Australian Finance Group Limited (AFG) Earnings Call Transcript & Summary

Good morning, everyone. On behalf of the Board and the management of AFG, I would like to welcome you to the 2023 Australian Group -- Finance Group Annual General Meeting. My name is Greg Medcraft, and I am the Chair of AFG. To begin with, we would like to acknowledge the traditional custodians of the land we are meeting on, the Whadjuk people of the Noongar nation, and acknowledge and respect their continuing culture and the contribution they make to the life of this city and this region. Today's Annual General Meeting is a hybrid meeting. It's being held physically at the Perth offices of AFG, and I welcome shareholders and visitors who have attended in person. The meeting is also being conducted online via the Link Group Virtual Meeting platform to permit non-Perth-based shareholders and stakeholders to attend. This allows shareholders, proxies and guests to attend the meeting virtually and watch a live broadcast or webcast of the meeting. I'd like to extend my welcome to shareholders and visitors attending virtually. As a hybrid meeting, shareholders and proxies attending online will have the ability to ask questions and submit votes during the meeting. Instructions on participating in the online meeting can be found in the Notice of Meeting available on the ASX platform. And for those present, as a courtesy to others, please turn off or silence your mobile phone. So it is past 9, and we have a quorum present and declare the meeting open. For those of you here in Perth, please ensure that you have registered and, even if you are not a shareholder, have obtained a registration card. The meeting agenda will be as follows: introductions and housekeeping, first; second, address by the Chair; third, the CEO's address; fourth, formal business; fifth, closing. In Perth, we are joined by nonexecutive directors, Malcolm Watkins, Brett McKeon, Jane Muirsmith, Craig Carter and Annette King. I'd also like to introduce our CEO, David Bailey; our CFO, Luca Pietropiccolo; and our Company Secretary, Michelle Palethorpe. We also welcome Fiona Drummond and Sarah Van Gent, representing Ernst & Young, the company's auditors. They are in attendance and will be available to take questions from shareholders. [ Kate Noon ], representing our share registry, Link Market Services, is also in attendance. Are there any apologies to be noted? And we have -- Company Secretary has confirmed, no apologies have been recorded. Before moving on to the formal part of the meeting, I'll now provide a brief address and then invite David Bailey, our CEO, to address this meeting. So the FY '23 results highlights. The '23 financial year showed the importance of AFG's diversification strategy, with the company reporting record revenue despite a challenging period for the sector and for mortgage holders across the country. As our full year results released in August, we have demonstrated AFG's strategy to diversify income streams and contributed to a successful navigation of the residential mortgage industry headwinds. The group's return on equity remained strong at 24% and reflects our prudent approach to capital management and the decision we took during the year with our securities business to protect long-term shareholder returns rather than chase volume at subeconomic returns. And I'll touch on this again in a moment. AFG's net profit after tax for the full year ended 30th of June was $37.3 million, while the underlying net profit after tax, which is a proxy for cash generation, after primarily adjusting for the noncash impact of trail book accounting, was $48.3 million, with a strong growth from new markets and our strategic investments contributing 32% of profit. AFG paid $43.8 million in dividends this year. The FY '23 payout ratio was 60%, with a full year dividend of $0.107 per share. To distribution. In residential finance, mortgage brokers remain the channel of choice for origination of home loans, both for customers and lenders, now consistently accounting for around 70% of all originations in Australia. As a large and consistent player in the Australian market, we participate in this increasing dominance. Brokers provide 3 things for all Australians: firstly, trust, supported by a best interest duty -- legal best interest duty, which is not applicable to direct lenders; secondly is choice beyond a single lender to dozens of lenders and thousands of mortgage products; and thirdly, and clearly, competition. And in my view, these factors will continue to drive that 70% figure even higher in the coming years, and therefore, delivering future growth for AFG. Brokers also support their customers. Over the past 18 months, the average rate to Australian mortgage customers have increased from below 3% to now sitting above 6%. The unprecedented pace of increase, together with the fewer competitive lenders and cheap fixed-rate mortgages converting into higher variable rates, has meant all eyes have been on the market with extensive media commentary on the pressures facing borrowers. In a rising interest rate environment, our brokers will continue to work with their customers to navigate these changes. The assistance they provide their customers facing the fear and uncertainty at the outset of the pandemic demonstrates they had the skills and the capacity to help, and we'll do so also in these difficult times. Our white label earnings held up again, benefiting from trail despite a reduction in volume. The commercial finance market is one we have been focused on for some time. The sector experienced 10% annual credit growth over the last 2 years, and we see potential to replicate the success of this broker channel, the same as it did in the residential market. Broker market share in the commercial sector currently sits between 20% and 30%, and AFG's strategic investments in this market will provide further opportunities for our broker network and for AFG through distribution and manufacturing opportunities. In the asset finance market, our settlements have nearly doubled from the previous year. And we see, again, significant growth in the coming years. Manufacturing, the business made a strategic decision, as I mentioned earlier, to not compete on price against lenders whose funding costs were structurally lower as a result of government fixed rate funding and slowness to raise deposit rates. This did result in a drop in volumes in our own lending arm, AFG Securities, but a sound decision made in the interest of the long-term sustainability of our business. However, with deposit rates now lifting, less prevalence of cashbacks in the market and RMBS spreads tightening, we expect, once again, to be more competitive. And longer term, we need to think about a public RMBS market to complement the private one to create a more level playing field and sustainable playing field against the major banks lowering borrowing costs to benefit all Australians. This will also broaden the investor base of RMBS to investors like our $3 trillion separation and superannuation fund sector, especially as the demand for fixed income rises as more strains move into retirement. Over the last 12 months, I have been heavily involved in advocating such a strategy to the Australian government and our industry. Sustainability. AFG remains committed to driving value for all stakeholders through operating our businesses in a sustainable and socially responsible manner. Our sustainability reporting, now in its third year, is continuing to align our business practices with sound sustainability principles. For AFG, our strongest commitment to our social license is to continue to deliver choice and competition to all Australians. I would also like to thank my fellow Board members, including Tony Gill, who resigned from the Board after 15 years of service to the company, for their counsel and support since assuming the role of Chair of this year. The sound governance processes that have served the business so well will be my continuing focus. In closing, I again extend my thanks to those of you able to attend our meeting in person or online today, and for all shareholders who have taken the time to participate in today's meeting through the proxy voting process. I'd also like to personally extend my thanks to our brokers for the value they deliver to their customers, and I look forward to the year ahead as we work to deliver on our core promise of creating a fairer financial future for all. I'd now like to hand over to our CEO, David Bailey.

Thank you, Greg. I would also like to extend my thanks to our shareholders, both here and online, for your participation in today's meeting. Despite the volatility in the external environment, we were pleased to report growth in revenue, with the strength of our experienced and valuable broker network central to our success. Within our core Aggregation business, broker recruitment remained solid on the back of a strong value proposition and reputation as an industry leader in support for brokers, brokers who are committed to providing positive outcomes and personalized services to their customers. The cash generated for the business is a highlight for the year, with $52 million worth of operating cash flow. This represents a cash conversion rate of 103%. As highlighted in our full year results, fierce competition and an elevated cost of funds meant that we delivered a lower interest -- net interest margin. Book growth slowed as customers chased significantly discounted rates and once-in-a-lifetime cashback offers as the country's major lenders looked to secure improved market share. Our September AFG index did highlight a reduction in the footprint of the major lenders. However, the market remains competitive. After the first quarter's end, major lenders made up some of the ground they lost in the September quarter. However, there are signs that more competition and choice is returning to the marketplace. This is good news for AFG, it's good news for brokers, and most of all, good news for Australian home loan customers. AFG is proud of the long-standing role we have played in driving competition in Australia's home loan market. Against significant headwinds, we continued that mission in 2023, with the business active in both market and policy fronts. Our level of investment into the broker channel continues. Our belief that the channel will continue to grow and that good brokers will become busier underpins our investment in technology to ensure time per transaction is reduced and an efficient end customer experience continues to be built upon. We have launched our new white label product, Bright, to the market. The product complements the overall suite of AFG Home Loan products very well, providing solutions to a new cohort of customers, including expats and others who have historically been underserved. With net migration to Australia on the increase, we expect there to be continued demand for these types of products. Manufacturing. An impact on our FY '23 result with the elevated runoff experienced in our securities business, largely because of the aggressive front-end pricing for new business conducted by the major banks. Over recent months and following the reduction or removal of cashbacks, our runoff rate has improved and October lodgments were the best experienced in 7 months, early positive signs that the market is beginning to normalize after a very unusual 18 months. Our long history of sound lending standards and product knowledge will continue to support our portfolio. We have added to our warehouse capacity and capability through a new partnership with an international warehouse provider that settled in October that has a different lending appetite based on its experience in overseas markets. While still in its early phase, our desire to diversify our source of funding inevitably leads to not only increased overall capacity and competition for our existing near-prime business, but also in the form of new product development. Our recently launched long-term interest-only product for the mature age market, Retro Thrive, is an example of this. Strategic investments. During the year, we've been particularly pleased with the performance of our strategic investments. Fintelligence delivered settlement growth of 49% for the 2023 financial year. We have a future white label options in technology and product and are piloting a spot-and-refer model. Our 5-year partnership with Thinktank continues to deliver, with settlement growth of 3% for the year in a very competitive environment. AFG represents more than 10% of Thinktank's settlement volumes, and the company is increasing the diversity of its product set. Subsequent to the end of the financial year, we exercised the option to buy out the remaining 30% shareholding in BrokerEngine. We see BrokerEngine as being pivotal to enhancing our broker-facing technology. To spend a little bit of time on the trading update. As we move into the new financial year, it's pleasing to note that non-major lenders are incrementally better placed to compete as the majors lift front book pricing, remove cashbacks and transition away from their unique cheaper internal and external funding. The broker proposition remains strong with Australian consumers, and there are good signs in the second quarter of financial year 2024 that broker activity is increasing. From an AFG Home Loans perspective, the September 2023 index revealed a penetration rate of 5.04%. With the introduction of new products, this penetration, on a year-to-date basis, has since improved to 5.45% early this month and 6.1% for the first half of quarter 2 FY '24, and 7.1% for this month. While still early days, there are some early marginal indicators that the competitive proposition for this part of our business is beginning to improve. At the same time, the performance of the book remains in line with our high expectations. Last month, we priced an upsized $750 million RMBS issue. This price -- we priced this transaction on more favorable terms than we originally anticipated on the back of strong demand. Our product offering and lending standards are now well recognized, and we are delighted to see both existing and new investors participate in the issue. Outlook. It is inevitable that the Australian economy will continue to face challenges. Global events, housing supply constraints, building costs and inflationary pressures on households will continue to be cause for concern. However, AFG is in a strong financial position and has the capacity to diversify and to continue to support our brokers and our customers. Despite market uncertainty, housing prices remain firm, unemployment is low and net migration continues, providing support for longer-term stability. Our brokers remain busy. Lending may still face challenges, but our experience has always been that with tighter lending conditions, loan lives extend, thus demonstrating the benefits of our revenue model. With a broader removal of cashbacks, we remain focused on identifying opportunities to grow our book. On the back of strong balance sheet supported by reliable cash flow, our people are focused on continuing to deliver our strategy: to consolidate and grow our distribution network; to leverage our distribution strength to deliver higher margin growth; to harness technology to be more agile, competitive and profitable; and to build on our foundation of support for our broker network in delivering choice, convenience and competition. In closing, I would like to thank our shareholders for their support, our brokers for partnering with AFG, and our staff as they continue to strive to help our brokers grow their business. Thank you. I will now hand back to Greg to conduct the balance of the meeting.

Thank you, David. And before I open the floor to questions, I'd like to outline the question and voting procedures. Each person who signed in today will have received either a yellow voting card, a blue card or a red card. If you are holding a yellow card, you may vote and ask questions. Those holding a blue card may ask questions but cannot vote. Red cards are for visitors who may neither ask questions nor vote. [Operator Instructions] And due to time constraints, we may not be able to get to every question. And if this happens, we will be in touch as soon as possible to answer your question after the meeting. I propose that the order for taking questions will be as follows: Firstly, questions from the floor. Please state your name and whether you are a shareholder in your own right or an attorney, proxy or corporate representative of a stakeholder. You will be invited to ask questions now or we -- as we discuss each of the resolutions at the end of the formal part of the meeting. And secondly, I will take questions from any holders who have asked a question online. With regard to voting and further information for shareholders in the Notice of Meeting, in the interest of equitably representing the views of shareholders in accordance with the ASX Corporate Governance Council's Corporate Governance, Principles and Recommendations, we intend to call a poll in relation to each of the resolutions considered at this meeting, and the poll will be concluded at the end of the meeting. I will outline the poll procedures prior to conducting the poll. The results of the poll will be released to the ASX after the votes have been counted. And we refer you to the Notice of Meeting for details of voting exclusions, and copies of the notice are available here. The proxy results for each resolution will be shown on the screen behind me. And for those online, you will see the results for each resolution presented in the virtual meeting platform. To the extent that open proxy votes are held by the Chair of the meeting, those proxies will be cast in favor of the resolution. I'll now open the floor to questions. Please begin by clearly stating your name. Are there any questions? Okay. And so our moderator will now read any questions from shareholders or proxy holders participating online or which were submitted prior to the meeting. There are no online questions or prior questions have been submitted. So as there are no further questions, I shall move on to the formal proceedings of the meeting. So Notice of Meeting, the slide we've got here, I've been advised by the Company Secretary, the Notice of Meeting has been properly circulated and there are no objections. I will take the Notice of Meeting as read. I have received confirmation that the presentation materials for today's annual meeting have been launched with the ASX in accordance with the listing rules. All directed proxies will be voted as directed. Any undirected proxies that default to the Chair of the meeting will be voted in favor of resolutions, including whether resolutions are connected directly or indirectly with the remuneration of key management personnel. A copy of the minutes of the last AGM of the company held on the 25th of November 2022 are available at this meeting if any shareholders wish to inspect them. So the first item on today's agenda relates to the financial report of the company for the financial year ended 30 June 2023, together with the director's report and the auditor's report. It is not necessary to formally pass the 2023 financial reports. However, as shareholders have gathered here today, it is a convenient time to ask shareholders whether they wish to address any matters in these documents. I now invite shareholders to comment or ask questions on the reports. Questions may also be asked of the auditors in relation to the conduct of the audit, the content of the audit report, accounting policies adopted by the company and the independence of the auditor in carrying out the audit. If any shareholders are -- on the floor have a question or comment, please raise your yellow or blue card. And again, please begin by clearly stating your name. Okay. There's no questions. Have any questions been submitted online or prior to the meeting? No. As there are no further questions, we will move on to the next item of business. As advised earlier, we will conduct a poll in relation to each of the resolutions considered at this meeting. For those physically attending, the persons entitled to vote on this poll are holding a yellow voting cards. Mark either for or against each resolution on your voting card for your vote to count. Once you've finished marking your card, please place it in the ballot boxes circulating in the room after all resolutions have been read. If there are any aspects regarding the voting on which you are uncertain, please do not hesitate to ask the Link staff who will be circulating the ballot boxes after reading the resolutions. For those attending virtually, click on "get a voting card," enter your shareholder credentials per the instructions and click on either for or against button for your vote to count, and select submit. We now move to Item 2 of business, the adoption of the remuneration report for the financial year ended 30 June 2023. Under the Corporations Act 2001, listed companies are required to include, as part of their directors' report, a remuneration report which includes specified information. Directors have prepared a remuneration report for the period ended June 30, 2023, and it is included on Pages 38 to 54 of the 2023 annual report, which has been made available to shareholders. The Corporations Act also requires companies to put to shareholders a nonbinding vote to enable shareholders to voice their opinion on matters included in the remuneration report. I remind key management personnel and their associated parties that voting exclusions apply to this resolution under the Corporations Act, and excluded parties should not vote. I move the following resolution, that the remuneration report for the company for the year ended 30 June 2023 be adopted. The proxies received for item 2 are displayed on the screen and show a majority in favor of the resolution. Are there any questions or comments from the floor? Have any questions been submitted online or prior to the meeting? No. So there are no further questions. I'll now put the resolution to a poll. Please complete your voting cards or submit your online vote for this resolution. I now refer to Item 3 of the agenda, the reelection of Brett McKeon as director. As stated in the Notice of Meeting, in accordance with the company's constitution, a director may retire from office no later than the longer of the third Annual General Meeting and 3 years following the director's last election or appointment. Retiring directors are eligible for reelection. Brett McKeon was last elected as Director at the 2020 Annual General Meeting, and Mr. McKeon, therefore, retires and, being eligible, offers himself for reelection to the Board of the company. All directors' details are set out in the directors' report on Pages 29 and 30 of the 2023 Annual Report. And Mr. McKeon's details are on Page 8 of the Notice of Meeting, so I will not repeat those details. I move the following resolution, that Brett McKeon, who retires as a Director of the company in accordance with Rule 8.1(e) of the company's constitution, and being eligible, be reelected as a Director of the company. The proxies received for item 3 are displayed on the screen and show a majority in favor of the resolution. Are there any questions or comments from the floor? Have any questions been submitted online or prior to the meeting? If there are no further questions, I'll now put the resolution to a poll. Please complete your voting card or submit your online vote for this resolution. Now that all resolutions have been read, please ensure that you have properly completed your voting card and kindly lodge your voting cards in the ballot boxes circulating in the room. If you have not already done so, shareholders and proxy holders participating via the virtual meeting platform should now submit their poll, as the poll will close in 5 minutes. [Voting]

It appears that all persons have now voted. I therefore declare the poll closed. Rather than adjourn the meeting, I'll ask the share registry and our company Secretary to calculate the poll results and to announce them to the ASX when that is completed. That concludes the formal business of the AGM. Thank you all for your attendance and interest, and we look forward to your continued support in the coming year and declare the meeting closed. Thank you. We're done. Thank you.