All SGH questions - put here (financials ONLY), page-159

Robert, some good information there that you have provided. In both looking at that information and in looking back through the Annual reports (particularly focused on the AU operations), I have found a different comparison which is baffling me in a sense. It concerns the further split of the AU operations between "core" (essentially, those entities covered by the Deed of cross Guarantee) and "other" (essentially, those entities like Conveyancing Works which has not been a good acquisition for SGH, as the figures below suggest, but possibly good on a cross referral basis, All States Legal which is Nowicki Carbone, and Schultz Toomey O'Brien.

In a sense, SGH has (without it necessarily being realised) provided much more informed disclosure of its Australian operations than has otherwise been the case when considered purely on a segment reporting basis.

This additional information can be gleaned through cross comparing its segment reporting (Note 3 in AR15) to its closed group – Deed of Cross Guarantee – reporting (Note 36). Not all of SGH’s Australian operations are included as part of its closed group which is limited to the parent entity, Slater and Gordon NSW and Trilby Misso. Controlled entities not forming part of the closed group include Conveyancing Works, Schultz and Toomey, All State Legal (being Nowicki Carbone) and SG NSW, the latter 3 first appearing during F15.

The inter-relationship between Note 36 and Note 3 is such that some useful, drilled down information can be obtained. For example:
*/ Note that “core” below refers only to the parent entity, Slater and Gordon NSW and Trilby Misso (all forming the “closed” group for purposes of the Deed of Cross Guarantee). “Other” refers to Conveyancing Works only in F12 – F14, and to Conveyancing Works, Nowicki, Schultz Toomey and S&G NSW in F15.

	Column 1	Column 2	Column 3	Column 4
0	2015	Core	Other	AU
1	Revenue	271	43	314
2	OPEX			240
3	EBITDA			74
4	Expenses	223.5	25.8	249.3
5	NPBT	47.5	17.2	64.7
6	NPAT	33.3	12.4	45.7
7	PBT Margin	17.5	40.0	20.6

	Column 1	Column 2	Column 3	Column 4
0	2014	Core	Other	AU
1	Revenue	227	9	236
2	OPEX			279.3
3	EBITDA			56.7
4	Expenses	177.2	9.3	186.5
5	NPBT	49.8	(0.3)	49.5
6	NPAT	33.4	-	33.4
7	PBT Margin	21.9	(103.3)	21.0

	Column 1	Column 2	Column 3	Column 4
0	2013	Core	Other	AU
1	Revenue	219	8	227
2	OPEX
3	EBITDA			58.2
4	Expenses	168.3	8.1	176.4
5	NPBT	50.7	(0.1)	50.6
6	NPAT	34.8
7	PBT Margin	23.2	(101.2)	22.3

	Column 1	Column 2	Column 3	Column 4
0	2012	Core	Other	AU
1	Revenue	203	3	206
2	OPEX
3	EBITDA			44.3
4	Expenses	166.6	3.7	170.3
5	NPBT	36.4	(0.7)	35.7
6	NPAT	25
7	PBT Margin	17.9	(123.3)	17.3

Coming from a different perspective, AU PBT margins have remained relatively stable over the last 4 years due to:
*/ the resilience of PI driving “core” between F12 and F15 (note, “core” dropped away by whilst core margins dropped away by 20% in F15, alone):
*/ “new” adding significantly to AU outcomes during F15 (which is unlikely to provide the same profit impact in F16);
*/ with “industrial” (normalised) NPBT margins likely stabilising in the 17 – 20% range (assuming slight deterioration to “core” and “other” normalising and trending towards “core”.

	Column 1	Column 2	Column 3	Column 4	Column 5
0	Year	2015	2014	2013	2012
1	Core	17.5	21.9	23.2	17.9
2	Other	40.0	(103.3)	(101.2)	(123.3)
3	AU	20.6	21.0	22.3	17.3

The revenue profile covering “core” however was also interesting as it pointed to something going askew in F15.

	Column 1	Column 2	Column 3	Column 4	Column 5
0	Year	2015	2014	2013	2012
1	Core Revenue	271	227	219	203
2	Change YoY	+44	+8	+16
3	Core Expenses	223.5	177.2	168.3	166.6
4	Change YoY	+46.3	+8.9	+1.7
5	Rev /Exp variance	(2.3)	(0.9)	+14.3
6	Core NPBT	47.5	49.8	50.7	36.4
7	Change YoY	(2.3)	(0.9)	+14.3

“Core” Pi includes most of the AU PI operations (ex-Nowicki and STOB, etc) and some of the AU GL operations acquired in recent years which were partnership (not corporatized) based.

Within “core” AU (the PI engine house, so to speak, of the parent, Slater & Gordon NSW and Trilby Misso), all of the revenue gains made since F13 however have been effectively wiped out through the increased expenses incurred in the same time period. That is “core” PI, despite increasing its revenue profile in recent years has been flat to backwards since F13. Only the new bolt on acquisitions made during F15 have added to the AU profit outcomes and even here, most of the F15 gains can be considered as one off results due to the focus on driving outcomes through the new acquisitions (like wringing out the laundry to remove the water, before drying).

It is therefore quite clear that in order for the “core” AU operations to be maintained, and for the “other” (or new) operations to be optimised (ie: so that they do not trend towards the mature, industrialised margins emerging in “core”, significant OPEX and headcount reductions need to occur. Quite likely, this will also be accompanied by SGH reviewing its AU WIP /matters’ listings to ensure that the cases being worked on and maintained are profitable and margin producing to the business going forward (ie: rather than average, to marginal, which is likely to be the case when involving the accumulation of potentially stale WIP over time).

A leaner, meaner more efficient SGH (both in AU and in the UK) is therefore likely to emerge later in 2016 after the dishing out of some “tough love” to the business, to staff and to its clients, and shareholders. That's saying that some tough steps are ahead for the management team (something which they really did not practice during F14 and especially, in F15, when their eye to the AU detail dropped somewhat from the radar).