Solvar Limited (SVR) Earnings Call Transcript

Good morning, and welcome to Money3's First Half Financial Year '21 Results Webinar. From the company today, we have CEO, Scott Baldwin; and CFO, Siva Subramani. Following a short presentation, [Operator Instructions]. Scott, I'll now hand over to you to get started. Thanks.

Thank you, Simon, and thank you, investors and other stakeholders that have joined us here today to review the first half results. Siva and I join you from our homes as we are part of the lockdown in Victoria, as all of our staff at Money3 in Melbourne and, at this point in time, Auckland as well, working from home continuing to run our business. If we can move to the next slide, Siva. So just a bit of background for those of you that haven't followed the story in the repositioning. We've spent a number of years now, for those that have followed the journey, repositioning the business. I'm here today. We can say that we are very much a customer-focused consumer and commercial finance company. There is some call-outs further on in the deck about the commercial offering that's new. We're calling that out that comes with our AFS acquisition. We now have very strong brands in both Australia and New Zealand and covering those sectors. As a business, we address a very large addressable market, a $6 billion of used car financing, a larger sum, about $8 billion, of new car financing as well as personal loan segment for our repairs and maintenance product that we offer. So it is a multibillion-dollar market opportunity that the group faces. And at this point in time, we're currently funding over $30 million a month in assets for consumers. One of the things driving our business is that ubiquitous approach from whether it be a broker-dealer or direct application from a customer straight through into our processing engine room in Bundoora and Auckland and Brisbane. That technology driver has made it faster and easier for customers to interact with us. And finally, one of the pillars of the strength of this business is our customer care or collections team. The strength of that business has made it very easy for us to acquire our business, which we'll talk a little bit about, General Motors Finance Australia, and we've rolled that straight into our existing processes and our existing software, and we were able to collect that quite seamlessly. Post the acquisition, you're looking at about 0.5%. So these are the 3 core brands that Money3 has today. Money3, which is our nonconforming automotive loans plus our repairs and maintenance loans. Automotive Financial Services based in Brisbane, the acquisition that we completed on the 2nd of February. Just note the call-out there. While it does say January, to give you a picture of where we are today, we've included the AFS loan book and GMF loan books into this picture so that you can see what the total loan book looks like on a go-forward basis. And then in New Zealand, we have our Go Car Finance brand. All of these brands participate in funding primarily of assets. And what you'll see later in the deck is primarily consumer assets. They all face very large market opportunities, and we're very small players sort of in that 1% to 3% range of the market opportunity. So there's lots of opportunity for scale and growth in all 3 business units. Some of the highlights for the first 6 months of the year. Although these 2 did settle most of the work settled in early January, February, most of the work was done in the first half. So we acquired Automotive Financial Services. We think that as a product, it was a very good strategic positioning for us, allowing the group to make the most of this distribution through the Money3 network, but offering what AFS does. It's a near-prime automotive product, roughly twice the average size of a typical Money3 loan. In the month of January, our first month of owning that, nearly 90% of people who applied for a loan there are their own homeowners. So it is a different credit profile that attracts customers to that product, and it allows us to continue to grow our business. General Motors Finance Australia. This is playing to our strength of collections. We've acquired that book -- within a matter of days, our customer care team were able to roll that into our existing software platforms and systems. And we estimate roughly, on a go-forward base, about half our head count to manage that book. We had a very strong start to the second half of the year as a result of a variety of stimulus as well as our, I think, very good approach to working from home. So we had a lot of people transition to home. We haven't had a lot of downtime. We've seen a lot of stimulus. Our cash flow has been exceptionally strong. We also started in December a capital raise for $52 million, which completed in January with an SPP. All of those were well oversubscribed, and we thank all of those that participated in the capital raise. That money will be used principally to fund the ongoing growth of the business in New Zealand, so the loan book. That's where that money is going and allowing us to continue to draw down on our BNZ facility. The other part is also to fund opportunistic acquisitions as they may become available. As we were saying, record cash collections, $165 million, 23% up on the year before. Our loan book was up around 10%, with 23% increase in cash collections. You can see the impact of the stimulus. Credit quality has continued to improve across the business. This is not just as a result of stimulus, but also as we've refocused on teams in terms of their collection efforts, making a lot of conversations with customers. That's really what's driving that improvement. And finally, the foundation of many years to come has been the Crédit Suisse deal that we did for $250 million. We anticipate that we'll repay the Fortress debt in around June or July of this year. And we are -- the cost of funding is roughly a 4% improvement on existing cost of funding, hence why we're saying when fully deployed that it will lead to $10 million in interest rate savings. We finally secured a 20 -- $55 million warehouse facility with Westpac. For those that have followed the journey, you would be well aware that we've been working on that for some time, so delighted that, that has now settled. That Westpac facility will fund our Automotive Financial Services business based out of Brisbane. So many of you would have seen this slide before, but if I can call out the right-hand bars, $474 million was the receivables that we had at the end of December. And we've put in there the acquisitions and the impact that, that had in the business, taking us to roughly $550 million of receivables. That's the result of the Automotive Financial Services business as well as the General Motors Finance book. The General Motors Finance book, I'll call out, it's not an ongoing business. It's just a portfolio receivables that our customer care team will manage the roll-off of that. But it will make a solid north of $6 million contribution over 3 years to the business. If you look at the loan book, you'll see that 90 -- roughly 96% of our business is consumer-automotive lending. We have a very small segment of commercial lending. And then you should think the assets that are being funded there are typically utes and vans and light commercial. It's a very small part of our business, but we're planting this seed so you can see that this is the -- one of the product arms that we will use to continue the growth of our business. Our personal loan portfolio is a mix of secured and unsecured personal loans, not for the purchase of a vehicle, typically used for repairs and maintenance of vehicles we've funded in the past. It's a great growth opportunity for our business, and it helps us retain customers and stop them using some of our peers. But most of that funding today is used for repairs and maintenance of the motor vehicle. Just to reiterate the highlights of the half. Exceptionally strong cash flow over the first half, really, and that is what has driven the increase in revenue. Off the back of that increased cash flow, what is evident in our portfolio is cash has come from all segments of credit quality. Not just the best performers, but some of the poor performers have taken the last 6 months -- taken the opportunity to improve the position of their loan, reduce their arrears, and that's what's driving the improvement of credit quality and the reduction in bad debts in the business, which you'll see in the next slide. For New Zealand, I really have to call this out. It's just been a fantastic result. We have been in the right place at the right time yet again in New Zealand. We had a new head of the business start there well over a year ago now, working with the founders. We have been able to fund that business better than it has been in the past. And when many of our peers have had challenges, we've been able to be there with our existing dealer network to continue to fund vehicles when some of their competitors had some troubles. And we also have been able to expand our distribution throughout more dealerships in New Zealand. So the combination of doing more with the dealers we had and then bringing some new ones on has really driven strong solid growth in New Zealand. We haven't changed the credit profile. It really is still the same types of -- same spread of clients that we're approaching. But we are taking more share than we were 18 months ago in New Zealand. And as we spread our distribution, we are picking up more from there as well. You'll see too coming through in the results that post lockdowns, we have a fairly strong bounce-back in terms of application volume. And coming into Christmas, it was a record for the group. We certainly saw that November period when Victoria came out of lockdown and the customers in Victoria started to borrow again, really started to drive that loan book growth. So the 11%, most of that, that you see in the highlights, most of that has occurred in the last 2 months of the year. We can go to the next slide, Siva. Really, the thing to call out in the financial highlights is the bad debts. You'll notice that's down 20% year-on-year. That was really driven by that -- the financial situation and the stimulus that we have, also, coupled with, I suppose, extra communication. We took on as a business that we would contact all of our customers. Rather than do blanket advertising, we would just pick up the phone and ring customers to see how they're going. And because certainly on our Money3 product, there's no penalty for early payout. We saw customers favoring us with extra cash as they try to make sure that there was no arrears on their car loans or if they had the opportunity to pay in advance. The impairment provision movement is reflective of that continuing improvement credit quality. You'll note that, that's down significantly. If we go through a period of strong growth, again, you should expect to see that come back. Nothing to do with declining quality, but just growth will mean that we have to write more upfront impairment provisions. But at the moment, it's at record lows as our quality of our book continues to improve. To the next slide, Siva. I think this slide tells a story about what has happened in the business quite accurately. When COVID first hit in late March or -- we've got -- first case was started in February. Everyone started to hear about it in March. Lockdowns and restrictions started to happen in April. And you can definitely see our new loan originations fell off a cliff. And in fact, in New Zealand, they went to 0 for a period of time. You can see very strong rebound in terms of our application volume coming out of COVID. And you can see -- as we went back into the second lockdown. I would put to many investors that what we started to see in that August-September period, why it didn't bounce back as fast as we expected is starting to see some shortage of vehicles in the market. But a record month in November has really -- we certainly have seen that volume start to come back across the business. We expect to see those $30 million a month of vehicles being financed continue. In fact, investors should start to expect to see us, with AFS coming on board, exceed that $35 million, getting closer to that $40 million a month when you start to see more availability of stock coming in the market. There's quite a bit of a bullish movement there at this point in time that we're confident as long as there's no further lockdowns or restrictions that this graph continues to show a very positive sign. Improving credit quality. A little bit hard to read from a first glance, but if I can take you on the journey over the last 4 years, dark blue is good, red is bad, essentially. You can see that the strong credit quality for those that are thinking in the old school, no arrears or 0, the dark blue, light blue that 0 to 30 days is how you might have thought about in the past, under the new accounting standards, strong, strong and good. You can see that, that has improved across the business. And you have more people either -- than we've ever had, either in advance of their loan or having never missed a payment. You also see that the credit impaired segment in our business has really started to shrink off the result of additional cash flow. Just to set the foundation for the business because funding is so important for Money3's growth. And it's also important for us to continue that improvement on our return on equity is complementing the equity that we do have in the business today with more debt funding. The Crédit Suisse warehouse that we secured will deliver us a 4% saving. When fully deployed, $10 million of reduced interest expense across the business. So I think that will make a big difference in driving next year's NPAT growth that you'll start to see. $150 million we currently have with Fortress, we do plan to repay that at the end of this year. Siva will work through those timings, but investors should assume a June, July time frame. The Westpac facility. This has been -- there's been 2 parts to this. Not only has Westpac agreed to fund our AFS business, but we -- they've also provided us with a -- some levels of transactional banking as well, which just improves the efficiency of the business. So that's a real win for the business, being able to have our near-prime AFS business funded by Westpac, which has slightly better rates than Crédit Suisse and our Money3 business funded by Crédit Suisse. $8.5 million of funding comes from the government initiative, the AOFM. And with $52 million of new equity just raised, it's giving us the ability to add the equity layer into some new debt facilities, and in particular, we are in advanced negotiations with the Bank of New Zealand for an additional $40 million securitization warehouse, which we will fund that layer with. Have a strong cash position, and we also have the ability to acquire any businesses that may come up for sale that fit within our niche that will either give us more product in our vehicle and asset segment or give us greater distribution. Just to recap on AFS. Settled in early January. The best way, I think, investors should think about this is a product that plugs into the distribution networks of Money3. The AFS business does bring some incremental dealer-based distribution, but essentially, we plug this product into the group, and we start distributing it. There's only a tiny bit of overlap similar to what you would see with some of our peers between the AFS product set and the Money3 product set. So this helps us address a wider market than what we had before. And it allows us to take more market share from each of our brokers that we spend a lot of time integrating software with so that we can now fund more of their application volume. We've given you some forecast there. And we also think if you fast forward 24 months beyond that, that you should be looking at what we've done with Go Car Finance, which is roughly double those numbers. In terms of indicatively where we think this business can go, it's been a -- it's only early days. We're a little bit over a month into this, but we have started lending again a little over $2 million out of the door in the first month. Certainly expect February, March for that to continue to grow as a business. And as inquiries start to come back into the AFS business, we expect to talk more about it at future Investor Days. It's a great business. Next slide, Siva. New Zealand, I really would like people to think of this as the blueprint of where we can take AFS. We acquired it a little bit over 2 years ago now. It's been a very strong strategic fit with the group. And by strategic fit, I mean cultural fit. The management team of the Go Car Finance business have worked with us, they get where we're going. They've taken a lot of the money that was paid to them, put it back in equity. And I really thank Roy and his team for what they've done. It's been a solid growth engine when not everything is working here in Australia because of lockdown. And you can see that by the 20% contribution to revenue. The opportunity that investors should really call out is still only 1 in 700 cars in New Zealand is funded by the Go Car Group, and there's an opportunity for that to continue to grow significantly. It's well funded, well placed. And we have -- with Paul joining the team there, we have a good management team. And I think that investors should expect to see more solid contributions from our New Zealand Go Car Finance business. The takeaway here is the left-hand side is what we can do, and the right-hand side of the graphs there is where we see ourselves taking the business. So with the recent capital raise, we have around $310 million of equity. It says $391 million there. That's inclusive of the provisions within the business for impairment on deferred revenue. Just a reminder for all of those, deferred revenue is the unearned application fee, any fees and charges that don't have cash associated with them, deferred until the future and then only recognized when cash payments start to come through. So with everything that we have today, we have the ability to create $800 million of receivables. We think we're at $600 million at the end of this financial year, and we've got everything we need to add another $200 million between now and when we get there. To go from that next step, if you just think of retained earnings and possibly some improving debt, we don't foresee that we need any more capital within the business in order to achieve that goal of getting to $1 billion of receivables. Like with some slight movement in our debt facilities and retained earnings, we should be able to then grow from the $800 million to $1 billion. So we're here today saying that we think that all of the -- we've -- we certainly have spent a lot of time restructuring our business, focusing on the product segment that we are in today, getting the funding structure right today. There's 4 banks associated with this business funding us today. So we don't have a lot of concentration risk. They all fund slightly different portfolios. And we have that ability to grow the business over time from where we are, $800 million in the short term, $1 billion in that midterm 3-year goal. Currently funding over $30 million a day -- a month within the business. And you can see back from the other graph, we're getting pretty close to $35 million. And it won't be long before, as a group, we are funding $500 million of assets a year. We should be hitting those sorts of numbers in the next 12 to 18 months. As a result of doing all of those things, the business moves to a point where we will be getting very close to that 20% return on equity. We should be getting close next year or exceeding 15%. And then you've got that journey as we continue to deploy the rest of that mix of debt and equity. The next one is the final slide. Our forecast to NPAT is $36 million. I know that many of you may be asking or expecting that to be slightly stronger than what it is. We've chosen to keep it at $36 million really out of an abundance of caution. We're sitting here in lockdown today in both Melbourne and New Zealand. We know that lockdowns impact some of our new loan originations. So we thought it prudent to put out a number that we think that the momentum in the business gets us across the line and really through an abundance of caution of what does COVID bring for us. Also expecting to see stable unemployment rates. We also have a target loan book of $600 million for the end of the year. We think that's sort of the range that you should expect us to land within. And we're also very well funded in order to pursue any strategic acquisitions to give us product or distribution. And we're calling out that we anticipate returning to -- while we've declared a $0.03 dividend for the first half, the Board is comfortable to say that, that will improve for the full year. And we're anticipating a $0.09 dividend. The rest of the slide deck are just appendices. So I'll hand back to Simon for any questions.

Great. Thanks, Scott. First question. Great results, guys. Just a quick one on guidance. I think you've already answered this, Scott, with regards to the conservative nature and the anticipated contribution around the recent acquisitions. Is there anything else that you sort of want to expand at all on that?

Look, we're confident of having a strong finish to the year. And it's just keeping in mind that there's still a lot of uncertainty in the market at this point in time. There's a lot of tailwinds. Certainly, if things continue to improve in Japan, vehicles will come into Australia, which will drive more vehicles into the used car market. And we should be able to get there. An abundance of caution is why we put out the $36 million NPAT as a guidance.

Great. Thanks, Scott. When are you anticipating to release the $10 million [ in a bit of comments, ] economic outlook provision raised last year?

So we're -- JobKeeper comes off at the end of March. We are waiting to see what the impact that, that has. We -- that will drive our decision in our thinking of what the last quarter looks like as to whether some is released or whether it's held over until next year. The provision was raised in order to manage the impact of COVID-19. I don't think that we're at the end of that journey. There's still a lot of uncertainty. So as things become more certain is when we intend to start releasing that.

Great. Thanks, Scott. Our next question. Each year, how many borrowers would you have missed that came off money through a line and went to a competitor because you didn't have the near-prime product?

That's a really good question. We -- different businesses, we measure that slightly differently. But if we sort of were thinking 20 to 30 a day, you're probably in that right ballpark when we sit and think it through. Some of those go -- may not go to competitors that might change their mind, and that's the uncertainty in the answer. But if you sit in that range of 20 to 30 vehicles a day is probably what we think.

Thanks, Scott. Next question. James Bisinella at Shaw's. Congratulation on the results, Scott and Siva. In terms of the $250 million warehouse facility, can you please take us practically through how this will work in terms of the $10 million reduction in cost of funds? And when will the full run of savings begin to roll in?

Well, I think it's a great question for you, Siva.

Thanks, Scott. With the Crédit Suisse facility, as you know, we have a $250 million warehouse facility. And as Scott mentioned earlier, the interest rates or cost of funds are at least 4% lower than what we have. In terms of how we're growing there, we are apparently very low leveraged today with only $120 million out of the $350 million book in Australia being funded through Fortress. Coming June, we would roll over that. We've started the facility, but by end of next year, we should gradually increase the leverage as well as the amount of facility that's drawn, which should start to bring up the cost of savings. What we expect is the $10 million will grow over time, over the next 2 years. It will slowly build up from here to the $10 million savings. So I don't expect the entire $10 million coming into next year. But in 2 years' time, when the funds are fully deployed through the Crédit Suisse facility, we would have an annual savings of $10 million on a like-for-like basis.

Thanks, Siva. Next question. In terms of your $600 million gross loan book forecast for FY '21, from the $550 million where you're at, what's the anticipated source of this growth? And can we assume that it's all organic?

Our assumption is, from this point, it is all organic growth. And we expect to see it come from the 3 sources or 3 businesses. So certainly, New Zealand is going very strongly. And we've seen solid growth. If you look at the numbers from June to December, you can see that there's been good growth. There's no reason why that doesn't continue and that they soak up sort of half of that $50 million anticipated growth. And if you look at the Australian business, we are seeing some -- we are seeing good growth within that starting to come back. Once the -- once we -- confidence comes from being in a lockdown, and you should expect to see that have some more organic growth there. And then with AFS, remember, that business wasn't lending up until about November, just when they had confidence that the business was going to be bought. So every month, that improves significantly. I'm sure all investors that have spent the time consider there's been a slight contraction from when we announced to when we settled that deal. But that book is now starting to grow again off the back of really starting to ramp up the originations within that space. So a little bit of growth coming from all. Strong growth coming out of New Zealand is where I think investors should expect to see that additional $50 million coming from.

Thanks, Scott. The interim dividend of $6.2 million against an NPAT of $19.9 million represents about 1/3 of the current NPAT. Is there a plan to increase the dividend payout ratio given the strong underlying performance of the business and the significant retained earnings of $91 million?

Yes. While I know that the Board has signaled dividends in the past, if I go back to our last published dividend policy, it was between 30% and 50% of earnings. So we have maintained a payout ratio within that range. We're also being very conscious that we just raised some funds. And we have some growth opportunities that we would like to pursue over the next 12 months. So the money will go into funding growth of the business, which is our main focus. And we think it prudent to hold it back just a little bit as we fund those -- the rollover of some of the debt and those other items. And providing good trading over the next 6 months, the Board intends to come to the AGM with an updated dividend policy and also they put out what they anticipate they're willing to pay at the full year. So anticipating a $0.09 dividend for the full year.

Great. Thanks, Scott. Next question. How do you -- how do funding costs on the Westpac facility compare to the Crédit Suisse facility? Is there scope to extend that relationship across the broader group?

I know Siva will have the numbers off the top of his head in terms of Westpac. I don't. So I'll let you answer that, Siva.

Yes, absolutely. Thanks, Scott. Look, at this stage, the Westpac cost of funds are cheaper, but again a number of factors come into play in terms of how the eligibility criteria work between both the facilities. It's not only cost of funds, but the amount of loans that we can fund that makes a whole lot of difference. In the long term, we do expect the cost of funds in Crédit Suisse facility going further down as well as the opportunity to grow the Westpac funding on a broader basis as well. So both angles would be pursued in the future.

Thanks, Siva. Next question. Did you face any hurdles onboarding origination partners without access to a near-prime product?

You might have to ask that again. Did we have any hurdles...