Thank you for standing by, and welcome to the FleetPartners Group FY 2022 full year financial results conference call. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Julian Russell, CEO. Please go ahead.
Thank you, operator. Good morning, and thank you for joining our FY 2022 results presentation. Today, we are presenting to an all-time record set of results for our group. We've seen absolute outperformance in this set of results, and we're highly confident about how well the group is positioned for future growth in any environment. I'll cover the highlights shortly and then hand across to Damien to go through the financials and strategy. We'll then briefly update on our outlook before taking questions. First, let's start with the performance highlights on Slide 5. This is the best 12-month performance in our group's history. We've outperformed on every key line item. NPATA was up 29% to AUD 110.8 million. The bridge here shows 3 underlying drivers of growth in the period. Firstly, NOI pre-provisions and EOL. This was up 4%, reflecting strong underlying performance.
The second driver was end of lease income. Again, at record highs, but peaking in February. As we've said many times before, we expect this to steadily reduce to pre-COVID levels over the coming years. The 3rd driver was a reduction in our interest costs from carrying lower corporate debt. Putting it all together, this is a record result for our group and is coupled with some very exciting opportunities that I'll talk to you on Slide 6. The group has delivered positive jaws once again, 13% revenue expansion while holding OpEx flat for a third year in a row. As it relates to our funding, we have a very stable, well-supported funding program. Warehouses have been accessed for the FY 2023 year, and despite severe credit market volatility, the financial impact to our group has been neutral.
This outcome is a very strong endorsement of our conservative underwriting standards and our very long track record. Our cash EPS was up 37% on PCP, reflecting our positive jaws and some over-earning for EOL income. Normalizing to a more sustainable level of EOL income, FY 2022 EPS growth is 22%. Again, a very strong result. Going forward, we have four primary drivers of EPS growth. Firstly, Strategic Pathways. We have very strong foundations in place, and we're now primed for organic growth. In FY 2022, we delivered 24% growth in fleet new business writings despite supply constraints. This is well above market growth levels. Our forward pipeline continues to remain at record levels. The second driver of EPS growth will be the Accelerate program that was announced today. In short, this program is expected to deliver annualized OpEx savings of AUD 6 million by mid-FY 2025.
Third driver of EPS is our buyback program. We have already permanently canceled 13% of share capital to date, and now we have more to come. The fourth is the sector M&A, which remains firmly on our agenda going into FY 2023. Before I step through each of the EPS drivers for growth, let me turn to Slide 7 to show you our track record on EPS growth to date. Since 2019, the group's cash EPS has expanded by an average of 73% per annum. The primary drivers of this include the execution of simplification, cost reduction, margin expansion, our buyback program, and of course, end of lease income. The purpose of the chart at the bottom is to illustrate earnings in each year if we hadn't overearned on end of lease income. The outcome is 44% CAGR in cash EPS over the 4-year period.
Going forward, we have significant confidence in our EPS growth drivers outlined here in the bottom right-hand side of this slide. These include revenue growth from Strategic Pathways, permanent OpEx reduction from the Accelerate program, our ongoing buyback program, as well as acquisitions. I'll talk through each of these, starting with Strategic Pathways on Slide 8. To recap, our long-term growth strategy, Strategic Pathways, is designed to grow new business in three under-penetrated target markets, being corporate, novated, and small fleets. While we're only 24 months into execution, we have made strong foundational progress in each of our three markets. We are now primed for growth. This is clearly evidenced in our new business writings outlined on Slide 9. Our fleet businesses have really outperformed, delivering 24% new business writings growth in the year.
For context, market growth is typically 4%, so we're very proud of this achievement. Australian Fleet delivered new business writings growth of 24%, which includes 64% growth in Australian small fleets. This small fleets business already represents nearly 8% of our Australian new business writings. In New Zealand, we delivered another huge performance, and small fleets is now approximately 43% of New Zealand's new business writings. As a result, our fleet business in Australia and New Zealand has seen asset growth at very strong returns. Combined, these businesses contribute 95% of our group earnings. In contrast, our novated business represents about 5% of earnings, and while it is a small contributor to profit and has lower returns relative to fleet, we are focused on growing this business.
Like our peers in the market, we have seen some supply-side disruption in novated, which slowed deliveries and new business writings in FY 2022. Notwithstanding this, we're seeing very strong levels of customer inquiry, and our order pipeline in novated has never been larger. Putting all of this together, we're very pleased with Strategic Pathways and the foundations we have to build our assets to recurring revenue and ultimately EPS growth. This is expected to be more pronounced as supply returns. The second major driver of EPS growth going forward is the Accelerate program, which is summarized on Slide 10. Over the past four years, there's been significant transformation at our group, summarized here on the slide. We initially kicked off the Simplification Plan, which effectively restructured the group, including the sales of 6 non-core businesses, the optimization of our cost base, and a de-risking of our capital structure.
In parallel, we designed a strategy focused on delivering profitable growth and defined target markets called Strategic Pathways. We're now 2 years into the implementation of that program, and it's going very well. An extension of our strategic journey is called the Accelerate program, which is expected to deliver AUD 6 million of annualized OpEx savings by mid-FY 2025. Damien will cover this in more detail shortly, but before that, let me touch on our buyback program on Slide 11. The on-market buyback program is the third driver of forward EPS growth for our group. Since we commenced the buyback 18 months ago, we have already permanently canceled 13% of share capital. For FY 2022, we've announced a AUD 72 million buyback, of which we have about AUD 37 million left to go, which is equivalent to roughly 6%.
Putting that together, a potential 19% share cancellation. In perspective, that's equivalent to an EPS accretion statement in a recent fleet sector acquisition. Plus, our buyback has delivered the same EPS outcome with no financial leverage, no execution risk, and it's been delivered much faster. Notwithstanding this, we are seeking to allocate capital to achieve the best of both worlds. Therefore, we remain highly focused on our buyback as well as quality acquisition opportunities. We do expect these to emerge as EOL begins to normalize. Putting all of that together, Strategic Pathways accelerate our capital management program and potential acquisitions. We have a very clear pathway to maintain strong EPS growth going forward. We've also made great progress in our ESG program in FY 2022, summarized over on Slide 12. ESG and sustainability are central to our group strategy and values.
In March 2022, the group proudly became one of 12 new organizations in Australia to receive a citation from WGEA as an employer of choice for gender equality. In the same month, the Australian Institute of Company Directors ranked our group equal number one in the ASX 300 for female board representation. The group also retained its Australian Climate Active status granted last year. In New Zealand, we were also recently certified for Toitū carbonreduce . We're very pleased to become the first and only fleet management organizations with both sets of climate certification in our region. Beyond our own sector, our team feel passionately about our ESG progress in recent years and notably around our leadership position that we've taken on ESG across the ASX 300. In summary, we have great strategic opportunities in front of us.
Given the combined experience and track record of our team, we are highly confident in the execution of our plan. With a restored balance sheet, we have the maximum flexibility to move quickly on emerging opportunities. Now, with that, I'll pass across to Damien to talk through the financial performance.
Thank you, Julian, and good morning to everyone. I want to start this morning by acknowledging Julian's energy and leadership in the transformation of FleetPartners Group over the last 3.5 years. When he started in 2019, the company had clearly lost its way and needed a major reset. Today, we are announcing record profits, a strong balance sheet, and a bright future for our investors, employees, and customers. It is by no means an exaggeration to suggest none of this was possible without Julian's determination and leadership. On behalf of the entire FleetPartners Group team, thank you. Finally, on a personal level, it has been a career highlight to have worked side by side with you over the last 3 years. Let's now have a closer look at the result.
If I had to nominate one critical message from the presentation today, it would be as strong as the FY 2022 result is in terms of what we have achieved. Eclipx's outlook is even more compelling. Starting with new business writings on Slide 14. At AUD 530 million, the fleet business is up 24%, surpassing pre-COVID levels. What underscores this impressive result is the fact it was achieved in the face of ongoing delivery delays this year. The team maintained strong commercial intensity to deliver an impressive rate of new customer wins and continued growth in small fleets. Our service-led customer value proposition was validated again last month with the renewal of our largest customer in Australia and largest customer in New Zealand. Finally, our order pipeline continued to grow this year and now sits at 2.6 times pre-COVID levels.
The novated business wrote AUD 185 million, down 9% after adjusting for the exit of our FleetChoice partnership in the Northern Territory. The exit in March this year was in line with our stated strategy of exiting lower profitable products. The NT partnership was contributing less than AUD 100,000 of EBITDA per annum. Elsewhere, demand for novated leases has remained strong, with pipeline growing to 3.8 times pre-COVID levels. Turning to Slide 15 on UMOF. After adjusting for the FleetChoice NT exit and at a constant currency, UMOF grew at 3%. Volume is at 91,000 units, down 2%, as we continue to exit low profitable products such as manage-only fleets and the FleetChoice partnership just mentioned. We are focused on increasing the penetration of fully maintained operating leases and profitable novated leases.
This has delivered a 7% increase to NOI pre-EOL and provisions to AUD 1,711 per unit. Let's turn to Slide 16 on our income statement. Our focus is on margin expansion and OpEx discipline to deliver positive results despite a volatile macro environment. This is no more evident than net operating income pre-EOL and provisions. At AUD 157.4 million, it is up 4%. This margin expansion is driven by higher NIM, higher management fees from elevated lease extensions, and higher maintenance profit from lower fleet utilization. End of lease income is up AUD 92.3 million, up 33%. This was driven by a 5% increase in the number of vehicles sold and a 27% increase in profit per vehicle. This now sits at AUD 8,300.
As we exited FY 2022, we saw clear evidence that used car prices had peaked and began to fall back, which was expected. Nevertheless, in September just gone, EOL was AUD 7,548 per unit. That is still well above the pre-COVID normalized range of AUD 2,200-AUD 2,500 per car. Provisions were AUD 2.1 million as a result of releasing the management overlay relating to COVID. We now follow the same framework that was in place prior to the pandemic. That sums to an NOI of AUD 251.7 million, up 13%. As forecast operating expenses were broadly flat at AUD 80.3 million, we are pleased with this outcome in the face of a much stronger than expected inflationary environment.
Therefore, the sum of the above path is a pleasing EBITA of AUD 171.4 million, up 20%, and NPATA at AUD 110.8 million, up 29%. Moving to Slide 17, and you can see the continued strength of Eclipx's balance sheet. Net assets ended the year at AUD 621 million, up 8% from September 2021. Other highlights worth noting include cash up 33% at AUD 101.5 million. This is after using AUD 63 million for the share buyback and AUD 21 million to repay corporate debt. Inventory is at AUD 14.1 million, down 43%. Selling conditions were much more favorable in September 2022 versus last year, as lockdowns that disrupted sales in 2021 were lifted. Returning to my earlier comment about cash, we now turn to Slide 18.
Eclipx's operations today deliver strong cash generation. The net cash flow for the year was AUD 17.2 million. After adding back non-operational items such as CapEx, corporate debt repayment, movement in share capital, and adjusting for a constant currency, the cash generated by the business increases to AUD 128.5 million. Comparing that against an adjusted NPATA of AUD 113.6 million, the cash conversion for the year equals 113%. As we have seen over the last 2 years, the main driver for the cash conversion being north of 100% is the tax shield driven by the instant asset write-off. This is expected to provide a cash flow benefit to the business until late FY 2026.
This date has been pushed out due to the higher than expected new business writings and the tax-deductible costs of the Accelerate program, which I will detail later. Let's turn to Slide 19. In this section, I would like to address the three most common questions about our business today. One, how will rising interest rates impact margins? Two, how is the portfolio credit quality holding up in the current environment? And finally, what happens to our earnings when vehicle supply eventually normalize? The next few slides answer these questions, starting on Slide 20. While there are significant scale and underwriting barriers to our industry, the business model itself is really quite simple. As you can see in the graphics on Slide 20, we provide three solutions to our customers packaged as one simplified product. This includes asset-backed vehicle financing, in-life vehicle services, and vehicle disposal.
While financing makes a significant contribution to our revenue, the services that you see in the middle of the slide generate the majority of our NOI pre-EOL. A good way to think about Eclipx is that it is a service-based business with best-in-class funding capability. This enhances our profitability and increases our defensiveness of our earnings. That key point takes us to Slide 21. As illustrated on the chart on the left, our NOI pre-EOL and provisions is stable and predictable through time. This is because 90% of revenue is from financing or servicing. These revenue streams are fixed for the duration of every lease. The 8% EBITA growth, which you can see on the slide, is underpinned by our defensive, stable, and predictable revenue model, combined with the discipline focused on cost management, which we have ingrained in the business over the last 3 years.
With the stable and predictable nature of our revenue model in mind, let's turn to Slide 20, which looks at the first question around earnings in a rising interest rate environment. There are 3 key points I want to leave you with from this slide. Firstly, we have successfully renewed our warehouse facilities for another year with plenty of capacity to meet our funding requirements. This affords us the flexibility to access the term ABS market opportunistically in FY 2023 only if attractive conditions present. Secondly, there is negligible, yet still positive impact on FY 2023 earnings from these warehouse renewals and the recent cash rate increases. Finally, and perhaps somewhat counterintuitive, moving forward, every 25 basis point increase in the cash rate will result in an annualized benefit of AUD 500,000 to our FY 2023 PBT. Let's jump into the slide starting on the left.
The three sources of funding for our leases are warehouse, ABS, and P&A facilities. Leases are hedged at origination, meaning we don't carry any base rate risk. With respect to funding margin, the pricing on the warehouse renewals has been inside our expectations. Illustratively, this will have an AUD 4.3 million impact in FY 2023, which you can see in the chart below. Outside of these facilities, we also use corporate debt for working capital. AUD 30 million is at a fixed interest rate, while AUD 45 million is priced off the 90-day BBSW curve. At current rates, that creates an AUD 1.1 million impact in FY 2023, which you can also see in the chart below. However, the incremental interest income we will earn in FY 2023 will act as somewhat of a hedge to neutralize these headwinds from funding margin and corporate debt.
At today's rates, the AUD 238 million of cash we currently hold creates an incremental AUD 5.7 million of earnings for the business. These are the factors that combined show how the impact of warehouse refinancing on our business is negligible. More importantly, and to reiterate my opening comment, from this point onwards, every 25 basis point increase in cash rates will have a positive impact to the tune of AUD 500,000 on an annualized basis. Turning now to Slide 23, which addresses the question on credit quality in the portfolio. We feel really comfortable with both the composition and performance of our portfolio's credit in the current environment. 90-day arrears currently sit at 15 basis points. This is slightly better than the 3-year average of 17 basis points.
The business has four decades of institutional knowledge built on managing through numerous economic cycles. 76% of our top 20 customers are investment grade, and the assets we finance are business critical for our customers. Therefore, what these factors amount to is the very low delinquency rate that you can see and well inside other safe asset classes such as prime mortgages at 51 basis points. Turning to Slide 24. I'll use this and the next slide to answer the last question about the impact from the normalization of new car supply. You can see between FY 2019 to FY 2022, the business has expanded margins by 121 basis points from 7.02% to 8.23%. Half of this expansion is from executing our profitable growth strategy.
The remainder is temporary, driven by COVID-related tailwinds, such as higher management fees from elevated lease extensions and higher maintenance profit from lower fleet utilization. As these tailwinds dissipate with the normalization of vehicle supply, we expect yields to settle along a range of 7.5%-7.75%. The bottom half of the slide shows that once new vehicle supply comes back online, we expect end of lease income to settle at around 2,200-2,500 per unit. Let's now look at how that plays out in the normalization of new vehicle supply on Slide 24. As I mentioned, used car prices appear to have peaked earlier in the year. Datium Insights' index shows a 10% reduction since February, which has flowed through to our EOL numbers.
Our expectation has been consistent in that we see used car prices returning to pre-COVID levels once new car supply normalize. However, predicting the timing of this is still speculative in nature. Once they eventually do, however, the composition of our EOL will return to being about 60% from end of lease fees, which are contractual obligations with our customers and have been stable and predictable over time, and about 40% from the sale of the vehicle itself. Let's now move to Slide 26. Before I close on our FY 2023 expectations, I wanted to pull together the themes from the last few slides to pro forma net operating income. That is FY 2022 NOI without the impacts of COVID. There's a lot going on in this slide, so it's helpful to read it with, in conjunction with Slide 41 in the appendix.
There are several points I want to make here. The first chart on the left shows that we expect UMOF to be AUD 140 million higher today had it not been for the delays in new car supply. By applying this higher UMOF of AUD 2 billion to the normalized yield we called out on Slide 24, the illustrated NOI pre-EOL and provisions becomes AUD 157 million. By adding a pre-COVID EOL of AUD 30 million and provisions of AUD 2 million, it lands at an illustrative NOI of AUD 185 million. Therefore, this compares against the actual NOI this year of AUD 252 million. I hope this analysis is of some assistance as you think about our business in a normalized supply environment. Let's now turn to Slide 27 and our FY 2023 expectations. Consistent with past presentations, we don't provide guidance on NOI.
We expect NOI pre-EOL and provisions to directionally follow the same trend as average UMOF. Remember, however, as we illustrated on Slide 24, when vehicle supply begins to normalize, we expect NOI to settle to a range of 7.5%-7.75%. End of lease income is hard to predict. Used car prices are down 10%, and as supply normalizes, we expect used car prices to continue to also normalize. With that said, end of lease income will be somewhat cushioned by an increase in the number of cars we sell. With respect to provisions, temporary measures taken in response to COVID have now been removed, with the normal level of provisioning expected going forward. Looking at OpEx, wage inflation will be the main driver of it increasing next year.
The business has done a tremendous job to keep OpEx at AUD 80 million until now, and the next big productivity win will come from the Accelerate program, which I'll talk to next. Below EBITDA, it's worth calling out, interest and depreciation on leases will be down due to the office move in Auckland and interest on corporate debt is increasing in line with the 90-day BBSW benchmark. As you can see, with the exception of EOL, we expect results to be relatively predictable. Let's turn to Slide 29. Today, I'm excited to be announcing an extension of the strategic journey called Accelerate. Our team of 500 talented people has a proven track record of executing programs such as the Simplification Plan and laying solid foundations for reliable growth through Strategic Pathways, which is well underway. The business is now ready for Accelerate.
Julian and I always planned for Accelerate to be executed after the Simplification Plan and once Strategic Pathways was well established. I'm delighted to be launching it today. Turning to Page 30. The Accelerate program has four key deliverables which we expect to deliver over 2 years. These deliverables will set the business up to leverage the scale being created by Strategic Pathways in order to maximize profitability. The Accelerate deliverables include consolidating multiple brands into one, being FleetPartners. This ensures a clear and consistent go-to-market message for our customers. We are also removing the complexity and duplicative costs of a multi-branded approach. Simplifying our technology stack by moving to one operating system. This has the obvious benefit of reducing costs associated with licensing and maintenance of multiple systems. It also allows us to streamline product and technology development. Standardizing processes.
Moving to one technology stack also allows us to standardize processes and lean more on automation across the entire organization. Finally, the output of the first three deliverables will also result in enhanced workforce engagement. Our team will be able to focus on more value additive tasks for our customers and other stakeholders. We expect the project to cost AUD 25 million over 2 years and deliver a AUD 6 million reduction to our OpEx footprint. This represents a 24% ROIC. On Slide 21, you can see the program has 12 key milestones spread across three separate waves. The program is fully resourced and is up and running. Pleasingly, we have already achieved the first milestone of transitioning our FleetPlus business into FleetPartners in New Zealand. As I said, Accelerate is a super exciting business-wide initiative.
It promises to turbocharge our future profitability by leveraging the growth and scale which has already started to be delivered. My closing comment this morning is that the business has produced another convincing financial performance this year. While elevated used car prices helped, the underlying fundamentals of this organization continue to improve and impress. Today, the business is better placed than ever. We have the strategic vision and detailed plan to underwrite its future success. With that, I'll now hand back to Julian to close out on our outlook and take questions.
Thanks, Damien. Let's turn to Slide 33 to wrap up this morning's presentation before taking your questions. Above all, we're very happy with the strength of this result, the financial position and the strategic direction of the group. The operating environment remains very good and our customers continue to be very active. This is across the board from our order rates, retention rates, win rates, and our success in our tender activity. Our consolidated group order pipeline is running at 2.7 times pre-COVID levels, again, at record highs. While we've been successfully converting the pipeline into new business writings and therefore recurring revenue, the scale of the pipeline is further reinforcing our confidence about the future.
As it relates to EOL, as we said, we have observed a peak, and we continue to believe that this will steadily reduce over the next few years to an annual run rate of about AUD 30 million per annum, very much a long-term recurring level. Putting it all together, the team have done exceptionally well in positioning our group for any environment. We have a very predictable low-risk earnings profile. Our balance sheet and liquidity position has never been stronger. Our credit risk remains very low, which has once again been validated through our recent warehouse and ABS refinancing. We've reset those facilities at a neutral financial impact despite significant credit market volatility. We're gonna buy back up to AUD 37 million in this coming half. Our pro forma is 6% of capital to be canceled on top of the 13% already done.
new business writings are well above market growth in our most profitable business lines. As a result, our UMOF is up for the first time in many years, supporting recurring NOI in the coming years. Our OpEx is flat, reflecting our disciplined expense management process and only expected to grow at 2.7% this year despite the inflationary environment. We have a very clear pathway to maintain long-term EPS growth, including Strategic Pathways, Accelerate, our capital management program and of course, potential acquisitions. We see some great strategic opportunities in front of us, and our team is well-placed to implement the plan. As you can see from this set of results, the team has a very strong record of execution and delivery, which gives us great confidence in the future of our group.
Now, with that, I'll pause there and pass across to the operator to take questions.
Thank you. If you do wish to ask a question, please press Star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star and then 2. If you are on a speakerphone, please pick up your handset before asking your question. Your first question comes from Tim Lawson at Macquarie. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. I'm mainly just focused on sort of exit rate. Obviously, you sort of call out what's happened this half and what you think is normalized. In terms of end-of-lease income, margins and costs in particular, just sort of exit rates, second half on cost looks a little bit higher on an annualized basis than the sort of full year guidance for next year. Your thoughts?
Okay, Tim, it's Damien. Starting on EOL, in terms of the exit rate there, what we sort of saw in September, it was around just about that sort of AUD 7,500 range. What we've seen, and you can see in one of the pages we've got there is used car prices. They initially came down 10% from the peak in February, and then they really did plateau out, and we've certainly seen that with EOL as well. As I said, the exit rate's around that AUD 7,500 mark for EOL. For OpEx, with our OpEx, it's typically always weighted towards the second half of the year. What we see is a lot of the discretionary type of spending sort of always get back-ended. We've got a page on expectations.
We are seeing inflationary pressure going into next year, and what we've called out is OpEx to be in that range of AUD 82 million-AUD 83 million next year.
Anything on margins?
For NOI, what we've called out there is in the short term, there's probably around a 5 basis points reduction off the back of maintenance, which is elevated at the moment. The remainder of the circa sort of 50 basis points of compression that we sort of called out, that'll take a number of years, and it'll take as long as it takes for new car supply to come back online.
Okay, that's great. Thanks, guys.
Yeah.
Thank you. Your next question comes from Paul Buys at Credit Suisse. Please go ahead.
Morning, guys. First question from me, you obviously spent a bit of time talking about, I guess, risk and how you manage it and credit quality, et cetera. Just keen to understand in particular how you're gonna manage, I guess, a weaker macroeconomic outlook, as you continue to pursue your growth in small fleets and just kinda get an idea of the risk in that strategy versus the rest of the business.
Yeah. Yeah, okay, Paul. Yeah, I guess in terms of how we sort of think about risk, you know, the company itself's got over four decades of experience in this area, so there's been numerous economic downturns which we've managed through. Our assets are business critical, so for the majority of our customers, they need those assets to generate revenue. So what we've seen is through the cycle, our credit performance has held up really, really well. We've got, like I said, an experienced team that's sort of used to sort of collecting on that. The second part of your question, sorry, Paul?
Oh, no, it was just understanding risk in particular with the small fleet. I guess just taking that generic assumption that small businesses can feel the kind of tougher macro outlook harder than larger businesses. It was really just understanding how you manage that as you continue to grow into that area.
Yeah, yeah, sure. Yeah. Similar sort of theory applies in terms of them being business critical assets. The extra thing I'll talk about in terms of small fleets is, one, majority of those are on direct debit, so that obviously helps with the collections. The second part is when you look at our small fleets portfolio, we do see a lot of large multinationals in there who just have a small fleet in Australia or New Zealand. That small fleets portfolio is not all just SMEs as such. There is a good mix of larger corporates in there as well who just happen to have a small fleet in this region.
The only thing I'd add to that, Paul, is from an underwriting perspective, nothing changes. Obviously, they're direct debits as opposed to corporates, which have a different type of payment plan. I think the underwriting criteria that we've applied for many, many years has proven itself to be very successful. I mean, it's a good illustration of prime Aussie RMBS, which is one of the best asset classes in the world, in fixed income loans. We're inside of that by, you know, 15 points versus, you know, mid-30s. We feel pretty good about the underlying portfolio quality, even going into a hard cycle. In any environment, we feel pretty good about small fleets or our large corporate fleets for that matter.
Got it. Thank you. Next question is just on novated. I guess just keen to understand sort of strategically how you think about the novated business. I mean, obviously you guys, you know, you called out earlier 95% of the business is fleet. Which kind of leaves me thinking novated doesn't really move the needle. You're saying you want to grow that over time, but I guess I just wanna understand how do you see that changing? You know, is it a foregone conclusion you continue to hold novated or are there cross-sell opportunities? Just trying to get your thinking on that.
It's still a key pillar in our Strategic Pathways, Paul. We still firmly believe in it, and our strategy is focused on growing our portfolio. Over time, once end-of-lease income starts to normalize, that balance of the contribution it makes will sort of balance out a little bit more. We're still fully focused on novated. We see it as a great product that complements our operating leases with a lot of the corporates. We see still plenty of growth there 'cause we feel like we're very under-penetrated.
Got it. Okay. Then last one, perhaps just one for, well, for either of you, I guess. I guess my question is, you know, well, Julian, with your departure, I guess I'm just trying to work out if we read anything into kind of, Eclipx's M&A ambitions, perhaps even just in the short term. Obviously, M&A has been on the agenda for a period of time, but it's also been very much in your personal wheelhouse. I'm just trying to work out if there's a read-through into the timing thereof, given your announced departure.
There's no change to short-long, long end to short. I mean, there's no change whatsoever. I mean, James Owen, who is to be appointed our CFO, comes from KPMG, where he's a partner of transaction services, so probably has more M&A experience than I have. The hunger we have for M&A has not changed. We're just waiting in the middle of the field, waiting for someone to kick the ball back at us, 'cause right now, we haven't had that. We're pursuing it very carefully. There's no read-through on my departure. I mean, I was brought in by the board to restructure the business, get the debt down. Obviously, we're net cash today. Sell the non-core assets, they've been sold.
We managed through COVID very well, and we've set a strategy as well as a very deep succession plan. All of those issues have now been executed upon. Now is the time to transition to Damien, particularly as we start out on the extension of our strategy, which is Accelerate, which is a three-year program of implementation. We felt when we looked at it, now is the time to make that transition and be very stable in terms of our succession planning.
I'd just like to echo Julian's comments on that. Like, when you look at our business today, the strength of the balance sheet, we probably are in a better place than we've ever been in terms of pursuing M&A. We still firmly believe it's at the center of our growth aspirations going forward.
Got it. Thank you, guys. That's all for me.
Thanks, Paul.
Thanks, Paul.
Thank you. Your next question comes from Scott Hudson at MST. Please go ahead.
Yeah, good morning, gentlemen. Thanks for your time. Just quickly, maybe Julian or Damien, could you just expand on your, I guess, your ability to increase your distribution in that SME space or the small fleet space? Sort of what are the tools required to do that?
Yeah. Good day, Scott. Yeah, in terms of our strategy around that, I think we've got a really good business model out there in New Zealand at the moment. We've got a really large footprint at the point of sale position with a lot of the dealers out there, less so in brokerage. What we're trying to do in Australia is to replicate that to a large extent. We've got, obviously, the relationship with Mitsubishi, with the Diamond Advantage, which is still getting legs, but it's starting to show really promising signs there. We see expansion in that way. The other one is just, you know, expanding the intermediaries, so the broker network in particular in terms of getting out there.
This half, we just launched our digitized tool around small fleets, which allows not just the quoting on the spot, but also immediate online credit approval. We're in a position now with small fleets where whether it's the small fleet owner walks into a dealership or they're with their broker, they can get a quote immediately and then immediately also get an application to apply for credit and get approved within seconds.
That's great. Thanks. Just in terms of the AUD 25 million cost associated with Accelerate, is that a P&L cost or a capitalized cost?
That'll be CapEx.
CapEx. Thanks. Do you have any, I guess, insights into the supply outlook in terms of, I guess, any channel feedback that you've got as to when you expect supply to start to normalize?
That's the million-dollar question. There are green shoots that are getting better, particularly in the last three months. When you look at the number of cars sold in Australia, this year versus last year, it was down, but that was more weighted towards the first half of the year. In the second half of the year, we started to see positive growth. It is starting to get better. Conversations that we're having around the dealership landscape is that last year it was really centered around the ability to produce cars and around the shortage of semiconductors. Today, it seems to be more of a logistics challenge around just getting enough ships to get the cars on boats to get them down here. As I said, it is starting to get better.
I think realistically, though, it's still another 12 months away until we get to something which represents a normalized level of supply.
Okay, thanks. Lastly, could you just explain to me how the end-of-lease margin kind of moves as vehicles kind of stay in inertia for longer?
Yeah, absolutely.
Yeah.
When vehicles are in inertia, they continue to be depreciated at the same rate as the original lease. If you sort of imagine that depreciation gradient, it continues along that same line. However, the fair market value of the vehicle really does start to plateau out over that extra period. Effectively what happens is when a vehicle's in inertia, it creates a lot more equity in the vehicle as time goes on. The longer cars are in inertia, the higher the end-of-lease income is when we go to sell the car.
Is the, I guess, the average age of the fleet extending in the current environment?
Yeah, it certainly is, without a doubt. As I said, the fair market value obviously runs off at a lot slower rate than the actual depreciation of the asset itself. As I said, EOL expands. We do see obviously higher maintenance costs and things of that nature as well. We've got, you know, all our contracts clauses in there around unfair wear and tear or excess kilometers, which is designed just to ensure that if maintenance costs do go up, we're able to recoup it when the car comes back or even better, we're pretty active in terms of speaking to our customers about extending their leases so that we can embed that extra cost throughout the remaining term of the lease.
Okay. Thanks very much.
No problem.
Okay.
Thank you. Once again, if you do wish to ask a question, please register by pressing star then one on your telephone and waiting for your name to be announced. Your next question comes from Chenny Wang at Morgan Stanley. Please go ahead.
Yeah, good morning, guys. Thanks for taking my questions. Just the first one on Slide 24 on NOI pre-EOL margins. I guess I just want to better understand, you know, what would kind of drive the 7.75% versus, let's say, the 7.5%. You know, I guess given the small moves in basis points does make a bit of a difference. Think it's helpful to understand, you know, what the key moving parts are that drives that sensitivity.
Yeah. The difference between 7.5% and 7.75%, Chenny, is just portfolio mix. The higher weighting we have towards small fleets will sort of drive that up more towards the 7.75% versus a more weighting, say, towards novated would bring it back down to 7.5%.
Got it. Just, the second one on the order backlog. At the group level, that was 2.7 times for FY 2022, and it's kind of been changed versus the first half. I know you have kind of talked to some of the demand and supply dynamics out there, but maybe you can kind of maybe rehash some of that, but also talk to how that impacts the order backlog. I mean, I guess you did call out in the outlook that you see strong demand, but you know, with the order backlog kind of remaining flat half-on-half. Not trying to read too much into it, but just useful to maybe go into some of that in a bit more detail.
Yeah. A good way to think about it, Chenny, is obviously the pipeline or the backlog is a function of the new orders we take, less the new business writings we write. New business writings were up 24%, so that's a pretty fast clip. We've done really well to actually maintain the pipeline where it's at. The underlying demand is definitely still there.
Got it. Cool. Thanks, guys.
No problems, Chenny. Thanks.
Thank you. Your next question comes from Richard Amland at CLSA. Please go ahead.
Hi, good morning, guys. Got a couple questions. First off, just wanna talk a little bit further about the wind down in secondhand car prices, EOL being such a material part of your earnings. You're basically saying there's a AUD 60 million swing coming over the next two years. Can we talk about what you expect, like what the drivers of that are, you know, 'cause I guess acknowledging that secondhand car prices have been very high, you know, that seems to be a big call in terms of like they're gonna drop off the face of the earth. I guess the supply comments around new vehicles don't necessarily warrant such a harsh view.
I think morning, Richard Amland . I think in terms of the commentary, I mean, we've been pretty consistent, I think, since the start of COVID when we started seeing these supply issues creep through, it was going up. I mean, our business has been around for 40 years. It's very, very predictable. We've always consistently said in every market release that this is a temporary phenomenon. Others may disagree about it, and that's fine, but we just wanna be very honest as to what we see and what we expect. We expect sort of the, on average, going forward, the earnings line for EOL will be roughly about AUD 30 million. And right now it's obviously very much overinflated for what it is.
Notwithstanding that, what are the big key drivers of that is obviously supply coming back online. We are seeing some supply coming back online, but it's patchy. One of the biggest issues today that we're hearing feedback as of Thursday from a conversation with an OEM is just getting cars on boats. There's stories of cars sitting in yards in Japan and other ports where they can't actually get on boats 'cause there is no boats, and the forward ordering is sometimes three years out. You know, from our honest assessment from where we sit now, it'd be hard for us to point the finger and say, EOL is gonna stay elevated forever, 'cause it's not. It will come down and our expectations is the next couple of years.
We've been wrong before, but directionally we feel that we are right.
Okay. Our car guy has been talking about changes in delivery channels and a lot more direct to consumer and a lot more direct to corporate. That changes the dialogue with dealerships. Do you have any comments around, you know, your business and exposure to dealerships or going direct? Are there any inherent advantages or any comments you wanna make around that?
You know, something that we're also looking at, I think it's probably 10 years away before we get to that model where most cars are sold online directly with the OEMs. From our perspective, in terms of how we procure cars, I can't see a huge amount of change. Today, we obviously interact with dealers out there. If it does change, it will just change to us interacting directly with the OEMs. It might mean less discounting and things like that. And what that does for us, it means the rentals are a little bit higher, but it doesn't impact our earnings profile.
Okay. Nothing material in the near term.
No.
Finally, we've started talking about it's always been a metric, AUMOF, and I guess I'm interested in your views on, you know, new car prices seem to be, you know, higher as just a general barometer than they were five years ago. You know, as you recycle through your book and, you know, depreciated assets come down and new buy prices are relatively much higher. I mean, how does that go through the book? I mean, AUMOF seems like that should be going, you know, at sort of, you know, a higher growth rate than some of the other things on the P&L, and then, you know, that trickle down on the margin.
Can we just get a sense of, yeah, the impact upon AUMOF from the new vehicle prices relative to what they were historically?
Yeah, I think that view is pretty valid there, Richard. Certainly, used car prices are increasing. What that means is it just means that it increases our AUMOF, all other things being equal, which, and we obviously charge interest rate above that AUMOF. Then for me, it means we have a higher margin, if you like.
I guess, you know, an AUMOF growth rate of, you know, sort of 5%-7%, is that sort of rational in a car market that may be growing to, you know, 2%-3%? I mean
I'd hate to be quoted on it.
Should AUMOF
Yeah.
Should AUMOF grow faster than units, you know, essentially?
Yeah, I'd hate to be quoted on it. Certainly we see used car, new car prices probably 10% higher than what they were a couple of years ago. The challenge is just new car supply. Like, when will that start to normalize? That's the big question mark. Historically, the industry grows probably around 4%.
Okay. All right. Thank you very much, guys.
Thanks.
No problem. Thanks, Richard.
Thank you. Next, we do have a follow-up question from Scott Hudson at MST. Please go ahead.
Yeah, thanks. I was just wondering if you have any comments on the EV legislation that's seemingly set to be passed and whether or not that's driving any increased discussions or activity across either of your channels?
Yeah, Scott. Yeah, it's certainly something that we're very supportive of. We think it's a pretty good initiative. You've got obviously, I don't know if you're talking about the relief on the FBT line or the talk around the clean energy or emissions legislation. I think both of them are welcomed. We look to our New Zealand business, which has got both those policies in place now for around a year, and we have seen a pretty significant increase in the number of EV orders over there as well. Today, they, their orders are about 14% EVs, where if you go back prior to when they had the legislation in place, they were probably around the 2%-3% that we see in Australia.
What we expect is Australia sort of follow suit once those legislations are in place. EVs is the number 2 conversation that all our corporates wanna talk about these days, how can they transition to EVs. We feel like the fact that we're the largest FMO in New Zealand and have got runs on the board over there in terms of our proposition to our customers, it places us in a really strong position over here in Australia once things take hold.
Does it, I guess, enable you to drive penetration in that insourced market?
Yeah. It's not gonna be a seismic change, but I do see that with the complexities of moving to EVs, it will be a catalyst for some corporates who might insource fleet at the moment to wanna outsource it to the likes of us because they just don't have that experience or expertise in terms of managing an EV fleet.
That's great. Thank you very much.
Thanks, Scott.
Thank you. As we are showing no further questions, I would like to hand the conference back for closing remarks. Thank you.
Thanks, Cameron, and thanks everyone for joining this morning. We look forward to sort of catching up with most of you over the coming weeks. Hope you enjoy the rest of your day.
Thank you, everyone. That concludes our conference for today. Thank you for participating. You may now disconnect your lines.