those. We obviously evaluate opportunities as they arise and monitor those and still believe that we'll participate in nonorganic when the right acquisition becomes available.

Your next question comes from Chenny Wang of Morgan Stanley.

Maybe I can just start off on the PSS business. And I was interested in getting a bit more color on the incremental costs there. Like where is that cost going into -- and can you kind of help us understand some of the buckets, whether it's, let's say, marketing and brand building, maybe you're investing ahead on technology or employee resources versus maybe the overall [indiscernible] whether that's kind of increased? And yes, you guys need adding more cost to support that intensity increase? Some color there would be great.

Yes. Chenny, I mean the first thing, I think, to understand is that there was impact in the revenue line, which there were no annual fee increases as well as participants are continuing to increase the duration of their plans. So previously, plans were largely 1 year and you would get a renewal fee every year. Plan durations have been moving out. So you're not getting that renewal fee every year now as plans at 2 or 3 years in terms of tenure. That's I think the first thing to understand. I think the second is in terms of -- from a cost perspective, we're taking a medium- to long-term view of the growth of the scheme in terms of continuing to invest in it. In terms of the buckets, I mean, the first is obviously continuing to put some people on the ground to grow acquisition opportunities from an organic perspective and relationship perspective. The second is investment in the integration of plan tracker into plan partners. So we made a good progress during the period and moved our plan tracker onto our common technology stack. But obviously, apart from that, we're operating 2 platforms. So there's costs associated with that. The third is continuing to invest in our data and our ML technology and in raising the bar in terms of how we manage cyber in this space and fraud to support the scheme. And fourthly, I think, obviously, as this business grows in terms of its relativity to the group, there's also increasing costs associated with the group recharges within the group. So I think all of those factors played a part in terms of costs. And then similar to our GRS business, obviously, we had remuneration increases from July 1 with the Fair Work Commission, which applied to a large portion of this business.

Got it. No, that's super helpful. Maybe I can [indiscernible] GRS and PSS together on this. So you just mentioned for PSS in terms of the integration of Plan Tracker and you're making progress on that. To me, that sounds like short-term costs. And earlier on the call, you also mentioned some of the short-term resources in GRS as well, with respect to the [indiscernible] transition. Just kind of help us understand if these are indeed short-term costs, are you able to quantify some of that for us or help us understand ballpark where the quantum of those resources?

Not in terms of specific quantification. But to your point, there is some short-term costs incurred across both of those businesses, as well as ongoing costs, right, in terms of labor cost increases and ongoing investment in technology and cyber, which is just part of the business going forward. But we certainly would say in line with our strategy that these 2 businesses over coming periods would start to benefit from a productivity perspective and see that in our margin improvement.

Got it. And then just last one for me. Hopefully, it's quick. Just in terms of seasonality in the PSS business, just remind us, is there a seasonality in this business?

Not like the GRS business. So it would just be obviously day count differences between the halves. But the way we generate income in the PSS businesses, the fees associated with the customers that we manage, irrespective of the size of their plan. The only seasonality aspect will just depend on when renewals end up just greater in certain periods, depending on when we've had growth and when those renewals come through from the government.

Your next question comes from Jack Dunn of Citi.

Just a quick one on -- in the AMS business. The remarks, can you give us a sort of indication on the exit rate for re-marketing yields? Did it sort of come off from the 273% you're sort of showing in the package there?

The exit rate, sorry, Jack?

The exit rate from re-marketing yields. Is it in line with what you were calling out at 273% above first half of '20? Or had it fallen a bit towards the end of the year?

Right. So I think in terms of period-on-period, I mean the first half of '23 is certainly up on what it was for the first half of '22. So that's the average over the period. In terms of differences between months, don't actually have that at hand, but that is the average in terms of relative to pre-COVID and we certainly see an increase in a relative sense to the prior comparative period.

All right. Perfect. And then that's sort of holding in the first 7 weeks of this calendar year as well in the same levels?

I would say in line with comments made earlier that everything is kind of stabilizing in this space at the moment, certainly in the first couple of months of this calendar year.

Your next question comes from Paul Buys of Credit Suisse.

Rob and Ashley. First one for me, please. Just a question on novated lease, you gave us color on the order book, and we can see net that it's growing. I was just interested to know if there's been any drop off in orders, obviously, from a consumer's perspective with those settlement delays and ongoing interest rate hikes? How sticky has that order book been? Has it been in line with historic levels? Or have you seen any attrition there?

No. In terms of what we've experienced to date, Paul,, broadly in line. Whilst interest rates have certainly moved over the period, as we all know, and -- we know that every time the RBA makes those announcements, those increasing inquiries from people in the pipeline as well as customers in terms of the impact. To date, it's holding up well, and we've seen that over the recent period. Obviously, orders benefited both from existing clients and penetration from our book as well as some new clients have come on board.

Okay. And then just wanted to reconcile the kind of your, just sort of auto operating environment outlook with, I guess, your second half expectations for novated lease. So you're talking to new car sales, obviously back to pre-pandemic levels, stabilization in settlement deliveries. Just I want to -- I mean that sounds like a little bit of an improvement. Just wanted to reconcile that to your outlook for kind of more of the same into the second half, and why there wouldn't be at least some kind of modest improvements in terms of in terms of the amount at least of deliveries, and perhaps starting to run down that excess carryover. I just want to reconcile kind of your outlook with the macro.

Yes. Thanks, Paul. I mean, certainly, our view at the moment on everything we're seeing and hearing is that the second half conditions are similar to those in the first half. And in terms of delivery times and forward expected delivery times, they've certainly stabilized, which is encouraging. In terms of the carryover, as outlined, obviously, the growth in that is at a lesser rate than it was the prior period on the year before. So we're certainly seeing that starting to slow down in terms of growth. Exactly whether that comes off a little bit or grows moderately up, it's probably a bit early to tell. I mean the first couple of months so far this calendar year are broadly in line with what we saw towards the latter part of the last calendar year.

Okay. And last one from me. Just -- if you've got any -- any kind of color you can share in terms of your contract renewal pipeline? Any kind of specific ones to call out in coming months? And thoughts, I guess, on that pipeline?

Yes. I think as we have stated before, we're in that tender process with both our 2 largest contracts, Queensland Government novated lease and South Australian government. We've submitted our tenders and there's not much more we can comment at this stage. Obviously, we expect them to be competitive as they always would be. In terms of largest ones, they're the key ones we communicated obviously previously on [indiscernible] and got renewed as a novated lease on the panel for New South Wales Health.

And Rob, any view on the timing? Is that kind of coming months? Any view on the timing of those ones that you put the tender in for?

We expect in this half, exactly when we wait and see. I mean they're obviously both 30 June contract. So we expect that in the coming months.

There are no further questions at this time. I will now hand back to Mr. De Luca for closing remarks.

Thanks, Karl. I appreciate it. Thanks, everyone, for joining us this morning. I will now conclude the call.

That does conclude our conference for today. Thank you for participating. You may now disconnect.