FleetPartners Group Limited (FPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eclipx Group 1H '21 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Julian Russell, CEO. Please go ahead.

Thank you, Lexi. Good morning, and thank you all for joining our 1H '21 results presentation. Today, we're presenting to the first set of clean financials after simplification, and it's a vastly improved story compared to where we were at the outset of COVID this time last year. I'll cover off on the performance highlights shortly and then hand over to Damien to run through the detailed financials. We'll then finish up with an update on our strategic initiatives and outlook. But first, let's start with the performance highlights on Slide 5. Notwithstanding the current supply chain disruptions in new business writings, all key financial indicators are very positive. We delivered a 77% growth in cash NPATA compared to 1H '20. This growth was helped in part by end of lease income, which was 107% up in terms of outperformance. Cash conversion remains consistently elevated at 157%, and this allowed us to accelerate a reduction in our net corporate debt by another 62% pcp. Net debt-to-EBITDA is now just 0.49x compared to over 2x in March this time last year. This puts us below the lower end of our target gearing range about 6 months ahead of our own internal treasury plans. As a result, the Board has determined to accelerate our capital management program. Given our lack of distributable franking credits, we will commence an on-market share buyback program, starting with $20 million of volume in the second half of FY '21. Finally, the implementation of strategic pathways is on track, and I'll get into that shortly. But let's have a closer look at the results starting on Slide 6. We delivered EBITDA growth of 43% versus pcp and on a like-for-like basis. The composition is outlined in the bridge here. The primary growth driver was significant outperformance in end-of-lease income. The used car market has remained very strong against the backdrop of global vehicle supply chain issues. In the half, we achieved average profitability of $5,944 per unit sold. That's up from $2,468 in the prior comparative period. To be clear, we expect this market to normalize as the supply chain is restored. While the timing for those remains very uncertain, we feel very well positioned in the intervening period. If I turn over to Slide 7, we'll talk through the NPATA movements in the period. We're very pleased to report NPATA of 77% at $39.3 million for the half. Post simplification, our income statement is very clean. And beyond EOL profitability, it's worth noting a couple of points. Firstly, our lower depreciation and interest was driven by our smaller property footprint. And interest in corporate debt has also significantly reduced with our deleveraging profile. A summary of second half expectations for these line items is outlined on Slide 21, which Damien will talk through shortly. This includes interest in corporate debt, which I'll talk through over on Slide 8. In relation to our debt, we're really happy with what we've achieved here. We paid down close to $240 million of debt over the last 2 years. During 1H '21, cash conversion was much stronger than we had initially expected, and this allowed us to accelerate the reduction in our gross debt. On a balance sheet date, gross debt was $113 million, a 50% reduction in gross debt on pcp. Post unrestricted cash, net debt was only $54 million. This is much lower than our internal target for FY '21 and year, and this enables the group to bring forward its capital management strategy, which I'll talk through now on Slide 9. The top chart here provides context about our debt covenant headroom and how it has materially expanded as we delevered the balance sheet over the last 2 years. For example, you can see here, the net debt-to-EBITDA ratio is currently 0.49x against the covenant of 3x, so plenty of headroom there. In the bottom chart, you'll see that available liquidity has increased by 64% pcp. While we do pay a premium for this liquidity, it does provide us with capacity to absorb external shocks that are unexpected, for example, like COVID or other potential dislocation macro scenarios. All of the combination of the strength of balance sheet, a better liquidity profile and stronger overall financial performance is what enables our group to bring forward this capital management strategy today. Given Eclipx is a net beneficiary of the Australian federal budget's instant asset write-off policy, it will not pay cash tax in Australia for the foreseeable future, and therefore, will not have distributable franking credits. Therefore, we believe a return on capital to shareholders is best achieved through an on-market share buyback during the second half of FY '21. So just recapping my overview. In our first half year post simplification, we've delivered a very strong performance. Our balance sheet has never been in a better position, which has allowed us to bring forward these capital management initiatives. The balance sheet also provides us with significant flexibility to execute on our growth strategy. And I'll go through that in detail after Damien goes through these financial results.

Thank you, Julian, and good morning, everyone. I'll start with new business writings on Page 11. At $204 million this half, new business writings for corporate and SME were up 11% half-on-half and represents 85% of the prior corresponding period. This is a very pleasing result, especially given the continuing new vehicle supply disruption. Supply disruption in the auto sector is widely reported on at the moment, and the downstream impact for fleet companies like Eclipx is that it takes longer than usual to convert orders to new business writings. With that said, this is simply a timing delay, and we are confident the business is well positioned for growth once delivery times normalize. Our positive outlook towards growth is supported by a number of leading indicators. Firstly, tender activity is the busiest it has been in recent history. Lease extensions are up 79%, which signals pent-up demand. And our locked-in order backlog is at all-time highs. As you would expect, the lack of new cars is also acting as a headwind for our novated business. However, despite this, new business writings grew 11% half-on-half to $105 million or 92% pcp. Novated reached an exciting milestone this half when it launched its digital originations platform. This leading-edge technology is a key pillar in our strategic pathways, and we plan to roll it out across all major clients by the end of the year. Turning to assets and vehicles under management on Page 12. At the end of March, AUMOF was $1.9 billion. 60% was funded via securitization and 40% via P&A arrangements with our partner banks. The timing delay to the new business writings, as just discussed, is placing downward pressure on the AUMOF balance. Although clients continue to extend their leases as they wait for the replacement vehicles to be delivered, an extended lease has a lower asset value versus a new lease, and therefore, AUMOF has declined 7% pcp. With reference to the chart at the bottom of the page, VUMOF sits at 94,000 units at the end of March. In addition to lower new business writings, the other factor at play for VUMOF is the intentional reduction to reduce these low-margin managed family units. As previously communicated, this particular product is no longer part of our strategy. To wrap this page, it's important to highlight that despite the 7% and 6% decline in AUMOF and VUMOF,, respectively, profit per unit has actually increased 5% to $1,537. As you'll see later on Page 14, net operating income pre-provisions in EOL is flat despite the decline in asset and units. We clearly have been successful at expanding our margins over the last 6 months. That's a good segue to the group's financial performance on Page 13. The key takeaway here is that the group's strong financial performance is not only from the high end of lease income, but also, it's underpinned by our focus on sustainable margin expansion, along with a disciplined approach to expense management. Despite the headwind from lower new business writings in AUMOF, net operating income pre-EOL was $73.8 million, up 4% pcp. This was driven by higher NIM, higher maintenance profit and lower provisions. Offsetting these were lower management fees and lower revenue items that are directly linked to lower new business writings such as brokerage commissions and rebates. End of lease income was $32.1 million, up 107%, as we saw profit per vehicle increase to $5,944. This profit per unit was slightly offset by a 14% reduction in the number of vehicles sold as clients extended their leases while they wait for replacement deliveries. Operating expenses were $39.4 million, down 2% pcp, including stranded costs. This result reaffirms our previously stated expectation regarding the full year 2020/'21 run rate for expenses. The sum of these parts culminates in an EBITDA of $66.5 million, up a pleasing 43% pcp. Turning to Page 14, which presents the income statement down to NPATA. Below the EBITDA line, which was just discussed, there are 2 items I want to call out. One, the $800,000 on the nonrecurring items line. This positive number mostly relates to a settlement received by the business in relation to an auto sector class action we participated in. The second item is interest on corporate debt which was $5.2 million. This expense item is down 36% as we further repaid debt during the half. After taxes and add-backs, our NPATA is $39.3 million, up 77% pcp. This is a satisfying result given all the efforts involved by everyone across the entire organization to achieve it. Turning now to the balance sheet on Page 15. The Simplification Plan has been transformational in terms of strengthening the company's balance sheet. The share buyback that we've just announced earlier in the presentation is a great example of that. In the period ended March 2021, net assets have increased by 8% to $548.2 million. Cash has remained stable at $58.6 million, and that's after we used $42.1 million to further repay our corporate debt. Inventory has reduced by a further 16% to end the half at $15.5 million. As clients extend their leases while they wait for delayed new vehicles, we are clearly not seeing the normal number of vehicles being returned. A combination of strong demand and reduced supply has resulted in a net outflow of our inventory. Leases are down 4% for the same reasons I discussed on the AUMOF page, and there is a corresponding 4% reduction in borrowings in the warehouse and ABS, which sits in the liability section. Finally, deferred tax liabilities have increased significantly, which is related to the timing differences created by the instant asset write-off in Australia. The instant asset write-off also creates a temporary cash flow benefit for the group, which takes me to Page 16, cash generation. At 157%, the cash conversion for the group was a positive outcome this half. The business generated $67.2 million of organic cash in the half and as mentioned, used $42.1 million to repay debt. Also, as mentioned, the timing difference created by the instant asset write-off in Australia is what is largely driving this high cash conversion rate. This is because while the NPATA amount of $42.7 million includes tax expenses, we actually paid no tax installments in Australia this half, given the substantial tax deduction available from the instant asset write-off. Jumping to Page 18, end of lease income. As illustrated in the chart at the top of the page, EOL income has outperformed this half, up 107% pcp, with profit per unit up 141% to $5,944 per vehicle. As discussed, slightly offsetting this highly inflated EOL profit is the 14% reduction in the number of vehicles sold to 5,405 units. Once we see the supply of new cars normalize, in turn, so will the supply of used cars also normalize. This will ultimately result in EOL profits pulling back from their currently elevated levels. When it comes to our RV methodology, we remain unashamedly conservative and disciplined. Our RV setting expertise has been developed over 35 years, which allows us to set RVs with a high degree of confidence. As a second layer of control, every month, we test our leases for impairment, and we do this at the individual lease level. We continue to set RVs based upon pre-COVID used car prices. And in doing so, have excluded the current inflator prices from our RV models. Finally, with respect to used car prices beyond the point where the supply of new cars normalizes, we hold a positive view. As shown in the chart on the bottom left, new car imports have been declining in Australia since mid-2018. This translates into a reduced supply of used cars for the years to come, which is expected to create inflationary pressure and support prices over the medium term. Moving to credit risk on Page 19. Like RV risk, the credit risk in our portfolio is also conservative and continues to perform well through the COVID period. It's worth calling out the following points: First, we continue to hold a provision overlay at the end of March of $4.1 million. This increases our total provisions to $18.4 million. This adds a significant layer of downside protection as the economy begins to wean itself off government stimulus programs. Second, the portfolio remains high quality and is performing well. Our top 20 exposures represent -- of our top 20 exposures, 77% are investment-grade. Third, almost 96% of our total portfolio represents exposure to very low-risk sectors. And finally, inquiries for the financial assistance have completely fallen away in the second half -- in the first half, sorry. This program, especially implemented for COVID has now ended. Moving to Page 20. It was pleasing to announce the placement of our $300 million ABS in March this year, the eighth public market securitization by the group. The fact we priced the ABS at the tightest spread in the Australian securitization and capital markets since the GFC is a strong endorsement of the group's management of both RV risk and credit risk that I just discussed. It also represents a validation of Eclipx's securitization program and diversified funding model. In this instance, as it typically does, the transaction lowers our average weighted cost of funds and creates capacity for growth in our warehouse. It is our intention to remain active in the securitization market and look to issue every 2 years. Finally, before I hand back to Julian, I would like to walk you through our expectations for the rest of the year on Page 21. While we are not providing guidance on net operating income, we see NOI, pre-EOL and provisions, typically stable given the annuity-like nature of this line. The strength and longevity of elevated EOL income has been greater than initially anticipated. However, the closer we get to new car supply normalization, the sooner we expect prices to rationalize. With respect to provisions, given the $4.1 million overlay already held on the balance sheet, there would need to be a noticeable decline in macroeconomic conditions for additional provisions to be necessary. Operating expenses on a pre-AASB 16 basis are expected to be $84 million, which is unchanged from the number we communicated back at the start of FY '21. Our expectations for depreciation is $2.5 million to $3 million, and share-based payments is $4 million to $5 million. Finally, we have reduced our expectation for interest on corporate debt down to $9.5 million to $10 million as a result of our lower debt levels. I will conclude my section by commenting that this half was a period in which the business transitioned out of the Simplification Plan and into strategic pathways. In the last 6 months, the business has expanded margins, controlled OpEx and used record end of lease income to further reduce debt. Our novated business went live with its digital origination platform, perfectly positioning itself in the market when new car supplies normalizes. Finally, while supply chain disruption had caused delays to new business writings, our commercial team has been focused on the hype of tender activity across the market, and our clients have driven our locked-in order pipeline to all-time highs. With that, I'll hand back to you, Julian.

Thanks, Damien. Let me turn to Slide 23 to provide an update on the group's strategy for sustainable growth. We're just 6 months into the implementation of strategic pathways, and we're really happy with the progress we've made to date. We're now very focused on growing our new business through both digital and traditional channels. At the same time, we're seeking to enhance customer experience while maximizing our operating leverage in order to drive that underlying growth. We have very clear objectives in each of our 3 markets. These include penetrating the new existing employee base and broadening our employers in our novated business, we're targeting above-system growth in corporate and we're seeking to access to very, very large underpenetrated SME market with operating leases. We see really good momentum in each of these 3 markets, and I'll go through that in a bit more detail on Slide 24. In novated, we've made good progress reflected in the 12% volume new business writings growth in the first half, despite the supply chain issues. We launched the pilot of our end-to-end digital origination platform, including auto credit decisioning in the half. In our most recent testing, we've experienced 73% visitor account conversion, which is a very positive early indicator for the platform. We are currently rolling out the platform to all of our existing novated employers and expect this to really differentiate our proposition to the target audience. In corporate, although new business writings grew by 11%, this segment has been seriously hamstrung by supply chain issues as evidenced by the order pipeline at all-time highs. Tender activity remains very elevated, as Damien mentioned, making up for some of the lost time with the rolling lockdowns of 2020. We've completed a full rollout of our enhanced one-stop-shop digital fleet management platform, which we call Nitro. Nitro is designed to reduce the administrative burden, friction and fleet costs for our customers. And over the last 12 months, we've seen a very impressive 40% increase in users on this platform with our customer base. In the coming period, we're very focused on finalizing our RV underwriting, our residual value underwriting capabilities, at scale for both electric vehicles and hydrogen vehicles. In SME, we've established and we're growing our specialist team. We're seeing good volume growth, albeit off a low base, through our partnerships, and we have multiple new distribution partnerships in the pipeline at discussion points right now. The online quoting experience remains in pilot phase with our test partners. And we're also in the midst of expanding that digital capability to be both partner agnostic and to include automated credit decisioning, which we expect to be ready by the end of this calendar year. Just like the novated platform, we expect this to be a very highly scalable distribution approach. Now putting all that together, we're seeking to drive customer engagements, the advocacy and ultimately profitable new business write-ins. We're very focused on market leadership as we return to a more normalized operating environment. To support that sales growth at scale, strategic pathways is also designed to deliver both operational and functional enhancements, which I'll talk through on Slide 25. We are refining our business operations to maximize reliability and efficiency. We've already converted and derisked all critical infrastructure to the cloud. And we intend to move 100% to the cloud by the end of this calendar year. As part of this, we are transforming the way we work with our infrastructure, which will enable flexibility and scalability of our operating systems. At the front end, we've initiated the rollout of a new streamlined and centralized CRM, while at the back end, we've commenced the scoping of an integration layer to further scale up our operations. We'll provide further details on this operational project as it develops in due course. While a large part of strategic pathways is about digital distribution and efficiency, we've also delivered a number of nondigital improvements, which include an enhancement to content-based marketing. We've attracted some of the industry-leading sales personnel into our corporate business, and we're adding further sales personnel into both SME and novated. So my key points in today's presentation is that while Eclipx has seen a fundamental turnaround over the last 2 years, we've got some great opportunities in front of us to extract through our strategic pathways program. And although it's early, we're seeing really good signs of momentum building. Let's turn over to Slide 26 to wrap up this morning's presentation before we take your questions. It's clear that global vehicle supply disruption will continue for the time being, and the end point remains uncertain. But as you can see, we're now very well placed in manage through this operating environment. Our order books are at all-time highs and continue to build, reflecting the constraints in new vehicle deliveries. As supply is restored, this will convert into new business write-ins and therefore, recurring NOI in due course. We are extending leases where replacement vehicles are currently unavailable. This means we're still seeing the yields while our customers remain in those vehicles. While we're currently benefiting from the temporarily inflated used market pricing, we expect this pricing to return to in and around pre-COVID levels when supply is eventually restored. In relation to strategic pathways, while we're only 6 months into execution, we feel really good about the planned implementation to date. This plan will position us to take a leadership position in our target markets in the more normalized operating environment. In early March, we reopened the Australian ABS market and priced our issuance at the tightest spreads recorded in domestic ABS since the GFC. This represents one of the most solid endorsements of our platform from multiple global credit investors. The Eclipx team is performing really well, and employee engagement is at all-time highs. This level of engagements, combined with our transparent strategic and customer approach, has attracted many inbound inquiries from very talented individuals across our industry, and we've been hiring these individuals opportunistically. So if I bring all that together, this is the first set of clean financials post simplification. It's a very strong result. The group balance sheet and liquidity position has never been better. And we're really, really happy with our current levels of cash conversion. While this has allowed us to bring forward capital returns to our shareholders, the group also has tremendous flexibility to implement the strategy and to allocate incremental capital for growth. We're really pleased with this first outperformance, and we're highly confident in the platform's strategic direction. Now with that, I'll pause and pass across to Lexi to take some questions.

[Operator Instructions] Your first question comes from Paul Buys with Credit Suisse.

First question for me, please. Just keen to get a sense of how you guys are seeing the competitive environment. Obviously, one of your competitors has undergone some first steps of consolidation out there, I guess. So just curious to see -- to get your views on the state of the competitive environments and potentially thoughts on how that landscape continues to evolve?

Paul, thanks for the question. I think we watched out with interest, and it was obviously ongoing for quite some time, and we welcome it. I think it's a good first step in our sector. It is a competitive environment. It is fragmented, as we've always said before. We welcome the change to the environment. We're not threatened by it, but we certainly welcome the change that's come through. In terms of the competitive environment, as Damien mentioned, tender activity feels like it's at historic levels. And so there's a lot of movement around the client bases, which is fantastic. It's a good opportunity for us, both to retain our clients and grow to new clients, either the trends through outsourcing or capturing competitors' clients. The competitive environment is probably consistent with what it's always been, notwithstanding that tender activity.

Got it. And then on some of those strategic pathways you outlined. Just wanted to know, how do you see your push into SME changing the business risk profile? And I guess, how will you be managing the potentially different risk profile of that client base versus the pretty low risk profile, I guess, of the corporate client base?

Yes. Look, the corporate client base is very low risk. And it's a well banked base, I suppose, even though it's only 50% outsourced. The SME market is not new to us. We've been dabbling in it in New Zealand for quite some time, albeit the distribution is slightly different over there. The reason we're taking our time going into it is we are aligning our scorecards and making sure we're writing business at the right counterparty. At the end of the day, the risk is an asset-backed risk. So it's, really, we're taking risk on the vehicle as opposed to the -- just the credit counterparties as you'd have on unsecured. So all the in-outs we've done and the testing and stress testing we've done, we feel pretty good about the counterparty risk to date in terms of what we've assessed and what we've written thus far.

And then last one, probably a quick one for Damien. Just on the -- just on the impairment side, made the comment that barring a material deterioration, you wouldn't expect, I guess, further provisioning required. Obviously, you had a -- effectively a positive charge coming through the income statement this half. I mean I'm just trying to get an idea there. Presumably, you'd still see a charge going through the income statement in the future as the book starts to go again. Is that fair? Or could there be low -- 0 to positive charges still on the next 6 months or so?

Yes. So the underlying assumption is that we'll continue to see the normal underlying charges that normally flow through the book. I guess what's a little bit different at the moment is we've got that extra $4.1 million overlay, or COVID overlay, that we booked up as a provision, and we hold that at the end of March, given just the relative uncertainty what -- how the market is going to play out over the next 6 months as the government's stimulus unwind. We'll get to the end of this year in September, and we'll assess whether or not it's still appropriate to continue to carry that COVID overlay at that time.

[Operator Instructions] Your next question comes from Chenny Wang with Morgan Stanley.

Congrats on the strong result. I just had a few for me. So just firstly, on the RV underwriting. You sort of mentioned that for you guys, you're still doing it on pre-COVID levels. But just sort of wondering, are you seeing any sort of changes on the competitive front in that sense where competitors are potentially changing some of that? And then sort of just related to that as well, have you gotten any customer feedback/pushback on the RV methodology by any chance?

Yes. So to answer your first question, Chenny, it's hard to really sort of tell, I guess, what competitors are doing. Our commercial team will always say that our RVs are too conservative. But we haven't seen too much of a noticeable sort of change out there in the market. On the customer side, no, it's not really the feedback that we've got from the customers. I think they like the fact that we are in a sort of safe position in terms of RVs.

Great. And then just sort of on the comment around the tender activities, being the busiest it's been here. Give us some color on how much is sort of existing fleet customers potentially looking to change versus first time outsourced?

Yes. It's a really good question, Chenny. So it's something we run a lot of internal analysis on. We are seeing a substantial amount of new customers come into the market beyond the existing sort of retained customers, either ours or that of 1 of our competitors or some of our competitors. So there is -- it feels like there's more new customers as part of the function of those tenders, but I guess I'd say I mean tenders are in their all-time highs or historic highs, at least that our team have seen in their careers. "So I think there's probably a good mix of sort of existing and new, but probably leaning on the side of weighting towards new.

Right. And then just one last one for me. You sort of mentioned the digital rollout in novated. You guys have those pilot programs that you're looking to moving to full customer rollout. Just, like, how does that rollout actually happen? Like, what does the customer need to do to adopt this? Is it just sort of an API integration? Or can you sort of give us some additional color around that?

Yes, sure. It's different for every company. It's highly scalable, right? So it's basically we've done an encrypted format and it gets loaded into the HR tool of any of our customers, and the format effectively links into an underlying cloud-based program, and they operate through that close-based program. Now in its pilot test, just to give you an idea, our visitor conversion in its mid-70s means that anyone who's interacted with the tool is quite comfortable in their testing to put in all of their details and progress through the tool. And on average, they spend about 7.5 minutes in the tool. So to give you an idea, how does that compare to the status quo across the whole sector, people have to get on the phone call and call 6 times before they really get to a conversion stage, whereas we're seeing end-to-end fulfillment has been done in 7 minutes without having to talk to a human. So it's -- so far the test has gone pretty good. I'll never ever promise on it any -- a small sample, but we are rolling that out. And the rollout, it takes a bit of time because sometimes you have to integrate with different corporates. But we're pretty comfortable we'll get it done by the end of this calendar year.

Your next question comes from Joshua Hain with REST Investments.

I just had a quick question on the end of lease income side of things. I joined the call late and as you were discussing it I think I heard a comment around despite the dynamics causing that temporary elevation in used car prices, there was some expectation that the inflationary pressure would come through over time, and that might -- with the implication, that might sort of keep used car prices elevated above historic levels. Was that the comment? Or did I miss something?

Yes. Yes, Josh, it's more to the point that we just see -- we see a soft landing back to pre-COVID levels. So if you go back just before when COVID started, used car prices were, at that point, still relatively high historically. So our expectation is a soft landing back to those levels and not some sort of major step change. And the reason why is because just to that long-term structural shortage of used cars going forward.

There are no further questions at this time. I'll now hand the conference back to Mr. Russell for closing remarks.

Thanks, Lexi. And thanks, everyone, for joining the call. I think we'll wrap it up here, and I look forward to catching up in person over the next couple of days. So thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.