Humm Group Limited (HUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Humm Group Half Year 2025 Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Chief Executive Officer, Mr. Stuart Grimshaw. Please go ahead.

Good morning, and thank you for joining us today as we release the first half results for financial year 2025 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. Turning to Page 5, where we have highlighted the key performance metrics of the half. Our focus on delivering an exceptional customer experience has delivered a strong result for the period, once again highlighting the efforts of management and improving the performance of the company. There are 6 key metrics that I want to leave you with. Firstly, we delivered cash profit after tax of $29.8 million, an increase of 119% on the same time last year. Earnings per share was up 124% from this time last year to $0.11 a share. Return on cash equity was up 122% to 10.9% over the same period. Management's focus, discipline and execution has delivered an 18% improvement in the cost-to-income ratio dropping from 64% to 52.4% today. Income has increased 6%, and we've delivered a 13% reduction in operating expenses over the prior comparative period in a difficult inflationary environment. The strength of our risk assessment and recovery in collection processes has been demonstrated once again with credit losses being maintained in the historic record lows of 1.8% of average net receivables. Finally, the strength of our result has allowed us to declare a fully franked interim dividend to shareholders of $0.0125 per share. This represents a post-tax return of 6% and on an annualized basis and an increase in dividend of 67% over the same time last year. Turning to the next page. In the first graph on the left-hand side, you can see the increase in shareholder value and returns. Return on cash equity has continued to grow more than doubling the return from last year to now be into double digits at 10.9%. This growth has been off the back of a higher cash profit after tax for the first half which has increased threefold since the second half of financial year 2023. The chart below that evidences the strong credit culture that permeates throughout the company with net loss to average net receivables remaining at record lows of 1.8%. This highlights the positive impact that our product mix has on the business with the expected losses from our commercial portfolio as the portfolio seasons, being offset by lower loss rates across our consumer portfolio, following changes to credit savings initiated in the first half of financial year 2020. The chart at the top right shows the impact of cost savings that have been delivered in the first half of financial year 2023, our cost base was $92 million. This increased to $97.4 million in the first half of financial year 2024, with us now delivering a cost base of $85.1 million the first half financial year 2025, slightly up on the second half financial year 2024. An exceptional result given the cost pressures felt across all parts of the supply chain and employment sector. Since the inception of our cost savings program in the first half of financial year 2023, we've delivered a gross total savings amount of $36.6 million. These savings have been used to fund investment in our global operations, invest in sales capability, technology investments, including the uplift and the capability of our technology team, funding the long-term incentive program for management and offsetting the impact of inflation on our cost base. The final chart on the bottom right-hand corner highlights the continued growth in assets under management. We now manage $5.3 billion in assets, up 14% on the prior comparative period with a compound annual growth rate of 19% for the past 2 years, which is a terrific outcome growing off a large receivables portfolio. Assets under management is our new measure of loans and receivables and includes the current balance of the $500 million in assets sold to MA Financial. Whilst these assets are no longer on our balance sheet, we continue to generate fee income from servicing, risk managing and providing collection services on these assets together with the share of the residual return. On Page 7, we highlight our capital management initiatives and returns we have generated for shareholders. The chart on the left highlights that for financial year 2023 we have returned over $80 million to shareholders through a range of initiatives, including dividends on ordinary shares and the perpetual notes, $10 million share buyback in financial year 2024 and the $27 million partial repayment of principal and accrued interest of our perpetual notes this half year just gone. The chart on the right shows the value that we have delivered for shareholders with 2-year compound annual growth of 30% return on cash equity and cash earnings per share, which is a more than doubling of returns over the last 12 months. Our future growth will -- turning now to Page 8 -- Our future growth will be enabled by investments in technology and transformation -- these initiatives will deliver increased revenue as we transform our platforms, build out new data capabilities and leverage AI and deliver cost savings stability as we modernize our infrastructure, leverage cloud and SaaS opportunities. The fundamentals of our transformation program included transforming our core platforms, including our lending, card management and customer experience systems, we're investing in better data management that will evolve our use of AI across a range of areas and our business started with our call centers and credit teams. At the same time, we are modernizing our technology infrastructure as we decommission our data centers and move more of our systems and services into the cloud. Most importantly, these technology investments will be made from within our existing capital expenditure envelope and operating expense budget. As you'll see from Slide 8 and under the right-hand side of the table, we are moving into a more evolved technology environment with a number of initiatives underway. These technology initiatives are critical in supporting and delivering our organic growth strategy, which we communicated at the full year and at our AGM. We're also investing in the future growth of the company focused on enhancing the customer experience through new platforms, product and data as well as leveraging AI capability where possible. I'll now hand you over to Adrian to take you through the Group financials.

Thanks, Stuart, and good morning. I'll be discussing the financial performance of Humm Group for the half year 31 December '24. We are very pleased with the momentum of the business, our results, the key drivers of performance for the first half of the FY '25 year. The first half saw an increase in cash profit to $29.8 million from $13.6 million this time last year, which is a 119% increase and from $22.3 million, a 34% increase from the second half FY '24. This represents significant effort from the management team to transform the underlying performance of the business over the last 2 years. Our investors will remember that we agreed to remove normalized profit as a core metric and adopt cash profit after tax as a performance metric from this period. Cash profit take statutory profit after tax and adds back the impact of noncash items being depreciation and amortization and AASB-9 provision movements on a post-tax basis. This simpler measure means that we no longer normalize items into our results, such as suspended products, which have now been removed and absorbed in our cost base and other expenses that we previously deemed one-off and material in nature. Our comparators have been restated and are consistent with the reconciliation we shared in the appendix on Page 28 of our 30 June '24 results presentation. For the half year, our statutory profit of $27.3 million is up from a $6 million loss in the prior comparative period and is only $2.5 million different to our cash profit of $29.8 million. Our growth metrics remained strong despite broad pressures on credit growth across the market in which we operate with asset under management growing 14% and representing 19% CAGR over the last 2 years. Interest income is also up 6%, net operating income, up again 6% on the prior comparative period. Our performance measures also remained strong with portfolio NIM maintaining at a stable trend of 5.5% and a net loss to ANR continuing its historic low of 1.8%. I note on this slide, the dollar value of credit impairment charge is lower than previous periods, and this is a result of provision reductions associated with the forward flow sale an improvement in credit -- underlying credit performance of the Consumer business in Australia, which I'll cover on our coming slide. We are very pleased to report operating expenses down 13% on a PCP basis, with the CTI falling from 64% to 52.4%. This brings cost savings since the commencement of the program of $36.6 million, with $4.8 million delivered in the current period. Pleasingly, ROCE, return on cash equity is up 10.9% or 122% increase from the prior period. Finally, I'll note that CapEx was $11.3 million in the period as we implemented our hybrid product this year. with a target -- with the target of $20 million for the full year. And this is within the expected spend of $18.20 million that we've been communicating to the market and encompasses the technology transformation highlighted by Stuart. Turning now to Slide 11. The commercial business known as Flexicommercial, our leading equipment finance business continues to maintain momentum with cash profit of $26.5 million, up 35% on the prior period. The growth metrics for commercial continue to be positive with assets under management growing 18%. Net interest income is up 13% and net operating income, which includes service fees under the forward flow arrangement is up 20%. We have seen some signs of slowing growth across the market with SMEs delaying purchases of large equipment in the current financial climate and learning federal election. Our team continues to perform well and is growing market share with our largest brokers and dealer groups. We have successfully diversified our growth in the half and have launched our Flexi premium product, which represents larger loan size, high-quality assets with lower expected credit losses. This has resulted in a slight reduction in front book NIM but has increased volume in recent months, and we expect credits to improve over the life of these loans, enhancing shareholder value. I also note that front book NIM lifted in the January period. The commercial business is extremely well run and its performance metrics continue to improve with portfolio NIM up 20 basis points to 3.7% and critically, cost of income falling from 38% to 26.8%. Our very strong cost-to-income ratio delivers operating leverage and allows us to quickly respond to market conditions, capture market share, drive annual returns to shareholders while profitably growing our business. Annual net loss to ANR has lifted 10 basis points to 0.8%. This is in line with our expectations as the commercial receivable book seasons and is consistent with what we've previously communicated to the market. This is a result from strong growth in FY '23 and FY '24 with losses rates normalizing towards 1% over the medium term, which remains an exceptional credit loss number. Return on cash equity for the Commercial business increased 38% to 23.5%. Now on Slide 12. The consumer finance business continues the transformation that commenced over 2 years ago. delivering a cash profit of $3.3 million from a loss of $6.1 million in the prior comparative period. As you can see from the graph on the bottom right-hand side, we have a number of profitable businesses, including Cards NZ, Card AU, Humm Island and Humm AU which generated $14.8 million in combined cash profit, up from breakeven result in the prior comparative period. In particular, the Australian business have benefited from deliberate action taken 12 months ago to improve credit performance of the portfolio across Humm AU and Cards AU, Humm AU in particular, continues to grow strongly with targeted margin enhancement across verticals and merchant. We're also executing against targeted investments, which totaled $8.7 million for the period. These investments included Humm U.K., as discussed at our most recent AGM Humm personal loan and Humm Canada. Humm Ireland is pleasingly delivering strong growth and financial performance as the leading point-of-sale business in the Irish market. The business is supporting the growth of the U.K. and its outperformance will be used to fund U.K. growth. The personal loan product is our hybrid product, which will replace our POS PP over time and will comply with the new regulations that go live in Australia shortly. The hybrid product allows for both merchant services fees and customer interest in addition to fee -- this product construct is based upon our successful Ireland and Canada offering, which already provide these features and expands our channel partner opportunities that we can target whilst improving unit economics for the business and boosting shareholder returns. The hybrid product has been in PSC for the last 3 months and we plan to launch to key merchants on 31 March '25. We remain confident in the opportunity unit economics in our Canadian business, but our losses are higher than we expected at this time. The local Australian team with a proven track record of delivery been heavily engaged in supporting the Canadian business with a clear path to reducing second half losses and a path to profitability in FY '26. On Slide 13, the slide is consistent with the updates we provided in FY '24 and sets out the movement in net interest margin in the financial statements. Pleasingly, it shows that NIM at 5.5% being held consistent with the FY '24 results, which is a function of significant work at a transaction merchant level to improve portfolio NIM. In the period, yield improvements were offset by older swaps, which were written at favorable priceses -- prices being replaced with new swaps at higher fixed rates. Also on the slide, we've shared our exit NIM would represent the NIM for the final month of the reporting period. This is slightly down at 5.4% versus 5.5% and with the 10 basis points representing the targeting of the Flexi premium product that I discussed in the commercial slide, which is expected to deliver lower losses over time. We note that the consumer exit NIM was higher than the portfolio NIM in the period. It is important to note that these NIM metrics are strong metrics in our sector. The business continues to prioritize margin and pricing across consumer and commercial with consumer focused on unit economics per merchant and vertical to ensure that finance is appropriately priced. In Treasury, which manages our cost of funds, we continue to see credit spreads improve, and we've been able to achieve more favorable pricing in recent transactions and facility negotiations over the period. We expect these favorable credit settings to continue for the remainder of the year as investors, particularly in credit funds, compete for assets in the markets in which we operate. On rates, we continue to hedge our portfolios to 100% and have executed additional swaps in the variable rate portfolios to lock in pricing benefits and smooth volatility. The Australian swap curve was and remains inverted beyond 3 years. The recent shortening of expectations on the timing of cash rate cuts have flattened the curve over the last few weeks. We are watching to see how the market responds to the RBA's decision later today and I'm cautiously optimistic that there is a lower cash rate that will boost consumer confidence and we'll start to see SME growth. We note that any changes to the yield curve we'll have only minor timing effects on pricing in the front book with minimal overall NIM impact. On Slide 14, credit risk management, we are pleased to report that annualized net loss to ANR has been maintained at 1.8%, which is a historical low for the Humm Group and has an outcome a deep experienced and disciplined execution by the credit team and the business over the last 3 years. The increase in net loss of the commercial business to 80 basis points is in line with our near-term expectations and represents the normalization of that portfolio as it seasons towards the forecast medium term of 100 basis points, net loss to ANR. We've previously discussed the impact on arrears that we are witnessing in the Victorian economy, and these trends continue and have been managed to an acceptable level by the credit team. These are excellent loss rates for this book and reflect the secured nature and diversification of this portfolio. You can see on the bottom right graph, the improved credit quality of this portfolio since December '22 using our internal rating systems. Consumer losses have fallen 80 basis points to 2.5% and have improved due to deliberate actions, particularly in the Australian business to tighten credit settings as demonstrated by the chart in the bottom right. The POS PP team have been particularly effective in this regard, delivering a net 2%, which is a 90 basis point improvement on the prior period, noting that we have completely exited the high loss Little Things product. Similar trends have been delivered in the Cards AU with a net loss to ANR dropping 60 basis points to 3.5%. NZ cards has increased losses from 50 basis points to 3.4% on a PCP but this is only a 10% -- 10 basis point increase since 30 June '24. The increase in loss rates demonstrate the level of seasonality in this business and as a result of higher volumes in a tougher macroeconomic environment being experienced in New Zealand. These positive results have improved our balance sheet provision ratios and with our balance sheet remaining conservative provided for, given our improved loss rates. On Slide 15, we have a differentiated funding platform that has enabled us to continue to grow through all market conditions, while some of our competitors have remained constrained. During the period, we have executed over $3 billion in funding transactions, including finance facilities, private placements and the forward flow program, this included executing new facilities in the U.K. to support growth in this market and new transactions to support the Canadian business. Our funding plan combines the use of warehouse structures, public and private term transactions and the forward flow program. These are all supported by leading local and international banks along with local and international credit investors. On the bottom right-hand side, you can see we have been able to continue to grow our book by becoming more efficient in our funding structures through increased utilization of mezz debt across our warehouse and turn transactions. -- optimizing the capital structure, improving funding costs and minimizing the capital employed across the platform. This is made possible by the strength of our credit performance as set out on the previous page. As we discussed in the last results in August, we executed our forward flow program in the period with $495 million sold to save the program with $500 remaining under our forward flow program is delivered on expectations with the financial income -- the financial outcomes as expected. The benefits of this facility increased our capacity for capital-light growth in commercial improves ROE accretion as we grow fee income with our equity impact. Our business becomes an origination and asset platform and hence, the change to our definitions on those metrics. diversification of our funding platform to protect the business and we see this as an opportunity to expand beyond the commercial business. Our unrestricted cash balance for the year was $113.6 million which includes the repayment of $25 million of our perpetual note given the step-up in costs that is contracted later in the year. It's our plan to repay the entire perpetual note in this period, and this demonstrates the strength of our capital markets transactions that we've been able to execute improving returns for shareholders. So with that, I'd like to thank you for your time and now hand back to Stuart to close the presentation.

Thanks, Adrian. Turning to Slide 17, final slide. Just to summarize where we are and following on from Adrian's comments, we've continued to strengthen our balance sheet and have built an efficient and diversified funding platform with sufficient headroom that underpins our future customer growth strategy. We continue to refine credit settings, looking to leverage data and AI and build on our existing credit and collection processes to ensure that our risk management metrics remain strong. remain focused on operational efficiency, and we'll continue to pursue a lower cost-to-income outcome as we target continued income growth while achieving further cost savings to cover the impact of inflation and investments for further growth. As mentioned on Slide 8, our future growth depends on our ability to transform our platforms and modernize our infrastructure. We have already commenced this journey and are excited about the opportunities that this will create for us. Finally and importantly, the first half of financial year 2025 delivered a very strong result, which saw an impressive growth across many metrics. We have delivered strong returns to shareholders and continue to build on the foundation for future profitable growth. That concludes our presentation for today. We'll reintroduce our quarterly market updates with the Q3 trading update in April and May of this year. I would like to thank you for joining us today. I'd also like to thank the team at Humm for a result they rightly should be proud of. I will now hand back to the moderator who will open up the conference bridge for questions. We'll also take any questions that come through via the webcast. Thank you.

[Operator Instructions] We will now take our first question from the line of Phil Chippindale from Ord Minnett.

Firstly, I just wanted to touch on the commercial segment. Adrian, in your comments, you mentioned that the SME segment, you've experienced some potential weakness there, SME delaying their purchases, et cetera. Can you give us sort of the latest on that? Any sort of observations you can make since 1 January?

Yes. So we had -- we're pretty much on our expectations for January in terms of volume growth. The team have been diversifying just the nature of the assets that we're pursuing, which has enabled us to maintain good growth in December. And we'll continue to leverage both the Flexi premium and the Flexlife part that we had in market. But overall, you see across the sector, there has been a reduction in volumes in terms of growth, but our team are doing a good job to improve our competitive position.

Okay. Just on the topic of forward flow. Clearly, you transacted it was $466 million in the first half. Can you just talk to your current plans in the second half? And can you just confirm how much control you have around the timing of that if you have, in fact, the ability to defer some of that if you so desire?

Yes. So what we'll be managing very closely over the second half is yield. And so we will be making choices about whether to use the forward flow or to not use the forward flow. And yes, we have the flexibility to be able to do that. So the first $495 million was just to see the pool and we have flexibility from there about what we execute.

Last question comes from the line of Larry Gandler from Shaw and Partners

Good result in a tough market. And just following on, Stu, from that first question about Flexi Commercial. Can you talk to maybe some of the verticals that you've concentrated on in that last half to try and actually outpace what was a tough market?

Larry, good to hear you. We've traded pretty much within the same verticals that we've always played in, but what we're going to have to do is offer a different style of product to the industry, which has enabled us to expand the customer base that we have far and beyond that. We've also been able to implement some efficiencies which enable us to settle quickly. We've used a couple of AI tools to enable that plus electronic signatures, which we should have had but haven't had enabled us to close transactions even quicker than we have. So the service proposition has strengthened. What we've found is that our offering has meant that we've started replacing a number of other finances on our broker's list. So we're actually getting a bigger share of the broker's business due to the, I suppose, the range of product that's now opening up to all their customers, not just some of their customers to I suppose, to further build on where you are potentially hitting we have expanded into the regional New South Wales market and into regional Queensland. And we're just about to implement a new agricultural policy, which will enable us to start working that vertical more so than we have currently. So we see tremendous opportunities not only through regional New South Wales and Queensland, but also into WA, where we know there's demand for the product.

Okay. Excellent. That helps. And my second question on Canada. It looked like the losses arose on -- due to sort of credit issues there. Can you just put some color around that and how that changes into the second half?

Yes. There's -- there are a few merchants we had in there. We did in the early stages have incurred some losses. We shut those down in October. But the losses still came through the books till the end. We've reinvigorated the platform. We're starting to originate -- starting to get some volumes and good volumes back, the arrears are now back of new businesses back under control. The piece that we're looking at is there a more efficient way that we can reduce the cost base as we start to grow the volumes. So it's a work in progress, but we do see opportunity there to actually change that results around.

So it's unlikely the loss will be of that magnitude in the second half. I know you don't want to give guidance, but is that how I interpret your comments there?

We would certainly hope not.

There are no questions on the phone lines at the moment. I'll hand back to the room to check for any questions online.

Thank you very much. We've had some questions come through on the webcast. Extending the question on Canada that is the higher loss from Canada results of lower revenue or higher expenses?

The losses came through from the expense line was fairly consistent. So it was mainly through the loss line that we saw that increase. Plus also, we -- we invested in some of the technology estate there to actually make it more seamless. We had a few bugs in there. So it's a bit of technology and losses. The underlying cost base remains fairly consistent.

On the dividend payout ratio we note that the dividend is $0.0125 per share with cash earnings of $0.11 per share. Can you give us more color around that on payout ratio? And whether there will be any other capital initiatives looking into the second half

Sure. No problem. So as we have communicated, we try to pay out a dividend ratio within the sort of 34% -- 30% to 40% of free cash flow. This number is at the higher end of that range, so up around the 40% of that number. And so we're pleased to be able to do that. We're also looking -- we obviously paid down the perpetual notes, so we paid down 25% million of that, and our intent to try and do more of that in the second half. They are the key initiatives that we have in place.

And then one final question that came through is around CapEx. And -- the spend in the first half is the spend in the second half. There's a comment that in the cash flow statement, it appears to have grown from $7 million CapEx in the first half of last year to $11 million now. So what does that outlook look like for the remainder of the year?

Yes. That's right. So as we've been executing a hybrid product, which is a regulated product in POS PP, we're sort of higher from a run rate perspective in the first half than the second half. but we are very clear on hitting our target for the second half. So we'll deliver $20 million over the full year is that plan, which is consistent with what we have expressed in the market previously.

Thank you very much. That concludes all questions estate through on the webcast. Handing back to the moderator. Are there any further questions coming through from the conference group.

There are currently no further -- we do have a follow-up question from the line of Larry Gandler from Shaw and Partners.

I can't help myself. Just on Australia, I think it was Australian Cards that you guys are also implementing or upgrading the system there. Just wondering if you can update us on how that's going and when that business sort of returns to growth?

Yes. Thanks, Larry. The -- we're at the -- close to the stage of mandating a vendor to actually implement the system for us. We expect that, that should be -- if we can run it as we think internally to have it probably do at least by the end of FY '26 with a pilot in market by the first half and calendar year '26. So we are managing the existing Card portfolio as you can see, mitigating some of those potential credit losses through there and getting some efficiencies while we actually implement this new system. So the focus has been on getting the hybrid loan in place, which we're close to getting and then moving into the Cards platform just to mitigate any operational risk we may incur by trying to run a dual implementation strategy.

I am showing no further questions. Thank you all very much for your questions. I'll now turn the conference back to the room for closing comments.

Thanks very much, everyone, for listening in today, and both Adrian and I are around for further follow-up questions as and when needed. So please feel free to reach out should you require. Thanks again for taking the time with us today. .

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.