Humm Group Limited (HUM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the hummgroup FY '25 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Angelo Demasi, CEO. Please go ahead.

Thank you very much, and good afternoon, all. Thank you for joining us today as we release hummgroup's full year results for the FY '25 financial year. I'm Angelo Demasi, and I'm the Group Chief Executive Officer. And joining me today is Adrian Fisk, hummgroup's Chief Financial Officer. On Slide 3, you'll see the agenda for the presentation this afternoon. Adrian and I will walk you through the slides included in the investor presentation. Turning to Page 5, where we've highlighted the key performance metrics for the group for FY '25. We delivered a statutory profit after tax of $36.9 million (sic) [ $39.6 million ] for the period. Cash profit after tax of $52.9 million represents a refined measure of our performance. And I'd point out that on the same basis as our previously reported and defined measure, our cash profit after tax was $55.1 million for the year. Cash earnings per share was $0.102 and return on cash equity for the year was 10%. This was supported by the increase in our refined cash profit after tax result and capital management through the paydown of the perpetual notes through the period. Our continued commitment to cost reduction saw operating expenses down by 6%, driving our cost-to-income ratio to 51.7% for the period. Group-wide, our net credit loss to ANR was stable against prior periods at 1.7%, with improved credit performance in Consumer, offset by increased losses in the Commercial business, which I'll discuss in more detail later in the presentation. And finally, we've declared a final and fully franked dividend of $0.075 per share, recognizing that H2 was weaker than H1 as a result of both increased commercial losses and elevated legal costs associated with an ASIC inquiry in respect of our AU cards book. This takes total dividends to $0.02 per share for FY '25. which is consistent with FY '24 and represents a 4.8% return to shareholders. We have also included a new measure of underlying cash flow for investors, which was $41.9 million for the period, consistent with FY '25, which I will talk to in more detail in a moment. Moving on to Slide #6. You will see in the top left graph, we show the growth in cash profit after tax over the last 3 years, representing the clear focus of the management team on profitable growth, credit discipline and cost management across our core businesses over this period. The top right graph focuses on our cash generation capability, which, along with our investment in transformation will be a strong focus of my leadership. The underlying cash flow of the business is derived from the cash flow statement and represents cash from operations net of CapEx. You will note that the cash flow generated was used to invest in higher CapEx this year of $21.3 million. And this CapEx investment has been targeted across 3 major areas: our new regulated humm loan product, the continued investment in our Commercial business to maintain our leading position in the market and the replatforming of our data and infrastructure. Across the bottom 2 graphs, you can see our stable credit performance and the output of our continued focus on our cost-to-income ratio as we move closer to our goal of sub-50% CTI. We'll now turn to Slide 7, which shows the strength of our balance sheet and the extensive capital management activities we have executed throughout the year. On the top left, you will see the growth in assets under management over the period to a record $5.5 billion, up 9.6% on prior period. We saw consistent growth in our Commercial and Consumer portfolios. And as discussed on the previous slide, we have executed on this growth whilst maintaining a stable credit performance despite headwinds across the markets. We're increasingly focused on equity returns and capital allocation. On the top right graph, you will see the improving returns to shareholders over the past 3 years, measured both on a return on cash equity basis and on an earnings per share basis. We have also introduced an underlying cash flow per share metric, which is in line with my focused leadership on managing to cash. I want to emphasize that we remain committed to balancing the return to shareholders and the investment in our end-to-end technology and product platforms. On the bottom left graph, you will see the continued strength in our unrestricted cash, which represents the cash available to the group for liquidity, working capital and investment purposes. Importantly, unrestricted cash was able to be maintained at circa $125 million alongside a full and final repayment of the $53.6 million of our subordinated perpetual notes. Turning your attention to the bottom right graph. This further reinforces our commitment to effective capital management that delivers long-term shareholder returns. The repayment of the perpetual notes resets the balance sheet to lower cost facilities and releases approximately $7.7 million of savings in future periods. The Board determined to pay a final dividend of $0.075 per share, taking the final dividend for FY '25 to $0.02 per share, which will be paid on the 7th of October this year. I direct you now to Slide 8, which shows our half-on-half performance through FY '24 and FY '25. Whilst cash profit after tax was lower in the second half, we have had solid performance across our key metrics. Volumes, as presented in the top left graph, were largely stable over the 2 halves. However, we do expect softer volume across the group in the first half of FY '26. We expect this softness to be primarily driven by lower volumes in our humm AU business as we continue to refine the credit processes and the end-to-end technology platform, underpinning the new humm loan offering released in response to the new buy now, pay later regulations. While this has had a limited impact on the FY '25 cash profit result as at 30 June 2025, the Board has determined to impair $8.5 million of software capitalized in the earlier years of the humm AU loan project in light of the reduced volumes we expect in FY '26. On the top right-hand side, net interest margin reduced slightly in the second half as the Commercial business targeted growth in premium assets and as we saw growth in the lower-yielding, better-performing health and solar posPP verticals. Finally, on the bottom right graph, our net loss-to-ANR ratio has remained lower over the period with an improvement in credit performance in our consumer book, offsetting heightened losses in the Commercial portfolio. As we've highlighted with the market previously, losses in the Commercial book have increased as anticipated and as the receivables book seasons. The time to recover secured asset lengthens and as a result of heightened arrears in Victorian transport sector for assets originated in FY '23. We expect these losses to remain elevated in the first half of FY '26 before trending down through the balance of the financial year. Now to Slide 9. Our investment focus through FY '25 has been on transforming our product platforms and modernizing our IT environment to enable growth in revenue, enhance user experience, increased platform resiliency and efficiency. Through the increased CapEx investment in FY '25, we've made good progress in executing against our transformation strategy. In humm AU, we've implemented and continue to refine our product platform that underpins the new humm loan offering with a legacy humm PosPP product now placed into runoff. We have turned our attention to the implementation of the new cards product platform and are mobilizing efforts to commence this project later this year. The implementation of our new modern data platform is underway, which will allow us to leverage our significant data resources and create value through our AI initiatives across the business. We're well progressed in the modernization of our IT environment, having simplified our infrastructure by removing more than 1,000 servers, decommissioning physical data centers as we migrate to the cloud, lowering our costs over the medium term and improving our security posture in the process. Moving to Slide 10. Our global expansion investment strategy delivered a positive return in FY '25, supporting a balanced growth trajectory across key international markets as we look forward to FY '26. Our Irish business delivered a profit of $11.2 million with strong net interest margin and a positive return on cash equity of 29.7% Pleasingly, our U.K. business broke even in the month of June, following a careful strategy to follow our Ireland merchants into the U.K. in verticals we understand deeply. We see a sizable growth opportunity across these markets, which offer access to a retail finance market in excess of $80 billion as we harness our digital platforms, exceptional service offering and existing merchant relationships as a competitive advantage. As communicated to the market in May, the operating model reset for our Canadian business was executed with $4.4 million of costs removed from the business ahead of FY '26. Management will continue to monitor our performance in this market. I'd now like to hand over to Adrian Fisk, the hummgroup's Chief Financial Officer, to speak to our financial section. Over to you, Adrian.

Thanks, Angelo, and good afternoon. I'll be discussing the financial performance of hummgroup for the year ended 30 June '25, and we are pleased with the cash profit result and the underlying performance drivers of the business in the FY '25 year. Firstly, we've made a minor modification to the way the non-IFRS measure of cash profit is calculated. Our investors will remember that we removed normalized profit as a core metric back in FY '24 and adopted a cash profit after tax. As a result, we do not normalize one-off items, but we do note that it includes both cash and noncash items. Following our reporting at the half year, the Board have refined the cash profit measure to reflect cash depreciation attached to rent. This refinement recognizes that AASB16 includes rent in depreciation and therefore, by deducting depreciation in full, we're excluding the rent from cash profit. This change has had the effect of reducing cash profit by $2.2 million at the year-end and $2.1 million in FY '24. Cash profit for the full year on this refined measure was $52.9 million, up from $33.8 million in FY '24. Under the prior measure, our cash profit for FY '25 was $55.1 million. The cash profit result reflects the effort from management team to transform the underlying performance of the business and to remove the cost of suspended products over the last 3 years. For the full year, our statutory profit is $39.6 million, and this includes $8.5 million of impairment of software in the humm AU business. Traction on the humm loan, which was released in market in June has been softer than expected as the product adapts to the new market regulations, we refine credit approval processes, and we implement a new end-to-end technology platform. This has had limited impact on the cash profit result for FY '25, and management is evaluating impact into FY '26. Our growth metrics remained stable despite broad pressures on credit growth across the economies in which we operate, with assets under management of $55.5 -- sorry, $5.5 billion at year-end. This represents a 16.4% increase in CAGR over the last 5 years, driven by both Consumer and Commercial, while maintaining losses at a low level. Net operating income was up 6.2% to $330.5 million, reflecting top line growth momentum. Portfolio NIM was 5.4% in FY '25, down from -- down by just 10 basis points on FY '24, reflecting disciplined pricing and funding strategy that is taking advantage of improved credit spreads across the market. It is important to note that the changes in fee and other income and cost of origination largely reflect the effects of the forward flow as we replace NIM with fee income. Net credit losses as a percentage of ANR originated by the group remained at historical lows of 1.7%, reflecting our credit underwriting standards. Improvement in the underlying credit performance of Consumer business in Australia follows deliberate and focused initiatives to tighten credit settings over 12 months ago. The improvement in credit performance in Consumer was partly offset by anticipated increases in losses in Commercial, which Angelo spoke to, and I'll cover a little bit more in detail later. We are pleased to report that the operating expenses are down 5.7%, contributing to an improvement in our cost-to-income ratio, which reduced from 58.2% to 51.7%. This is very close to our interim target of 50% CTI and demonstrates the ongoing commitment to operational efficiency and cost control. Pleasingly, return on cash equity was 10.4%, highlighting the enhanced capital productivity and reflecting profitability across Consumer and Commercial segments. Importantly, return on cash equity was supported by the full repayment. The group introduced a new reporting segment, Corporate this year, which is a common practice across the industry and is designed to more accurately reflect the performance of our underlying businesses and the central corporate costs. Items include group payroll costs, professional fees, insurance, occupancy and technology costs. As a result, the FY '24 results have been reinstated to ensure comparability. Finally, I note that CapEx representing IT development and software expenditure was $21.3 million as we implemented our regulated hybrid product this year, which was slightly higher than our target of $20 million for the year. Turning now to new slide, Slide 13, supplementary information. While cash profit metric no longer normalizes one-off items, the Board, given the NBIO has determined to include additional detail for investors in these results to highlight specific items in FY '25 and FY '24. This added transparency will ensure that investors are fully informed of the underlying performance of the business. Of note, through FY '25 on the left-hand side, the group incurred additional $1.8 million in project costs associated with the acceleration of the Humm loan project in the lead up to the 10 June deadline. We also incurred additional legal costs in response to the ASIC inquiry on our AU cards portfolio, and this was partially offset by the reversal of the forum finance provision as new information became available. As advised at our Q3 '25 update, we have executed on the removal of costs from our Canadian business as we reset the operating model with $4.4 million of cost reduction expected in FY '26. Alongside this supplementary information, we have provided a view on underlying cash flow for FY '25 and FY '24. This information is based upon the cash flow statement, which shows stable cash flows for the year. Growth in cash from operations has been used to invest in additional CapEx investment through FY '25. On Slide 14, our Commercial business led by Brendan White, branded as flexicommercial and one of the leading equipment finance businesses in Australia produced a cash profit result of $45.3 million for the year. Despite softer market conditions, the team is growing market share and diversifying into new geographies like Regional Australia and Perth and new products such as Flexipremium and Agriculture. Our Flexipremium product represents larger loan size, higher-quality assets with expected lower credit losses. This has resulted in a slight reduction in front book NIM and is expected to improve credit losses over the life of the loans. The growth metrics for Commercial continue to be positive with assets under management growing 12% and net operating income up 11%. The cost-to-income ratio of 24.4% delivers us operating leverage and allows the business to respond to the current economic environment and drive returns to shareholders. As previously communicated, the Commercial business recorded higher losses in FY '25 when compared to prior years. This was particularly the case in the second half. Despite the dollar increase, the net loss to ANR ratio has remained within our targeted range of 1% to 1.1%, which remains industry-leading losses for an equipment finance portfolio. The reasons for the year-on-year losses include growth in the receivable books of around $1.6 billion between FY '22 and FY '25 and the fact that losses take 12 to 18 months to flow through the book. We've also seen an increase in time taken to recover secured assets post the market distortion in COVID. We're lending into -- we had lending into areas such as transport sector in Victoria, predominantly originated in the second half of '22 and the first half of '23, noting that controls were tightened in late '23 to reduce loss exposure for these sectors. Our credit team expect these heightened losses to increase in the first half of next year and normalize for the remainder of the year. These credit losses have affected the overall performance of the second half, noting that 10 basis points of net loss to ANR represents about $3 million in loss before tax. On Slide 15, we look at Consumer Finance. The Consumer Finance team of Jacqui, Emma and PJ continued to transform the business, delivering a cash profit of $24.8 million from a profit of $8.6 million in the prior period. As you can see from the graph on the bottom right-hand side, we have a number of profitable business, including Cards New Zealand, Cards AU, humm Ireland and humm AU, which in combination generated $35.2 million of cash profit. In addition, we have executed on targeted investments in the U.K. and Canada, which cost $10.4 million. Importantly, these targeted investments have improved from their run rate at the first half. The Cards New Zealand team delivered $15.7 million cash profit from our leading Q Card business from an increase in volume and receivables and yield. We are growing volume above market trends from our strong brand and our focus is on product mix and revolve rates. The team did well to be flat on the prior period given the roll-off of favorable hedging in the prior period, increasing the cost of funds by 20 basis points. The Australian consumer business has benefited from deliberate action taken 18 months ago to improve credit performance of the portfolio across both humm AU and Cards AU. While traction on the humm loan offering was softer than expected, management will be focused on restoring humm volume in FY '26. The humm Ireland business is delivering good growth and the financial performance as a leading point-of-sale business in the Irish market. The returns on this business are close to 30%. While humm U.K. posted a small loss of 0.9% for the year, it turned profitable in the month of June. We remain focused on the opportunity, unit economics and competitive environment in the Canadian business. And as Angelo said, we've now consolidated the business under the leadership of the U.K. and the Irish team, which has delivered our $4.4 million run rate savings while concurrently improving merchant and credit profile. On Slide 16, we have introduced our Corporate segment, and we've included this page to have transparency around our central costs, such as audit fees, insurance, et cetera. I'll move then to Slide 17, which is credit risk management. We are pleased to report that the annualized net loss to ANR was 1.7%, which is a historical low for the group and an outcome of the deep experience and disciplined execution of our credit team led by Tim Lord and the business. This ratio takes into account assets originated by the group and sold in the forward flow program. In Consumer, net loss to ANR improved by 60 basis points to 2.7%, driven by a tightening of credit settings and continued improvement in collection processes. Cards NZ has increased loss rates by only 10 basis points, which is pleasing given the economic headwinds facing the economy. We have already covered the Commercial net loss to ANR ratio that has increased to 1% and note that this is within the range of our expected loss rates for this group and reflects the secured nature and the diversification of this portfolio. You can see on the bottom right graph, the improvement in credit quality in this portfolio since December '22 using our internal grading system. As we have said, we expect losses in this book to peak over first half '26 before normalizing through the balance of the year. You can see that our balance sheet provision remains good at 2.6%, exceeding actual losses by 90 basis points. And we note that we have provided 2% against our Commercial business, well above the current loss rates. Finally, on Slide 18, we have a mature funding platform that has enabled us to continue to grow. During the period, we have executed $4.7 billion in funding transactions, including term deals, private placements, refinances and forward flow. This is including executing new funding lines in Ireland and the U.K. to support growth in this market, along with accessing additional mezzanine that was executed just last week. Our funding platform is a combination of warehouse structures, public and private transactions and the forward flow program, and we're very pleased with our return to the commercial market with the commercial term deal in June of this year. These programs are all supported by leading local and international banks along with local and international debt investors, and we continue to take advantage of favorable credit markets, which have delivered savings during the period. The bottom left hand graph shows that over the period, the team are focused on balancing cost-effective funding with capital efficiency targets. We saw us strategically manage our funding drawdowns to contain interest expense over the year. Under our forward flow program, we sold $682 million of assets in 2 tranches in October and June. The forward flow program has delivered the financial outcomes consistent with our expectations. The benefits of this facility include increased capacity for capital-light growth in Commercial without the need to raise equity. It improves ROE as the facility grows fee income without the need for equity and it diversifies our funding platform to protect the business in the event of closure of term markets. And finally, we see an opportunity to expand this program into other asset classes. I'd like to thank you for your time. And now I would like to hand back to Angelo to close our presentation.

Thank you, Adrian. To wrap up on Slide 20, looking forward, we are focused on profitable growth and returns to build upon our strong credit performance, alongside further investment in our products and technology platforms to enhance customer, broker and merchant experience. As a business, we are well capitalized and well diversified in terms of customers, merchant partners, products, geographies and funding sources, factors we see as an advantage in this economic environment. Our stable balance sheet and committed funding facilities provide comfortable capacity to focus on profitable growth. Credit quality will remain stable as receivables season. However, we do anticipate the continuation of hardened losses in the commercial business in H1 FY '26 before we expect losses to normalize through the remainder of the year. Cost management remains a top priority alongside strategic considered investment in our end-to-end technology platforms to deliver platform resilience and enhance user experience across our brokers, merchants and customers. We see the group delivering consistent performance across key metrics with a focus on restoring volumes in our humm AU business as we continue to refine our new regulated humm loan offering. We are pleased with the performance of the business in FY '25. And management is clear on the FY '26 agenda to work through the continued execution of our transformation strategy, the restoration of humm loan volumes in Australia and management through what we expect to be heightened losses for the H1 period of FY '26 in our Commercial business. I look forward to working with the Board and the executive team to successfully lead this business into the next phase of growth and transformation. Thank you, and I'll now hand back to the moderator for Q&A.

[Operator Instructions] We have received some online questions. Your first question reads, can you tell me about the offshore investment and the progress you are making?

Thank you. I'll take this question. It's Angelo. I've actually just returned from a trip both to Ireland and the U.K. And what I'd share with the market is I was extremely impressed with the efforts on the ground under the leadership of PJ Bryne, who is now taking carriage also of the Canadian business following the operating model reset that we executed in FY '25. As we've stated, the Irish business is performing extremely well with really good returns and a consistently low credit loss. I was struck by the sales and marketing efforts on the ground in Ireland and just our prominence, which translates into a market-leading position for the product that we put into the market. From a U.K. point of view, it's extremely pleasing to see that we've had our first month of breakeven growth on a cash flow front. And I was struck in the U.K. by the size and potential of the market. I'm really pleased with the strategy that PJ and his team have executed on the ground there to follow many of our best merchants coming out of Ireland. And of course, Canada is the area where we have work to do as we turn the corner into FY '26. But management feels confident that with the restructuring of the operating model and the reduction in the annualized run rate from a cost point of view that we've noted, we've also cleaned up the quality of the book, the credit quality of the book as we closed the FY '25 period. And we feel that we have a clean run going into FY '26 to refocus on growth in that part of our business. Thank you. Back to the moderator, please.

Your next question reads, commercial equipment finance system growth has been slower. How is flexicommercial performing?

Thank you for the question. I'll take this again. We're really pleased with the volume in FY '25 that we've been able to achieve in the commercial business. We note that our best market information tells us that overall, the market seems to be down by about 5% and we note that we're flat on a year-on-year basis in terms of our volume growth. We've discussed and highlighted a number of times here that we are working through the heightened loss rates in the Commercial business. And we do expect that we'll work through that in the first half of FY '26 before we then normalize to our expected rates in the back end of FY '26. Overall, the Commercial team has done a really good job in diversifying their product offering, diversifying across industries and across assets and also diversifying from a geographic standpoint as well. And I might just invite Adrian to add any comments from a financial perspective on that.

Yes. Look, I think the team is doing a very good job. And you can imagine in a lower growth environment, there's a bit of pressure on NIM. And I think the team has been managing that very well. NIM is only down 10 basis points, which is a combination of, I think, good pricing efforts by the team being selective and taking a portfolio approach to the NIM alongside good cost reduction from a cost of funds perspective by the treasury team. So they're doing a good job on that front.

We have a phone question from Phil Chippindale from Ord Minnett.

Thanks also for the extra disclosure. Firstly, just on the volume outlook for '26. I think Angelo, earlier, you mentioned that you'd expect some softness in humm AU at the start of FY '26. What's the outlook look like from a volume perspective for the Commercial business?

Yes, Phil, Adrian here. We are expecting an increase in volume over the full year. I'd say the first couple of months of the year have been flatter than we would expect just given the economic environment. But our anticipation is that the second half by then, hopefully, rates will have dropped. There'll be a lot more confidence in the economy, and we'll start to see a turnaround in that second half.

Okay. And just staying with the Commercial segment. You've mentioned that losses should remain a little bit elevated in the near term before you expect an improvement in the second half. Just what's driving that confidence for the second half improvement?

The confidence really is driven by our understanding of where the arrears have come from, and we've been able to link them back to the FY '23 vintage of loans. And as we track those vintage of loans through a 12 to 18 months arrears position, we often expect that the heightened loss period exists at around about the 18-month mark. So we're seeing that very thing now, which explains why in the back half of FY '25, we started to see those losses wash through. And when you follow that same vintage of loans, we expect it to be approximately the same as we go through FY -- H1 of FY '26. What we've also seen is that as you move beyond the FY '23 vintage of loan, the arrears buckets start to drop notably. We've also seen a reduction in dishonors and late payments that follows that as well. So we feel that the leading indicators are starting to turn. But I do just want to be clear, this is something that we'll have to monitor on a daily, weekly, monthly basis, but that's our best forecast as to how this is going to pan out over the next 3 to 6 months.

Okay. Just looking at the OpEx side of things, that CTI continues to trend downwards. I mean you reached 51.7% for the year, but it was 52.4% in the first half, so it implies sort of around the 51% mark in the second half. You also mentioned you're obviously trying to get to below that 50% level. Is it sort of too early to say that you might be able to get to that level at some stage during FY '26? Or is that more likely to be a sort of '27 or onwards phenomenon?

Yes. Look, it's a little bit early at the moment. That's certainly our focus. The big effort, we have done a lot of work across procurement, sort of removing legacy products and systems. We've done a lot of good work in that space. The next phase of cost reduction relates to the technology implementation that we're making. And so look, we're anticipating to be able to get below that number. But I suspect it's probably later in next year as opposed to earlier.

Okay. And then last one for me, just on the CapEx side of things. You spent over $21 million in '25 on IT development. The year prior was around $15 million. I think the reason for the $25 million increase was that hybrid product. What does that '26 number look like? Have you got a budget for us that you can sort of guide us to?

Yes. We expect it to be the same or slightly higher than FY '25 as we finalize the transformation program that you'll note in the investor pack. What I would say, though, is that the progress in that transformation journey has been quite pleasing. So we feel like we're definitely on track, and this is not a forever investment program. So we expect that we'll have the majority of or all of the transformation program done by the end of calendar year '27. So we do expect that we'll have a continued level of investment in CapEx at or slightly above the number you see here today before it starts to recede in future years.

Your next phone question comes from Larry Gandler from Shaw and Partners.