S&U plc (SUS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the S&U, plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company reviews all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Anthony Coombs. Good afternoon, sir.

Yes. Good afternoon, and good afternoon to everybody on the call. It's nice to be speaking to you, and we're very grateful for the opportunity that investor meet gives us both to reach out to new shareholders and also to inform existing ones. Can I just move to the second slide. And that is today's speakers. Obviously, it's myself, I'm the Chairman; my brother who is Deputy Chairman Chris Redford, Group Finance Director; and Graham Wheeler, Chief Executive of Advantage Finance, our Motor Finance subsidiary; and Ed Ahrens, who is the Chief Executive of Aspen Bridging, the property finance subsidiary we started in 2017. Next slide, please. I think what I'd like to say is 1 or 2 words about the company, which was founded in 1938 by my brother and I's grandfather as a home credit company. It's evolved since then. We've moved away from home credit, we're now in motor finance, mainly for used vehicles, and we financed about 65,000 vehicles at the present time, about 23,000, 24,000 a year. And we're also now, as I said, the property bridging business through Aspen, which finances really investors and refurbishes and developers of relatively small-scale residential property. And we lend up to about GBP 5 million per deal on that. So it's a nice balance between the 2 different sides of the business. And I can tell you that despite the rather pessimistic and gloomy outlook that you read about in the newspapers and that you hear on the television, business at S&U is good, robust, steady and sustainable. And that's how we've always tried to run the company. We're a conservative bunch, but we also temper that with a sensible amount of ambition. And you can see that from the slide, not the next one, the highlighting one, but the 5-year record. I think I'd like to bring that up, if you could, please, not the next slide, but the slide after that. That's it, 5-year record, which indicates that we do like steady, sustainable growth despite the dip in January '21 as a result of the pandemic, but we stormed back after that at GBP 47 million, where we were able to add back a few of the provisions that we wrote off in January '21 and this year has started at GBP 20.9 million, which on an annualized basis would see us over GBP 40 million, which I think is a very good reflection against the GBP 34 million to GBP 35 million that we were achieving just before the pandemic. So -- that is, I think, a steady increase in profits. And when you consider that our profitability back in the 2000s, was about GBP 5 million to GBP 7 million a year. I think that we've actually made great strides over the past 15 years and want to continue to do so. Just talking about the existing results for the half year. Could you go back a page, there we go, yes. And that's for the 6 months ending the 31st July. I mean group profit is up GBP 1 million, about 5% as we recovered from the pandemic. Earnings per share, 140p which allows us to pay a dividend, we like our dividends to be twice covered of 35p. So on an annualized basis, that will be twice covered. And the balance sheet is extremely strong. Our gearing has never really been above 100%, which is very low for a finance company. That's the way we like it. It protects us from adverse interest rate movements. But at the same time, gives us the opportunity to invest in the business as we actually have been doing this year to the tune of about GBP 40.8 million because we believe in the quality of our receivables and the future profitability of the group. So very good trading in terms of advantages, very good trading in terms of Aspen, but most important of all, the quality of that collections is extremely high. And any lending business depends not on what you lend, but how are you collected. And we think that on both counts, the advantage in Aspen performance is extremely good. As will be explained by people who are far more knowledgeable than I in the next few slides. And for that, can I go to Chris Redford for the group financials, which in 2 slides time. Chris, over to you.

Thank you, Anthony. I think people more knowledgeable must be following up to me. So I'll do my best in the meantime. On the income statement, just to say what's driving those profit figures that Anthony mentioned. So we've had some good book debt growth revenue up 15%. You can see at the top of the income statement on Page 5. And also good impairment, as Anthony mentioned, a key driver of that is the very good collections, particularly in our main business advantage. They've had very good collections and also low bad debt attrition during the 6 months, and that's helped that figure. So falling to the bottom line, you can see the profit before tax was up by 5% during the period with growth in both of our operating businesses, which is good. Good results therefore on profit and a dividend of 35p against 33p at this time last year, which we hope goes down well with investors. If we could turn to the next slide, please. It's a nice simple balance sheet in this company. Basically, you've got book debt, you've got reserves and you've got borrowings. So not too much for the finance director to do on that in terms of the main highlights in this half year, it's really been the growth in book debt in both of our operating businesses, which we're very pleased with. And if we could move to Page 7, in terms of the borrowings, what we try and show you on this slide is, where is all the cash gone? And you can see, therefore, the opening balance in each of our operating companies in both years, moving to the closing balance and what's caused those movements. So in general, you can see that we've had healthy advances in Advantage, well up on last year and very good collection figures too and then moving down through overheads and corporation tax and dividend. And then on Aspen, I just need to mention one thing on Aspen that moved from GBP 58.9 million in the half year to GBP 84.0 million borrowings very good advances again and very good collections. Last year's figures in July '21, some of you who follow the company may remember, were affected by CBILS. So we did quite a lot of CBILS lending last year that Aspen did very well, but there were a lot of early repayments. So they beefed up both the advances and the collection figures in July '21 for us than last year. Moving on to the next slide, please. On treasury and funding, I think Anthony mentioned we've -- with one of our banking partners, we've added another GBP 30 million revolving credit facilities, which means that we're now at GBP 210 million worth of total committed funding facilities against the previous GBP 180 million, and that gives us a bit more flexibility for growth. You can also see, I'll try to bring out on this slide, we've got some good maturities, nothing too close. So a healthy position there. Gearing is at 73%, still well within our appetite for gearing. And just mentions the group cash flow outflow again in the bottom point, including the payment of GBP 11.3 million worth of dividends during the first half year. We only have 1 dividend in the second half year. So cash flow tends to be easier from that point of view in the second half year. So I'm going to finish, and I'm going to hand over to Graham Wheeler, who's going to tell you more about Advantage's performance during the first half operationally.

Thanks, Chris. Yes. So I've got a few slides just to help focus on the key issues as far as Advantage Finance are concerned. The first chart shows our sales performance, and I have purposely shown quite a long period in there because the -- it allows people to compare February last year versus February this year, et cetera. And the thing to point out on this 6 bars on the right-hand side of that chart is continued growth other than April, slight dip in April, just basically because of a lack of supply in the marketplace that came back quite strongly in the second quarter of the half year. I guess 2 main things to take out of our slide. Firstly, we're setting continuous growth and 105% of our budget and significantly higher than last year's performance. And the other thing is that the tier mix is very consistent. Now the thing -- important part of that is we classify the risk of our customers across those different tiers. Tier E is the higher-risk customers, Tier A, we have the lower risk customers and by applying that risk rating, we apply different interest rates to that at each one of those different customers, which allows us to kind of flex the margin of our business as we continue to lend. And the story from that chart is growth in terms of cases, but also a well-managed tier mix, which allows us to manage the future profitability and bad debts within our business. So that's where that chart explains. Next chart, please. A little bit back into some of the developments that have taken place that have maybe driven some of those figures. So last 6 months ago, we laid out some of our development plans for the coming year. We're making some fantastic progress in that point of view. We've reengineered our API to create a kind of multichannel offer. We've influenced a new scorecard back in July. We've integrated with one of the major black box providers, which is basically a decisioning system for credit that points the customer to the right lender as opposed to the other way around. And we've integrated with that. And we've integrated our scorecard with a couple of our key brokers. So that's helped to drive some of the volume that you've seen in the previous slide. We're still working on some other things. So the best we're working on now is an integration into another decision system , HD Decisions, which is part of the Experian group, which will allow us to expand our business into -- it kind of aggregate websites like the comparethemarket.com and clearscore.com and people like that. We've made some big improvements in terms of our customer renewal activities and shown some very early positive signs of increasing levels of customer renewal. And we are in the process of redesigning the whole Advantage website based on the levels of communication required set out under the FCA's consumer duty, which I'll come back to in just a couple of minutes. But generally speaking, a huge amount of progress from a sales and marketing perspective that have helped support some of those sales numbers that you've seen in the previous slide. The other part of the business, Anthony touched upon it, is the collection side. So if you move on to the next slide, I'll just show you where we are from a collections perspective. We went too far, thank you very much. What this slide shows is our live cash collection performance, both in terms of pounds and in terms of percentage and in our non-prime finance lending company to be achieving 94%, 95%, 96% live cash collection is exceptional at any time. But in the middle of a so-called cost of living crisis the media frenzy in terms of reporting that pushes that into even incredible situation. So we've seen our live collection performance better than we ever had. Our bad debts and bond determinations are less than [ 3.8% ] of last year. Our average loss per bad debt is much better than last year's performance. And all those things are driving a very, very strong financial performance of the business as we are collecting very high levels of cash. The obvious question is, how do we do that in the current environment. And the next slide, we'll maybe begin to explain that in a bit more detail, if you won't mind clicking on to the next page. We are constantly assessing what's happening with all the data that's available to us in the marketplace. And pieces of information we get through FLA. In terms of cost of living, at the front end, we've adjusted our affordability calculator line with some of the inflationary issues that are quite obviously everybody. We've obviously introduced our new updated scorecard. And we've made some amendments in terms of lending values and the values of cars just to protect ourselves in the longer term. The biggest impact from a collections perspective is how we're looking after existing customers. So we are constantly signposting customers today, advice, support, providing enhanced flexibility for our customers to keep them in their cars and keep them paying maybe not sometimes the full contractual monthly payment. But as long as we're keep them in the hub and pin it makes a big difference to the overall financial results. We'll get specialist teams in place for vulnerable customers of all types. And really what this slide is all about is a cut of the business. It's the human touch that we provide to customers in the most difficult times, which keeps the money rolling in and the levels of support and the levels of customer support at its highest. And that's when you make the biggest differences in particularly in our marketplace, a very, very focused individual support to the customers delivers great results, and that's what our business is all about. And hopefully, in the previous slide in terms of collections, from that perspective, you've seen that level of result. Moving on to the next -- my last slide, which is the regulatory slide, which is a bit of an update on what's happening from the FCA. There's a big focus from them in terms of cost of living. And obviously, I explained where we are by that. There are 2 other issues [indiscernible] just now that the market that the FCA have got market concerns on. One is on something called commission disclosure where the existence of full disclosure in commissions in terms of the amount paid has been a bit of an issue more recently. And where -- there seems to be a bit of a risk for some lenders is where the amount or the commission is discretionary. So the dealer or the broker decides on the commission based on the terms set out by the finance company. That's not the situation at Advantage Finance then we've operated a fixed commission arrangement with our brokers and dealers for 23 years, which means that the risk of any issues regarding commission disclosure are much more limited an advantage compared to some other people in the marketplace. So from that perspective, I think we're in a great place. The last bit is the FCA have introduced their new consumer duty guidance in July, with a 12-month implementation period. That's an upgrade to the FCA's rule book. And basically, and it raises the standards for lenders to make sure that we all ensure good customer outcomes. We've now completed our gap analysis of where we are versus where we need to be by July of next year. We've -- we're in a fantastic place and that the culture of our business is all about delivering good customer outcomes and deliver an individual customer service. We've got a few issues that we need to work on in terms of some of the MI we've got and some of [indiscernible] covering. And then lastly, some of the customer communications, I think we'll spend a bit of time between now and July, upgrading and introducing some new types of customer communication, which will make sure that by in July next year, we'll be in a great place from our consumer duty point of view, as we are with many other parts of our business. And I think that's probably enough for me now. I'm going to hand back to Chris.

Thanks, Graham. That was a really good background for you on the excellent first half results that Advantage have achieved. And thanks to Graham for explaining all that. The next 3 slides are more detailed book debt slides for the Advantage book. On the first of these slides that we're looking at now, you can see details of the number of loans we've done in the last 4 years and also the half year, we've just had and you can see some good growth there to 11,800. On the profile of loans, you can see that the average Advantage has gone up again in terms of both the tier mix and also the higher average value of cars that is about at the moment. And then lastly, on the interest rate and on the average customer score, you can see the return to the normal tier mix that we were doing pre-pandemic. So the 2 asterisk figures 900 and 892 in Jan '21 and Jan '22 relate to when we pretty much withdrew from the Tier E product, which is the higher risk end of the spectrum during the pandemic, and we're back in the traditional market now, and we're happy to be there. So if I could move to the next slide, please. There's another standard slide that regular investors and attendees will know that we show. What this very busy slide attempts to show is the correlation there is between how customers make their first payment and also the end outcome in terms of the number that go to bad debt after 5 years. So the blue line is the way customers make their first repayment and the red line is the end outcome after 5 years. And the red line, you can see dotted since 2017. The reason it's dotted is obviously the end outcome hasn't happened yet. So that dotted red line is a prediction. But it is a really good chart for the parent company and other investors to look at, well, what are the early warning signals like in this business, how can we tell if the business underwriting is going well or if it's going badly. And only one of the metrics we looked out at, but it's a good one, is the first repayment quality. And you can see on this chart that during that period when we -- during the pandemic, when we stayed out of tiering, the blue line was up at 99% even in some periods. We flipped that down now to 96%, 97%, but we're still quite happy you can see that accord with where we were in the pre-pandemic area, and it still results in end outcomes of sort of 15% to 20% bad debt, which is where we were pre-pandemic and represents the business mix we're doing now. If we can go to Slide 17, please. This shows you the health of the book. And what we're doing on this slide is comparing the original contractor arrears status of customers now at the end of the half year at the end of July, which is the left-hand 4 columns and also at the end of January, as a comparator. And you can see that the number of up-to-date accounts has increased from 42,600 up to 44,900. So that seems to be a good measure of quality. And also the total live accounts has gone up from 62,000 up to 63,000. So -- there's the statuses within there that you can look at. But all in all, it's a healthy picture and totally consistent with the picture on collections, which Graham showed in his slide. So after that, I will now hand over to the CEO of Aspen Bridging, Ed, who's going to tell you a bit more about Aspen Bridging's good performance in the first half year.

Thanks, Chris, and good afternoon to all. Strong results for Aspen Bridging in the first half of 2022, really continuing the success that we had throughout 2021. Record PBT at the half year of about GBP 2 million, building our net receivables to GBP 90.2 million on the back of issuing 73 new loan facilities during the half year. Recent bridging market trends are showing bridging loan market prices increasing and some of the early repayments of loans starting to slow as the Bank of England increase take effect. However, the book quality has remained very robust with only 6 loans on the book in a default state, all of which look to be settling within Q3. We recently won an award for a new bridge-to-let product, Product of the Year with the bridging and Commercial awards, and that product is progressing well. Overall, our view is that we're cautiously positive. Market movements that are happening at the moment gives us a good opportunity to maintain quality, improve margin, slightly lower loan to values as a future picture. With that, turn to the next slide. Thank you. Just looking at the key trends in the business over the last few years, you can see that the number of new loans on the top line, 73 for the first 6 months of this year. Average gross advances have increased to 873. That's really a combination reflecting better underwriting overall and quality of borrower as well as market trends. We're in control of our cost of sales. You can see that steadily at 1.6% of gross advance and steady on the LTV. In terms of the blended yields, that's really a reflection that the market has been competitive over the last few years. We think there's an opportunity to shape that and improve that in the short term -- short to medium term. Average terms have remained steady at 11 months. And you can see that our improving trend on the collection side, settlements on contract terms are continuing to improve, and we see that as we speak. But really, overall, we remain very pleased with the very good quality of our borrowers. That's it for me. I'll now hand you back over to Anthony. Thank you.

Sorry, I'm just going back to the music. Thank you. Thank you, Ed. Can you hear me?

Yes, we can hear, sir. We can't see you at the moment, your camera. I don't know if your camera is covered a block, but we can hear you.

Yes, here we go. You can see me now presumably.

We can't see you at present.

Okay. Anyway, let me just continue by saying that I hope that, that gives investors and potential investors an idea that here we are a very dynamic, ambitious, but at the same time, conservatively managed company, which is very well placed indeed to take advantage of any opportunities that come along as a result of the current economic circumstances, and is very well placed in terms of the stability of its position for the future. And I would just point out that we've just had our own brokers, marketing communication on these half year results, and they quite centrally say that they retain their buy recommendation. They see significant upside to their target price of GBP 33. And when we consider that we're just over GBP 20 at the moment. I think that gives an indication of the potential attractiveness of the shares. And irrespective of the capital position on the shares, which I think has got a huge potential, they also mentioned the dividend yield, which has been very steady and sustainable at 7%, which I think is also attractive. And hopefully, we'll be to IMC investors. If I can just find the IMC account again, then we can start taking questions. I've got a note of the questions anyway.

Paul B asked about margins and protecting margins. Could we go to Chris to answer Paul B's question.

Yes. Thanks for the question. I think we submitted before the meeting. So in terms of interest rate rises, clearly, they're a hot topic at the minute. Yes, we are looking to pass on interest rate rises, particularly within our short-term business, Aspen Bridging, and I think there's a market opportunity there where we can maintain quality and enhance margin and also keep a good eye on loan-to-value as well. So we think the market we'll move in our favor there, and we can pass on rate increases. Within Advantage, it's more difficult, it's a 4- to 5-year businesses. So we're committed there. But the original health margins are very healthy. And within that original margin, we're also operating a lot for variance, as Graham said, and collecting very well as well. So it's a less important part of the model within Advantage. I think the other thing to say is we're helped versus some of our competitors by our low gearing. So we're not so exposed to interest rate increases as others.

Good. Thank you, Chris. The next question from Paul B was when are you going to retire? I don't know if that was an invitation or a request for information. But the answer is that we're in very good fettle. We're in good form, and we don't see those necessary. You don't retire in your 50s. Actually, I'm joking. We're slightly more than that. But nevertheless, we're in good form. And when we do retire, we have our eyes on a very, very good cohort of potential successors, some of who involved in the business, some of whom may be in the future. But nevertheless, we feel continuity in terms of control can be assured. The next question also Paul B is on the price of debt. And what they're fixed and whether they're term. Chris, do you want to go for that one?

Yes. Thank you, Anthony. So historically, you can tell from our accounts, we've paid about 3% to 4% on cost of funding. Currently, we're up at 5% after the recent increases and just to give you some guidance, obviously, on a GBP 150 million worth of average funding, a 1% increase would cost us another GBP 1.5 million on that line in the account. So not great news in terms of -- in the short term. But as I mentioned in the other answer, we can start to pass that on in terms of the way the businesses operate, particularly within the short-term business, Aspen. And in terms of the overall business model, because of our low gearing and because of the healthy margins anyway, it's not life threatening.

Good. Thank you, Chris. Next question was on the 36.5% preference shares and whether we plan to get rid of them. Look, they've been with us for a long time. They don't cause any problems. Certain of our shareholders like them. And if you're going to ask me where I would prefer to put the capital either into redeeming those dividends or into the trading activities of the company, then there will be a very simple answer, which would be the latter, the trading activities of the company. So I think the answer is, if you're a preference shareholder, you're going to be a preference shareholder for a while yet. Now Bill H asked about Advantage finances key brokers and particularly the trend towards a wider spread of key brokers over the past few years. Graham Wheeler, would you like to say something about that?

Yes. Of course, yes. Thanks, Anthony. Yes, I guess the 3 biggest brokers we operate with in U.K. for most people in our marketplace, which would be Zuto, Carfinance247, Evolution. We don't deal with one-man bands because there's a level of oversight and regulation we need to put in place for our brokers to make sure that they didn't representing us and other lenders to the customers properly. So we deal with established brokers, and we assess both the quality of broker before we start dealing with them, and we assess them on a regular basis to make sure that they're following the regulation properly. So that's where we are with them. The top 3 brokers -- the share of top 3 bookers has dropped from 44% to 34% over the last 2 years. And I have to say that, that was entirely planned because my feeling when I took over as CEO was that we were overly reliant on just a few brokers in the marketplace. And the relationship falls if something goes wrong with our business, then that could have had a bigger impact on Advantage. So we purposely planned to spread to increase the number of brokers and spread ourselves across a much bigger, wider broker cohort. And actually, I'm delighted to say that 44% moved down to 34% in that particular environment. We still want to deal with very big brokers, but we spread our risk across lots of other people at the same time. Will their share continue to decline? Well, actually the measure of the success of the business [indiscernible] would be the diversification of our business channels. And therefore, actually, I think it probably -- we'll hope that, that declines a little bit further because that means we're doing a really good job in terms of building relationships with the whole market rather than just maybe 2 or 3 very many large brokers. So I kind of hope it does decline a little bit, not because of a drop in volume for the big brokers, but because we're spreading our volumes from other sources of business at the same time.

Good. Thank you. Thank you, Graham. The next question was, again, Bill H. What happened to your profits during the last serious recession? I suppose the last serious recession was the great financial crisis of 2009 to 2011. Do you want to say something on that, Chris?

Yes, happy to. Thanks, Anthony. Yes, that actually created a good opportunity for Advantage. So we were a smaller company in those days, particularly at the start of that period, 2008, 2009, but Advantage built some fantastic systems, had some fantastic and developing relationships with brokers. And off the back coming out of that recession, what we found was there were quite a lot more near-prime customers coming in our market because they were being turned down by banks and near prime lenders. And so Advantage was able to grow significantly, but in a higher quality arena because a lot of these people, they were only temporarily in difficulty because of some of the ebbs and flows of that [indiscernible]. So that's what happened during the last financial crisis. And if you look back at our profits, therefore, our profits grew significantly after that and obviously up to near where they are today. So we're reasonably confident that we can handle most aspects of the different recessions, and time will tell whether we're right on that.

Thank you, Chris. Paul, I think it's Paul. I no longer have the screen in front of me.

No problem. So We've got 1 final question from [indiscernible]. If I just may read that out answering just if you haven't got in front of you. How are the fees that Advantage pay to their brokers moving?

Yes, shall I take that? Yes. Well, I'm not -- that's the -- we're not paying for more business. We've got a fixed commission structure that we paid to brokers. And those arrangements have been in place for some time, and the commission arrangements aren't changing, where you get a slight change in the overall average commission is where we're moving volumes in between different brokers because -- they've all got maybe slightly different terms based on the size and the quality of the business there and the volumes of business there, et cetera, et cetera. So we haven't changed any of our fixed commission terms within our brokers.

That's fantastic. Look, that's fantastic. You've actually covered all the questions that we've had through. And of course, around further questions that come through the company have the ability to review those. We published responses where appropriate to do so on the Investor Meet Company platform. Anthony, if I may, just ask you just for some final closing comments before I redirect the investor to give you feedback, that would be fantastic.

Yes. Thanks very much. First of all, it's been good to talk to IMC investors. And secondly, just to say the whole point of this is not only to improve the communications, but to actually encourage people to invest in the company. And I think I said earlier on, the reasons why I thought both for long-term reasons and the fundamental health of the business and our ability to take advantage of opportunities and to ride any storms that might be coming our way in the next -- in the next year and also the reasons of valuation in that I believe that, as Peel Hunter demonstrated, and as the share price currently sadly reflects I think that the company is insufficiently rated given the underlying performance and its prospects. I anticipate and I'm confident that, that some -- that above standard performance will be maintained and will actually increase. And I'm very confident indeed about the prospects for this year and for the years thereafter. We're a company where -- we like to work on a family ethos, everybody hangs together in an extremely enjoyable way. And I think it's the kind of company that smaller and larger investors alike should be involved in because it's driving the growth of the British economy. So with that, with those few words, thanks for attending the seminar.

Anthony. Thank you very much. Indeed, thank you to the full team today for your presentation. please ask investors not to close the session to be automatically redirected to provide your feedback in order the team can better understand your views and expectations. It's going to take a few moments to complete and is greatly valued by the company. On behalf of the management team, investors we would like to thank you for attending today's presentation. That concludes today's session, and good afternoon to you all.