Humm Group Limited (HUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to hummgroup FY '23 Results Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Stuart Grimshaw, CEO of hummgroup. Please go ahead.

Good morning, and thank you for joining us today to discuss hummgroup's financial results for the full year ended 30th of June 2023. My name is Stuart Grimshaw, Chief Executive Officer of hummgroup, a position I've held since the start of June of this year. With me, I have Adrian Fisk, our Chief Financial Officer; and Dave Grevler, our Head of Investor Relations. On Slide 2, you'll see the agenda for the day. I will turn to Slide 3 at this point of time. The company delivered $75 million in normalized cash profit after tax for the 2023 financial year. This allowed us to provide a fully franked final dividend of $0.01 per share, bringing the FY '23 full year fully franked dividend to $0.02 per share. We have also announced that we'll be conducting an on-market share buyback of up to $10 million across FY '24, subject to market conditions. We've continued to invest and enhance our superior credit decision engine, which has delivered net loss to average net receivables of 1.8% in FY '23, an historical low for the group and a 60 basis point improvement on prior corresponding period. In the current environment, we're acutely aware of the need to manage our costs, and we've already removed more than $18.6 million, including a reduction in marketing, payroll and other operating costs. Our balance sheet position is strong and remains one of our key differentiators in the market with $112 million of unrestricted cash, $1 billion in warehouse headroom and a well-diversified funding platform. During the period, we've grown our receivables book by over 27% to $4.2 billion, with the overwhelming majority of it in what we call financing large transactions for small to medium businesses and consumers. Less than 1% of our business is a lower transactional value point-of-sale payment plans. Turning to Slide 4 now. hummgroup's vision is to be the favorite provider of finance for bigger purchases. It's a vision that speaks to both our future and our heritage, spans our entire suite of products and capitalizes on its strength in funding and securitization. We often get asked how our 2 businesses fit together. And on Slide 4, you can see the characteristics for each of our businesses. While the end customer distribution and purchase average transaction value differ, the core expertise of the business is in its credit decisioning and managing along of funding and securitization that will leverage to service both businesses. Is that capability, which enables us to deliver an exceptional customer experience in the areas of speed to yes, our priority for our merchant and broker partners and speed to sale and settlement. Turning now to Slide 5. This year, we introduced our new measure of normalized cash profit after tax given the impacts of credit provisions, depreciation and costs associated with suspended products. We believe this removes volatility and is a more accurate reflection of the cash profitability of the business. Of note, it excludes $33.2 million in operating losses of suspended products, which are hummpro, bundll, humm New Zealand and humm UK, including exit costs for these products ceasing to have a material impact on the business. There's also a $16.5 million AASB 9 provision swing, which is a result of large provision of leases in FY '22. Our commercial business delivered $42.3 million in normalized profit with our Cards businesses adding another $26 million. Our focus on larger transactions and point-of-sale payments plan products delivered [ $14 million ] in normalized cash profit, which was offset by smaller transactions, which have been deprioritized as a companion product and also [ investment in our ] international business. Overall, this delivered $75 million of normalized cash profit for the group. I'd now like to discuss the strong performance of our commercial business for the year. And on Slide 7, we'll see the flexicommercial slide. flexicommercial is the leading provider of specialist asset finance in the market with over $2.4 billion in receivables. Our average ticket size is $100,000 with an average loan life of 4.8 years, providing a diverse portfolio that can withstand fluctuations in individual sectors. Our business primarily offers equipment finance to growing small- and medium-sized enterprises, which help them to fund the purchase of revenue-generating assets. Our top 3 assets being transport, construction and light commercial vehicles. The landscape of small and medium enterprise lending is rapidly changing. For the first time, non-bank lenders have overtaken banks in providing SME loans. Our focus is on delivering exceptional service to brokers through our sole channel. As a result, as a specialist SME lender, we specialized in asset finance for capital-intensive businesses, and we see opportunities to broaden our industry and product offerings. With a total addressable market of $45 billion at Australia and $8 billion in New Zealand and an increasing preference to access finance by our brokers, we are well placed to continue our strong growth trajectory. Our market-leading service stands us apart from 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. 80% of deals are decisioned on the same day, up from 45% a year ago and 39% of approved deals are automated, making us quicker, nimbler and easy to work with than more traditional lenders. Turning to Slide 8. The commercial business has continued to see excellent momentum. As you can see on slide -- on the slide, quarterly volumes have grown rapidly since first quarter '21 with FY '23 volume of $1.56 billion, up 43% on the right corresponding period. This has contributed to a 57% growth in receivables to $2.4 billion. Despite this growth, our credit performance has remained consistently strong, thanks to our sound underwriting principles, better collections capabilities and improved systems. The benefits of this investment can be seen in the net loss to ANR being maintained at 0.5%. Our strong volume growth this year is important because growth in new volumes is 2x greater than the run-off in receivables with the average tenor of new growth written in FY '23 at 4.8 years. Receivables growth had delayed effect on revenue and the profit in FY '23 net interest income was based on average net receivables balance of $1.9 billion. You will note that the exit receivable balance as of 30 June '23 was $2.4 billion. Turning to Slide 9 on credit quality. Our commercial business benefits from broad-based sector exposure with industry priorities and logistics, civil engineering and agriculture. We prioritize assets that have strong retained value and strong demand on the resale market, ensuring low concentration risks. Our largest broker by origination in financial year '23 represents less than 9% with the top 10 brokers representing approximately 33% of loans originated. We also have a relatively even distribution between New South Wales, Queensland and Victoria. Finally, you'll see on the bottom left of the slide, the improving credit quality of our customers as we target bank grade credits. Turning now to consumer finance, Slide 10. I'd now like to talk about the performance of our consumer finance business this year. In financial year '23, the company made significant progress in executing its strategy to streamline operations and reduce costs while improving profitability and growth in key areas. As we committed at our financial year '22 results, non-core small ticket products, humm New Zealand and hummpro Australia and New Zealand have closed. All receivables have run-off enabling those systems to be switched off and costs removed by 30th of June 2023. We have also substantially delivered on our cost-out initiatives and removed $18.6 million of costs half-on-half and are on track to deliver $20 million to $25 million of annualized cost savings going forward. Consumer repricing initiatives commenced in FY '23 with a series of increases to merchant service fees, annual and monthly account keeping fees and interest rates. Front book yield now hits hard than the back book. In the year ahead, we'll have a laser focus on unit economics and profitable growth. This includes removing unprofitable merchants driving yield improvements across our key verticals. Finally, the business has been focused on returning to profitable growth and core larger transactional value volumes and card receivables. humm Big things is back to growth, increasing 20% on prior corresponding period, and we've seen a return to growth in Australian Cards from increased travel spend. Turning now to Cards New Zealand. Normalized cash profit of $20.6 million was down 30% on the prior corresponding period, predominantly due to higher funding costs, lower revolve rates and lower long-term interest free spend over the past few years, which has not yet translated into interest-bearing balances. New Zealand Cards volumes of $748 million was up 8% on the prior corresponding period with closing customer loan balances up 4%, with gross increasing in the final quarter of the year, following lower receivables throughout the year. You'll see on the graph on the right side of the slide that our revolve rate is trending ahead of the RBNZ market, indicating the strength of our products in the region. Net losses for financial year '23 were flat on the prior corresponding period, demonstrating overall strong quality receivables book. Benefits of back book repricing initiatives executed in financial year '23 will continue to flow through into financial year '24 and beyond. And we continue to see customer spend improve. Turning now to Australian Cards on Slide 13. Normalized cash profit in our Cards Australian business of $5.4 million was up 17% on the prior corresponding period. The result of increased gross income and lower marketing operating expenses being partially offset by higher funding costs during the year. Australian Cards volumes were $514.9 million, up 8% on the prior corresponding period, a result of increased card spend, particularly in the travel sector, which has seen spend increase as the sector returns to more normal levels. You'll see this reflected in the graphs on the right side with spend returning to near pre-pandemic levels as growth in travel numbers returns. Looking to the year ahead for Australian Cards, the strong and strong volume growth, long-term industry travel in '23 will translate into income in future periods, typically 12 months from origination. We'll also see the benefits of merchant repricing that took place in the first quarter of '23 and passed on to consumers in the third quarter of '23 starting to come through. On Slide 14, the point-of-sale purchase plan segment volumes of $1.15 billion reflects the focus on larger transactions supported by companion lower transaction value e-commerce purchases. The pie chart on the right demonstrates the receivables growth in higher value, lower loss solar, health and home improvement segments. Normalized cash profit of $6.7 million was 11% lower as a result of competitive market pricing pressures impacting gross income, higher funding costs, which were progressively passed on to merchants throughout the year and higher costs associated with investment in Canadian and Irish businesses. We believe there are significant near-term opportunities to properly grow merchant and customer numbers with reduced competition of hearing in the Australian market. We will continue to refocus away from Little things with growth in large transaction value purchases and concentrate on ongoing margin management through merchant service fees and other fees. Finally, on Slide 15. I'd like to mention an internal reorganization of our customer finance business that we've completed in recent weeks. I'm a strong believer that product strategy should be strongly aligned to customer and geography given the different nuances that exist in each of the regions. That is why we have now aligned our employees and brands internally by region rather than by product, allowing us to focus on meeting the needs of our partners and customers in these geographies. You can see on Slide 15, the 3 regions are now report into me, each with their own CEO and the products that operate in each region, their market dynamics and financial profile. I'd now like to pass over to Adrian, who will walk us through the financials.

Thanks, Stuart, and good morning. I'm on Slide 17. I'm here today to discuss the financial performance of hummgroup for the full year, the 30 June 23. At the half year, we communicated our revised metric normalized cash profit to better reflect the underlying performance of the business. It removes material infrequent items that previously been captured as part of our cash NPAT measure, excludes non-cash items such as AASB 9 provisions, which are required by accounting standards, with actual losses and recoveries still included in this measure. It excludes depreciation, as this moved significantly when we impaired assets last year. And further, we have excluded cash NPAT losses in our suspended products, which was stopped during the period. The Board and management consider that this is the best measure of our ongoing earnings and long-term performance as we navigate this transition phase. As committed for consistency and transparency, we'll be including the normalized cash profit, cash NPAT and the component parts for the full year results. Moving to our results for FY '23, we have reported a normalized cash profit after tax of $75 million for the period ended 30 June '23, which compares to $76.9 million in the prior comparative period. Gross income was up 16% to $510.4 million from receivables growth across commercial and consumer. Our receivables at a record of $4.2 billion. Net operating income was down over the prior period by $19.9 million, reflecting a squeeze in margin attached to unprecedented cost of funds over the last 12 months. Credit impairment expense comprises net loss and provision movements. There has been a $3.1 million increase in net losses, which is a significant achievement given the growth in receivables with a net loss to ANR reducing 60 basis points to 1.8%. The significant change you can see in this line reflects a $27.8 million non-cash provision movement, resulting largely from the reversal of COVID provisions in the prior year and growth in receivables in FY '23. From a cost perspective, we are pleased with delivering $18.6 million in savings across marketing from suspended products, people reductions and right-shoring. In terms of one-off items affecting the normalized cash profit, this amount includes $8.1 million of non-cash impairment and accelerated amortization with additional items booked in the second half, including our onerous contract provision of $4.2 million related to suspended products. We also have redundancies in prior year tax matters. This leads to a cash NPAT using the prior measure of $24.1 million, which, as we mentioned, has been affected by big swings in AASB 9 provisions and depreciation movements, leading to a normalized cash profit of $75 million, and I'll cover our suspended products in more detail on one of the slides. Finally, on capital management activity, as mentioned by Stuart, the directors have determined that humm will continue to pay dividends and set out a fully fracked dividend of $0.01 per share, which equates to $5 million in cash. This brings the full year to $0.02 per share and a dividend yield based upon the current share price of 6.2%. We have also announced a share buyback of $10 million shares alongside the purchase on market of our FY '23 equity plans. Consistent with the prior period, our investors will be able to utilize hummgroup's dividend reinvestment plan. As indicated at the half year results, we have reviewed our dividend policy and determined to pay dividends on 30% to 40% of free cash flow, which equates to normalized cash profit, adjusted for CapEx, working capital and growth. We consider that these capital management activities balance appropriately our investment in growth with activities to drive shareholder returns. On Slide 19 (sic) [ Slide 18 ], our commercial team have delivered another excellent performance with receivables of $2.4 billion, which is now 57% of our portfolio. You can see from the graph the team have consistently delivered growth in each half as we capitalize on the strategic shift in asset finance from banks to brokers. NIM for the year is growing, but affected by the annualization of margin squeeze that occurred late last year when we're able to pass on rate increases to consumers at the same pace of swap increases. We note that for the last 10 months, we have originated loans at yields that fully recover the cost of those funding increases. Normalized cash profit was $42.3 million, a 20% increase on the prior period. It is important to reinforce Stuart's comments that the income from loan origination has a delayed effect on the profit with only part of net interest income recognized in FY '23 from those assets originated this year, with the annualized effect of these originations being almost doubled. We know that given the pace of growth, the run-off in portfolio is a lot limited to $55 million, and the average tenor is 4.8 years. We consider that this annualized net interest income to be important to understand the inherent value in our commercial business. Credit losses remained low at 0.5% and consistent with our commitment. We have retained our product economic tables in the appendices. In consumer, we have -- on Page 19, we've seen a reduction in normalized cash profit of 22% to $32.7 million, which is largely attributed to margin compression and reduction in receivables attached to pay down the New Zealand Cards business. In respect of margin, we've previously discussed the delayed effect of price increases in the PosPP business and the natural cuts that exist in both Cards businesses. This year, PosPP has been focused on vertical and merchant profitability, delivering increase in front book yield given recent interest rate rises. Overall, margins have been adversely affected with the mix shift for solar and health, which have lower margins, but ultimately, longer term -- better longer-term credit outcomes. While competition is not completely abated, we continue to focus on unit economics at a geography, vertical and a merchant level to drive profitability in our large transactions. Both the Cards business have limited capacity to increase headline rates, but we are focused on activating these Cards to improve the gross yield, improve our transaction volume, and we'll see profitability increase as interest free periods roll off. We're also focused on operating models to support these businesses and will continue the cost transformation that I'll discuss on the next page. On Slide 20, the hummgroup executive team have made good progress on our cost initiatives and have delivered $18.6 million in savings this financial year. Putting aside the reductions in depreciation, we have delivered savings from reductions in marketing that were directed to our small transaction suspended products, along with our U.K. business. We've lowered our people cost, and we have reduced headcount by 105 in Australia, New Zealand. In addition, we have moved our call centers from Adelaide and Auckland to Manila. We've also managed cost increases over the period, including our investment offshore, which was reduced in the second half due to the decision in November '22 to retrieve from the U.K. and Northern Ireland. We anticipate that this will normalize at around $3 million [Technical Difficulty] Northern Ireland. As disclosed at the half, we have incurred a couple of additional costs associated with the failed transaction with LFS. We have also included this table the notional cost increases associated with inflation for both payroll and non-payroll costs. On Slide 21, we set out a cost-to-income ratio for the commercial business, the consumer business and the consumer business, excluding costs associated with our international investment and suspended products. We're proud of what our commercial team have achieved with a sub-40% cost-to-income ratio. And we have demonstrated that this business has the operational leverage to enable the business to grow without a commensurate increase in cost. We're also implementing further technology enhancements across Australia and New Zealand to enhance our speed to decision along with operational back office improvements. In the consumer business, we are targeting a 50% cost-to-income ratio and note that despite good progress on cost removal, the ratio is affected by reductions in net operating income arising from a higher cost of funds. The 47.5% CTI number shows the effect of our offshore investment and some suspended products. We continue to focus on a number of initiatives, including exiting and closing the technology associated with suspended products. And we expected that there is a small amount of head office stranded costs that we'll be targeting in FY '24. Technology-enabled transformation, particularly in our call centers and back office functions will be a focus, in particular, in FY '24, we'll be migrating our BNPL platform to our global Salesforce/Q2 platform. We'll see platform cost reductions from migrating legacy service to the cloud, and we're conducting procurement activities across all service providers. On Slide 22, attached to credit risk management. Our credit performance continues to demonstrate the strength of our credit team and their long history in credit decisioning. We make that statement without hubris as we are conscious that we are living in uncertain times, and we are keenly focused on the early credit indicators. We note very low losses, arrears and hardships across all our portfolios. hummgroup has made investments in systems and processes that have delivered over recent years and include a single group fraud platform, comprehensive credit reporting, electronic bank transaction data for income verification, enhanced decisioning tools and credit scores. We're also using machine learning models in Cards AU. More recently, we have tightened our credit criteria and increased buffers in response to shifts in the macroeconomic environment. These have directly contributed to lower losses and further, we have been successful with our collection strategy and debt sales programs over the last 12 months, which has seen material improvements in recoveries. The net loss to ANR for the group is 1.8%, which is a 60 basis point improvement on FY '22, adjusting for some one-off operational items. Big things net loss to ANR is flat at 2.7% and has been stable for many periods, representing our long history in this market and focus on verticals such as solar, home improvement, order repairs and medical. Little things net loss to volume has fallen to 2.2% excluding suspended products as a result of the deliberate reduction in volume from Little things merchants. AU Cards has normalized at around 3.6% last year, which had a -- after last year, which had an additional debt sale. NZ Cards is flat over the period, and we are particularly focused on the New Zealand economy and any impacts of more -- than more targeted interest rate measures. Commercial continues to demonstrate low losses, showing resilience in the SME sector and recoveries are from a strong secondhand market. I note that this ratio also benefits from high growth in a large denominator, and we anticipate that it will normalize over time. On Slide 23, we've included this table for some time to provide our investors with the movement in net loss, AASB 9 macro provision releases and AASB 9 provision movements per product. It highlights the point I made at the start of the presentation that net losses have been resilient over the period. The net loss is increasing by $3.1 million despite an increase of $923 million in receivables. FY '22 benefited from reversals in macro provisions taken during COVID and reductions in improvements from -- improvements in credit decisioning. While we're not seeing any deterioration in losses or arrears this year, we did increase the macro provision in New Zealand slightly at the half as we watch unemployment metrics. We continue to maintain conservative credit provision settings with credit provision being 30% coverage in consumer and 1.9% in commercial. While we are confident in our credit processes, we also recognize we're experiencing historical low credit losses and the market is uncertain as we navigate the current climate. On Slide 24, when we talk about our capacity to fund growth. Over the last 24 months, our treasury team have worked alongside our banking and investment management partners to execute a complex funding plan in challenging financial markets. humm has executed $1 billion in capital markets transactions, $1.4 billion in new warehouses or warehouse extensions, and we have added $132 million in mezz capacity that allows us to fund the growth efficiently. Further, subsequent to year-end, we have executed a $760 million private placement, which is the largest transaction executed by humm and frees up additional capacity for growth in our commercial business. These transactions demonstrate our reputation and experience in the securitization market and provide a stable platform for growth. In recent years, we've been focused on improving capital efficiency of our balance sheet, which has freed up capital for additional growth. This is involved introducing mezzanine in our facilities, which has the effect of reducing capital employed in our warehouse from, say, 20% to 5%. Introducing mezz has the effect of increasing interest expense but improving returns to shareholders and allows us to grow. While the introduction of mezz across our warehouse is largely complete, we continue to explore options to drive growth in the business without the need to raise capital. We finished the year with $112 million of unrestricted cash and $75 million drawn in the growth facility. The cash utilized during the period predominantly represents our investment in capital to support the growth in the commercial and the consumer business. Finally, on Slide 25, our objective is to balance growth and returns to shareholders. To date, we have grown our balance sheet prudently while limiting credit losses. When I arrived at humm, our receivables were $2.4 billion and our cash is $102 million. Now, our receivables 2 years later, at $4.2 billion, and our cash is $112 million. We also wish to pay dividends and with a payout ratio of between 30% to 40% of free cash flow being normalized cash profit adjusted for CapEx and working capital. Further, we have determined a buyback of $10 million worth of shares is appropriate given the current value, and we'll also buy the FY '23 executive plans on market. We consider these actions, along with our focus on unit economics, capital allocation and cost out will deliver enhanced long-term share value. Thank you for your time, and I'll now hand back to Stuart to close our presentation.

Thanks, Adrian. Turning now to Slide 7. hummgroup will focus on driving profitable growth across our operations staying close to both our customers and our partners. This will be supported by our strong balance sheet position and resilient credit performance, ensuring improvements in unit economics and capital allocation. We'll continue to review and remove our necessary cost and complexity from the business and execute on strategic capital initiatives to deliver shareholder value in the year ahead. With that, I'd like to conclude today's presentation and hand back to our moderator for today's Q&A session.

[Operator Instructions] I will now hand back to David.

We've received some questions coming through over the chat. 2 questions, in particular, one for Adrian and one for Stuart. For Stuart, we have a question on the international business. What is the rationale for the investments in Canada and Ireland? And is the focus on Big things or Little things?

Thanks, David. I've been in Ireland for quite a while now, and it's been a good beachhead for us to continue to grow and trial, certainly the technology platform, of which we're enabling further into Australia. And it does give us a springboard option, should we want to use it anywhere into the U.K., although we have just withdrawn from there, but we still watch that space with interest. Canada is a real option play for us. It's a nice market. We believe we can be very competitive there. There are verticals which have very similarities to what we have here in Australia. And with a very focused approach to those verticals, we believe that there is some very good profitable growth that we can achieve in a capital-efficient way.

One final question for Adrian on suspended products. What is the timeline for the exit of suspended products? And what will be the [Technical Difficulty] into FY '24?

So we've done the bulk of the cleanup as it relates to our suspended products in FY '23. So we're looking forward to a relatively clean FY '24. We have some costs that we'll be looking to remove in FY '24 that relates to some head office costs attached to those products. But given our history, we're confident we're going to remove them. So we're looking for a relatively clean '24 relative to '23. And we expect that this normalized profit will begin to [indiscernible] profit apart from depreciation and...

Thank you, Adrian. That concludes the questions that have come through the chat. Handing back to the moderator. Thank you.

Thank you. I see no further questions at this time. I would like now to turn the conference back to Stuart. Thank you.

Thanks very much, everyone, for listening on today's conference call. Both Adrian and I are available for any calls outside of this meeting to the investors, I wish. But thanks for your interest, and we look forward to the year ahead. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.