Humm Group Limited (HUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the humm Group HY '24 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stuart Grimshaw, Chief Executive Officer of humm Group. Please go ahead.

Good morning, and thank you for joining us today as we release the first half results for financial year 2024. My name is Stuart Grimshaw, I'm the Chief Executive Officer of humm Group. Also joining me today is Adrian Fisk, our Chief Financial Officer; and Dave Grevler, our Head of Investor Relations. On Slide 2, you'll see the agenda for today, and Adrian and I will walk you through the slides. Turning to Slide 4. The first half presented many challenges, which we will touch upon through this presentation. However, it was pleasing to see the continued strengthening of the balance sheet. We increased our receivables by 23% to $4.7 billion, and our gearing ratio stood at a relatively conservative 11.3%. Unrestricted cash also increased to $159 million from $112 million at the same time last year. The balance sheet position was supported by another strong credit performance, with group net loss to average net receivables of 1.68%, down from 1.95% at the same time as last year, highlighted by low loss levels of 0.5% net loss to average net receivables in the Commercial business. We continue to focus on cost efficiency with a further $7.5 million of costs removed in the first half, taking the total costs actively removed from the business to $26.1 million since first half 2023. From the space, we're able to return a normalized profit of $28.1 million, which was down $10.4 or 27% from the same time last year. As you will see in the following slides, the dramatic increase in interest rates and credit spreads had a material impact on the company's results, and to achieve the result we have is very credible. In line with our guidance in regards to the dividend payout ratio and the decline in normalized profit, the Board has declared a dividend of $0.0075 per share. Additionally, during the first half, we purchased around 20.9 million shares or around 4% of outstanding shares to satisfy our on-market buyback and long-term incentive programs. Turning now to Slide 5, where we see the impact of the increased interest expense had on the profitability of the group. In broad numbers, the increase in gross income from a 23% increase in receivables was eroded from the 88% increase in interest expense, the net effect being a relatively flat net operating income line to that of the prior corresponding period. Operating expenses were held below inflation, and we saw a slight tick up in credit losses as the portfolio grew. While the normalized profit number of $28.1 million was a 27% decline on the prior corresponding period, management has responded to this pressure by effective use of hedging to minimize the whole impact of interest rate increases, increase in the interest rates and fees on our products where possible and implementing cost reduction programs in the business. These initiatives recovered around 55% of the interest expense increase relating to the base rate and credit spread increases. Adrian will expand on these points later in the presentation. Turning to Slide 6 now. We've made no secret that we're very much about growth, but at the right price and the right time. We still have work to do in rebuilding foundations, particularly in the Consumer business. However, we feel that with the recent capital markets dislocation, the company is well positioned to maximize the opportunities that we will see over the coming period. In particular, in Commercial, we have been singly focused on the infrastructural assets and our growth and by doing so, have developed excellent relationships with the broker community. We'll seek to further leverage these relationships into new verticals, for example, with the medical and dental industries to expand our offering. We're also not servicing many areas of rural Australia that we should, and we will be increasing our business development activities into these regions. With the Consumer, the Consumer business is one that has taken a lot of our focus as we rebuild and refocus the team around the customer. We continue to remove excess costs associated with products that no longer resonate with the customer. However, we will reinvest some of these savings into a new personal loan product in Australia that will be soft-launched in the upcoming half year; with a refocus on the Q brand in New Zealand. We have a very successful card brand in New Zealand being the Q brand, which has lost its focus as we promoted the humm brand for point-of-sale purchase plans in New Zealand. As we have shut that offering down, the focus of our business around the Q brand in New Zealand makes a lot of sense. We are seen as a strong competitor brand to the major banks in this space and currently the second largest card issuer in New Zealand reaching 33.6% of new cards issued in November 2023. Finally, we're live in Canada, where we're starting to grow volumes in the verticals that we are consistently focused on, being medical, health, automotive and veterinarian. We're using the same IT platform that we'll be launching the personal loan product on in Australia, so this is a good trial for that launch. Ireland is also returning positive profit numbers, and this trend is expected to continue. In addition to the customer-focused initiatives, we're investing resources to stabilize the technology platform and we're seeing the benefits from the migration of our card platform to AWS as well as the ancillary benefits and credit decisioning and time to cash for our customers as we remove manual processes. Adrian will later touch on the funding platform that we have developed and the advantages it provides to us as we continue to grow our portfolio. Turning now to Slide 8. The Commercial business continued its terrific trajectory in growth, recording a normalized net profit after tax of $21.6 million, which is 12% up on the prior corresponding period. Its receivable balance now sits at $2.7 billion, which is a 39% improvement on the same time last year. Gross income from these balances was up 56% to $132.8 million, an increase of $47.5 million. However, this growth was offset to a large degree by the increase in interest expense, which grew by 111% or $41.2 million. The resultant net effect was to have net operating income grow by 13%. Continued cost efficiency carried us through to a 12% improvement in normalized cash profit after tax. Some of the increase in interest expense was due to an increased leveraging of the portfolio, which, while increasing the interest expense, saw the ROE of the business improve from 18.9% to 25.2%. Also, the management has taken action to further offset the interest expense challenges. The frontbook NIM has increased to 5.1%, which is 100 basis points higher than the overall portfolio NIM. On Slide 9, supporting the strong growth of the Commercial portfolio has been a conservative approach to credit. This has been evidenced over the last periods and continues with a net loss to average net receivables of just 0.5%. As we can see on this slide, the risk profiles provide comfort from a diversification perspective, the largest sector exposures being to logistics at 36% and civil engineering at 30% of the portfolio; equal state exposure to New South Wales, Victoria and Queensland at around 25% each; and consistent and stable customer origination rating profile, evidencing a well-performing portfolio. Turning now to the Consumer business on Slide 11. Our Consumer business comprises 3 units, being New Zealand Cards, Australian cards and Point of Sale Payments Plans. The normalized cash profit after tax for consumer of $6.5 million was down 66% or $12.7 million from the prior corresponding period. Gross income was actually up 7% from $155.1 million to $165.9 million. However, this $10.8 million improvement was well and truly overtaken by a $20.5 million increase in interest expense. The gross income growth was driven by a 6% increase in receivables to $1.95 billion and a volume growth of 13% in continuing products to $1.15 billion. The net loss to average net receivables remained at 3.3%, which was a solid performance in the current economic environment. We also continue to review the cost platforms we operate on, and this has delivered $26.1 million in savings since first half 2023, which has supported reinvestment into customer-facing roles, has covered inflationary pressures seen across all cost lines in the business. We continue to focus on optimizing the profitability through improved unit economics and a targeted review of product, geography and merchants. We're investing in our international businesses that provide optionality and opportunity for future growth. And we look to meet our customers' needs through new products such as the personal loan product we'll be soft-launching in this half year. Turning now to the individual business performances on Slide 12. New Zealand Cards experienced a volume uplift of 13%, representing $432 million in new volume. This equated to a 4.6% growth in receivables to $634.5 million, which flowed through to a 7% improvement in gross income over the prior corresponding period. Offsetting this growth was a 45% increase in interest expense, which was a greater increase in the marginal improvement of the gross income line, affecting a net operating income reduction of 9% to $37.3 million. Normalized net profit after tax of $7.8 million was down 38% on the prior corresponding period, primarily due to the interest expense impact while credit charges remained relatively flat year-on-year. There was a slight tick up in expenses as we refocused the New Zealand business as a stand-alone customer business revolving around the Q brand. Australian Cards volumes were down 5% on the prior corresponding period to $254 million as a result of exiting unprofitable merchant relationships, tightening of credit settings at origination and a lower marketing spend as we sought to rebuild the portfolio. According receivables were also down by 2% on the prior corresponding period to $429 million, also impacted by the runoff of legacy product receivables. Gross income was up 10% on the prior corresponding period to $41.9 million, and this was supported by a material reduction in origination costs of 47% or $2.6 million resulting in a net operating income improvement of 19% to $28.1 million. While interest expense was up 22% to $10.9 million, it was not sufficient to erode the benefits of the reduction in origination costs. Operating expenses remained flat with the previous year. While the net loss to annual -- to average net receivables increased over the prior year, it remains at historically consistent levels. The normalized net profit after tax was up 37% to $3.7 million. Point of Sale Purchase Plan saw volumes decreased by 15% due to the lower volumes recorded in Little things, following the closure of BPAY and the repositioning of Little things as a companion product to our core Big things product. Continuing products increased by 25% year-on-year to $461.5 million, with humm AU volumes up 19% and Ireland, Canada growing 49%. The strategy of rationalizing our product portfolio and exiting unprofitable merchants result in volumes for suspended products of low transactional value reducing by 78% to $50.9 million. Notwithstanding this mixed volume picture, receivables were up 11% to $885 million, driving a gross income growth of 5% or $2.8 million, which was more than offset by a 109% or $12.8 million increase in interest expense. While expense growth was controlled to a 4% increase, the current impairment charge was down 8% to $12.7 million. This, however, was still not sufficient to offset the material increase in interest expense with the business losing $5 million on a normalized basis against a $4 million normalized net profit at the same time last year. Turning now to Slide 13 and the priorities for each of the businesses for the year ahead. There is a mix of what I would term refocus and rebuild through each of them, and I'll highlight a few of the more pertinent priorities. With New Zealand Cards, there is a strong focus on the rebuild of the Q brand to further strengthen what is already a strong market position. We're reviewing the economics of the Q-branded portfolio to ensure that profit opportunities are both understood and available and we are reviewing merchant economics to eliminate or rebalance currently unprofitable relationships. In Cards Australia, we will seek to further deepen our volume growth from the travel industry. This is a major user of a long-term interest rate option and we see the benefits of this product attribute reflected in our profit and loss around 12 months after origination. We're also looking to selectively take advantage of pricing opportunities the markets allow us to and improve the penetration of our cards product with the merchants we have and also expand into other verticals where possible. So the Point of Sale Purchase Plan, we are focusing on the larger ticket purchases with the effective closure of Little things this month. We're undertaking a complete review of all merchants to ensure we have the profitability at a level that meets our return criteria. We'll be looking to increase our share of the merchant service fee where appropriate. We're transitioning the lower returning merchants to the new personal loan product where the merchant service fee outcomes are insufficient to meet our hurdle returns, and we will monitor and manage the Canadian business as it starts to strike volumes in a measured and balanced way. I'll now pass over to Adrian.

Thanks, Stuart, and good morning. I'm here to discuss the financial performance of humm Group for the half year ended 31 December '23. Consistent with the last 12 months, we continue to adopt the metric normalized cash profit to better reflect the underlying performance of the business. It removes material, infrequent items that do not reflect the future earnings; noncash items, such as AASB 9 provisions, which are required by accounting standards, and depreciation. Further, we have excluded cash NPAT losses in our suspended products, which were in runoff and equated to $8.2 million, down from the $32.2 million in the prior full year. The Board and management consider normalized cash profit is the best measure of our ongoing earnings and long-term performance as we navigate the space. We have reported a normalized cash profit of $28.1 million for the half year to December '23, which compares to $38.5 million in the prior comparative period. Gross income was up 24% to $298.7 million, predominantly resulting from the growth in receivables across Commercial and Consumer businesses, which are now at a record $4.7 billion. This line also benefits from interest income increases from pricing initiatives throughout the last year. Gross income was negatively affected from reduced fees attached to suspended products of $2.8 million and lower prepayment by our customers in Commercial with $2.2 million due to higher -- due to the higher interest rate environment. Origination costs are lower as we target this line for cost savings across the business including credit decisioning and historical business development arrangements. Net operating income was flat over the period, resulting from interest rate increases that was discussed by Stuart, and I will cover this in more detail on the next slide. There has been a $3 million increase in net losses, which is pleasing given the growth in receivables, resulting in a net loss to ANR of 1.68%, a reduction of 27 basis points compared to PCP. From a cost perspective, we continue to drive efficiencies in our business, and we're seeing an additional $7.5 million in savings across marketing, people and procurement activities. And I'll cost -- cover costs in more detail in the later slide. On capital management activities, the directors have determined that humm will continue to pay dividends and set out a fully franked interim dividend of $0.0075 per share or three-quarters of a cent per share. Our dividend policy remains consistent with the prior year, and we aim to pay dividend on 30% to 40% of free cash flow, which equals normalized cash profit adjusted for CapEx, working capital growth. Consistent with the prior period, our investors will be able to exercise humm Group's dividend reinvestment plan. Following announcement of the full year of a share buyback of 10 million of shares alongside on-market purchase of shares related to executive equity plans, I can confirm as of last Friday, we have bought back 9.6 million shares under the buyback and 11.3 million shares in the executive equity plan. We consider that these capital management activities appropriately balance our investment in growing receivables with activities to deliver returns to shareholders. On Slide 16, as Stuart mentioned, at the beginning of the presentation, humm like all nonbank financial institutions have been affected by the unprecedented rise in interest rates and credit spreads that began in early 2002. The interest rate expense walk on the left-hand side is a simplified version and indicative of the changes that we have seen in our portfolio over the last 12 months. You can see that the interest rate expense increased $61.8 million when compared to the prior comparative period. Of this, $32 million is explained by increases in new receivables, which increased interest income by $62 million. The increase in base rates or BBSW, which have moved from 2.66% to 4.41%, has affected interest rate expense by $27.7 million. The increase in credit spreads, which on average were 50 basis points over the period, increased interest expense by $8 million. I note that while we hedge base rates, we are unable to hedge credit spreads. Critically, humm has consciously decided to improve the capital efficiency of our portfolio by increasing mezzanine in both the Commercial and PoSPP businesses. This strategy increased interest expense by $4 million and has partially enabled us to increase our cash to $159 million to support future growth in receivables. It has also contributed to the improvement in return on equity on the commercial business from 18.9% to 25.2%. We have a sophisticated hedging program to manage interest rate risk on the back book, which is over 90% hedged in our fixed rate books and sub-50% hedged in our floating rate books. The number here of $10 million is the net effect of hedging period-on-period, and the actual benefit that actually flowed through the period from our hedging activity was $22 million. Note that the other factor that is important in management's activities to manage these external factors is repricing by the business during the period. On the right-hand side, we have 2 yield curves. The black is from 30 June '23 and the orange is current, around mid-February. On average, home hedges at the 3-year part of the curve given our asset profile. And you could see that the market is already expecting reductions in interest rates at the 3-year part of the curve of 34 basis points, which, as Stuart mentioned, along with pricing changes has improved our frontbook NIM of around 100 basis points in recent months. humm aims to expand margins in our frontbook yields as we seek to hold asset pricing on new originations and benefit from lower cost of funds as base rates begin to normalize. On Slide 17, the executive team is committed to a long-term program of efficiency and cost removal across the business. The commercial business continues to have a strong cost-to-income ratio at 33.1% and demonstrates operational leverage to enable the business to grow gross income by $47.5 million while cross-selling grew $2.5 million. We've continued to refine our operating model with new technology introduced into New Zealand, leading to efficiencies that will yield benefits in the second half. Consumer and our back-office functions continue to be the focus of cost efficiency as we refocus and rebuild this Consumer business. As set out in the walk, the humm Group executive team have made good progress in our cost-out initiatives and had delivered a further $7.5 million in savings this half, which equates to $26.1 million since the program began in the first half of FY '23. These savings had helped us manage inflationary pressures and allowed the group to continue to invest in customer-facing capability. Putting aside the reductions and depreciation changes, we have delivered reductions in marketing that were directed to small transaction suspended products as we review the [ Post of Sale Payment Plans ]. We've lowered our people costs, reducing head count by 42 in the last 6 months. These FTE reductions have been offset by investments in executive talent and customer-facing staff in Australia and New Zealand. Our people costs are also affected by an increase of $2.3 million attached to executive share plan incentives. Professional and outsourced operations have also increased due to higher legal fees, collections and repo fees. In the last 6 months, the group has conducted a detailed procurement review across the business, which will lead to additional savings. We've booked an onerous contract of $4 million, attached to technology not required to support the PoSPP strategy. We've had insurance cost reductions, communication savings across statement SMS and mail; origination costs such as credit checks and valuation recovery services; and also technology savings and infrastructure. Consistent with our clarity on investment, we have tightened CapEx over costs over the last 6 months to $7.5 million. This continuous efficiency program at humm will yield benefits. On Slide 18, our credit performance continues to demonstrate resilience in this market, with a net loss to ANR of 1.68% for the group, a direct result of the strength in our credit team and actions taken at the start of this cycle to manage losses. Across our portfolio, we have no low losses, arrears and hardships. Specifically, our 30 days arrears was flat at 1.9%. We recognize that we live in uncertain times in both the consumer and commercial sectors and are keenly focused on the early credit indicators. We have been successful with our collection strategy and debt sale programs over the last 12 months, which have seen material improvements in recoveries. Commercial continues to demonstrate low losses, showing resilience in the SME sector, with continued good recoveries in the secondhand equipment market. I note that our net loss to ANR ratio for Commercial benefits from high growth in receivables that increases the denominator. And we anticipate that this ratio will normalize over time around the 1% level. And we are currently provided at 2% for this portfolio, and so well covered. In Consumer, while cost of living pressures continue to affect individuals, we are not seeing material, unexplained changes in arrears or hardships across the portfolio. PoSPP has seen an improvement in its net loss to ANR ratio from the exit of suspended products and Little things merchants, which had higher loss rates. The large transactions portfolio has been stable, with a 3% net loss to ANR, noting that late-stage arrears are falling due to tightening of credit settings in the last 6 months. AU Cards' net loss to ANR ratio has increased from 2.6% to 4.1%, and this is a function of a very low loss ratio in FY '22 attached to additional debt sale. And with operational collections and credit scoring changes, we anticipate this to normalize under 4%. NZ Cards has maintained a net loss to ANR ratio of around 3% for the last 3 periods, with arrears below FY '23 level and hardships low in this portfolio. On Slide 19, we consider that humm has a sophisticated and diversified funding platform, with a long history in our key products and markets. This means we have a strong support from financial institutions, both local and offshore, along with the diversified pool of investors. We have continued to execute transactions over the last 18 months in challenging markets, allowing us to maintain growth in this market. In fact, humm executed a record $1.8 billion in asset-backed securities in the last 6-month period in both private placements and public market transactions. As at 31 December, we had $159.4 million in unrestricted cash, which provides a foundation for growth. This cash balance was achieved while continuing to grow assets, pay down $15 million of our corporate debt facility and execute our buyback and share purchase plan of $5.6 million. We achieved this cash balance through increasing the mezzanine in our warehouses and term deals. This increased cash removed the need to raise capital to grow while equity markets have been challenged. Our leverage ratio of 11.3% is prudent, and the direct result of this additional mezz investment has led to increased efficiency in our Commercial business that has increased our ROE in Commercial. While the introduction of mezz across our warehouses is largely complete, we'll continue to explore options to drive growth in our business without need to raise capital. Our objective of our capital strategy, on Slide 20, is to balance growth and returns to share funds. To date, we have grown our balance sheet to a record $4.7 billion prudently, while maintaining credit losses at 1.68%. We have a conservative net tangible asset ratio to receivables of 11.6%. We also have the capacity to pay dividends at $0.0075 per share with a payout ratio between 30% to 40% of free cash flow. Further at 30 June, we decided to buy back 10 million of shares and purchased shares associated with the employee share equity plan. We consider that these actions, along with our focus on the customer, unit economics, capital cost-out will deliver enhanced long-term share value. Thank you for your time, and I will now hand back to Stuart to close our presentation.

Thanks, Adrian. Turning to Slide 22. For the second half of this financial year, we will continue to build a strong balance sheet that will drive shareholder value improvements and provide the platform for future growth. We expect credit performance to continue to be well maintained, and we'll remain focused on achieving cost efficiencies throughout this period. With the realignment of the business into customer and geographical segments, we're seeing improvements in our understanding of the customers' requirements. And this will bring a renewed focus on the construct of our customer value proposition. The outlook from a renewed customer value proposition should bring opportunities that we can execute on with a strong balance sheet to support. At the end of the day, it's about profitable growth and the execution of the above initiatives will enable consistently robust shareholder returns. Thank you, everyone, and now we'll open it up for questions.

[Operator Instructions] I'm showing no questions on the phone lines at this time.

Thank you very much. We've had a couple of questions come through on the webcast. The first question, for Stuart, I guess: "Stuart, have you considered splitting off the Commercial And consumer businesses? This report clearly highlights the strength of Commercial while there appears to be weakness in the Consumer part."

Yes, it's a good question. Commercial has performed very strongly since 2019 when Rob Wright was put in charge of Commercial. And if you put your mind back to 2019, the Commercial business was actually in a mess; wasn't performing well; had large losses, and Rob was able to turn the business around to now be a real force in the asset finance industry. We've taken a role out of the Commercial business and put him in charge of the Australian Consumer business, where we see the need to be refocusing, such as we did with the commercial business in 2019. And we'll be looking to Rob to reinvigorate that part of the business. Historically, we have had very good returns from the Consumer franchise. So with Rob at the helm, we're fairly confident that, that will be achieved under his leadership and guidance. But we're also pragmatic that we do have to watch it closely and make sure the capital allocation reflects the returns.

Thank you, Stuart. The second question here, I guess, for Adrian: "On the share buyback, how many shares have been bought back to date? Do you have that split between LTI and the share buyback? And do you -- will you be continuing and extending the buyback given the cash available?"

Thank you. So I can confirm that as of last Friday, we have bought back and canceled 9.6 million shares on the buyback. And then the share plan has purchased 11.3 million shares under the share purchase plan. We are continuing with the buyback as discussed at the -- in the last year.

Great. There's one more question that has come through the chat, and that's relating to the normalized profit to stat profits. "Can you articulate some of those differences and when you think they'll return to -- they'll become more closely aligned?"

Yes. So we've -- our objective obviously is to get the statutory profit and the normalized profit to start to align. There's 2 areas where they weren't aligned is really in the noncash items, which is depreciation in these AASB 9 provisions. And just as a reminder, as we're growing our receivables quite significantly, we're required to book the provision. So those numbers in a high-growth environment are quite significant. So those noncash items are depreciation; the AASB 9 will always be there. But our goal at this stage is then to reduce the one-off items. And so in there, we have some impairment and some onerous contracts that have been booked in the period of about $7 million. And we also have our suspended products of $8.2 million that we've removed as well, noting that we had $32.2 million at the full year last year, and so we've reduced that down to about $8.2 million. We're expecting that to come off by the end of this year. Our receivables in our suspended products is down to about $1 million, and we're expecting to shut down those products. It lasted probably a bit longer than I anticipated. And that will then enable us to switch off technology costs and remove additional costs attached to suspended products. But our goal is to really try and line up our normalized profit to the cash profit.

Thank you, Adrian. Two more questions have come through, and then we'll wrap up for the day. Second to the last question is: "How far are you through the cost-cutting exercise? And what can you expect into H2 from both a cost-out and profit perspective?"

As we sort of mentioned in the presentation, cost efficiencies are actually part of the everyday life of businesses now, particularly with the different interest rate environment that we're in, where being fit is actually a critical success factor for us. We don't give guidance on profit or the cost-out scenario we have in the past. But as this is part of the ordinary life that we live and what we want to do is ensure that our cost growth is substantially less than our revenue growth.

Thank you, Stuart. And final question for the day: "Can you provide some color as to the volume trends for the start of the second half of FY '24?"

The -- in New Zealand, we've seen a slight tick up in the cards portfolio and -- which is quite typical after the Christmas period, and we're starting to see the revolve rate tick up. In December, there was quite a large payoff in the New Zealand Cards business. Commercial volumes still retain their strength. We actually had a record number of applications 2 days ago for the Commercial business. New Zealand -- Australian Cards has maintained its position, and it's still early to see what's really happening out of the Point of Sale Purchase Plan.

All right. Thank you, Stuart. Those are all the questions for today. So handing back to the moderator to wrap up the call today. Again, back to you.

At this time, I'd like to turn the call back over to Stuart Grimshaw, Chief Executive Officer of humm Group, for closing remarks.

Thanks, everyone, for the attendance today, and we look forward to talking to you over the next period. Thank you very much.

Thank you. That concludes today's conference call. Thank you for attending. You may all disconnect.