Shine Justice Ltd (SHJ) Earnings Call Transcript

Thank you for standing by, and welcome to the Shine Justice Ltd FY '22 Full Year Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Simon Morrison, Managing Director and CEO. Please go ahead.

Thank you, and welcome, everyone, to the FY '22 results for Shine Justice. Can I start by introducing our team? Speaking with me today is our CFO, Ravin Raj. Ravin is a very experienced public company CFO, was CFO of the enlisted company Watpac for more than 20 years, does tremendous job with us. With us also is our Company Secretary and General Counsel, Annette O'Hara. I'm pleased to advise that Annette was awarded the Company Secretary of the Year at the Australian Law Awards a couple of weeks ago, so a great testament to Annette. And then our Head of Investor Relations, John George. John is a former executive and Director of the company, sits on other listed Boards, including Yellow Brick Holdings. I'm the Managing Director and CEO. I've spent more than half of my career as a mortgage litigating in most areas of the business and in management for the balance. So let's get into the presentation. We'll start on Slide #3. The business, as people would well know by now, is broken broadly into 2 parts. What we call our Personal Injury practice, which sits across a number of the brands in the group; and in what we call New Practice Areas. They're not really new practice areas, but that's how we delineate them from the core. And what they have in common, there are other areas of damages-based litigation across various brands. There are 3 things that really drive us which we talk to each year. The first is, we are very much a purpose-driven business. Our raison d'etre is to deliver damages for people who've been wronged and something we take very seriously as a company. Secondly, and in the more recent history of the company, we've been working very hard at resetting our base for good growth again, and we're going to talk about that today. We've had 3 solid years of good growth and trending for further ahead. And finally, we haven't been immune to the pandemic as most companies haven't, but notwithstanding that, we've demonstrated our ability to not only grow organically, but to continue to grow revenues moving forward. So a testament to the foundations of this company. Let's cut across to Slide #6, and we'll start with key financial metrics. A good year for us. We were very happy with the outcome. Revenue at $215 million was up almost 15% organically. NPAT at $31 million, up nearly 22%. EBITDA, $63.09 million, up a shade over 14%. Cash flow was a bit off this year deliberately so on our part. We made some key investments in growth of the company, and Ravin will talk us through some of those details a bit later in the presentation and will give you some color about where those investments have been made and the revenue that will come forward from that. Pleasingly, we declared a total dividend of $0.06, a record for the company, and we'll have a little chat about dividends a bit later in the presentation. And finally, earnings per share up a very healthy 22% at $0.1802. So all in all, a good set of numbers and a good result for the company for the year. Let's move to Slide 7. I just want to walk you through what we've been up to in the year. First and foremost, we had said that we would deliver year-on-year earnings growth. We've done that, and we're now fit for even further growth in the company. We have won the landmark Johnson & Johnson case. We're now in the back end of that litigation where we simply have to determine how much money Johnson & Johnson have to pay to the many thousands of group members. It's been a long battle for our company, but a really pleasing win, and once again, that has set our Class Actions business for greater things. We were really busy this year, opening new offices, fueling more growth in the company. So we opened in Adelaide, Darwin, Canberra and Wollongong, and I'll touch on that a bit later in the presentation. We launched a new brand marketing campaign, which we are expecting to produce very good results for us in the year and years ahead. We filed 7 new class actions and settled 3. So our net movement was healthy. I'll walk you through the Class Action Book, and I'll walk you through some court and pending regulatory changes, which we think will favor our Class Actions practice moving forward. Fantastic settlement we achieved in the '22 year was another one of our Mesh Class Actions against Boston Scientific, which settled for an incredible $105 million. The cash from that litigant in the first half of FY '23, which will be a healthy injection to our cash for the forthcoming year. With all of the new work coming into the company, we've grown our staffing levels. We'll talk about that in a moment, but we've peaked over 1,000 members across the group. And pleasingly, our engagement levels have held up in the organization at 83% compared to a market average of 75% in our sector. And finally, we've been chipping away to trying to be the leader in all of the practice areas we're in. So again, a pretty busy year for the company and a busy year ahead. Over to Slide 8. I'll quickly walk you through highlights of strategic things we were working on in the year. Our Case Tracker that we've started, socializing with the market in the last 2 presentations, is gathering momentum. We think this will be a game changer for client service and CRM sector. So we're expecting rollout of that moving forward in the year. We've done some work with recruiting branding agency to reposition our brand for the recruitment market. And legal services is no different to other sectors at the moment. There is a real war for talent. And we are thrilled with that work that's been done, and we're expecting good results moving forward. I'll give you a flavor of the sheer number of people who have joined the business a bit later in the presentation. One of the founders of Shine, Steve Roche, wrote a book about Shine called The Right Side of Wrong, which chronicles our journey in the last 45 years, and it's been backed up with a Comcast platform. So that's a really good read. I mentioned growth before. We opened in Darwin. Darwin has been a good market for us on a brownfield basis. We've been doing sex abuse and class action work up in that jurisdiction and building a real profile in the territory. So we've opened an office staff with lawyers, and it's already producing very good results. It's a market that doesn't have a lot of competition and one we see as a great opportunity for Shine. We opened just down in South Australia in Adelaide. We took over some 60 cases on behalf of refugees who have been abused in detention in cases against the Commonwealth Government and, again, has launched us with a good profile in that state. So we're expecting good organic growth. At Canberra, we opened. Again, we've been attracting work from down that jurisdiction and handling it in other states and it became too compelling. So we've opened offices down there -- with lawyers down there. Wollongong builds on our expansion in New South Wales down the South Coast and already that organic growth has been really strong. So a great year for Shine in terms of growing out our footprint around the country. On the Strengthen Shine, we launched a new brand campaign, as I mentioned, and showing good signs already. We've kept working on an internal operating model change designed to help our margins moving forward. And finally, in innovation, we launched what we call Shine Tank, a bit of a play on Shark Tank, where we invite innovative ideas from all across the company. I'm pleased to announce that in the '22 Shine Tank, a new innovation coming into the company will be a compressed working fortnight, a 9-day working fortnight, and we're expecting great gains in productivity and great gains in engagement. We're doing that process again in '23. Over to Slide 9. So just some extra data we wanted to share with the market. You've seen these numbers before, but we wanted to articulate to you the journey we've been on in growth in the last 3 years, both in revenue and earnings. So revenue has gone from $183 million up to $215 million in that short period. Earnings, $51.1 million up to $63.1 million. So the trajectory is good. It's looking better as we move forward in the forthcoming years and that has largely been organic growth, which is an added bonus for the company. Over to Slide 10 now. This is new information for the market, and we wanted to flesh out the investment we've been making in growing new work coming into the business and what it will bring for us downstream. So firstly, the black bars tell you what we call our New File Fees. So that's the value of forward revenue that we will get from new work coming into the business. And you can see that's been a pretty fast trajectory over the last 3 years, going from a base of $188 million in FY '20 through to $278 million in '22, testament to the organic growth going on in the company. To do that work, we've got to add fee earners to the business. Adding fee earners adds revenue, which will add cash. So we've had a good increase in fee earners from 454 in '20 through to 600 in '22. And against the war for talent going on in the marketplace, to attract that number of people into the organization, means we think we're doing that pretty well. Let's go to Slide 11. And again, this is a different lens for the market. And what we're showing here is effectively what's in our cabinets. So we can see what our forward revenues are for the working cabinet at the moment. So in the current year, we have $630 million of forward revenues available to us. We've completed $332 million of work in progress. So we have good head height of organic work moving forward. You can see a nice increase year-on-year. I'll call out the WIP went backwards a little from '20 to '21. That was largely building off of our Mesh Class Action against Johnson & Johnson, which was a big chunk of WIP in one hit. The percentage you see at the top is the percentage of WIP versus the TOTAL Cabinet. So that percentage is going down, which is a healthy sign for us that we've got more work coming through and more profitable work to do as we go forward. So a very good lead indicator that the organic health of this business is very strong. I'll pass to Ravin now to give us a bit more color on the financials. Ravin?

Thank you, Simon. I'm on Slide 13. And if you look at the revenue, as Simon indicated, revenue was up 14.9% to $215 million this year. NPAT was up 21.96%. EBITDA is up 14.2%. If you look at expenses, you'll note that employee benefits expense was significantly higher due to growth in our staff numbers. And that was really our reaction to a huge number of [ file ] inflows into the business in FY '22. Overheads were also higher than PCP due to sort of increased investments in long-term projects, such as our new marketing platform, brand refresh and also establishment of new sites, as Simon indicated. And when you break up the results in terms of the segment view, in terms of the PI segment, you'll note that the PI segment revenue increased by 12% and also the margin has increased in the PI segment to 21%. So we've been on a bit of a journey, as everyone knows, in terms of our businesses in New South Wales and Victoria. We significantly restructured and reorganized those businesses in the past, and this is now beginning to bear fruit. I think that looking forward, we'll see continued improvement in our margin in our PI business. In terms of the NPA segment, we did have an increase in revenue of 18%, but there's been a small decline in the margin, which is standing at 37% in that business in FY '22. And this profit margin is mainly due to increased provisioning in our Class Actions business under the revenue standard. In terms of segments, moving forward, I'd just like to make one point. In FY '23, we are moving our abuse business from the NPA segment to our core segment. And this is really because we believe that we'd like to manage that business along state lines rather than on a centrally national basis. And we believe that, that will improve our file velocity and also improve our cash flow in that business in the future. Turning to Page 14, the numbers that interest shareholders. EPS was up, as we indicated, 22.17%, and [ that moves ] NPAT. As Simon indicated, total dividend for the year was $0.06 per share, up 14.29%, and that is also in line with NPAT. The payout ratio is at the lower end of our range, but we believe that we will increase dividends in the future, consistent with improving cash conversion. Our balance sheet is on Page 15. The key things to call out there, the balance sheet remains quite strong. Cash on hand includes mesh funds that we received in 2020 as a result of that initial judgment. We do want to use that money for acquisitions and growth. We've done DD on a couple of potential acquisition opportunity in FY '22, but we've elected not to use that cash until we find the right opportunity. In terms of other highlights in terms of the balance sheet. There's been a marginal drop in borrowings. Our debt equity remains at [ 13% ]. And also our deferred tax liability has gone up a little bit because we have started to use up our tax losses. Given that we're moving into a profitable situation over the last few years, our tax losses have now been utilized. Moving to Page 16. This is our normal gross operating cash flow slide. As Simon indicated, gross operating cash flow was down in FY '22 to $30.76 million, down about 9% compared to PCP, excluding mesh. Cash conversion is at the lower end of 48.75%, but we're still targeting 70% to 80% range in the future. The waterfall chart reflects Shine. We always have a low first half and a second half and we're working to evening those cash flows in the future. In terms of FY '22, we thought it would be worthwhile to reflect where our cash has gone in FY '22. And you'll see that we're reporting a cash flow GOCF of $30.7 million, but we've invested in a number of areas, and we believe that the GOCF, had we not made those investments, will be sitting at 42%, which is approximately 65% conversion. And those areas are our new marketing platform that we talked about, will be 550,000. Our brand refresh was $1 million. And then our fee earners, which grew by approximately $14 million we've spent on total employee costs, but our fee earners cost about $8.9 million in the year. And those fee earners will generate revenue -- while we incur those costs in FY '22, those fee earners will generate [ revenue and cash ] moving into the future. As Simon indicated, we've also opened new sites in Darwin, Adelaide, Canberra and Wollongong, and those offices will take a little bit of time to convert into cash flow, probably a period of about 18 months to 2 years before they convert to cash. Back to you, Simon.

Thanks, Ravin. So we're on Slide 19. Three key metrics that I just wanted to share with the market that we watch very carefully. Firstly, for those who've been with the company for a long time, you'll know that '17 was the year we sort of started the reset to position ourselves for future growth. So just outlining how we've gone over that 5-year period. EBITDA has gone from $36.5 million back then to $63.1 million now. Revenue, $165 million to over $215 million. The second metric, which is our mix of core PI and specialist work, or New Practice Area work, again, for those who're with the company when we listed, you might recall that ratio looks like about 93% core PI and 7% for the balance. And our greatest operating risk in the company is the threat of [indiscernible] in the core PI area. So very deliberately, we've been evening that out over the period. And as you'll see, the last couple of years, the new practice areas are actually ahead of core, and that's largely because of the growth in Class Actions and abuse. And thirdly, dividends. We didn't list as a big dividend payer at Shine. As you'll see, dating back to FY '17, we've gone from $0.026 up to $0.06 now. So we're working year-on-year towards improving our dividend ratios. Cash is obviously our key focus on that, but that's certainly something that's top of our mind. Move to Slide 20, just to look at our Class Action book. It's a very healthy book of current cases, new cases that we filed in the year and cases where we have a dozen cases under investigation at the moment. A couple of the key things that I will call out. You may recall, there had been some reform in the Class Action arena of the back of the federal inquiry. And 2 key reforms were, firstly, that litigation fundings were required to hold an AFS license and funded Class Actions were going to be managed through investment schemes. A significant decision came down in the fourth quarter in the federal court a couple of months ago, and it was a 3-0 decision, which effectively found that funded Class Actions are not managed investment schemes. So that will change the landscape, we believe, to open up more competition again into the funding market. We had a change of federal government in May, and there was a commitment by the labor opposition then to buying back those reforms. So we do envisage again that there will be greater opportunities moving forward in Class Actions. We are positioning ourselves, I think, very well across the class action market in Australia, where we have a very diverse portfolio of class actions. We don't weigh them too heavily in one particular area and that augurs well for long-term growth for the company in this really important area. If we move to Slide 22 to round out just the outlook for FY '23. Operationally, as you can see, we have a very, very busy year ahead of us with lots of work. A key focus is our cash conversion in FY '23. Strategically, I'll just call out some highlights. We want our case tracker, which we think will be a game changer to be launched. We're working hard on further recruitment programs to bring more people into the business and good quality people. We will expand our network in Victoria in FY '23. And finally, we will go around again with our innovation on Shine Tank. So I look forward to letting you know what comes out of that process. In keeping with our confidence in the growth of the company, we have issued guidance for increasing EBITDA growth in FY '23 in the order of a low double-digit percentage increase. That concludes the presentation. Ravin and I are very happy to take questions.

[Operator Instructions] Your first question comes from Daniel Seeney from QValue Equity Research.

I was just hoping you could provide a bit of color on the evolution of margins going forward. Obviously, the quality of the case load has changed over the last little while, and there's a number of productivity initiatives way -- underway in the business. So how should that margin evolve going forward? And then in FY '23, is there margin expansion assumed within that guidance you've given?

Daniel, Ravin here. Yes, I think you've been on the journey with the business for a while now. You would have seen that PI margins have improved from circa 16%, 17%, 18%, now we've reached 21%. Our target in PI is to get to 25% plus, and I think we're well on track to get that. The margins in our -- in PI business are around the 37 -- 35% to 40% range, and we're sort of fluctuate in that range, depending on revenue standards and provisioning. So I think those margins will remain relatively constant where the growth is likely to come is in the PI space in terms of margin growth.

Great. And secondly, just on the M&A pipeline. You've talked to the capital allocation strategy with the looming closure of the mesh case. Can you just update us on how that's evolving and whether there's anything that might come through the woodwork there in the near term?

Yes. So Simon here, Daniel. We do run a pipeline of opportunities that we explore constantly. As Ravin mentioned, there were a couple that we did a fair bit of work on in FY '22, but elected not to proceed with them in the end. There would be at least half a dozen opportunities that are currently under different forms of scrutiny. So I did indicate we expect that we would do something in '22. We thought at least one of those we might do, but we pulled back in the end. I'd be confident there would be something happening in FY '23, but we'll certainly keep the market apprised.

[Operator Instructions] Your next question comes from [ Nick Caley ] from [ Hensley ].

Just a couple of quick ones. You just touched on M&A for FY '23. You think that will be domestic?

Yes.