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

Good afternoon, and welcome to the S&U plc Interim Results investor presentation. [Operator Instructions]. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Anthony Coombs. Good afternoon and to you, sir.

Good afternoon, and welcome to all the investors from AIMC. Excuse me I have slight cough, dry cough. But we're very pleased to see you. Can I just quickly introduce my brother, Graham, who's the Deputy Chairman on my left. Ed Ahrens, who is the Chief Executive of Aspen and finance. On his right. Here is Karl Werner, who is the Chief Executive of Advantage Finance. And on my far right, is Chris Redford, who is the Group Finance Director. Introducing the slides today. I wanted to start off with our wonderful customers and staff. And the reason I say that is over the past 25 years and this year, we did celebrate our 25th anniversary in business -- the real reason we built up such a strong business, both at Advantage and at Aspen is because of the care and encouragement and attention we give to our customers. And the last half year or last year, we've seen as most companies in the modifying sector have. We've seen some regulator attention from the FCA. We're learning from that. Everybody is learning from that. That's part of the new customer duty regime and everybody is finding their way, but inevitably, in the first half of the year, it has had an effect on our collections and our sales ability, which we don't regard as being permanent in any way at all. We're learning, we're strengthening. And as a result, we anticipate as a business. we will come out stronger and fitter than ever. But for the moment, it has had a temporary effect. And as you can see, the results for the 6 months have been impacted to the group profit. On revenue that's continued to increase has actually dropped from GBP 21 million last year to GBP 12.8 million this year. We -- most of that is increased impairment. That impairment will inevitably the second half crystallize into bad debt. Why? Because on a one-off basis, our collections ability has been impaired by the regulatory action that the FCA took through the 166 and through the [ V Reg ]. But that will be temporary. And Karl will mention to you in a few minutes the action that he is taking to resume normal business in Advantage. On the -- for Aspen, the results are extremely good. It just shows us the wisdom of our starting a business in the Property Finance business only 5 or 6 years ago. It's now reaching record profits and both is expected to go from strength to strength, and we'll demonstrate that. So without further ado, I'd like to ask Chris Redford, our Finance Director, to look at the group finance.

Thanks, Good. Anthony afternoon, everybody. On the group financials, we'll start with the income statement. There's some very big percentages on a couple of items that I'll mention. So impairment of 162%. For those of you who follow the business, that's virtually all Advantage, Aspen Bridging companies and [indiscernible] bad debt model. So most of that impairment is Advantage and there has been a significant increase caused by lower collections, which in technical terms means more Stage 3 debt and IFRS9, which we hope to flex some of it back, but realistically, as Anthony said most -- most of what's currently provided for will crystallize in H2, which means your current balance sheet impairment provisions of GBP 120 million are likely to reduce in H2 as we utilize them. There's been some delays. It's fair to say in our repossession action, where we've tried with customers to get payments that they can afford. And that process has been exhausted, but then the length of time to get the car back under the current restrictions are working to has increased, which means that more of those debts are still lie on the books. So that's impairment in terms of the others more significantly -- no significant increase that's in finance costs. So I've mentioned there, we had higher borrowings in H1 and the some here at [indiscernible] versus H1 '23 on what we've got as variable rate borrowings. Also in the P&L account, just a technical point on revenue. Revenue is 9%, it would have been about 3% higher. But for something at Advantage, where revenue on Stage 3 debt is taken at a net level after provisions rather than at the gross level. So that has a reducing effect on revenue that is probably likely to be there in the second half as well. If we move to the balance sheet, this is very simple. So 3 main items about receivable, borrowings and reserves. You can see the movement in each of those items there. Reserves has gone down 2%, that's majorly due to the timing of dividends, which are weighted towards the first half in terms of borrowings, they've done. Ever since the year-end, although in the announcement this morning, we did say that borrowing in early-October is GBP [ 290 ] million, so are being reduced from there, largely due to lending cost in Advantage. In terms of the amount receivable, you can see very strong growth in Aspen and smaller growth over to the last year in Advantage. Next slide, please. And this is where is all the money gone slide. So we try and show you exactly where the money is gone, better balance sheet is out there when we statutory cash flow. So we're splitting it between what's been planted, what's been land, what's been spending in terms of cost and what's being spent on tax and dividends, too. You can see those figures for Advantage and that's the points to note, Advantage has been fairly stable in the half year, starting at [indiscernible] borrowings ended at slightly lower GBP 176 million borrowings, but that also covers the majority of their dividend to S&U, which is also the majority of the group dividend, GBP 10.5 million. So that's fairly flat in Advantage. But in Aspen, as I said, that's really where the money has been invested, come from GBP 120 million borrowings of GBP 237 million in the half year. Mostly through extra lending. So treasury and funding, just a few points that I've noted there in terms of where we stand on our facilities and how we're using them. So without further ado, I will then pass on to the CEO of Advantage Finance, Karl Werner, and he will take you through Advantage's first half performance.

Good afternoon, everybody. If we turn to the first, first slide there's been a section, you'll see mainly for our attention, the chart on the left, which shows a fairly significantly improved credit quality of written business done deliberately so, so that we employ a tactical cautionary use of our liquidity whilst we progress through the regulatory engagement process, and we are moving that through to its conclusion. We hope with some optimism in H2. And also the fact a theme that we'll talk about a number of times in this section regarding the regulator is that way that, that enables investment in new competency, new systems and tools and one of those being our reengineered new scorecard and approach to credit risk, which we're building towards the end of H2. So obviously it makes common sense not to put too much lending through the previous scorecard, while you're doing that. If we turn to the next slide, moving from lending to repayment. You'll see a number of charts and graphs there that unpack for you, the challenges presents within H1. The key drivers of this, of course, as you've heard mentioned from Chris and Anthony, the abundance of caution during that regulatory engagement. As part of that also, you can naturally get some pooling of your later-stage debts, which then unpool at the appropriate point in the near future. I think we're seeing the final playout of macros, cost of living crisis in our customer base, as you would have seen in other lending books. And as we have also worked hard to address the process and resource challenges in H1. But as we sit here today, the commencement of H2, the regulatory engagement is progressing very successfully. We're engaged and embracing that process with the regulator in exactly the right manner, as I think Anthony alluded to earlier. And what we're doing also is making sure that we all read the dividend as well as our customers from that engagement in terms of our people, the processes, the resources we have to handle the investment that we've made in systems and technologies throughout that process. So we will certainly with the dividend from the engagement. To get into a little bit more detail on the next slide on the regulatory update, I would like to sort of call out and highlight that the team have excelled in numerous areas. Not only progressing 5 different in-depth work streams hand-to-hand with our skilled person, how many FCA, but also some great work in areas we closed the first anniversary of the consumer duty as well as new and achieving to a very good and high standard the new standards in regards to important processes and documentation such as wind down planning, business contingency and data sharing with various regulatory bodies. Not to mention as well as the borrowers in financial difficulty review, which is obviously Advantage is part of as well as a number of different lenders. Affordability and sustainability is obviously also very, very important and an in-depth review done on that basis also has concluded successfully. And by way of counterpoint, never losing sight as we started there as the Chairman started the statement with our customers first and foremost, our strong and positive outcome in regards to customers the data set remains as strong as ever, whether that be our service to them, as evidenced by the Financial Ombudsman Service, our ratings, our CSI scores, very high levels of customer retention, people coming back to us more than once. So we have concluded an awful lot of work in H1. We are seeing the main engagement draw to a successful conclusion in H2, which puts us in a position to be focused on both customer outcome and performance matters in the new year. With there, I'd say, arguably a competitive edge because we're through all of that, and it's been a very deep and positive and proactive engagement. And we're also a lender that's not impacted by what will be the main story next year, which is obviously the DCA issue. If we turn to the next slide, very briefly unpacks for you in a little bit more detail, the voice of our customers, which is first and foremost, and the success following an investment in systems and people and had a product expertise in all things consumer duty. I would call out specifically for the interest of the audience, so a range of specific investments. That includes an end-to-end training and competency schemes, brand-new state-of-the-art telephony there'll be certainly that follows workflow optimization, a greater digitization and automation of elements to the customer journey, moving to more cloud-based platforms. Not to mention expanding our premises quite considerably gives you a good idea as to our thoughts as to the future. Coupled with maintaining those very strong customer proof points. Turning to my last slide, I think that's one before I hand back over to Chris. Yes, we've had a year of consolidation and investment, but the headline story is not necessarily negative as far as the regulatory engagement. It's one that has been a catalyst for positive change. And I would just reiterate the investment in the tool set and the machinery of the firm, we predict some open space from a competitor environment not to mention the market is predicted to remain as robust in terms of unit sales and customer demand as it has been previously. Especially as we get past this part of the final quarter, waiting for budgets, et cetera. So you're invested in a sort of a fitter, stronger, more capable deeply invested and cautiously optimistic firm, as in regards to Advantage. So I'll hand back over to Chris.

Thank you very much, Karl. So there are 3 slides about the [indiscernible] prove that, we normally showed you every half year, and so I'm just going to go through those. And the first one is about new lending. So you can see that the cautious lending is reflected in the [ 8,752 ] volume that we've put on in the first half of this year. Some of the stats reflect the fact that the quality is [ up ] slightly in the half year, again, reflecting our cautious approach. So [ 8,367 ] as an average advance [ 882 ] is an average customer score and 16.9% interest rate platform. It's largely driven by 2 features. One, we've got a slight price rise through early in the quarter in about April, but that's been offset by a slightly higher quality, where our customers get a chance to slightly lower [ rate ]. The other feature there is cost of sales. Cost of sales have gone up about GBP 1,000 mark. That's more a measure of fixed cost to efficiency. Most of cost of sales is broker commission, introduced commission, which is cost variable, but there are some fixed costs behind that and because of the lower volume impact [indiscernible] GBP 1,000 in the first half year. If we can move to the next slide, please. This is the one that attempts to show the correlation between the way customers make their first payment and they end out from after 5 years. So up to 5 years ago, it's the harbored line, matches quite well, I think, with the blue red line. So there's quite a good correlation there between the way customers made efforts to payments and the end performance of that cohort in terms of the percentage of bad debt, which is shown on the reverse scale on the right-hand side of the chart, so around sort of 15% to 20% bad debt typically. You then hit the pandemic, which is the yellow section. And we still think there's quite a good correlation between the way customers make their first payment and the end outcome after 5 years. So that's now a dotted red line, because we haven't quite got there yet, but we're monitoring now all the time. You will see the first payments more recently have also been not as good as they were previously. Why is that? Well, it's still with a cautious approach. So quite often with first customers as well, they might need an income and expenditure doing if they hit their first payment, and that takes time, and therefore, it might take a bit longer for them to rectify a first payment problem. That's reflected in those numbers and also reflected in the fact that we think the dotted red line may finish slightly higher than the blue line would naturally implies. So I hope that gives you comfort in that correlation slide. If we could move to the next slide, please. This reflects something that Anthony mentioned earlier in his announcement. So 69.32% of today reflects not just deflections, but also the fact that we've got more nonpaying debt hanging around on the book. Why are they hanging around on the book. It's one of the restrictions that we've had since last December actually in terms of managing the repossession activity takes a bit longer because of the restrictions we're under if those restrictions are lifted, which we believe will happen within the next few weeks, then generally will be more back to normal. That feeds into the provisioning. Therefore, GBP 120 million provisioning. I expect maybe lower than that at the year-end as we start to use those provisions in H2. So if you look at the bottom of that slide, 6.01 plus means any customer that's actually got more than 6 months arrears, last time we reported, that was only 3% of the book, now at 6.69% of book the reduction in year-to-date. I mentioned earlier, why is that, it looks maybe this is a lagging repossession timing that I've talked about. So I hope that could you some information about the current status of the book. And without further ado, I'll hand over to Ed Ahrens, who is the CEO of Aspen Bridging and he will report on Aspen's performance in the first half year.

Thank you, Chris. Good afternoon to all. Aspen has had a strong start to the year, a good first half of '24-'25. And this is largely built on the momentum that we created in the second half of last year. That's resulted in a number of new records for the company, both in terms of PBT, which is 42% up for the same period, record lendings of [ GBP 92.5 ] million on 98 facilities and recorded net receivables of GBP 149 million. Also and very importantly, we've record repayments and that's a good reflection of our borrowers' ability to refinance and sell their properties. On the right-hand side, in terms of trends, we're seeing an improving outlook and sign for the housing market with a view of lower interest rates to come, very pleased with the quality of the book. It remains good than 13 loans beyond the term at the end of July. And from an outlook perspective, still a very positive about both the size of the bridging market, which is expected to grow and also the emerging health plus growth that appears this year and is also forecast. Next slide, please. So on this slide, we talk here really about what's happened to the business on some key metrics over the last 5.5 years. You can see the sustained growth of new loans on a year-to-year basis. On our gross advances, we're basically coming out at about 900,000, and we have done that for the last 2 years. The trend continues in that space. In terms of cost of sales, you can see we're in control of the cost of sales that has been coming down. We've started to see the benefit of an increasing number of direct customers, and that reduces the amount we pay in commission for the loans. Our average gross LTVs are at 70%, and that's steady, and that's in the space that we wanted to be. And our blended yields have been improving as we've had increased pricing and managing our margins. In terms of terms, they remain the same at 11 months for a number of years, that's steady as we go. Next slide, please. So just to update you in terms of other areas of focus for '24-'25. We're very pleased certainly with the ongoing quality, credit quality and also the quality of the projects we're investing in and the quality of our borrowers. So we see that continuing -- we're certainly making inroads in terms of returning customers that's increased this year from 26% -- sorry, to 26% from 15% last year, and we will continue to try and get our borrowers to return to us going forward. In terms of -- you can also see from a channel management perspective, 15% of our new loans are coming direct now, which is important and it helps us as it set full control of some bank commission costs. And in terms of from a project delivery overall, we've invested in our website helps our brokers and our borrowers as well as speed of delivery. And obviously, we cut our ability to move fast in terms of delivering loans in days with other USPs such as visiting all of our properties for ourselves as part of the loan process. We've introduced electronic signing, and that certainly speeds things up for our borrowers and our solicitors, and we continue to invest in our staff. Actually, 50% of our staff are currently on training courses to get accredited and qualify in areas like valuations and specialist property finance, and it just shows that one that will help them, help our business and shows that we're investing for the future. That's me and I'll now hand over back to Anthony.

Good. Well, thank you very much indeed, both Karl and obviously, Chris and Ed, I think although we've had a challenging year really in terms of regulatory activities in Advantage. I think you can see that the enormous amount of work has been done in response to that. And I think that, that will benefit the business in the future, which obviously gives us confidence that we will come back stronger in the long term as a result of this regulatory activity. That certainly applies for -- to Advantage. And Aspen is not even on page -- in the nonregulated sector. And it goes from [ strength to strength ] as it's a growing market and it will even greater and expand more as smaller developers actually improved properties in line with environmental consideration among other things. So that, I think, brings us to 12:35, was it 25. Which gives us 35 minutes for the questions. And I noticed that we got quite a few questions, which I think are very important indeed. I'm trying to read them, but I think I've made notes of them.

First of all, basically asked a question as to whether with the view of as to what the effect of the 166 or similar restrictions whether we knew how they had affected competitors, in particular, you mentioned bank rules and money borrowed. We won't normally make comments on our competitors, but we do know that this is an industry-wide initiative from the FCA and in one way or another, they will have been affected. We do believe that we are first out of the gate so far as the responding to 166 is concerned. And I'll just ask Karl to elaborate on that.

So I think the question was really -- is it -- regulatory engagement across the market are specific to Advantage? The answer to that one from Edward, I think it was, is now it's across the market. It's the borrowers and financial difficulty review. There are 3 main themes affecting the most finance space at the moment. One is the business review. One is obviously DCA or DIC commissions and the third one in coming, which is being signed posted is affordability and sustainability. With all the other market-wide ones, such as consumer duty and all the other elements universally still applicable. H -- quarter numbers, is in double figures as to those in the same channel as far as the FFIT's review is concerned, and by looking over those players within our space, you'll see various market commentary for those that are publicly listed or issue as such. So I wouldn't want to comment specifically on the brand names that you've mentioned in your question, Edward, but I think if you do have a chance to have a look into different lenders results, you'll see reference to the FFIT review for those that are impacted or which there's a fair number. You want me take that?

Yes. Let me just move on to Stephen B. And may not -- obviously, people who know the business very well and I asked some very, very interesting and helpful question. Stephen B, can we -- should we have moved earlier? I think is the essence of what you're seeing. And you also ask what's the effective Labour government with Rachel Reeves, Chancellor will have on regulation. And I think there was a very pertinent question to Stephen, that you also said what are the key learning. Well, I'm going to leave the key earnings to Karl. I'll answer the one should we have moved earlier, because I don't think we would like to have moved earlier, but I don't think we could have done because I think that a lot of the regulatory involvement from the FCA related to BIFD, borrowers in financial difficulty, initiative. And the way in which they interpreted the then relatively new customer duty or consumer duty back in October 2023, and don't get the duty only been introduced in July 2023, was uncertain. And I think, still, to a certain extent, is uncertain. I mean, it is subject to a certain amount of interpretation. So we're all learning is the answer and we'll continue to learn over the next few years. One of the reasons why I said in the Chairman's statement that we're working very closely with the FCA is because it's in their interest and our interest to do so. We will gradually hone ourselves in line with the new regulatory regime together with our own with our own commercial considerations. As for Reeves and labor, well, I don't know. My -- the optimistic side of me says that the Labour party has a greater understanding of the needs of nonprime customers, decent people who may not have a perfect credit record. Those are the kind of people we offer credit to. It's always been our mantra. The customer is worth more than their score and that we'd like to improve their credit rating as a result of their interaction with us. And we'll continue to do that. And I think the labor parties is very cognizant of the fact that these people do need access to credit. They need it. They need a car to go to the work to take the children back and forth from school and for other reasons, and they shouldn't be denying it and we're there to help in that way. And obviously, we're going to work together to ensure that. And how we help them is acceptable in the -- under the new compliance regime. Key learnings, I'm going leave to Karl.

Yes. I mean, now let me answer specifically as it relates to the regulatory piece. I think there's another question on other changes. But whenever you have these reviews or sector-specific engagement for all players within that sector learn something and if you're lucky, quite a great deal. So I wouldn't necessarily give you a very long list of things. But fundamentally, it's about being a higher bar or an expectation is clearly illustrated. So that's kind of what the process aims to achieve. And there's a long list of stuff there, whether that would be oversight, forbearance practices, forbearance options, time for recovery, recovery options for that all that kind of stuff. So it is completely arrears and forbearance focused and you get -- it's a great benefit to have direct conversations, quite lengthy ones with both skilled people and the regulator directly to flesh out. So you understand clearly the right level of expectation and then achieved accordingly.

Okay. I hope that's helpful to you, Stephen. Now we're going to [ Maynard ], who says that reach the very perfect question. What exactly were [ V Reg ] restrictions? And when do we anticipate to be lifted and which of those restrictions are going to be restricted or lifted and why? So over to you there, Karl.

Yes. I mean it's a list of specific restrictions, it's held against the register since December, I think, of last year. Fundamentally, they talk to certain practices and restrictions on ease of progress in certain areas regarding once in collection of payments and secondly is in repossessions. So they are viewable to see the explicit I think is 9 in total. So those are the new restrictions, which we hope to be lifted. Why is because we have achieved the required standard. And as I say, much as we have -- we have shared with you our optimism, we've engaged openly and constructively with the regulator in those discussions. And have made our case as to reach their required standards, which they are opining on current rate. So we will let everyone know in due course.

Maybe you also do another question, subsidiary question to that one, which is very, very, very appetite, which is -- you talked about regulatory negotiations with the FCA. And you asked whether, in fact, they might lead to a more lenient collection, purchases in the future. And therefore, it didn't mean what the hiatus in profits is going to be in temporary one, because of the collection's performance. My view is that it will be temporary, it may well read that the profile of collections changes slightly. It might be lower and it might even be slightly slower, but will still be there. and the collections would come in, because that's basically how you'd judge the success of any lending business. It's easy to lend it. We got to get paid back. And I think the FCA understand that. But what would you like to comment?

Nothing encapsulates that. That said, I was looking at the question now. I think it's not about sort of being necessarily more lenient. There are certain things. It's a very complicated and involved customer journey, the whole forbearance journey an industry looks to increase its standards and improve its service continually. But I don't think, just by focusing on the regulatory part, we're in danger of losing sight of the many other things, either we do by broadening access, high levels of automation, servicing customers in the different styles and tones that suit them best. So it's about achieving the required standard continuing to focus on the customer voice and the feedback that illustrates how you're doing and looking across a very broad spectrum of options to ensure that your repayment performance and the customer outcomes are over at the highest level.

That brings us very nicely on to Stephen B's on the second question, which basically says would this restructuring, which we complements the business line of taking place without FCA intervention? Now obviously, we had FCA intervention in more of a catalyst. And we don't argue with that. But one of the principal points that we're trying to get it across is that we make long-term virtue out of what might appeared a short-term problem. And the reason why? The way in which we are going to be doing that is by adopting a whole series of practices and interventions within our business, which makes it more efficient and make it more property customer-oriented it has ever been before. We're proud of our record. On collections and we're proud of our records in improving sales. But that doesn't mean we can't do better. And occasionally, this kind of catalyst is a requirement for any business in order to improve in that way. So we do see this in a positive way, Stephen. And I think the restructuring. In short answer to your question, the restructuring would have probably taken place without FCA intervention anyway. And then, we've [ Maynard ], then are some redress and remediation. And it has been today going to ask them. I can ask Karl to answer that. I wouldn't necessarily agree that bad numbers obviously take longer to add up. I think that may well really the people want to ensure the value remediation in each stage is properly targeted and is proportionate to [indiscernible].