Plenti Group Limited (PLT) Earnings Call Transcript & Summary

Results Presentation. [Operator Instructions] Today's presenters are Daniel Foggo, Chief Executive Officer; and Miles Drury, Chief Financial Officer. The presentation will be followed by a question-and-answer session. [Operator Instructions] I will now hand over to Daniel Foggo, Chief Executive Officer of Plenti. Please go ahead.

Thank you, moderator, and thank you, everyone, for joining us this morning for our Results Presentation for the year ended 31 March. We're pleased to be delivering these results today, which in a year when many lenders have struggled. Firstly, show how we've continued to grow our loan portfolio and revenue very strongly; secondly, show how our technology-led business is delivering significant economies of scale; and thirdly, how we've delivered robust cash NPAT growth. So let's get into our Results Presentation. If we can [ move the screen ] to Page 2. As a reminder, Plenti is a technology-led lending business. Amongst other things, we're a prime lender. We're cash NPAT profitable. We're taking share across 3 large lending verticals. We're technology-led with a team of around 50 products and engineering specialists and we're founder-led with a long-term perspective. In total, where a team of 200 Plentineers, all committed, devoted to building Australia's best lender. Moving to Page 4 on the results we achieved last year. In terms of metrics, we grew our loan portfolio strongly, up 36% to $1.8 billion. The 67% growth in our average loan portfolio in the year drove strong revenue growth, up 62% on PCP to $143 million. We drove robust cash NPAT of $4.5 million, up $4 million in the prior year, despite margins being compressed for much of the period. And finally, we maintained our track record for delivering really strong credit performances, credit outcomes, which are leading across our listed peers in each lending vertical. All of these metrics are pleasing as is our operational and strategic advancements, which we are most proud of. Notably, we enhanced our retail investor platform, which during the year, we passed the $1 billion of loans funded. Peer-to-peer lending is alive and well. This included creating a new investment market, the Notes Market, which allowed us to provide a higher return to our investors whilst also allowing us to recycle our corporate capital invested in ABS notes. We further advanced the depth and diversity of our funding base, including through the issue of 2 ABS transactions; and thirdly, we advanced our technology platform, including through the launch of GreenConnect, a service which helps make the purchase of solar battery systems more affordable to Australian households. Moving to Page 5. We've delivered a really strong loan portfolio growth every year since we funded our first loan in 2014. We keep the track record intact in the last year, growing our portfolio 36%. We did this despite increasing our borrower rates to times being well above our competitors, so we could do the net interest margin we wanted to achieve. Pleasingly, our portfolio growth was reasonably consistent across each of our 3 lending verticals. Turning to Page 6. This slide shows we've been successful at consistently growing our revenue. Importantly, it also shows that we've been able to translate this increased scale into improvements in cash NPAT profitability. Note, cash impact we report is post all of our technology product technology development costs, which were $10.4 million in FY '23. On Page 7, regarding our delivery against objectives and expectations. When we presented at this time last year, we set out how FY '23 playing out in light of the rapid changes in interest rates that were taking place. I'd like to think the picture that we painted at that time has proved to be accurate and that we've been able to achieve the expectations we set. And then as we show on this page, we successfully achieved objectives we articulated for the second half of the year across growth, profitability and operating leverage. On Page 8, we highlight our competitive strengths. I won't talk through each of these strengths. However, I will emphasize that it's these points of difference and the investment we've made in each of these foundations over the last decade which have allowed us to continue our momentum over the last year whilst many other lenders had multiple issues. Now moving to our 3 lending verticals; firstly, in terms of automotive finance. As you can see on this slide, we have driven strong growth in our loan book over the last year, up [ 54% ]. This year has been most notable for, firstly, the growth we have achieved in our EV funding, helped by our relationship with Tesla; and secondly, the growth we've achieved in lending commercial customers, which were up over 200% year-on-year. Although I'd highlight our consumer auto loan originations were lower than the prior year, of our 3 lending verticals, this is the channel we're most -- sorry, this is the channel we competed. We're particularly slow in passing on higher funding cost to borrowers, so we chose to prioritize it in the right NIMs, with the right net interest margins, rather than maximizing on originations. We continue to set the standard, especially in terms of speed and ease for others to follow broker channel where we originate most of our auto loans. And we are excited about our plans to continue to raise the bar further in this channel. Moving to renewable energy lending, our smallest lending vertical but one that is very important to us. And with elevated power prices, increased awareness of the benefits on battery ownership and a very important federal budget, a vertical which we believe is set to deliver continued growth. The year has been very pleasing, not just the 44% growth in our loan portfolio, but with some exciting initiatives coming to fruition. We built and launched GreenConnect, an innovative point-of-sale platform which brings together renewable energy product manufacturers, energy retailers, equipment installers and Plenti's cost-effective finance to provide Australian households with access to broad selection of more affordable home and solar battery systems. Our team that drove this initiative had proven Plenti can really impact the shape of the loan markets that operates in through bringing partners together and building funding and technology. Whilst early days, we've already seen our GreenConnect platform help us win key accounts as I see GreenConnect is helping drive the future of the market. Moving to personal lending. As we expected in a higher interest rate environment and with the COVID lockdowns behind us, we are seeing strong industry-wide demand for personal loans with the ABS data showing 20% growth year-on-year. Our PL business saw solid growth, primarily driven in the first half by our high-performing [ broker ] team and in the second half by the market share gains driven by our recently appointed direct-to-consumer team. Our direct-to-consumer loan origination grew by over 50% half-on-half. We now have over 700,000 Australians in our ecosystem. We see this ecosystem and the attractive economics we're in by lending directly to the space as a key competitive advantage given our differentiated scale. So what's driving strong performances across each of our lending verticals? On Page 13, we set out some of the technology initiatives we have been working on during the year. We have long talked about our unique, proprietary fully featured technology platform and the benefits of this technology ownership brings. In financial terms, as I mentioned, we invested over $10 million in product and technology in the year. I think a very marginal dollar invested is helping to drive either market share gains or improved margins over time. It is this investment which leads us to considerably raise the bar and set the standard for others to follow in each of our verticals. On this page, we show some of the projects we brought to life over the year. You can see driving efficiency of operations and automation has been a key focus as well as growth projects such as GreenConnect. On Page 14, we show a set of charts the evidence of the operating leverage we've been able to achieve to Plenti's scale. We are proud of these [indiscernible]. Most notably, we're pleased with how we've been able to drive down our cost-to-income ratio year after year. In FY '21, the year of our IPO, our cost-to-income ratio was 55%. In the last year, this has reduced to 34%, making us a very low-cost producer. In the next year, we expect to be able to show this ratio continuing to improve reduced from 37% in the first half to 31% in the second half of FY '23. And finally for me before I pass to Miles is our credit performance, as set out on Page 15. As you can see from these important charts, we've continued to deliver very strong credit outcomes. Our annualized net loss rate over the year was only 68 basis points, and our 90-day-plus arrears at the end of the period were only 42 basis points, so less than half of what many of our peers might have shown. Why is our credit performance market-leading? Because our technology platform lets us make smart credit decisions. As I said at this time last year, others might say this but the proof is in the data. Looking forward, whilst we've taken a prudent approach to credit over recent years despite the benign credit environment, we continue to fine-tune our credit appetite and credit policy. So that's to say about our operational performance. I'll now pass to Miles to talk to our financial performance.

Thanks, Dan. Clearly, the highlight of the FY '23 year was the delivery of main cash NPAT result of $4.5 million. This was achieved through strong revenue growth and effective cost fall, which helped overcome the impact of margin compression for the rising market interest rate environment. In terms of growth, loan portfolio growth remained good with the average portfolio up 67% year-on-year, which fed through to a broad equivalent growth in revenue at 62%. Margins were low over the year, and I will talk to that more on the following page, but obviously, we put a lot of work to recover the impact of the significant market movements in the first half of 2022. The key driver of profitability was really good cost control across the business as our technology-led model drove operating efficiency, not withstanding investment in a number of areas to sort future growth. One important item to call out is that to develop improved profitability, the group was basically self-funding through the year and all cash usage related to support and growth in the loan portfolio. On the funding side, we continue to develop and strengthen our warehouse and ABS programs as the scale of the portfolio grew. We also enhanced our retail platform, and we're particularly pleased to introduce a new market which supports recycling of capital for ABS transactions to allow the business to grow while consuming minimal capital. On Slide 18, margins were clearly the story FY '23 year in the context of a volatile macro environment. Despite funding cost headwinds, we were able to restore margins in the year to return margin stability versus the first half. As investors are aware, we saw a very rapid increase in funding costs around March to April last year that materially impacted margins on new ones written. Plenti made a clear decision to proactively make these rates to adjust for this impact in funding costs, but there was a lag in our ability to do this given we needed to remain cost -- remain conscious of competitive pricing. This impact the portfolio margins in the first half, which reduced to 5.3%. By the second half, we'd restore margins on new originations to be in line with or above the portfolio average, and this remained the case through the period. Given the relative size of new originations compared to the existing portfolio, it does take some time to move portfolio margins. In the second half, there were also some offsetting margin impacts, most notably with the expansion of the larger of our 2 auto warehouses. The combination of higher margins on new loans and offsetting funding cost changes on the overall book resulted in stable NIM half-on-half, which we have indicated within case. Pleasingly, the exit rate for margins on new loans is above the portfolio average. While you see portfolio margins remaining broadly stable as the year progresses, including due to some more facility repricing and acceleration in growth in the auto channel, which has a lower NIM profile. Transaction costs on new loans are also down slightly, reflecting some reductions we've been making to broker commissions. Strong credit performance remains a feature of the Plenti portfolio given the type of customers that we fund. Our overall credit results for the year was [ 68 ] basis points was an excellent performance when you compare across the market. We've been consistently, however, for the last few years very benign for consumer credit and a return to longer-term trend was expected. If anything, the surprise has been that it is taken as long as it has. We saw this adjustment start to happen at the back end of last calendar year, again, the system with broader market trends. And hence, why we provided an average actual loss rate in March and April to give a better sense of where credit currently sits. Another useful indicator of the credit outlook is the ECL provision. You will note that the ECL provision rate at the start of this calendar year ended up being about 2x the actual realized losses in the year and the ECL at our last balance date is now running just about 2x the current portfolio realized loss rate. We do expect a gradual increase loss rate from here. But based on our performance, we think we are largely through the normalization phase. Slide 20 sets out P&L, where the key dynamic is the one I referred to earlier: A material increase in cash NPAT to $4.5 million, driven by a strong revenue growth with operating leverage being demonstrated on the cost side. This cost performance helped offset the headwind of higher funding costs due to market factors and corporate debt costs of capital used to grow business. In sales and marketing, we actually reduced spend as we did repeat some brand investment from FY '22 in order to manage Direct Digital acquisition spend carefully. I note that we actually increased loan origination volumes from the [ digital ] channel, even though we spend less on digital advertising in the period. We continue to invest in product and technology and increase spend there, primarily in team and salaries, while general operating expenses grew at about 1/3 of the book, again, largely in salaries. [indiscernible] to note is that we spend all of our technology spend. Numerous of our peers take the approach of capitalizing technology spend. To provide comparability, we've shown indicatively what impact on cash NPAT would have been if we capitalized tax spend. In the FY '23 year, we could have capitalized approximately [ $5 ] million of spend which would have seen cash NPAT at $9.4 million for the year. We'll provide further detailed half-and-half analysis in the appendix. Finally, on Slide 21, we provide an overview of funding developments both on the loan portfolio and corporate funding. With growth in the loan portfolio, we continue to expand and develop our funding program, which is very well established across our warehouse, ABS and retail investor platforms. In the year gone, we successfully completed 2 more ABS deals with total issuance in our program date exceeding $1.3 billion. The most pleasing aspect of our ABS deals this year has been introduction of a number of large international investors to support the program, and we continue to work actively to diversify our base of support of investors as the portfolio grows. Following the successful [ PL-Green ] ABS in February, we indicated we expected to follow similar timing to last year on our next auto ABS, so you can assume that we are well progressed in preparations for that. While warehouse headroom gets a lot of focus from investors, we see it very much as BAU activity and continue to increase and decrease as needed, depending on book growth and the timing of ABS deals. From a corporate funding perspective, FY '23 saw us continue to access capital and recycle existing capital to support business growth. The corporate debt facility was introduced just before the start of the FY '23 year, followed by the settlement facility and then establishment of Notes Market at the end of calendar year 2022. This market allowed us to offer an attractive new product to our retail investors while also recycling our capital in ABS transactions that is supporting growth. Finally, and importantly, the business is self-funding on underlying basis -- cash flow basis for the loan growth funded in the year. The appendix contains more detail on the cash flow and information to help bridge the statutory results to actual core cash flows. But being in a position to operate on an ongoing basis without needing additional capital other than growth is an important milestone. With the corporate debt facility and ABS note recycling capacity, we've also given ourselves to access capital to support our growth going forward. With that, I'll pass back to Dan to talk about projects and outlook.

Thank you, Miles. We've been positive about FY '24, as you can see by the objectives we have set, which are, first, in terms of growth. After keeping loan originations recently stable over the last year, we expect to grow loan originations over the coming year which will support continued loan portfolio growth and help grow our revenue to over $200 million. Secondly, in terms of efficiency, we expect to reduce our cost-to-income ratio to below 30% and remain on target to deliver the $25 million in efficiencies as our loan portfolio scale towards $3 billion. And thirdly, in terms of profitability, we expect to drive robust cash NPAT growth. Moving to Page 24, we want to provide some color on how we see FY '24 playing out half-on-half. We have shown over recent years a significant skew in profitability towards the second half of the year. We expect this to play out again in FY '24, primarily driven by, firstly, an uplift in direct-to-consumer marketing expenditure in the first half given the improved economics we are now achieving in this channel; and secondly, a continued uptick in credit losses in the first half after the very benign credit environment over the last 2 years. We expect profitability in the second half to be boosted by the continued scaling of our loan portfolio. And briefly on Page 25, we set out the benefits of scale we expect to achieve in the medium term as we set out in our half year results in November last year. Our objective is to deliver $25 million of cost benefits as we double the size of our loan portfolio from $1.5 billion to $3 billion. Achieving this required cost to grow at 0.47x or lower, and we are confident of achieving this given our historical performance, which has been around 0.35x. So in summary, it's been another solid year in which we continue to grow our loan portfolio really very strongly; secondly, we leverage our technology strengths to deliver significant economies of scale; and thirdly, we delivered robust cash NPAT growth. Thank you very much for listening. I'll now pass back to the moderator to facilitate any questions you might have.

[Operator Instructions] The first question comes from John Hynd.

Great to see the revenue guidance you issued today, over $200 million, which is really encouraging and obviously growth year-on-year. Can you help us think about where that comes from on a vertical basis, please? And perhaps if you're willing, we can talk to how that may impact profitability as well given each of the verticals to operate with different profitability levels?

Look John, I will talk about volumes first and Miles will talk about the profitability. In terms of volumes especially on our portfolio over the last year, we saw real stability across the contribution from each of the different channels. When we look out here into FY '24, I think it's really apparent that there's a greater growth opportunity for us in automotive finance. We funded a large amount -- a larger amount in auto finance in FY '22 when we look ahead -- or sorry, in the past year, obviously, we've quite deliberately pulled back our originations given we didn't like the numbers at that time. When we look forward, we're moving more into a growth stance. And given the size of that market at around $35 billion of originations every year, we've got a small market share. There's a much growing growth opportunity there. So yes, we do expect a greater contribution from auto. But we do expect to continue to maintain growth in both renewables and personal lending.

And then, John, from a profitability point of view, look, I don't think as the portfolio has scaled up, although as it stands, you probably think of slightly more growth in auto than in PL and renewables, but which we obviously continue to -- want to grow. You're not going to see, I don't think, a huge shift in the way that the portfolio composition looks just given the sort of relative size. So I did talk to probably margins being more stable rather than sort of at the levels we might have seen in the last month or 2, and to an extent, that reflects a bit more auto given it does tend to be a lower margin product. But I think really what we like to -- what we set to do is drive profitable lending across all of our different verticals, which then drives through margins, transaction costs and operating costs [indiscernible].

I'm just interested from the vertical growth given auto is a touch softer -- not softer, it's not the right word, but there was less growth in it than personal this year. So are you expecting that to reverse a little bit more?

I think that's fair. We see a great opportunity at auto which is in front of us.

Yes. So that -- and is that coming from like less participation from competitors? Or just you're continuing down that aggressive, I guess, market share growth for the categories you want to be lending to?

I'd particularly call out commercial automotive finance, where we saw our volumes reduced in the last 12 months, and we see an opportunity to restore them to where we were in FY '22 on...

Consumer.