Solvar Limited (SVR) Earnings Call Transcript

Good morning, and welcome to Money3's investor webinar on the 23rd of November 2020, which will discuss the announcement this morning regarding the $250 million securitization warehouse facility and the Q1 update. From the company today, we have CEO and Managing Director, Scott Baldwin; and CFO, Siva Subramani. Scott and Siva will provide a short presentation, and then we'll throw it over to Q&A. [Operator Instructions] I'll now hand over to Scott and Siva to get started. Thanks, guys.

Thanks, Simon, and thank you to all the investors that have joined the call today. This is a long-awaited announcement. I know that for many of you, this has been well over 12 months sitting there waiting for this to happen. So we're very delighted that this milestone has been achieved for the company, really setting us up for future growth for years to come. As we say in our media release, this really is the cornerstone between us from where we are today to growing our gross loan book into $1 billion, which we certainly think is achievable within the market. So Siva and I will take you through the PowerPoint deck that's been watched on the ASX. If you've not seen it, you can navigate the ASX website and get that there, or I'm sure Simon can send it to you after the announcement. But just some key highlights from the presentation that we've put out today. We're delighted that after some months of review and work from Siva with the team at Crédit Suisse, that they have agreed to set up a warehouse facility, which sits off our balance sheet alongside the business, hence, why Fortress and Crédit Suisse are able to exist together, but they've really cornerstoned our debt requirements for the business. This -- why this is such a significant achievement for us is if you consider, we now have 2 A-rated banks that are backing the business, BNZ in New Zealand, which is owned by National Australia Bank here, and Crédit Suisse, giving us facilities that we believe we'll be able to grow over time with the business as we move towards our goal of $1 billion of receivables. That facility puts us in a very strong position to continue the growth of our existing subprime automotive loan book as well as expand further into our near prime business. Many of you, to give you some flavor about that, that's the business that we've been talking about, slightly better credit quality and slightly better vehicles. So a key milestone that we've achieved here today. The funding is pretty much available almost immediately. We will -- once the cash that we currently have on our balance sheet is used, our intention is that we would start originating receivables into Crédit Suisse. And we are very thankful to our existing fund of Fortress that we've been able to work with us that we will be able to move their debt funding into the Crédit Suisse facility when it becomes due in about June, July of next year. So that works very well for us. The -- as I'm saying, it's cornerstone that allows us to have -- just with the existing facilities now, we can achieve over 50% growth in our business. We're very well positioned to continue to grow our receivables from this point moving forward. Very delighted with the work that we've done internally to secure this new facility. Just moving on to the highlights for Q1. So funding, certainly a big tick, I think, for the business, certainly a big tick for the processes in the business, given the amount of lawyers and audit that the business has been through, that that's now achieved. Now moving on to Q1 highlights. I think that this is -- I think Siva and I would say these are better results than we expected. Thanks to government stimulus in both countries, Australia and New Zealand, our cash collections have been exceptionally strong. We're always confident in our customer care teams in both countries collecting beyond trend through this period of time. And I think the piece of the puzzle that gave us well beyond expectation in terms of cash flow has been the superannuation release from the Australian government. We have seen a lot of resilience from our customers that through this period of time, many have caught up on any arrears. We didn't put in an update here because it's only been a few months from the last one, but we are happy to say that our arrears continues to decline, and our bad debt has improved over these last 4 months from the June 30 position. So we feel that we're in a very strong position, which has given us an $8.8 million normalized NPAT for the quarter, $10 million statutory NPAT. The only difference there is the job to keep a payment that the business has received. Talking a little bit about the future in terms of these Q1 results. I mean the loan book is the best leading indicator of our continued growth. You can see that we had some mild growth over the first quarter, 1.3%. From the media release, you'll see that we grew just under 4% in, I think it's 3.9% of our receivables grew in October alone. So what we've seen is a strong, confident return to the market to buy vehicles at the end of Q1 as well in both countries. So I think that the highlight here, though, is certainly the bottom line, the cash collections and the improving credit quality. Just moving on to -- I'll move on to the business impact slide for shareholders. I think this paints the picture of how our business has performed over this period of time. You'll see the big dip, which is both countries going into lockdown when the pandemic come out in April. You'll see that the impact of lockdown does have on the business, slows things down quite significantly. What you'll see there in August is the hard lockdown that Auckland went into for a period of time, and then you'll see that as we've come out of that, we started to rebound. It's been interesting to see that the Victorian business with the lockdown that we've had for the last 4 months hasn't had the hard, sharp reduction like we saw in New Zealand. It's sort of a gradual loss of momentum. And I'm happy to say that certainly from late October, early November, we started to see things in Victoria start to pick back up again. So if you look at October's results, sort of on par with our record results that we produced in July, and we're confident that the business, provided that there is no further lockdown, really starts to move into consecutive record months of new loans originations as some confidence starts to return to the market and Victoria starts to add to our monthly settlements as well. Just moving on to our cash advantage. So you'll see that very similar to last year in Australia, a lot of that is subdued as a result of the Victorian lockdown. New Zealand, through our expansion, many of you that have followed the story, we talked about a strong partnership we struck last year with the importer of vehicles into New Zealand, expanding a number of dealerships we're working with, and just a push with the availability of cash in New Zealand has allowed us to increase the number of dealers that we work with. And it just really has been a fantastic acquisition for the business, giving us that smoothing of our results because they seem to be hitting their straps just as we were quieting down a little bit in Australia, and you can see that in the cash advance numbers there for New Zealand. So great results from both, in our view. Just looking at cash collections for Australia. You'll see Australia and New Zealand, up 29% in Australia, up 40% in New Zealand year-on-year. Both of them have shown that they, as a result of the government stimulus, that we are collecting beyond trend. And we're highlighting that because we don't expect that to stay. We also note that a lot of our good payers, a lot of that is coming from people paying out their loans early, which is not necessarily something that we want to have happened. We do think a lot of that was driven not just -- not by the JobKeeper so much, but by the early super release. And we're seeing that come back to beyond trend, but healthy collections post sort of late August when the super release came to an end in Australia. So I think the theme has been that cash has been quite strong and continues to be, but not as strong as we saw in the month of July and August of this year when we saw people actually repaying their loans earlier than we otherwise would expect. Look, that's the conclusion of the announcement. You would have read a lot of it in the media release. So I'll hand back to you, Simon, as I expect there will be some questions.

Great. Thanks, Scott. Just a reminder, for those on the line, if you did want to ask a question, do so via the Q&A button down at the bottom. First question, congratulations, guys, how flexible can this financing facility be, equity attachment and points, from Jonathon Higgins at Shaw.

The structure we've set up here is quite favorable for us. What we anticipate is that the initial layer in the facility will be provided by Crédit Suisse, but they certainly provide the option for us to add a mezzanine funder in there as well. And it's not prescriptive a way that gets us to, but certainly, we think that we can get to an 80%, 20% ratio, so from an attachment-point point of view where Money3 is contributing 20% into that facility over time. And I just stress, we're not there yet, but the facility gives us the flexibility to get to that point.

Thanks, Scott. Feedback from auto retailers is that there's a shortage of supply for new cars across many brands, which is shifting people towards the second-hand market. Has this been a benefit for your business? Does second-hand vehicle prices have also been strong? And would you expect these effects to unwind over the next 6 months?

Look, I noted there is an announcement out today from car sales in the paper, where they're saying that this is going to continue for several months, maybe a couple of years, which is probably more informed than our view. We certainly have seen appreciating vehicle prices, and we've certainly seen dealers complaining of a lack of stock. That's probably more an issue in Australia than it is in New Zealand, but in both places, we're seeing a lack of stock. So from our point of view, where an average loan is around that $12,000 mark, that 10%, 15% price appreciation means that each vehicle is being funded for about $1,000, maybe $1,500 more than it otherwise would have been. And I think the point that gives us comfort in that process is that all of our loans amortized to 0. So if there is some residual value risk at the end of the curve in the third year with loans that we're originating today, we're still confident that even if car prices start to slightly trend back down to where they were, that there's little RV risk given that we -- residual value risk, given that we amortize to 0 over time.

Just to flesh into that point just a little bit further, Scott, in terms of new brands and a shortage of supply, have you seen any increase in terms of the second-hand customers going towards secondhand vehicles and therefore [ a boom ] for you?

Definitely, when we look at our application volumes over the last 4 months, they are trending at record highs. We are seeing more people apply for a loan than we ever have. I'm just trying to find the percentage increase while I'm talking to you, but it's roughly a 20% increase in people applying for a loan year-on-year. So we think that demand is quite strong. Investors won't see that translate exactly through the settlements. But as we return to, let's call it, COVID normal and we can see what people's employment looks like, we will start to move some of our credit policies back to normal rather than the restricted credit policy that we initiated through the COVID period.

All right, thanks, Scott. Could you speak further about the competitive environment? And how much this facility means as others have fallen behind?

I think there's 2 arms to that. One, our cost of funding has improved significantly as a result of the facility. So it gives us a competitive advantage in that regard. Secondly, it gives us the ability to really push up the credit curve a little bit with competitive pricing in a period of time where competition, while it's still strong, it's not as strong as it was. Many of our peers are not as aggressive in the space as they once were. I think access to funding and possibly not as strong a cash flow collection has been a challenge for some of our peers. But I would say that we are benefited with a trend that we've seen for some years now where banks not servicing this sector, more people coming into the sector. And then while there has been some new entrants, those people -- there's not as much competition as what we've seen in the past, I guess, is the outcome, and a growing market from a sector point of view as banks stop their servicing in that space. And I think that's leading to our -- we are definitely at record application volume.

Sorry, Scott. Just had a technical failure there. Can you hear me okay?

I -- Siva and I can hear you.