FleetPartners Group Limited (FPR) Earnings Call Transcript & Summary

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

Thank you, operator. Good morning, and thank you for joining our FY '21 results presentation. Today, we are presenting the first full year of clean financials since simplification. It's a vastly improved story compared to where we were 18 months ago at the outset of COVID. We're not only proud of the strength of this financial results but also the strategy rebuild that we've commenced, including our progress on ESG matters. I'll cover the FY '21 highlights shortly and then hand over to Damien to go through the detailed financials. We'll then briefly update on our strategic initiatives and outlook. But first, let's start with the performance highlights over on Slide 5. I'm delighted to say that this is the best performance in our group's operating history. NPATA is up 110% to $86.1 million. Pleasingly, the group delivered positive jaws, namely 32% revenue expansion and 2% cost reduction. Cash conversion remained consistently elevated, allowing us to reduce net debt by 80%. Net debt today is only $20 million. During the second half, we commenced an on-market buyback program initially sized at $20 million and subsequently resized to $40 million. Today, we are adding an incremental $16 million to that buyback, bringing the total to $56 million for FY '21. That's roughly 65% of NPATA. We consider the 65% NPATA as a proxy for the dividend payout ratio. The total return implies a yield of 7.2%. Going forward, we will be targeting a capital payout ratio between 55% and 65% of NPATA. This will likely be in the form of buybacks until franking credits allow for a return to dividends. I'll address this in more detail, along with the progress with strategic pathways. But first, let's have a closer look at the results starting on Slide 6. We grew EBITDA by 63% compared to FY '20. The composition of this is outlined in the bridge here. NOI pre-provisions and EOL was at $10.6 million despite a 4% reduction in AUMOF. This margin expansion was driven by our focus on higher-margin products and from our treasury initiatives. The AUMOF reductions were an outworking of ongoing vehicle supply issues and, therefore, book asset depreciation. These supply constraints continue to be a positive influence on the used car market and our end of lease income. This year, we achieved average profitability per unit of $6,558 compared to $2,566 in FY '20. It's important to note that we expect this used car market to normalize as the supply chain is restored, and we would guide back to FY '19 for what normalized EOL is expected to look like. While the timing remains uncertain, we feel well positioned for the intervening period. Turning to Slide 7, let's walk through the NPATA movements for the year. As I mentioned a moment ago, NPATA was $86.1 million for the year. That's up 110% in the year. Beyond margin expansion and EOL profitability, we realized the full year benefit of a smaller property footprint as well as reduced interest costs on our corporate debt facility. You can see a summary of our FY '22 expectations for these line items on Slide 20. This expectation analysis includes interest costs on our corporate debt facilities, which I'll talk through on Slide 8. We couldn't be happier with what we've achieved with our deleveraging profile, and we've recently agreed a debt refinancing on a great set of terms. Back in FY '19, at the start of simplification, these corporate debt facilities were highly geared and quite unstable. We were put under an enormous amount of pressure to take down the debt with dilutive equity. But instead, we pushed through quite a challenging debt restructure and refinancing at that time. 6 months later, after that restructure was locked away, COVID emerged. We were once again put under equity pressure. However, we aggressively pushed back on dilution in favor of another debt refinancing. As you'd expect, the commercial terms of these debt refinancings reflect the real and the perceived risks at that time. Since those refinancings, we have repaid $254 million of that gross debt, which is roughly 75% of the total facilities. Net debt today is only $20 million. That's just 0.14x leverage versus well over 3x back in FY '19. With our credit profile now vastly improved, we have recently refinanced the debt facilities, amending the terms to provide us with much better flexibility, improved commercial terms, longer tenor and better pricing. This strengthened financial position and solid organic capital generation profile meant that we can commence the capital management strategy during the second half of FY '21. This is outlined over on Slide 9. We've now defined the medium-term capital management strategy, which will target a capital payout ratio between 55% and 65% of NPATA. For FY '21, this ratio will be equivalent to 65% of NPATA or $56 million. We consider this capital payout ratio as a proxy for a dividend payout ratio, which implies a yield of roughly 7.2%. Given the group does not expect to start accruing franking credits until late FY '24, we believe the return on capital is best achieved through an on-market share buyback. However, if an alternative use of capital arises that would otherwise generate better returns to shareholders, the group will seek to reallocate the capital accordingly. An example of this could be an acquisition opportunity or new business writings growth that's in excess of our internal expectations. Before I hand over to Damien for the detailed financials, let me summarize FY '21 achievements on Slide 10. 1 year post simplification, the group is in good shape, which is evident in this set of clean financial results. Despite 18 months of COVID-19, we have seen strong financial outperformance, including some temporary benefit from EOL income. Organic cap generation has allowed us to accelerate corporate debt deleveraging and has enabled us to commence our capital management strategy. I'll expand on the direction of the strategy from here after Damien talks us through the detailed financial performance for FY '21. Over to you, Damien.

Thank you, Julian, and good morning to everyone. I want to set the scene for the next few slides by first addressing some key themes that reoccur throughout our presentation, namely an expanding order backlog, elevated lease extensions and end of lease income at record levels. All 3 factors can be linked back to the global shortage of new cars. With respect to the order backlog, business confidence is up and customer demand is back. However, the supply of new cars cannot meet this demand. Delivery time frames have blown out, resulting in an order backlog that is over 2x pre-COVID levels. Compounding the issue is that customers are now anticipating longer lead times and are ordering cars up to 12 months in advance, further increasing the pipeline beyond normal levels. We don't see a catalyst for normalization until the end of calendar year 2022. Given the delivery delays, we have, of course, been focused on lease extensions as our customers wait for their replacement vehicles. Accordingly, lease extensions were $164 million at the end of FY '21 compared to $98 million during pre-COVID times. Extended leases typically generate higher returns, so the elevated level of extensions in our portfolio today is contributing to increased income, which you'll see in the slides to follow. Again, once new car supply normalizes, extensions will also normalize, and we expect to see the yield in our income statement reduce as a result. Finally, due to the shortage of new cars, we are seeing increased demand for used cars, which is driving incredible prices in the secondhand car market. This translates into end of lease income increasing an impressive threefold from pre-COVID levels to an average of $6,558 per unit today. However, clearly, this is unsustainable. Therefore, as new car supply comes back online, we expect end of lease income to revert closer to pre-COVID levels, albeit cushioned temporarily by an increase in the number of vehicles we sell. Eclipx has navigated these 3 factors in FY '21 really well. Let's start with new business writings on Slide 13. The group continued to recover back to pre-COVID levels of 1H '20. And if not for the recent lockdowns in Auckland, Sydney and Melbourne, we would have exceeded that benchmark. At $224 million for 2H '21, corporate and SME was up 22% pcp and on track to exceed pre-COVID levels until the Level 4 lockdown in Auckland slowed momentum. At $110 million, Novated was up 17% pcp and only 3% short of eclipsing the 1H '20 result. Similar to what we saw in Auckland, the recent lockdowns in Sydney and Melbourne created enough decision inertia with our customers to hold Novated just short of pre-COVID levels. With that said, delivering double-digit growth in the current environment provides great confidence. Further confidence comes from the robust tender pipeline we currently see, the expansion of our SME distribution network and the rollout of Novated's digital platform. The business has created strong tailwinds once new car supply comes back online. This will, in turn, lead to AUMOF growth, which takes me to Slide 14. The conversion from new business writings growth into revenue growth is not something clearly understood with our business. Therefore, I've changed the format of this slide to better illustrate the interplay between new business writings and AUMOF. That's important because AUMOF is the ultimate driver of our NOI pre-EOL. In FY '21, we ended the year with AUMOF of $1.927 billion, down just 4% from FY '20. As previously indicated and illustrated on the slide, the business normally needs approximately $720 million of new business writings in order to hold AUMOF flat. Therefore, despite the fact we achieved new business writings growth in FY '21 at $644 million, it was still about $80 million short of resulting in AUMOF growth. With that said, although AUMOF declined, the business still generated NOI pre-EOL growth of 8% during the same period. I'll elaborate on how we achieved this in the next few slides. With respect to VUMOF, it ended the year at 93,000 units, down 2% pcp. We stuck to our strategy of not participating in low-profit managed-only fleets. Finally, NOI pre-EOL provisions has gone from $1,412 per unit in FY '19 to $1,606 in FY '21. That's 13% margin expansion in the last 3 years and an appropriate segue to the income statement highlights on Slide 13. The headline I wanted to leave you with for this slide is that irrespective of the positive impacts from the current trading conditions that saw higher end of lease income and provision releases, the business still oversaw double-digit EBITDA growth. At the top line, net operating income pre-EOL provisions is $151 million for the year, up 8%. A good way to think about this NOI growth in the face of declining AUMOF is that for every dollar the business lost due to lower assets, it manufactured an additional $3 of margin to offset that decline. 67 basis points of NIM expansion, higher maintenance profits and higher management fees all represent the key revenue levers pulled by the business to deliver this strong outcome. With respect to provisions, the net movement in FY '21 was a favorable $2.6 million. The business released approximately half of the management overlay that was first recorded last year in the response to COVID. At the end of FY '21, the business still holds $2.4 million of this overlay on the balance sheet. Moving to end of lease income. And the impressive performance in FY '21 is obvious in the third row of the chart. With this year's result being greater than the past 2 years combined, profit per vehicle was 2.5x higher than FY '20, which meant although we sold 19% less vehicles in FY '21, the business still generated $69.2 million of end of lease income, which was up 108%. Finally, operating expenses were $79.9 million, down 2% versus FY '20 and demonstrating the business has maintained its disciplined approach to cost management. The sum of the parts gets you to an EBITDA of $143.4 million, up 63% and a very pleasing result for FY '21. Completing the income picture on Slide 16. And NPATA is $86.1 million, up 110%. In addition to the 63% increase in EBITDA discussed on the previous slide, the other key drivers of the NPATA result include share-based payments at $4.5 million, which is down 25%; and interest on corporate debt at $9.6 million, which is down 36%. This is the tangible benefit of the corporate debt reduction that Julian already mentioned. Finally, and although not included in the NPATA number, nonrecurring items were $7.6 million this year. The key items driving this amount were redundancy costs, along with costs associated with the early repayment and refinance of our corporate debt. By reducing our corporate debt, we achieved greater flexibility, significantly reduced refinancing risk and a lower expense run rate. Moving now to Slide 17. And the takeaway here is about the strength of the balance sheet today. Net assets ended the year at $576 million, which is a 13% increase on FY '20. Other highlights worth noting include cash of $76 million, which is up 37%. This is after using $26 million for the share buyback and $59 million to repay corporate debt. You can see in the liability section that corporate debt now sits at just $96 million. Inventory is at $25 million. This is up from the record lows of FY '20, however, still sits below pre-COVID levels. Finally, the last item to call out is the deferred tax liabilities at $36 million. This has increased by $26 million due to the tax shield the business receives from the instant asset write-off. Returning to my earlier comment about cash, we now turn to Slide 18 and the business' cash flow. Another pleasing aspect of the business' strong financial performance in FY '21 is its cash generation. Net cash flow for the year was $16.9 million. And after adding back nonoperational items such as proceeds from the sale of noncore businesses, CapEx costs, corporate debt repayment and the movement in share capital, the organic cash generated by the business increases to $112.5 million. Comparing that against an adjusted NPATA of $93.3 million, and the cash conversion for the year equals 121%. As we saw in FY '20, the main driver for cash conversion being north of 100% is the tax shield driven by the instant asset write-off. This temporary full expending (sic) [ expensing ] legislation is expected to provide a cash flow benefit to the business until late FY '24 at the earliest. Before I close on our expectations for FY '22, I get a lot of questions about now that we are through the transformation, what our business looks like without the impact from COVID. In other words, what is the new normal for Eclipx? So let's have a look at Slide 19. On this slide, we have taken the time to model out an FY '21 pro forma scenario for net operating income. That is FY '21 NOI without the impacts from COVID. There is a hell of a lot going along in this slide, so it's helpful to read it in conjunction with Slide 37 in the appendix. Instead of stepping through this slide in detail now, I'll happily take questions about this analysis during the Q&A section of today's call or, of course, when we meet in the coming days. Therefore, hitting the highlights. We see an incremental $130 million of new business writings, which you can see in Chart 1, excluding the impacts from COVID. And jumping to Chart 4, the FY '21 pro forma NOI is $180 million. It compares to our actual NOI result in FY '21 of $223 million. I hope that this analysis is of some assistance as you begin to think about our simplified business when conditions normalize, which we currently expect towards the end of calendar year 2022. So let's turn to Slide 20 on our FY '22 expectations. Consistent with past presentations, we don't provide guidance on NOI. We expect NOI pre-EOL and provisions to directionally follow the same trend of average AUMOF. Acting to partially counteract the drag from lower average AUMOF will be the tailwind driven by the recent warehouse renewals in Australia and New Zealand. End of lease income is hard to predict. Once new car supply begins to normalize, used car prices should begin to fall. However, end of lease income will be somewhat cushioned by an increase in the high number of used cars we sell. With respect to provisions, the business currently holds a $2.4 million management overlay. Absent of a material deterioration in economic conditions, we do not expect to increase this amount. OpEx is expected to be flat. It is something we are committed to, whilst AUMOF is also flat. Of course, as we continue to generate better productivity across the company, we intend to reinvest those savings into parts of the business that will drive further growth. The items below EBITDA are expected to be relatively stable with the exception of interest on corporate debt, which is down due to the reduction in borrowings. As you can ascertain, with the exception of EOL, we expect results to be relatively predictable. So my closing comment is that the business has produced a strong financial performance in FY '21. This is undeniably fueled by the positive impacts from the current trading environment. However, do not let that distract you from how well the business executed its strategy during the year and how well it is set up for the future. The Eclipx team grew revenue in the face of lower assets. This was made more notable by the simultaneous reduction of OpEx. We continue to deleverage the balance sheet and started a share buyback. Eclipx is very well positioned for the year ahead. So with that, I'll hand back to Julian for an update on Strategic Pathways.

Thanks, Damien. Look, we're really happy with the progress across all the aspects of our Strategic Pathways plan. Let me turn to Slide 22 to start with the ESG component of our strategy. There are a number of important initiatives summarized here, including the achievement of some very important milestones during FY '21. Following some recent director appointments, Eclipx has become an ASX leader for female Board representation, something which we're incredibly proud of. Another significant moment for our group during the year was becoming certified carbon neutral by Climate Active, which is a partnership with the Australian government. That makes us the first and only player in the fleet and novated space with this certification. This is a really critical step not just for our own corporate responsibility but from a commercial perspective. We intend to lead the EV space in the years to come, and having tangible environmental alignment with our customers is a very powerful commercial proposition. ESG is a core underpinning of Strategic Pathways, which is summarized over on Slide 23. To recap, Strategic Pathways is designed to grow new business in 3 underpenetrated target markets being the corporate, SME and Novated leasing markets. Implementation includes the development of digital origination platforms while at the same time reinforcing our traditional sales and operational capabilities. While we're only 12 months in, we've made really good progress in each of our core target markets, which I'll go through on Slide 24. In Novated, new business writings grew up 17% on a pcp basis despite the ongoing supply chain issues. Order pipeline is currently at 2.8x pre-COVID levels, that is the 2019 financial year. The Novated digital platform has matured from its initial release and has been used by over 130 corporate clients in Australia with more organizations being onboarded weekly. In corporate and SME, new business writings grew by 22% pcp. The supply chain issues remain very challenging. That's why our order pipeline remains above 2x. While all of this disruption has happened, we've made a number of strategic sales hires, including Daniel Thompson. Daniel is widely considered as one of the best operators in the fleet space and will lead our front-end sales and relationship teams, further driving our commercial intensity. Our digital tool for corporate customers called Nitro has continued to evolve and has seen a 16% increase in active users year-on-year. Turning over to SME. This is outperforming our initial expectations, albeit off a lower base. The new business pipeline is growing as is our preferred distribution partnership channels. We expect this will be enhanced further as we roll out our integrated credit and quoting platform to our partners. Putting all that together, we're seeking to drive customer engagement, advocacy and ultimately profitable new business writings through better digital and traditional channels. This will place our business in a strong origination position as we return to a more normalized operating environment. To support sales growth at scale, Strategic Pathways is also focused on operational enhancements, which I'll talk through over on Slide 25. Here, our task is to deliver operational intensity to support the scale expected from our front end over the future time. Each of the initiatives we are running is about scaling our business for growth. There are many highlights, but we've outlined 3 here. During the year, we consolidated 3 CRMs into 1 single source of truth for our customer records. This gives us a more holistic view of our customers. As it relates to data insights, we have consolidated our data warehouse into a cloud-based tool, enabling on-demand data insights for our customers. This provides the customers with far more detailed insights into their fleet in near real time. Lastly, over the coming quarter, we will finalize the migration of our infrastructure from physical data centers into the cloud. This will provide a superior and more scalable approach to our infrastructure. Let me turn to Slide 26 to run through our near-term objectives for each of our core target markets. With the foundations of the Strategic Pathways platforms now in place, our focus is on full activation, ultimately driving commercial intensity to a new level. In Novated, our near-term focus is rolling out the digital experiences to all off-line corporate customers. In corporate, with Nitro and our new sales leadership in place, we are now stepping up our commercial intensity. Lastly, in SME, now that we have a proven digital quoting capability that is being integrated with our digital credit experience, the task now is to roll this out to multiple distribution partners. Let's turn over to Slide 28 to wrap up this morning's presentation before taking your questions. Above all, we are really happy with the strength of this result, the group's financial position and the direction of our capital management strategy. We have all the foundations in Strategic Pathways in place, and the task for the team now is to deliver sustained, profitable growth while lifting our commercial and operational intensity. We feel very strongly about our ESG obligations, and we're very proud of the direction we are taking, be it from Board diversity through to becoming the first player in our sector to be certified carbon neutral by Climate Active. As it relates to vehicle supply disruption going forward, our best guess is that supply constraints will continue on until the end of FY 2022. In the interim, our order book continues to build. As supply is restored, this will convert into new business writings and, therefore, recurring NOI in due course. The key points I'll leave you with today is that while our group has seen a major turnaround in the last 2, 2.5 years, we've got some great opportunities in front of us through Strategic Pathways. And while it remains early, we are seeing really good signs of momentum building. Now with that, I'll pause and pass across to the operator to take questions.

[Operator Instructions] Your first question comes from Tim Lawson with Macquarie.

You've been quite clear on your intention to move away from the sort of managed vehicle space and focus on funded. Can you just talk about the success you've had in that area? I don't think you're giving the funded units separately anymore, but just be interested to see how you've been able to convert any managed units into funded.

Tim, it's Damien. Yes. So in terms of our strategy for that, effectively, what it is, is when new tenders come up, where they're fleet managed-only, we simply don't participate in that. If it's a customer that has a combination of the 2, then we will. But for managed-only, we won't. So what we've seen -- what we'll see is over time, our proportion of fleet managed versus funded will decrease, and that will obviously lift the yields.

Yes. Okay. And just on the end of lease income, I mean, the second half, based on your disclosures on the full year, even the first half, looks even to be over sort of $7,000 a unit. What's the sort of best going-forward thinking? Is it the full year number, the average across the year? Or should we be actually sort of pegging to the second half while we still got the supply constraint issues?

Yes. It's hard to predict at this stage. So what we have seen in terms of used car prices is they have plateaued. So they peaked halfway through the year and then held that level as new car supply comes back online, which it sort of seems based on the commentary coming out of Detroit, that it will start to happen midway through next calendar year and then get back to normal at the end of next calendar year. So at -- that inflection point halfway through next year is probably when you start to see used car prices taper off. So it's probably -- I know I said this last year, but it's probably a similar type of pattern as it was this year but in reverse order, so high end of lease early on and then starting to taper off towards the end of next year.

Yes. Just in terms of your cash flow measure with the buyback, you're obviously giving us a range there against a sort of cash-in header number, but you're not paying cash tax. So just thinking about how that comes into your thinking with the ratio and how that -- those funds are being managed in the business, those excess, ultimately, tax paid in 2025 or whatever -- whenever it will be?

Yes. Sure. So -- and as you'd appreciate, Tim, in the model and when we looked at our internal sort of treasury requirement for cash, obviously, we're expecting supply of cars to come in. When they come in, we need to fund those new business writings. And that takes up some of the cash going forward in our forward modeling. And the second part is we need to make sure we have the right balance in place. So when cash tax eventually comes in, it's a smooth sort of entry in terms of the repayment profile of that tax installment.

Yes. Okay. So I guess while you're not paying tax, you are going to get an interest-free loan from the government to fund those new -- that new vehicle growth?

That's correct. But obviously, you have to pay at some point in the future, but that is correct. And we factored all that into our modeling.

Yes. One of your competitors talked about higher Novated conversion as we come out of lockdown. Just be interested to sort of your comments on sort of post-lockdown experience both in the fleet and the Novated business in terms of particularly conversion around Novated.

Yes. Look, on Novated, certainly, lockdown impacted, as Damien mentioned on the call there. It certainly tempered consumer confidence. That consumer confidence moves very quickly, as you know. So the lockdown is very unhelpful. As we were coming out of lockdown, it's pretty early to call, right? Obviously, New South Wales is only a couple of weeks, and Melbourne is barely out of lockdown. So it's probably too early to call, but you can see there's an increased inquiry level coming through. And naturally, this is a busier season as well because we're coming into Christmas, which is a -- usually a time of higher demand for Novated. So we are seeing a pretty big pickup in the inquiries at the moment, but it's probably too early to call that, given Melbourne is still in a pretty fragile state and as is New South Wales.

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

Quick question on Novated. And I guess, Julian, just thinking of your comment for potential other uses of capital other than the buyback, and you mentioned, I guess, potential acquisitions, just interested to hear how you think about Novated in terms of, I guess, your organic growth capabilities versus is there anything that you don't have or scale that could be accelerated with a potential acquisition?

Yes. Look, in terms of acquisitions, I think we said this before. I mean, there's a few small bolt-ons out there that are sort of interesting. But the reality is I think we're not in the game of bolting on earnings necessarily. It's bolting on capability, which I think is what you're getting to, Paul. So we certainly -- there's a few capability enhancements we could put through. But certainly, the organic -- or the sort of capital investment that we've put into Novated in our digital platform is interesting, and we're looking forward to seeing the fruits of that come through. But we'll always keep an eye out for opportunities at the right time as long as they meet our returns threshold.

Got it. Okay. And then a quick one on the SME side. I guess you guys have been talking about sort of increased focus in that area for a while and obviously, another area where COVID and the lockdowns have impacted. I guess just kind of want to get a sense of when you -- do you see the next sort of 12 months as providing some sort of clean air now to really accelerate that and get an idea of, I guess, your medium-term aspirations for how meaningful SME could be for your overall business?

Yes. In terms of last question first, I think the -- we do think SME can be meaningful over time. What we need is cars, a normal operating environment so we can see what the true meaning of that book looks like. We've certainly -- the SME business outperformed our expectations in the first year of Australia, and we've seen that obviously over the last few years in New Zealand. And I think as we launch our digital platform with the credit underwriting attached to it into our sort of network of distribution partners and then we expand those partners, we'd like to think it can really put a meaningful contribution into our business over the medium and long term. It's -- SME is a risk profile that you don't want to dive headlong into, and we've spent a lot of time refining our scorecards. But certainly, we feel from what we see from early days off a low base, we feel that there's a good opportunity there. And then I look back into the European market for confidence. Certainly, the SME operating in this market over there is on fire at the moment.

Thank you. There are no further questions at this time. That does conclude the conference for today. Thank you for participating. You may now disconnect.