Humm Group Limited (HUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to humm Group Full-Year '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 your speaker, Stuart Grimshaw, Chief Executive Officer. Please go ahead.

Thank you. Good morning, and thank you for joining us today as we release the financial 2024 results for humm Group Limited. My name is Stuart Grimshaw, and I'm the Chief Executive Officer of humm Group. Also joining me today is Adrian Fisk, our Chief Financial Officer; and David Grevler, our Head of Investor Relations. On Slide 3, you will see the agenda for today, and Adrian and I will walk you through the slides. We'll start by turning to slide -- to Page 5, where the highlights for the year are presented. The year was characterized by the comparative performance of the financial half years. The half-year-on-half-year comparison demonstrates the efforts of management in improving the performance of the company. The success of these actions is shown in the 4 points. Firstly, we delivered an 18% increase in receivables to $5 billion, a record level for the group. Secondly, in the second half of the financial year, cost savings of $13.6 million were achieved when compared to the first half. Thirdly, net interest margin stabilized in the second half to 5.5%. This was achieved after several periods of rapid interest rate increases, and the benefit of interest rate hedges eliminated as they expired and rolled off our portfolios. Of importance, our exit NIM was also 5.5%. And lastly, the strong risk credentials of the organization were shown in the credit losses maintained at the historic lows of 1.8% of average net receivables. We turn to the next page. During financial year 2024, we continued to strengthen the balance sheet. As mentioned, we achieved $5 billion in receivables. We also had a 6% increase in volumes from continuing businesses to $3.8 billion, which was significant given the previous year's volumes benefited from the instant asset write-off program introduced by the government that was ceased this year. And we also finished the year with $125.1 million in unrestricted cash. We had strong net operating income with NIMs stabilizing in the second half to 5.5%. Our gross yield improved by 50 basis points through selective pricing initiatives to 11.6% and credit losses contains the 1.8% of average net receivables. We had a strong operating income performance, coupled with improving cost efficiency. Our second half cost-to-income ratio reduced by 780 basis points to 56.2% from 64% in the first half. This ratio was underpinned by a $13.6 million reduction in operating cost, supported with a further $4.9 million reduction in origination costs, with some of these savings coming from the exit of Little Things in our Australian business. From this space, we're able to record a $7.1 million statutory profit, which was up from $2.9 million in the previous year. About a $60.6 million normalized cash profit after tax, which was down 19% on the prior year. However, as mentioned previously, the second half of the year produced a 16% improvement on the first half in normalized profits. We have a fully franked dividend for the year of $0.02, with a fully franked dividend of $0.0125 for the second half. And we completed the $10 million share buyback as well as the purchase of a further $6 million of shares to satisfy long-term employee incentive obligations. Together, this accounts for around 6% of outstanding shares. Turning to Page 7. In the first graph, you can see the strong growth in the commercial portfolio. I would point you to 2021 when the average receivable balance was just $0.7 billion and at the close of 2024, grown to $2.7 billion, a remarkable period of growth for the business, which shows that we're hitting the mark with our brokers. The chart below that evidences the strong credit culture that permeates throughout the company, with net loss to average net receivables stabilizing at a low 1.8%. Also highlighting the positive mix effect, the secured commercial portfolio has on this measure. The top right chart shows the impact of interest rate changes on the net interest margin of the business. The majority of our interest swap portfolio has run off and we're now seeing stabilizing of the net interest margin. The final chart in the bottom right-hand corner highlights the continued successful efforts of management to manage the expense line at a time of heightened inflationary pressure. Turn to Page 8. From this space, flexicommercial closed the year at a record $3 billion in receivables. This has been achieved through doing more with existing and proven creditworthy customers, speed in decisioning and closing, sometimes approving and closing deals on the same day has continued to be attractive to the broker network and it continues to set us apart from our competitors. We've also expanded our offering to new regions. We've increased our teams in Western Australia as well as regional New South Wales and Queensland. We're also expanding our focus into other sectors such as agribusiness and medical. The consumer story was one of improvement over the financial year, as we focused on rebuilding the businesses and refocusing around the customer. We're seeing the benefit of this renewed energy with the improvement in the second half normalized profit to $11.8 million from $6.5 million in the first half. We have a very successful card brand in New Zealand, the Q brand. We will continue to focus the New Zealand business around this brand and leverage our position as a major competitor to the New Zealand banks. In the Australian Cards business, we deliberately slowed the growth as we tightened our credit standards, resulting in a 22% reduction to credit impairment charges for the second half of the year. And we'll introduce a regulated hybrid loan structure for our merchant partners in the first half of financial year 2025. This will allow us to provide merchant-specific offerings that will set us apart from our competitors. Internationally, ex New Zealand, we're seeing good growth potential with Ireland returning positive numbers and Canada starting to grow volumes in preferred verticals. In addition to the above, we're investing resources to enhance our current technology platforms that will improve our customer and merchant value propositions. I'll now hand you over to Adrian to take you through the group financials.

Thanks, Stuart, and good morning. I'm here today to discuss the financial performance of humm Group for the full year-ended 30 June '24. The second half of the year saw a 16% increase in normalized cash profit from $28.1 million to $32.5 million to bring our full-year normalized cash profit to $60.6 million. This stronger second half performance saw a 5% increase in net interest income, with NIMs stabilizing in the second half following unprecedented rate rise in 2022. I'll walk through this in more detail on the following slide. Fee and other income was up in the second half, but shows reductions year-on-year, attached to the exit of Little Things that had relatively high fees, but did not meet our gross yield and unit economics perspective. We also had a reduction in early termination fees in the commercial business, meaning that customers are less likely to terminate their loans in this higher rate environment. Net losses have increased in dollar terms half-on-half as expected, but are down year-on-year and flat at 1.8% on a net loss to ANR basis. The increase in net losses in dollar terms relates to the commercial business, where we have seen, as expected, a catch-up in losses following a period of high growth in 2022 and 2023, noting that losses have increased only 20 basis points from 50 basis points to 70 basis points and are below our expected long run average of around 100 basis points annualized. I'll comment in more detail on our losses in a separate slide shortly, but we remain confident in the continued performance of our portfolio given the improved credit quality, lower risk and overall strength. Operating expense is down 14% half-on-half and reflects the significant work by management to remove costs across the business. And I'll cover this in the following slide. Losses from suspended products have reduced from $33.2 million in FY '23 to $15.9 million in FY '24, with $7.7 million recognized in the second half. All remaining costs have either been removed from the business or absorbed into new product development, and we will not -- be reporting no further suspended costs in future years. Our CapEx was $15 million for the year, a drop from $18 million in the prior year. Finally, through discussions with investors, we have agreed to remove the normalized cash profit measure in future periods and we'll be moving to a cash profit metric, which deducts from statutory profit non-cash items such as AASB9 provisions, depreciation and other items such as amortization of intangibles. The Board and management consider that cash profit is the best measure of our ongoing earnings and the long-term performance as we have now navigated this transition phase and have stabilized our Consumer business. As committed for consistency and transparency, we have included the normalized cash profit measures, cash profit in the component parts with these results to allow investors to dissect them and make their own judgments. On Slide 11, net interest margin. This slide is an update from prior years and sets out the movement in net interest margin for the portfolio. Over the period, as set out in orange, along with an exit NIM we delivered across our business in the final months of the period, which is then set out at gray at the top. On the right, it shows that net interest margins stabilized in the second half at 5.5%, down from 5.6%. The 10 basis point reduction in margin in the second half did not come from margin compression, which is shown as 0.0%, rather related to higher capital efficiency, which increases interest expense but frees up capital for investment and boosts return on equity. As an example, if we improve warehouse efficiency from 5% to 2%, we replace the 3% of capital that we have invested in the warehouse with a debt. And while we pay interest on net debt about 3%, we invest this capital into growing the business and further generating returns to shareholders. On the left of this diagram, in the first half of FY '24, we saw a 50 basis point reduction in margin from old swaps that were written at favorable prices that have matured as the underlying assets have matured and that has now been replaced by new funding on new assets that have been written in the current high interest rate environment. The first half also saw a 50 basis point improvement in capital efficiency. The business continues to prioritize margin and pricing across consumer and commercial, with consumer focused on unit economics per merchant to ensure that finance is appropriately priced and meets our target returns. Critically, front book pricing, which is in gray at the top of that slide, has seen an exit NIM increase from 5.1% in June '23 to 5.5% in June '24. Exit NIM is now in line with portfolio NIM after several periods staying behind. In treasury, we are observing credit spreads improve from increases experienced in FY '22 and '23, and we've been able to achieve more favorable pricing in transactions such as Solar Private Placement, which was executed at a material discount to our positive [ e-warehouse ]. On base rates, we continue to hedge our fixed portfolios to 1% and are evolving our hedging strategies as we transition to the next cycle of interest rates. On Slide 12 in credit risk management, we're pleased to report the net loss to ANR was maintained at 1.8%, which is a historical low for the humm Group, and is an outcome of the disciplined execution of our credit team and the business over the last 3 years. Commercial losses as a percentage of ANR increased from 50 basis points to 70 basis points, in line with our expectations and is still below our long-term expectations of around 100 basis points. These are exceptional loss rates for this book, and reflect the secured nature and the diversification of this portfolio. Consumer losses have fallen 20 basis points to 3.3%. PosPP has fallen to 60 basis points, which is a result of the closure of suspended products, including bundll and Little Things that have high loss rates, along with a tightening of credit settings for Big Things over the last 2 years. Cards AU returned to more normalized levels of 4%, and Cards NZ has lifted by 10 basis points, noting that we're watching carefully the New Zealand economy portfolio for signs of stress. In dollar terms, in the bottom left graph, you can see that the value of losses has fallen from $109.2 million in FY '20 to $81.4 million in FY '24. Whilst over the same period, the average net receivables have grown from $2.7 billion to $4.6 billion, demonstrating we've been growing this book really well. We continue to monitor closely the economy, our customers by geography and verticals to identify early signs of potential issues and adjust our settings accordingly. Note the bottom left graph shows the arrears for our AU businesses, both in cards and humm AU, which is showing normal arrears levels. It is important to recognize that as at 30 June '24, we have a balance sheet coverage of 2.8% of our average net receivables and 100 basis points in excess of our current loss rates. On Slide 13, committed to cost efficiency, the humm Group executive have made good progress on our cost-out initiatives and have delivered $13.2 million in savings this year and $31.8 million in savings since the commencement of the program in first half '23. These savings have offset the impact of inflation and allowed us to invest in frontline capability across the front office and our delivery tenant. After considering inflation, we delivered $4.3 million in savings and marketing attached to reductions related to suspended products, $1.3 million in payroll savings that have also seen a reduction of 27 FTE people and increases due to expanding capability and customer-facing teams. $3.5 million have been achieved in risk and regulation, largely associated with insurance costs and $4.1 million has been achieved in consolidating technologies and other savings. We consider there still to be areas of opportunity and continue to drive cost savings and have launched a range of initiatives to improve technology, cost and back office processes for our next range of cost efficiencies. We've reduced our costs associated with suspended products from $33.2 million in FY '23 to $15.9 million in FY '24. And as mentioned earlier, we've either removed these costs from the business or absorbed them into new product development and as such, we will be reporting no further suspended costs in the future years. Our cost-to-income ratio calculated on a normalized basis by dividing total operating costs as a percentage of net operating income reduced by 280 basis points from 61% to 58.2% for the year. Importantly, we note a reduction in the second half '24 from 64% in the first half to 53% in the second half, which is a step in the right direction. On Slide 14, our differentiated funding platform. humm Group has been funding our assets for many years, having commenced our first public transaction in 2011. We've built a differentiated funding platform that has enabled us to continue to grow, while some of our competitors have been constrained. During the year, we executed $3.5 billion funding transactions, including term deals, private placements, refinances, et cetera. Our funding plan is a combination of warehouse structures, public and private transactions and is supported by local and international banks, along with local and international debt investors. Innovations have included recent private placements, along with our solar funding transaction. The graph on the top right sets out the well-publicized growth in private credit since 2010, and the potential to grow to a $2.3 trillion industry globally by '27. This growth demonstrates the opportunity that exists for our business to leverage this global trend. humm is an experienced player that can originate high-quality, medium-term consumer and SME credit assets to this sector that will enable Australian and international investors to diversify the investment portfolios. We're already seeing the benefits of this trend, with high demand for lending Australian commercial business and expanding interest in mezzanine across our entire portfolio. On the bottom left, since 2020, humm has been able to continue to grow receivables by improving the efficiency of our warehouses, private and public transactions and reinvesting the cash in growth. You can see that our capital efficiency, which is mentioned as statutory equity over tangible assets has grown to 10.9% in FY '24 and approximately $200 million release has funded about $2.4 million in asset growth. Our unrestricted cash balance for the year increased to $125.1 million. This increase came after repaying $15 million in debt from our growth facility, which now stands at $60 million and $16 million payments related to on-market buyback and purchase of shares to satisfy the FY '23 grant enabled through our LTI program. Next on Slide 15. Today, we announced a new program that adds a new layer to our existing funding plan for commercial. We've executed a partnership and a Forward Flow Program with MA as financial sponsor. The Forward Flow Program arrangement is something that is used extensively within the United States and is relatively new to Australia and has the following key features. Flexicommercial continue to originate, credit assess and service receivables through our broker network. This is a Capital-Lite model where we do not require any capital for this facility. humm Group does not incur any credit losses on these receivables, and we derecognize these assets off our balance sheet. The group will continue to receive upfront reimbursement of origination costs through fees, along with servicing fees and a share in upside of these transactions. We note that under this strategy, flexicommercial will continue to use warehouses, facilities and term deals for about 70% to 80% of the assets originated from this business. The facility has the following benefits. It increases our capacity for Capital-Lite growth in commercial without the need to raise significant equity and dollar to shareholders. It is ROE accretive as the Forward Flow grows fee income. Our business transforms from an existing business to an origination and asset management platform. It also diversifies our funding platform to protect the business in the event of closure to markets and allows us to continue to originate receivables for our customers in difficult environments. And we see this as an opportunity to expand this program to other asset classes, including the lower mezzanine solar. We've set out below the accounting differences between Forward Flow and warehouse facility on the bottom right, showing the removal of receivables, associated minimum credit losses and that being replaced with fee income. On Slide 16, we set out the efficient and effective use of our capital. The core objectives of our capital strategy is to balance growth, while maximizing percentage to shareholders. Today, we have grown our balance sheet prudently while maintaining credit losses at historic lows. This year, our receivables grew 18% to $5 billion, and we have continued to do this by improving our capital efficiency in our funding platform, which will continue to be enhanced through the Forward Flow Program. We also pay dividends with a payout ratio between 30% and 40% of free cash flow, being the normalized cash profit adjusted for CapEx of working capital. We've announced a $0.0125 dividend, taking our annual dividend to $0.02 per share and a pre-tax return of 6.02% based on average share price of $0.475 for the year. Further, we announced in June that our buyback of 10 million shares is completed and a total of 31.2 million shares were purchased through the program to satisfy LTI grants. The purchase of LTI grants in FY '23 ensures that our employee share plan was not dilutive. We consider that these actions, along with our focus on unit economics, capital allocation and cost-out will deliver enhanced long-term shareholder value. I thank you for your time. And I'll now hand back to Stuart to continue our presentation.

Thanks, Adrian. Turning to commercial on Page 18. As I mentioned earlier, commercial has performed exceptionally well over the last 4 years. This year, the business returned a normalized cash profit after-tax of $42.8 million, which was slightly up on last year's result. As we dissect the numbers, we can see that the net interest income grew by 19% from $78.6 million to $93.8 million, despite interest expense growing by 80% against the 52% increase in interest income. We experienced some margin compression in the first half as loans written in early years rolled off and were replaced by loans written in the current environment with much tighter margins. As expected, we saw a $9.5 million increase in net losses because of the high volume growth experienced in 2022-'23 caught up with the more stable volumes and receivables in the current period. Typically, we see losses from loans occur if they are to occur after 24 months on the books. Importantly, net losses as a percentage of average net receivables was only up 20 basis points to 0.7%, which is still a very low loss experience. The business was positively skewed to operational leverage with a 26% increase in receivables and a 19% increase in net operating income, only having a 4% increase in operating expenses. Moving to Page 19. The real message here is around diversification. When we look to investor geography and customer, we are well diversified. We have strong positions in the tools of trade sector, which have retained values with a strong secondary resale market. We, therefore, remain well diversified, fully secured with a low sector of state-based concentration. We have a diverse customer base with no single exposure greater than $4 million, and our repeat customer business now accounts for 42% of our volume, up from 38% in financial year 2023. These repeat customers typically have lower loss rates as we have a track record of payment history and credit performance and it means we're doing something right. The chart on the bottom left also shows how the quality of customers we do business with has improved over the years and critically has improved as we've increased volumes. Turning now to Page 21. The Consumer business had an improved performance in the second half, as the initiatives commenced in the first half of the year gained traction. The major impacts could be seen through the stabilization of NIM at 8.2% after several periods of compression and reductions in origination costs, lowered net losses following tightening of credit settings and the exit of Little Things and lower operating expenses, particularly in the second half. Turning to Page 22. We highlight here 3 of the major businesses that make up Consumer; the New Zealand Cards, Australia Cards and humm Australia. As we focus our efforts in rebuilding these businesses, it's pleasing to see increases in product contribution and growing interest-bearing balances. In Cards New Zealand, we saw a growth in receivables through the year supported by an increased revolve rate from 61.3% to 64.1% on half-on-half basis. This resulted in a normalized cash net profit after-tax improvement in the second half of $1 million from $7.8 million to $8.8 million. Australian Cards, as expected, we saw a reduction in normalized cash net profit after tax following our decision to slow growth on the platform, exit and run-down our closed products at Once and Lombard and tighten the credit settings. Offsetting these measures to a degree was an increase in product yield from 18.6% to 19.6% on a year-on-year basis and a higher revolve rate in the second half of 58.5% compared to 56% in the first half. For humm Australia, second-half normalized cash net profit after tax of $0.8 million, was up from the first half, which recorded a loss of $2.5 million. This positive change was driven by management actions around, firstly, optimizing the unit economics with continuing reviews of product and merchants, funding costs being managed well with the recent issuance of a Solar Private Placement. We had no lower net losses and we're experiencing further growth in our international businesses. We turn to the summary on Page 24. We've continued to strengthen our balance sheet and have built an efficient and diversified funding platform that underpins future balance sheet growth. Our risk metrics continue to perform well and are supported by a large secured commercial portfolio. We remain focused on operational efficiency and will continue to pursue a lower cost-to-income outcome. The success we have seen in our commercial business by focusing on the customer is being replicated in our Consumer business. We have seen the stabilization of net interest margin, which is pleasing. Thank you, everyone, for joining us today. And that concludes our presentation. I will now hand back to the moderator who will open up the conference for questions.

[Operator Instructions] I show no questions on the phone lines at this time, sir.

I don't think we have anything on the web either. So thank you, everyone, for joining us on the call today. Both Adrian and myself will be available for any calls outside of this conference should you wish it. And to the shareholders, thank you for your support through the year. Thanks, everyone.

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