Humm Group Limited (HUM) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the hummgroup Limited Fiscal Year 2021 Results. [Operator Instructions] I would now like to turn the conference over to Ms. Rebecca James, CEO. Please go ahead.

Good morning. Thank you for joining us for our full year results presentation. My name is Rebecca James, CEO of hummgroup, and I'm joined today by our new CFO, Adrian Fisk. I'd like to start today by talking you through our group highlights for the half before discussing our plans to accelerate local and international growth. I'll then hand over to Adrian, who will walk you through our financials. We will, as always, allow for your questions at the end of the presentation. At hummgroup, we're liberating people from a one-size-fits-all approach to finance. We enable seamless approvals for purchases big, small or business-related, empowering consumers to choose how they wish to pay with terms from 5 fortnights through to 5 years. Today, 2.7 million customers entrust us to help them buy and pay over time, and we're just getting started. In the second half of '21, we launched humm in the U.K. and will be live in Canada by the first half of this financial year. We've secured our first global partnership with Westpac, New Zealand. These partnerships are being pursued around the globe. As we grow internationally, we're putting significant firepower into our marketing efforts and product experience, actively shaping how people will buy in the future. Turning to Slide 5, you'll see the group highlights for the year. This year, hummgroup reported a cash NPAT of $68.4 million, up 121% on the prior year. During the period, we've added 450,000 new customers, up 20% on pcp, taking total group customers to over 2.7 million. We ended the period with $108 million in unrestricted cash, up from $15 million in June 2020. Combined with our nil net corporate gearing, this gives us balance sheet flexibility. We now have a superior credit decision engine, delivering a net loss to ANR of 3.5% in FY '21, a direct result of continued investment in this area. And our buy now pay later business is well and truly humming. Our BNPL segment volumes of over $1 billion is up 31% on pcp and reflects the strong performance of humm in Ireland, little things in humm Australia and the increasing contribution of our newer products, bundll and hummpro. A standout performer in our results is our refocused commercial business as origination has successfully shifted to SME lending through the broker channel. Volume for this segment of $540 million increased 56% on the previous year. The strong full year results reinforce our strategy designed to support and accelerate our long-term growth. Turning to Slide 7, humm has 4 areas of focus that will support its short- and long-term growth. The significant work over the prior years has positioned us to put our firepower behind these growth initiatives and expand our customer numbers, merchant numbers, partners and addressable market, both locally and abroad. We will go to market with our new products, bundll and hummpro, which target new segments, new partnerships and new audiences to expand our reach; drive customer engagement and transaction frequency, building our products that are loved and used every day; expand our installment payment core by attracting new merchants and platforms in Australia and New Zealand through our differentiated product offering; and expand into new markets internationally through a considered and differentiated strategy that will appeal to a broader range of retailers and customers than traditional BNPL players. Turning to Slide 8. You'll see that hummgroup now has an interest-free installment product for every purchasing occasion that will drive the way our customers live, shop and budget. This slide also highlights the difference of each product and the types of purchases made. On the left-hand side of the graph, humm big things is used approximately once a year for larger, more specific transactions with our average transaction value in FY '21 of just under $4,000. While we work hard at increasing this transaction frequency, the velocity will never match little things currently used 5x per year, up from 3 on prior period with an average transaction value of $275. The increasing interactions keep humm top of mind when our customers finance larger ticket items. In addition, over 90% of little things transactions in Australia were made by existing customers, highlighting the stickiness of this product construct. Rounding out the smallest and most frequent of transactions, we have bundll, which enables customers to buy everywhere, every day and is being used 97x per year. As a mobile product, customer acquisition costs are low, and this is a great way to introduce customers to the broader hummgroup product suite. We also have humm90, our revolving credit product. In FY '21, our humm90 customers transacted 42x, up from 30 on the prior period. For hummpro, we look forward to providing an update on customer behavior as the product continues to build scale. Across all these products, our customers transacted 19x per year. This distinction of each product across the purchasing spectrum also gives us confidence that our customers will benefit greatly from using more than one hummgroup product. Currently, 18% of humm customers have made both a big and little transaction. In a quick 18 months, 1/4 of our bundll customers also have a humm account. While the overlap in Cards and humm is small at present, we believe that there is a big opportunity here given the humm90 rebrand in November, which now allows us to more actively promote our combined product suite. We are confident that we can continue to increase our cross-sell activity into the future. We're seeing a structural shift in paying fixed-term installments over revolving credit, which started in Australia and is now spreading across the world. And we're seeing technology, banks and loyalty programs wanting to enter this space to capitalize on this trend, looking to proven buy now pay later providers to drive customer engagement and retention. In FY '21, hummgroup was focused on finding new audiences through partnerships for our innovative products. We've entered into a number of strategic partnerships with major banks, like Westpac in New Zealand, loyalty programs, such as Velocity Frequent Flyer, retailers like Mitre 10 and Home Hardware and issuers like Mastercard to grow hummgroup's customer base and distribution reach. Excitingly, discussions are well progressed with a number of banks, loyalty programs and retailers, both locally and globally. We expect the partnership channel to be a significant contributor to customer numbers with a target of delivering 250,000 additional customers in FY '22. On Slide 10, we continue to drive customer engagement by adding merchants to the network, which shows the strength of the product and our differentiated customer proposition. In the last 12 months, the company added over 9,000 new retailers, taking our total to 82,000. Turning to Slide 11. This has translated into rapid growth for our buy now pay later products, a key driver of expanding our installment payment core as the brand continues to gain traction and consumers use our products more regularly. We have presented the volumes on this page on a half year basis to show the longer-term momentum in our BNPL segment across big things, little things and the combination of our new products, bundll and hummpro. In the portfolio, big things has been impacted by the various state lockdowns as a predominantly in-store transaction. However, we continue to generate momentum across our key verticals, especially health care, and believe there is still room for strong organic growth in the portfolio, as evidenced by the volume increase of 26.1% in the fourth quarter of last year. Little things has performed very strongly in recent periods, driven by the customer shift to online shopping and the ability to grow our merchant network. Finally, bundll and the recently launched hummpro. I want to point out here that the data is quarterly as bundll only launched in February 2020. However, we are really pleased with the products, the utility based on the positive online reviews and the frequency with which our consumers are using these products. On Slide 12 is humm90, which has been reinvigorated and rebranded in November 2020. One of the core features of this product is the ability to offer fixed-term installment payment plans through a feature we call the humm90WRAP for any transaction over $250 or up to 60 months interest-free at key retail partners. The businesses are both very profitable with interest-bearing balances sitting around the 60% mark for both of our card segments. We continue to look at ways to activate spend among our customer base through brand crush discounts exclusive to the app and targeted life cycle marketing. Turning over the page, Slide 13 summarizes the opportunity and our approach in Canada and the United Kingdom. We will be differentiated through offering bigger ticket longer-term installment plans, an area that has traditionally been served by white label credit cards. With a number of these players retreating from the market and buy now pay later offering a more flexible solution for both retailers and consumers, we are confident in gaining traction in these markets. In addition, like we have across all of our jurisdictions, we are focusing on target verticals through software partnerships and integration. We believe that this is a very cost-effective way to scale quickly. Slide 14 is an update on the progress and expected timings for major milestones in Canada and the U.K. The U.K. already launched in FY '21 with the Pay in 5 smaller ticket product. We expect the next iteration of up to GBP 3,000 to be in market by October, followed by big things of up to GBP 20,000 in January 2022, subject to regulatory approval. We have already generated significant momentum signing over 300 retailers, including The Hut Group, which has 200 brands across 800 retail locations. In Canada, we are on track for a combined little and big things launch this half. Finally, we wanted to provide an idea of the level of investment required for our international expansion plans. We forecast a cash NPAT impact of between $12 million to $14 million this financial year as we continue to invest in platforms, marketing, people and credit performance. We also expect volume of circa $150 million, which is subject to regulatory approvals in the United Kingdom. Skipping over Slide 15 and turning to Slide 16, I'd now like to give an update following our strategic review of our commercial business. The flexicommercial strategic review has been completed with the recommendation to invest and grow the flexicommercial broker channel. This takes into consideration the successful refocusing of the business to SME lending, favorable market conditions and strong business momentum. We are pleased with the portfolio performance, including the securitization pricing achieved in March, which has allowed us to drive much greater capital efficiency, a key recommendation from the strategic review. flexicommercial is focused on delivering commercial asset finance for the SME market, our top 3 assets being transport, construction and light commercial vehicles. We've served over 4,300 customers in FY '21 with an average deal size of $75,000. This makes us the second largest NBFI commercial asset finance lender in Australia. Our market-leading service is how we've stood out in the broker channel and has been underpinned by an investment in technology, which allows us to drive efficient decisions and differentiates us from traditional lenders. 45% of deals are decisioned on the same day, and 35% of approved deals are now automated, making us quicker, nimbler and easier to work with than most traditional lenders. On Slide 17, you'll see that this refocused business delivered operating income of $50.5 million, an increase of 51% on FY '20. The continued growth in operating income has come as we have successfully moved to broker originated SME lending. We also are delivering increased capital efficiency with capital deployed as a proportion of the portfolio declining materially following the ABS transaction of $450 million in March 2021. To give you an idea, the initial capital deployed in respect of the March 2021 ABS transaction was 6.5%. We're also continuing to explore the introduction of mezzanine debt into the warehouse facility, which will lead to a further improvement in capital efficiency. I'd now like to hand over to Adrian to walk us through our FY '21 group financials.

Thank you, Rebecca. I've been in the CFO role now for just over a month. And I joined humm as I'm passionate about the transformation of consumer and SME finance. I'm intracted to humm's culture of innovation, its credit and funding capabilities and its growth ambitions. I'm here today to outline the strong financial performance of hummgroup for the 2021 financial year, which has resulted in a cash NPAT of $68.4 million, up 121.1%. We reported gross income of $443.9 million for the year, down 73% (sic) [ 7.3% ] on the prior period. There are a number of component parts when evaluating our revenue. We have a number of high-growth products where revenue is growing consistent with our strategy. We also have legacy products in runoff, affecting our year-on-year revenue performance. There are also environmental factors driving revenues, such as competition in the buy now pay later sector, and COVID-19 continues to impact our Cards portfolio, particularly travel. I will go into all of these in more detail when we cover the segment performance. Net operating income of $342.9 million was down 5% on the prior comparative period. Net operating income has benefited from lower interest costs from a strong and active balance sheet management. I consider our funding to be a strategic differentiator for our business. Impairment losses were down 59.5%, and I would like to point out that this performance included lower actual losses of $20.1 million. This is a direct result of the hard work in improving processes and technology and credit decisioning across the whole portfolio in the last few years. In addition, we benefited from the release of $21.6 million of the $43.3 million COVID-19 overlay provision booked in FY '20. I will discuss this specifically later. Our tax expense of $28.9 million reflects a normalized effective tax rate, noting that FY '20 had a number of one-off adjustments. Combined, this led to a cash NPAT of $68.4 million. Finally, on dividends. The Board has determined not to pay a final dividend for FY '21. We are very confident in the strength of our balance sheet and consider this to be a strategic asset in this environment as we continue to invest. The combination of profitability and cash generation means that we are uniquely placed to balance growth and shareholder distributions in the future. And the Board will continue to review this position. Turning now to buy now pay later on the following slide. FY '21 was a year of investment of buy now pay later, resulting in a cash NPAT of $1.2 million, up from $2.7 million loss in the prior year. I would like to note that the buy now pay later numbers have been reinstated to include bundll and hummpro, which were previously reported in FY '20 in the Cards and Commercial and Leasing segments, respectively. We've provided a reconciliation in the pack that sets out these changes. We are pleased by the strong volume momentum generated in FY '21, which increased 31%. This has predominantly been driven by humm Ireland, bundll and humm little things in Australia. Gross income was up -- sorry, gross income of $120.6 million decreased slightly. humm Australia saw growth in little things and a growing combination from bundll. Gross income was also impacted by margin compression from competition across specific verticals in buy now pay later and reduced fees from older Certegy contracts. At the net operating income level, interest expense decreased. Origination costs also grew as we continue to build momentum in the humm network. From a credit performance perspective, impairment losses were significantly lower by 34.3%, with actual losses of $10.3 million lower. Operating expenses increased by $4.3 million, and this is in line with increased activity from new products being developed and launched as well as the international expansion. For clarity, we have broken out the investments made across new products and in international expansion as this relates to bundll and hummpro. International expansion accounted for $5.8 million cash NPAT drag for FY '21. And this relates to investment in people, marketing and systems. We are confident in the future growth of these innovative products, which has been validated by the blue-chip partnerships signed in recent months. New products take time to build sustainable revenues, and we will continue to make the necessary adjustments to drive growth and profits. Turning to the Cards segment, which were profitable in FY '21 despite adverse economic conditions. In Australia Cards, cash NPAT of $16.8 million was up 121%. Volume of $417 million was impacted by the ongoing effects of COVID-19 on merchant activity specifically in the travel industry. Gross income of $91.1 million was down, largely a result of the paydown of the discontinued Lombard and Once products, which are in runoff. This paydown also had a positive effect on profitability through the reduction in net loss. Importantly, our current product in market, humm90, continues to perform well with strong interest-bearing balances broadly steady over FY '21. Impairment losses of $1.9 million was down 94.4%, driven by a lower net loss of $9.1 million as well as a partial release of the COVID-19 provision as a result of significant reduction in customer hardship. Looking at New Zealand Cards, this segment continues to be a strong performer in our portfolio. Cash NPAT of $28.1 million was up 28.9% on FY '20. Volume was down 7.4% due to the impact of COVID-19 on travel merchant activity in the long-term interest free portfolio. Gross income of $135.4 million was down because of lower volume and lower receivables. Net operating income of $107.3 million was broadly flat as lower gross income was offset by a decrease in interest expense. Impairment losses of $19.4 million was down 42.6%, and this was largely from the partial write-back of the COVID-19 provision, which reflects the improving economic outlook. On Commercial and Leasing, I echo Beck's comments on our Commercial and Leasing business. It has continued to grow over FY '21. Our SME lending proposition has resonated with our broker network and I'm excited about the future of this business. Cash NPAT of $22.3 million was up 431%. Volume increased by 55.6%, driven by strong origination growth in the Australian commercial, providing commercial asset finance through the broker channel. While gross revenue was largely flat year-on-year, Australian commercial increased 47% for the year. However, it was offset by a discontinued and profitable Consumer Leasing portfolio in runoff. While volume continues to grow, we remain focused on our credit standards and using technology to improve decisioning. And this is reflected in the lower net loss of $3.1 million and arrears in this segment. Operating expenses were down 3.1%. And again, this represents the lower cost from the Consumer Leasing book in runoff while increased activity in the Australian commercial business added to costs in this segment. Now turning to operating expenses. I would like to provide some additional information around our operating expenses on a cash NPAT basis. This is a particularly important area of focus for me and for our business. Our operating expenses increased by 5.9%. And while payroll costs decreased, there has been an uptick in marketing costs and depreciation and amortization. We continue to maintain our disciplined approach to costs, with payroll expense down $3.9 million. This has been achieved by continuing to leverage technology to automate and better serve our customers. Our success in FY '21 also resulted in a normalized level of incentive payments when compared to FY '20. In addition, we benefited from an increase in government payments, which have now ceased. Operating expenses increased by $0.9 million and reflects the increase associated with overseas expansion activities, partially offset by the continued benefit we received from the rationalization of products. Marketing expense of $30 million was up $6.3 million against FY '20. A conscious push was made to build brand awareness and continue to develop the humm brand after our rebranding back in November '20. The increase in marketing has had a positive effect on attracting and activating customers, as evidenced by the strong volume growth in our buy now pay later sector in the second half of '21. Depreciation increased $7.1 million and reflects the investment in new product development, including bundll, hummpro as well as the recently launched humm//TAPP. Looking at the bottom right-hand corner, we have provided our cost-to-income ratio and also broken out the marketing and depreciation impacts. Importantly, the core business costs have maintained a lower trend in FY '21. And I note the ratio has also been impacted by lower net operating income. Turning to our credit performance, which was a highlight for FY '21. Our FY '21 net loss and impairment performance was driven by our investment in technology and focus on credit decisioning and collections over the last few years. Net loss, which represents gross write-offs less bad debt recoveries, was down 18.6% for the year. Buy now pay later decreased $10.3 million and reflects the investment we have made in our credit origination engine, including a bespoke buy now pay later serviceability model. AU Cards is down $9.1 million and benefited from the paydown in discontinued products as well as a broader humm-wide group improvements in fraud in partnership with GBG. New Zealand Cards was an anomaly, up $2.5 million. And this related to front book. Including a new open loop card scheme program, there's a higher loss rate than the legacy closed loop products. We note that this is off an extremely low base. Commercial and Leasing continues to perform strongly and reflects our credit approval processes combined with management implementing a new credit matrix for decisioning. Turning to the COVID-19 overlay provision, the other material movement that affected the impairment performance in FY '20. At the bottom right-hand corner of the page, we have provided the balance sheet movements between FY '20 and '21. The $43.3 million COVID-19 overlay provision charge raised in FY '20 was reduced during the year with $21.6 million remaining on balance sheet. We believe the remaining COVID-19 overlay provision is prudent, given the continued uncertainty surrounding COVID-19 and its impacts on the economy. In looking at the balance sheet provision movements in more detail, the BNPL segment COVID-19 provision increased slightly. This was because the humm provisions released during the year were offset by an increased provision for the bundll. This is reflective of delivering a new product into market, and we continue to adjust our settings over the year to drive growth and profitability. Although New Zealand Cards net loss increased, the improved economic outlook led to a $4.9 million COVID-19 provision reversal. AU Cards and Commercial and Leasing were broadly flat in line with the net loss performance. Turning to our credit risk management slide. I won't spend too much time on this slide, but as you can see, there are very positive multiyear trends in loss performance against average net receivables for most of our segments. The group performance was 3.5%, which is down 60 basis points, and we continue to look at ways to better manage our credit performance. Turning over the page, I believe our funding platform is a real strategic differentiator against our peers. Our track record across all of our facilities cannot be replicated overnight by our competitors. The team has been extremely busy with over $1 billion in asset-backed securities issued during the year, with a number of transactions achieving record lower pricing. Some of the key highlights include the 2 humm securitizations in October and June. The successful execution of the transactions also reinforce our leadership position in green ABS notes. Our flexicommercial securitizations in March '21 was upsized from $300 million to $450 million following strong investor demand. Finally, looking to the right-hand side of this graph, we enter FY '22 with almost $1 billion in headroom to fund our future growth ambitions. On the next slide is our corporate debt facilities. The company has substantially strengthened its balance sheet, and our corporate debt facilities remain undrawn as at 30 June '21. In June '21, we secured commitments for $110 million under a new 3-year syndicated revolving loan facility, which replaced the existing $197 million facility. The new syndicated loan also diversifies our core banking relationships with 2 new international banking partners joining the lender group. The smaller facility is in line with the company's current debt needs and will also have the positive effect of reducing undrawn fees. We finished the year with $107.6 million in unrestricted cash and combined with our syndicated loan facility gives us the balance sheet flexibility to pursue future growth initiatives. And on that note, I'd like to pass back to Rebecca to close the presentation.

Thank you, Adrian. In closing, we're excited about the future. hummgroup has numerous growth initiatives underway, including international expansion, new product growth and new partnerships. We will also be holding an Investor Day on the 27th of October, where we will provide a full strategic update alongside volume and other measures for FY '22. Thank you for your support. And I'd now like to open the call for questions.

[Operator Instructions] And the first question comes from Apoorv Sehgal with UBS.

Good to see the momentum across the business with those new partnerships and the new products. But just with the lockdowns, can you talk about the net impact of the start of FY '22? I know you said earlier that little things has had an offset from online. But I guess, is the impact of volumes still net negative for the group, given that you have exposure to big things, Cards, which has the hospitality exposure, and then SME lending as well?

Thanks for the question, AP. We have started the year with strong momentum and growth across all of the segments. And this is also, I think, a benefit of our diversified product strategy and the shift that we've made towards direct-to-customer acquisition, particularly over the last 12 months. And so this diversified strategy with humm little things, with bundll and hummpro and also the continued demand in our flexicommercial business has seen us start the year in positive growth territory.

Okay. That's pleasing to hear. Second question, just on the cost outlook into FY '22. You said in the presentation pack, expecting a moderate increase in the CTI ratio. Is that an increase on the 55% for FY '21 or the approximately 59% in the second half of '21? And on that -- if I can ask more specifically as well within the buy now pay later business. There's a slide where you called out about a $22 million investment in FY '21. Should we expect a substantially higher level of dollar investment in '22 just given the international expansion now in buy now pay later?

We haven't given any specific cost guidance for next year other than to point out the investment that we'll be making into the U.K. and Canada. And we continue to be focused on cost right across the business. Obviously, we'll be continuing to invest into our new products.

Okay. Sure. Just 1 final question before I'll close off. This is on the gross income margins. There's a further sort of compression there in the second half, particularly in buy now pay later. Can you just talk about the competitive environment in BNPL and whether those margins are now the new base or if there could potentially be further potential downside in '22?

There is -- given the competitors' competitiveness of the sector, AP, which you've pointed out, there is pressure on merchant services fees. What we've been able to benefit from, particularly in our bigger ticket items, has been the underlying, I guess, restructure of our credit approach in this segment. So we have substantially reduced the net loss to ANR, particularly in humm big things, And this will be a permanent resetting for us as a business. We've also -- because of the tenure that we have had in this business and the successful securitizations, we had one of our best competitive advantages, which is the lowest kind of cost of funds, we believe, out of our competitive set, particularly in that larger ticket. And so what that means is that we have been able to combat some of that top line merchant services pressure with strong performance in credit risk management and cost of funds. And so we have been able to hold that net transaction margin across particularly that area of the portfolio fairly steady, and it is a key focus for us moving forward.

Your next question comes from Brendan Carrig with Macquarie.

I just had a follow-up just on the cash NPAT forecast in the international division. So is it fair to think about that as that sort of quarantine to international and then similar to what we've been seeing in the investment within the division that they will just offset the profit contribution from the domestic and Ireland buy now pay later business?

Yes. So I think what we have from a product development perspective, which is where a core amount of the investment occurred last year, we feel that we've got that product investment relatively right with the introduction of bundll and hummpro. And so now the investment is in scaling those products. And so we are expecting the overall investment and cash NPAT impact to be slightly lower than the investment that we've made in last financial year. And so it's safe to take that guidance range of that $12 million to $14 million as the investment from a growth perspective.

Okay. That's clear. And then just on the Aussie Cards business, apologies if it was touched on specifically, but the $163 million of travel volumes, is it fair to assume that that's very close to zero in FY '21 and why you haven't separately called out the volumes for travel in the chart on Slide 21?

That would be fair. That would be fair. While we did see some positive shoots from a domestic travel perspective, obviously, that's -- with what's happening in the country, around the country right now, that's reversed.

Okay. And then the last question just on leasing, obviously, stronger performance in the business. So just to clarify the strategic reviews. In essence, it's done and that business is now happily -- you're happy owners of that division and that business now going forward?