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

Thank you for standing by, and welcome to the Latitude Financial Services First Half 2024 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mitchell Hawley, Head of IR. Please go ahead.

Thanks, Ashley, and good morning, and welcome to the Latitude results briefing for the half year ending 30 June 2024. I'm Mitchell Hawley, Head of IR, and I'm joined here today by 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 respects to the elders, past and 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.

Thanks, Mitch. Good morning, everyone. Welcome, and thanks for joining us on today's first half results briefing call. The past 12 months here at Latitude can be characterized as a period of renewal, rebounds and, very importantly, a refocus on the core fundamentals that have driven our company's historically strong and stable commercial results. Today, I'm really pleased to share that we've had a solid start to the 2024 financial year. We've seen the strategic and focused action that's been taken by management starting to compound to have the desired effect. And as you'll see in the coming slides, the leading indicators of our business are pointing to a clearly strong and, I believe, sustained profit performance acceleration into the future. Beginning with Slide 6. Our Pay and Money divisions combined to generate $4.1 billion in spending and lending volume in the first half. That's up $500 million or 14% on a year-on-year basis. Originations in our Money division were particularly strong, exceeding $1 billion, which is a new record high for the company. While market conditions have been more supportive as of late, this growth has been incrementally driven by further investments in marketing, the launch of new functionalities that improve customer experience, and the deepening of our relationships with key broker partners across the country. New personal and auto loans continue to be written at stronger margins, which has and will continue to support our profit growth momentum well into the future. Turning to Slide 10. You'll see that there's been a material lift in demand for our Pay division products, with credit card application volumes now back to 2021 levels after several consecutive years of decline. In the last 6 months, we've seen an increase in retailer-led promotional activity for our market-leading interest-free offers. At the same time, customer engagement with our products has increased, with average spend per customer up 12% year-on-year, despite softness in retail industry turnover more broadly. Our Pay division growth has been further supported by the launch of several new marquee and very exciting partnerships such as Amazon, David Jones and Officeworks. We have and will continue to expand our powerful retail network that supports our Pay division and in doing so, continue to increase the relevance of our credit card products for both current and prospective customers. Moving back to Slide 6 for a moment. It's evident that the first half volume growth has driven a strong recovery in our interest-bearing receivables, a leading driver of future revenue growth. Interest-bearing balances have now increased for 10 consecutive months to reach $4.7 billion, the highest level since June 2020. Total group receivables, which include card spend, interest-bearing and interest-free balances, reached $6.4 billion through 30 June. This is up $145 million year-on-year and the strongest first half growth we've experienced since 2018. Importantly, this volume growth has been delivered at higher yields. After 3 consecutive years of decline, net interest margins increased in the first half by 31 basis points to 10.1%. As the full impact of margin management actions take hold and as the benefits of our funding cost optimization work rolls out, we expect this trend to continue with further upside ahead when benchmark interest rates begin to ease. Credit discipline is the core competency of our company and something we remain laser-focused on. While we expected delinquencies to revert back to historical norms, we're pleased to report that our 90-day past due metrics remain low at 1.15%. To round out the financial highlights, which are noted on Slide 7, you'll see that operating income for the first half came in at $342 million, up 2% year-on-year, up 5% half-on-half. Operating expense for the period decreased to $165 million, down 3% year-on-year, down 6% half-on-half. This resulted in first half cash NPAT of $27.4 million. That's up $11 million or 69% half-on-half, and up $16 million or 140% year-on-year. As I've shared before, our actions have and will continue to be guided by our refreshed corporate strategy that places emphasis on 5 key themes, which are summarized on Page 8. These initiatives are being led by a highly tenured, talented and globally experienced leadership team, who are deeply committed to delivering on our strategic agenda. I'd like to thank the executive team and all of our Latitude colleagues for their commitment and hard work that's gone into restoring business momentum and initiating performance turnaround that's now underway. In closing, I want to acknowledge that we still have plenty of work ahead of us, but I'm also very pleased with the progress and the pace of the change today. We'll continue to focus on executing on our strategic priorities in our core markets and core segments, but at the same time are building the pipeline of new, high potential and high commercial value opportunities to drive further growth in the quarters and halves ahead. With that, I'll now pass things over to our CFO, Paul Varro, to walk you through some of the technical details of the first half results. Paul, over to you.

Thanks, Bob. If you turn to Page 15, what we thought we'd do is just lay out some of the key metrics for the half. I'll save some of the details for the subsequent pages, but I just wanted to highlight a few key points for you. Starting on the left-hand side, you can see the really strong momentum that we've had both in our cash NPAT and stat earnings. And you can see the really strong upward shift in particular versus the first half of 2023. Underpinning that strong profit result has been really strong lead indicator metrics with our -- with growing volume year-on-year and half-on-half. That strong volume performance has allowed us to grow our receivables 2% half-on-half and 3% year-on-year. Not only did we grow the book, we also expanded margins. As you can see there, our op income margin, up 47 basis points year-on-year, and also managing to manage our costs relatively flat whilst also managing inflation and investing more to grow. On the right-hand side, our TER remains strong, and the dividend is on hold as we continue to invest further in the growth of our business and our profitability. If you move on to Page 16, I've just laid out some of the key inputs for our receivables. And as you can see on the top left-hand side, volume really strong at 14% growth year-on-year and 2% half-on-half. This is really led by the Money business, which is up 60% year-on-year as it recovered really strongly from cyber, but also 25% half-on-half. Pay was less impacted by the cyber incident, but still grew 4% year-on-year. Bottom left-hand side is our repayments, slightly down due to seasonality, up versus first half '23, largely due to first half '23 being cyber impacted. And first half '24 has more card spend, which typically drives higher payments. That solid volume and relatively steady payments delivered growth in our receivables of 3% year-on-year and importantly, interest-bearing receivables up 4% half-on-half and 5% year-on-year. If you turn to Page 17, I'll take you through the P&L, starting with operating income. And as you can see on the top left-hand side, our disciplined pricing actions in the second half of '23 and into 2024 delivered a margin expansion of 47 basis points half-on-half and 40 bps year-on-year, so really strong performance there. The bottom left shows you, in combination with our increased assets, we delivered $18 million extra half-on-half, largely off the back of the higher receivables and that margin expansion. If you turn to Page 18, we've shown this page before. But really, it's our operating income journey over time. And if you look at the revenue yield on the top row of numbers, you can see revenue was up 72 bps half-on-half. Cost of funds in the dark blue shaded area still rose 26 basis points. The combination of those 2 metrics though is in the light blue shaded area, and you can really see that momentum, up 47 basis points from a low in second half of '23. I like the top right-hand chart because it really shows the -- basically, the differential in our revenue yield growth versus our cost of funds yields. And you can see the dark blue lines, in particular, cost of funds abating from the highs of second half '22 down to first half '24. We expect that dark blue bar to be relatively flat from now on, obviously, as COF is at the top of the cycle. We do expect further cost of funds increases largely off the back of newer vintages being at a higher cost of funds, in particular, on our Money business. But we do expect our pricing to outrun those cost of funds increases going forward. If you turn to Page 19, just a reminder of the sensitivity to cash rates on this business. 100 basis points in cash rate movement drives $40 million in pretax earnings and gives us further optimism for margins in the future as the rate cycle pivots. As we saw last week with the RBNZ reducing 25 basis points, that's expected to deliver us an extra $2 million of pretax earnings annualized. Over to Page 20, as you'll see there, our credit quality remains strong. Left-hand side, through the door, credit quality continues to have a high proportion of high-quality credit risks. And that quality, underpinned by solid employment results, really drives our delinquency outlook going forward. Notwithstanding, we do expect to see a normalizing of our delinquencies, which you can see in the chart there, back to those -- reverting back to those historical ranges of the pre-'19 levels. If you move to Page 21, left-hand side, as I pointed out, NCOs or net charge-offs, back to their historical ranges. And on the right-hand side, our provisions remain well covered. Over to OpEx and our prudent cost management, along with the disciplined op model changes in the back half of 2023, have really created some capacity for us to keep costs relatively flat whilst managing inflation pressures but investing more in growth. As you can see there in the first left-hand side bar, minus $23 million, which is really our operating model, along with a one-off on our STI has created that capacity to spend more in marketing, more in tech uplifts as well as managing inflation really, really well. On to Page 23, notables. There's not too much to say about this pleasingly, in this half, down materially half-on-half and year-on-year. And then I'd like to close out on Page 24. The funding program had a magnificent half. Three really, really successful public transactions, which raised $1.1 billion in debt, increased our investor base to 56 investors, created headroom for us to call our facilities going forward, and balanced our maturity profile. We also refinanced our corporate debt facility for another 3 years. The program is really, really well set up for some super strong second half performance and into '25. With that, I'll turn it back over to Bob, who will take us through closing remarks and our outlook.

Moving to -- Mitchell, have we posted the outlook statement?

Yes.

We have. Okay. So -- and it's 26, Slide 26 of the presentation. There's really 6 key points that I wanted to underscore and provide a few views on. One is we are beginning to see the emergence of more favorable macroeconomic settings, which we believe will -- have been more recently and will continue to be supportive to Latitude's business model as we get into the second half and into 2025. We do expect that the growth that we experienced in the first half of this year for that momentum to continue and really with a focus on new partnerships, marketing, martech, marketing optimization and ongoing focus on customer and retailer experience enhancements. Margins, we expect to expand as we benefit from the flow on effect of pricing and funding initiatives. Tremendous amount of hard work has been put into surgical and strategic margin management over the last several quarters. And we expect the roll-through benefit of that to manifest in the coming months. We expect employment to remain resilient and supportive of credit performance. That said, cost of living pressures are real and having an impact. And so we expect to see delinquencies continue to revert back to long-term historical norms. Cost discipline has been a real hallmark of this business and of this management team specifically. You can expect that to continue. Again, as Paul mentioned, the whole idea here is to make sure that our capital is being deployed to strategic and growth initiatives wherever that's possible. And last point is, again, tailing off of Paul's comments, the work that's been done in our treasury team to put the balance sheet in place that's required to support our growth ambitions is well progressed and more of that to come in the back half of this year.

Thanks, Bob. I will hand it back to Ashley now for the Q&A.

[Operator Instructions] Your first question comes from Andrei Stadnik with Morgan Stanley.

Can I ask around the repayment rates? Should we expect repayment rates to slow further from here? And does that mean that balanced growth should continue to pick up in terms of the growth rate?

Yes. Great question, Andrei. We do expect payment rates to moderate a little bit further. We don't expect them to dramatically change and get back to those pre-COVID levels that you see on the chart there in 2019. What will drive it, obviously, is the overall environment. I mean, obviously, the opposite impact of that is our delinquencies. The other factor going on there is the increasing amount of card spend that we're seeing, which will probably elevate the payment rate slightly to counteract the reduction that we do expect to see going forward. So moderate reduction is what I would think going forward.

Can I ask around fees? So I think some of the customer fees, they have been increasing. And I think there have been some more repricing in this new half, in the December half. So how are you thinking about fee pricing actions? And what kind of benefit could come through from that?

I'll take that one. So if you're talking about margin expansion, we do expect the fees and API changes that we've already implemented in the first half of '24 to benefit us going forward. As I said before, margin expansion has been really good in this half. But we're on a journey, and we expect to expand those margins going forward.

And then also in terms of -- it's obviously a bit smaller, but in terms of the noninterest fees, I think some of those are also going up, so just more in terms of your like monthly or in annual fees. What sort of repricing actions are you taking?

Yes. So we've probably made the majority of the changes in those types of fees. So we've taken up account-keeping fees on our sales finance products by $1 this half as well as, I think, you're referring to the payment handling fees and paper statement fees. We made those changes in this half as well, so that will give us benefit through into the second half and going forward. At this stage, we think we're pretty much done in those types of fees. But obviously, we'll manage our margins as we deem appropriate going forward.

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

My first question is more of a big picture question just from the charts on Slide 10, where we've seen pleasingly a recovery in the applications. But if we look at the interest-free penetration in the middle chart, in sort of about half what it used to be about 5 years ago. I mean what kind of steps can you take to increase that penetration from your existing merchants and, I guess, some thoughts around the customer proposition in sales finance?

Good question, Tom, and thanks for joining today's call. It does take a little while to build that momentum back up. And you'll recall that 2020, '21, '22, consumer demand for the interest-free or retailer demand for the interest-free proposition was not nearly as strong as it was prior. I'm really proud of the work that the team is doing to work with all of our retailers to ensure that the value proposition is understood. And we continue to invest in building those relationships as evidenced by a few new partnerships, very significant new partnerships that we've added to the portfolio in the first half. So the way I would sort of describe that more broadly is we believe that there is significant opportunity through marketing and promotion and just engagement with our existing set of retailers. And I have every expectation that the new partners that we brought on board will help further support the interest-free -- growth in interest-free volumes in the coming months and quarters ahead.

Great. That's clear. And in terms of what you're seeing in delinquency rates, I mean, it's obviously quite seasonal. And you sort of typically expect to see an improvement in the third quarter. Is that -- I mean, we're sort of halfway through the quarter now. Have you seen that improvement that you typically see in July and early weeks of August?

We've certainly seen the usual seasonal performance in the third quarter. And just as a reminder, we tend to get increased payments, lower delinquencies in the third quarter, typically off the back of tax refund time. So we have seen that typical seasonal element in this quarter as well. What I'd say though is, as you can see on the chart on Page 20, the general uptick in delinquency is generally back to those historical means, Tom. So we would still expect an overall increase, but certainly seeing that seasonal dip or reduction in the third quarter.

And one final one. Just around the dividend, it's on pause again for this half. I mean, the gearing sits above your target range of 6% to 7%. I mean what would it take generally for the forward, do you think, to get more comfortable to reinstate the dividend?

Well, first things first. We're really happy with the earnings and the cash generation in this half. But obviously, we're in a bit of a transient half in terms of earnings. Yes, it's a really good recovery, but we still believe that there is more cash and capital to invest in further growth and building the profitability of the business. The TER at 7.2% is marginally above the range. Obviously, if you pay a dividend, it takes you back to within the range. So I think we would expect the TER, ex dividend, we would need to be higher, a bit higher than the 7.2% number pre-dividend for you then to be able to afford a dividend to be paid. Notwithstanding, we had a really good conversation with the Board about when we will turn the dividend back on. But obviously, that's a decision that we'll have to make half-by-half with the facts that we have available to us at the time. But I guess in closing, we're really happy with the trajectory of our cash generation and earnings so far. Just not quite big enough at this stage for us to resume that dividend because we think we can deploy that capital in growth and profitability.

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

Just to wrap things up for today, I really appreciate everyone joining the call and looking forward over the coming days and early part of next week meeting with a number of you in person. Thanks again for your time today, and we'll catch up soon.

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