If you look at fee revenue before any adjustment for WIP...

If you look at fee revenue before any adjustment for WIP movement, then H18 returned a primary revenue result of $100M.

Looking then at WIP, closing Half WIP was $237M, as against opening Half WIP of $515M. Divested WIP was $270M. All things being equal then, new WIP for the Half was $92M before any adjustment. If so, then replacement WIP was being created at 92% of its consumption rate meaning that the decline evident since the acquisition peak of mid 2015 has not yet been arrested. For example, AU REV (PIL + GEL) were recorded (their numbers, at the time, as opposed to any restatements being made 12-18 months later:

• H15 - $128M
• 2H15 - $140M
• H16 - $138M
• 2H16 - $127M
• H17 - $114M
• 2H17 - $112M
• H18 - $96M

Please note however that these REV numbers (above) include movements in WIP which is how they reported to the market.

That said, the primary advantage of GEL was that it carried with it relatively little LT WIP. That is, the link between REV recognition and WIP generation was (and is) far more contemporaneous than what it is for PIL. Here, we all know the typical 2-3+ year timeline to most PIL matters being addressed before any final resolution is achieved. The future loss therefore of GEL whilst quite possibly improving the gross margin (perhaps also the net margin) must also be balanced against the future CF impact of PIL matters having to be carried for that much longer on the BS. Of course, there are accounting ways and means by which all of this can be addressed or factored for but the fact remains that at a time when cash is in need of becoming King, the near to medium term generation of that cash will likely be poor to neutral, at best. To therefore get to a sustainable position such as what SWC has suggested requires, first, for the future to be achieved. To do this, if reliance on past numbers is considered a misplaced science, then so too must any reliance on that remaining hoard of WIP ($237M) and that tantalising bounty of RECEIVABLES ($86M, of which $71M is considered due within the next Current period being within +12 months). Already, factors such as (*) bad debts, (*) increased provisioning, etc are all taking their toll and quickly likely some of this will remain crusted on within both WIP and RECEIVABLES. In other words, until such time as the reported balances on account of both WIP and RECEIVABLES have completely washed their way through the system, then it is likely that the past (Dec31 balances) will continue to raise mischief (if not havoc) to the financials. This however will also be exacerbated by the coming, imminent exit from GEL.

The GEL revenue contribution in H18 was $13M as against PIL’s $83M. Adjust for the WIP movement however and the PIL revenue was $87M. Further adjust GEL from the WIP equation and it would seem that during H18, PIL WIP was being created at the rate of $79M per reporting period, or if grossed up (smoothly), at a sub-$160M annualised rate. In other words, at a far cry from SWC’s suggestion of $200M in revenue, going forward. Granted this may well be achieved in due course (that is, through +25% in future organic growth over the current trending position) but not likely without there being further hits to the expenses column, etc (ie: heavy laden advertising, for instance). As such, I suspect that even if a future $200M recurring revenue result can be achieved, this will not be at a 10% profit generating rate. Granted, if this is achieved, there will be a profit to be had, just not at the 10% rate. More likely, the recurring profit rate will fall somewhere in the region of 6-8% (so, 7% at the midpoint). Why this figure? Because of the increased investment required in advertising, for starters, as well as the continued maintenance of a national PIL footprint (both boots on ground and glass in the foyer). So, I see a future $200M prospect returning upwards of $14M but not much more than this and not before all the remaining bumps, lurks, and squirts have all been sorted out. This suggests a much longer time frame to any future based recovery taking hold. Certainly not during calendar 2018, but perhaps sometime well into calendar 2019.

That said, I do also doubt the magic $200M number quite simply because both revenue and WIP on a successive reporting basis have all been trending down. The effort therefore to arrest this will be significant especially in what has now suddenly (last 12-18 months) become quite a crowded PIL market (witness, for example, all the radio advertising, TV advertising and even print advertising that has been appearing for virtually every practice and its dog). Certainly though, with 1,140 staff across Australia at Jun30 (1330 @Jun30/16) and likely with this shrinking below 1,000 by later this year, the question is what sort of revenue numbers are being generated on a per employee basis. In F17, this figure was $183,000 per employee (F16 /F17 midpoint, based on Revenue before WIP movement). After WIP movement, this figure was $171,000.

For H18, the figure was $175,000 (annualised, if staff numbers were as they were at Jun30), or static at $183,000 on a midpoint adjusted basis (that is, based on a midpoint position which assumed 1,050 staff as Dec31). Ex-WIP movement, however, the annualised figure @H18 was slightly improved @$175,000.

Either way, it is fair to say that the annualised employee revenue generation figure remains stubbornly stuck at the near $180,000 mark which represents its peaking point rather than its nadir. Going forward, in order then to generate $200,000,000 in recurring revenue (even if allowing for WIP movement), the number of required staff will need to stay at somewhere around the 1,100 – 1,150 mark. This however is not what the administration has been saying or suggesting. Rather, the reverse, sliding back to either at or below the 1,000 mark. More likely, circa, the 900-950 mark.

Reason:
In the GEL categories, the staff numbers (ex-Conveyancing Works) would likely reflect a figure of 150-200+, with STOB (70 staff) being the most recent of these (late 2014). If so, then the likely required employee revenue generation level will need to spike above $200,000 in order to match out any type of $200M+ renaissance scenario (circa, $210 – 222,000 per employee). In its history however, SGH has never been able to breach the $200K per employee benchmark. Future focused however, this is likely to be harder rather than being any easier to achieve. Hence, the reason why if $200M in future recurring revenue can (in some way) be achieved, it will be against a margin much nearer to the 6-8% mark.

By all means, be future focused, but if so, then also be future savvy. Think it through as to achieve this, then things will have to be done like they have never been done before. And that’s not just history telling you this. It’s also reality. Hence our continued difference of opinion. To ignore history risks having to repeat it. To learn however from history means to evolve from it. That’s the future challenge for SGH. Not just the current challenge, or the failed past challenge.