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

Thank you for standing by, and welcome to the Latitude Group Holdings Limited FY '23 Results briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mitchell Hawley, Head of Investor Relations. Please go ahead.

Thanks, Rachel, and good morning, and welcome to Latitude's result briefing for the year ending 31 December 2023. I'm Mitchell Hawley, Head of IR, and I'm joined by our MD and CEO, Bob Belan; and CFO, Paul Varro. In the spirit of reconciliation, Latitude acknowledges the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to the Elders past, present and extend that respect to all Aboriginal and Torres Strait Islander people today. I'll now hand over to Bob to begin the presentation.

Thank you, Mitch. Good morning, everyone, and thanks for joining us this morning. As we look back at the last 12 months, it's clear that 2023 has been extraordinarily difficult year for our company. We faced a number of challenging headwinds and setbacks that have tested our resilience and led to a financial results that, quite frankly, fell well below the expectations that we set at the start of the year. Since the onset of COVID, Latitude and the financial services industry, more broadly, has faced a range of unfavorable macroeconomic conditions that have impacted lending demand, increased funding and operating costs and put pressure on our ability to deliver profit growth to our shareholders. This year's results were further challenged by a malicious cyber attack in March that impacted debt collection activities, delayed planned pricing actions and prevented us from acquiring customers for a period of time. The situation required decisive action, and in response, we deployed full resources of the company to safely restore our systems, regain business momentum, and very importantly, begin the process of rebuilding trust in our brand. The cumulative and compounding effect of these factors is evident in our '23 results. Last year, the company lent $7.65 billion to Australian and New Zealand customers. This was down $300 million or roughly 4% on the prior year and primarily related to the pause in lending activity as our systems were being restored following the cyber incident. Receivable balances ended at $6.25 billion, which was $230 million or 4% lower on a year-on-year basis. This reflects the combination of fewer new loans originated, as just discussed, along with higher customer repayment rates, which remained above historical levels. Pricing actions taken by management resulted in a $70 million or 8% increase in interest income. However, these gains were offset by $130 million increase in funding costs, which resulted in an 8% decline in our net revenues to $658 million. Revenue was further impacted in '23 by a $68 million increase in charge-offs due to cyber-related disruptions to our collection systems, along with the slow, but steady reversion of credit losses to more normalized historical levels. While expense discipline, which has been a key feature in our results leading up to this point, was maintained, operating costs rose by $20 million or 6%. That said, this was predominantly linked to nonrecurring costs related to reengineering our operating model, which will deliver sustained productivity gains going forward along with various investments in things that are certain to drive revenue growth over the next few years. In line with what we shared with the market in May, our cash profit after tax dropped to $18.4 million. After amortization of intangibles and other notable items, including a $68 million pretax provision for cyber remediation costs, we recorded a statutory loss of $138 million from continuing operations. Importantly, Latitude maintains insurance policies to cover key risks, including cybersecurity risk. We continue to work cooperatively with our insurers to be reimbursed for eligible expenses and to date have received $5 million in recoveries. Shifting gears, despite this year's challenges, our balance sheet remains strong and our tangible equity ratio, which is, of course, a key measure of our capital adequacy, was at 6.8%, and so at the upper end of our stated targeted operating range of 6% to 7%. Through all of this, Latitude's customers, financiers and partners stood behind us. All of our retail and broker partnerships were retained and a number of new large merchants were added to our network across both Australia and New Zealand. By June, 3 months after the attack, growth momentum was clearly rebounding, and by December, new origination volumes returned to pre-incident levels for both our Pay and our Money division. This supported growth in our receivables balances, which has been on a steady upward trajectory since August. Pricing actions were resumed in July, which resulted in strong net interest margin improvement in the second half, a trend that we expect to continue into 2024. Our actions last year were and will continue to be guided by our new Path to Full Potential corporate strategy that was endorsed by Latitude's Board shortly after my commencement as CEO in April. Our new strategy places emphasis on delivering market outperformance growth in our core sales finance, credit card and personal lending businesses, segments that have historically served our customers and retailers well and that have generated superior returns for our shareholders. We also look to expand our white label solution, beginning with the launch of the new David Jones private label credit card next month. We're also investing more in innovative technology to meet the evolving needs of our customers that will drive strong commercial outcomes and that will further enhance our cyber defenses. While there is still much to be done, I'm quite pleased with the pace of change that's being delivered. The key evident points that our new strategy is coming to life include the sale of the Hallmark insurance business, Symple Canada assets and the exit from the Buy Now Pay Later segment, which align with our commitment to simplify our business and which has resulted in the return of $118 million in capital for our balance sheet. We're also committed to focusing on our core products and markets. Last year, we completed the integration of the Symple technology platform, which unlocks numerous new capabilities and opportunities to further increase our share growth in this high ROE segment. We've also taken the difficult but necessary steps to restructure our operating model in the second half of '23, which resulted in the personnel reduction of 16%. These savings will be reinvested back into our highest potential and highest yielding growth opportunities. And finally, we've reshaped our executive team, appointing a group of highly motivated, talented and globally experienced leaders to deliver on our target commercial outcomes. These accomplishments demonstrate Latitude's ability to adapt, persevere and deliver even in the face of adversity. In closing, while 2023 was undoubtedly a difficult year, it was a period of significant progress towards our renewal. We remain the largest nonbank consumer finance lender in Australia and New Zealand, are privileged to serve the needs of over 2 million customers and 5,000 retailers across the region, and with each passing month, are increasingly confident in our ability to unlock Latitude's full commercial potential in the quarters and years ahead. With that, I'll now pass it over to Paul Varro, our CFO, to talk more about the underlying details.

Thanks very much, Bob. If you turn to Page 12 of the presentation, what I thought I'd do is just start with a snapshot of some of the key drivers of the results. I won't go through all of the detail on this page, except to say 5 key points. Starting on the left-hand side, cash NPAT, $18.4 million as Bob said, in our guidance range of $15 million to $25 million, and then a statutory loss from continuing operations of $138 million, mainly driven by cyber and a goodwill impairment for Asia. $6.7 billion of volume was down year-on-year by about 4% is recovering well. That good momentum into the second half, allowing us to keep receivables flat to plus $16 million since June. We've stabilized our operating income, as you can see there at 10.44%. That's largely off the back of a number of pricing changes that we made across both [ FBUs ] since the pause due to cyber. We also had some impacts on our net charge-offs, which impacted our rate yield, which you can see there. In terms of OpEx, we created the capacity via our operating model changes to invest in growth, which can also help offset inflation. Our TER remains at the top end of the range despite the statutory loss and we made the prudent decision to pause the dividend for the second half of 2023. If we turn to Page 13, I'll just lay out some of the key input drivers for our receivables. As you can see on the left-hand side there, just a couple of call outs of some of the highlights. Money up 28%. Money was really impacted by the cyber incident, not able to originate in the first half, but you can see the really rapid recovery there. That also in the context of pricing up new business, as you can see there on the page. In terms of Pay, steady increase in the second half with interest-free volumes impacted by softer retail environment, but certainly recovering. By the fourth quarter, down 7%. Pleasingly, new accounts, though, were up 6% for the fourth quarter as well. 28 Degrees is also traveling really well. Right-hand side of the page, you can see the consistent reduction in payment rates by about 300 bps for every second half, you can see there in the chart, since 2020. Those 2 factors are building momentum, reducing payment rates, helped obviously support our receivables to be up 0.3% or $16 million. If we turn to Page 14, I'll take you through the P&L. Top left of Page 14 is our operating income yield, and off the back of all of the pricing that we've done, we resumed it post cyber. You can see there 56 bps in interest income offset by some operating income to be 48 bps up in revenue, offsetting 56 basis points of increase in cost of funds. Bottom left, down $10 million largely off the back of $2 million due to the rate. So given that we held at 8 bps at the CoF of that $2 million, the lower assets though, on an average basis relative to the first half, CoF was $13 million offset by days of $5 million. If we move to Page 15, we've shared this chart before, but it just gives you the evolution of our operating income. The way to read it, you can see the revenue yield on the top row. In the dark blue, you can see the rapid increase in our cost of funds, and the middle shaded blue area is our operating income. And you can see since first half '22, we've really made some progress in terms of our revenue yields up 160 basis points. But obviously, given the rapid increase in CoF, that's been up 300 basis points. We believe that, that stabilization that you see there at 10.44% continued to grow in the second half. If you look at the top right chart, you can see that by half. So the dark blue bar is our revenue, the purple bar is CoF, and you can see really cost of funds getting ahead in the second half of '22. But if you look at the most recent half, second half '23, even due to the delay in our pricing, we've pretty much been on parity with cost of funds. We do expect technically cost of funds to continue to increase by about 60 to 80 basis points going forward, and that's really just the annualized impact of the cash rate being on hold for the remainder of '24, higher swap costs on our new vintages of personal loans and refinancing some of our existing facilities that were struck when margins were particularly low. If we move to Page 16. Our credit quality remains really strong. You can see our origination quality, and we've showed this chart before on the top left, with a good mix of CR 1s and 2s maintaining that high-quality base. Bottom left is our delinquency rate. You can see those normalizing post the blip for cyber, but then reverting to the long-term mean. We've laid that out on the right-hand side of the page, where you can see the real peak due to the cyber event from 30 days rolling into 60 days and then into 90 days, and then the rapid improvement when we resumed our collections activity. I think it's a really good endorsement of what we're able to do once we're able to restart our collections activities. You can see those delinquencies starting to slowly revert, to normalize, and we mean -- what we mean by normalize is pre-2019 historical averages. Those delinquencies manifest into charge-offs. So if you move to Page 17, you can see there net charge-offs on the left-hand side. We've actually broken the year out for you into the quarters, and you can see there on the blue bar to the right, the 2 peak quarters of 3.91% and 3.94% and then reverting to a more normalized 3.2%. Our long-term average is about 3.35%. We expect charge-offs to be somewhere in that range going forward. Our provisioning remains in good shape, 4.23%. We believe that's a prudent rate for normalized losses going forward. If we move on to OpEx now on Page 18, as Bob said, our discipline remains. We've created a lot of capacity with the operating model changes we made throughout the course of this year. That created capacity for us to invest in growth in the golden quarter for retail, but also in some of our check changes and also obviously to mitigate inflation as well. So cost up 2% half-on-half. In terms of notable items on Page 19, $62 million for the half, down from over $149 million. The big drivers there are asset impairments largely off the back of Asia and Buy Now Pay Later, some intangible amortization since the acquisition from GE and some integration costs for Symple, David Jones, and International, the remaining 12%. You'll note the minus $8 million for cyber. Essentially, we had a modest release in the provision for ID replacements offset by costs incurred in the half. And then as Bob said, we have insurance proceeds of $5 million as well. And finally, our funding program remains in great shape. We delivered 6 transactions this year, delivering investor diversity and $1.3 billion of headroom. We feel really good about that, along with the strength of the balance sheet with our TER ratio. If you turn back to Page 10, just in terms of outlook, we see Latitude emerging from the tough '23 in actually really good shape. We believe the macroeconomic conditions going forward are more conducive to our business model and our core strengths, with interest rates not increasing at the same rate as they have and continued low unemployment. We think this supports a return in the demand for credit, which will help us offset some of the softness that we're seeing in retail spend. We've decreased repayments. We see that supporting our asset growth going forward. But obviously, with those decreased repayments, we also expect that normalization in our net charge-off as well. As I've said before, further margin actions will mitigate cost of funds. We expect to have a natural increase there in our CoF, but we do expect to expand margins in 2024. We'll also keep our cost discipline, as I've said a number of times, which will all obviously help us invest in growth going forward. And with that, I'll turn it back to Bob.

Yes. So I think from here, we'll just say thank you and open it up for Q&A., so I hand it back to Rachel.

[Operator Instructions] Your first question comes from Tom Strong from Citi.

I just wanted to start on the cost base. I mean despite some pretty significant FTE reductions over the last 12 months, I mean we're still seeing half-on-half cost growth. Can you maybe just give us an idea of the split between underlying inflation and I guess the reinvestment opportunities that you've identified, and a view to how that will progress over the next 12 months?

Yes, sure. So I think on the cost side, clearly, the operating model reductions help mitigate some of those inflationary pressures. We largely see those inflationary pressures on some of our big tech contracts. A lot of those are already embedded into the numbers. In terms of how it looks going forward, obviously, we'll get an annualized benefit of the operating model changes that we made this year, given that we only really did a lot of those in the third quarter of this year. So I would expect to see continued reduction in the FTE costs on an annualized basis. But obviously, we want to invest in growth. And that will look like marketing plus continued investment in our tech, like we've done this year, in particular on the Symple platform, which is some of that IT increase that you see in the operating expense walk.

Great. And just a second question, if I can. You put through some pretty considerable repricing over the last couple of years. In the press the other day, you were repricing your cards -- some of your cards by 3%. Just given the magnitude of the repricing initiatives and where the products are in an absolute sense, can you give us a sense of how that's starting to impact demand and how you sort of see the pricing on an affordability basis?

Look, there's always a really -- this is Bob, by the way. There's always a really good, delicate balance when we think through margin management actions more broadly in terms of balancing the need to not undermine demand, but also a real need to make sure that we're pricing our products accordingly on the basis of how funding costs have changed. And what I would say is there's no surprise to anyone that our funding costs have changed materially over the last number of years, and we've had to think carefully and strategically about where we pass those pricing changes through. At the end of the day, Tom, we apply a price for value equation and price for value strategy. And our view is that the products that we offer in the marketplace, offer customers, those who choose to use it, significant rational value relative to other alternatives. And so we find ourselves in a position where we have to make sure that we're finding the appropriate balance between volume and margin trade-off, but also doing the right thing by our shareholders in ensuring that strong margins are maintained.

Yes. No, that makes sense, Bob. And I guess just as an extension of that, I mean, do you see the competition taking the same rational approach in terms of pricing?

I can't comment on the strategic choices of our competitors, Tom, but what I will say is that, look, the markets will eventually act rationally and make whatever adjustments they have to make in order to deliver the outcomes that they've committed to. And those choices really are quite bespoke to every company. Some will focus more on CoF, some will focus more on revenue, others will focus more on volume. What I'd say is we are constantly balancing the mix of those 3 inputs to make sure that, that we don't overshoot. My view is that if you get pricing wrong, you will lose volume very quickly, which is not helpful for revenue growth. And so it's a constant adjustment. I think one thing that we are really fortunate about here at Latitude is that we have agility. We're a small and nimble organization that can respond very quickly to how things change in the marketplace, both in terms of customers' response, the changes that we make and also the competitive environment. I think that's a real competitive edge for us going forward.

The next question is from Lara Tufegdzic from Bank of America.

In terms of the potential positive turnaround in credit demand you mentioned in your outlook, which segments or product specifically would you expect this to come from? And additionally, strategically, your deployment of capital to the highest growth areas. Which growth areas can we expect these to be?

So I think, Lara, the return of the demand for credit is across both of our products. We've already seen that in our personalized book, which obviously, as you can see with the numbers, has grown really, really well. In terms of interest-free, as we know, that value proposition resonates in a higher interest rate environment relative to our performance when interest rates are at 10 basis points or near to 0. So we actually think that inflation pressure, higher cost of loans will actually help that demand in credit generally for both of our products on the Pay and the Money side.

Lara, I think one of the charts I'd point to, I can't remember whether it's in the presentation, this presentation or whether we shared earlier, is the relationship between credit demand and household savings rates as well. And so as household savings rates begin to erode post the big buildup during the COVID period, the natural outcome of that is elevated demand for credit. As Paul mentioned, we've seen really strong growth in the fourth quarter in our personal loans business, also in our motor loans business and a really strong resurgence quite recently in our sales finance business as well. I think the one key question that I and we have collectively is to what extent will consumer discretionary spending pullback. My instinct, time will tell, is that while we would likely expected some pullback in consumer discretionary spending, that will be offset by elevated consumer lending demand in the segments that I just talked about.

The next question is from Andrei Stadnik from MS.

Can I ask my first question around Slide 16? You mentioned delinquencies normalizing, which they seem to be, on a 90-day basis. But on a 30-day basis, they seem to be still going up. Can you talk a little bit about that? And also, just the seasonality seems to be that you have this improvement in the third quarter, but most years. Can you talk a little bit about kind of what's driving that? Is it just like tax refunds or something else?

Yes. So I'll answer your second question first. That's exactly right. There's seasonality in our collections and delinquency rates. And in particular, they are at their lowest in the third quarter, largely off the back, exactly what you say in terms, of tax refunds. We actually expect the right-hand side of those graphs on Page 16 to increase. And really, what we're seeing there is the normalization back to the long-term average. If you think about the last few years, in particular, with COVID and the amount of stimulation that was put into the economy, obviously, consumers had a much a higher stock of cash in the balance sheet. We saw elevated payments. When you see elevated payments, obviously, the flip side to that is in lower delinquencies. So as that stock of savings is used up, we expect repayment rates to slow. Obviously, as repayment rates slow, receivables are easier to grow, revolve rates go up, but also delinquencies go back up as well. So we expect -- obviously, you'll see, post the cyber shock, the really rapid reduction. That wasn't so much just because it was the third quarter, it was actually resuming collections activity that drove it down so quickly. And then we expect that gradual increase in those delinquencies to continue, you can see we put some little dotted lines on there as well, back to the long-term averages through the course of 2024.

Okay. And my second question can I ask around just our outlook for the net interest margin? You mentioned the funding costs will go up by 60 to 80 basis points. You also have a fair bit of repricing. I think consensus is looking for maybe 30 to 40 basis points improvement in FY '24 NIM. Is that -- do you think that's reasonable? Do you think you got pricing to offset those higher funding costs?

Yes. You can see there's a higher funding cost. That 60 to 80 is assuming that, obviously, cash rates stay flat. If cash rates stay flat, we will naturally get that increase coming through due to the annualization effects from '23 into '24. We've got a number of pricing actions in train, but clearly, the biggest driver of whether we expand margins by 20 basis points or 60 is related to what the cash rate does next year. But certainly, with what we have in plan at the moment, we do expect some expansion going forward.

There are no further questions at this time. I'll now hand back for closing remarks.

Thanks, Rachel, and thanks to everyone for joining the call today. Bob, Paul and myself look forward to meeting a number of you over the next few weeks. And that concludes our call for today. Thank you.

Thank you, everyone.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.