Thank you for standing by, and welcome to the Eclipx Group H1 2021 Results Presentation. All participants are in a 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 on your telephone keypad. I would now like to hand the conference over to Mr. Julian Russell, CEO. Please go ahead.
Thank you, Lexi. Good morning, and thank you all for joining our H1 2021 Results Presentation. Today, we're presenting to the first set of clean financials after simplification, and it's a vastly improved story compared to where we were at the outset of COVID this time last year. I'll cover off on the performance highlights shortly and then hand over to Damien to run through the detailed financials. We'll finish up with an update on our strategic initiatives and outlook. First, let's start with the performance highlights on slide five. Notwithstanding the current supply chain disruptions in new business writings, all key financial indicators are very positive. We've delivered a 77% growth in cash NPATA compared to H1 2020. This growth is helped in part by end of lease income, which was 107% up in terms of outperformance.
Cash conversion remains consistently elevated at 157%. This allowed us to accelerate a reduction in our net corporate debt by another 62% pcp. Net debt to EBITDA is now just 0.49 x compared to over 2x in March this time last year. This puts us below the lower end of our target gearing range, about six months ahead of our own internal treasury plans. As a result, the board is determined to accelerate our capital management program. Given our lack of distributable franking credits, we will commence an on-market share buyback program, starting with AUD 20 million of volume in the second half of FY 2021. Finally, we delivered EBITDA growth of 43% versus pcp and on a like-for-like basis. The primary growth driver was significant outperformance in end-of-lease income. The used car market has remained very strong against the backdrop of global vehicle supply chain issues.
In the half, we achieved that up from AUD 2,468 in the prior corresponding period. To be clear, we expect this market to normalize as the supply chain. Timing for this remains very uncertain. We feel very well positioned in the intervening period. If I turn over to slide seven, we'll talk through the NPATA movements in the period. We're very pleased to report NPATA of 77% at AUD 39.3 million for the half. Post-simplification, our income statement is very clean. Beyond the EOL profitability, it's worth noting a couple of points. Firstly, our lower depreciation and interest was driven by our smaller property footprint. Interest in corporate debt has also significantly reduced with our deleveraging profile. A summary of second half expectations for these line items is outlined in slide 21, which Damien will talk through shortly.
This includes interest in corporate debt, which I'll talk through over on slide eight. In relation to our debt, we're really happy with what we've achieved here. We've paid down close to AUD 240 million of debt over the last two years. During H1 2021, cash conversion was much stronger than we'd initially expected, and this allowed us to accelerate the reduction in our gross debt. At a balance sheet date, gross debt was AUD 113 million, a 50% reduction in gross debt on pcp. Post unrestricted cash, net debt was only AUD 54 million. This is much lower than our internal target for FY 2021 end year, and this enables the group to bring forward its capital management strategy, which I'll talk through now on slide nine.
The top chart here provides context about our debt covenant headroom and how it has materially expanded as we delevered the balance sheet over the last two years. The net debt to EBITDA ratio is currently 0.49 x against a covenant of 3x . Plenty of headroom there. In the bottom chart, you'll see that available liquidity has increased. While we do pay a premium for this liquidity, it does provide us with capacity to absorb external shocks. All of the combination of a strengthened balance sheet, a better liquidity profile, and stronger overall financial performance is what enables our group to bring forward this capital management strategy today. Given Eclipx is a net beneficiary of the Australian Federal Budget's instant asset write-off, it's best achieved through an on-market share buyback during the second half of FY 2021. Just recapping on my overview.
In our first half, very strong performance. Our balance sheet has never been in a better position, which has allowed us to bring forward these capital management initiatives. The balance sheet also provides us with significant flexibility to execute on our growth strategy, and I'll go through that in detail after Damien goes through these financial results.
Thank you, Julian, and good morning, everyone. I'll start with new business writings on page 11. At AUD 204 million this half, new business writings for corporate and SME were up 11% half on half and represents 85% of the prior corresponding period. This is a very pleasing result, especially given the continuing new vehicle supply disruption. Supply disruption in the auto sector is widely reported on at the moment, the downstream impact for fleet companies like Eclipx is that it takes longer than usual to convert orders to new business writings. With that said, this is simply a timing delay and we are confident the business is well positioned for growth. Firstly, tender activity is the busiest it has been in recent history. Lease extensions are up 79%, which signals pent-up demand, and our locked-in order backlog is at all-time highs.
As you would expect, the lack of new cars is also, however, despite this, new business writings grew 11% half on half to AUD 105 million or 92% pcp. Therefore, this leading edge technology is a key pillar in our Strategic Pathways, and we plan to roll it out across all major clients by the end of the year. Turning to assets and vehicles under management on page 12. At the end of March, AUMOF was AUD 1.9 billion. 60% was funded by securitization and 40% via P&A arrangements with our partner banks. The timing delay to the new business writings, as just discussed, is placing downward pressure on the AUMOF balance. Although clients continue to extend their leases as they wait for the replacement vehicles to be delivered, an extended lease has a lower asset value versus a new lease, and therefore AUMOF has declined 7% PCP.
With reference to the chart at the bottom of the page, VUMOF sits at 94,000 units at the end of March. In addition to lower new business writings, the other factor at play for VUMOF is the intentional reduction to reduce these low margin. Previously communicated, this particular product is no longer part of our strategy. Throughout this page, it's important to highlight that despite the 7% and 6% decline in AUMOF and VUMOF respectively, profit per unit has actually increased 5% to AUD 1,537. As you'll see later on page 14, net operating income pre-provisions in EOL is flat despite the decline in assets and units. We clearly have been. Six months. That's a good segue to the group's financial performance on page 13.
The key takeaway here is that the group's strong financial performance is not only from the high end of lease income, but also it's underpinned by our focus on sustainable margin expansion, along with a disciplined approach to expense management. Despite the headwind from low end new business writings in AUMOF, net operating income pre-EOL was AUD 73.8 million, up 4% PCP. This was driven by higher NIM, higher maintenance profit, and lower provisions. Offsetting these were lower management fees and lower revenue items that are directly linked to lower new business risk commissions and rebates. End of lease income was AUD 32.1 million, up 107%, as we saw profit per vehicle increase to AUD 5,944. This profit per unit was slightly offset by a 14% reduction in the number of vehicles sold as clients extended their leases while they wait for replacement deliveries.
Operating expenses were AUD 39.4 million, down 2% PCP, including stranded costs. This result reaffirms our previously stated expectation regarding the full year 2020-2021 run rate for expenses. The sum of these parts culminates in an EBITDA of AUD 66.5 million, up a pleasing 43% PCP. Turning to page 14, which presents the income statement down to NPATA. Below the EBITDA line, which was just discussed, there are two items I want to call out. One, the AUD 800,000 on the non-recurring items line. This positive number mostly relates to a settlement received by the business in relation to an auto sector class action we participated in. The second item is interest on corporate debt, which was AUD 5.2 million. This expense item is down 36% as we further repaid debt during the half. After taxes and add backs, our NPATA is AUD 39.3 million, up 77% PCP.
This is a satisfying result given all the effort involved by everyone across the entire organization to achieve it. Turning now to the balance sheet on page 15. The simplification plan has been transformational in terms of strengthening the company's balance sheet. The share buyback that we've just announced earlier in the presentation is a great example of that. In the period ending March 2021, net assets have increased by 8% to AUD 548.2 million. Cash has remained stable at AUD 58.6 million.
That's after we used AUD 42.1 million to further repay our corporate debt. Inventory has reduced by a further 16% to end the half at AUD 15.5 million. As clients extend their leases while they wait for delayed new vehicles, we are clearly not seeing the normal number of vehicles being returned. A combination of strong demand and reduced supply has resulted in a net outflow of our inventory.
Leases are down 4% for the same reasons I discussed on the AUMOF page, and there is a corresponding 4% reduction in borrowings in the warehouse and ABS, which sits in the liabilities section. Finally, deferred tax liabilities have increased significantly, which is related to the timing differences created by the instant asset write-off in Australia. The instant asset write-off also creates a temporary cash flow benefit for the group, which takes me to page 16, cash generation. At 157%, the cash conversion for the group was a positive outcome, AUD 67.2 million of organic cash in the half, and as mentioned, used AUD 42.1 million to repay debt. Also, as mentioned, the timing difference created by the instant asset write-off in Australia is what is largely driving this high cash conversion rate.
This is because while the NPATA amount of AUD 42.7 million includes tax expenses, we actually paid no tax installments in Australia this half, given the substantial tax deduction available from the instant asset write-off. To page 18, end of lease income. As illustrated in the chart at the top of the page, EOL income has outperformed this half, up 107% PCP, with profit per unit up 141% to AUD 5,944 per vehicle. As discussed, slowly offsetting this highly inflated EOL profit is the 14% reduction in the number of vehicles sold to 5,405 units. We see the supply of new cars normalize, in turn, so will the supply of used cars also normalize. This will ultimately result in EOL profits pulling back from their currently elevated levels. It comes to our RV methodology, we remain unashamedly conservative and disciplined.
Our RV setting expertise has been developed over 35 years, which allows us to set RVs with a high degree of confidence. As a second layer of control, every month we test our leases for impairment, and we do this at the individual lease level. We continue to set RVs based upon pre-COVID used car prices, and in doing so, have excluded the current inflated prices from our RV models. With respect to used car prices, beyond the point where the supply of new cars normalizes, we hold a positive view. As shown in the chart on the bottom left, new car imports have been declining in Australia since mid-2018. This translates into a reduced supply of used cars for the years to come, which is expected to create inflationary pressure and support prices over the medium term. Moving to credit risk on page 19.
Like RV risk, the credit risk in our continues to perform well through the COVID period. It's worth calling out the following points. First, we continue to hold a provision overlay at the end of March of AUD 4.1 million. This increases our total provisions to AUD 18.4 million. This adds a significant layer of downside protection as the economy begins to wean itself off government stimulus programs. Second, the portfolio remains high quality and is performing well. Of our top 20 exposures, 77% are investment grade. Finally, inquiries for the financial assistance have completely fallen away in the first half. This program, specially implemented for COVID, has now ended. Moving to page 20. It was pleasing to announce the placement of our AUD 300 million ABS in March this year, the eighth public market securitization by the group.
The fact we priced the ABS at the tightest spread in the Australian securitization capital market since the GFC is a strong endorsement of the Group's management of both RV risk and credit risk that I just discussed. It also represents a validation of Eclipx's securitization program and diversified funding model. In this instance, as it typically does, the transaction lowers our average weighted cost of funds and creates capacity for growth. Target and look to issue every two years. Finally, before I hand back to Julian, I would like to walk you through our expectations for the rest of the year on page 21. While we are not providing guidance on net operating income, we see NOI, pre-EOL and provisions, typically stable given the annuity-like nature of this line. The strength and longevity of elevated EOL income has been greater than initially anticipated.
However, the closer we get to new car supply normalization, the sooner we expect prices to rationalize. With respect to provisions, given the AUD 4.1 million overlay, need to be a noticeable decline in macroeconomic conditions for additional provisions to be necessary. Operating expenses on a pre-AASB 16 basis are expected to be AUD 84 million, which is unchanged from the number we communicated back at the start of FY 2021. Our expectations for depreciation is AUD 2.5 million-AUD 3 million and share-based payments. Finally, we have reduced our expectation for interest on corporate debt down to AUD 9.5 million-AUD 10 million as a result of our lower debt levels. I will conclude my section by commenting that this half was a period in which the business transitioned out of the simplification plan and into Strategic Pathways.
In the last six months, the business has expanded margins, controlled OpEx, and used record end of lease income to further reduce debt. Our Novated business went live with its digital origination platform, perfectly positioning itself in the market for when new car supplies normalizes. Finally, while supply chain disruption have caused delays to new business writings, our commercial team has been focused on the height of tender activity across the market, and our clients have driven our locked-in order pipeline to all-time highs. With that, I'll hand back to you, Julian.
Thanks, Damien. Let me turn to slide 23 to provide an update on the group's strategy for sustainable growth. We're just six months into the implementation of Strategic Pathways, and we're really happy with the progress we've made to date. We're now very focused on growing our new business through both digital and traditional channels. At the same time, we're seeking to enhance customer experience while maximizing our operating leverage in order to drive that clear objectives in each of our three markets. These include penetrating the new existing employee base and broadening our employers in our Novated business. We're targeting above-system growth in corporate, and we're seeking to access the very, very large under-penetrated SME market with operating leases. We've seen really good momentum in each of these three markets, and I'll go through that in a bit more detail on slide 24.
In Novated, we've made good progress reflected in the 12% volume new business writings growth in the first half, despite the supply chain issues. We launched the pilot of our end-to-end digital origination platform, including auto credit decisioning in the half. In our most recent testing, we've experienced 73% visitor account conversion, which is a very positive early indicator for the platform. We're currently rolling out the platform to all of our existing Novated employers and expect this to really differentiate our proposition to the target audience. In corporate, although new business writings grew by 11%, this segment has been seriously hamstrung by supply chain issues, as evidenced by the order pipeline at all-time highs. Tender activity remains very elevated, as Damien mentioned, making up for some of the lost time with the rolling lockdowns of 2020.
We've completed a full [redesign of our one-stop] digital fleet management platform, which we call Nitro. Nitro is designed to reduce the administrative burden, friction, and fleet costs for our customers. Over the last 12 months, we've seen a very impressive 40% increase in users on this platform with our customer base. In the coming period, we're very focused on finalizing our RV underwriting, our residual value underwriting capabilities at scale for both electric vehicles and hydrogen vehicles. In SME, we've established and we're growing our specialist team. We're seeing good volume growth, albeit off a low base through our partnerships, we have multiple new distribution partnerships in the pipeline at discussion points right now.
The online quoting experience remains in pilot phase with our test partners, and we're also in the midst of expanding that digital capability to be both partner agnostic and to include automated credit decision, which we expect to be ready by the end of this calendar year. Just like the Novated platform, we expect this to be a very highly scalable distribution approach. Now, putting all that together, we're seeking to drive customer engagement, the advocacy, and ultimately profitable new business write-ins. We're very focused on market leadership. To support that sales growth at scale, Strategic Pathways is also designed to deliver both operational and functional enhancements, which I'll talk through on slide 25. We are refining our business operations to maximize reliability and efficiency.
We've already converted and de-risked all critical infrastructure to the cloud, and we intend to move 100% to the cloud by the end of this calendar year. As part of this, we are transforming the way we work with our infrastructure, which will enable flexibility and scalability of our operating systems. At the front end, we've initiated a rollout of a new streamlined and centralized CRM. While at the back end, we've commenced the scoping of an integration layer to further scale up our operations. We'll provide further details on this operational project as it develops in due course. While a large part of Strategic Pathways is about digital distribution and efficiency, we've also delivered a number of non-digital improvements, which include an enhancement to content-based marketing.
We've attracted some of the industry's leading sales personnel into our corporate business, and we're adding further sales personnel into both SME and Novated. My key points from today's presentation is that while Eclipx has seen a fundamental turnaround over the last two years, we've got some great opportunities in front of us to extract through our Strategic Pathways program. Although it's early, we're seeing really good signs of momentum building. Let's turn over to slide 26 to wrap up this morning's presentation before we take your questions. It's clear a global vehicle supply disruption will continue for the time being, and the endpoint remains uncertain. As you can see, we're now very well-placed to manage through this operating environment. Our order books are at all-time highs and continue to build, reflecting the constraints in new vehicle deliveries.
As supplies restore, this will convert into new business write-ins and therefore recurring NOI in due course. We are extending leases where replacement vehicles are currently unavailable. This means we're still seeing the yields while our customers are managing those vehicles. While we're currently benefiting from the temporarily inflated used market pricing, we expect this pricing to return to in and around pre-COVID levels when supply is eventually restored. In relation to Strategic Pathways, while we're only six months into execution, we feel really good about the plan implementation to date. This plan will position us to take a leadership position in our target markets in the more normalized operating environment. In early March, we reopened the Australian ABS market and priced our issuance at the tightest spreads recorded in domestic ABS since the GFC.
This represents one of the most solid endorsements of our platform from multiple global credit investors. The Eclipx team is performing really well, and employee engagement is at all-time highs. This level of engagement, combined with a transparent strategic and customer approach, has attracted many inbound inquiries from very talented individuals across our industry. If I bring all that together, this is the first set of clean financials post-simplification. It's a very strong result. The group balance sheet and liquidity position has never been better, and we're really happy with our current levels of cash conversion. While this has allowed us to bring forward capital returns to our shareholders, the group also has tremendous flexibility to implement this strategy and to allocate incremental capital for growth. We're really pleased with this first half performance, and we're highly confident in the platform's strategic direction.
With that, I'll pause and pass across to Lexi to take some questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Paul Buys with Credit Suisse. Please go ahead.
Morning, guys. First question from me, please. Just keen to get a sense of how you guys are seeing the competitive environment. Obviously, one of your competitors has undergone. First, curious to get your views on the state of the competitive environment and potentially thoughts on how that landscape continues to evolve.
Morning, Paul. Thanks for the question. I think we watched that with interest, and it was obviously ongoing for quite some time. We welcome it. I think it's a good first step in our sector. It is a competitive environment. It is fragmented, as we've always said before. We welcome the change to the environment. We're not threatened by it, but we certainly welcome the change that's come through. In terms of the competitive environment, as Damien mentioned, tender activity feels like it's got movement around the client bases which is fantastic. It's a good opportunity for us, both to retain our clients and grow through new clients, either to trend through outsourcing or capturing competitors' clients. The competitive environment is probably consistent with what it's always been, notwithstanding that tender activity.
Got it. Thank you. Then on some of those Strategic Pathways you outlined, just wanted to know, how do you see your push into SME changing the business risk profile? I guess, how will you be managing the potentially different risk profile of that client base versus the pretty low risk profile, I guess, of the corporate client base?
Look, the corporate client base is very low risk. It's a well-banked base, I suppose, even though it's only 50% outsourced. The SME market is not new to us. We've been dabbling in New Zealand for quite some time. Albeit the distribution is slightly different over there. The reason we're taking our time going into it is we are aligning our scorecards and making sure we're writing business to the right counterparty. At the end of the day, the risk is an asset-backed risk. Really we're taking risk on the vehicle as opposed to just the credit counterparty as you'd have on unsecured. All the analysis we've done and the testing and stress testing we've done, we feel pretty good about the counterparty risk to date in terms of what we've assessed and what we've written thus far.
Thanks, Julian. Last one, probably a quick one for Damien. Just on the impairment side, you made the comment that barring a material deterioration, you wouldn't expect, I guess, further provisioning required. Obviously, you had effectively a positive charge coming through the income statement this half. I'm just trying to get an idea there. Presumably, you'd still see a charge going through the income statement in future as the book starts to grow again. Is that fair? Could there be zero to positive charges still on the next six months or so?
The underlying assumption is that we'll continue to see the normal underlying charges that normally flow through the book. I guess what's a little bit different at the moment is we've got that extra AUD 4.1 million overlay or COVID overlay that we booked up as a provision. We hold that at the end of March, given just the relatively uncertainty how the market's going to play out over the next six months as the government stimulus is unwind. We'll get to the end of this year in September, and we'll assess whether or not it's still appropriate to continue to carry that COVID overlay at that time.
Got it. Okay. Thanks, guys. That's all from me.
Thanks, Paul.
Thanks, Paul.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Chenny Wang with Morgan Stanley. Please go ahead.
Hey, morning, guys. Congrats on the strong result. I just had a few from me. Just firstly, on the RV underwriting. You sort of mentioned that for you guys, you're still doing on pre-COVID levels. Just sort of wondering, are you seeing any sort of changes on a competitive front, in that sense, where competitors are potentially changing some of that? Sort of just related to that, on feedback/pushback on that RV methodology by any chance?
Yeah. To your first question, Chenny, it's hard to really sort of tell, I guess, what competitors are doing. Our commercial team will always say that our RVs are too conservative, we haven't seen too much of a noticeable sort of change out there in the market. On the customer side, no, it's not really the feedback that we've got from the customers. I think they like the fact that we are in a sort of safe position in terms of our RVs.
Great. Just sort of on the comment around the tender activities being the busiest it's been. Can you give us some color on how much is sort of existing fleet customers potentially looking to change versus first time outsourced?
Yeah, it's a really good question, Chenny. It's something we run a lot of internal analysis on. We are seeing a substantial amount of new customers come into the market, beyond the existing sort of retained customers, either ours or that of one of our competitors or some of our competitors. It feels like there's more new customers as part of the function of those tenders. I guess, like Damien said, tenders are near all-time highs or historic highs, at least that our team have seen in their careers. I think there's probably a good mix of sort of existing and new, but probably leaning on the side of weighting towards new.
Great. Just one last one for me. You sort of mentioned the digital rollout in Novated . You guys have those pilot programs that you're looking to move into full customer rollout. Just how does that rollout actually happen? What does the customer need to do to adopt this? Is it just sort of an API integration, or can you sort of give us some additional color around that?
Sure, it's different for every company. It's highly scalable, right? It's basically, we send an encrypted format, and it gets loaded into the HR tool of any of our customers. The format effectively links into an underlying cloud-based program, and they operate through that cloud-based program. Then, in the pilot testing, to give you an idea, our visitor conversion in its mid-70s means that anyone who's interacted with the tool was quite comfortable in the testing to put in all of their details and progress through the tool. On average, they spend about 7.5 minutes in the tool. To give you an idea, how does that compare to the status quo across the whole sector? People have to get on a phone call and call 6x before they really get to a conversion stage.
Whereas we're seeing end-to-end fulfillments being done in seven minutes without having to talk to a human. Far, the testing's gone pretty good. I'll never overpromise on it. It's only a small sample, but we are rolling that out. The rollout, it takes a bit of time because sometimes you have to integrate with different corporates. We're pretty confident we'll get it done by the end of this calendar year.
Great. Thanks, guys. That's all from me.
Thank you. Your next question comes from Joshua Hain with Rest Investments. Please go ahead.
Thanks for that. I just had a quick question on the end of lease income side of things. I joined the call late as you were discussing it, and I think I heard a comment around despite the dynamics causing that temporary elevation in used car prices, there was some expectation that the inflationary pressure would come through over time, and with the implication that might sort of keep used car prices elevated above historic levels. Was that the comment, or did I miss something?
Joshua. It's more to the point that we see a soft landing back to pre-COVID levels. If you go back just to before when COVID started, used car prices were, at that point, still relatively high historically. Our expectation is a soft landing back to those levels and not some sort of major step change. The reason why is because just of that long-term structural shortage of used cars going forward.
Okay, great. Thanks for that.
You're welcome.
Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Russell for closing remarks.
Thanks, Lexi, thanks, everyone, for joining the call. I think we'll wrap it up here, and I look forward to catching up in person over the next couple of days. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.