Humm Group Limited (HUM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the FlexiGroup Limited 1H FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Rebecca James, Group CEO. Please go ahead.

Good morning. Thank you for joining us for our half year '20 results presentation. My name is Rebecca James, Chief Executive Officer of FlexiGroup, and I'm joined today by our Chief Financial Officer, Ross Aucutt. We'd like to first run through our performance for the first half of the year before I discuss the significant progress made against our new strategy that was laid out at this time last year. We will, as always, allow for your questions at the end of the presentation. I'd first like to start with a brief overview of FlexiGroup. We've been helping Australians and New Zealanders fund their lifestyles for over 20 years. We serve over 1.8 million customers as we continue to rewrite the playbook for digital spending. The transformation strategy put in place 12 months ago is delivering, demonstrated by the key metrics in the first half: profit growth; strong double-digit volume growth across all current product propositions; and a significant reduction in losses in proportion to volume. This has been achieved in conjunction with transitional investments in technology, new product development and marketing. We've revitalized our Buy Now Pay Later offerings. First with humm, launched in April 2019, and then bundll, a world first in February 2020, that allows customers to buy everywhere and pay later. And our customers are enjoying these new experiences, shopping with us more frequently. At the same time, we've been restructuring the business, and this will accelerate into the second half as the business works towards reducing its cost-to-income ratio to below 40% by 2022. Against the backdrop of these significant investments, a double-digit ROE has been maintained. We've been profitable since inception, enabling the payment of a consistent dividend. We're a digital spending powerhouse, helping people buy everything, everywhere, every day. I'd now like to turn to Slide 3 and discuss our position on responsible lending. This is the prism which we look when we consider how we should operate as a company. We have long acknowledged that the community has high expectations of us and we have a history and a track record of adapting to and leading industry and regulatory change. Over our 30 years of operations, we have engaged with a wide range of stakeholders on the importance of responsible lending. In the last 12 months, we have delivered our submission to the ASIC review of Buy Now Pay Later, participated in the Senate inquiry into consumer leasing and Buy Now Pay Later, and subsequently engaged with industry bodies and peers on developing a code of self-regulation in Buy Now Pay Later space. We do this because, ultimately, our interests are aligned with that of our customers. Affordability of finance means reliability of payments, which is good for both parties. We believe that the right financial solution differs for each individual indication, which is why we pride ourselves on being flexible to our customers' needs. We are extremely pleased with the progress made towards implementing the Buy Now Pay Later Code of Practice in collaboration with AFIA and our industry peers. FlexiGroup recognized early the need to establish a self-governing code and is proud to have played a key role in its development. We are pleased the code was made for public consultation in January and includes a number of initiatives for which FlexiGroup was a leading advocate, and look forward to seeing the code implemented as soon as possible for the benefit of consumers. Turning to Slide 4, you will see our agenda for today's call. I would like to frame today's call by talking a little bit about who we are today and what we want to become. This time last year, we announced our plans for ensuring that we remain the digital spending powerhouse, helping people buy everything, everywhere, every day. We plan to do this by rewriting the playbook for digital spending, having millions of customers using FlexiGroup's products to pay everywhere, every day. Our purpose is to make a richer, fuller life affordable for everyone, and this is not about a life of money in opulence, it's about a life rich in opportunities, experiences, variety and empowerment. It's about our customers having the confidence to create exactly the life they want and being able to live it. I'd now like to turn to Slide 8 and provide an overview of today's results before I hand over to Ross to take you through some of the financials in more detail. This half has been characterized by strong customer and volume growth. Total customer numbers have grown to reach 1.87 million active customers, up 12% on the prior comparable period, demonstrating continued strong demand for our products. We have also seen good traction with our retail partners, up 15% on the prior comparable period, taking us to 69,000 partners in total. This increase in customer numbers and new partners to our network has resulted in transaction volume increasing to $1.3 billion, 28% up from the prior year after excluding for POS leasing, Once and Lombard, products grandfathered in line with simplifying out our offering. A good sign of health in our business is our return on equity, up 50 basis points to 11% during the period. Finally, cash NPAT for the period of $34.5 million was up 8% on the first half '19. Cost-to-income ratio of 54% reflects the investment made in marketing technology, digital advertising and brand repositioning and represents an increase on the prior period. In addition, numerous business initiatives to reduce costs commenced in the first half. These projects have stated -- have started incurring expenses with the full benefits to the cost base expected in future periods. And our transformation program is well underway. I'm not going to spend too much time on this now, but here, you'll see how we're tracking against each of our objectives to simplify, lead, streamline and expand. We've quickly consolidated our brands and simplified our systems, launched humm with great momentum, as evidenced by today's announcements of 3,000 new retailers, and created a bespoke Buy Now Pay Later serviceability model to reduce losses. Finally, we've expanded our reach by launching bundll to market as a world first in February, and we're also launching the bundll marketplace today. I'd now like to hand over to Ross, who will go into more detail on our financial performance for the period.

Thank you, Rebecca. Cash NPAT for the half was $34.5 million, which is 8% higher than the prior comparable period, driven by strong performances across almost all of our business segments. As we mentioned at the full year results, we ceased writing new business in Once and Lombard cards in June and in Consumer Leasing during this half. These businesses are now in rundown. This has had some impact on the result. However, the effects of this fall away relatively quickly. The $1.2 million differential between statutory NPAT and cash NPAT is driven by the amortization of acquired intangibles. The reduction in the number and size of adjustments to statutory NPAT is a direct result of the steps we've taken to simplify our business over the last 18 months. Volumes for the period were 3% ahead of the first half of 2019, and 28% up if we normalize for the discontinued Consumer Lease business and the Once and Lombard cards products. We remain on track to meet our full year target of 10% to 15% growth year-on-year. The acceleration in the second half will be driven by a number of initiatives, which are already in place and include recently integrated retailers in humm, the continued strong growth in everyday card spend in both Australia and New Zealand, and the impact of bundll. In addition, Q2 volumes were up 16% against the prior quarter in 2019 -- prior second quarter in 2019. The directors have maintained a fully franked dividend of $0.0385 per share, which at 44% is at the upper end of our payout range. The decision to maintain the dividend at this higher level reflects the Board's confidence that the current strategy will deliver strong volume and earnings growth in the future. The placement of 20 million shares in the second half of 2019 meant that cash earnings per share growth of 1% did not keep pace with the cash NPAT growth. Return on equity, as Beck has already mentioned at 11%, was up 50 basis points, which means that we're on track to deliver on our target of maintaining double-digit ROE for the year. Our cost-to-income ratio increased half-on-half and reflects a few things. Firstly, we generated lower fee and other income than we did in first half of 2019 as we simplified our fee structure in humm and closed legacy businesses. Secondly, consistent with the strategy that we outlined last year, we increased our marketing spend to support our greater brand presence in market. Thirdly, we had $2.2 million of restructuring costs this half as we aligned our organizational structure, removed duplication and further simplified our business model. We are well on track to see further cost savings in the second half, and I remain confident in our ability to deliver a cost-to-income ratio below 40% in 2022. Moving to Slide 12. Before I move on to performance of our individual businesses, I'd like to discuss our new segmental reporting. We are now reporting 4 segments: Buy Now Pay Later, which includes humm, New Zealand Oxipay and Ireland; New Zealand Cards; Australian Cards; and Commercial and Leasing, which combines our Australian and New Zealand commercial businesses as well as the discontinued Consumer Lease. There is further information in the appendices to the presentation, including a full breakdown and reconciliation between prior periods under the old and new reporting structure. So on to Buy Now Pay Later. Volumes are up a significant 23% as we have seen humm available in more stores and as a result, used by more customers. humm's unique proposition of offering big things, longer-term installments and little things, shorter term, is resonating well with both retailers and consumers. Cash NPAT of $8.4 million is lower than the prior period and is as a result of lower fee income of almost $3 million pretax, as we have simplified our fee structures for consumers; higher marketing spend, $3 million post-tax, as we focused on lifestyle marketing to our customers and driving increased usage; a higher provision, which was driven by the increase in volumes, and we would expect those provisions to normalize over time. This is offset by higher interest income as we continue to benefit from margins in our core verticals and enter new verticals. Interest expense was impacted positively by a $265 million securitization executed in November at extremely cost-effective funding levels. We continue to make improvements -- significant improvements in our credit and fraud checks with 60-day plus arrears at a steady 1.6%. New Zealand Oxipay and Flexi-Fi Ireland performed strongly during the half. Turning to Slide 13, which summarizes the performance of the Australian and New Zealand Cards businesses. This is a great story, and we are pleased with the result that we've delivered this half. The headline volume number for Australia, which shows 11% decline, does not represent the true health and performance of this business. Reported volumes are down 11% as we no longer allow transactions on Once and Lombard cards. All originations for the half are through Skye with volumes increasing at a very pleasing 115%. And at the same time, we're seeing very strong growth in interest-bearing balances. We are confident that this momentum will continue in H2 as we increase our direct-to-consumer origination. We also maintained earnings momentum in our Australian Cards business. Cash NPAT was up 925% from the prior period, reflecting the positive work the team have done in driving everyday card spend and working with our merchant partners to provide relevant financing options at point of sale. We've seen 13% growth in interest income on the prior period. The huge work undertaken by our credit team to drive improvements in our collections is paying dividends, while at the same time, the rich data provided by positive credit scoring has reduced losses at origination. New Zealand Cards continues to perform well, generating volume growth of 15%, which is a particularly good result in a market which grew at only 5%. More importantly, our card spend has seen an almost 20% CAGR growth over the rolling 12-month period. Net income was up 16%, with interest income up 11%, reflecting the strong growth in card spend and interest expense was $2 million lower, benefiting from a further $300 million capital markets issuance in August, our largest in the New Zealand market to date. Overall, cash NPAT was up 10%. Slide 14. Commercial and Leasing generated a cash NPAT of $9.4 million. In Australia, the team are focused on SME lending. As we previously mentioned, we exited a number of equipment finance programs, which adversely impacted our volumes but has improved the quality of our overall book. The strategic focus in H2 is to continue to grow our SME relationships and build a strong and more sustainable business model. Our view is that this is a strong business with great growth and earnings potential. New Zealand Commercial continues to perform well and is benefiting from further investment in frontline sales, and the Consumer Lease business is in runoff. Turning to Slide 15. Our overall credit management has driven strong performances across all our businesses. The huge investments we've made in systems and people has certainly delivered results with our overall net losses to average net receivables decreasing by 40 basis points to 3.3%. This is as a result of having a laser focus on the key drivers of losses as well as leveraging system investments in collections, automated credit decisioning and fraud controls. We now see our credit capability as a huge competitive advantage. Turning to capital management on Slide 17. Funding continues to be one of our core strengths. We have access to a diverse range of funding sources with significant headroom to allow for growth. During the half, we continued to diversify our funding with almost $600 million of capital markets issuance with a loyal and growing domestic and offshore investor base both in Australia and in New Zealand. Our humm securitization program continues to see strong demand from investors. We're issuing an increasing amount of green bonds, making up almost 40% of the overall transaction executed in November. The Q Card New Zealand master trust issuance of $300 million in August was the largest ever ABS transaction in New Zealand. We are on track to execute our first master trust issuance for our Australian credit cards in the second half. On Slide 18, our access to recourse or on-balance sheet funding is unique in the nonbank sector and provides us with a backstop in these uncertain times. Our gearing was slightly lower than at year-end and considerably lower than prior period. This is despite our receivables growing by almost 8%. Our headroom is now $102 million (sic) [ $103 million ]. I'll now hand back to Rebecca to provide the strategic update.

Thanks, Ross. I'm excited to now give you all an update on FlexiGroup's strategy and direction over the last 12 months. As I outlined earlier, the first of our 4 strategic pillars was to simplify our offering and build profitability and brand strength. Today, I'm pleased to announce that we now have 3 clear propositions that are underpinned by unique, recognizable brands. In Buy Now Pay Later, we have humm, the only Buy Now Pay Later product in the market that offers up to $30,000 interest free. We also announced the launch of a world first buy now, pay later everywhere offering in bundll in February. In credit cards, we have cartt as a direct-to-consumer brand that consolidates Skye, Once and Lombard and Q offerings all in 1 place, and is the ultimate shopping companion. And in SME lending, we also have wiired, that pivots us to focus on small business lending which we see as a huge opportunity for the business. However, to simplify doesn't just mean to simplify our product offering. Slide 22 shows that we're also in the process of simplifying our service. That means a digital-first approach using technology and an enhanced call center experience to improve our customer experience. We have removed full-time positions from call center and back-office functions while increasing volumes. This is important as we are building the right platform to scale effectively. We've introduced webchat, reducing core volumes by 20%, and automated additional elements of the customer journey by utilizing bots, which provides faster responses, reduces customer interactions and generally offers a better customer experience. We're also simplifying our operations. Here, we've continued optimizing our Manila operations. We have removed duplication of functions across each geography. We have renegotiated supplier arrangements on more favorable terms, and we've also made strong progress on our $7 million cost target -- cost-out target for FY '20. Finally, by simplifying our systems during the period, the company took steps to reduce complexity in its systems. We have commenced reducing 3 telephone systems to 1, which will enable round-the-clock support with reduced full-time employees. We've progressed the development of the centralized knowledge management system, which will have the benefit of upskilling our contact center capabilities to reduce core handling times, allow for additional bot implementation and reduce the number of customer contacts, to name just a few benefits. And we've also reduced 3 fraud engines to 1 fraud platform with better fraud detection capability to reduce losses. By simplifying our product suite, the areas we play in and moving fully to a shared services model, we're confident in delivering a cost-to-income ratio of less than 40% over the next 3 years. Next, we want to lead in Buy Now Pay Later, a space that we invented nearly 20 years ago. We have continued to see positive momentum in Buy Now Pay Later. humm is the only product in the market that can service transactions from $1,000 to $30,000, allows customers to access $2,000 instantly, gives them more time to pay and allows them to shop confidently with pre-approval. Our product differentiation is resonating with merchants and customers, as evidenced by the growth in Australia and New Zealand, including 31% (sic) [ 32% ] more customers, 66% more transactions and 23% more volume compared with the first half of last year. We've also more than doubled the number of transactions on Black Friday, up 103%, and Boxing Day, up 123%. In Australia, humm is consistently rated as a top 10 finance app as consumers are now enjoying the newly designed user experience and shopping with us 4 times a year, up from once every 18 months with our legacy Buy Now Pay Later product. Today, we're also proud to announce numerous new retailers to the humm platform across key verticals, including Miele and Duracell in home, Malaysia Airlines and Boardriders in lifestyle, United Chemists and Attune Hearing in Health, and Retail Apparel Group in retail, giving humm customers another 3,000 locations to shop with humm. Our third strategic pillar is focused on streamlining our originations with instant credit decisions by developing a fit-for-purpose digital framework that will help us grow. FlexiGroup's objective is to foster a single credit platform that is easily scaled for growth. Significant work has been undertaken in the 2019 calendar year to decommission legacy systems and deliver a sophisticated proprietary decision engine that makes best use of the 20 million data reference points collected from customers. During the period, we've automated credit decisions by optimizing our models to reduce referral rates; created a bespoke Buy Now Pay Later serviceability model leveraging a number of data points, including online bank statements to drive continued improvement in losses; enhanced the registration process for humm with photo ID scan to protect against fraud, a first in the BNPL space; put in place 1 enhanced and optimized collection systems for all products, reducing losses; and improved our collection efficiency significantly. Work on this continues, but the company is already experiencing the benefits of the investment with significant improvements in collections efficiency and reduction in our loss ratio, which Ross touched on earlier. Finally, we continue to expand our reach, our target market, our audience and our relevance. On Slide 29, you'll see what we see as our key target segments, each now served by 1 or more of our products. You have the balancer, who lives life for the moment served by bundll. You have the amplifier, who lives life by making what they have go further, served by humm. You have the shopper, who lives a lifestyle to enjoy and can do so with our new direct-to-consumer credit card, cartt. You have the nomad who lives life prioritizing new experience and does it with Flight Centre, a contract which was extended for 4 years in January of this year. And finally, you have the founder who lives to create, build, grow and can do so with either of our SME products, wiired leasing and soon to be launched wiired money. On the 10th of February, 2020, FlexiGroup announced its word first -- world first Buy Now Pay Later product that can truly be used everywhere. Using the MasterCard network, bundll customers can shop wherever they like online and in-store, interest free, with no minimum spend. All weekly purchases get bundled into 1 place. Consumers get no less than 2 weeks to pay their bundle or can snooze to delay payment further. bundll also benefits merchants by providing another payment alternative as no integration is required and eliminates merchant services fees. With no minimum spend, bundll expands Buy Now Pay Later spend for everyday items with interest-free purchases in categories normally reserved for debit card spend, such as petrol and groceries. We have a number of features rolling out for bundll in the future. But today, we're excited to announce the first new feature. The bundll marketplace, which launches today, allows bundle customers to shop anywhere online where MasterCard is accepted with the swift, seamless and engaging user experience. This is an exciting development for us as it opens up a number of opportunities for FlexiGroup and creates another reason for our customers to use and pay with the bundll app. The marketplace provides a simple 2-click shopping experience when purchasing online. By utilizing advanced features by our partnership with filler, customer details and bundll payment information will auto fill, so in other words, you select your item, select bundll as the payment method and your goods ship. The bundll marketplace will allow you to search for any item online and will curate and customize based on the user to provide the best and most relevant offers. Importantly, while you can shop everywhere online, FlexiGroup will generate an affiliate marketing revenue stream at over 20,000 stores. We have also made a number of strategic partnerships to drive adoption. bundll will be co-branded and offered to Raiz customers as a means of facilitating instant liquidity in their Raiz accounts, funding purchases on bundle via Raiz. It will also allow customers the opportunity to round up bundll purchases and invest via Raiz. In addition, Groupon, a founding bundll marketplace partner, will promote bundll as a BNPL partner across various channels and customer communications. Finally, we've signed a partnership with Coca-Cola Amatil vending machines, targeting customers with discount loyalty offers and promotions. In February 2019, I laid out our ambitious plan to become a digital spending powerhouse, helping people buy everything, everywhere, every day, and the steps taken over the last 12 months have catapulted us in that direction. We've done that by simplifying our products and brands to reduce effort, trading synergies and allowing us to focus on growth; delivering customer experiences that create viral demand for our products, solving pain points others can't solve; creating and delivering products that increase our reach and exposure; and growing the value of customers seamlessly within digital wallets and product platforms, giving us higher profit per customer than our competition. On Slide 35, you'll see our new suite of brands, bundll, humm, cartt and wiired; simple, lovable and most importantly, relevant. Turning finally to our outlook on Slide 37. FlexiGroup is in the first year of a 3-year business transformation plan designed to build on its first-mover advantage in nonbank consumer finance. Our objectives are clear: accelerate growth; reduce costs; deliver a best-in-class digital platform; and invest in loved brands. The plan is progressing well. The company is on track and believes it can achieve its business improvement objectives while maintaining a key focus at all times on earnings and return on equity. FlexiGroup expects transaction volume to grow between 10% and 15% for FY '20. Transaction volume is being driven by new product launches, new customer segments and new partnerships, as evidenced by the second quarter volume, which increased 16% on the prior comparative period. This will be partially offset by the softer retail trading environment. The company also expects to balance margin with growth and to maintain a double-digit return on equity. We believe that the steps taken over the next 18 months will deliver us substantial returns and solidify FlexiGroup's position as the digital spending powerhouse, helping people buy everything everywhere, every day. We have 20 years of operational experience, $2.5 billion in receivables, a simplified offering and unlike many of our competitors, are highly profitable. So with that, I'd like to bring an end to our half year presentation. Thank you for your continued support, and I'd now like to take questions.

[Operator Instructions] Your first question comes from Scott Murdoch with Morgans.

Just a few from me. Can I just start with the consolidated divisions? I think you said there's a reconciliation. But just trying to understand if can help us with the profitability drivers of what would have been the old 3 divisions, just a high level understanding between AU leases and New Zealand leases.

Yes. Sure, Scott. I mean, on Page 44 of the presentation, there's the full reconciliation, which sort of steps you through what '18 would have looked like under the new structure versus the old structure. Obviously, the consumer leases, we stopped writing the new business in the -- during this half, so that's been declining over a long period of time. And the commercial lease in Australia and the New Zealand businesses are obviously taking up most of that volume or, in fact, all of that volume growth. So I guess, those -- that's probably the biggest area of the combination.

I just guess, a bit more color on Australia leases versus New Zealand if that's okay because if you look at Australia leases under the old segmentation, obviously, last year, you had the big impairment here. The second half was barely profitable. Just more interested in what that division is doing on a stand-alone basis.

Yes. I mean that's performed well. I mean obviously, we had that one-off last year, so normalizing for that, it's been performing very well this half. And New Zealand lease continues to perform well. Volumes were up over the prior periods. Australian leasing volumes have been down, as I mentioned because we shut off a number of those vendor programs and focused on the SME lending. But those are probably the key areas. I mean there's very little difference in, I suppose, the split at this point in time between those divisions.

Okay. Just interested in how we should look at the $3.6 million after-tax extra marketing costs within humm. Is that likely to be a recurring spend? Is it an increasing spend? Is it variable with volume? Can you just help us understand that number a bit more?

Yes. Thank you. With Buy Now Pay Later as a category and obviously, there was a significant investment in the first half in humm and the repositioning of humm, that won't be sustained at that level for humm into the second half. There was a lot that was done in terms of the launch of that particular product. But this half, we do have the launch of bundll, and there is marketing investment in bundll with bundll now being, obviously, our second Buy Now Pay Later product within that sector.

Okay. So the short term, then, I guess, bundll costs sort of offset the non-sustained cost in humm. Is that a fair statement?

Yes, that would be. That would be a fair statement.

Okay. And just interested in your comments around the restructuring to accelerate in the second half, just how we interpret that. Obviously, you had the $2.2 million in redundancy cost. Does that also accelerate in the second half given your statement?

Yes, that's right, Scott. There's further restructuring going on in the second half as we simplify both our products and also the way we offer those products.

Okay. So should we think of that redundancy cost plus whatever happens in the second half to achieve the $7 million of run rate cost savings into FY '21?

That's exactly right.

And just interested, obviously, you have reaffirmed the 40% cost-to-income ratio over the next couple of years. Just wondering how you sort of think about that or come up with it in terms of absolute cost reduction. Or is it the income growth leveraging the current base? Or a combination of both?

Yes, it's clearly a combination of both. I mean, obviously, we expect to be growing our business and our income will grow commensurately. But obviously, at the same time, I mean you can see where our cost-to-income ratio is now. We'll be taking considerable cost out to achieve that. But there is a combination of both because we are definitely a growing company.

Okay. This is reasonably high level because I haven't gone through all the line items in terms of revenue yields. But if we just look at the, I guess, the revenue yield or the yield on the book or the receivables, obviously, there's been some changes in remuneration and fee lines. Is there further compression to come through? In the past, we've seen a lot of legacy income rolling off and it's impacted -- is what we see now in terms of yield on book a sustainable level? Or is there further compression? And if so, in what division?