FleetPartners Group Limited (FPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Eclipx Group FY '22 Half 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 first half '22 results presentation. Today, we are presenting to another record set of results for the group. We have seen absolute outperformance across every line item. I'll cover the highlights shortly and then hand across to Damien to go through the financials and the relative strengths of our operating model. We will then briefly update on our outlook before taking questions. First, let's start with the performance highlights on Slide 5. This is the best 6-month operating performance in our group's history. NPATA was up 58% to $62.1 million. The group delivered positive JAWS again, namely 26% revenue expansion and 2% cost reduction. For the first time ever, we've delivered a balance sheet with no net debt. As a result, we intend to return up to $40 million in the form of an on-market share buyback. Our financial outperformance was complemented with strong new business writings growth, up 19% across the group. These growth rates reflect the ongoing implementation of our strategy and the foundations that we've put in place. I'll address this in more detail shortly, but first, let's have a look at the results, starting on Slide 6. This proper bridge shows 3 underlying drivers of the 58% growth in NPATA in the period. First, NOI pre-provisions and EOL. This was up $4.8 million or 9%. The second driver was end of lease income, again at record highs. The third driver was a reduction in our interest cost from lower corporate debt. The cash generated from our outperformance has enabled our capital management strategy, which is outlined on Slide 7. We've restored our balance sheet to a net cash position, taking net debt down by $263 million over the last 3 years. In FY '21, we returned $56 million through our buyback. For 1H '22, we are targeting up to $40 million. That's nearly 50% above the 1H '21 buyback number. Our restored balance sheet provides maximum flexibility to us to pursue incremental opportunities. And one such example is our Strategic Pathways program, which is summarized on Slide 8. To recap, Strategic Pathways is designed to grow new business in 3 underpenetrated target markets being corporate, novated and small fleets. While we're only 18 months into execution, we have made good foundational progress in each of our target markets. And this is evidenced in strong new business writings outlined on Slide 9. Our Fleet businesses have really outperformed internal expectations in the half. Australia delivered new business writings growth at 37%, 1 New Zealand at 33%. Small fleet is tracking well and is now approximately 40% of New Zealand's new business writings. In Australia, small fleet has grown materially off a lower base, reflecting its more recent establishment. As it relates to Novated, new business writings were disrupted by weaker sentiments around supply constraints as well as the initial emergence of Omicron. As a result, we saw a 3% decline in our Novated leases. However, they still outperformed the broader market, which was down 4%. We have a continued focus on growing new business writings and enhancing our profitability across all segments. This will continue to be support of our digital offering. Now before I hand over to Damien to go through the financials, let me touch briefly on our recent ESG achievements over on Slide 10. ESG and sustainability are essential to our group's strategy and values. In March '22, the group proudly became 1 of 12 new organizations in Australia to receive a citation from WGEA as an Employer of Choice for Gender Equality. In the same month, the Australian Institute of Company Directors ranked our group equal #1 in the ASX300 for female Board representation, a privileged position for our group to be in. The group also retains its climate active status granted last year, priorly the first fleet management company to have achieved this. In summary, we've made significant progress across our group and implemented strong strategic foundations to drive profitable growth. We see some great strategic opportunities in front of us. And our restored balance sheet provides us maximum flexibility to take on these emerging opportunities. Now with that, I'll pass across to Damien to talk to you the financial performance.

Thank you, Julian, and good morning to everyone. I want to open my comments this morning by repeating Julian's message that this is the best 6-month performance in our group's history. Starting with new business writings on Slide 12 and up $277 million, the Fleet business is up 35%, surpassing pre-COVID levels. What underscores this impressive result is the fact that it was achieved in the face of the ongoing supply shortage during the half. Despite this supply headwinds, this double-digit growth was delivered by the commercial intensity of our sales team, underpinned by the strategic pathways framework, a combination of recent customer wins and around $24 million in sale and leaseback transactions drove this growth. We also saw growth in small fleets, which is promising. Finally, our order pipeline grew during the half and now sits at 2.5x pre-COVID levels. Therefore, while the new business result is impressive, it was better by the volume of new orders we banked in the same period. Our Novated business wrote $91 million and saw a 3% decline in total units. To put some perspective around this decline, the Novated industry as a whole fared worse with a 4% decline in total units. However, as we exited the half, Novated's new business writings in March were the highest in 8 months. This provides confidence the business is entering the second half of '22 with momentum. Turning to Slide 13 on AUMOF and the key message is that we saw AUMOF growth for the first time in 2 years. So stopping of declining and return to growth, the business needs to write about $360 million in new business writings each half. As such, at $368 million, AUMOF grew 1% sequentially half-on-half. VUMOF is at 93,000 units, down 2%. That's because the business continues to exit lower profitable managed-only fleets. Our focus is on increasing the penetration of fully maintained operating leases and profitable Novated leases. As a result, we have seen an increase in our NOI pre-EOL and provisions to $1,717 per unit, up 11%. Let's turn to Slide 14 on our income statement. The key takeaway from this slide is that the business has outperformed on every line. This is no more evident than net operating income, pre-EOL and provisions, at $79.4 million, it is up 9%. This margin expansion is driven by higher NIM, higher management fees from elevated lease extensions and higher maintenance profits from lower fleet utilization. End of lease income is $51.4 million, up 60%. This was driven by an 8% increase in the number of vehicles sold and a 48% increase in profit per vehicle, which now sits at $8,813. Provisions of $2.8 million as a result of re-leasing the management overlay relating to COVID, we now follow the same framework that was in place prior to the pandemic. That sums to an NOI of $133.6 million, up 26%. Moving to operating expenses, which are $38.6 million, down 2%. We still expect OpEx for the full year of $80 million, with it being weighted towards the second half of FY '22. Therefore, the sum of the above path comes to an EBITDA of $95 million, up 43%. Finally, to close out this slide, at the bottom of the table, NPATA is $62.1 million, up $23 million or 58%. Moving to Slide 15, and the key takeaway from this slide is about the further strengthening of Eclipx's balance sheet. Net assets ended the half at $614 million, which is a 7% increase from September '21. Other highlights worth noting include cash at $82 million, which is up 7%. This is after using $28 million for the share buyback and $21 million to repay corporate debt. You can see in the liability section, corporate debt now sits at $75 million, what's more important is that Eclipx now has 0 net debt. Inventory is at $16 million, down 35%. Selling conditions were much more favorable in March '22 versus September last year, as lockdowns, that disrupted sales back then, were lifted by March. Returning to my earlier comment about cash. We now turn to Slide 16 and the business' cash flow. Another pleasing element of Eclipx's operations today is its cash generation. The net cash flow for the half was $7.7 million. And after adding back nonoperational items, such as CapEx, corporate debt repayment and movement in share capital, the cash generated by the business increases to $70.7 million. Comparing that against an adjusted NPATA of $64.2 million, the cash conversion for the half equals 110%. As we have seen over the last 18 months, the main driver for our cash conversion being north of 100% is the tax shield driven by the instant asset write-off. This is expected to provide a cash benefit to the business until late FY '24 at the earliest. Before I close with our expectations for FY '22, I would like to address 3 common questions about our business today. They are, as vehicle supply normalizes, what is the impact to Eclipx's earnings? Number two, how will rising interest rates impact Eclipx? And thirdly, how will cost inflation also impact Eclipx? So let's have a look at the next few slides to answer these questions. While there are significant scale on underwriting barriers to our industry, the business model itself is really quite simple. As you can see in the graphic here, we provide 3 solutions to our customers packaged as one simplified product. These solutions include asset-backed vehicle financing, in-light vehicle services and vehicle disposal. Vehicle financing makes a significant contribution to our revenue. However, it is important to note that the majority of our NOI, pre-EOL is generated by the services that you see in the middle of the slide. Therefore, Eclipx is a service-based business with best-in-class funding capability. This enhances our profitability and increases the defensiveness of our earnings, which takes me to Slide 19. As illustrated on the chart on the left, our NOI, pre-EOL and provision is stable and predictable through time. This is because the vast majority of our revenue, in fact, 88% to 92% is from vehicle financing or servicing, which are locked in for the duration of every lease. Not only is it a business model that produces annuity-like income, it also has a low credit loss given the business-critical nature of the assets we provide. Therefore, when you have a defensive, stable and predictable revenue model and you add a disciplined focus to cost management, which the business has now had for 3 years, it results in double-digit EBITDA growth, which you can see on this slide. With the stable and predictable nature of our revenue model in mind, let's turn to Slide 20, which looks at the first question around Eclipx's earnings on vehicle supply normalizes. Let me start by saying that predicting the timing of when vehicle supply normalizes is still very speculative in nature. With that said, we do not see this happening before the end of this calendar year. This is a busy slide. So rather than stepping through it 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. The top half of the slide looks at NOI, pre-EOL and provisions as a percentage of AUMOF. And what that looks like in dollar terms, once things normalize along the 7.5% to 7.75% range. The difference between this NOI range and the 8.15% we saw this half is due to 2 key factors being higher management fees from elevated lease extensions and higher maintenance profits from lower fleet utilization. This table also illustrates the new business writings required to achieve the corresponding levels of AUMOF. The bottom half of the slide shows that once new vehicle supply comes back online, we expect end of lease income to settle at around $2,200 to $2,500 per unit. This price reduction will be partially offset by an increase in the number of vehicles sold. The precise timing and impact from the normalization of vehicle supply is hard to predict. However, we believe this slide provides helpful information as you think about our earnings outlook. Let's turn to Slide 21 on managing interest rate risk. This slide explains that we have 3 sources of funding: Principal and Agency or P&A, where we take no interest rate risk; warehouse funding; and asset-backed securitization or ABS. The interest rate we pay in our warehouse and ABS can be broken into a base rate and a funding margin above the base rate. Starting with base rate risk. In our warehouse, we hedged this out from the start of each lease until the end, and these hedges continue through our ABS programs. The group's conservative approach to hedging at lease origination ensures there are no speculative positions with regards to base rates in our funding. Turning to funding margin. Within the warehouse, these are typically repriced annually. For ABS transactions, these are set at issuance and locked in for the entire term. For illustrative purposes, a plus or minus 10 basis points movement in funding margin would have about a 4 basis points impact to our NOI. Three points to emphasize about this impact include: one, the impact sets down over time as the warehouse backed book repays. Two, there is no impact to the front book as a warehouse because changes to funding margins are fed into the pricing of new leases. And three, there is no impact to our ABS, as ABS funding margins are locked in at issuance. Therefore, in light of this overview of our interest rate risk, we are clearly comfortable with our position through any rate cycle. Let's now turn to Slide 22, where I'll conclude my section by reaffirming our FY '22 expectations and address the third question around cost inflation. Consistent with past presentations, we don't provide guidance on NOI. Our expectation is that NOI, pre-EOL and provisions to directionally follow the same trend as average AUMOF. Noting, however, that as we illustrated on Slide 20, when vehicle supply begins to normalize, we expect NOI to settle to a range of 7.5% to 7.75%. 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 number of cars we sell. With respect to provisions, all temporary measures taken in response to COVID have now been removed with a normal level of provisioning expected going forward. Looking at our OpEx and notwithstanding the fact that we are certainly feeling the inflationary pressure impacting all industries at the moment, we reaffirm our $80 million OpEx expectations. Our track record of being disciplined around cost management, driving productivity gains and simplifying our operations provides us with confidence to reaffirm its expectation. All other NPATA items are expected to be relatively stable. My closing comment is that the business has produced another strong financial performance this half. In some respects, this is undeniably fueled by the positive impacts from the current trading environment. However, in a period that was disrupted by lockdowns, Omicron and an ongoing shortage of vehicles, the business has delivered strongly on its strategy. Eclipx is very well poised for the remainder of the year ahead and equally well positioned for when vehicle supply eases. So with that, I'll now hand back to Julian to close out on our second half outlook and to take questions.

Thanks, Damien. Let's turn to Slide 24 to wrap up this morning's presentation before taking your questions. Above all, we're very happy with the trend of this result, the financial position and the direction of the group. The operating environment remains solid, and our customers remain very active as does tender activity. Global vehicle supply continues to be the ongoing theme. As Damien mentioned, we don't see these issues normalizing before the end of this calendar year, which will continue to benefit EOL income. Our group order pipeline is at 2.7x pre-COVID levels. We expect this to gradually convert into new business writings and therefore, recurring NOI in due course, really reinforcing our confidence about the future. Putting it all together, the team have done exceptionally well in the tough environment for me to follow in 7 metrics represent the highlights. We have no net debt. We've extended our buyback by another $40 million. Our new business writings growth is ahead of our own internal expectations. AUMOF is up for the first time in many years, supporting future NOI. Our NOI before EOL is growing, and our OpEx is down. And importantly, NPATA is up 58%. We have the foundations of strategic pathways in place, and our task now is to deliver sustained profitable growth while continuing to lift our commercial and operational intensity. We see some great strategic opportunities in front of us. And while it remains early, this result highlights that our momentum is certainly building. Now with that, I'll pause and pass across to the operator to take questions.

[Operator Instructions] Your first question comes from Richard Amland from CLSA.

Was just hoping to get -- sorry, the Australian New Zealand fleet new business writings looks very, very strong. Can you guys give us some further commentary in terms of price and volume mix? To what extent was price helping out with that versus injections of volume? And then in light of vehicle supply constraints, how are you guys able to drive the volume, what I suspect must be volume gains. Can you add some color on those 2 things?

Yes. Richard, it's Damien. In terms of what drove the growth in the first half or us for Fleet, Australia and New Zealand, it's a combination of 3 things. Firstly, just new customer wins. We obviously -- you can see in the results increased the commercial intensity over the last 6 months, and we saw that the benefit that come through to that new business writings line. The second one was just existing customer activity. So we're coming up now to 12 months since we really started getting on the front foot with our customers about ordering in advance of when they normally do. So customers that ordered 12 months ago were getting deliveries this half, so that obviously helped. And then thirdly, we did about $24 million worth of sale and leaseback transactions. And the beauty of those are, you're not relying on new car supply for that. It's obviously existing fleets. So there's a combination of all 3, which sort of drove that. In terms of price, price has held up. So none of that growth that we saw there was to do with price. And then the second half of your question, sorry.

No, please continue.

Sorry, can you just repeat the second half of your question?

Just I guess I'm surprised at the volume -- the implied volume gains, given the constraints in the market and access to vehicles. Can you give us any color on in terms of how you've been successful getting vehicles? And is that likely to continue?

Yes. So no easing in new car supply constraints that we saw in the first half. In fact, in -- between January and March, actually got harder. The reason why we achieved this growth was really because, as I said, these cars were ordered 12 months ago. So it obviously took a long time to get here, but they arrived. And the second one was the sale and leaseback transaction. So this is where our customers own the fleet themselves or they lease them from a competitor to move across to us. We buy those cars off them and lease it back to them.

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

I just maybe want to touch on the sale and leaseback. Can you provide us with just a bit more color on what those transactions are related to. Are they coming from new customers or from the existing customers that I guess, as you mentioned, have shifted their fleets across. And also maybe some color on what drove that behavior in the first half?

Yes. Sure, Chenny, the $24 million of sale and leaseback was across 2 main customers. They're relatively new customers, one of them just signed a sale supply with us. One of them, they own the fleet themselves, which made it a lot easier. The other one who actually was leasing the fleet from a competitor, but they wanted to move the fleet across because it obviously makes sense for one FMO to manage their entire fleet. So we were able to execute on that, and that's what obviously drove the new business writings there.

Got it. Got it. No, that's helpful. And then maybe I can just touch one of the questions asked earlier around the fleet MBW, new business running up materially. I mean your VUMOF is also up a bit, but your VUMOF sort of on the vehicle spare still went backwards. And in your response, you said that it's got nothing to do with price. Maybe just -- maybe that's gotten this a little bit confused, but does this mean that there's been some churn where you're getting sort of new business writings up, but then the existing base from a units perspective, there's been some churn on that, hence, VUMOF, let's call it, basically flat?

Yes. So with VUMOF and AUMOF, that NOI is moving in the same direction and a simple explanation for that is often when a car comes to the end of its lease, and we replace it, it will come off at, say, $17,000 at the end of the lease, and then the new lease will come on at say, $40,000. So in that scenario, your VUMOF, the number of units is flat. By VUMOF, your assets has actually grown. So that's part of what you're sort of seeing going on there. So you've seen assets up 1% half-on-half, VUMOF still down slightly. The second part of it is as we sort of said, if we don't participate in customers who just have unfunded fleets. So what we'll see is just natural little bit attrition in our sort of space because we're not looking to refill that type.

Got it. No, that's helpful. Yes. So it's basically replacing new car with -- sorry, replacing the depreciated asset with a new car.

Exactly.

And just -- got it. Cool. And then just maybe last one for me, just on the cost. I know you guys are reaffirming the $80 million OpEx expectations for FY '22. But I guess as we sort of think into FY '23, should we base that off the second half '22 run rate? Like would that be a good guide in terms of where the cost base should land for next year?

I think that will probably be a little bit too high. We still got -- we still -- our expectation is for this year to be at 80%, but the second half for us will be a little bit skewed because -- just because of some timing of the cost that we thought we're going to land this half, but we'll land next half. So it'd be sort of ahead of your skews if you sort of annualize that run rate for the second half for us. So it won't be double. It will be some -- it'd probably be more than 80% but less than twice the run rate for the second half for us.

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

First question, just on the fleet new business side also. You mentioned some recent customer wins. I guess I was just curious to hear how you'd describe industry growth versus, I guess, Eclipx market share gains and your own specific performance just to sort of stack that up and understand it?

Paul, it's Julian here. Thanks for that. Look, I think in terms of the industry growth, there's obviously been a lot of change in the industry in recent times. And obviously, we're just focused on running our own rates. So we've obviously invested pretty heavily in our front end and lifted that sort of commercial intensity as a result of sort of strategic hires we've made. And obviously, this is probably the early signs of us bearing fruit on that. I can't comment on our competitors. Obviously, some of them are public, some of them are private, but the disclosure is pretty good from all of them. So I think you can sort of see how they're tracking. We net feel like we are winning market share based on the customers that are we're winning. And beat out as Damien mentioned, from somebody who might be gel with on a supply and then we take over their fleet or if we just win head-to-head against competitors. So we do feel like we've looked at that commercial intensity and there's no really good industry source of data for commercial fleet, but we indicatively, from if we add it all together, we feel like we are gaining some market share.

Thanks, Julian. And then on the small fleet side, which is, I guess, you guys have articulated a focus there for some time now and probably somewhat disrupted by COVID, but now, obviously, new business growing strongly. So where do you see that going as potentially as a percentage of book or whatever metric you're looking for? And how do margins and risk on small fleet compared to your larger fleet?

Yes. Look, I suppose with small fleet, I mean, we see a huge addressable market there. We're only a very, very small fraction of it including 1 or 2 of our peers who play in that space as well. Like I think I've said to you before, it's probably in our interest that our competitors, actually do play in that place because there's plenty of field to play on. And in terms of their customer base, what we see in there, there's traditional SME, but I suppose you'll see the reason we changed is we do see very large multinationals coming through the broker channel and come through us that a credit is, in many cases, very, very strong. And we've naturally priced for that risk, but their margin in smaller fleets is pretty good. The cost that you put against it because it's not as heavily service as a AA-rated corporate, you can generate a pretty good sort of return and their cost for effort is a bit lower. It's not no frills, but it's pretty good. So we're pretty happy with that. You can see in New Zealand that business is established from about 4 or 5 years ago, and it's become a reasonably large part of that portfolio, probably reflecting the nature of the composition of the New Zealand economy in terms of relative size as well, that's sort of 1 to 20 car fleet. In Australia, we're only -- as you said, Paul, we're only just started 18 months ago. COVID wasn't very helpful to us in terms of getting it going. But our technology is getting rolled out at the moment. And we like this space. It's pretty hard to pin the tail on the donkey in terms where we're going to end up, but we feel pretty good about that space for growth.

Got it. Thanks, Julian. And then last one from me. Just on your Novated lease book, so you spoke about obviously a slightly different trajectory on timing, I guess, versus fleet new business, but you've still got a very strong order book pipeline. Some of your peers have put some quantification around that excess order book in terms of potential revenue, they kind of, call it, excess revenue that might drop through. Do you guys have an idea of what they would look like for you?

Yes. We -- the way we think about it, Paul, is really just around what asset growth the Novated book is going to produce for us. And then, therefore, the NOI created off the back of that. We're less transactional against some of our peers because they all fund through P&A. So obviously, the funding commissions have driven off back of that. So on Slide 20, we've got a page here which sort of talks about NOI as a percentage of AUMOF. So the best way we think about it is once we see our new business writings growing higher than $720 million a year that will grow AUMOF and then off the back of that, we've got the percentages there in terms of translating that into an NOI number.

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

Thanks, Matt. And look, thanks, everyone, for joining the call. I appreciate your support. And finally, I just thank the team at Eclipx has done a phenomenal job to get us in a position we're in. Really happy with the progress we've made, and we're very excited about the future and the strategic opportunities that we see right in front of us right now. So thank you again for joining and look forward to catching up with everybody in the next coming days and weeks. Thanks.

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