McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Good morning, and welcome all. My name is Helen Kurincic, the Board Chair of McMillan Shakespeare Limited. I'm delighted to be able to extend a very warm welcome to all our shareholders and guests to our 2023 Annual General Meeting, joining us in person and great to see so many people here in person, and also welcome to everybody that's joining us online. Firstly, I'd like to acknowledge the traditional custodians of the lands across Australia, recognize their cultures, and continuing connection to land. I'm speaking from Melbourne, which is the traditional country of the Wurundjeri people of the Kulin Nation. And I pay my respect to their elders past and present. I'm advised that in accordance with Clause 16.4 of the company's constitution, the quorum of members is present. And accordingly, I declare the Annual General Meeting open. The notice of meeting was distributed to all shareholders on the 22nd of September 2023, and I'll take the notice of meeting as read. All attendees can watch and listen to the live cast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Questions can be submitted at any time. To ask a question, select the Q&A icon, select the topic your question relates to, type your question into the chat box at the bottom of the screen and press send. Please note that you can submit questions any time from now, and I will address them at the relevant time of the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on one topic, amalgamate it together. For those shareholders who wish to ask a verbal question, an audio questions facility is available during this meeting. To use this service, please follow the instructions on the virtual meeting platform. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly be opening the voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting item options. To cast your vote, simply select one of the options. There's no need to either submit or enter button as your vote is automatically recorded, and you can change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time, and I'll provide you with a warning before voting will be closed. The proxies received in advance of the meeting are held by the company's share registry and are available for inspection upon receipt of a written request. I'd like to introduce you now to the directors of the company who are attending the meeting today, and who are on the live webcast. We have Non-Executive Director, Kathy Parsons; Chair of the Audit, Risk and Compliance Committee; Bruce Akhurst, the Chair of the People, Culture and Remuneration Committee, Arlene Tansey, John Bennetts, and Ross Chessari. We're also joined by Managing Director and CEO, Rob De Luca; and our CFO and Company Secretary, Ashley Conn. I also note the presence of Brett Kallio, representing the audit firm of Ernst & Young, and thank Brett for his attendance today to respond to any questions you may have. I'll now turn to the chair address. MMS is proud to be making a difference to people's lives. The services we provide, salary packaging, novated leasing, asset management, disability plan management, and support coordination are essential to helping customers now more than ever, given increasing cost of living pressures. This importance continues to be reflected in our strategy, our clear customer focus, and in turn, our financial performance. Today I'll be providing you with an overview of our FY '23 results, capital management and business simplification, progress on our Group sustainability, strategy, and governance overall. Our Group Managing Director and CEO, Bob De Luca, will provide an overview of each segment's financial and operational performance for FY '23, highlight our strategic priorities, and provide an update on our first quarter FY '24 trading performance. In FY '23, we delivered growth in our normalized financial and operating performance as the Group focused on the customer a set of clear priorities and simplifying our portfolio of businesses. The focus enabled the Group to cement its market leadership position in both salary packaging and novated leasing during the period, whilst helping to position our more focused portfolio for future growth. Our performance in FY '23 saw the achievement of customer growth in all 3 of our segments. In FY '23, your company delivered normalized underlying net profit after tax of $86.2 million, up 3%; normalized earnings per share of $0.1196, up 10.5%; and strong normalized return on capital employed of 40%, up a further 1.4 percentage points. Normalized refers to adjustments made for the negative earnings impact during the transitional period for the implementation of our funding warehouse, OnBoard Finance. Importantly, our strategic rationale for OnBoard Finance remains unchanged. It secures and diversifies our funding source. It increases annuity-based income, which is also a new source of income, and captures a greater share of the value of transactions that we complete. This warehouse funding initiative launched in FY '22, achieved our target of 20% of monthly volume leases financed in June 2023. Our capital allocation framework has a key priority of reinvesting in the business in order to deliver sustainable growth, after which we'll fund any strategic acquisitions, deleverage as appropriate before returning capital to shareholders as fully franked dividends in the first instance. Consistent with this capital allocation framework, during FY '23, we completed a 10% off-market share buyback at $11.66 a share, which incorporated a significant franked dividend component. We are pleased to have delivered a fully franked dividend of $0.124 per share for the year, inclusive of the final dividend of $0.66 per share. This represents a 100% of normalized UNPATA, in line with our previous stated policy of paying between 70% to 100% of UNPATA. We've simplified our business portfolio through the divestment of our aggregation business, which completed on the 31st of July, 2023. And in relation to our U.K. businesses, we've completed the sale of Maxxia U.K. on the 30th of September, 2023, with agreements also in place for the sale of Anglo Scottish Asset Finance, which we expect to complete during the first half of FY '24. Turning now to the continued delivery of our sustainability strategy. Now in its third year, the strategy is driving positive environmental and social outcomes across our business and the businesses of our customers. As a leading provider of novated leases and fleet management services, promoting the uptake of electric vehicles and supporting our customers to transition to a low-carbon future is a key focus of the Group. During FY '23, 35% of our own Australian and New Zealand fleet was transitioned to electric vehicles. 21.4% of our customers' novated lease orders in June 2023 were for an electric vehicle, up from 1% in June 2022. Having already committed to reducing our own operational carbon footprint to net zero by 2030, during FY '23, we also developed a climate change action plan, which brings together in a clear framework, our proposed actions to respond to climate-related risks and opportunities over the next 3 years. As a provider of disability plan management and support coordination services, the Group is committed to removing barriers for and improving the lives of people with disabilities. During the financial year, we implemented a range of initiatives through our accessibility and inclusion plan to make our own product, services, and workplaces more inclusive. I also volunteer my own time to mentor a New South Wales leader with the disability as part of the Australian Network on Disability directing change mentoring program, which aims to advance the governance knowledge of leaders with a disability, while building disability confident boardrooms. MMS also continued the implementation of our Reflect Reconciliation Action Plan during FY '23, including further developing our own cultural awareness in joining Supply Nation, which facilitates procurement through indigenous businesses to help strengthen economic opportunities for First Nations communities. We are proud that our Morgan Stanley Capital International environment, social and governance or ESG rating increased from BBB to A during FY '23. Turning to Board governance. During FY '23, we welcomed Arlene Tansey, who joined the Board as an independent non-executive director on the 7th of November, 2022, in a smooth succession from Tim Poole, who we thank for his tremendous contribution to the MMS Board as former chair and non-executive director. Arlene is a highly experienced Director of ASX companies, high-growth businesses and government entities with a financial services background in commercial and investment banking. She's a member of our Audit, Risk and Compliance Committee and our People Culture and Remuneration Committee. I also take this opportunity to formally thanking all of my fellow non-executive directors for their commitment and contribution to the Group over the past year. We have a high caliber and diverse skills and experience mix on our Board. The Board has set a clear, focused, and ambitious strategy to achieve our vision to be the trusted partner, providing solutions in making complex matters simple. Our performance is achieved through the work and commitment of every single one of our MMS people, led by our CEO and MD Rob De Luca and his executive team. On behalf of the Board, thank you. We enter FY '24 with positions in large and growing markets, and with businesses well positioned to meet the challenges and capture the opportunities we see for MMS. Thank you to all our customers and clients who entrust us as their partner as we continue to focus on enhancing the quality and access of the important services we provide, given the current macro environment. Thank you also to our shareholders for your support of our company. I'll now pass over to our CEO, Rob De Luca.

Thank you, Helen. Good morning, and welcome, everyone. It's a privilege to be here today as MMS CEO and Managing Director, as we enter an exciting period for the company. In my presentation this morning, I will provide you with an overview of each of our continuing operation segments, financial and operating performance during FY '23, provide an update on our first quarter FY '24 performance, and highlight our strategic priorities and outlook. Firstly, by placing our customers at the core of our focus, we have achieved some strong metrics. Our Group Remuneration Services segment achieved total normalized revenue of $232.8 million for FY '23, reflecting growth of 12.7%, whilst normalized UNPATA grew by 8.5% to $52.5 million. Revenue growth was driven by a 13.3% increase in novated lease sales, an additional 23,300 salary packages and an uplift in interest received from salary packaging funds administered. As Helen mentioned, as the cost of living continues to rise, our services take on increased relevance for our customers as they seek to maximize their after-tax income, with employers seeing the true value of salary packaging and novated leasing when it comes to creating a strong employee value proposition amidst the ongoing labor market dynamics. During half 2 FY '23, electric vehicles comprised 18.2% of our total novated lease orders, up from just 1.7% in half 2 FY '22. We saw interest in electric vehicles gain momentum as the year progressed, driven by our increased focus on supporting customers through the transition and the federal government's treasury laws amendment Electric Car Discount Act legislated in December 2022. This legislation, which relates to employer-provided low and zero emission vehicles, intends to remove one of the key barriers that may prevent consumers from transitioning to an electric vehicle, which is their higher average price when compared to similar vehicles with an internal combustion engine. Asset management services, which refers specifically to our AMS, Australian and New Zealand business, continuing operations benefited from a 4.1% increase in net amount financed and sustained remarketing yields, achieving revenue of $187.4 million, an increase of 9.9%, while UNPATA rose 4% to $18.7 million. Our Plan and Support Services segment, which supports participants in the National Disability Insurance Scheme, achieved 21.3% growth in normalized UNPATA during the year, which increased to 8 million. This result was largely attributable to strong customer growth of 22.8% and margin expansion resulting from our continued investment in execution of a scalable platform. Importantly, last year, we also announced and began implementing our new set of clear strategic priorities, focused at delivering sustainable growth and helping us achieve our vision. Our strategic ambition has clear intent to deliver increased productivity, continuing to drive customer advocacy through strong net promoter scores, and generating high return on capital employed and earnings per share growth. In support of our strategy, we initiated our Simply Stronger program during the year, which has 3 areas of focus across FY '23 to FY '25 years, namely excelling in customer experience through digital and insights-led experiences, driving simplicity and technology enablement to increase productivity, and leveraging our culture and competency-led solutions to extend and enhance value. Whilst early in the program, Simply Stronger FY '23 initiatives included the design of new mobile apps and web portals to facilitate greater digital self-service for our customers, commencement of the modernization and simplification of our technology infrastructure, digitizing some of our existing manual processes, and leveraging and extending our ecosystem of relationships to extend our market and offering particularly regarding to electric vehicles. Now moving to the next slide. I'd firstly like to mention that the new vehicle sales in the Australian market had been at high levels for each of the months of July, August and September in the first quarter of FY '24 as reported by VFacts, up 16.2% on PCP. This unprecedented sales activity level, together with the ongoing vehicle supply dynamic and continued strong upwards momentum in demand for the purchase of electric vehicles via a novated lease, is generating material benefit to our business with group normalized revenue from continuing operations, up 15% in the first quarter of FY '24 versus the previous corresponding period. In the first quarter of FY '24, within our GRS segment, our novated lease orders were up 12.3% on PCP. This continued growth in order activity further stems from client growth and increasing customer demand and contribution from electric vehicles, as mentioned. Novated lease unit sales in the first quarter of FY '24 were up 27.6% on PCP, well advanced of that experience in the broader new vehicle market. This activity was underpinned by strong activity levels, particularly towards the back end of the FY '23 period with the increasing electric vehicle uptake. To demonstrate the strength of this increasing uptake for electric vehicles via our channel, that is our novated lease arrangement in quarter 1 FY '24, 36.3% of our new novated lease sales were from an electric vehicle, up from only 4.3% in the prior corresponding period. This performance also compares favorably with the volume of electric vehicles being sold as a percentage of all new passenger and SUV car sales in the Australian market, which sat at 10.8% in the quarter 1 FY '24 as reported by VFacts. We remain pleased with this activity and continue to work hard on capturing this momentum, and in particular, helping our customers in their consideration and transition to low and zero-emissions vehicles. During the quarter, we continued to grow our customer base across all M&A segments. And for the remainder of the year, we will continue to respond to market conditions and focus on our 3 strategic priorities. Turning to the next slide. I'd like to now touch on our outlook and priorities for FY '24. In relation to our GRS segment, the value of our carryover, which is expected to benefit future periods remains at similar levels to that reported at the FY '23 results. This is consistent with an auto supply dynamic we expect to remain with increasing demand and uptake for electric vehicles to continue. From a broader environment perspective, we expect labor market, interest rate and inflationary pressures to remain. In relation to our PSS segment, we're pleased with the fundamentals of our business, which is a plan manager plays an integral role in helping to address challenges being experienced by the NDIS, including helping to detect and mitigate fraudulent behaviors and in doing so, supporting the scheme integrity, sustainability and improved participant outcomes. As the scheme and plan management continues to grow and mature, together with our continued focus on the customer experience and leveraging our scalable platform. We look forward to achieving further participant growth. We also note that the government agency administering the scheme, the NDIA is rolling out a new technology platform called PACE, which is a customer relationship management system designed to improve participant and provider experience. Whilst we expect some teething issues during the rollout of the new platform, our own PSS technology platform and business model is concurrently being updated in order to best align with the required PACE changes, aiming to enable us to continue to transact and support our customers in a timely manner. Additionally, whilst we remain in regular dialogue with policymakers and the NDIA, we note that the findings and recommendations of the NDIS independent review are due for release shortly. We have made a submission to the review outlining where we believe further scheme improvements are possible. We await the findings of the review and will work accordingly in response, should there be any matters arising relevant to our PSS business and its services. At an operational level, we will continue to invest in our Simply Stronger program with FY '24 CapEx spend forecast to be around $23 million. We are also continuing to focus on key client renewals and pursuing new tender opportunities to underpin organic growth. Our funding warehouse, OnBoard Finance, will continue to evolve as an important plank in our business strategy, aiming to continue to represent approximately 20% of our novated lease volume. Based on our growth in novated leases, we currently expect the warehouse normalization adjustment for FY '24 to increase to approximately $15 million. Finally, whilst the strength of our balance sheet allows us to make important CapEx commitments like the Simply Stronger program to enhance the customer experience, help drive organic growth and generate efficiencies. It also provides us with the flexibility to consider and pursue appropriate nonorganic growth opportunities, which we will continue to do, particularly within the PSS segment. We are optimistic about the future and opportunities for the long-term sustainable growth. Before I close, I'd like to thank our loyal customers, our people, our shareholders and our Board of Directors for their ongoing support and commitment. Thank you.

Thanks, Rob. We now come to the formal business of the meeting. Each item of business will be discussed in turn, and shareholders will have the opportunity to ask questions on that item of business. Questions which relate to the general business of the company will be collected and addressed at the conclusion of the meeting. You can submit a question by clicking on the Q&A icon. If you're having any difficulties in asking a question, please refer to the user guide, which can be accessed through the platform. The first item of business listed in the Notice of Meeting is to receive and consider the financial report, director's report and the independent audit report of the company and its controlled entities for the financial year ended, 30 June, 2023. In accordance with the Corporations Act, there is no vote on this item. This item of business provides shareholders with the opportunity to ask questions about the reports and management of the company generally. Are there any questions?

There are several questions from online. A question from the Australian Shareholders' Association. For years MMS has been reporting underlying profit, including the determination of remuneration, making it difficult for a normal shareholder to tell what is happening as you continue to write off impairments. The impression is that no one is accountable.

Okay. Thank you for the question. I think we make it very clear in our financial reporting and inclusive of our investor presentations, our statutory profit as well as our underlying profit in those financial results. If there are any impairments or adjustments, we all show it to net profit after tax. We also make that very clear. Shareholders would be aware that if you look at our investor presentation, we provide a full reconciliation as well from NPAT to UNPATA and also to normalize UNPATA, which, just as a reminder, is the warehouse adjustment. And so that's set out fully in the appendix in our investor presentation. So I think there's very good disclosure in terms of those items. In terms of the second part of that question, the accountability is full and real. So in regards to impairment, that's included in our assessment of all remuneration outcomes. So management are fully accountable for them. And so that there is no receipt of any inappropriate benefit as a result.

Now, there is 2 other questions, Chair. First one is, did any of the 5 proxy advisors, ACSI, Ownership Matters, Glass Lewis, ISS, and ASA recommend a vote against any of today's resolutions? If so what reasons did they give? Which of the proxy advisers are covering us? And please describe the engagement we had with them before today's AGM. Will you disclose the proxy votes before the debate on each resolution, so shareholders can ask questions about the reasons if there have been any protest votes? And why not disclose the proxy position to the ASX with the formal addresses to offer a more timely disclosure to the market? Many other issuers do this now.

I think that's 5 questions. So I'll do my best to answer each one. And Ashley, I'm sure you'll let me know if I haven't. So in terms of the main proxy advisors, so no, we're not aware of any recommendation against any of the resolutions that have been put to this meeting. So that's a no. So no reasons to explain there. In fact, we understand that they've been very supportive. In terms of describing the engagement, so prior to the AGM each year, myself and Bruce Akhurst, as the Chair of the People Remuneration and Culture Committee, do engage with some of the proxy advisors. Then again, that's a really positive engagement, and we welcome their feedback and no material issues have been raised in that. In terms of disclosing the proxy positions, I think was the next key question in that group. So what we do and as you'll see during the course of this meeting, as soon as the resolution is put forward that we then provide fully the results of those proxy positions, so that can inform or questions and any questions that shareholders may have during the course of the meeting.

And why not disclose the proxy position to the ASX with the formal address to offer more timely disclosure to the market? Many other issuers do this now.

Yes. I think what we do is in line with standard practice, and it does still give all shareholders the opportunity to see the proxy votes well in advance. So if people actually finalizing their own votes, we prepare all the final proxy positions of the morning as the AGM. So we believe that's a really good disclosure for our shareholders to inform their voting.

And just to be clear, those questions were from Stephen Mayne.

Thank you, Stephen.

Another question, Chair, but directed to the CEO. I note that you have successfully transitioned 35% of MMS's own Australia and New Zealand fleet to battery electric vehicles. Are these vehicles recharged by our coal power stations or by solar energy?

Thank you, Ashley. Yes, pleasing, we had transitioned 35% of our own fleet to battery electric vehicles. Each of our drivers are assigned these vehicles have charging stations installed at their homes. And given their needs would change based on circumstances, based on their travel and locations, it's difficult to actually tell what they utilize on a day-to-day basis. Having said that, as a guide, a recent report by the Electric Vehicles Council highlighted that people surveyed around half of the respondents reported using home solar to charge your electric vehicles, and a further 25% reported using green energy or offset. So I think that's a good indication.

There are no further questions on that resolution.

There's a third question in the room.

My question is to the CEO. In your last slide, you so presented that the number of priorities in your outlook -- you presented a number of priorities on your outlook. And my question is, what do you see as the single biggest opportunity ahead for McMillan Shakespeare? And what do you see as the single biggest risk for McMillan Shakespeare ahead?

Thank you, Michael. Great question. Firstly, if there was only one thing, it would be an easier job than the various priorities that we have on our agenda. I think the hugest opportunity for our business really is realizing the potential in each of our businesses. And I think that's also the biggest challenge, which is the capacity also to take advantage of those opportunities. As outlined in my presentation, I think in the short term, we're seeing a significant opportunity with electric vehicles transition and taking advantage of that, I think, presents a fantastic opportunity for our business and for our shareholders. And so that's something that we spend a lot of time with the management team here and the Board discussing in terms of our ability to execute on that opportunity and deliver great value for our shareholders.

On electric vehicles, is the opportunity just that there is a greater volume because of the interest in electric vehicles, and there's a greater volume of sales? Or is there something intrinsic with electric vehicles that's advantageous for the company? For example, they might be more expensive or there may be something related to electric vehicles that is different?

I think to that question, Michael, I think the first one, which is we're going through a transition period. And therefore, there is a great opportunity from a volume perspective as we go through that transition. Firstly, for our novated lease business, but I think also in terms of our asset management into leasing businesses corporates and organizations transition their fleets. I think from an economic perspective, as you alluded to, as I outlined in our presentation, the price point for electric vehicles is higher than generally the internal combustion engines, and therefore we generate a better return on them.

No further questions online.

Thank you. If there's no further questions, I will proceed with the resolutions to be considered. I appoint David Squires of Computershare Investor Services as the returning officer for the purposes of conducting the poll on each resolution. As I mentioned at the start of the meeting, voting on the resolution is currently open, and you can vote at any time until I declare the voting closed. Results will be released to the ASX after the conclusion of the meeting. Please note that only shareholders, proxy holders, or authorized shareholder representatives may vote. Any directed proxies given to you by a shareholder will automatically be cast as directed when the poll is closed. The voting icon is available within the navigation bar. Once you click on this, the resolutions will appear on your screen along with the full against and abstain voting options. Simply select one of these options to cast your vote. When voting is closed, your final voting selection will be recorded. If you have any difficulties, please refer to the user guide, which can be accessed through the platform. Okay. Let's go to the adoption of the remuneration report. Item 2, and it relates to the adoption of the remuneration report of the company for the financial year ended 30 June, 2023. And it's set out on Pages 20 to 35 of the 2023 annual report. The remuneration report sets out the company's remuneration policy for its executives, employees, and directors. The company strives to ensure that the remuneration report is clear, transparent and demonstrates your Board's objectives of ensuring the alignment of executive reward with the creation of shareholder value. And the current market practices have been duly considered in terms of both quantum and structure of the company's remuneration framework. The resolution before the meeting is that for the purposes of Section 250R2 of the Corporations Act and for all other purposes, the remuneration report for the financial year ended 30 June, 2023 as contained in the Director's report be adopted. The Board unanimously recommends that shareholders vote in favor of adopting the remuneration report. I'll now put the resolution to the meeting. A summary of the votes received before the meeting is up there on the screen. Are there any questions in regards to the remuneration report?

There are no questions online from -- about the remuneration report, Chair.

And there's no questions in the room. So if there are no questions on the remuneration report, we'll just note that the company will disregard any votes cast on item 2 by all key management personnel and their closely related parties, except where that vote is cast by them as a proxy for a person who is entitled to vote. Item 3, the reelection of Ross Chessari as a Director of the company. Details of Ross' background, qualifications, and experience are set out in the Notice of Meeting. A summary of the proxy votes received before the meeting is on the screen. I'd now like to invite Ross to say a few words.

Thank you, Helen. As some of you know, I'm the Founding Director and shareholder of the Group, as is John Bennetts. I'm very pleased with the Group's performance since listing in March 2004. Although it's probably time to update the photo in the annual report, which is [indiscernible]. During the period, the Group has consistently grown its relevance to the customer base and deepened its staff engagement. We've expanded and diversified our operations and refocused as required. This morning, you've heard Helen and Rob described some of these changes. All the while, the Group has consistently grown and delivered earnings to shareholders. I'm also very pleased with the Group's prospects. Rob De Luca, is a welcome appointment, who has helped sharpen the Group's strategy and is navigating initiatives, which target improvements in productivity and growth that we expect will benefit shareholders in the near future. It's been a privilege to sit on the Group's Board with many talented and committed members, and I look forward to continuing to do so at the shareholders' permission.

Thank you, Ross. Are there any questions in relation to this resolution?

My question is not specifically to Mr. Chessari, but more generally. The ASA likes to see a director skills matrix published in the annual report, we are asking shareholders to vote on various directors today. And having a skills matrix would tremendously assist shareholders in making their assessments on how to vote. You don't have a skills matrix in the annual report, so I would request perhaps you could consider doing that next year. Also there is a so-called skills matrix in the government statement, which most shareholders wouldn't be aware of. And we would ask that skills matrix, we think could be better done and we have some suggestions, if you are interested, and have to do a better job on that. And we'd like to see that published in the annual report next year.

Okay. Michael, thanks. I'll note the request. I think in terms of the Board skills metrics, that we do publish fully in our corporate governance statement that shareholders can all see and read. I think one of the things we do, actually, well, compared to many that I've looked at is, we actually define each of the areas in terms of the Board skills matrix, and then we do a pretty robust assessment in terms of each director against those skills that are listed. And we provide then the transparency in regards to that assessment across the Board. So happy to speak to you afterwards in terms of any other examples that you've seen in the market that you'd like us to consider. We update our -- obviously, our corporate governance statement and look at our Board skills matrix every single year, ahead of the publication in terms of how we do that. And we also then take on Board feedback in regards to that as well. The Board skills matrix is really important to us from a governance perspective. And it certainly has been a major tool in terms of how we look at our link with both strategy and performance of the company. And also, then thinking about how we use that when we come to recruiting new directors as well and our succession planning. Any other questions?