McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the McMillan Shakespeare FY '21 Full Year Results. [Operator Instructions] I'd now like to hand the conference over to your first speaker Mr. Mike Salisbury, Managing Director and CEO. Thank you. Please go ahead.

Thanks very much, Tara, and good morning, everyone. Welcome to our full year results presentation for FY '21. My name is Mike Salisbury, and I'm joined today by our Chief Financial Officer, Ashley Conn. Before we move to the details in the pack, I'd like to make 3 key points. Firstly, we delivered an improved profit performance in FY '21, achieved against the backdrop of a highly challenging operating environment, with underlying net profit of $79.2 million, representing growth of 14.8% on the prior year. Secondly, we continue to execute well on our key strategies. Plan Partners is performing strongly with $1.2 billion funds under administration. And on the first of July, we completed our first acquisition in the sector. We restructured our U.K. business and continue to simplify the group with the agreed sale of the retail business in RFS. Our novated book grew 2.2% in the year, demonstrating our resilience and we continue to improve customer engagement through an ongoing shift towards digital distribution. And thirdly, we are well positioned for recovery when car supply issues, which have had impacts across our business improve and the lockdown restrictions ease. A final dividend of $0.312 per share, fully franked, brings our full year dividend to $0.614 per share, representing a payout ratio of 66% of underlying NPAT, excluding the contribution from the JobKeeper program. Our result also reflects the automotive supply dynamic, which we have summarized on Slide 7 in the deck. Vehicle supply issues were and continue to be the combined result of various COVID-19-related restrictions, behavioral shift away from public transport and shared mobility, and a shortage of vehicle semiconductors impacting manufacturers globally. These factors combined to create an abnormal trading market, punctuated by delays in vehicle deliveries and increased vehicle values, which presented a range of both opportunities and challenges for most of our operating segments. This combination made for a very complex and interesting year with conditions not expected to abate in the near term. Our improved profit performance on FY '20 speaks to the organization's ability to anticipate, react and respond to these conditions which is testament to the engagement and commitment of our people and the strength of our customer base. In addition to our improved profit position, I'd like to speak briefly to some of the year's key highlights. Despite the vehicle supply challenges, our novated book has grown over the year. Customer order rates have rebounded strongly and are ahead of pre-pandemic levels. Lack of supply has increased wait times with our carryover almost double that of 30 June last year and over 5x greater than the same time in 2019. The automotive supply dynamic can also be seen in the increased demand for high-quality used vehicles with secondhand car prices remaining significantly elevated and creating very favorable conditions for our Australian and New Zealand asset management businesses. In the U.K., the work done in the first half to restructure the business, including the divestment of EVC, combined with improved operating conditions in the fourth quarter has seen the business return to profitability. In RFS, we've seen a solid year-on-year improvement in both businesses. The aggregation team performed well with the net amount financed increasing 7% on pcp. We were also pleased to see the Federal Court approval of the Davantage class action settlement. Following a strategic review of the retail warranty business, a decision has been made to divest the operations via a sale to the existing management team. The sale is expected to complete in the first half of this financial year. Plan Partners delivered another strong performance for the period with funds under administration growing to just shy of $1.2 billion and support coordination hours increasing by 43% over pcp. As we've previously said, a critical component of our Plan Partners' growth strategy has been to lead consolidation within the sector. And I'm pleased to report that immediately post the end of the period, we successfully completed a small acquisition of a New South Wales-based plan management provider called Plan Tracker that represents a strong operational and cultural alignment with our business. And as you can see, the group's balance sheet and cash position have been improved throughout the year. We've again included Group UNPATA Bridge on Slide 4 which I know Ashley will speak to in more detail shortly. The key highlights being a 10.2% improvement in revenue at $544.5 million, EBITDA of $130.7 million, up 31.4% on FY '20. And as I said, UNPATA of $79.2 million, up a little over $10 million on the prior year. Turning to the key operational dashboard on Slide 5. You can see the variation in performance across each of the segments, given that each is being affected slightly differently by COVID-19 and the automotive supply dynamic. Key call-outs, our Plan Partners ostensibly unaffected by COVID-19, achieving strong customer organic growth. A reduction in the overall fleet and written down values in asset management has been driven by customers reducing and extending their fleets and the vehicle supply shortage impacting our new business volumes. We've seen solid improvement in the asset finance businesses with $2.8 billion in originations, up 6%. And in GRS, our new business wins went close to covering the remaining New South Wales Health District, which transitioned out post our contract loss a number of years ago. And finally, novated a solid performance to grow the book under the conditions, up 2.2% and a result that could have been considerably stronger if not for the supply constraints. As we did at the half, we've provided an updated COVID slide on Slide 6. I don't intend to speak to it in any great detail today as the business has adapted well to the new operating rhythm. Rather, we've included it to acknowledge the Australian government JobKeeper subsidy received in the first quarter and to demonstrate our continued progress back to pre-pandemic levels. You can see from the chart on the right, that the business has returned to around 90% of its pre-pandemic performance. During the year, the board approved our inaugural sustainability strategy for the group. The strategy sets out our focus and future direction on how we will create positive environmental and social outcomes throughout our business. As part of our sustainability strategy, we're taking action on climate change, both within our own operations and by assisting our customers transition to a low-carbon future. And we've established ESG targets to achieve net zero carbon emissions for MMS's direct operations through scopes 1, 2 and 3 by 2030. Investment in our people also remained a priority for the group in FY '21 as we continue to adapt to new ways of working as the pandemic persisted. Throughout the year, we also delivered more than 81,000 hours of training and professional development to our employees, and we were delighted to see our sustainable engagement score of 85%, a figure well above the benchmark for financial services firms and in line with global high-performing organizations. Just before I hand over to Ashley to speak to our financial performance in more detail, I'd like to briefly touch on our key priorities for FY '22. In the past, we've taken positive steps to simplify the group restructuring the U.K. operations and divesting the EVC business. Our recent decision to divest the retail warranty business also supports this focus. In FY '22, we will allocate capital to support our core growth opportunities. The key priorities are delivering strong organic growth, reducing costs and improving execution through our digital strategy, building stronger value through the development of new products and services, creating viable funding alternatives through our warehouse facility and exploring opportunities for further market consolidation. I'll now pass over to Ashley to speak to the company's financial performance.

Thanks, Mike, and good morning, everyone. I'm currently on Page 11. Over the next few minutes, I'll be talking to our consolidated performance, balance sheet, cash flow and existing funding. I'll also provide an update on our funding warehouse. I'll then hand back to Mike to speak in greater detail about the individual segment performance. I'd like to start on Slide 11 that sets out, as Mike said, Group UNPATA. UNPATA being underlying net profit after tax and amortization of $79.2 million, which is an increase of 14.8% versus pcp. This includes a $7.3 million contribution from JobKeeper relating to the first half as outlined previously in our half year results. The statutory net profit after tax was $61.1 million which was a substantial increase on last year. The difference between UNPATA and NPAT of $18.1 million is predominantly attributable to the U.K. JV acquisition and non-business operational items, including impairments and restructuring costs, which were outlined in the first half and some additional amortization of acquisition intangibles during the second half. EBITDA increased to $130.7 million, which was up 31.4%. Our basic earnings per share was 79 -- $0.789 and importantly, underlying earnings per share increased to $0.124. Full year dividend of $0.613 is fully franked. We've had second half dividends seeing $0.311. Overall, this represents 66% of underlying UNPATA, excluding the 7.3% contribution from JobKeeper. Free cash flow for the year was strong at $99.8 million or 126% of UNPATA, and I'll discuss this in more detail in a few moments. Importantly, group return on equity was also up materially to 31.3%, and return on capital employed is also healthy at 33.2%. Turning to Page 12. Our balance sheet continues to be strong. We split out our asset management components from our group balance sheet. Net cash being group cash on hand at $158 million, less amortizing corporate debt of $16 million sits at $142 million, up materially from $67 million at 30 June 2020. The fleet businesses are geared at 63%, where the group gearing is 20% or 0.5 turn of EBITDA, which -- with significant headroom to our covenants. Importantly, during the second half, we also completed the refinancing of our debt facilities, which included extensions of 1 to 3 years and significantly improved pricing. This positions the group liquidity well for future needs and growth. Equity increased to $269 million, mainly due to the statutory net profit of $61.1 million, as I said, and the first half dividend that we paid of $23.4 million. Group cash flow on Slide 13 continues, as I mentioned, to be very robust and strong. Free cash flow before fleet increases was $99.8 million, including a reduction in CapEx to $9.9 million as we moved to our new lower CapEx model. During the year, sell-downs of fleet management assets on balance sheet exceeded acquisitions by $50.5 million and $34.9 million were sold to P&A funders during the year. Borrowings reduced by $90.3 million off the back of fleet management, asset sell-downs and $23.4 million was returned to shareholders, as I mentioned by dividends. As I mentioned, closing group cash as of the 30th of June stood at $158 million. I'd like to take a moment just to note the cash and balance sheet impacts in relation to the agreements that Mike mentioned that we have signed to sell the retail warranty business. Under the agreement, the retail warranty entities are being sold, including the net assets, which were approximately $1.7 million at 30 June 2021. These net assets include the future claims liabilities and the liquid assets on balance to pay those future claims. This includes $20.5 million of cash and $10.5 million to note receivable from McMillan. More specific details in relation to this balance sheet impact are set out in the appendix of this presentation on Page 39. Turning to Slide 14. An important element of our strategy has been the establishment of our own warehouse funding capability, and we have made good progress today. The warehouse is important as it provides a secure and committed source of funding through times of constrained capital market conditions, increases pricing tension for customers, enables more customers to access to novated leasing products and services, reduces risk of volatility in earnings by creating an annuity earnings stream. Provides alternative funding for attracting new investors and lenders and increases per transaction in PV to McMillan. We've received term sheets from interested warehouse financiers and the internal team is ready to start introducing transactions to the warehouse in this half once our credit license is received. The warehouse will represent some change for the group, including the accounting impact of leases financed through the warehouse that produce a more annuity-style earnings and cash flow streams. By way of background first, we will continue to significantly use P&A funding as part of our funding strategy, and we expect the longer-term mix to be approximately 80% P&A and 20% warehouse. For those novated leases originated through the warehouse, we expect there to be a positive NPV impact, as mentioned, but the cash flow and earnings or the NIM received from those leases will be recognized over the life of those leases. This means that there will be some short-term impact on earnings, but over time, it will improve McMillan's earnings and cash flow profile. Based on our current assumptions, we expect this timing impact of the leases financed through the warehouse will have an approximate $4 million to $5 million impact on UNPATA in FY '22. That's all for the moment from me. I'll hand it back over to Mark.

Thanks, Ashley. Turning to the specific segments, and starting with GRS on Slide 16. At $228.8 million, our revenue was up 6.5% for the year. However, the global auto supply shortage negatively impacted revenue growth for the period. Despite increased inquiry levels from our customers, the lack of available new car stock has meant that customer orders have been carried forward into future periods. As at the end of the financial year, our carryover increased by over 500% on pre-COVID-19 levels. Importantly, the rate at which orders progressed to settlements has not changed over the period, giving us confidence that revenue is simply deferred to a future period. The supply impact was partially offset by the increase in average demand finance driven largely by higher retail prices being achieved by dealerships, which contributed to a stronger average yield. We've shown the movement in orders, sales, carryover and yields on Slide 18. Our ongoing commitment to improve customer engagement and strengthen our digital distribution capability was a key driver of GRS performance over the year, with traditional face-to-face customer engagement constrained. Digital innovations included our new online education hubs, the introduction of remote online sign-up for new salary packaging customers and a new digital estimate function for novated leasing. We are also now interacting with customers more intuitively and meeting their changing needs on a more individualized basis with more than 80,000 customers interactions recorded through our digital live chat functions across the year. Plan Partners delivered another strong performance for the period with funds under administration now at $1.2 billion, and support coordination hours increasing 43% to just shy of 50,000 hours per year. Through '21, the National Disability Insurance Agency continued to execute on the rollout of the scheme with approximately 93% of eligible individuals now in receipt of funding. The number of people with planned management included in the NDIS plan has also continued to increase and now represents 49% of all plants, up from 40% at the same time last year. In the year, our focus has been on creating a more efficient customer experience through further investment in technology, including enhancements to our online dashboards to improve self-service functionality, a redesign of our website to improve accessibility and deliver richer educational content to customers, carriers and service providers and the introduction of live chat functionality as an additional communication tool, recording more than 11,000 sessions in the year. We ended '21 well positioned to continue to progress our growth strategy in FY '22 with a focus on expanding our investments in people and capability through product and service enhancements. On the 1st of July, we achieved a meaningful milestone in the growth strategy for the business successfully completing the acquisition of Plan Tracker. Whilst relatively small, Plan Tracker is a well-established New South Wales-based national plan management provider and is highly aligned with our culture and focus on quality service. This acquisition demonstrates pleasing progression of our growth and consolidation strategy. Mergers and acquisition opportunities at the right value will continue to be a strategic priority for the group. The asset management segment in Australia and New Zealand achieved UNPATA of $15.6 million, an increase of 44.3% on FY '20 and continue to operate in a market both void and impacted by COVID-19. Before new vehicle supply happened new business volumes and presented challenges in replacing assets that had reached contract. This was offset by strong demand for used vehicles, which resulted in higher yields through the wholesale and retail remarketing channels with remarketing yields for the year up 189% of pre-COVID level. These elevated yields subdued sales volumes are expected to continue for FY '22. A rise in contract extensions and reductions to overall fleet sizes led to a reduction in overall written-down value of assets under management by 11.2% to $311 million. In the year, the business recorded 30 new client wins, which demonstrates our focus on improving our value proposition and reinforcing our core capability centered around strengthening customer relationships and improving our service provision through technology enhancements. Off-balance sheet funding of assets remained above the 30% concentration levels reflecting the focus of recent periods on increasing P&A funding as part of our capital-light focus. In the U.K., UNPATA was $1.4 million, an increase of more than 100% on the prior year. The result was pleasing, given that economic conditions remain challenging with the U.K. heavily impacted by restrictions throughout most of the year. Used vehicle disposal, profitability was also impacted by the widespread lockdowns as sales channels were limited to online click and collect distribution during the period. As we advised at the half, CLM reported an impairment of $2 million against the carrying value of goodwill with lockdowns having a greater-than-anticipated impact on our outsourced fleet management services. A restructure of the U.K. business was completed during the year with a new senior leadership team established. The business reported stronger-than-expected off-balance sheet origination with NAV increasing by 2% to $890 million. The rebound in finance originations was benefited by the U.K. government's coronavirus business interruption loan scheme. The asset finance business has also been restructured in the year and consolidated under the Anglo Scottish brand. Consistent with our capital-light strategy, the business continued to execute on the runoff of the existing on-balance sheet lease portfolio with no new on-balance sheet funding being provided. In RFS, segment UNPATA was $2.6 million representing a 15% decrease on FY '20. However, with solid year-on-year improvement in both businesses offset by a $1.4 million adjustment for deferred warranty income reflecting the enhanced product terms and recent claims experience. Despite challenging market conditions, the aggregation business performed well, with NAV increasing 7% compared to FY '20. The result was driven by a strong recovery in consumer and small business confidence and particularly demand for vehicles and leisure goods. Acquisition of new broker accounts combined with organic growth by a number of large existing brokers resulted in NAV exceeding the $1 billion threshold for only the second time in the business' history. The overall performance of the retail business was impacted by challenging trading conditions, primarily associated with the impact of COVID-19 on the used vehicle market. Despite these conditions, work done in previous periods to reinforce the business value proposition through enhanced products, distribution into new markets and strengthening stakeholder relationships continued across FY '21. As I mentioned previously, we're also pleased to see the Federal court approval of the Davantage class action settlement and a strategic review of the retail business completed in the year, including assessment of the current regulatory landscape and MMS business priorities culminated in the decision to divest the warranty business via our sale to the existing management team with that sale expected to complete in the first half of '22. Turning to the outlook. We expect COVID-19 to continue to challenge the environments within which we operate with the unpredictable imposition of restrictions expected to remain, impacting our operations and remaining a key variable during FY '22. As you would expect, the current prolonged lockdowns across both New South Wales and Victoria are having an impact on current activity levels. The constrained auto supply conditions that impacted the market in FY '21 are also expected to continue through FY '22 and potentially beyond. In response, the focus for the GRS segment will be continue to work to enhance our digital distribution channels and increase choice and convenience for customers. In response to a changing funding landscape, we will implement our revolving funding warehouse as an additional source of funding for novated leases. In the Plan Partners business, we'll continue to invest in technologies that support our customers' experience and continued focus on both customer acquisition and retention is expected to further expand our customer base in addition to the successful integration of Plan Tracker into the group. And the target approach to further market consolidation will continue to be a strategic priority. In asset management, Australia and New Zealand will continue to focus on leveraging the abnormal conditions in the used vehicle market while reinforcing our value proposition through further technology enhancements and introducing new driver products and services. And as COVID-19 lockdowns ease in the U.K., more favorable trading conditions are expected. Following the successful management restructure, a key concentration for the business will be the growth of the broker businesses and the profitable realization of end-of-lease vehicles. As a result of the strategic review of the RFS warranty business, on the 23rd of August, we agreed the sale of the warranty business by our management buyer as the most effective and efficient option, resulting in ongoing service and support to existing customers and staff. And as I said, we expect this transaction to be completed in early FY '22. Finally, I'd like to sincerely thank our people for their amazing efforts and commitment during such a challenging time. As always, we thank our customers and our shareholders for their ongoing engagement and support of the group. I'll now hand back to you, Tara, for any questions.

[Operator Instructions] Our first question comes from Chenny Wang at Morgan Stanley.

I just had a few if that was okay. Just firstly, on the novated business and the novated sales volumes and orders. So you called out order rates of 104% versus FY '19 levels for sales volumes of 98%. So look, I guess, very simply, and just to clarify this, if supply has not been an issue, would your sales basically have been that 104% on FY '19?

Yes, they would have Chenny.

Okay. Cool. And then just on the other side, being the yields, that's continued to rise versus pre-COVID. I think in your presentation, you called out the higher net asset finance. I guess I just wanted to get a sense of -- if supply again was an issue and you sort of didn't get that benefit from higher vehicle prices, interested to just understand where those yields will be?

So if I understand correctly, Chenny, you're saying supply remains constrained, but the pricing of those new cars would have been a pre-COVID levels?

Yes, that's right. I guess I'm just trying to back out the higher net asset finance. And if I back that out, like what would those yields have been?

It's -- look, I think on average, there's about $3,000 to $4,000 in the average NAV, higher in FY '21 to pre-COVID. So I'll let you make your own calculations in regards to what reduction you would apply to the yield.

Okay. Great. No, that's helpful. And then just on the comment around further market consolidation. Like are you referring -- I guess I'm just trying to understand what your -- what that referred to. Is it regarding sort of Plan Partners and the NDIS or are you sort of talking sort of more broadly as well?

I mean the reference specifically was around the NDIS. But clearly, if there were opportunities in the GRS segment, we would also be interested in exploring those as well.

Okay. Great. And then just 1 last one. Regarding the warehouse, you called out $4 million to $5 million underlying UNPATA impact. I guess you're ramping up to 20% FY '22. So basically on a full year impact, when you guys hit that 20-80 split, would it be fair to think full-year impact of being $8 million to $9 million?

Chenny, it's Ashley here. We've given some details in an appendix on what we see the profile thing and what that -- would we expect that to be over time in FY '22 and then beyond, it will obviously depend on the level of profitability and activity at the time. But we expect the warehouse to come online in the second half of this year -- sorry, in the first half, and it will ramp up during the second half. So there won't be a full year impact from this year, as you say. So it will -- there will be a higher impact next year. Now the benefit in FY '23 is we'll obviously have some NIM coming through from the leases that we've written in FY '22. So -- and likewise, as the warehouse continues to build, that will revert back to a more normalized level. And because we get a higher NPV out of transactions through the warehouse, overall, we view that as -- in the long term, it's going to set us up for a positive earnings contribution. But if you go to Slide 35, we've tried to give you a bit of sounding on how we think the profile is going to look like over the next few years.

Our next question comes from Scott Hudson at MST.

Just a couple of questions. In terms of the Plan Partners acquisition, can you give us a sense of, I guess, the scale of that business from a funds under management perspective?

Yes, just a baseline, Scott, it's about 10% of the size of Plan Partners.