SG Fleet Group Limited (SGF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SG Fleet Group Limited 2024 Full Year Results Call. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Robbie Blau, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everybody, and thank you very much for making time for us today. We know it's a very busy reporting day and particularly so in our sector. My name is Robbie Blau, the CEO of SG Fleet. With me today is Kevin Wundram, our CFO. As usual, I'll refer to the slide numbers as I go through the presentation. Please turn to Slide 3 for a quick overview of the period. This has been an exceptional year for us with underlying profit after tax growing close to 20%. The second half picks up where we left off in December last year and orders and deliveries again achieved new highs. Both the corporate and the novated funded fleet grew materially, which is very pleasing for us. While deliveries reached exceptional levels, the order pipeline reduction has only been partial to date, particularly in the tool of trade channel. At the rate of reduction seen in the second half of the 2024 financial year, a return to pre-covered pipeline levels could take another 1.5 years to 2 years. We were anticipating a drop off in used vehicle values as supply and deliveries improved. But as the months past, we did not see that occur as early or as materially as expected. More on that a little bit later. We do believe this will finally start to occur in the current financial year. While we are confident earnings will remain strong, lower used vehicle values in combination with a couple of other factors, we'll see us return to what I would call a more normal environment and revenue profile. With the LeasePlan integration on track, this will, of course, be followed by the extraction of the associated synergies, and we reaffirm our synergy number of about $20 million, as I've said over the past few years. $again, as I've mentioned over the past few results, in addition to that, there will be some additional savings coming out of our technology investments, which should add to that number. I'll come back to all of that at the end of the presentation when I talk to our outlook. As was the case in the first half, the increase in revenue generated by the strong deliveries more than offset the adjustments in end-of-lease disposal income. Our confidence in the continued success of our model and our growth potential is evidenced by the decision to declare a special dividend of $0.15 per share, bringing the total dividend for the year to $0.33 per share, more than double that of last year. Please now turn to Slide 4 for a recap of the period in our Australian corporate or tool of trade channel. It's been an exceptional year for vehicle registrations in Australia so far. Despite the slower than usual June month, it looks like we will reach record registration numbers in the calendar year. I'll come back to this in more detail a bit later, but we've seen more stock coming into the country, which is obviously positive for both of our channels. While for some models, we still have orders to fill that date back 2 years. We are gradually clearing the supply challenges of the past few years. In line with extensions and inertia are starting to drift lower. The economy remains in a good state and corporate confidence is stable. Competition has remained largely rationally in our Australian tool of trade business over the past year. Very pleasingly, though, our business development teams in the corporate channel have never been busier, and the structural demand drivers that have had a positive impact in previous years still remain very much prevalent in our market. This is bringing more organizations to outsource fleet management or funding for the first time, typically via sale and leasebacks in the case of finance assets. We also continue to make good progress in widening our product and services offering and take up by our customers has been very encouraging. You might remember that in the 2020 financial year, I said about 42% of our customers took 2 or more of our products. Well, 4 years later, this has become the norm in the SG fleet book with about 85% of customers taking multiple products, a really great achievement for our business development teams. Interestingly, the legacy LeasePlan book, that figure stands at 47% and the LeasePlan's SIP platform creates limitations to upselling that book, completing the system migration will instantly free up significant potential to increase product penetration across a significant part of our combined customer book. Please now turn to Slide 5 for a look at the Novated channel. While during this period, consumers had to process a flood of seemingly contradictory economic data, we continue to see strong inquiry levels and leads in novated. The performance of the Novated channel confirmed that Novated leasing has remained front of mind as a product for both drivers and employers. Employers are increasingly recognizing its financial appeal and sorry, my apologies, employees are increasingly recognizing the financial appeal of the product. Employees see that Novated leasing is a must-have employee benefit that can conveniently be provided and managed by third parties such as ourselves. As I mentioned, while the EV incentives have undoubtedly attracted attention to this product, we are seeing increased driver interest across all vehicle types. I'll talk a bit about this in a bit more detail and particularly around low and zero-emission vehicles later on in the presentation. But I think it's important to say that our Novated customers remain huge fans of these assets. Interest in EVs has not dropped off as consumers continue to take advantage of the FBT incentives introduced almost 2 years ago now. Incentives have also led to significantly greater interest in plug-in hybrid vehicles. A widening model range and the narrowing price gap between EVs and comparable ICE models have also helped. Additionally, plug-in hybrid demand has grown strongly from a very low base in our Novated channel. Orders for battery EVs grew 32% on the first half and plug-in hybrid orders grew 69% on the previous period. Adding in hybrids, low and 0 emission vehicles now account for the majority of Novated orders in our book. ICE orders, however, have remained strong. Overall, lease grew significantly again over the previous period, and orders were up around 15% on the first half, a really strong result from our team. In line with my observation earlier about EVs having brought an entirely new consumer cohort to the product. Customers new to Novated leasing accounted for a significant portion of the growth achieved in our book. In parallel with that, we were able to sign up a large number of new employers. Those will bring growth in future periods. Further new business opportunities continue to arise at a significant pace. Our focus is on translating the inquiry growth into actual orders by further improving our conversion rate. In this regard, I mentioned our digitization efforts at the first half, and I'll return to this theme a little later in the presentation. Smoother digital journey, we are building the smoother digital journey rather that we are building will yield a world-class customer experience from initial contact to conversion and ongoing service, which will, of course, support retention in our book as well. Combined with the efficiencies achieved by our integration process, the digital service portal will, of course, also lower our cost to serve. That was some of the savings that I talked about a few minutes ago. If you could now turn to Slide 6 for my comments on our New Zealand business. It's been a mixed bag from an economic perspective in New Zealand. While we seem to be moving out of recession, economic conditions are likely to remain subdued in that market. Although this has been reflected in slowing vehicle registrations, particularly in the passenger segment, these conditions have had little impact on our business there to date. Used values other than for EVs have normalized very gradually. New business development and tend activity has remained particularly strong during the period for us. As to EVs in this market, sales took a hit earlier in the period after the end of the clean card discount, which in turn led to some heavy discounting and a drop in used values in EVs. That seems to have stabilized somewhat in the past few months. At the same time, hybrids have attracted more interest in the New Zealand market. We've seen one particular competitor in this market acting fairly irrationally in terms of pricing. But other than that, the main state players have remained pretty rational over the period. Nevertheless, we've been very successful in retaining existing customers that went to tender during the period, and we picked up additional wins across a range of sectors in some cases as part of [indiscernible] arrangements. We have a firmly established presence in the government sector in New Zealand, and this has again allowed us to present a number of additional solutions to existing customers in that segment, including sale and leaseback opportunities. Pleasingly, demand for our eStart product continues despite the drop in private EV demand. Turning now to Slide 7 and a look at our U.K. business. With the elections out of the way in the U.K., there's definitely a feeling things will settle down and the investment will pick up again in that market. This is likely to drive some economic growth. Inflation now appears to be under control and wage pressures are falling off in that market. Car registrations are picking up again and battery electric vehicle demand continues to grow, largely driven by tax incentives. Used EV values have however, remained under pressure in the U.K. market. As is the case in Australia, plug-in hybrids are gaining in popularity as they also take advantage of the benefits in kind incentives. I'll come back to that theme a little later in my presentation. Our business there has stayed on the steady course we've seen for a few years, and we are seeing a healthy stream of opportunities in that market. We continue to sign up new accounts for both tool of trade and for our Nova lease product and we have extended a number of sole supply arrangements for multiple year periods. At the same time, upsell within existing customers continues at a steady pace in the U.K. business. Short-term high solutions, in particular, are attracting strong interest for us over there. These trends have continued in the current period with a number of contracts expected to be awarded in the first half of the 2025 financial year. I'll now recap on the various comments I've made regarding supply, order pipelines and used vehicle values on Slide 8. As mentioned, supply has definitely improved further, although we are still facing challenges with some makes and models and where special body builds or accessories are required. That also applies to telematics devices where we have seen some supply shortages. In Australia, we're making about 3,000 funded deliveries a month and we are yet to fill some model orders that we originally received 2 years ago, as I said a little earlier. In terms of the order pipeline, generally, the tool of trade pipeline has come off by about 18% over the past year and about 9,500 units at the end of the period, it's still about 3.5x what we would consider a normal level. As reported in February, the Novated pipeline started to shrink a little earlier, peaking in June 2023 and reducing by 45% during the financial year, although the rate of reduction has slowed markedly in the last few months. It now stands at about 3,600 units, which again is still 3.5x normal levels. In summary, Tool-of-trade, Novated combined, we still have a backlog of about 13,000 units and that translates to somewhere in the order of an $80 million backlog on that pipeline. Taking the rates of new orders and delivery seen in the second half, it could take 1.5 years to 2 years, as I said earlier, to reach levels seen in mid-2020. In other words, we clearly will continue to have elevated delivery numbers for quite some time now. In terms of average end of lease selling prices, these have continued to normalize gradually. As you can see on the chart, the rate at which used vehicles are normalizing has been slowing recently as well. I think that's because we're starting to get down towards what the new norm might be, which we've said consistently will be elevated from pre-covered levels. EVs have suffered from the volatile new car pricing packs of some manufacturers, however, and certainly used EV prices have been more volatile. We're also seeing used prices come down somewhat because we're getting back a number of older vehicles that were in inertia, while we were waiting for deliveries. $so they've either been in inertia extension. So they do come back a little older. Again, that trend is normalizing now as we start to get vehicles through which is beneficial to where the numbers might settle. Our vehicle tenders continue to attract significant dealer interest. Average end of lease selling prices in the past financial year were about 130% of pre-Covid levels. As we've said repeatedly over the past few years, taking into account new car price inflation and continued structural supply challenges, we see values above pre-Covid levels for the foreseeable future. It will, of course, fluctuate seasonally and in line with volumes coming to market. We're already starting to see the seasonality creep back into the market, which is actually a really good sign because it's a sign that the market is normalizing. We're obviously happier to operate in a normalizing market. It's more sustainable for us. I'll hand over to Kevin now to talk about the financials, and I'll be back a little later. Thank you.

Thanks, Robbie. If you could please turn to Slide 10. This year, we've had exceptional growth in the volume of vehicles delivered across both the Corporate and Novated channels, which has driven significant growth in most of our revenue lines. As foreshadowed, used vehicle disposal values have softened as a result of the continued normalization of mainstream vehicle supply. This has caused our end of lease income to fall by 27%. Yet despite this, we were able to grow our total net revenue by 11.4%. The growth in operating expenses was slightly lower than the growth in net revenue. As a result, operating income grew by 12.8%. Interest on corporate debt was lower due to lower leverage as well as due to the fact that the prior period included a one-off charge of unamortized debt establishment fees that were expensed in the lead-up to the refinance of the facility. The net result of all of this is we were able to grow underlying NPAT by 19.2% versus PCP. If you could turn to Slide 11 for a look at the corporate fleet movement. We received orders for 15,687 Tool-of-trade vehicles, which is 12% up on PCP. Stock availability from the mainstream manufacturers that make up a typical corporate fleet continues to improve. This, together with a number of large sale and leaseback opportunities in the second half allowed us to grow our deliveries for the year by almost 40%. The improved supply and material growth in deliveries has meant that we are starting to make inroads into the order pipeline, but it still remains elevated at circa 9,500 vehicles. Turning to Slide 12 for the Novated fleet movement. Order growth remained strong, coming in at 9.3% above PCP. Delivery growth for the year was exceptional at 36.8% up on PCP, largely driven by demand for electric vehicles due to the 0 FBT incentive. Touching briefly on the light fleet on Slide 13. The light fleet declined slightly this year, largely as a result of our success in converting an unfunded customer to funding through a sale and leaseback transaction. Turning to Slide 14 for a look at the individual net revenue streams. Net rental and finance income grew by a massive 44%. This was driven by a combination of strong growth in deliveries, vehicle price inflation and lower depreciation for on balance sheet funded operating leases. Over to Slide 15 and touching on net mobility services revenue. We were able to grow net mobility services revenue by 10.2% during the period, driven by growth in the total fleet under management as well as the cross-sell of SG Fleet products into LeasePlan customers. Please turn to Slide 16. Net additional products and services income grew by 22.6%, driven by the growth in new funded deliveries, which resulted in a significant uptick in accessory sales as well as rebate income. Over to Slide 17 to look at Finance commission. Finance commission was up by a whopping 50%. This was driven by growth in P&A funded deliveries and extensions of 20%, coupled with growth in the average finance commission per unit of 25%. The growth in finance commission per unit was driven by a combination of higher average funded capital per unit caused by vehicle inflation as well as proportionately fewer extensions relative to new vehicles in the funding mix. Please turn to Slide 18. As expected, the improvement in new vehicle supply has caused used vehicle pricing to soften. Our average disposal profit per vehicle reduced by 31% versus PCP, but it remains at about 2.6x pre-Covid levels. Disposal volumes were marginally up versus PCP. Please turn to Slide 19 for a brief look at the fleets and credit provisions. The growth in the residual value and inventory provisions is largely due to the softness of used electric vehicle values in the U.K. and New Zealand. We have not experienced this in Australia because of the vast majority of electric vehicles on our fleet on Novated finance leases. The growth in the ECL provision is driven by growth in the book as well as increased vehicle usage by Novated customers. Over to Slide 20 for a look at operating expenses. Operating expenses are still growing faster than we would like. Our average head count increased by 8.2% versus PCP as we gear up for the final push in our migration projects. We have also invested significantly in improving our overall employee value proposition. This investment is already paying off through improved engagement and reduce staff turnover. The growth in technology costs is due to our ongoing investments in infrastructure, platforms, cybersecurity measures as well as our ongoing digitization project. On Slide 21, we've presented the detailed P&L. But since I've spoken to the key line items already, I won't spend more time on this. Over to the financial position on Slide 22. The balance sheet obviously reflects the strong growth in the book and the related increase in lease portfolio borrowings. In this period, we have materially improved the advance rate on the lease portfolio, which has released a large amount of cash and allowed the Board to declare a special dividend, which I'll talk to in a few slides. Corporate leverage remains conservative at 0.6x. Touching on funding on Slide 23. We saw continued improvements in the lease portfolio composition towards our goal of having half of the book funded by securitization. But it's fair to say that we would like to see faster progress in this regard. In relation to corporate debt, at the time of the LeasePlan acquisition, we entered into a 3-year interest rate swap at a very attractive rate. That swap unwinds at the end of September this year. As a result, we will see a $7 million uplift in interest costs in FY '25. Turning to Slide 24. Based on a 65% payout ratio, the Board has declared a final ordinary dividend of $0.09 per share fully franked. As mentioned earlier, as a result of our efforts to optimize the advance rates on the lease portfolio, the Board has been able to declare an additional fully franked special dividend of $0.15 per share, bringing the total final dividend to $0.24 per share and the total dividend for the year to $0.33 per share, an increase of 110% versus PCP. Finally, please turn to Slide 25. Cash generation came in at 101.2%. Whilst we delivered significant growth in the book this year, we were simultaneously able to reduce the equity invested in the lease portfolio. This translated into a material increase in cash generated from operating activities. I'll now hand back to Robbie for an operational update.

Thank you, Kevin. Turning to Slide 27 for the 5-year horizon slide we've presented now for a couple of years. This is probably the first time we have not made any changes to timing as we expect to supply and use value normalization to play out in the near future with used values to reach a stable and higher level than the pre-Covid base during this financial year and supply to improve further over the next few years. As mentioned before, reducing the order pipeline to levels seen pre-Covid could possibly take up to 2 years. The integration time line remains unchanged, as I will explain next. We expect to realize the cost synergies once we complete the integration and the revenue synergies will obviously be continuous over the next number of years. Essentially, the synergies will become permanently embedded in the combined business. All the other key drivers of revenue growth and efficiency enhancement are now effectively becoming permanent features of our longer-term outlook. Please now turn to Slide 28. In February, I provided an overview of the future state that we are shaping for SG Fleet by integrating the LeasePlan businesses and by digitizing key processes in our operations. Since then, we've made really good progress in both regards. We've successfully brought together the 2 existing SG Fleet platforms in the Novated channel. This means that for the first time in our history, the SG Fleet brand operates off one single platform. 2 out of 3 phases have been completed for the LeasePlan New Zealand system migration with the third and final phase following in a couple of weeks' time to complete that process. I'll add that, that process is well on track as we sit here this morning. Having completed these 2 projects, we can now deploy additional resources to the LeasePlan Australia system migration. We will also be able to leverage off the work done in New Zealand to develop a consistent trans-Tasman business model. If you could turn now to Slide 29 for a snapshot of how digitization is shaping our customer journey, as mentioned when I spoke about our Novated channel. We are increasingly digitizing processes across our business to improve our efficiency. As our outline in February, we'll be able to generate benefits in terms of sales capability, lower cost to serve and enhance innovation. The most visible manifestation of this progress can be seen in the way we interact with our customers. The objective is to allow our customers to directly engage with our products and services through preferred channels and allow them to provide constant feedback on our product offering and service provision. It's a very customer-centric approach that we're taking to this project, the first pieces of which are already being delivered, importantly, and we're very excited about what this means for our customer journey and for our ability to better serve those customers at a better cost. To achieve this, we're building a very comprehensive interaction model, and that will certainly make sure that our customers have a completely seamless experience across the life of their lease. Please turn to Slide 30 now for a quick comment on the current EV landscape. It's been an interesting period in the EV world over the past 6 months. Very volatile new pricing and consequently used prices, higher insurance premiums and an immature maintenance network have all played a role in that volatility. What has emerged is a widening interest in low-emission vehicles generally, which is wider than just battery electric vehicles. More recently, we've seen plug-in hybrids become much more popular in the Australian market. Of course, standard hybrids are now firmly established as a large segment in our market. It's worth pointing out that the first hybrid vehicles came to Australia almost 20 years ago now when the first Prius was launched. So maybe there's something to be learned for how long sort of adoption takes for these technologies. You have read the stories about over-supplying some EV marks and aggressive pricing tactics as sales growth has been slowing. In Australia, EVs now account for about 8% of all new vehicle registrations and are likely to remain at that level for the foreseeable future. Interestingly, plug-in hybrids are becoming more popular helped by the FBT incentive and a widening model range. That incentive continues to drive interest in 0 or low emission vehicles in our Novated channel in Australia, as I mentioned earlier. Battery electric vehicles are now definitely a feature of the market, but growth rates have invariably fallen off. Having said that, the government remains firmly committed to driving adoption. Not only will we have the new vehicle efficiency standards coming in, in January 1. But the federal and state governments are setting ambitious targets for their own fleets to shift to 0 or low emission vehicles. Of course, given our strength in the government tool of trade sector, we are looking to play an important role in achieving those objectives for these very important customers. New Zealand had mixed fortunes in the low emissions world in the second half of this financial year. After the end of the clean car discount scheme late last year, EV sales dropped dramatically to which manufacturers responded with very heavy pricing discounting on new assets. Things have stabilized though somewhat in recent months, but battery EV registrations have certainly gone backwards to levels last seen a few years ago in the New Zealand market. This has led to a shift from 0 to low emission vehicles, particularly hybrids in that market. The U.K., which is obviously further ahead on the curve in this regard, continues to see steady growth in EVs and PHEVs. Although for EVs, this growth is well short of the growth rate seen over the past 5 years. EVs are struggling in the light commercial segment in that market as range anxiety continues to scare off delivery companies. A big part of the passenger vehicle EV demand is driven by the tax incentives available in respect of those vehicles in that market. This is greatly benefiting us, creating strong demand for our over-leased product in the U.K. With the new government in place, it will be interesting to see whether there will be an attempt to kick-start EV adoption again. It's anticipated that the emission reduction target postponed by the previous government will be moved forward again. But labor has given no indication it will postpone the end of the road tax exemption for EVs in the U.K. market. In summary, as we've indicated over the past few years, EVs are had to stay as is a global drive to reduce vehicle emissions. $this will play out in the tool-of-trade segments as well in due course. Obviously, a very significant opportunity for us at SG Fleet. The only thing that has changed is that we are gaining more experience through the full life cycle of the vehicle, again, will be very useful to our customers. If you can now turn to Slide 31 for a few words on our continued progress in the ESG space. It has always been our stated objective that our approach to long-term value creation is driven by the principle that industry-leading ESG behavior should be integrated and embedded in our daily business practices. In the past few periods, we've made significant progress in this regard. This year, we executed our first full year ESG and emission reduction action plans, created an ESG information hub for our people and introduced a more comprehensive environmental and social assessment of our supply chain. We also achieved group-wide carbon neutrality with New Zealand joining Australia and the U.K. in that respect. Our next ambition is to set clear net zero targets for all of our geographies, part of which will be continued transition of our own internal fleets to EVs. As I always note, the biggest difference we can make is by helping our customers achieve their own sustainability goals. For that purpose, in addition to sourcing vehicles and co-ordinating the development of support infrastructure, we are now also developing integrated mobility solutions that include targeted actions to meet our customers' sustainability objectives. Our people, as always, are our strength. During the year, we introduced a number of additional initiatives to enhance the attractiveness of our workplace, as Kevin alluded to a little earlier, our training and the benefits we offer to support our people at work and beyond. On this slide, you can see some of the images of the ESG initiatives we introduced during the period. Please now turn to Slide 32 for a quick summary of today's presentation before I move on to our outlook. In summary, this has been another exceptional period for us, as I said earlier, with close to 20% growth in underlying profit after tax. Just as in the first half, the increase in revenue generated by the strong deliveries easily offset the adjustment in end of lease disposal income. Orders and deliveries continue to set new records in both the Corporate and Novated channel. The trend we saw innovated in the first half, namely greater consumer awareness and Novated leasing on the back of that greater employer interest continue to drive new leads and orders as well as a lot of new customer wins. While New Zealand is currently doing it somewhat tougher from an economic perspective, opportunities continue to arise for us there, and we are picking up our fair share of what is on offer in that market. The U.K. is clearly benefiting from a stabilizing environment post election and this is starting to translate into improving business confidence and greater investment, which benefits our business there greatly. While vehicle supply is normalizing, the rate at which we are reducing the outstanding orders pipeline means that we will continue to have elevated delivery numbers for quite some time to come. The LeasePlan integration has made significant progress during the period, and we remain on track for completion. At the same time, our digitization drive will ensure we deliver an exceptional connected customer experience moving forward. As I said at the start of the presentation, we are expecting the end of lease tailwinds to abate at some stage during the second half, we were expecting, should I say, as supply normalize. While supplies did improve, and we were able to step up deliveries on the back of that, used vehicles continue to hold up for longer than expected. We do believe this will finally unwind during the current year. So I'd like to talk you through our view on the outlook for the year on Slide 33. Looking at how we expect the current financial year to play out. The first and major factor to take into account is that, as Kevin said, we are projecting an increase in interest on corporate debt due to the maturing of an interest rate swap originally entered into 2021. Obviously, rate movements have and we'll continue to have an influence on that. So this does not come as a surprise to anybody. As mentioned by Kevin earlier, we forecast the increase to be about $7.3 million. With regard to operating expenses, we expect that our technology spend will temporarily increase in the lead up to the final phase of our system migration program. This spend will, of course, come out in the 2026 financial year once the integration is completed and the synergies are realized. As mentioned earlier, we reaffirm about $20 million in pretax synergies per annum following the system migration of the lease plan business. As I've said earlier, our other technology investments and initiatives will certainly yield some further upside to that. Our financial profile will also start to reflect the gradual return to a more normal environment. We've obviously had quite a few years in which external factors such as the supply disruption and its impact on used vehicles have led to an exceptional performance in some of our revenue lines. We expect these influences to somewhat abate during the 2025 financial year. In other words, we're not going from tailwinds to headwinds not at all, but we do expect to return to a more stable environment, which we believe is a positive base to build off longer term. As supply of mainstream brands continues to improve during this financial year. This will drive further growth in deliveries, boosting finance commissions income where we fund the vehicle through a principal and agency arrangement and net rental income where we fund the vehicle on balance sheet. Obviously, also the movement to on balance sheet for us constantly has an effect of spreading income over the life of leases. The growth in deliveries will also reduce the volume of older vehicles in extension and inertia, again, a feature of the last few years in the market. These typically are in our book at higher margins and lower depreciation costs, so the runoff will impact net rental and finance income. On the plus side, more deliveries will mean higher end of lease disposal volumes. So while growing supply should lead to a continued gradual reduction in average end of lease disposal profits. Net vehicle risk income will be positively impacted by the greater number of disposals. Taking all of these into account, we expect to deliver an underlying input of between $88 million and $95 million in the 2025 financial year. The expected $7.3 million increase in interest on corporate debt referred to earlier accounts for a substantial or most of the difference between 2024 underlying NPATA in the middle of the 2025 underlying NPATA range. The balance is made up of other potential ups and downs, the variables that I've just discussed over the last few minutes. As it's still very early in the year, we'll need to see how quickly and to what extent the expected normalization of the environment occurred. As I said, over the 2024 year, we expected some of that to happen, and it certainly didn't happen as quickly or as wifely as we thought it would. In other words, the range still puts us well ahead of the 2023 financial year when we were very much enjoying the tailwind of average end of lease selling prices. To put that in perspective for you. In that year, net end of lease income accounted for more than 57% of operating EBITDA in our business, whereas in the 2024 financial year, the contribution dropped to about 36%. Notwithstanding this decline, we grew NPATA by about 17%. So a very pleasing result and a very pleasing sort of endorsement of our model and the resilience in our model, which we're very pleased about. This certainly does show that all profit drivers are improving and the business is in very good shape. The progress is very much reflected in our ability to declare that special dividend of $0.15 that I referred to at the start and that Kevin has explained. We're very happy to declare that for our shareholders. That for now is all I have on the formal presentation. Thank you very much for your time and happy to take all in any questions.

[Operator Instructions] Our first question will come from Paul Buys with Canaccord Genuity.

First question just around your Novated lease business. You spoke a lot about obviously how that's growing in number of ways. I just want to get a sense of your view on yields on the Novated leases into next year. There's just been some, I guess, competitive commentary on the impact of price competition in EVs, in particular, which is obviously a very well-known factor, but just wanted to get an idea of how your business is handling that?

Look, I think a couple of points there, and Kevin jump in if I'm missing any of them. EVs are still priced ahead of normal ICE vehicles. So we still continue to see higher margins on those vehicles. All we were pointing to is the fact that they're normalizing somewhat. So we're very positive on that front. In addition, as I've said over the last few periods, we are not banking our future solely on EVs. I think that would be a somewhat irresponsible strategy for our customers actually because remember, all of these EVs have to come back into the market at some point. So we're very much selling febs to our customers. We also sell to a corporate customer who has a higher salary than a government sort of employee. So febs remain very interesting to them. ICE vehicles remain very intent. We still have a really good spread over our fleet. So we remain positive on margin opportunity in that book over the time. Also important to note that, as we've said for a number of years, we feel that where our interest margins are in that business are very sustainable. If not, they'll have some upside. They certainly are in a very different place to some of our competitors in the market. So we're not seeing competitive pressure on pricing at all. Quite the contrary, actually, given where we priced.

Then just kind of extending that into hybrids. Just wondering if you've got any thoughts on the possibility of an extension from an FBT exemption for the hybrid specifically? I guess, either way, what would the impact be on the Novated business if it's not extended?

Look, I think firstly, to be clear, we're only talking about plug-in hybrids, just for those on the call. Look, our feeling is and again, I'm giving you an SG Fleet view, I can't speak for the government. We are talking to the government about their views on this. It would be very responsible for a number of reasons to extend that plug-in hybrid opportunity. The reasons are numerous. The first thing that there are a number of markets where pure EV just doesn't work. You can't shove pure EV down rural people's throat because where do they charge them and how do they get the distance they're needing them. But plug-ins got a very obvious solution for that. Plug-in hybrids are an obvious solution for youths where range anxiety on fully battery electric vehicles are a problem. Plug-in hybrids are a solution for people that are transitioning into EV and aren't quite there yet. So it would make sense for an extension there. I'm not sure whether we'll achieve that or not. We are talking to government. We think it's a sensible way forward. The bottom line is if it's not achieved, it will drive a lot of people back into pure electric again because a lot of people are taking advantage of the legislation. There's no doubt about it. If you look at the shift out of pure retail sales from the dealers world into Novated, you can see that shift. So what does it mean for our business? It probably doesn't have a real effect on demand in our business at all, but we think a more balanced approach would be the ability to sell normal hybrids, plug-in hybrids and febs, all of the above. We've certainly seen that be the case in the U.K. In the U.K., plug-in hybrids have been a very successful sort of transitional road to full electric as well as the right asset for certain use cases. I hope that answers your question, Paul.

Then just the last one from me, just I guess a general one on your cost base. So you're clear in your outlook statement there in terms of technology costs increasing in the final phase of the migration. I guess I just want to understand your view on your overall OpEx base. Is it really kind of an increase of the current base into the next year before it starts reducing? Or is this sort of a first half, second half timing that we should be aware of there? I just wanted to kind of understand the drivers.

If you want to answer the detailed question then I just want to make a general point on that after you.

Yes, it's not really a first half, second half issue. The costs will be elevated throughout FY '25 and then post the SIP migration, that's where the synergies and the cost out will come through.

I think 2 points on that, Paul. The first is they'll be somewhat elevated. It's not a massive jump up. It's just that they're remaining elevated. They've been elevated for some time now. We could be too smart by half about this and get external consultants to come in and do it and normalize the hell out of that number. The truth is we're doing it in-house because we want the capability. We want that digital capability in the business. Then we'll trim down the capability massively when we have to. So that's the reason why we're calling it out. But we've set a program. We're at the final stages of that program. It's on track. It's on time as we speak today. Never going to overpromise in that regard. We all know our technology migrations are. But right now, we're feeling like we've got a program that's achievable and doable, and we're just trying to execute very well and efficiently.

That's all for me.

The next question will come from Scott Hudson with MST.

Just to clarify, that $7.3 million interest cost, is that a post-tax impact or a pre-tax impact?

That's pre-tax cost.

I guess in terms of the guidance of the outlook commentary, that accounts for the majority of the headwinds into FY '25 relative to the FY '24 base?

Correct.

Yes. Look, there's a lot of moving parts, but that's a key part, yes.

Summarizing, I'm assuming that you're expecting a decline in interest costs, a modest increase in the OpEx base and a decline in end of lease income, which will, offset continued growth in the fleet and Novated earnings pieces, is that correct?

Sorry, just not a decline in the interest cost and the increase in the interest cost.

Yes, interest.