McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the McMillan Shakespeare Limited Half Year Results for FY '25. [Operator Instructions] I would now like to hand the conference over to Mr. Rob De Luca, MD and CEO. Please go ahead.

Thank you, Rachel. Good morning, and thank you for joining us for the McMillan Shakespeare Half Year Results Presentation for the 2025 financial year. My name is Rob De Luca, and I'm the Chief Executive Officer and Managing Director of MMS. I'm delighted to be joined today by our new Chief Financial Officer, Paul Varro, who joined MMS at the start of January. I would like to start by acknowledging the traditional custodians of the lands on which we meet today and pay my respects to their elders, past and present. As we move through the presentation, we'll be referring to the slides that were released with our results this morning, and both Paul and I will be happy to take questions at the conclusion of the presentation. Now turning to Slide 4. In the first half of FY '25, MMS continued to progress its strategy focused on delivering long-term sustainable growth. The company grew normalized revenue by 2.4% with growth across all 3 segments whilst continuing to provide valuable support to Australians amid ongoing cost of living pressures. We made strategic investments to drive customer growth and ongoing efficiencies reflected in our operating expenses with the half including $4.4 million in nonrecurring costs. Our Simply Stronger program is on track and is already delivering on its objective of superior digital experiences, technology-enabled productivity and broadening our solutions and relationships. Benefits realization from this program will increase in the second half. Onboard Finance continues to scale with novated lease receivables at our target of approximately 20% of GRS novated lease volumes in the half, excluding Oly. As previously stated, FY '25 will be the last year our results will be normalized. We are pleased to announce an interim dividend of $0.71, reflecting a 100% payout ratio of normalized UNPATA, reflecting our commitment to ensuring shareholders are not negatively impacted during the Onboard Finance transition period. Now turning to Slide 6, which provides an overview of our business platform and the strength of our market position. Across the group, our vision remains clear, to be a trusted partner providing solutions in making matters simple. Whether it's managing employee benefits through our GRS segment, managing assets and mobility solutions in our AMS segment, or administering and managing MDIS plans in our PSS segment, this guiding ethos underpins everything we do. Our broad business model is unparalleled in the market with an extensive distribution reach of 55,000 businesses and 2.4 million consumers across the group through our market brands while capturing value through our broad range of trusted solutions to clients and customers. Across our platform, our businesses continue to deliver high levels of customer satisfaction, have combined favorable financial characteristics, namely attractive margins, high returns and generating recurring revenue streams while making a positive social and environmental impact. Now we move on to our Simply Stronger program update on Slide 7. This program is designed to ensure we deliver a superior digital experience for our customers, increase our productivity through technology enablement while broadening our solutions and relationships to deliver long-term sustainable growth. Our Simply Stronger program remains on track with our investment largely complete. The program has been delivered in a disciplined manner, and we are already seeing benefits, which will increase in the second half and into future periods. In January, we delivered an important element of our technology architecture with a digital enablement platform that enables an omnichannel capability and supports greater velocity to make changes to our digital assets. Our invoice automation initiative in PSS has delivered productivity gains, which benefited in 1 half FY '25 results. Having implemented the initiative in late FY '24, we have now seen full run rate benefits in the half with a 31% increase in invoices processed per FTE. By broadening our novated reach through our innovative Oly brand, we are enabling SME employers to offer novated leasing to their employees. We introduced our new brand Oly in May 2024, which has opened a new market for novated leases and delivered 3% of total novated lease sales in 1 half FY '25. In March, we will launch our employer platform that enables reduced turnaround times, digital processing and payments for SMEs. This reduces a traditional pain point for small business payroll managers, reducing payroll administration. In February, we launched our new app for Maxxia customers, MyMaxxia, which delivers a superior customer experience with significantly more self-service capabilities for our customers. By increasing our customers' ability to self-serve through MyMaxxia, we not only improve their experience, but are able to reduce the resources previously required to process customer requests. We expect to see a 9% increase in salary package and novated lease units for operational FTE by June 2025 compared with PCP. Moving on to Slide 8 and a first half financial snapshot. The group delivered sustained revenue growth, up 2.4% on PCP to $276.4 million. During the period, we invested $11.9 million in our business, Oly and Simply Stronger, to drive customer growth and ongoing efficiencies. This included $4.4 million of nonrecurring costs. Our EBITDA margin for the half remained above 30%, notwithstanding our strategic investments. Our return on capital employed, referred to as ROCE, was strong at 61.7%. We now move on to more detail on our segment performance, beginning with Group Remuneration Services. Looking at Slide 10. GRS revenue grew to $143.7 million in the first half, underpinned by novated lease sales growth up 6.8% on PCP from faster order to sale conversion, improved delivery times and order momentum. Novated orders were up 18% in the month of December 2024 versus PCP. This momentum has continued into the start of the second half with order growth up 21% in January 2025 versus PCP. Yields remained stable compared to second half FY '24. Moving on to Slide 11. Our customer focus and strong novated value proposition has enabled GRS to outperform the broader new vehicle sales market over the period. We have seen this performance continue into the start of the second half with new novated sales growth of 9% in January versus PCP compared to the market growth of 0.1% for the same period. Our investments in Simply Stronger and Oly are providing foundations for growth with 16 net new clients across Maxxia and Remserv, representing a 32,000 employee opportunity and an additional 312 SME employers with novated lease arrangements via Oly. Additionally, we continue to expand our partnerships and open new referral channels for our business, having now signed 10 novated partnerships with leading OEMs, dealership groups and platforms. Now moving to Slide 12 with an update on Onboard Finance. Onboard is building a future revenue stream that will drive long-term value whilst enabling greater diversification of financiers across our funding platform. Onboard continued its strong growth trajectory with receivables at $411.4 million, up 97.4% on PCP. During the half, UNPATA normalization was $4.3 million with a full year impact expected to be approximately $8 million, subject to market conditions. A milestone in our securitized funding program was the completion of our first amortizing private placement for $300 million, which enhances investor diversity and lowers our funding costs. As previously stated, FY '25 will be the final year of normalization with Onboard Finance to contribute incremental earnings post the normalization period. We now turn to Slide 13, which provides a summary of our Asset Management Services segment performance for the first half. The segment saw growth in written down value and finance assets, reflecting improved vehicle supply and increasing demand from business clients. Written down value grew by 8.8% to $368.3 million, with more clients replacing their fleet vehicles as finance assets increased by 2.8% on PCP. Remarketing units were up 5.7% on PCP. As expected, the moderation of used vehicle prices across the market resulted in lower yields. AMS secured 7 new clients in Australia in the period. To support ongoing customer growth, we invested in digital enhancements and business development resources during the period. While these strategic investments contributed to a 2.5% decline in EBITDA, they are important in driving an enhanced experience and future growth. Now on to Slide 14, which highlights the performance of our Plan and Support Services segment, which delivered growth across all key metrics during the period. PSS saw strong customer growth at 10.1% year-on-year, while revenue grew by 6% to $27.8 million. As the scheme continues to lengthen NDIS plan durations, we experienced lower renewal volumes. Our investment in platform automation has delivered improved turnaround times and productivity improvements with customers per FTE increasing 12.8% on PCP to 221. This has helped lift EBITDA up 19.7% on PCP. We continue to support the integrity and sustainability of the NDIS, particularly following the October scheme changes. In 1 half FY '25, we helped deliver $45.7 million in scheme savings with services paid by TSF customers under the NDIS price [ guidelines ]. Additionally, our integrity checks led to the $31.2 million in invoices not being paid on first instance to support the integrity of the scheme. I will now hand over to our CFO, Paul Varro, to take you through the financials in more depth.

Thanks, Rob, and good morning, everyone. If you move to Page 16, what we thought we'd do is just take you through some of the financial outcomes in a bit more detail. On the left-hand side of the page, you can see the consolidated P&L with normalized revenue up $6.3 million. As noted by Rob, we saw growth across all segments, a really resilient performance as we mitigate the previously announced removal of the SA Gov contract. We then move to expenses, up $12.5 million. I'll talk about those in a bit more detail in a moment. Next, we have depreciation, amortization and interest, down $1 million and taxes down $1.6 million, delivering a normalized UNPATA of $49.6 million, down 6.7% on the higher costs, but up $13.7 million on 1 half '23. You'll also note the normalization adjustment for Onboard Finance below UNPATA reducing from $9.3 million to $4.3 million with FY '25 being the last year of normalization. If we move to the right-hand side of the page, you can see our walk of the expenses for the half. The first 2 bars show our core cost management outcomes with wage and vendor inflation largely offset by productivity and cost-out initiatives. As you move from left to right, we have our 4 categories of investing in growth and ongoing efficiencies with Simply Stronger program expenses up $3.5 million in this half, but are expected to materially reduce in the second half as the program costs conclude. Next up is Oly at $2.5 million, which is predominantly sales and marketing costs as we invest in scale, noting that Oly is already providing benefits at 3% of our sales. We then have $3.9 million in growth and efficiency investments. Of that, $1.6 million is in relation to spend on customer and client experience, which has already delivered benefits in customer advocacy with NPS for GRS at plus 50 in the half and net new client wins for GRS at plus 16. The other $2.3 million in the $3.9 million is for process efficiency and automation. This is designed to deliver productivity outcomes in the future and so far has already delivered $400,000 in the half, with further benefits expected in the second half of 2025. And finally, the last bar is the cost of growth, which is the depreciation cost for the AMS business, which grew its written down values by 8.8% in the half. Notwithstanding the increased expenses have impacted the result for this half, we are seeing early benefits and expect to see further improvement in the second half of '25. If we turn to Page 17, balance sheet and funding, the balance sheet remains strong. On the left-hand side, you can see the impacts of Onboard Finance growing receivables with higher assets year-on-year and higher funding facilities and liabilities to support this growth. On the top right-hand side of the page, our key covenant measures remain well inside requirements, and we continue to hold strong net cash and maintain our AMS funding at a consistent advance rate of approximately 70%. On the bottom right-hand side, we've laid out our debt maturity profile across Onboard, AMS and corporate debt. As you can see, we've progressively built out the maturity profile with a successful securitization deal in the half, allowing us to extend maturities, lower drawn margins and increase our investor diversity. Overall, a strong and secure balance sheet position from which to grow. With that, I'll now hand it back to Rob to take you through our outlook.

Thanks, Paul. We now turn to our second half FY '25 outlook on Slide 19. We expect normalized UNPATA for the second half of FY '25 will be higher than 1 half FY '25. For the second half, benefits are expected from growth in novated sales, reflecting order momentum, Oly net new client wins, Simply Stronger efficiencies and a reduction in nonrecurring costs. Onboard Finance normalization adjustment of approximately $8 million is expected in FY '25, which will be the last year our results are normalized. In terms of external factors, the FBT exemption for plug-in hybrids is scheduled to expire on 1 April 2025. The exemption on battery EVs continues with Federal government committed to review by mid-2027. We will continue to focus on our strategic priorities, excelling in customer experience, driving simplicity and technology enablement and broadening our solutions and relationships. We're confident in our ability to navigate the current environment while continuing to execute on our strategy to deliver long-term sustainable growth. Thank you for your continued support. Paul and I are now happy to take any questions you may have, and I'll pass back to the moderator. Rachel?

[Operator Instructions] Your first question comes from Tim Lawson from Macquarie.

I just wanted to dig into the cost a little bit more. You called out that $11.9 million incremental spend. And I think within that, the $4.4 million you're calling out as a one-off. Can you just maybe talk more about the detail behind those? And have we actually reset back to levels pre those increases already for the second half? Or are they still in the cost base?

Thanks, Tim. Yes. So look, let me just give you a bit of an overview of the $4.4 million. As Paul alluded to, $3.5 million was the incremental growth in the half on the PCP. But within that $4.4 million, there's a combination of kind of 3 aspects. One was some brand awareness spend for Oly when we did our soft launch that started in the second half of '24 and has continued in the first half of '25. That's no longer going to continue into the second half of '25 as now we have our Oly business up and running with its own marketing spend and sales team. The second component is during big technology changes, there are some aspects that you don't capitalize. Examples of that are testing environments whilst you're working through pre-deployment. There is a little bit left in the second half related to that as we will be launching our MyRemserv app post FBT year-end. That will launch in April, and we're also launching our employer portal for Oly next month in March. So there's some testing costs still in the second half of '25, but reduced amount versus where we were in the first half. And the third component is some change management costs. So you go through training of your operations and sales team so they can answer questions for customers about the features on the apps and the portal and also some collateral that goes out to the clients and customers. That's largely spent. There's a little bit left to go with MyRemserv when we launch that, but that's reduced again in the second half. So relative to the $4.4 million, we'll have approximately about 25% of that in the second half.

So maybe I could just clarify, like, for example, on the Oly brand awareness, are you saying that the revenue now offsets the level of spend or has the level of spend actually reduced?

Yes. So if I break it into 2 parts, the element within the $4.4 million is the brand awareness. And then if you look at the walk on Slide 16, you'll then see $2.5 million, which is called Oly business, that's now running at business to go forward. That has the combination of marketing spend as well as salespeople. That $2.5 million will continue and continue to grow as the business grows. In the second half of '25, we would expect the revenue to be higher than the cost associated with the Oly, but it wasn't in the first half.

And then just a question on the UNPATA where you're talking about second half to be above first half. I suspect your comments on order growth and what we just talked about on costs really combined to deliver that. But just trying to understand how much of that is just cost related versus what your assumptions are on revenue given obviously the focus on the FBT tax change coming up?

Yes. I mean there will be a little bit of cost reduction in the nonrecurring that I alluded to, but the -- if you look at the expense walk that Paul took you through, the -- largely outside of Simply Stronger is ongoing costs. They're not one-off, only $3.5 million incremental, which is the $4.4 million total, is nonrecurring. The rest of it is ongoing. The growth in the UNPATA is going to be coming from a proportion of that, but largely revenue growth through the order momentum in the GRS business, the Oly continued growth as well as a bit of growth in our other 2 segments.

The next question is from Paul Buys from Canaccord Genuity.

First question, just on the December, January experience that you called out, Rob. Obviously, pretty strong market outperformance there and [indiscernible] some competitor comments that say, competitor outperformance as well. Just interested to know if there's anything you can call out that you think you would ascribe that outperformance to? And related to that, while the Feb expiry is upcoming, just interested to know how that's going for you now? This feels like there's been some strong promotion and some pretty good Feb numbers coming through as well.

Yes. Thanks, Paul. Look, really pleasing that we're seeing some good momentum in the GRS business. Obviously, the challenge we had as we started the new financial year with a bit of a gap from the SA Government loss takes time to fill and really pleasing that we saw novated lease growth in that period, notwithstanding the loss of SA Government. As we've progressed through the half, we're seeing continued improvement in momentum, combination of growth from a customer perspective. We've added quite a large number of private and corporate clients to our portfolio as well and obviously starting to see some growth out of Oly, which we didn't have in previous periods. So I think those combinations have assisted. In terms of the mix, yes, there's been some uplift in plug-in hybrids during the period. It's largely offset battery electric vehicles. So if I look at 1 half '25 versus 2 half '24 and I look at the comparisons from an orders perspective, second half '24 plug-in hybrids were about 5%, first half '25 they are about 10%, whereas battery electric vehicles went from 24% down to 21%. So we've seen a little bit at the offsetting ICE, but it's largely being between plug-in hybrids and battery electrics for the period.

Okay. And I guess a little bit related to that, just around the competitive environment. I mean, you've called out a number of client wins, and it sounds like there's a large number of sort of smaller clients that probably individually not at the sort of ASX disclosure level. Obviously, we did see Smartgroup announce Monash Health. Just keen to kind of hear how you would stack up -- how that sort of nets off and I guess your take on the competitive environment?

Yes. I'd say it varies between different segments within our GRS business. If I think about it, we look at different types of segmentation. Oly has entered a new space. There's quite a new number of players targeting novated leases that probably were there 2 years ago. So that's quite competitive. And I think we're pleased with the progress we're making so far in that new business and new channel, but still early days and encouraging in terms of just [indiscernible] improvement in growth. But that remains pretty competitive, and it's largely price driven. So that's a core element of that segment of the market. And then within our historically Maxxia and RemServ brands, if you think about government contracts, health care, charities and corporates, we're certainly seeing a lot more opportunities in the corporate space than we would have previously seen a few years ago. I think the FBT legislation has created more awareness about novated leases and the benefits for employees. So we're really pleased with how that's going. And in many cases, that's new business that previously organizations didn't have a provider or they may have offered a little bit of in-house service to their employees. Then within the government, health care and not-for-profits, it remains pretty consistent with what we've seen over the last few years. They're always well contested. We feel like we do a pretty good job on retention, but we do lose some from time to time. I think that's always happened, but we retain the majority of our existing, but there are some that change at a point in time for various reasons. We've lost obviously SA Gov and Monash over the last couple of years to clients that we've had relationship with for over 20 years. So at some point in time, I understand organizations make a change, and we see the benefits on the other side of it as well. So as I said earlier, we've seen some good growth in the period, largely in the corporate space. Whilst it's still a very small proportion of salary packaging, it's now over 20% of our novated lease volumes, which is really encouraging because you don't have as much of a cost to serve those clients and customers as well.

And then last one for me and kind of somewhat related to that very last point you made there. Just interested in the -- now that Oly is obviously, as you said, early days, but somewhat up and running. Just interested in your views on that product sort of profitability relative to, whatever the term is, more traditional novated lease? Just to get a sense of how it stacks up on a profitability side?

Yes. Look, it's still in start-up mode, I would say. And you've got incremental costs that you're adding to this business as you're growing the business. We're still working through marketing and working through digital channels and the effectiveness and the optimization of that is a new part of our business that we previously didn't really focus on in terms of targeting consumers and small and medium-sized enterprises. At a NAV level, it's slightly higher than our core business because it doesn't have an existing portfolio in books. It doesn't have really releases and they're largely new vehicles that we're financing. At a yield level, it's there or thereabouts with our core business. We do pay out some distribution margin from converted referrals of different parties and partners that we work with. Our partnerships is about 1/3 of our volume so far and 2/3 of our volume comes from the SME market. So that part of the market we don't pay out any commissions. But then in terms of operating costs, we would expect this business to be a digital business with a very low operating cost in the future outside of marketing and salespeople.

The next question is from Scott Hudson from MST.

Just a couple of questions. It sounds to me, given your commentary around the order momentum at the back end of last year and earlier this year that your order book is growing as we head into 2025 -- calendar year 2025?

Yes. So if you think -- you're alluding to carryover or you're alluding to just order growth, Scott? Sorry, just to clarify?

It just looks like your order growth is outpacing your sales growth. So, your order book is growing?

Yes. So obviously, on Slide 10, you can see our novated orders indexed to '23 were up, but relative to '24 lower. So we're about 2% on the same comparative period. If you exclude SA Government, we're up over 4% for the period. And as we ended the year at the start into the new year, we've got growth in orders, yes. So we're now starting to see total order growth, including the loss of SA Government from last year.

That's helpful. Just on the $4.4 million of costs. So just to understand correctly, that's included in the $3.5 million bucket in the Simply Stronger on that waterfall chart on Slide 16?

Yes, $3.5 million is the incremental increase. It's the proportion of the $4.4 million.

There'll be a $1.1 million costs still being carried through the second half. Does that then end in the second half? Or is that carried on beyond that?

Yes. So as I alluded to, of that $4.4 million, I think about 25% of that we will still incur some costs in the second half. And then it could be 0 in '26.

And then lastly, just on the, I guess, the GRS margin profile following on from Paul's comments, [ sort of the ] -- you got a few more distribution channels with the inclusion of Oly and some of the other partnerships you've signed. I mean, over the medium to long-term, is the sort of low 40% margin still applicable for GRS?

Yes. Certainly, we've thought about this business for a while now since I've been here, but I think it's certainly a 40% plus margin business EBITDA, impacted a little bit in this period, but obviously still higher than where we were in '23. And you back out the $4.4 million, you're above the 40%. So we certainly expect this business to continue to be a 40% plus EBITDA business. And from a yield perspective, we had a bit of a drop at the end of last financial year and the start of this financial year, and that's stabilized and the last couple of months have actually been pretty good in terms of yield. So I think that should help as well.

[Operator Instructions] Your next question is from Chenny Wang from Morgan Stanley.

Maybe just the first one, just in terms of some of the contracts, I guess, volatility that we've seen over the past few years. Just for you guys, what are, I guess, the key contract renewals over the next 12 months? And then also, I guess, around that as well, can you just talk to some of the key tenders that you're potentially contesting for that -- for customers that you don't have?

Yes. I mean we don't comment on ones we're tendering. They're confidential in nature generally. In terms of our portfolio renewals over the next couple of years, it's much lighter than what we've seen over the last couple of years. So we don't have anything even at the size of Monash over the next 2 years, so even smaller than that. So we've got a next 24 months a much lower run rate of renewals than we've had certainly over the last couple of years.

Got it. And then just maybe a question on pipelines more generally. You talked about the corporate space that is, I guess, becoming more prominent on FBT. And I know that you don't want to kind of disclose the key [ tenants ] you're testing for. But in terms of that pipeline, can you give us some color on how that looks like at the moment, I guess, into this calendar year versus maybe same time last year?

Yes. I mean, so in terms of just scale, in the last -- since the last comparative period, so if we take the 1 half '25 versus the 1 half '24, we've added about 100,000 employee opportunities through the corporate space and private space. If we think about the contracts we have won from a net growth that we alluded to, over 32,000. About 60% of those -- just shy of 60% of those are corporate. So it gives you a bit of a sense of what we've been successful at over the last 12 months period. And we've got quite a few still in the pipeline that we're tendering for or having discussions with clients. Compared to government and health care, which generally have a renewal period that kind of finishes up on 31 March, there are a few that finish on 31 December or 30 June. They largely finish on 31 March. Corporates are much more open to the time frames they start, particularly if they haven't got the existing relationships.

Got it. And then just maybe one last one for me. Just maybe unpacking some of the yield movements over the course of this year with, I guess, some of the lower-priced EVs coming in. I guess, historically, you guys and also your peers have kind of talked about that potentially targeting a very different customer. So yes, I just want to kind of ask how we should kind of think about that impact of lower-priced EVs on your yields and whether we can expect some cannibalization on that across the base?

Look, the thing that I'd say is if I -- we compare the 1 half '25 versus the 1 half '24, there's been about a 6% reduction on NAV for EVs, whilst there's been about a 4% increase in ICE vehicles. Having said that on the EV reduction, the -- still the NAV on EVs is higher than what the ICE is. So whilst that's coming down, there is still a premium on EV compared to ICE. So yes, I think more choice for consumers and customers, which is great from a competition perspective. We feel that some reduction in pricing, particularly in EVs hopefully makes it more attractive so you get the benefit of volume to offset the reduction on NAV.

Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.