Humm Group Limited (HUM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Humm Group Limited Half Year 2022 Results. [Operator Instructions] I would now like to hand the conference over to Rebecca James, CEO. Please go ahead.

Good morning. Thank you for joining us for our half year '22 results presentation. My name is Rebecca James, Chief Executive Officer of hummgroup, and I'm joined today by our Chief Financial Officer, Adrian Fisk. What hummgroup is known for and what we have a history of is finance for bigger ticket items. There is no one else in the local market and, indeed, globally that can offer virtually instant credit provisioning up to $30,000 for installment payment products. With a strong history in consumer and SME finance, strong credit funding and securitization disciplines and a decision platform that serves us across our suite of products, we are able to run a profitable business and self-fund our growth. The purpose is to help our customers and their families to afford and live their best lives with confidence, with the mission to provide installment plans that enable customers to buy now, pay later and budget responsibly for the things that customers need and love. And our vision is to be the favored way to pay for bigger purchases. It's as simple as that. It's a vision that speaks to both our future and our heritage, spans our entire suite of products and capitalizes on our strengths in funding and securitization. Turning to Slide 3. We'd like to speak to the proposed transaction with Latitude. On Friday, the Board of hummgroup announced that we'd entered into a binding definitive agreement to sell hummgroup consumer finance, comprising our buy now, pay later and Cards businesses to Latitude Group for aggregate consideration of $335 million. The consideration for humm consumer finance comprises 150 million Latitude shares and $35 million cash. The aggregate value of $335 million represents a multiple of 13.4x humm consumer finance run rate cash NPAT and 1.8x humm consumer finance net tangible assets. hummgroup intends to distribute and transfer the entire HCF consideration of 150 million Latitude shares and $35 million cash to shareholders. That means humm shareholders will receive approximately $0.68 per share, consisting of 0.3 Latitude shares and $0.07 in cash. In addition, humm shareholders will retain full ownership of the flexicommercial business, which will continue as a well-capitalized ASX-listed company. The Board of hummgroup recommends shareholders vote in favor of the Latitude transaction in the absence of a superior proposal and subject to an independent expert concluding that the Latitude transaction is in the best interest of shareholders. By receiving Latitude shares as consideration, humm shareholders could further benefit from any potential enhanced scale and efficiencies of Latitude's enlarged consumer finance platform. Shareholders do not need to take any action at this stage. In the months ahead, shareholders will be asked to vote on the HCF transaction via ordinary resolutions and the proposed scheme of arrangement to distribute Latitude shares. A comprehensive package of information will be provided to shareholders in advance of the general meeting and scheme meeting. Slide 4 outlines the agenda for our discussion today. I'd now like to turn to Page 6 with the key highlights versus pcp. The company delivered first half '21 cash NPAT of $27.8 million, down 37.1% on pcp. As we outlined at our Investor Day, the decline in cash NPAT has been partly driven by planned investment relating to new products and international expansion. This is coupled with lower income during the period as a result of discontinued products that are in rundown and lower interest-bearing receivables in cards. The first half '22 statutory net loss after tax of $168.3 million includes a noncash impairment of intangible assets of $181.2 million. humm has a strong balance sheet with a net cash position of $132 million, up 149% on pcp. Buy now, pay later volumes of $651.1 million were up 37.3% on pcp, reflecting the strong performance in humm AU, particularly in Little things. humm Ireland and New Zealand and the increasing contribution from bundll. The Board have also decided to recommence dividends with an interim dividend of $0.017 determined. Our superior credit decision engine has delivered net loss to ANR of 2.8% in the first half '22, a 40 basis point improvement on pcp, a direct result of continued investment in this area. Finally, our Commercial business continues to go from strength to strength, growing 101% on pcp and delivering $433 million in volume in the half. Slide 17 (sic) [ 7 ] covers the impact of COVID-19. In our buy now, pay later business, growth in big ticket items has been impacted since the start of COVID, and these items are typically brought in person at a physical location. Growth in buy now, pay later has been driven by a deliberate pivot to online with increased marketing spend focused on driving small ticket growth in periods where in-store spend remain subdued. As you can see, we've experienced continued strong momentum in our Australian Commercial business throughout the COVID impacted period following the successful shift in strategic focus towards small to medium enterprise lending in calendar year 2020. Our Cards business remains restrained when compared to the non-COVID impacted period with volumes still remaining well below pre-pandemic levels. In our Australian business, this has been largely due to restrictions impacting key partners, particularly in travel, while in New Zealand, and the strict lockdowns have reduced everyday spend. Strong household savings during the pandemic have also resulted in a pay down of interest-bearing balances, which has had a flow-on effect through to our bottom line with spot receivables down on pcp in both portfolios. I'd now like to provide an update on our strategy for growth in our consumer finance business, Slide 9. humm consumer finance has 4 areas of focus that will help deliver 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 and addressable market, both locally and abroad. We'll find new audiences through: partnerships around innovative products; drive customer engagement and transaction frequency; building our products that are loved and used every day; expand the reach of our installment payment core by attracting new merchants and platforms in our current markets; 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 buy now, pay later players. In first half '22, we've expanded our number of blue-chip partners with the inclusion of Air New Zealand. This 10-year multiproduct financial services partnership commences with the launch of the most rewarding scheme card in the New Zealand market in Q4 of this year. We've driven customer engagement and transaction frequency. hummgroup provides payment solutions across the entire shopping journey covering purchases from $1 through to $30,000. And this gives us confidence that our customers will benefit greatly from using more than one product. At 31st of December, 25% of humm customers have made both the Big things and Little things transaction, up from 18% in June. And 35% of our bundll customers also have a humm account from 25% -- up from 25% in June last year. While the overlapping cards in humm is small at present, there exists an opportunity to grow this number given the humm90 rebrand in November, which allows hummgroup to actively promote its combined product suite. We've continued to add new merchants and platforms in our home market. We've signed on Eagers Automotive, one of the largest new car sales merchants across Australia and New Zealand. This makes humm now the leader in the automotive vertical with over 450 new car dealerships and 4,500 dealer and servicing storefronts across Australia and New Zealand. We've also launched humm marketplace, significantly increasing the number of merchants and products available online via our humm//CARD offering. Finally, with the launch in Canada and approval for big ticket items in the U.K., humm consumer finance is now focused on rapidly scaling in those markets, targeting merchants in the home and home improvement, health, automotive and luxury retail verticals, and I'll talk more about this shortly. Turning to Slide 10. This has translated into rapid growth for our buy now, pay later products 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 this 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 in health care and automotive and believe there's still plenty of room for our organic growth in this portfolio. Little things has performed very strongly in recent periods driven by the consumer shift to online shopping and the ability to grow our merchant network and online presence. Finally, bundll and the recently launched hummpro. I wanted to point out that the data here is quarterly as bundll only launched in February 2020. However, we're pleased with the products, the utility based on the positive customer experience reviews and the frequency with which our consumers are using these products. During the period, we launched humm marketplace, which when combined with humm//CARD functionality allows humm to offer a broader range of merchants and products in its online marketplace without incurring the cost and time of onboarding new merchants. The shift to curated merchants will drive incremental revenue and ROE along with volume and transaction frequency. humm continues to operate a blend of curated merchants, providing affiliate marketing fees and closed-loop operations, providing merchant services fees via its online marketplace, effectively diversifying its revenue stream. Turning to Slide 12. I'd like to give an update on our progress expanding internationally. The green circles indicate the major milestones we've passed this half. In February 2022, hummgroup was granted its U.K. credit license, a major milestone in the geography and amongst the competition, allowing us to start financing larger ticket items. With a market opportunity of $778 billion and as the only player servicing both the U.K. and Ireland, there's clearly a differentiated offering for merchants and customers that will challenge traditional point-of-sale finance in the U.K. In December 2021, we launched our buy now, pay later offering in Canada with the ability to service both big and small ticket items now operational. Canada provides humm with an additional $613 billion market opportunity and gives the strong existing relationships and the region's complementary regulatory framework it makes for an attractive market for us to operate in. With this launch in Canada and approval for big ticket items in the U.K., hummgroup is now focused on rapidly scaling in those markets, targeting merchants in the home and home improvement, health, automotive and luxury retail verticals. We've previously articulated our strategy to expand through becoming embedded in practice management software. In the U.K., across the half, humm has now been integrated with 13 software management systems, providing an access to over 7,000 automotive health and education merchants. Finally, I'd like to call out the forecast volume in FY '22 for international. Due to the delay in receiving our credit license in the U.K. and the impact of Omicron on in-store shopping, we're now forecasting that these new geographies will add circa $40 million in volumes in FY '22. On Slide 13, we look at where we are strategically heading with flexicommercial. We're ANZ's leading provider of specialist asset finance and the second largest nonbank finance lender and asset finance in Australia and New Zealand. Products are now exclusively distributed through the broker channel with 73% of SME asset finance sold through brokers. flexicommercial primarily offers equipment finance to growing SMEs to fund the purchase of revenue-generating assets, our top 3 assets being transport, construction and light commercial vehicles. What really differentiates us from our peers is the speed at which we reach decisions and fund applications and our specialist offering for capital-intensive businesses. There's a large underserved addressable market of $49 billion across Australia and New Zealand with a broader $430 billion SME lending market. The result is that flexicommercial is a profitable growing business with strategy to build a scaled financial services business through organic and inorganic growth. Given the strong performance of the business, the Board has decided to retain New Zealand commercial to ensure stand-alone entity continues to have size and scale. Turning to Slide 14. You can see from the chart at the top of the page the strong momentum we're experiencing in our Commercial business. We've reached a milestone achieving over $1 billion in receivables. We're continuing to invest, ensuring that the business continues to deliver a differentiated service proposition of speed to yes and settlement within 24 to 48 hours. Following the decision to retain our New Zealand Commercial business, we're now focused on replicating that broker-led strategy in New Zealand. I'd also like to touch on the improved capital efficiency of the business. Capital deployed as a proportion of the portfolio continues to decline, now at 9%, with material improvements in capital efficiency within the business over 2021. Mezzanine funding of up to $82.5 million has also been introduced for the Australian commercial warehouse facility that took place in December 2021 and will further reduce our capital requirements. I'd now like to hand over to Adrian to walk us through our group financials for the half.

And thank you, Beck, and good morning. I'm here today to discuss the financial performance of the hummgroup for the half year to December 21, which has delivered a cash NPAT of $27.8 million, down from $44.2 million in the comparative period. Our cash NPAT result reflects continued investment in the future growth of our consumer business, combined with the impacts of COVID on volumes, receivables and income. As a result of our announcement to sell the consumer business to Latitude, we have recognized a number of one-off items in statutory profit, and these items are outlined on this page. The statutory accounting loss of $168.3 million is a result of $181.2 million noncash intangible impairment, reflecting a Latitude offer of $335 million less the consumer net assets of $517 million. This impairment has reduced goodwill by $135 million and capitalized software by $46 million. Further, we have recorded $3.5 million of related transaction costs in the half. A legal provision of $8.4 million after tax has been booked in relation to our foreign finance exposure in the Commercial business. This is consistent with our contingent liability disclosure at the full year last year and relates to a business that we closed in 2018. Finally, on dividends. As foreshadowed in our Strategy Day last year, the directors have determined that humm will return to paying dividends and set out an interim dividend of $0.017, which equates to $8.4 million. On Slide 17, volumes increased by 33.5% relative to pcp with strong volume growth in commercial and leasing up 101%, and BNPL products up 38%. This was despite lower volume growth in Big things and cards AU and card NZ. We reported gross income, which is a combination of interest income, fee and other income of $220.7 million for the half, down 1.4% on the prior period, with volume growth driving revenue in BNPL and commercial, offset by lower income in both the Australian and New Zealand Cards portfolio. The lower income in cards was a function of slower activity and paydown in receivables. Net operating income of $169.4 million was down 4.1% on pcp. Net operating income has benefited from lower funding costs on higher volumes from a strong and active balance sheet management by our treasury team, offset by a $3.4 million increase in the cost of origination due to volume increases. Marketing expense was also higher due to local and offshore expansion. There is also a weighting of our marketing focus to the first half of this year. Credit impairment expense was down 5.6% to $23.6 million due to the improved credit performance in the half. We recorded a higher bad debt expense associated with higher receivables and volumes combined with better bad debt recoveries from a number of successful debt sales during the period. There has also been a $10.9 million before tax and a $7.6 million after-tax release of macro provisions as we witness credit conditions easing. Offshore expenses were higher in this half largely due to the investment -- operating expenses were higher in this half largely due to investment in offshore, higher depreciation from investments in prior periods and the impact of JobKeeper benefits in the first half '21. And I'll specifically cover this in the coming slide. Our tax expense was $9.9 million with an effective rate of 26%, lower mainly due to the recognition of offshore losses. On Slide 18, we've included this -- the following slide to help you understand both the Commercial and Consumer businesses as a result of the transaction. Ultimately, there will be slight differences resulting from minor perimeter changes, one-off costs and additional costs required to set up a stand-alone Commercial business, and we'll be communicating these amounts as part of the next phase of this process. On Slide 19, we cover the cost to income. We continue to work on our cost transformation as we reduce our legacy cost base while concurrently building a new technology platform. In the period, operating expenses were up $18.1 million on pcp or $91.4 million. This was largely a function of our offshore expansion in the U.K. and Canada, which has cost $6.1 million, which is tracking well against our previously indicated cash NPAT target of $12 million to $14 million loss for the year. The group has benefited from JobKeeper subsidies of $6.1 million in '21 that were not available in '22. We've also seen higher depreciation in FY '21 of $4.5 million, reflecting the increased investment from FY '21. This has been related to new product development and infrastructure. The combination of falling income and rising OpEx has lifted CTI to 64%, which is significantly above our medium-term targets of 40%. This is partially a timing issue resulting from our transition from legacy products and technology to new products and technology, and we are continuing to implement a number of very specific items to lower cost and about to meet our targets. Slide 20, the BNPL. We continue to leverage the profitability of our local Big things product to invest in our buy now, pay later offering locally and globally. We've had a strong half-on-half volume growth at 38%, which has been largely in Little things and bundll, reflecting the shift to online spending during the pandemic. Big things volume has been flat over the period, resulting from lower in-store spending on larger items, and we look forward to this improving. Overall, half year '22 has continued to be a year of investment for buy now, pay later, resulting in a cash NPAT loss in the segment of $9.7 million. And the detail will follow on the following slide. On Slide 21, as we committed in the Investor Day, we have provided more information on the value drivers and results for each of our products in this presentation. Our Big things and Little things products are integrated from a customer and platform perspective and a result yield and cost of this funding is blended in the system. We have observed yield compression on both Big things and Little things in key verticals such as solar and jewelry as competition has increased. And we have a number of initiatives in place to manage MSF and optimize our fee structures. Cost of funds are lower across BNPL, reflecting improved outcomes in recent funding transactions. In Little things, volume growth has been strong and is on track. We have seen growth in BPAY, gift cards and humm//TAPP. In Little things, net losses are broadly stable, which is pleasing given the operating environment. As mentioned, Big things is largely an in-store purchase and [ consequently ] is more heavily affected by the COVID-19 lockdowns. As a result, volume has been largely stable throughout this period. BT losses were broadly stable over the last 3 halves with a slight uptick in losses in the first half '22 and higher recoveries in the second half '21. On the next page on bundll and hummpro. bundll, our open-loop BNPL product has performed relatively well from a volume perspective in the last 18 months. Volume has been partially constrained to improve credit quality and lower losses through more active management of origination. bundll income yield has reduced as we continue to tweak our fee settings on this product. Initial losses that we saw in the launch of bundll have declined substantially in the second half of this product, and we anticipate that will begin to normalize. In the second quarter of this half, we saw net losses drop to below 3%. And this is a function of initiatives such as bank statements online and process improvements. hummpro growth has been lower than we had hoped largely due to delayed adoption given activity levels in the SME market generally and key merchants being distracted by lockdowns. In relation to cards on Slide 23, humm90 volume growth has been restricted by the slowdown in travel activity associated with COVID-19. We are hoping that this will begin to return to normal in the second half. Prior to COVID-19, volumes for AU cards were running at circa 315 million a half. The proportion of interest-bearing balances has declined due to the runoff of legacy products in the Once and Lombard portfolios. Product yield is consistent with interest-bearing balance reduction with interest rates being relatively stable. Cost of funds has increased in the half as we executed mezzanine finance in our warehouse, which has improved the capital position, but results in interest -- increased interest expense. Net loss performance is pleasing in this environment as customers pay down outstanding debt. The New Zealand Cards portfolio continues to perform strongly and demonstrate resilience despite significant covered lockdowns with volumes down from over $400 million pre-COVID. Similarly, interest-bearing balances have drifted down over the last 18 months. However, product yield is stable despite the decline in interest-bearing balances. Cost of funds are down on pcp and broadly stable, reflecting improved ABS issuance pricing. We continue to be excited about our Commercial business, which is demonstrating strong growth through our speed to decision and speed to cash propositions with brokers. Last week, we surpassed our FY '21 volume, and we are optimistic that we continue our growth story. Strategically, we are seeing strong demand from our SME customers and reduced appetite in the sector from big banks. Credit impairment charges were $5.8 million, up from $0.9 million in the first half. Bad debts were lower despite growth in the book due to improved credit performance. It is worth recognizing that as we grow, we are acquired under accounting standards to book expected loss provisions on period and receivables, while interest is recognized on average receivables balance. As you can see from the graph on the bottom right that Beck spoke to, we continue to achieve improved capital efficiency in this portfolio with the introduction of mezzanine debt into the warehouse structure. We received solid support for the flexicommercial brand across public capital markets with $840 million of asset-backed securities issued in support of the portfolio across 2 successful ABS transactions executed in March and in October 21. At a more detailed level, you can see on the left-hand slide of our Australian business that we're seeing strong growth on each half, and we continue to deliver record months. Yield is lower as we write loans usually written by the big banks, and this comes with higher credit quality and slightly lower yield. Yield is also impacted by the runoff of the legacy POS leasing book. Cost of funds has fallen as we execute funding transactions at favorable rates over the past 12 months. NZ commercial performance remains stable and the decision has been made to retain this business. We will continue to deliver to New Zealand customers the same capability that we have successfully built in Australia. On Slide 26, we are pleased with our credit performance despite the implications of the macro environment and ongoing COVID disruptions. Our credit team have worked hard to deliver improvements in our credit risk management practices and disciplines. BNPL small ticket loss to volume has increased from 3.6% in pcp to 4%, largely due to mix with increased volume in bundll at comparatively higher loss rates and an increase in humm NZ from lower levels in the first half '21. As mentioned, though, bundll losses continue to reduce in the final quarter as we've had improved credit decisioning processes and the product matures. We're also finding that partnerships have materially improved our losses. Cards AU and Cards NZ loss rates have declined as repayment rates have increased. Commercial leasing losses are lower than the prior comparative period, which is a product of the exceptional gross growth over the last 12 months and the natural lag of losses, but also as a result of improved credit quality of the portfolios we actively manage our exposures. Finally, on Slide 27. humm has a well-established funding platform, which is a strategic differentiator against our peers. This slide sets out our wholesale funding and corporate debt facilities. You can see that we have significant capacity available to fund our growth. The company has substantially strengthened our balance sheet in recent periods. And as at 31 December '21, we have $132 million in unrestricted cash. You'll remember that back in June '21, we secured commitments for $110 million under a new 3-year syndicated revolving loan facility. This facility remains undrawn as at 31 December '21. Our treasury team continue to improve the capital efficiency of our programs and funding growth. And on that note, I'd like to pass back to Beck to close the presentation.

Thank you, Adrian. Now to outlook. While the macro environment remains uncertain with the impacts of COVID-19 and, most recently, the Omicron variant weighing on consumer sentiment and activity in the second half '22, hummgroup expects: a rebound in consumer spending on Big things by fourth quarter '22 as consumers return to in-store experiences; continued profitable growth in commercial following the business repositioning; stable loss rates with an improvement in small ticket buy now, pay later; an uplift in AU cards volumes as international travel resumes; continued investment in international expansion; and volume in U.K. and Canada beginning to flow through as our rollout scales up. Thank you again for your support, and I'd now like to take questions.

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

Just a few questions on the Commercial business actually. So firstly, just with the volume pickup you guys have seen since pretty much the second quarter of '21, can you talk through some of the key drivers there? You've basically doubled your volumes there. Is there anything cyclical about those drivers? And what gives confidence that the business grows from here now that it's off of a much larger base?

Yes, thank you. We do have some cyclicality as we entered into December and June. So we do get higher rates of volume both in those periods, largely because we stay open a lot longer than the major banks. And we anticipate that we will continue to get volume growth. As I mentioned, we surpassed last year's number last week so we're continuing to get good volume growth.

And maybe one on the commercial product yields as well. Like do you expect the big banks to kind of enter the space in a bigger way going forward just given some of the returns and offer? And then therefore, do you think those product yields will sort of continue to maybe compress a bit going forward?

We are seeing at least one of the banks has pulled out of this market, and we are continuing to see less focus from the majors on this area. So we continue to see a significant opportunity for us. I think we can expect that yields will be under some pressure, but I don't think they're significant.

Okay. And then also, just on the POS leasing book, what sort of profit or income contribution is that making just given that, that part of the book is getting phased out?

It's very small amount. It was -- in terms of it was sub 1 for the forecast for this year. It's about $3.5 million in receivables, and it's reducing at about $1 million a month. So we expected that to be run off by the end of this year.

Okay. That's great. And maybe just one sort of broader question. At your Investor Day at the back end of last year, you gave some medium-term targets across the Consumer and the Commercial business. Are they sort of still the same? And maybe if I can extend that question in terms of the cost-to-income ratio, do you think that sort of still falls down over the medium term to hit those targets?

Yes. Thanks, Apoorv. We've got a very clear differentiated, fully funded strategy, and we're happy to continue to pursue that strategy. So no changes there.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Ms. James for closing remarks.

Thank you for your support and for dialing into the call this morning, and we very much look forward to catching up with many of you in the coming days. Thank you.