Heartland Group Holdings Limited (HGH) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome. My name is Greg Tomlinson and I am Chair of the Heartland Group Holdings Limited Board. A warm welcome to shareholders and guests present today at the 2023 Annual General Meeting of Heartland Group Holdings Limited, the first annual meeting since the sad passing of our previous Chair and Founding Director, Geoff Ricketts. It is our pleasure to return to Christchurch for this hybrid meeting. For those in the room, to ensure your experience at Te Pae Christchurch is both memorable and safe, we would like to make you aware of the following: Washrooms are in the foyer, way outside the rooms we are currently in. It is unlikely -- in the unlikely event of an emergency, please remain calm and follow the instructions of the automated emergency system and the Te Pae Christchurch team. All emergency exits are clearly identified with illuminated green signs. In the unlikely event that an evacuation of the center is necessary, all available staff will assist in the process and detailed instructions will be given. The assembly area is located on the green, directly opposite the exhibition halls Lot 3 that's next to the river. Smoking, including vaping is not allowed anywhere in the building. Finally, as a courtesy to everyone present, ensure your phone is on silent. For those joining online, I will provide you with instructions on how to vote and ask questions as we progress through the meeting. If you encounter any issues, please refer to the virtual annual meeting online portal guide or phone the helpline 0800-200-220. Since a quorum is present, I declare the meeting open. I will now outline the agenda of the business for today's meeting. As Chair of the Board, I will shortly introduce you to the Board of Directors and management team who are joining in person and online. I will then take you through the formalities of the meeting before I provide a high-level overview of Heartland's performance and activities in the 2023 financial year. This will be followed by an address from Heartland's Group Chief Executive Officer, Jeff Greenslade, who will provide you with more detailed performance overview and an update of Heartland's current strategic objectives. Following this, there will be an opportunity to answer any questions you may have concerning Heartland's performance, strategy and operations. I encourage shareholders attending online to begin to submit their questions now, if they have none -- if they have not done so already. We will answer as many of these as we can at the appropriate time. Thereafter, we will move to the formal business of the meeting, including voting on resolutions posed to you today. I would like to acknowledge the Directors. I'll begin by introducing Heartland's Group Directors followed by Heartland Bank Directors. Jeff Greenslade to my left, our Chief Executive Officer and Executive Director. Jeff has held this role since Heartland's Bank's establishment in January 2011 and as a Director on both Boards. Ellie Comerford, Ellie was appointed as a Director of Heartland Board in January 2017. Geoff Summerhayes, Geoff was appointed a Director of Heartland Group Board in October '21. Kate Mitchell, Kate has been a Director of Heartland Bank since March 2019 and was appointed to the Heartland Group Board in October 2021. To my right, Bruce Irvine, our Chair of the Heartland Bank Board. Bruce has been a Director since establishment. Also joining us seated at the front of the room are other Heartland directors. Shelley Ruha -- but Shelley, maybe you could just stand and if you wouldn't mind. So Shelley was appointed Director of Heartland Bank in January 2020. John Harvey, John has been a Director of Heartland since establishment. Simon Tyler, Simon was appointed a Director of Heartland Bank in November 2022. Finally, I was appointed a Director of Heartland in March 2013 and was appointed Chair of Heartland Group Board on the 20th of February 2023 after Geoff Ricketts stood down as Chair. Also alongside Jeff, other members of Heartland's management team present. Leanne Lazarus, Chief Executive Officer of Heartland Bank; Chris Flood, Deputy Chief Executive Officer of Heartland Group; Phoebe Gibbons, General Counsel; Andrew Dixson, Chief Financial Officer; Andy Wood, Chief Risk Officer of Heartland Bank; Michael Drumm, Chief Compliance Officer. The management team also includes Aleisha Langdale, Chief Performance Officer; Doug Snell, Chief Executive Officer of StockCo Australia; and Lana West, Group Chief People and Culture Officer. Also joining us today is Nicola Foley, Group Head of Communications, who will be looking after the online questions. Formalities; proxies and posted votes. Turning to the business of the meeting, I advise that all valid proxies and posted votes received from shareholders within the prescribed time limits have been admitted. I can confirm that a total of 840 proxies and postal votes have been accepted. This represents some 251 million shares and 35% of the total shares on issue in Heartland Group Holdings. I can say that for all the resolutions before us today, approximately 82% of those proxies and postal votes are in favor. Meeting procedures; I would now like to outline the meeting procedures. This is a meeting of Heartland Group Holdings Limited shareholders. Accordingly, while our guests are very welcome to witness the proceedings of the meeting, participation in the shareholders' discussion and the business of the meeting is confined to ordinary shareholders present in person, online by proxy or by authorized representation. Regarding the voting procedures for today's meeting, all resolutions will be decided by way of a poll. This is in line with the practices increasingly adopted by listed companies and the preferred method of the New Zealand Stock Exchange and the New Zealand Shareholders' Association. By having resolutions decided by way of a poll, we are counting all postal votes, proxy votes, votes online and votes from the floor. Each resolution will be put to the meeting. Shareholders joining us in the room should have received a voting card on registration. You will need to keep your voting card with you until all the resolutions have been voted on. Our share registry, link market services will then move through the room with the ballot boxes and collect the voting cards. If you need to leave the meeting before the end, you may place your voting card in one of the ballot boxes at the exit with the Link Market Service staff member. For shareholders attending the meeting online, when your online registration is validated; you will receive an electronic voting card, which you can use to cast your vote. To vote, you will need to click get voting card within the online meeting platform. You will be asked to enter your shareholder or proxy number to validate. Please then mark your voting card in the way you wish to vote by clicking for, against or abstain on the voting card. Once you have made your selection, please click submit vote on the bottom of the card to log your vote. Please refer to the virtual meeting online portal guide or phone the helpline 0800-200-220, if you require assistance. Voting will remain open for 5 minutes after the conclusion of the meeting. Notice to the meeting that the notice calling this annual meeting was published electronically on the 11th of October 2023, with hard copies subsequently sent to shareholders. That notice outlined the formal business for the meeting and also provided background information of each resolution to be voted on. The minutes of the last annual meeting held on the 8th of November 2022 have been approved and confirmed by directors as is our custom. A digital version is also available on Heartland's website at www.heartlandgroup.info. Upcoming items, so I will now share with you my Chair's address, before inviting Jeff Greenslade to address you. We will then move to the shareholder discussion. We invite online questions to be submitted now to allow us time to answer them. I acknowledged earlier that this is the first AGM since the very sad passing of Geoff Ricketts in March this year. As a Founding Director, Geoff played an instrumental role in bringing Heartland together and establishing the successful trans-Tasman financial services organization that it is today. Geoff will be remembered as an esteemed leader, who was generous with his time and wisdom. Geoff leaves an incredible legacy. The Board and I are proud of the way in which Heartland and its customers demonstrated resilience through FY '23. I'm pleased to be standing here today, confirming Heartland's performance for FY '23, which I believe Geoff would be very proud of. On behalf of the Board, I can report that in FY '23, Heartland achieved a net profit after tax of $95.9 million, an increase of $0.7 million on FY '22. On an underlying basis, this was $110.2 million, an increase of $14.1 million over the prior year. Heartland's underlying results exclude the impacts of one-off and technical noncash items, such as fair value changes on equity investments and the designation of the derivatives. This is intended to allow for easier comparative -- easier comparisons between periods as these items are not considered part of business as usual activity, and therefore, are not representative of Heartland's core earnings. This is another strong result for Heartland, driven by growth in gross financial receivables of 10.1% to $6.8 billion across Heartland's core lending portfolios. Underlying returns on equity was 11.9%, down 68 basis points compared with FY '22. This reflects a strengthening capital position following Heartland's equity raise in the first half of the financial year, positioning the business well for future growth opportunities. Heartland's net interest margin was consistent -- has consistently remained higher than its banking peers. This continued in FY '23 with an underlying NIM of 4%. Through proactive portfolio pricing and margin management, Heartland's NIM stabilized in the second half of FY '23. Focus will remain on careful management of asset quality, margin and growth as the high interest rate environment continues to impact on borrowed demand and credit quality. Heartland continued to solidify its position in the Australian market. StockCo Australia completed its first year as part of the group and performed well in a challenging environment. Meanwhile, Heartland's Australian reverse mortgage business continued to increase its market share to 39.9%, up from 34.7% at 30 June 2022. In October last year, Heartland signed a share purchase agreement for the acquisition of Challenger Bank conditional only on a receipt of the necessary regulatory approvals. As we continue to actively work through the regulatory approval process, we eagerly anticipate the growth opportunities that will be possible upon completion. Jeff Greenslade will discuss in more detail the Australian growth strategy, including the proposed Challenger Bank acquisition. As demonstrated in receivable growth, Heartland's Bank continued to perform well. This was supported by the recognition it received from its saving products and online home loans. Heartland Bank was awarded Canstar New Zealand Savings Bank of the Year Award for the sixth year in a row, while its online home loans received an outstanding value home lender award. Digitalization of Heartland's products and platforms continued. Achievements included a 65% increase in the number of Heartland mobile app users in New Zealand. As part of its commitment to digitalization and the efficiency of its operations, Heartland's ambition is to reduce its underlying CTI ratio to less than 35% by FY '28. Jeff will address this shortly. Progress has been made against Heartland's sustainability framework. In this regard, I'm pleased to announce that the beginning of October, Michael Drumm, previously Group Chief Operating Officer, was appointed to the new role of Chief Compliance and Sustainability Officer at Heartland Bank. Michael has responsibility for creating a dedicated regulatory affairs and compliance function with Heartland Bank and progressing the various initiatives within the Heartland sustainability framework. Sustainability; Heartland's Street pillar sustainability framework is focused on sustainable practices, which minimize Heartland's environmental impact positively contributing to its communities and enhancing the lives of its people and customers. Under the environment pillar, Heartland has made a commitment to support the just transition to a net 0 economy. Heartland's unaudited operational greenhouse gas emissions for FY '23 saw a 17% reduction on the FY '19 base year. Heartland intends to set a long-term greenhouse gas emissions reduction target plan in FY '24, including Scope 3 financed emissions. Heartland developed an environmental risk screening tool to understand the sustainability of its larger business and rural borrowers by reference to environmental, climate, reputational and regulatory factors. This tool is now being used in credit decisioning processes. Furthermore, Heartland is phasing out lending on diesel passenger vehicles and more than doubled the portion of new generation vehicles funded through its motor finance portfolio in FY '23. For the people; the people pillar is focused on supporting Heartland's people to grow, thrive and be empowered to achieve Heartland's goals together. It also describes Heartland's commitment to caring for customers and the communities in which it operates. FY '23 was Heartland's second year of reporting pay gap information for gender, Maori and Pasifika. Heartland remains committed to ensuring it monitors recruitment, pay levels and remuneration to ensure it is fair and unbiased. There is more to be done to close Heartland's pay gaps. And we will continue to report on these metrics annually. Heartland invests in attracting and developing talent with a particular focus on the younger demographic. This is important given that 49% of Heartland's employees are under 35 years old. Heartland's Manawa Ako internship program for Maori and Pasifik; youth is a key initiative in the space. The program has welcomed more than 110 interns since its inception in 2017 with many having continued in employment with the Heartland Group after the conclusion of the internship. In line with concerted efforts by its people to focus on diversity, equity and inclusion, Heartland's accessibility employee group was formed to champion accessibility within Heartland with a goal of achieving the New Zealand excessive -- sorry the tech. As many of our shareholders will be familiar, Heartland has a long history in the New Zealand dating back to 1875. So we are delighted to be able to support the communities we operate in through the Heartland Trust. The Heartland Trust is an independent registered charitable trust, which is closely supported by Heartland. Since becoming the Heartland Trust in FY 2012, the trust has donated more than $4.3 million to the New Zealand community groups and organizations, a figure we are very proud of. During FY '23 alone, the Heartland Trust made grants totaling more than $710,000 in the areas of education, arts and culture and mental health. The trust continues its funding and support of the InZone Education Foundation, Auckland City Mission, word Christchurch Festival and a number of high school, and club first 15 rugby teams across the country. Donations in FY '23 included $45,000 towards disaster relief efforts following the effects of the Auckland flooding and Cyclone Gabrielle in the Hawke's Bay. And financial well-being, activities under the financial well-being pillar intend to support the financial well-being of Heartland's customers and communities. This was delivered through Heartland's products and ongoing digitalization efforts. The current economic environment and cost of living has left more New Zealanders experiencing financial difficulties. Heartland is committed to supporting its customers during this difficult time and continues to offer the Heartland extended products, which enables customers and arrears to make their existing loan repayments more manageable. Furthermore, we are pleased to share that more than 48,000 New Zealanders and Australians have been able to live a more comfortable retirement with the Heartland reduced mortgage. Heartland has extended digital access to its Australian reverse mortgage customers through the release of its Heartland Finance mobile app, allowing these customers to manage their loan from their mobile device. Heartland intends to provide app access to its New Zealand's reverse mortgage customers in FY '24. For our shareholders, we are pleased to be able to pay a final dividend of $0.06 per share, bringing the total for FY '23 to $0.0115 per share. The full year payout ratio of 85% compares to the average over the last 3 years of 76%. This continues our track record of delivering for shareholders. Since first listing on the NZX in 2011, Heartland has paid more than $514 million dividends to its shareholders. Outlook, the year ahead will be a significant for Heartland as it seeks to complete the acquisition of Challenger Bank and continues its commitment to digitalization and frictionless service for our customers. The Board is confident in Heartland's -- in Heartland to generate strong growth and profitability as it continues to deliver against its strategy to provide best or only products through scalable digital platforms. Heartland expects net profit after tax for FY '24 to be within the guidance range of $116 million to $122 million, excluding any impacts of fair value changes on equity investments held; the impact of the designation of derivatives and any costs related to the acquisition and integration of Challenger Bank. As the acquisition, be its completion, guidance will be updated to reflect the impact of Challenger Bank becoming part of Heartland. I wish to conclude my address this afternoon by expressing my thanks and gratitude to my fellow directors for their wise counsel and support. Thank you to Jeff Greenslade and to the executive team who continue to provide strong leadership for Heartland. On behalf of the Board and executive team, I wish to thank Heartland's employees for their hard work and resilience, which enabled an exceptional result this year. Last but not least, I would like to thank you, our shareholders and customers for supporting Heartland. We appreciate the confidence you place in us. And we look forward to continuing the delivery of strong shareholder returns. Thank you. I will now ask Jeff Greenslade to address you.

Thank you. [Foreign Language] Thank you, everybody, for joining us here today. It's great to be in Christchurch. This is actually our first real AGM since the COVID lockdown and it's real privilege for it to be located in Christchurch. I'd also like to begin by acknowledging Geoff Ricketts. Looking around the room, there's a lot of familiar faces that were in rooms like this in Christchurch in Ashburton when people like Geoff Ricketts and Graham Kennedy, were bringing everybody together to create Heartland. And Geoff was instrumental in the amount of enormous vision and drive and was a wonderful mentor. As the Chair mentioned, FY '23 was a year in which Geoff would have been proud, another year based on growth around our best or only product platform. So we grew at around about 10%. And with it, both underlying and reported profit grew. And it also should be noted, it was a result that was forged in a very difficult environment of high inflation, increasing interest rates and reflects the strong market position that we've got, both in New Zealand and in Australia. In New Zealand around motor finance and asset finance and in Australia and New Zealand are the reverse mortgages. These products have shown themselves to be resilient and consistently performed well. And I'd like to share with you some of the context behind the achievements and taking firstly, reverse mortgages. Over the last 5 years, the compound annual growth rates for New Zealand and Australia portfolios have been 16.4% and 22.8%, respectively. And last year, in each country, the books grew by more than 20%. And that just demonstrates that resilience and the position of those products and growth that we expect to continue is that demographic demand continues as people age and wish to remain in their homes. In Motor Finance, while New Zealand's vehicle market experienced a 6.2% decrease in total new and used cars that were sold, our volumes grew by 11.6%. So we did well in a shrinking market, increasing market share. And that growth is based on some great relationships we've got with dealers and white label partnerships with manufacturers. In Asset Finance, where we finance things like trucks and transportation equipment, yellow goods, tractors, we experienced 7.8% growth. And that reflects the dependency that that book has on things like infrastructure spend and the need for transportation of goods and services around the country. And one last one is in the highly contested home loan market, our online platform for mortgages grew by 14%. And this product is an example of the success of Heartland's digital strategy, where with an online-only platform; we can be competitive against the major banks in terms of price. However, as noted, despite growth across these portfolios, we saw a contraction in our net interest margin due to the new mix of business favoring a better credit quality, the disproportionately higher growth in the low-margin product of reverse mortgages and increased cost of funds, which has and continues to impact on margin. Alongside these operational achievements, the FY '23 year was one of significant advancement in terms of strategic activity in 2 areas, in particular, I'd like to share with you. Firstly, in technology, with our focus on efficiency and the upgrade of our core systems within the bank; and secondly the development of our strategy for expansion in Australia. And turning first to technology, our mantra is very much around frictionless service at the lowest cost. And what this means in practice is quick, hassle-free service and more importantly, delivered with an unrelenting commitment to efficiency. Efficiency is very important to us. And we measure it through our cost-to-income ratio at what it costs us to earn a $1. Our ambition is to achieve an underlying cost-to-income ratio of less than 35% by the end of FY 2028. And this aim truly sets us apart. So let me explain a little bit about how we are going so far with this objective. In FY '23, the underlying cost-to-income ratio was 42%. In other words, we spent $0.42 to generate every dollar. How does this compare with others? Well, smaller banks in New Zealand of our size have cost-to-income ratio is much higher in the range of 60% to 80%. The 42% though, also compares very favorably against the -- it's about the same as the average for the Australian major banks. So this means we have the same operating leverage of banks that are more than 100x our size. And we've replicated that scale through technology. Initially through being an early adopter of digitalization at the front end and reducing our physical distribution networks using online or app-based channels. But it is an ongoing challenge and requires the application beyond the front end and automating all parts of the service platform. There is more to do. And while the ratio may wobble around across its journey over the next few years, we want to see a trend down, not just at parity with those Australian banks, but to create some distance between ourselves and them, to create a real point of differentiation in respect of efficiency. And the ingredients of achieving that are through increasing customer self-service, streamlining and automating our internal ways of working. And let me give you some examples of the projects that we have underway in terms of achieving that objective. Firstly, reducing customer inbound calls by shifting the solution for those calls onto our mobile app. We aspire internally to have zero inbound calls because let's be honest, calling your bank is a time-consuming and joyless exercise for customers. If a customer has to call us, we have failed. Instant solutions on your smartphone is good service, waiting 30 minutes, listening to awful music is not good service. Secondly, offering Motor Finance customers, in particular, increased flexibility to self-managed life loan repayments to suit their lifestyle. Giving good customers flexibility is good service and providing access to this via mobile app with our one-click deferral initiative will create significant efficiencies. Thirdly, we're looking at ways to provide more digital support for our partners and dealerships and in the white label manufacturers through giving them access via the mobile app on the ground when they are selling the car. And this will allow them to speed up the process of providing finance, so they can spend more time with their customers. And finally, we are investing in ways and the upgrade is one example of this, where we have access to more smart technology, which will help with automation, even things like AI. So the upgrade of the Heartland's core system is part of this, as I said, and will be an important enabler of greater efficiency and position us very well for scalability in the future. The upgrade of the core banking system continued through FY '23. And I'm pleased to confirm that the upgrade has now been successfully completed. This project involved considerable effort over 3 years during which COVID lockdowns and the availability of skilled people, docs resourcing and stretch capacity. And I wish to thank the Heartland Bank CEO, Leanne Lazarus, for her leadership and tireless efforts in bringing about the successful conclusion of this project. The second area of focus for us has been expansion in Australia alongside the other things we're doing. And really it is about fulfilling the goal of becoming a bank in Australia. And the acquisition -- or the ultimate acquisition of Challenger Bank is the key stepping stone for this. Challenger Bank is small, so it doesn't come with much in the way of legacy lending and has recently gone through a technology upgrade. So it is an excellent base for us to start our business aspirations in Australia. And Chris Flood, the Group Deputy CEO has been engaged heavily in preparations for the Challenger Bank acquisition, paving the way for the transfer of our existing Australian businesses into Heartland Australia Bank once regulatory approvals are obtained and completion of the acquisition has occurred. It's fair to say that the regulatory process has proven to be complex. What we are doing? New Zealand bank buying an Australian bank and integrating existing business is a novel process on both sides of the Tasman. Normally, it happens the other way around. There have been a range of technical issues to resolve across 2 jurisdictions. But the applications with the relevant regulators in both countries, we are now subject to regulatory timetables, but are hopeful of obtaining an in-principle approval prior to Christmas, if not early New Year. And this will be followed as soon as practical by a completion of the acquisition. I want to emphasize just how important the opportunity is for us in Australia. It will make us Heartland, the only bank provider of specialist reverse mortgages and livestock finance in Australia. And there's also the opportunity to expand into Motor Finance and Asset Finance. Motor Finance, in particular, represents a massive opportunity for us in terms of growth. We will have a differentiated position by being the only specialist bank provider of motor loans in Australia. And we already have distribution opportunities through our relationships that we have with manufacturers. We estimate that the size of the pie in Australia is around about $35 billion for motor finance in loan and that's probably around about 10x the size of the New Zealand market. As signaled, as Greg mentioned, when the FY '23 results were announced, the guidance range did not include the cost impacts of Challenger Bank becoming part of Heartland. And obviously, we will update that when we come closer to completion. And as I said, we hope to be able to make some announcements soon. Turning now to the outlook. Clearly, we expect FY '24 to be a more challenging year than last year due to the higher interest rates impacting on borrower demand and credit quality. We're also seeing greater competition for deposits due to the major banks refinancing the COVID Funding for Lending Programme. But initiatives are underway to address this, including the new digital Saver ON-COOL deposit product targeting the lower cost and less competitive parts of the yield curve. The first quarter is typically slow, and this year, obviously exacerbated by the uncertainty of the election, which impacted particularly in motor as people awaited the outcome of election in terms of making decisions around cars. But there are signs of a bounce back and the pipelines are strong. Meanwhile, reverse mortgages and asset finance growth has continued. A strong commitment to ensuring good customer outcomes alongside proactive portfolio pricing and margin will remain a focus, particularly in this challenging environment. In conclusion, I'd like to thank the people of Heartland for their exceptional efforts. We've achieved a lot in FY '23 operationally, but also just strategically. And that has come with a lot of hard work and sacrifice by our staff. So I thank them for all that they have done. I'd also like to thank the support of the Board. And finally, thank you, our shareholders. Your support is very greatly appreciated. Thank you very much. And that's once again; love to see you here in Christchurch. Thank you.

Thank you, Jeff. Ladies and gentlemen, before opening the meeting for questions, I advise that [ Karen Chaz ] of PricewaterhouseCoopers, the company auditor is present today and is available to answer any questions relevant to the conduct of the audit and the preparation and content of the auditor's report for the year ending 30 June, 2023. Shareholders who wish to ask a question on Heartland's performance, strategy or operations can submit the questions through the online meeting platform. And I will aim to ensure as many of those questions as possible are addressed. Any questions unanswered will be responded to by e-mail or please feel free to engage with the Board and management after the meeting and online by e-mail. Any comments, questions or matters raised for discussion during the meeting must be relevant to the business before the meeting. If you have matters you would like, to -- raise as a customer, the Board and management team are available to answer your questions during refreshments following the meeting. For those online, please submit any customer questions. And we will endeavor to respond to you after the meeting. Shareholders, we also invite shareholders were also invited to submit questions prior to the Annual Meeting. We received just one question, which I will address now. Regarding the proposed increase of the Director fee-pool, we were asked why is this, proposed rise, in directors' salary, so high. Heartland is asking shareholders to approve an increase of the director fee pool to address 2 matters. The first is to ensure the -- sorry, the available and additional fees needed to attract and retain suitably qualified nonexecutive directors to the Board of Challenger Bank from the data completion of the acquisition. The acquisition remains subject to receipt of the necessary regulatory approvals. Challenger Bank is a regulated authorized deposit-taking institution and is required to be independently governed by a Board of Directors, who -- meet APRA governance requirements. Secondly, to increase the fees payable to Heartland's existing non-executive directors prior to settling -- prior to setting the proposed rates for nonexecutive directors, the Board commissioned an independent benchmarking review of director fees by EY. The proposed Board Chair fee increases are in line with benchmarking. As noted in the notice of meeting, Heartland Group and Heartland Bank's nonexecutive directors have not had the benefit of any change in fee allocations since 30 June 2018, with a significant CPI increase and material changes in the regulatory and directors landscape in the subsequent 5 years. Benchmarking was obtained to support the Board's decision-making and to provide transparency for shareholders. Ultimately, for the reasons set out in the notice of the meeting, including complexity, time considerations for these roles, CPI since last fee change in 2018. It was considered that the proposal is put forward is appropriate. I will now open the meeting for questions, starting with those in the room followed by questions online. Shareholders in the room who wish to ask a question are requested to raise their hand and then wait for the arrival of a microphone to be put to put the question to the meeting. Please state your name before asking your question. If you have more than one question, please ask all of your questions and then resume your seat. We will answer each of your questions in turn. This will help to ensure as many shareholders as possible have an opportunity to ask questions. So any questions from the floor? Yes, sir.

Thank you. My name is Max Smith, and I'm from the New Zealand Shareholders' Association. And I've authorized a couple of questions here, which I'm sure you'll find easy enough to answer, and I hope you do. In your 2023 annual report under your strategic vision, you highlighted growing your existing Australian reverse mortgage business, which you already mentioned here today, which is excellent. A tightening economy in Australia suggests that this may well put into a growing opportunity in this area as people require more funds. But it also suggests it may well bring about increased competition from other bigger and stronger banks. Does the Board perceive such an opportunity to have this increase there? And does this revenue stream in Australia? And if so, is there a strategy and/or plan to take advantage of such an opportunity and to meet encounter any increased competition in this area. I have one second question, which you've asked us to ask at the same time and that is this, again, a tightening economy, in Australia, particularly for worms of possible increasing default rate in the motor vehicle financing market. Does the Board believe that this is possible or probable? And if so, is there a policy to place a second event the possible erosion of this really new stream?

Well, yes, they're both very good questions. Now on your first question on the reverse mortgage business, hence, our appetite to make sure we're getting a bank license in Australia. And we're 40% of the market share there. So I think in time, we've got to expect competition. So we've got to get matched that. Let's answer that. Now with a tightening economy, well, that's everywhere. And -- but what I can say is for the niche markets we're in, we've got a strong team of professional people managing those parts of the business. Now what I can say is also that there's been a strong focus on the quality of our assets. And that has been obvious over the time of the Heartland business. You would have seen the strengthening of the asset classes and credit risk. Further questions?

My name is [ Simon Martin ]. I just wanted to ask you about your road to carbon zero. Presumably, a lot of your carbon emissions stem or derived from your customers, because I heard you're saying that you are no longer landing on these tractors. What sort of effort is made to actually work out the carbon footprint of those to whom you land?

Simon, that's a good question. If you don't mind, I'll pass you to our expert Michael Drumm. Thank you, Michael.

Thank you. In short, it's very hard. So what we need to do in this upcoming year is calculate the emissions of our borrowers that we as a financier, are responsible for. And there are various ways of doing that. And we're more than happy to speak to you afterwards. But what we need to always look at how far they're driving the cars, how long they've got the tractors on for, what the quality of the tractor is? And if you take all this information onto account to produce a baseline and ultimately, we will win this together in terms of getting to net zero. And we want to be with customers who have high quality equipment. And we want to be financing high-quality equipment to fund their transition. So that's sort of the short answer.

[ David Dunes ], shareholder. I just was interested in StockCo. And you mentioned that it performed well for the year. We had a capital raising for that a couple of years ago. But I don't know any other information about it. And I wonder just how well it's done and whether it's a chief budget and where you see that going and whether Challenger will make a difference to continuing that growth and profitability.

Thank you, David. I'll pass that question on to Jeff Greenslade.

Actually, probably Chris Flood.

Thanks, David and a good question. Look, the lots of markets in Australia had its challenges last year, not the least of which was started the year off very weak and ended the year in parts of Australia very dry. But also is confronted with where they sell a lot of the MIG-2 is, of course, China and the COVID impact that saw the wireless might also impacted. But the actual underlying performance of StockCo was very strong. They increased the cattle numbers by around 24%. They increased their ship numbers by 12% and they increased their customer numbers by 11%. But during the period, there was a commodity price drop. And so the value of the stock that was replacing the stock that was processed actually dropped. We still achieved notwithstanding most months between a 20% and 30% commodity price drop to grow the balance sheet, although the growth in the year was modest. With the increase in customer numbers and stock numbers that we have on hand, we think we're well placed to execute on our strategy. And I think it's -- it was a difficult year but it was a fantastic opportunity to get a great asset and it will continue to perform well in the future.

Thank you, Chris. So look, I've just got a minute it. I'd say if we can bring it down to the -- just the final questions, please. So there's anything from the room?

[ Stephen Bryant ], a shareholder. Perhaps a question for Jeff. The company has made quite a bit of an effort or a slot towards reverse mortgages, probably by their nature a slightly risky product or a higher risk profile. Do you see any risk long term in terms of perhaps and deteriorating economic circumstances for the company?

Thank you for your question. We see reverse mortgages as probably one of the best risks that we have in our portfolio. And the reason being is that we had very low LCRs, the customers had to begin with. So typically, New Zealand and Australia, people only borrow around about maybe 15% in terms of loan-to-value ratio. That aligned with the fact that despite what you think, on average, people repay the loan after 7 or 8 years. So you don't get that sort of lifetime occupancy going on for 30, 40 years. You get a tail a very small tail. But those 2 factors means, that the average LVR in the book is in the sort of mid-20%. And I think and Chris, correct me if I'm wrong. To give you an idea, in terms of loans in excess of 75% LVR, I don't think there's any in New Zealand, and there's maybe a handful in Australia. So that gives you an idea of the book and that's -- Australia has been through a correction, 10% and so forth, it's bounced back recently. So we don't have any concerns in terms of the risk, in terms where we sit with either Australia or New Zealand at the moment.

Thanks, Jeff. We've got time for one more question here.

[ Grant Armstrong ], shareholder. Just going back to the pool for the directors there. You addressed it about why. One of the key things that I'm interested in because I've never sat in on a Board meeting is you mentioned time. So if I could just arbitrary one of the directors say, Ellie, how much time would you dedicate to your duties as a Director of Heartland outside of the meetings on a weekly basis, hour, please.

The right answer is much time it takes and it's not something that's dutiful. But on average, I would say it's at least 1 day a week is dedicated in terms of the portfolio that I have. That can vary. And it could be many weekends sometimes when we're busy. But yet about a day week is the way I like to look at it.

I'd just like to add, if I could to that, is that we are very demanding of our directors. We've put them under a lot of pressure because we're very active. So it's not just about board meetings as well. There's a lot of activity between board beings, urgent approvals required. And we are very fortunate with the Board we've got in terms of the hard work and diligence.

I get e-mails from Ellie at 11:30 at night and she's still working and she's still going through 300 pages of Board papers and asking detailed questions. So she's an exceptional worker. And she works incredibly hard and spends a huge amount of time on this business.

As all the directors, I can assure you don't get the stellar growth by accident. Okay. So look, in the interest of time, we will now move to online questions. There will be an opportunity to discuss any further matters with directors and executives after the conclusion of the meeting. Are there any questions online?

Yes. The first question we've got is from Mark McCarthy. The question is can you give us some guidance regarding dividends for the year ahead?

So I mean, I don't think -- we're not in a position to give that information out yet. Thank you.

I'll add something. And again, the issue this year, we have a history of dividends that many of you will be well aware of. And they've been relatively consistent and relatively strong over many years. The issue that we have this year coming is the acquisition of the bank in Australia. And we need to work about how that fix the dynamic of what we're doing. So we've always had a policy of paying strong dividends. But we need to look at what the needs of the business are over the next 12 months.

I think we have time for one more online question. And that does the Board believe there has adequate resources for expansion in Australia? Or will there be future calls on shareholders for capital, the questions from Bruce Parks.

Thank you, Bruce. Yes. Well, look, we really see Australia as the opportunity. And you can see that our growth, and we are -- we strive for better. So we will be working that market hard. So what does that say that opportunities are there and are they sensible. We will be working hard to grow this business as we've done all the way through.

I can't really answer any more than that because we haven't got something on the table. We're focused on getting the regulatory approvals. That's our major job. That's the one we've got to get completed.

Thank you, Bruce. Okay. So I'll close the meeting. That brings us to the end of the Heartland's 2023 Annual General Meeting. Accordingly, I declare -- oh sorry, if I missed something. I better go back, I better go back, sorry yes? I've stepped out to turn, here. Yes, we're voting. So this is -- we now move on to the formal businesses of the meeting, which is to vote on the resolution set out in the notice of meeting. As mentioned earlier, if you are attending the meeting online, you can cast your vote using the electronic voting card received when you -- with your online registration is validated. If you have any questions relating to any of the resolutions, please submit them online now so that they may be addressed alongside questions from the floor within the discussion of each resolution. So Resolution 1 is a re-election of myself. So please I'll pass you to Bruce to that.

Thanks, Greg. For a minute there, I thought I'd missed out on my opportunity. The first item of business is the re-election of Gregory Tomlinson into the Board of Heartland Group. Details regarding Greg's background, qualifications and experience, were included in the Notice of Meeting. Greg stands for re-election with the full support of the HGH Board. The resolution to re-elect Greg is an ordinary resolution requiring approval of 50% of shareholders of those voting and entitled to vote. So I'm now going to hand back to Greg to tell you about Greg and then I'll come back and move the resolution. Thank you.

Thank you, Bruce. No doubt you're starting to get sick of me. So good afternoon, everybody and thank you for the opportunity to give you a little background on myself or my involvement with Heartland Group Holdings. My association with Heartland dates back to 2009 when PGC at the time was the owner of Marrick Finance. During the GFC, many finance companies were in trouble. Some failed. Marrick was no exception. Recognizing the longer term impact for the New Zealand economy, if the under-banked market couldn't be served, I could see this was going to be a major concern. So I agreed to participate in the capital raise for PGC in 2009 and was supportive of the spinout of Marrick from PGC to Heartland Group Holdings. I further increased my shareholding through 2010 to 2012 and assisted with the underwriting of the -- sorry, the pine gold rights and rural loan book, which was purchased by Heartland Group Holdings. I have supported Heartland Group Holdings on every capital raising since and to date and have maintained a shareholding in the order of 10%. My business experience spans over 40 years, owning, managing and building scalable businesses with directorships in several listed and unlisted companies, which are all noted under disclosures in the annual report. Throughout this time, each business has been established with sound and robust infrastructure to ensure commercial soundness, investing for scale and adding a meaningful contribution to the economy. I'm focused on the sustainable growth of Heartland as a dynamic market-leading business in its core products with significant growth opportunities across New Zealand and Australia. I am confident in Heartland's strategic vision, having niche best or only product offerings in deep markets. The success of this strategy is demonstrated by its stellar growth. Keeping our customers at the core, a disciplined focus on the execution of our strategy and building wealth for shareholders will put Heartland Group Holdings in good stead for continued growth. This is an exciting time to be part of the Heartland journey as it embarks on the further expansion of its core lending products in the Australian market. I have the skills, experience, passion and motivation required to contribute to the ongoing growth and success of this great little company. And I will be grateful for your ongoing support for my directorship of Heartland Group Holdings and I'm delighted to take any questions. I'll take the questions.

So I'm going to move the resolution that Gregory Tomlinson, who retires by rotation and is eligible for re-election, be re-elected as a Director of Heartland Group. Are there any questions from the floor? Max? Thank you, Max. Any questions? Are there any questions online? No questions online. If there are no further questions then, please just, Mark, if you haven't voted already, please mark your intention on the voting card, either for, against or abstain. And for those online, please click on the submit vote on your online screen. And I'll now pass back to you, Greg. Thank you.

So Resolution 2 Directors Remuneration. This resolution is for the proposed increase in the total of annual remuneration available to all nonexecutive directors. Details regarding the rationale for the increase in directors' remuneration, including a table of current fees and a summary of EY's report were included in the Notice of Meeting. The proposed increase in directors' remuneration has the full support of the Board. The resolution to increase the directors' remuneration is an ordinary resolution requiring approval by a majority being more than 50% of the votes of those shareholders entitled to vote and voting. I move that the total annual remuneration available to all nonexecutive directors be increased from NZD 1.6 billion or AUD 1,400,000 to NZD 2,400,000 or sorry, AUD 2,200,000 whichever is the greater amount from time to time, an increase of NZD 800,000 or AUD 800,000, 33% and 57%, respectively, effective from FY '24 and onwards. With such sum to be divided amongst the nonexecutive directors as the Board may from time to time determine. Are there any questions from the floor?

[ David Lloyd ], and I'm a shareholder. So it seems to gain sort of one basket, if the deal doesn't go ahead, my understanding is that this increases to pay for the new directors that has to be brought on as a deal does go ahead. What happens if the deal doesn't go ahead?

Well, well, we won't be increasing the fees to that level. But there still will be an increase for the current -- an increase to the fees to the current directors as stated.

Max Smith from New Zealand Shareholders Association. We did have a very close look at this. And we discussed it with some of your executives. And we would like to make it known that we approve of this, and we will be voting in favor of this resolution.

Thank you very much, Max. Are there any questions online? Thank you, Nicola. Please mark your intention on your voting card by selecting for, against or abstain in item 2. For those online, please click submit vote on the bottom of the voting card to lodge your vote. Resolution 3, auditor's remuneration. The final resolution is to record the automatic reappointment of PricewaterhouseCoopers as the company's auditor and to pass the following resolution. This resolution also has the full support of the Board. I move that the Board be authorized to fix the remuneration of Heartland's auditors PricewaterhouseCoopers for the year ending 30 June 2024. Are there any questions from the floor? Thank you. Are there any questions online? Please mark your intention on your voting card by selecting for, against or abstain at Item 3. For those online, please click submit vote on the bottom of the voting card to lodge your vote. Just as a bit of procedure, voting cards in the room will now be collected. Please place your voting cards in the ballot boxes as they are passed around. If you require assistance, please raise your hand. Online votes should now be submitted. The voting will be open until the closing of the meeting. The results of the poll will be advised on the NZX and ASX after the conclusion of the meeting. So other business, so ladies and gentlemen that concludes the formal business of the meeting. There is now an opportunity for any other matters that may probably be brought before the annual meeting to be considered. Are there any such matters that shareholders wish to raise? Okay. Are there any questions from the floor?

[ Brian Dalton ], the shareholder. I'd just like to know if you can give us any indication of the possible earnings that's likely to come from the Challenger Bank, please.

Over what period, Brian? Well, yes, okay. We can't. Again, it's -- we're making an acquisition. We've got the benefit by having a bank license for deposit taking. So I think that's as much as I can really forecast out. But I'd view it that we're moving forward. We've got -- we're not risking our business anywhere. We're carrying on in our core lending -- our core lending -- sorry, our core lending platforms. Hence, it's a good proposition for Heartland.

Can I just add that at the moment, we're uncertain on timing. We're uncertain of the final sort of conditions of bank registration, et cetera. So -- but obviously, when we come back with the update to guidance once we have clarity on those matters, then, you'll have a better idea.

[ Mike Golden ], shareholder. You can understand why we're nervous because the last crack at doing something in Aussie, you took over the Challenger situation because it was a better proposition. You've perhaps indicated that you can't give us any indication of what your dividend is going to be or whether we're going to have a dividend because we might have to finance this bank. We're probably just putting a hand out to say, please give us some confidence as shareholders for voting increased fees for directors, et cetera. So Greg, please?

Well, what I can say is the purpose of buying Challenger Bank is to become a bank in Australia. By becoming a bank in Australia, we have access to retail deposits. We're currently wholesale funded. Currently, our retail deposits over time are more efficient than wholesale deposits. It's a deeper ball as one of the gentlemen observed over here. How do we wish to respond to the possibility of a more competitive market of the big banks got into their business so we need to have a banking license, which will give us a deeper pool of funding and a more efficient pool of funding as well? So we're definitely doing it because we think it's going to be better. All we're saying at the moment, for a whole lot of reasons, we can't break that down into numbers at this stage.

[indiscernible] With respect to the increase in contributions that are going to be coming from Australia, hopefully, does that affect the level of imputation attached to dividends at all?

Where is Andrew?

In short, no. Indeed.

Thank you, Andrew. Yes, one final question, please.

My name is [ John Radon ], shareholder. I understand the advantage of the Challenger Bank as Jeff just explained. Would you be able to tell us what the purchase price as buying the Challenger and how you plan to fund that?

Yes. Well, we can tell you that it's $35 million. It's been -- sorry, $36 million. And there are some adjustments over the time that it's taking to settle. But -- so that's the first piece. Then, what was the second part of your question?

How are you planning to fund the purchase?

We are looking at a number of options. Look, it's $35 million. It's not a lot of money to this business. Yes, one more question.

This is a very general question, but in the Australasian banking center -- sorry my name's Derek, I'm shareholder. In the Australasian banking sector, where would you like to see Heartland position itself in 5, 10 and 20 years' time?

Well, again, look, yes, Derek, we're focused on the products that we are good at. So you think about our business. We look after what we call the underserved. And with a lot of those business units, they are quite high touch. So they're not really where the banks want to play. And our people are very trained. They are specialists in those products. So there's going to be a long time before you see much deviation from that. You can see by our growth prospects, particularly the reverse mortgage business in Australia, is growing at plus 20% per annum. So we've got plenty of runway ahead of us as all I can say on it. So look...

So the answer from your fellow shareholder was absolutely correct. We want to be #1 in the areas where we live. That's where we want to be. We don't want to be #1 in home loans or anything like that. We want to be #1 in reverse mortgages, and livestock lending and mobile lending basically.

So look, I think -- look, if you've got further questions to ask, please raise them with the Board and management outside as we're having a drink. And so this brings us to the end of Heartland's 2023 AGM. Accordingly, I declare the meeting closed. Thank you for your attendance and participating here today. You are welcome to join us in refreshments. Thank you.