Solvar Limited (SVR) Earnings Call Transcript

I'm joined by Managing Director and CEO, Scott Baldwin; and CFO, Siva Subramani. Before I hand it over to Scott to get started on today's presentation, I'll remind you that you can submit a question through the Q&A function at the bottom of your screen. We will address these at the conclusion of the presentation. I'll now hand over to Scott to start the presentation. Over to you, Scott.

Thanks for the introduction, [ Banjo ], and thank you to all the listeners that have joined our results call for today. For those that want to follow along, we'll be discussing the results that you can see on the financial year '22 presentation that was lodged with the ASX this morning. So assuming that it's there for you to flip through. Let's start by reviewing the highlights of the business. As you will see, group revenue is up 30% year-on-year. And that's on the back of very solid loan book growth over the course of the year. And what we've seen as a very robust increased cash flow that the business has collected over the course of the year, driving up revenue. Loan book has been up 22%, a great result in the current year, we believe, probably a little bit less than we had expected, but that is only because of the excess cash flow and a little bit of weakness in the New Zealand market. Net profit after tax of $51.6 million is as promised, north of a $50 million guidance number that we're very proud to have delivered for our shareholders. Probably the most exciting thing for Siva and me on the deck that you'll see here is $300 million of available cash flow, available cash gives us a lot of flexibility. You will note that of the $300 million of available funds, $122 million is cash, of which about $70 million of that -- roughly $70 million is unrestricted, which gives the group a lot of optionality in terms of our capital management program. Things that we will be considering as a business will be the dividend, using that excess cash for organic growth in our loan book, any potential acquisitions. And of course, as you may be aware, the company has a current buyback in place today. Leverage across the business is currently at 47%. We think that's a fairly low leverage. As you'll find further on in the slide deck, we have a capacity to take out debt to $661 million. And we're -- so we've got lots of headroom in that facility with cash and headroom to continue the organic growth and all the other things we talked about in our capital management plan. EBITDA has grown in line with revenue. Probably, one of the challenges there that many would realize has been increasing labor costs. And the other part for our business has been growth in provisions over time. I'll talk more about that later through the deck to explain bad debt and provisioning and how we believe we've taken a rather conservative approach to that as a business. Earnings per share is expected to continue to grow over time. And thank you, [ Banjo ], for bringing that up along with return on equity. We're still on the first page here, just looking at the impairment provision currently sitting at 5.7% or $39 million in absolute terms versus bad debts in our business of 3.7% or $27 million for the year. We believe that our impairment provision is conservative. We believe that we are well provided given any market deterioration that may happen in the current changing environment. So we do believe that we have a conservative provisioning across our business, which is prudent in the current economic environment. Dividend for the half has declared $0.07 which is flat on last year but a 30% increase over the full year, so $0.13 full year dividend for the business and given the available cash is also one of the tools that we're able to use in terms of our capital management. We'll skip through to the following Slide 6, if we can, [ Banjo ], let's talk a little bit about why we think Money3 is a very good business. We have a very long track record of producing profitable growth for our shareholders, which is evidenced by the slides that you've just seen. As a business, we continue to focus on a segment of consumers where, while the vehicle that they choose might be discretionary for the vehicle, you could consider that the asset itself is not so much a discretionary item because people are acquiring a vehicle, a used vehicle typically through our group and that vehicle is helping to get to work, to earn an income, it's also helping to get the kids to school, but generally to participate in society. So we would -- we do very much look at it in terms of the consumer focus of the business while the vehicle might be the discretionary. The purpose often isn't. As a business, for many of you that would have followed the journey, to be aware, we have a very strong customer care team. That has really underpinned very strong cash flows, particularly in the Money3 business over the last 12 months, no penalty for early payout with any of our loans, which has meant that a well-funded consumer has taken a pragmatic approach to pay down their loans sooner than they otherwise have to, which we've benefited in the revenue. As you would see, the loan book has come off a little bit as a result of that excess cash flow. And I have to look at that as a good thing. Bad debt performance, a specific slide on that coming up, but it continues to improve. We sit here today with July's results where we've seen further improvement. We're very happy with how the performance of our receivables and our credit quality continues to improve. One last call out on this page is, as a group, why we think we're a good investment. We continue to have our growing and large database. We think evidence that the quality of the business is the 1 in 3 customers returning to take a loan of us again over the last 12 months. So 1 in 3 really principally the Australian business customers would come back to borrow again. It's something that we think is testament to the service that we provide to our consumers. Management team here has a long history, whether it's some of the people like Paul or Brian that have recently joined the group. Both of them come from automotive, a long history of automotive lending. So there's a lot of talent within the business. Just talking further about the opportunity on the next page. We believe that we're well placed to continue to make -- take market share. Our view is that coming into this financial year, we've seen more conservativeness from our competition. We do believe that particularly from March through to May last year, we saw some very aggressive competition in the market. As is the mantra of the group, driving profitable growth. We've only written a business that we believe can produce a profitable outcome. For us, we believe that puts us in a better long-term position. We also have significant headroom within our facilities and also our cash position to $300 million that puts us in a great position to either grow organically, which we expect to do. We expect to see new origination growth north of 20% this year, which will drive growth, and we also have money to look for strategic acquisitions. Please keep in mind, we have been through many market cycles, as you will see with the graph, we went through it previously in the 20-year history of the group. We have managed positive and negative cycles that we've been through and continue to grow through that. I might jump to the next slide. Please, [ Banjo ] at the financials for the year. So just the highlights in terms of last year's financials. Revenue up 30% to $187 million, driven off the back of that very strong cash flow has pushed that up. Given that we start this year with a record loan book, you know that can be -- you can rest assured that revenue will be higher than this number in FY '23 because we start the year with the largest loan book the group has ever have. And we also have good momentum in our lending volumes. New Zealand has been a bit subdued, and I'm excited to say that Monday, yesterday, New Zealand team advanced over $1 million in new loans. That's one of the strongest days we've had for the last 12 months. So while there has been some softness in the market really started, the Go Car business is starting to turn around. And as you'll see throughout the slide deck, the Money3 business, particularly Money3 and automotive financial services here in Australia have both been having record years. So very strong new originations, $467 million of new origination, new lending over the course of last year, and we believe that we are in a strong position that, that will grow over 20% this year. We'll move on to the next slide. This just sort of giving you a key couple of drivers of profitability of our business. Our gross loan receivable $733 million. Deferred revenue just under $50 million. That's essentially the deferment of the application fee. We defer all of our upfront fees that we charge to a customer and they get released over the life of loan. We know that means that we -- compared to some years may have a slightly lower revenue upfront, but it's part of creating a sustainable revenue release. You have $50 million that you know is coming. Impairment provisions of $39 million, experienced this year was $27 million. So that $39 million is based on some modeling that Siva and his team have spent a lot of time looking at in terms of unemployment and other things that may happen in the economy as a result of rising interest rates. We believe that we have started the year in a conservative position, which sets us up well that as our book grows, we only need to take our provision on new lending as opposed to what made a deteriorating economic environment. In our business, net debt, $300 million. This slide is evidence here. Sorry, you just moved a little bit too quick for me [ Banjo ], but one big difference, standout difference between our group and many of our peers is that of our $733 million of receivables, most of that today is still funded by equity within the group. That equity gives us an ability to compete in some sectors that our peers don't. It also gives us lots of opportunity to continue to grow leverage, which will improve our return on equity and EPS over time. Can just move through to the next slide on debt. As you can see, the facility limits $661 million, drawn to $200 -- $426 million, the number really to focus on, though, is the combination of debt and cash, which to $300 million available. We continue to focus on our diversified strategy that different lenders have funded different portfolios within our business. And that combination of 6 major banks, it also includes 2 partners that we have in there for mezzanine debt as well, which will improve the group's leverage, which will continue to drive NPAT and return on equity. You'll see our return on equities move to 15%. It's grown considerably over the last 24 months, and we believe these activities will continue to improve the businesses return on equity closer towards 20%. If we just move on to the next slide about credit book quality. This should be one of the things that investors take most note of, particularly the red line at the end, credit impaired, 0.02%, a little over $100,000, this is the leading indicator of what's coming down the line in terms of bad debt. You can see that our credit quality has been very stable over the last 12 months, and you can see a continued improvement in that credit impaired sector. The AFS business is growing as a slice in the pie of the business. If you consider the whole of the pie, the $733 million is going to grow. We say in calendar year '23, we believe that will grow beyond the $1 billion, but the AFS pie -- slice of that pie continues to grow at the fastest rate. It's -- it went for the first 6 months of last year without a bad debt, had a couple of loans written off in the second half. It is a very high-quality portfolio of receivables of prime automotive receivables, and that will continue to drive the overall quality of the business. Notwithstanding, Money3 business, in particular, has continued to improve the credit quality, possibly at a -- we have sacrificed some growth for quality over the last 6 months, in particular, in the current environment. We believe that's prudent because it's -- we are still growing rapidly. And improving the credit quality, which is giving us the ability to lift our leverage, which will drive that EPS and return on equity over time. Really happy that we come into here. And at the end of July, I know many investors have had concern about deteriorating portfolios. I just labor on this for 1 more minute. In terms of this year, we highlight throughout this deck that we think our bad debt will be between 3.5% and 4.5%, roughly in line with this year's result was 3.7%. We are confident of that because we start the year with a very good quality of receivables, nearly all customers paying or paying ahead of schedule. The other part being the time frame and the time lag it takes for a bad debt to move through the cycle is around 6 months in terms of if people are selling their cars. So the concern, I believe, is unfounded that the bad debt might blow out this year. If we move on to the outlook, sort of reiterating some of the themes of what we've talked about. Bad debts, we see it being 3.5% to 4.5% of the book for the year. So fairly consistent with what we've delivered this year. I think investors should be quite comfortable with that. We have $300 million of funding headroom. We acknowledge that there's some costs that we've taken as a result of having certainty of having availability. But what that means is we can focus on growth over the course of '23, which will deliver an even better result coming into FY '24 as that funding is deployed. We also know through that year that we started building out our product offering, particularly in commercial within $27 million over the course of the last 12 months into commercial assets. Think of that as somebody wanting to buy a van, a huge, a bulkhead or a small asset for commercial purposes that they're driving an income from, that it's in line with the distribution channels that we have and offering complementary to some of the dealers we're working with today. I think there's an opportunity for the group to continue to grow within that sector, and that will be a focus for the business. We also think that while there's been some challenging conditions in New Zealand that they are starting to improve. If I can give you any evidence of that, yesterday $1 million of settlements in the day. I mean that is a record for us for the last 6 months where it has been quite subdued. So we are quite excited that New Zealand's momentum are starting to pick back up again over there. Now in terms of demand for vehicles, I know there's been some conversation about that. As supply chains for new vehicles remain constrained, we think there will continue to be a point used vehicle market in Australia and New Zealand, as many people need a vehicle to participate in society, go to work, take kids to school and other things. We believe with these tailwinds to our business that we'll continue to make -- take market share and will push into some other product offerings in the business to continue to grow. With that, I'll close and we'll take questions from anybody.

Thanks, Scott. We will now move on to the Q&A session. [Operator Instructions] The first question comes from Jonathan Higgins from Storm Partners. Can you talk us through the expectations on loan book growth. Payments looks to have created a good position on cash to play about. What are your uses and targets?

So we expect some of that excess cash flow to return back to normalized positions. I mean I think at the start of this year, the typical consumer is still very well-funded, has a very good balance sheet. And many of our consumers don't have a home loan or other debt. So they're choosing to get ahead of their commitments in their -- for their vehicle because it's something that -- it's a necessity for them. The cash flow that we have -- the headroom that we have, the $300 million, we certainly see some of that being deployed in organic growth of the business. We did call out the amount we wrote last year. We're very confident given the momentum in the business that we'll grow our lending volumes north of 20% coming to this year. We'll keep it at north of 20% until we see how we go through the year, but we'll be focused on growing profitably through the course of the year as much as we can. We also think there's an opportunity that we'll present itself probably at the back end of this financial year or in 2023 calendar year to acquire other strategic acquisitions that will help us either broaden our distribution or add another product to the group. Our loan book expectations. Certainly, we are expecting solid growth in sometime next calendar year to hit that $1 billion. Just not putting the exact amount on it because there's still a lot of uncertainty as to when that will come through, but we are confident of hitting that in the next calendar year.

Thanks, Scott. Just another question from Jonathan. The returns out of AFS are different to core Australian operations. Can you give us an idea of yield annually into FY '23?

AFS has a much lower yield, much higher leverage in that business, so we can produce quite good outcomes. For every -- the last 50 basis point increase, we passed on 52 points to the consumer. We will be passing that on as base rates increase. And we haven't seen any sort of reduction in demand. June was the strongest month that AFS has ever had close to $15 million of originations that month. We think that as we temper volume to rate, that sort of sits a little bit under that number through the course of the year, but we certainly think that, that customer is able to bear the increasing rates. And I think it goes from -- I think we start to see low teens in the interest rate being offered through the AFS business. Currently, we've been around, you could say, between 10% and 12% interest rate for the majority of customers in that space.

Talking on interest rates, what are the effects of the interest rates on the business? You now have a number of facilities available and operating. What is the blended interest rate or blended margin over BBSW of the group currently?

I love challenging questions, and that's why Siva is here, so I'm going to let him answer that one.

Thank you Scott. I might probably say the blended interest rate, including the margins is probably in the high 5s at the moment. What I'm referring to at the moment here is the start of this financial year. During the course of last financial year, you would have noticed that we have increased substantially our facility limits and what that brought along was reduction in the margins from our funders. So that has helped us to absorb some of the increases in the central bank cash rates. We expect further reductions in margins over the course of this year as we continue on the journey of putting in more warehouse facilities on the New Zealand operations. And hopefully, that should help us to reduce the impact of base rate increases further.

The margin Siva is referring to is the cost of debt margin to the banks that we're borrowing the money from. As we highlighted, we think the AFS business, we maintain our margin by passing on a lot of the base rate increases through to the customer.

Thanks, Scott. Thanks, Siva. Just to clarify on the deferred revenue, the application fee is collected from customers upfront but only recognize revenue over the life of the loan.

Typically, the application fee is component of the net amount financed to the customer. So it is often financed within the receivables and paid back in from a cash point of view from the customer over time, hence, why we recognize it on cash receipt, not upfront.

Thanks, Scott. Can you discuss any impacts on Money3 volumes from the change in ownership of Stratton Finance to Pepper?

Stratton Finance is a broker that refers business through to the Money3 Group. It continues to do is a very small -- it is a very small referrer relative. We have quite a diverse range of brokers referring to the business. We haven't seen any negative impact as a result of Pepper's acquisitions. And typically, when we've seen similar sort of acquisitions in the past, those businesses, particularly very good brokerage houses are quite reliant on the broker that's on the phone. And that person directs traffic based on their knowledge, their relationships, and we haven't seen any downturn as a result of Pepper's actions and have -- I think like other lenders being assured by the Stratton team that it's not going to impact the volumes that we receive. But even if we did, it is a small part of the pie in terms of our introduction volume.

How does the company decide whether to continue with the buyback at current share price and still represent good value versus increase in dividend payout or equity requirements for book growth?

Now that is a conversation that the Board is engaged in on an ongoing basis, considering the use of capital between growth, which is our preferred growth either through organic growth or acquisitions. That's certainly our #1 priority. And then considering -- considering buyback versus dividends is -- I mean, it's an ongoing and evolving conversation within the business. But in terms of priorities, our #1 priority is growth of the business and to allocate funds there. We are well aware that the group has quite a large balance of franking credits. We are paying out a reasonable amount of dividends within our policy. And we -- investors should expect that to continue. And the cash balance that we have does give us optionality. But the -- that will continue to -- we'll continue to evaluate what is the best capital management strategy over time, including share buyback. As you would see, has happened, we will -- confirming, we will reinitiate the share buyback if there is weakness in the share price post release of these results.

What kind of leverage level is a long-term target for the business.

Sorry, [ Banjo ], could you say that again?

Yes, no worries. What kind of leverage level is the long-term target for the business?