Latitude Group Holdings Limited (LFS) Earnings Call Transcript & Summary

Good morning, everyone. I'm Michael Tilley, and I am pleased to welcome you to the 2023 Annual General Meeting of Latitude Group Holdings Limited. It's now just after 10 a.m., and I'm joining you today from Melbourne, and I'd like to begin by acknowledging the Traditional Owners and Custodians of the land on which we meet today, the Wurundjeri people of the Kulin Nation. I pay my respects to their elders, both past and present. Under Latitude's constitution, a quorum is required for this meeting, and I've been advised that a quorum is present, and therefore, I declare this meeting open. Today's meeting is being held in person, and there is the ability for shareholders to also watch a live webcast of the meeting. To provide sufficient time to vote, I now declare voting open on all items of business. A significant number of shareholders have already voted, appointed proxies and submitted questions ahead of this meeting, and we'd like to thank them for doing so. I'll start today's meeting by walking you through a few procedural guidelines for voting and question submission. I'll deliver my address, and then I'll pass to Bob Belan, our new Managing Director and CEO, who will give his address and provide a presentation on Latitude's 2022 performance highlights and financial results. Finally, we'll turn to the formal business of the meeting. Before we begin, I'd like to introduce my fellow directors who are also in person with us today. To my left, we have Vicki Letcher, our Company Secretary; and Alison Ledger, Nonexecutive Director. Alison is also Chair of the People and Remuneration Committee and the Technology Committee. And to my right, we have Bob Belan, Managing Director and CEO; Mark Joiner, Nonexecutive Director and CEO and Chair of the Risk Committee; and Julie Raffe, Nonexecutive Director, and Julie is Chair of the Audit Committee. Unfortunately, Aneek Mamik who's based in New York, was unable to come here for the meeting today. Scott Bookmyer, who's based in Denver, was on his way, but his plane was diverted, and he's unable to be here; and Beaux Pontak is also an apology. Paul Varro, our CFO; and Chris Wooden, the lead engagement partner of our auditor, KPMG, are also in attendance, and Chris is available to answer questions related to the accounts and conduct of the audit and the auditor's report. The Notice of Meeting dated the 24th of March 2023, has been distributed to all shareholders, and I'll take that as read. By attending our 2023 Annual General Meeting today, you, as a Latitude shareholder, or your appointed proxy will have the opportunity to ask questions and vote if you haven't already done so. Voting today will be by -- will be conducted by way of a poll on all items of business, and Computershare will act as the independent returning officer. For those watching the live webcast, you will not be able to submit votes online. For shareholders, proxies and corporate representatives in person, you'll be able to vote at any time during this AGM by completing the blue voting card that was provided to you on admission to the meeting. White cards are for visitors only who cannot vote or ask questions. Shareholders with a pink card are not entitled to vote on the items of business. I'll provide a warning before I move to close voting at the end of the meeting today. Thank you to those shareholders who submitted questions in advance of the meeting today. It is my duty as Chairman to ensure that shareholders have the opportunity to ask questions and discuss the items of business during the meeting. We ask that all questions and comments be concise, be confined to the particular item being discussed and to matters relevant to shareholders as a whole, be informative and respectful. Only shareholder's validly appointed proxies and corporate representatives who were given a blue or pink voting card upon entry are entitled to ask questions. When I call for questions, please raise your blue or pink card and state your name or organization you represent before asking your question. I'll move to my address. COVID and the post-COVID economy have been particularly challenging for your company. During COVID, Latitude operations were severely disrupted by extended lockdowns in its key locations of Melbourne and Auckland. Federal government financial initiatives to support the community led to significantly higher repayments by customers, leading to a reduction in receivables from $7.67 billion in December 2019 to $6.47 billion in December 2022. Lower receivables result in lower interest income. So your company implemented significant productivity initiatives along with the deployment of remote working technology solutions to ensure that under all scenarios, the business could continue to service our customers and remain profitable earning a cash net profit after tax of $153.5 million in the 2022 year. Post-COVID and in less than 12 months, Australia and New Zealand have seen a significant increase in inflation and a near record number of interest rate increases. The nature of your company's business model is such that recovering a large number of consecutive monthly interest rate increases involves a time lag. While each central bank rate increase flows almost immediately into Latitude's cost of funds, increases in rates charged to customers can take weeks or in some cases, many months to recover. I'm pleased to be able to inform shareholders that in recent months prior to the cyber incident, gross receivables were growing again as repayment rates began to normalize, and net interest income is responding positively to management's initiatives to recover rate increases. Your company has also experienced a malicious criminal cyber attack in recent weeks. We apologize unreservedly to all of those customers who have been impacted. We've put in place a comprehensive care package for all impacted customers, which includes remediation for the cost of replacing identity documents. You may wonder why your Board has not communicated more directly with you on this. The attack on Latitude is a criminal offense and as such is the subject of a comprehensive criminal investigation by the Australian Federal Police. Your Board's ability to speak freely on these matters is severely restricted by your company's obligations to not inhibit or influence the police inquiries or investigations. What I can share with you is this. There's been no evidence in our systems of activity from the threat actors since the 16th of March. Access to Latitude's systems was gained via a third-party service provider, which is a significant international vendor. Existing Latitude finance and credit card customers were able to continue to transact and make payments throughout the attack period, although there was restrictions on processing some new customer applications. Latitude will not pay a ransom. To do so would not assure the security of our customers' information stolen and only incentivize more cybercrime. The Department of Home Affairs, the Australian Cybersecurity Center, the Australian Federal Police and the Office of the Information Commissioner all provided timely and invaluable advice to Latitude throughout the attack period, and Latitude is extremely appreciative for both their guidance and support. Your Board and management have been focused on the risk of cyber attacks for a number of years, hiring experts to run mock attacks on our systems, and we were prepared for the risk of an attack with agreed procedures, policies and quick and clear decision-making authorities in place. The Latitude management team have worked countless hours since the attack to protect the company and its customers from further damage from this malicious attack. While the one-off financial cost of the attack remain under review, Latitude has substantial insurance cover that will help to offset some of the direct costs incurred. Beyond the one-off costs, the disruption of the business as usual is still being assessed and is expected to adversely impact our 2023 growth trajectory and net profit. And I must say Latitude accepts only it is responsible for protecting customer data, and that failure by large global vendors during this attack does not exonerate Latitude of that responsibility. I wish now to turn to the retirement of James Corcoran from the Board and that of Ahmed Fahour as CEO and Managing Director of Latitude and the recent appointment of Bob Belan as our new CEO and Managing Director. Ahmed presided over Latitude during 4.5 years of significant change, implementing significant investments in information technology and productivity. During Ahmed's time, receivables per full-time employee grew from $4.6 million to more than $6.4 million, while customer serving capabilities were materially enhanced. Ahmed led the company in its ASX listing and through the dark and difficult days of COVID lockdowns and the transition to remote working. On behalf of my fellow directors and all of the employees at Latitude, I would like to take this opportunity to express our sincere thanks and best wishes to Ahmed in whatever activities he may choose to engage in post-Latitude. I would also like to thank James Corcoran, who stepped down from the Board in February 2023, for his significant and lasting contribution to the company. You'll shortly have an opportunity to hear directly from our new CEO and Managing Director, Bob Belan. Needless to say, Bob's introduction to the role has been a real baptism of fire. Bob knows Latitude well having joined from the Symple acquisition in 2021 and having led the Money Business division since then, overseeing the integration of the 2 businesses and in particular, the transition of Latitude customers onto the new Latitude Money platform. While it's a great credit to the Latitude management team that Ahmed's successor was within our team, your Board conducted a global search to ensure that every possible candidate was identified and explored. It's a great credit to Bob that he was selected against the field of high-quality Australian and international candidates, and we have every confidence in his ability to generate great service for customers and great results for shareholders. Finally, I'd like to thank my colleagues on the Board for all of their time and diligence over the past 12 months, and in doing so, welcome Aneek Mamik and Julie Raffe to the Board. I would also like to take this opportunity to thank the more than 1,000 employees at Latitude who've worked tirelessly over the past year in responding to the COVID crisis, the rapid and significant changes in inflation, rising interest rates and the more recent criminal activity. Despite what you may read all hear in the media from time to time, most Boards and management of Australia are well meaning people who work hard to deliver great results for customers and shareholders, and the Latitude team is no exception. I'll now hand over to Bob to provide his address.

Thank you, Mike, and good morning, everyone. Thank you for joining us at today's Annual General Meeting. I'd like to begin today with a summary of our 2022 financial results, offer some commentary on what contributed to last year's performance and importantly, share my thoughts on what's needed in the months and years ahead for Latitude to realize its full commercial potential. Last year, our company earned a cash profit of $153.5 million, that was down $47 million on the prior year, which is a decrease of 23%. While this result was clearly below our expectations, there were a number of very positive trends and notable highlights that are important to call out and that will ultimately help support the growth of your company in the future years. Firstly, demand for our products remained very strong. We generated roughly $8 billion in new volume last year across our Pay and our Money divisions versus -- that's up 8% versus 2021. Volume growth in our Money Division was a particular standout, generating record new originations of $1.7 billion, a 12% annual increase. Volumes in our Pay Division reached $6.3 billion. That's growth of 7% year-on-year. These volumes results helped increase our receivables balance by 2% to reach $6.5 billion. For context, this represents our highest receivables balance in 18 months, going back to June of 2021. The quality of our loan book remains strong with charge-offs at a historical level of 2.35%. Cost discipline was another key standout in last year's results. Our cash operating expense was down $34 million (sic) [ 334.8 million ] or 9%. That was a function of in-year management actions and the roll through of productivity benefits from investments made in prior years. Our most significant challenge in 2022 was, of course, the rapid change in monetary policy here in Australia and in New Zealand, the fastest and most abrupt tightening cycle since the 1980s. The impact of this on our business was profound, resulting in $54 million in higher funding costs, which clearly had a direct and a negative impact on last year's earnings. While aggressive pricing action was taken by the management team throughout the year, we simply could not keep up with the pace of the changes that were passed through. Very pleasingly, however, our balance sheet remains robust and is well structured to support our future growth. We ended the year with a tangible equity ratio, which is the key measure of capital adequacy of 8.5%. That's above our target range of 6% to 7%. We continue to take a very prudent approach to credit loss provisioning, reserving at 1.6x net credit losses versus 1.3% during the pre-COVID period. And very importantly, we have strong relationships with a broad set of finance partners that provide access to the capital that we need to underpin the future growth of our company. So what's ahead for 2023? To be very clear, Latitude's business model is unquestionably strong, and the strategy of focusing on our core retail finance, credit card and personal lending segments will absolutely remain our priority. What's required, however, is that we take steps to ensure the company's capital is invested into a smaller set of higher-yielding growth opportunities. To that end, we will soon complete the sale of our Insurance business, which is expected to return approximately $90 million of capital upon completion next month. We are also in the process of closing down our small ticket Buy Now Pay Later platform, which will result in roughly $10 million in annual operating expense reduction going forward. In addition, we'll soon launch a new set of strategic revenue and cost optimization opportunities and initiatives aimed at improving our operating leverage. While expense management has been a key highlight in our results over the past few years, there is still more opportunity, in my opinion, to run our business more efficiently going forward. We will continue to seek out new partnerships, new distribution channels and new revenue streams to help drive incremental profit growth in the years ahead. This includes the launch of our exciting new credit card partnership with David Jones, which is expected to launch later this year. As debt markets settle in the coming months, we intend to leverage our deep and broad relationships with our finance partners here domestically as well as internationally to optimize our balance sheet and reduce our capital costs. We also remain openminded about inorganic growth opportunities, very specifically acquisitions, but only when these deals are short-term earnings accretive for Latitude shareholders. Before I close, I thought I'd say a few words about the cyber attack that was committed against our company last month. As we've stated publicly, a few days prior to our announcement on the 16th of March, our security monitoring systems detected unauthorized access to our technology environment. We made the difficult but necessary decision to shut down our systems and cease normal business operations in order to purge the attacker from our systems. As the Chairman stated, this criminal attack is under investigation by Australian Federal Police, and the full set of facts are emerging as part of the forensic review that's still underway. This incident is deeply regrettable, and I sincerely apologize to all of those who have been impacted. We cannot undo what's happened, but we can take responsibility for supporting our customers through this and to take the appropriate steps to safeguard our business from an incident like this happening in the future. We remain resolute in our focus on continuing to serve the financial needs of our customers, while taking the actions necessary to generate better and sustained financial returns for you, our shareholders. Thank you again for joining us here today, and I'll pass it back to our Chairman, Mike Tilley.

Thank you, Bob. So ladies and gentlemen, we'll now turn to the formal business of the meeting. And before we move to the agenda items, I'd now like to address any questions in relation to the presentation I gave today or Bob just gave more broadly in relation to the company. Are there any questions?

Good morning, Mr. Chairman. My name is [ Chris Lab ]. I'm representing the Australian Shareholders' Association at this morning's meeting. And just wondering your -- the Board's thought along not holding a hybrid meeting this morning. You've restricted to a webcast together with people present. Could you just outline the thinking behind that decision?

Yes. Well, I mean, we held a hybrid meeting last year. There was a good reason for doing that because a lot of people couldn't travel around because of restrictions with COVID. But it's a lot of additional work and expense. Last year, only 1 shareholder participated through the hybrid process and pretty much disrupted the meeting with the process that they pursued. And so this year, we decided not to hold a hybrid meeting. Are there any other questions? Okay. There being no further questions, the Latitude Group Holdings Limited Board tables the minutes from last year's AGM held on the 27th of April 2022, for approval. And the minutes are on site today. And if anyone would like to review them, our Company Secretary has a copy. If there are no objections, I declare them to be approved. Prior to the commencement of today's meeting, valid votes have been received, representing approximately 83% of the issued capital of your company. I now show on the screen the proxy votes received prior to the meeting for each of the resolutions being put today. Where the Chair of the meeting has been nominated as a shareholder's proxy, all open and available proxies will be voted in favor of all resolutions. There are voting restrictions for some resolutions, as outlined in the notice of meeting, which apply to those who have an interest in the resolutions and certain of their related parties or associates. The first item of business is to receive and consider the annual financial report, together with the directors and auditors reports for the year ended 31st of December 2022. A copy of which has previously been provided to shareholders. There is no requirement for shareholders to vote on these reports, but I would open up to shareholders the opportunity to ask questions. So if there's any shareholders who have questions on the first item of business today, the consideration of the financial statements and reports. There being no questions, we come to the items of business for which voting is required. Item 2 relates to the Adoption of the Remuneration Report. The resolution being put to the meeting is displayed on the screen. Please note that a vote on this resolution is advisory only and does not bind the directors or the company. Are there any questions or comments that a shareholder would like to make in relation to this resolution? Yes?

Thank you again, Mr. Chairman. It's quite an extensive statutory disclosure contained within the annual report, but most public companies in this day and age also provide actual remuneration received. Many retail shareholders find the statutory disclosures quite confusing and difficult to follow. And as a result, they actually would like to see what actually executives and directors receive an actual remuneration in any 1 period. Would you like to comment?

Look, the -- yes, we can consider doing that. The reality is that the statutory amounts shown are significantly higher than the actual amounts received. So we've always thought that showing the larger amount was more in line with the principles that ASX is seeking and -- the ASX is seeking to pursue here. There are times when you show a more favorable light on things that you do get challenged by ASX as to whether or not that is not misrepresenting or misleading from the statutory number, but we will take that on notice and have a think about it. Where true that the actual amounts received were higher than the statutory amounts, then I think there would be a much stronger case. Are there any other questions? Okay. There being no further questions, would you please record your vote now if you've not already voted? [Voting]

Item 3(a) relates to the Election of Ms. Julie Raffe as a Director, and details of Julie's qualifications, career, experience and other interests have been set out in the Notice of Meeting and in the directors' report. But I'll ask Julie to speak to you about what she brings to the collective capability of the Board. Thank you, Julie.

Thank you, Mike, and good morning, everyone. So I am a chartered accountant, was previously the Finance Director of Village Roadshow Limited, an ASX-listed company. My key areas of experience are risk, governance, strategy and capital management. So I think that adds a bit to the Board. I'm a Nonexecutive Director of Ridley Corporation Limited and a Nonexecutive Member of the Advisory Board of Ironman 4x4 Pty. Limited. In the not-for-profit space, I'm President of the Finance Executives Institute of Australia, and I'm also the Vice Chair of mental health charity, Entertainment Assist. So thank you for your time, and I appreciate the opportunity to continue to serve the company and its shareholders as a director. So thank you very much.

And as a director and a colleague, Julie has made a great contribution to the Board in the time that she's been on the Board. So the resolution being put to the meeting is displayed on the screen. Are there any questions that anyone would like to ask in relation to this resolution? Yes.

Yes. It's not directed to Julie directly, but I noticed in your policy in relation to minimum shareholding required to the directors that it doesn't apply to nonexecutive directors. Is there any -- could you just explain a little bit further the thinking behind that policy adoption, please?

Look, I think the -- there are people that argue that having a minimum shareholding is a conflict because someone that's a shareholder is not acting purely independently, just to someone that's on the Board too long, perhaps is determined to lose their independence. I don't think that a minimum shareholding obligation on an independent director or any of the independent directors on the Latitude Board would change their effort, their commitment, their contribution or their diligence. So I think, we think that it's just a provision that goes beyond what's required.

Just that I think so -- sorry. I think shareholders generally appreciate the retail and do appreciate when directors actually have a skin in the game, as [indiscernible].

I understand that. But almost 80% of the company is represented around the Board table already. So to suggest that there isn't a significant representation of shareholders on the Board, our CEO has well in excess of 10 million shares. I have well in excess of 3.5 million. There is a large amount of shareholder representation around the Board table already. I think if this was a case where there was no significant shareholder and no director at the Board represented shareholder -- had a material shareholding, it might be different. But I think in this case, it's -- it really doesn't make a difference. Thank you.

I do actually have personal holding in Latitude. Thank you.

Okay. There being no further questions, would you please record your vote now if you've not already voted? [Voting]

Item 3(b) relates to the election of Mr. Aneek Mamik as a Director, and details of Aneek's qualifications, career experience and other interests are set out in the Notice of Meeting and in the directors' report. Aneek is unable to attend today's meeting. As such, he's provided me with the following statement and asked me whether I would read it out on his behalf. Regretfully, I'm unable to join the AGM today. However, I'm appreciative of the opportunity to continue to serve the company and its shareholders as a Director. I am a partner and head of Financial Services investing for Varde, a global alternative investment firm that has invested more than $95 billion in both public and private markets. I'm currently a Director of New York Stock Exchange listed OneMain Financial, a leading consumer credit provider; and Mercury Financial, a U.S.-based financial technology firm. Prior to Varde, I worked at GE Capital for 15 years, including assignments in GE Money, which is now Latitude. I completed my bachelor of masters and business from Monash University as well as qualifying as a chartered accountant. The resolution being put to the meeting is now displayed on the screen. Are there any questions or comments in relation to this resolution?

Thank you. Thank you. Mr. Chairman, John Richards, shareholder. Well, sorry, representing Australian Minerals Shareholder. What percentage of the Board meetings in the past year has Mr. Mamik attended?

Well, many of our Board meetings have been by Zoom because of travel and other problems. But Mr. Mamik has only been on the Board since February this year. And he was physically in attendance at our last Board meeting, and I think that's the only Board meeting that we've had since he joined the Board. So he joined the Board at the end of February. We had a Board meeting in March, which he attended, and he's unable to be here today. But I can assure shareholders that Mr. Mamik is a very, very experienced consumer finance -- globally consumer finance expert, and OneMain Financial, the business that he is on the Board of in the United States, is very similar to Latitude in terms of its operations in the United States. So he brings significant experience. And he represents Varde, which is obviously, a substantial shareholder in the company.

Can I can ask a follow-up question? During your research on him and his choice to become an NED, did you -- have you set a quota that he should attend in the future?

Not specifically. But if you look in the annual report, you'll see that this company often holds in excess of 15, sometimes 19 or 20 Board meetings a year. For a director that's based overseas, to expect them to come to 60% of that many meetings would mean that they'd be traveling for 10, 12 weeks of the year just to be involved in Latitude. And I think we would not be able to keep him as a director under those circumstances. But he comes to the meetings that matter, meetings around strategy, meetings around budgeting and makes a significant contribution. But at this day and age, to give you an example, we now use 1/4 of the floor space that we did pre-COVID to run our business. So 25% of the floor space that we did and operating on remote Zoom or similar meeting arrangements has become a pretty much par for the course. And so we would expect that it's going to stay that way. And we think that opens up to the company the opportunity to get some of the best experts in what we do around the world to participate in the Board and operations of the business. Are there any other questions? Thank you. There being no further questions, would you please record your vote now if you've not already voted. [Voting]

Item 3(c) relates to the reelection of Alison Ledger as a Director, and details of Alison's qualifications, career experience and other interests as set out in the Notice of Meeting and in the directors' report. I'll now hand over to Alison to speak to you about what she brings to the collective capability of the Latitude Board. Thank you, Alison.

Thank you, Chairman, and thank you for your consideration. I have over 35 years of experience in financial services as a banker, a management consultant and a corporate P&L owner. Prior to becoming a full-time Nonexecutive Director, I was Executive General Manager of Product, Pricing and eBusiness for IAG and COO of The Buzz Insurance, an IAG subsidiary. Previously, I was a partner at McKinsey & Co in London and Sydney and consulted to global financial institutions. My areas of expertise are strategy, risk governance and operational management. I've also held senior roles at Chase and Bankers Trust. Currently, I'm a Nonexecutive Director of ASX-listed Audinate Group and CountPlus Limited. I'm also a Director of Latitude's insurance subsidiaries, Hallmark General and Hallmark Life Insurance. I have a BA in Economics from Boston College and an MBA from Harvard. I'm a graduate of the AICD. I would welcome the opportunity to continue to serve Latitude. Thank you.

Thanks, Alison. Again, Alison has been on the Board now for 5 years, I believe, and chairs the People and Remuneration Committee and the Technology Committee and is a significant contributor and a valued colleague. So the resolution has been put on the screen, and I'm opening it up if there are any questions on this resolution. Yes, sir.

Just interested in your role as the Chairman of the Technology Committee. I noted from the Director's Report, you met twice through the year. In light of the recent issues around the scamming, is there any intention to perhaps increase the scrutiny or increase the number of meetings that this important committee may hold throughout a year?

Thank you. I think typically, we meet from 2 to 4 times a year. It depends. But technology is also a topic that's on the Board agenda. So it's covered at the Board meetings as a whole. The subcommittee meetings really look at investment specifically and operational projects. So it is covered on a regular basis on the Board agenda.

Thank you. Are there any other questions? Okay. There being no further questions. Please record your vote now if you have not already voted. [Voting]

Item 3(d) relates to the reelection of Mr. Scott Bookmyer as a Director. Details of Scott's qualifications, career, experience and other interests are set out in the notice of meeting and in the directors' report. Unfortunately, Scott's flight was diverted overnight due to an old passenger being onboard the flight. And is, therefore, still in transit to Australia and is unable to make today's meeting. As such, he's provided me with the following statement and asked me to read it out on his behalf. In addition to my role at Latitude, I'm currently a Director of the Laser Clinics Group and the Australian Venue Company. I've previously been a Director of MYOB, Genesis Care, Unisteel and Alliance Tire. I have over 30 years of professional experience and have worked at KKR in the financial services industry for more than 20 years. Most recently, I ran KKR's Australian and New Zealand business. Prior to KKR, I worked at the Boston Consulting Group and Procter & Gamble. I hold a BA in Economics with honors from Indiana University and a Masters of Business Administration from the University of Chicago. I'm appreciative of the opportunity to continue to serve the company and its shareholders as a director. And the resolution being put to the meeting is displayed on the screen. Are there any questions or comments in relation to this resolution? And so I might say that Mr. Bookmyer does attend almost every Board meeting. So even though it's not based in Australia. There being no further questions, please record your vote now if you've not already voted. [Voting]

Ladies and gentlemen, that now concludes our discussion on the items of business. And in a couple of minutes, I'll close the voting. Please ensure that you've cast your vote on all the resolutions. I will pause now for a moment to allow you to finalize your votes. [Voting]

Thank you. Thank you, everybody. I'll declare voting now closed. And the voting results from this meeting will be released to the ASX and posted in the Investor Relations section of www.latitudefinancial.com later today. And that concludes our meeting. I thank you for taking the time to join the directors and myself today. Your ongoing support is greatly appreciated. Thank you very much.