McMillan Shakespeare Limited (MMS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the McMillan Shakespeare Limited FY '26 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Rob De Luca, Managing Director and CEO. Please go ahead.

Thanks, Travis. Good morning, and thank you for joining us for the McMillan Shakespeare Full Year Results Presentation for the 2026 financial year. My name is Rob De Luca, and I'm the Managing Director and Chief Executive Officer of MMS. Today, I am joined by our Chief Financial Officer, Paul Varro. I'd like to start by acknowledging the traditional owners of the lands on which we joined this meeting today and pay my respect to their elders, past and present. The presentation will commence with our FY '26 highlights, move through segment and financial performance, provide a strategy update and close with our outlook for FY '27. This morning's presentation will refer to the slides that were released with our results. At the conclusion of the presentation, both Paul and I will be happy to take any questions you have. Moving to Slide 4. FY '26 was a year of strong organic growth, strategic execution and a relentless focus of delivering excellent experiences for our customers as their trusted partner. We are pleased to deliver a record profit in FY '26 with UNPATA and underlying EPS up 13.8%. GRS was a standout segment with UNPATA up 24.9%. MMS performance was underpinned by customer growth across all segments, where we continue to see strong digital engagement and satisfaction. We made strong progress in executing on our strategy delivering superior customer experiences, enhanced distribution and improved our operating margin, which was up 250 basis points, reflecting the operating leverage in our platform. We delivered attractive returns for shareholders with ROCE of 62.1% and an annual fully franked dividend of $1.32 per share and a dividend yield of 6.6%. Now moving to Slide 5 and looking at some of the financial highlights for the period, where we saw strong performance across all key group metrics. Revenue for the year was $602.1 million, up 6.8%. Operating income grew 7.2% to $435.2 million. Operating expenses were up just 2.8%, which saw EBITDA grow by 14.1% to $180.7 million. As previously mentioned, UNPATA, our measure of underlying profitability grew 13.8% to $107.9 million, while statutory NPAT grew 11.4% to $106.7 million. We continue to deliver strong returns for shareholders with ROCE of 62.1%, underlying EPS of $1.55, up 13.8% and an annual fully franked dividend of $1.32 per share, comprising of a $0.62 per share interim dividend and a $0.70 per share final dividend. The results presented today are no longer normalized as we foreshadowed at the half year, having successfully transitioned and scaled onboard financed within the time frame set. Moving now to our customer highlights on Slide 6. We achieved customer growth across all segments while continuing to lift digital engagement and satisfaction. In Group Remuneration Services, Salary packages grew 7.1% to 402,000 and Novated leases grew 13.5% to a record 90,000 with an NPS of plus 50, while 94% of claims are now digitally processed. These outcomes reflect the investments we've made in automation and AI-enabled processing which is translating directly into a faster, simpler experience for our customers who continue to rate our app strongly at 4.6 stars. In Asset Management Services, fleet units grew 3.3% to approximately 16,000 with an NPS of plus 53. Our poor booking platform is enabling more customers to digitally self-serve their vehicle bookings, which was up 308%. And in Plan and Support Services, customers grew 3% to 44,000 with an NPS of plus 45, while our digital payments platform increased the invoices processed by 45 percentage points. These highlight the commitment to delivering market-leading customer experience. Moving to Slide 7 and highlighting how our investments and strategy execution are delivering superior customer experiences, enhancing our distribution and resulting in productivity gains reflected in a 250 basis point improvement in our operating margin. Our first strategic priority is to excel in customer and partner experience. In the period, we continue to strengthen and grow our ecosystem as strategic partnerships with leading global automotive brands. Our investment in a superior and more integrated digital platform for dealers representing OEMs is making the vehicle ownership process easier and faster for customers while more efficient for dealers. In the period, we saw a 42% increase in the number of dealers using our platform, and we're able to reduce the time from lead inquiries of settlement for customers by approximately 5 days. Our second strategic priority is to deliver simplified and scalable solutions, which we set out to achieve for Oly, our SME Novated offering. In the period, we continue to significantly expand distribution including partnerships who have strong access to SME clients like [ NAB ]. We also continue to simplify the employer onboarding experience, a key enabler for their employees to access the benefits of Novated leasing. In the period, these initiatives contributed to a 185% increase in Oly registered SME employers and a 23 percentage point improvement in employee to lease conversion. And our third strategic priority is to drive technology and capability enablement, where in the period we progress deploying AI and data capabilities with real-time agent monitoring which is flowing through directly to improved service and productivity outcomes. These enhanced capabilities allow our agents to have access to real-time dynamic information and tools which are helping customer inquiries be resolved faster, reflecting in a 13% reduction in average handling time in the period as well as less after core work, which was down 18%. Now moving to Slide 8, our FY '26 sustainability strategy highlights. We're proud of the progress we continue to make in how we run the business responsibly. We were upgraded to our Morgan Stanley Capital International ESG rating of AAA in March, achieved 105.6% gender pay equity in like-for-like roles and have again been certified as a great place to work. We supported Bravery Trust, mentored young people with disabilities through the Australian Disability Network and commenced our RAP Innovate program in September last year. 100% of MMS sites now run on green power or renewable electricity, 42% of our internal [ Cathleen ] are [ BEVs ] and we funded $12.6 million of fleet EVs through green finance during the year. I will now take you through the performance of each of our segments in more detail, starting with GRS. On Slide 10, our largest segment and a leading provider in salary packaging and Novated leasing delivered a strong result. Revenue grew 11.2% to $351 million, operating income was up 10.3% to $320.8 million, and EBITDA had a growth of 24.8% to $137.2 million taking the operating margin to 42.8%, a 498 basis points on PCP. This strong performance highlights the scalability of the GRS platform. This financial performance was supported by strong customer growth and operating performance. Salary packages were up 7.1% in the period, supported by 14 net new client wins in the year. Novated leases were up 13.5%, underpinned by Novated sales growth of 8.4% for the full year. Pleasingly, that performance accelerated through the second half, up 19.5% half-on-half. Our Onboard Finance receivables book grew 16.6% to $587 million. While focus on productivity contributed to customers for FTE improving 17.5%, a clear sign of the investment we made in growing Novated sales capability through the year is paying off in both volume and efficiency. Oly Novated sales growth was 77%, which validates our SME distribution strategy. Novated lease yield was down 3% on PCP, reflecting prior year plug-in hybrid surge and competitive value proposition enhancements made to support growth. Now turning to Slide 11. Asset Management Services, which reflects our Specialist Fleet Management business. Revenue was up 1.3% to $188.4 million with fleet units up 3.3% to approximately 16,000. This was underpinned by 20 net new client wins in the period, which saw a 30% growth in managed only units. As customers continue to hold vehicles for longer and fleet replacement cycles slowed, written down value was down 1%, contributing to a 1.7% lower operating income. These dynamics also impacted end of contract unit sales, which were down 9%, while high yields benefited from a greater proportion of early terminations attracting higher exit fees. Productivity continued to be a focus throughout the year with the leased assets per FTE up 17.2% on PCP. The business incurred one-off costs during the year to implement business process outsourcing and transition to a single retail yard. This one-off cost contributed to EBITDA being down 4.8% to $27.7 million on PCP, while operating margin remained strong at 53.6%. Now turning to Plan and Support Services on Slide 12. PSS now manages the plans of 44,000 participants, making PSS the second largest NDIS plan measure. Revenue grew 5.9% to $59.8 million, more than offsetting the removal of NDIS setup fees from 1 July 2025, and represented a 7.9% headwind of FY '25 revenue. NDIA and NDIS quality and safeguards commission continue to strengthen compliance and payment integrity requirements across the sector, supporting improved outcomes for participants and scheme sustainability. Industry-wide compliance requirements from the NDIA resulted in 88% increase in claims subject to review during the year. Operating expenses during the period reflected the acquisition of My Plan Support May 2025, higher scene compliance costs and investments to support enhanced payment integrity technology. These costs, combined with removal of setup fees by the NDIA, contributed to an EBITDA of $15.1 million. Our investments in automation continue to deliver productivity benefits with customers to [ FDA ] improving 14.5% on PCP. These investments also strengthened fraud detection capability to support our customers and our competitive position as a leading plan manager. I will now hand over to Paul Varro, our CFO, who will take you through the group's financials for FY '26.

Thanks, Rob, and good morning, everyone. If you turn to Page 14, what we thought we'd do is lay out some of the key financial outcomes for FY '26 in more detail. As noted by Rob earlier, our results are no longer reported on a normalized basis. Comparatives are presented on a non-normalized basis, for consistency with the current year results. On the left-hand side of Page 14, you'll see the P&L. As you can see versus FY '25 revenue grew year-on-year by $38 million or 6.8%, with revenue growth across all business segments, and in particular, GRS which grew revenue 11%, supported by excellent growth in Novated leasing, up 8.4% and onboard finance interest. Onboard Finance continues to perform in line with our expectations, with receivables up 16.6% year-on-year. Onboard results are reported in the GRS business segment. Cost of sales were higher by $8.8 million, reflecting higher business activity levels, including AMS remarketing values and continued growth in Onboard Finance, as noted previously. There is a table at the bottom left of Page 14 with the cost of sales breakdown for your information. Revenue and cost of sales combined to deliver operating income growth of [ $29.5 million ] or 7.2%. Operating expenses increased by just 2.8%, reflecting strong cost management and productivity gains across the business. Our focus on productivity along with our income growth has delivered positive operating leverage for MMS in FY '26 with EBIT are up 14.1% and operating margin up 250 basis points to [ 51.5% ] 41.5%, highlighting the scalability and efficiency of the MMS platform. Depreciation and amortization increased $3.3 million reflecting the successful completion of the Simply stronger program in FY '25. The outcome of our strong performance across a number of key P&L lines resulted in a record UNPATA of $107.9 million, up 13.8%. On the right-hand side of Page 14, we have our operating expense profile, walking you from FY '25 to FY '26. As you move from left to right, the first bar shows our cost increases due to wage and vendor inflation of $7.1 million, offset by savings from nonrecurring costs of $6.1 million primarily due to the successful conclusion of the simply stronger program in FY '25. We continue to invest in growth in particular, with investments in Oly, up $5.9 million, which delivered a 77% growth in Oly Novated sales. In addition, we invested in sales and distribution capacity and following the acquisition of My Plan Support in May 25 included their operating costs of $2.5 billion. Our investments in productivity initiatives delivered net savings of $7.5 million across all business segments. During the year, we also commenced a business process outsourcing initiative designed to further enhance efficiency and scalability. Implementation costs of $1.4 million were incurred in FY '26 with further benefits on top of those delivered in FY '26 expected to be realized in future periods. All up operating costs grew just 2.8%, a testament to our focused cost management. Turning to Page 15. The balance sheet remains strong with net assets growing to $126.4 million. Our key covenant metrics on the top right-hand side all remain comfortably inside threshold levels. allowing us flexibility moving forward. On the bottom right, following the successful extension of the Onboard Finance and AMS funding facilities, we have no maturities due over the next 12 months and a well-balanced maturity profile out to 2030. Lastly, turning to Page 16. Our cash generation remains strong with an underlying cash conversion of 111%, noting the elevated tax installment paid in FY '26 as the benefits of the temporary full expensing program partially reverted in the period. Our strong and flexible balance sheet positions us well to manage our capital efficiently and to ensure long-term growth while balancing returns to shareholders. In this half, the Board has declared a fully franked dividend of $0.70 per share, representing 85% of UNPATA, the midpoint of our payout range of 70% to 100%. This distribution when coupled with the first half '26 dividend, takes our annual dividend to [ $0.132 ] and a dividend yield at an attractive 6.6%. Overall, it's been a strong performance for FY '26 with all businesses growing revenue, positive operating leverage, a record UNPATA and a balance sheet that is well positioned to enter FY '27 with plenty of flexibility to grow. With that, I'll hand it back to Rob who will take you through our strategy and outlook.

Thank you, Paul. Now moving to Slide 18. As a trusted partner, we remain committed to providing solutions that make matters simple for our customers. We deliver on that through our 3 strategic priorities excelling customer and partner experience to grow trusted relationships, deliver simplified and scalable solutions to meet evolving customer needs and drive technology and capability enablement, to serve our customers more productively. Underpinning this is our core competencies, managing B2B2C relationships, delivering simplified solutions, financing and conditional payments, leveraging pattern technology and harnessing our ecosystem partnerships. Together, they drive outcomes we've talked through today, high NPS, strong margin, high ROCE, EPS growth and being recognized as an employer of choice. As you can see on Slide 19, we are a trusted partner with attractive financial characteristics, delivering long-term growth for shareholders. As a leading and scale provider in our markets, we have 402,000 salary packages, 106,000 mobility solutions under management, which includes 90,000 Novated leases and 16,000 fleet units and support 44,000 PSS customers. We have a reach of 2.6 million consumers and over 53,000 businesses, which gives us significant opportunities for growth. We have built sustained relationships over time to become a trusted partner for our customers. Maxxia and Remserv carry a Net Promoter Score of plus 50, inter-leasing sits at plus 53 NPS, and PSS has a strong NPS of plus 45. While over the last 12 months, we have retained 100% of our GRS and AMS top 20 clients. We run on a scalable technology-enabled platform, which manages approximately $8 billion in payments, $1.7 billion in finance assets and delivered 14.1% improvement in customers per FTE productivity in the period. The financial characteristics that come with all of that are attractive by any measure, a 41.5% operating margin, 62.1% ROCE, 50% recurring revenue and underlying cash conversion of 111%. Let me now move to Slide 20 and reflect on our proven record in consistently delivering strong financial outcomes and attractive returns for shareholders since setting our strategy in 2023. Revenue has grown at 9.1% CAGR over this period, while UNPATA has grown at 17.6% CAGR over the same period, reflecting the scalable platform we've built. Our disciplined approach to delivering strong returns is reflected in ROCE, which has expanded from 35.7% to 62.1%, up 26.4 percentage points. While over the same period, our underlying EPS has grown from $0.92 to $1.55 and 18.9% CAGR. Now turning to Slide 21 and our outlook for FY '27. As a market leader, MMS enters FY '27 from a position of strength. We expect FY '27 to be a supportive environment for business growth. Certainty of the [ EV FBT ] exemption and preferences for fuel-efficient vehicles is expected to support growth in Novated leasing and fleet management. Demand for salary packaging is expected to continue to benefit from ongoing cost of living and inflationary pressures. The current dynamics of elevated demand for EVs and softer demand for ICE used vehicles are expected to be reflected in remarketing income. As the second largest planned management provider, we are well positioned and will continue our engagement with the government and industry on the emerging NDIS reforms. We will maintain a disciplined approach to delivering productivity gains which will support selective reinvestment in broadening our sales capability while continuing to deliver an enhanced value to customers in a competitive market. Finally, we will continue to execute on our strategic priorities: one, excelling customer and partner experience; two, deliver simplified and scalable solutions; three, drive technology and capability enablement. Thank you for your time this morning and continued support. Paul and I would now welcome any questions you may have. I will now pass to Travis to moderate questions.

[Operator Instructions] The first question today comes from Phil Chippindale from Ord Minnett.

First question, just on Novated volumes. Rob, earlier, you mentioned that second half volume growth was around 19.5%. But clearly, over the 6 months, there was a significant variance in volume growth over the period. You then give us an update in July the volumes that month were up around 8%. Do you view that 8% number as sort of being a more normalized outcome? In other words, are we sort of through a lot of the Iran related disruptions and sort of those spikes in activity?

Yes. Look, great question, Phil, and always challenging to have a view of kind of outlook on any kind of measure or metric. Certainly, we saw a bit of volatility in terms of the last 12 months in the second half. Firstly, I think we've the market just unsure around what the government's position was going to be on the SVT exemption for EVs. And then secondly, obviously, the fuel crisis of the war. We've certainly seen things come back to a little bit more what I would call expectations of what we probably had for the period. Obviously, July 8% sales growth is good, orders are still strong. The month of July, I think is up 18% in orders. So there's still certainly good demand there at the moment in the market. How long that lasts, what that looks like over what period of time always difficult to say where our own analysis has shown historically, the long-term growth Novated sales in our business has been about 6% CAGR over a very long period of time. That's obviously fluctuated over different periods. But certainly, where we're seeing things at the moment, it feels like it's getting back to a level we probably expected 6 months ago. But again, obviously, different external factors drive that.

Yes, I understand. Just pivoting to the yield then. You've mentioned that the yields will be used down 3%. But I think the first half was up around 1.6%. So it sort of implies the second half is down 4% or 5%. In your commentary, you did mention that you're cycling the fab numbers in the PCP. Is that a make reference there? Is it effectively you're talking about the lower average vehicle value in this period? And then just a related sort of follow-up, what are you seeing in terms of new vehicles as a proportion of Novated sales over the last 6 months? Is that presumably, that has increased?

Yes. So look, obviously, from a yield perspective, some of the elements played out for us over the last period. I think the first is, yes, the plug-in hybrid in FY '25, the second half on the first half in '25, our yield was up 5% that reflected largely high-valued plugging hybrids at the time like the [ Shacks ] and others. So they are generally at a higher price point than what we're seeing today in our BEVs. So that's kind of the first thing. So we like that in the second half, which we don't expect to happen in FY '27. The second, in terms of EVs, yes, I mean our proportion of EVs in the second half was about 70% versus the first half being about 49%. And what we're seeing is the value coming down on average as new makes and models coming to the market. So our [ BV ] under 75,000 went from 80% to 84%. So we're seeing a shift of higher proportion of those BEVs, which we're financing at lower price points. So that's having a bit of an impact, and we've always expected that to happen. We think that will continue to play through in terms of FY '27. And just to give you a bit of a sense, the year before that was 72% were less than 75%. So it's moved quite a lot in terms of the last 12, 18 months in terms of the number of Chinese make some models that have come into this marketplace at lower price points. I think for us, the third thing that had a bit of an impact in our yield on the second half was we reviewed some of our insurance products with our insurer, made some changes there to enhance customer value. So the second half on first half, that was down about 7% in terms of its impact on yield. Overall, our second half on first half yield total was down 4% that you alluded to. It's still up about 7% on FY '23 before, obviously, the big take-up of EVs when the legislation came out and we had Tesla as the main price points. So overall, we still feel yields good but there are some pressures of moving it downward.

Okay. And then just last question for me. Just on Oly what proportion of your leases are now from that business? I think 6 months ago, you mentioned a number of around 5% of volume. Just wondering where that's up to now. Clearly, you spoke to the 77% growth, et cetera, but just maybe as a proportion of the total.

Yes, it's just around 6%. So it's up a little bit more. Obviously, we had such a strong performance across all of our brands in the second half. but really pleased with the performance of Oly. Our mixture is changing quite a lot in that so half of that is only coming through partnerships and the other half now is coming through SME relationships, which is really good. So we're starting to build a really good SME client base in that platform as well.

The next question comes from Tim Lawson from Macquarie.

Just a couple. In terms of the NDIA segment, can you talk just the growth in client numbers and whether you see there's an opportunity there to accelerate that without buying things that is organic growth and getting some operating leverage. Obviously, the policy settings are still moving around?

Yes. Thanks, Tim. Look, it's interesting, our growth was about 3% for the year. A little bit lower than what we've historically delivered. We are seeing though that the agencies removing participants from the scheme at a higher rate than they historically have. So almost 70% of our customers that we didn't have in '26 versus '25 was because their plans with [indiscernible] are no longer eligible. So it's certainly slowing down in customer growth from a participant perspective. That's kind of one factor. I think the second is obviously a little bit of high compliance that the agency and the quality of Safeguard is imposing now. We're expecting a number of plant managers to probably exit the scheme. So there will be opportunities to pick up share as some players exit the market from the higher compliance costs. And then thirdly is obviously with some of the reforms that are going to happen and move to a panel of high-quality plant managers, we see some opportunities. They're probably just starting to emerge in terms of opportunities, Tim, and we'll assess those on its merits, generally try and pick these up without having to pay anything from this people. [indiscernible] but there is a little bit of volatility in the market in terms of just obviously what's happening in terms of how the agency is managing it and some of the reforms.

So I didn't get you when that compliance hurdles increase? When was that happening?

It's been progressively increasing. So various factors, they brought in some back in late FY '25, early '26 with some of the black and white rules. And then as I mentioned in my early remarks, they're challenging and testing a lot more payments now of plan managers as well. So they're going through and verifying those a lot more, and that's putting a lot more scrutiny and compliance cost to operators.

Yes. Yes. Okay. Very clear. And just on the outlook comment around the remarketing yields or the EV versus the ICE. You're trying to flag -- you've cut out obviously unit decline versus the exit fees and yields, but you're trying to sort of flag that there's a little bit of a reduced remarketing yield because I don't expect there's a lot of EVs in the book and obviously will be [indiscernible] dominated?

Yes. So exactly right. Like our remarketing results in the second half were very different to the first half. First half was pretty good. We also had some benefits in our yield that I mentioned in terms of some early terminations that helped accelerate some of the income in the yield. But in terms of units, certainly down, we're down 9% for the year. We're down actually 20% for the second half on the first half. And the revenue that we kind of generated from those proceeds was down 17% second half on the first half. So we expect that to play out a little bit more in the first half of '27. To your point in terms of EVs in our fleet business, we funded about 7.5% of our units in 26 work EVs, up from 2.9 in '25 and the month of July is about almost just shy of 10%. So we're starting to see now our fleet clients make the transition more hybrids than pure battery electric vehicles. So we start -- we'll hopefully see a bit of replacement happening, which will hopefully stimulate some growth for us in terms of units. But at the moment, they've been holding on to their cars a bit longer. That's been a cycle we've seen now for a couple of periods. And I think that combined with probably the cost of replacement has been a little bit higher than what they would have seen a few years back. That's probably just holding them back on the replacements as well.

Yes. Okay. And so in terms of sort of contribution from the AMS segment, that's sort of second half, I think it's like almost $13 million. Are you feeling that sort of a comfortable go forward? Do you still think there's sort of more normalization of that remarketing yield to come out of that number?

Yes. Look, it's a hard one, Tim, as we've spoken plenty of times. We've always had a view that we expected the elevated remarketing values to come down over time. We've seen that probably in the last 6 months more so than we've seen in the prior period. I think part of that stimulated by external factors and some of that, obviously, by how businesses are feeling. In terms of where that is, pre-COVID, this business was kind of generating about $14 million UNPATA. So we obviously had elevated post that for a few years we probably see -- we see a little bit more downside probably on the remarketing values in the first half of '27 a bit hard to tell how long that lasts for, but they are still delivering us good profits and higher than where they were free COVID, but I certainly have come back a bit.

Yes. And can I just pick up on your comment around the 6% CAGR sort of long-term growth that gets to do with Novated -- just how you sort of feel -- obviously, you see a bit of a fuel boost. The policy certainty helps. You've talked about the sort of 84% of vehicles BEVs now coming sort of below that 70,000 hurdle that obviously is important in the policy going forward from sort of next year. Can you just talk how comfortable you are that, that sort of the right number even with these sort of policy settings moving things and fuel sort of moving things around a bit.

Yes, I'm not saying that 6% is the number to take is a forward estimate. I'm just saying our long-term average across this business has had 6% as a CAGR. Some periods higher than others, obviously, much lower during COVID period, a bit of a boom straight afterwards. We'd say at the moment, there are favorable characteristics in settings for positive growth in Novated leasing. The legislation is one of those things, the greater awareness of Novated leasing and the benefits it provides, obviously, our Oly platform and entering a new market. So I think all of those things are positive for us in terms of we feel good about the outlook in terms of sales growth. And I just pointed out that July was 8%. It feels more like kind of where we expected things to be before the fuel crisis.