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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Thank you for standing by, and welcome to the Eclipx Group FY '22 Full Year Financial Results Conference Call. [Operator Instructions] 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 '22 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 will 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 $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 third 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 reassessed for the FY '23 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 per EOL income. Normalizing for a more sustainable level of EOL income, FY '22 EPS growth is 22%, again, a very strong results. Going forward, we have 4 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 '22, 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 $6 million by mid-FY '25. 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 a sector M&A, which remains firmly on our agenda going into FY '23. Before I step through each of the EPS drivers for growth, let me turn to Slide 7 to show you our track record in EPS growth today. 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 haven't over-earned 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 on 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 pathway is designed to grow new business in 3 underpenetrated 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 3 markets. We are now primed for growth. This is clearly evidenced in our new business write-ins 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 the 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 '22. Notwithstanding this, we are 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 4 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 noncore businesses, the optimization of our cost base and a derisking our capital structure. In parallel, we designed the strategy focused on delivering profitable growth and defined target markets called strategic pathways. We're now 2 years into implementation of that program, and it's going very well. And an extension of our strategic journey is called the accelerate program, which is expected to deliver $6 million of annualized OpEx savings by mid-FY '25. Daniel 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 '22, we've enhanced a $72 million buyback, of which we have about $37 million left to go, which is equivalent to roughly 6%. Putting that together, a potential 19% share cancelation in perspective, that's equivalent to an EPS accretion statement and a recent fleet sector acquisition. First, our buyback has delivered the same EPS outcome with no financial leverage, no execution risk and has been delivered much faster. Notwithstanding this, we are expecting -- 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 and we do expect these to emerge as EOL begins to normalize. Put it all 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 '22 summarized over on Slide 12. ESG and sustainability are essential to our Group strategy and values. In March 22, the group proudly became 1 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 #1 in the ASX300 for female Board representation. The Group also retains its Australian Climate Active Status granted last year. In New Zealand, we were also recently certified for Toitu carbonreduce. We're very pleased to be -- 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 ASX300. 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 Eclipx 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 with Julian's determination and leadership. So, on behalf of the entire Eclipx team, thank you. Finally, on a personal level, it has been a career of highlights we have worked side by side with you over the last 3 years. Let's now have a closer look at the results. And if I had to nominate one critical message from the presentation today, it would be as strong as the FY '22 result is in terms of what we have achieved, Eclipx' outlook is even more compelling. Starting with new business writings on Slide 14. At $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 2.6x pre-COVID levels. The novated business wrote $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 $100,000 of EBITDA per annum. Elsewhere, demand for novated leases has remained strong with pipeline growing to 3.8x pre-COVID levels. Turning to Slide 15 on AUMOF. And after adjusting for the Fleet Choice NT exit and at a constant currency, AUMOF grew at 3%. VUMOF is at 91,000 units, down 2% as we continue to exit low profitable products such as managed-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 $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 $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 $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 $8,300. As we exited FY '22, we saw clear evidence that used car prices had peaked and began to pull back, which was expected. Nevertheless, in September just gone, EOL was $7,548 per unit. That is still well above the pre-COVID normalized range of $2,200 to $2,500 per car. Provisions were $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 $251.7 million, up 13%. As forecast operating expenses were broadly flat at $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 past is a pleasing EBITDA of $171.4 million, up 20% and NPATA at $110.8 million, up 29%. Moving to Slide 17, and you can see the continued strength of Eclipx' balance sheet. Net assets ended the year at $621 million, up 8% from September '21. Other highlights worth noting include cash, up 33% at $101.5 million. This is after using $63 million for the share buyback and $21 million to repay corporate debt. Inventory is at $14.1 million, down 43%. Selling conditions were much more favorable in September '22 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' operations today deliver strong cash generation. The net cash flow for the year was $17.2 million. After adding back nonoperational items, such as CapEx, corporate debt repayment, movement in share capital and adjusting for constant currency, the cash generated by the business increases to $128.5 million. Comparing that against an adjusted NPATA of $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 '26. This data 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 3 most common questions about our business today. 1, how will rising interest rates impact margins; 2, how is the portfolio of 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 3 solutions to our customers, packaged as one simplified product. This includes asset-backed vehicle financing, in-life vehicle services and vehicle disposals. While financing makes a significant contribution to our revenue, the services that you see in the middle of the slide generates a majority of our NOI pre-EOL. So, 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 on provisions is stable and predictable through time. This is, of course, 90% of revenue is from financing or servicing. These revenue streams are fixed for the duration of every lease. So, the 8% EBITDA 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 '23 only as attractive conditions present. Secondly, there is negligible yet still positive impact on FY '23 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 catch rate will result in an annualized benefit of $500,000 to our FY '23 PBT. So let's jump into the slides, starting on the left. The 3 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 risks. With respect to funding margin, the pricing on the warehouse renewals has been inside our expectations. Illustratively, this will have a $4.3 million impact in FY '23, which you can see in the chart below. Outside of these facilities, we also use corporate debt for working capital. $30 million is at a fixed interest rate, while $45 million is priced off the 90-day BBSW curve. At current rate, that creates a $1.1 million impact in FY '23, which you can also see in the chart below. However, the incremental interest income we will earn in FY '23 will act as somewhat of a hedge to neutralize these headwinds from funding margin and corporate debt. At today's rates, the $238 million of cash we currently hold creates an incremental $5.7 million of earnings for the business. So, these are the factors that combined show how the impact of warehouse refinancing for 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 $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 4 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 will use this in the next slide to answer the last question about the impact from the normalization of new car supply. You can see between FY '19 to FY '22, 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 tails we anticipate with the normalization of vehicle supply, we expect yields to settle along the range of 7.5% to 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 to $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's 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 '23 expectations, I wanted to pull together the themes from the last few slides to pro forma net operating income. That is FY '22 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 AUMOF to be $140 million higher today had it not been for the delays in new car supply. By applying this higher AUMOF of $2 billion to the normalized yield we called out on Slide 24, the illustrative NOI pre-EOL and provisions becomes $157 million. By adding a pre-COVID EOL of $30 million and provisions of $2 million, it lands at an illustrative NOI of $185 million. Therefore, this compares against the actual NOI this year of $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 '23 expectations. Consistent with past presentations, we don't provide guidance on NOI. We expect NOI pre-EOL on provisions to directionally follow the same trend as average AUMOF. 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% to 7.75%. End of lease income is hard to predict. Used car prices are down 10%. And as supply normalize, 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 or 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 $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 plan for accelerate to be sequenced after the simplification plan and one strategic pathways was well established. So, I'm delighted to be launching it today. Turning to Page 30. The accelerate program has 4 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 accelerated deliverables include consolidating multiple brands into one being fleet partners. This ensures a clear and consistent go-to message market 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, but 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 3 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 $25 million over 2 years and deliver a $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 3 separate ways. 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. So, over my closing comments this morning is that the business has produced another convincing financial performance this year. While elevated used car prices help, 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. So with that, I will 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 results, 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, retain rates, win rates and our success in our tender activity. Our consolidated Group order pipeline is running at 2.7x 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 $30 million per annum, very much a long-term recurring level. Putting it all together, the team have done exceptionally well and position in 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 going to buy back up to $37 million in this coming half at pro forma 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 loans. And as a result, our AUMOF 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 and pass across to the operator to take questions.
[Operator Instructions] Your first question comes from Tim Lawson at Macquarie.
I'm only going to just focus on sort of exit rate. Obviously, you sort of call out obviously what's happened this half and what you think is normalized. But in terms of end of lease income, margins and costs, in particular, just sort of exit rate, 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?
Yes, Tim, it's Damien. Starting on EOL in terms of the exit there, what we sort of saw in September, it was around just about that sort of $7,500 range. So 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're certainly seeing that with EOL as well. So as I said, the exit rates are around that $7,500 mark for EOL. For OpEx -- with our OpEx, it's typically always weighted towards the second half of the year. We obviously see as 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 $82 million to $83 million next year.
Anything on margins?
So for NOI, what we've called out there is in the short term, there's probably around a 5 basis points reduction of 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 will take a number of years and it will take as long as it takes for new car supply to come back online.
Your next question comes from Paul Buys at Credit Suisse.
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 going to manage, I guess, a weaker macroeconomic outlook as you continue to pursue your growth in small fleets and just kind of get an idea of the risk in that strategy versus the rest of the business?
Paul, yes, I guess in terms of how we sort of think about risk, the company itself has got over 4 decades of experience in this area. So, there's been numerous economic downturns which we've managed through. Our assets are business critical. So, [indiscernible] to our customers, they need those assets to generate revenue. So, what we've seen is through the cycle, our credit performance has held out really, really well. We've got -- like I said, we've got an experience tenants sort of used to sort of collecting on that. And the second part of your question, sorry, Paul.
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 a tougher macro outlook, harder than larger businesses. So, it was really just understanding how you manage that as you continue to grow into that area.
Yes, yes, sure. Yes. So, similar sort of theory applies in terms of him business-critical assets. The extra thing I'll talk about in terms of small fleets is one, the majority of those are on direct debit. So, that obviously helps with the collections. The second part is when you look at our small fleet's portfolio, we do see a lot of large multinationals in there who just have a small fleet in Australia or New Zealand. So, that small fleet's 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 other thing I'd add to that, Paul, that is from an underwriting perspective, nothing changes. Obviously, the direct [indiscernible] as the 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 there's a good illustration of prime Aussie RMBS, which is one of the best asset classes in the world in fixed income land, and we're inside of that by 15 points versus mid-30s -- so we feel pretty good about the underlying portfolio quality even going into a hard cycle. So in any environment, we feel pretty good about small fleet or our large corporate fleets that are hotter.
Next question is just on novated? And I guess just keen to understand sort of strategically how you think about the novated business. I mean, obviously, you guys -- you called out earlier, 95% is of your -- of the business is fleet. So, which kind of leads me thinking novated doesn't really move the needle. You're saying you want to grow that over time. But I guess I just want to understand how do you see that changing? Is it a foregone conclusion you continue to hold, [indiscernible] what you need is just trying to get your thinking on that.
It's still a key pillar in our strategic pathways, Paul. So, we still firmly believe in it and our strategy is focused on growing that 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, but we're still fully focused on novated. We see as a great product that complements our operating leases at a lot of the corporates. So, we see still plenty of growth there because we feel like we're very underpenetrated.
And then last one, perhaps just one for -- well for either of you, I guess. I guess my question is well, Julian with your departure, I guess I'm just trying to work out if we read anything into kind of Eclipx' 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, long answer short. I mean there's no change whatsoever. I mean James Owens who's 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. And 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 because right now, we haven't had that, but we're pursuing it very carefully. This is [indiscernible] to my departure. I mean I was brought in by the Board to restructure the business, get the debt down. Obviously, we're a net cash today, sell the noncore assets, they have been sold. We managed through COVID very well, and we've set a strategy as well as a very deep succession plan. And all of those issues have now been executed up on and as the time to transition to Damien, particularly as we start out on the extension of our strategy, which is accelerate, which is a 3-year program of implementation, we felt and we look at it now the time to make that transition and be very stable in terms of our succession planning.
And 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're probably are in a better placed than we've ever been in terms of pursuing M&A, and we still firmly believe it's at the center of our growth aspirations going forward.
Your next question comes from Scott Hudson at MST.
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?
Scott, yes, 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. So, 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. So, 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. So, we see expansion in that way. And then the other one is just expanding the intermediary. 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. So, we're in a position now with small fleets where whether it's the small fleet owner who walks in a dealership or with their broker, they can get a quote immediately and then -- and then immediately also get an application pipe of credit and get approved within seconds.
And then just in terms of the $25 million cost associated with accelerate, is that a P&L cost or capitalized cost.?
That will be CapEx.
And then 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 do you expect supply to start to normalize?
It's a million-dollar question. There are green shoots that are getting better, particularly in the last 3 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. So, it is starting to get better. Conversations that we're having around the dealership land 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. But 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.
And then lastly, can you just explain to me how the end of lease margin kind of moves as vehicles kind of stay in inertia for longer?
Yes, absolutely. So when vehicles are in inertia, they continue to be depreciated at the same rate as the original lease. So, 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 over that extra period. So effectively, what happens is when a vehicle is in inertia, it creates a lot more equity in the vehicle as time goes on. So, the long accounts are in inertia, the higher end of lease income is when we get to sell the car.
And I guess, the average age of the fleet extending in the current environment?
Yes, it certainly is without a doubt. But as I said that the fair market value obviously runs off at a lot slower rate than the actual depreciation of the asset itself. So as I said, the EOL expands. We do see obviously higher maintenance costs and things of that nature as well. But we've got 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 were 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.
[Operator Instructions] Your next question comes from Chenny Wang at Morgan Stanley.
Just the first one on Slide 24 on NOI pre-EOL margins, I guess I just want to better understand what would kind of drive the 7.75% versus, let's say, the 7.5%? I guess given the small moves in basis points does make a bit of a difference, think it's helpful to understand what the key moving parts are that drive that sensitivity?
The difference between 7.5% and 7.75%, Chenny is just portfolio mix. So, that the higher weighting we have towards small fleets, we'll sort of drive that up more towards the 7.75% versus more of a weighting say towards novated would bring it back down 7.5%.
And then just the second one on the order backlog. So, at the Group level, that was 2.7x for FY '22 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 with the order backlog kind of remaining flat half-on-half, I'm not trying to read too much into it, but just useful to maybe go into some of that in a bit more detail.
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. So, our new business writings were up 24%. So, that's a pretty fast clip. So, we've done really well to actually maintain the pipeline where it's at. So, in other words, we've refilled that bucket as quickly as we've emptied it and we've emptied it at 24%. So, the underlying demand is definitely still there.
Your next question comes from Richard Amland at CLSA.
I've got a couple questions. First off, I just want to talk a little bit further about the wind-down in second-hand car prices, EOL being such a material part of your earnings. And you're basically saying there's a $60 million swing coming over the next 2 years. Can we just -- can we talk about what you expect? Like what the drivers of that are? Because I guess, acknowledging that second-hand car prices have been very high. That seems to be a big core in terms of they're going to drop off the face of the earth. And I guess the supply comments around new vehicles don't necessarily warrant such a harsh view.
Richard, 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. But 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 and that's fine. But we just want to be very honest as to what we see and what we expect. And we expect sort of the -- on average going forward, the earnings line for EOL will be roughly about $30 million. And right now, it's obviously very much over-inflated for what it is. And notwithstanding that, what are the 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 on Thursday from a conversation with an OEM is just getting cars on both, the stories of cars in yards in Japan and other ports where they can't actually get on boats because there is no boats and the forward ordering is sometimes 3 years out. But from our honest assessment from what we see now, it would be hard for us to point the finger and say, EOL, it's going to say elevated forever because it's not. It will come down and our expectations in the next couple of years we've been robbed before, but direction that we feel that we are right.
Sorry, 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 and that changes the dialogue with dealerships. Do you have any comments around your business and exposed to dealerships or going direct? Are there any inherent advantages? Or any comments you want to make around that?
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. But 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 our interacting directly with the OEMs. It might mean less discounting and things like that and what that does for us -- it's just -- it means the rentals are a little bit higher, but it doesn't impact our earnings profile.
So nothing material in the near term?
No.
And then finally, we've started talking about -- it's always been a metric AUMOF. And I guess I'm interested in your views on new car prices seem to be higher as just a general barometer than they were 5 years ago. As you recycle through your book and depreciated assets come down and new buy prices are relatively much higher. I mean, how does that go through the book? And I mean, AUMOF, it seems like that should be going at sort of a higher growth rate than some of the other things on the P&L and then that trickled down on the margin. Can we just get a sense of -- yes, the impact upon AUMOF from the new vehicle prices relative to what they were historically?
Yes. I think that view is pretty valid there, Richard. So certainly, used car prices are increasing. And what that means is it just means that it increases our AUMOF, all those things being equal, which -- and we obviously charging interest rates above the AUMOF. So, the info means we have a higher margin, if you like.
So -- and I guess, an AUMOF growth rate of sort of 5% to 7%, is that sort of rational in a car market that may be growing to 2%, 3%?
I hate to be quoted on it.
Should AUMOF grow faster than units essentially?
Yes, I hate to be quoted on it. Certainly, we see new car prices probably 10% higher than what they were a couple of years ago. The challenges is just new car supply like when that start to normalize. That's the big question mark. Historically, the industry grows probably around 4%.
Next, we do have a follow-up question from Scott Hudson at MST.
Yes. I was just wondering if you had any comments on the EV legislation that's similarly said to be passed and whether or not that's driving any increased discussions or activity across either of your channels?
Yes, Scott. Yes, it's certainly something that we're very supportive of. We think it's a pretty good initiative. You've got, obviously, the -- 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've seen -- we have seen a pretty significant increase in the number of EV orders over there as well. So today, 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% to 3% that we see in Australia. So, what we expect is Australia to sort of follow suit once those legislations are in place. EVs is the #2 conversation that corporates want to talk about these days, how can they transition to EVs. And 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 that 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 in-source market?
Yes, it's not like -- it's not going to be seismic change, but I do see that with the complexities of moving to EVs does -- it will be something callous for some corporates who might in-source fleet at the moment to want to outsource it to the likes of us because they just don't have that experience or expertise in terms of managing an EV fleet.
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. I 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.