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

Good afternoon, and welcome to the S&U plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I would now like to hand you over to Chairman, Anthony Coombs. Good afternoon to you, sir.

Good afternoon and good afternoon, everybody, at IMC. We very much welcome these opportunities to speak to investors, both retail investors and institutional and I'm just going to go through the slides. You can see that today's speakers, if you go back one there, Harry, we've got myself, my brother, Graham, who's Deputy Chairman. We've got Chris Freckelton, who is the Group Finance Director on my left. We've got Karl Werner on my right, who is the Chief Executive of Advantage Finance. And on my left, we've got Ed Ahrens, who is the Chief Executive of Aspen Bridging. We -- if we can go on to the first page of the results, we talk about our wonderful customers and staff. We're very proud of that. Our customers are a bright blood of our business. And we've got 4.9 in our Trustpilot scores. So what we say about our customers and those wonderful staff who serve them it's not just from -- it is backed up by research that we get from [indiscernible]. Okay. Let's go on one more page. I mean, this year, we -- this half year, we produced some very good and solid results with the emphasis really on future investment in our business, which is why we're making a further GBP 40 million worth of investment in the half year, another GBP 90 million on the previous year, we're selling for the future. And the way that our business works, it basically means that our profits come about 6 months to a year after the initial investment. And so as you will see, we indicate that we're going to grow as a result of the investment we put in, and I will look at that in a second. Okay, we move on. And that investment basically is evidenced by our net group receivables, which increased by just over GBP 100 million since last year to GBP 541 million, over GBP 0.5 billion for the first time. The quality is indicated by our group impairment charge, which has hardly risen despite that additional investment. And the borrowings in order to finance it have gone up to GBP 285 million, which is showing gearing of 114%, which we don't regard as being very high for a finance company. Just looking at those profits means that we could increase our dividend to shareholders, and we like to give dividend to shareholders because we as executives of the group are also shareholders. So we share an identity of interest. And that's why because we believe that the prospects for the group are very strong, we've increased the dividend from 35p to 36p, and we anticipate that we'll be able to get that replicated with -- for our 2 further dividends in the year so that we can reach a significant increase on the 115p that we paid last year. We'll go into the more details about the profit of the individual companies, Advantage and Aspen later on. But I would say that I think these are extremely good figures. And that if you take out an exceptional profit that we made last year at Aspen as a result of a repayment in the half year, we're about 7% up on group profit before tax this year. It's a bit better than the 15.6% to 15.7, which justifies the 36p ordinary dividend that we are proposing for the first payment of this year. Okay. So next one. And I'm going to hand over now to Chris Freckelton, who's our Group Finance Director, and he will take you through the group financials.

Thanks, Anthony, and good afternoon, everyone. So starting with the income statement, our profit before tax for the period is GBP 15.7 million against GBP 15.6 million last year, so a 1% increase. As Anthony has mentioned, the Aspen profit before tax figure last year was boosted by a large unexpected recovery. And therefore, on a like-for-like basis, we are -- we have observed a 7% increase in PBT year-on-year. Delving down into some of the key movements in the profit and loss statement. Revenue was up 11% period-on-period due to the higher average receivables and also some higher-margin deals that we're writing in the first half in Advantage following our rebalancing of the book to our more traditional customer base. The impairment charge was steady, as Anthony mentioned, at GBP 8.2 million, reflecting a couple of items. Obviously, Advantage repayments continue to improve. So we were up at 92% of June versus 90% last year. And also, that was alongside lower write-offs than we had assumed in our budget and also improving the book quality at Aspen. And a key metric we use to measure that is the number of loans that have past turn at the balance sheet date, which has reduced year-on-year to be 17 out of 259 live loans. And I guess that's all in the context of a significant increase in receivables that we've also seen in the period. Then just focusing on the costs. So cost of sales have increased 32%. That's predominantly following a return in higher advantage volumes and that relates to the broker commission paid on those deals. Admin costs were well controlled and unsurprisingly, finance costs increased around about 30%, which was alongside the growth in the borrowings. We then move on to the group balance sheet. So it's a relatively simple balance sheet focused on accounts receivable, borrowings and equity. At Advantage, the net receivables have increased 22% to GBP 341.1 million, following strong lending and better repayments, meaning also lower provision requirements. At Aspen, net receivables have increased 35%, following strong lending, but also to do with slower repayment patterns. So 2 factors for that, one of which operating in quite a challenging U.K. property market at the moment. And also, we were expecting a slower repayment profile as we've moved to longer-term products, as we've mentioned before. Then just focusing on borrowings. So they have increased in line with the growth of the loan books. And with the GBP 4.6 million of overdrafts that we have in the middle of the slide, results in net borrowings of GBP 285.1 million at the 5th of August. Then move on to the cash flow statement. This tries to sort of break down the movements in the balance sheet positions by division, obviously, on a cash basis. Overall, we've had an investment of GBP 43.3 million in the group in terms of net borrowings since the year-end. And as mentioned, that's reflecting strong advances in Advantage, which increased 49% from GBP 70.6 million to GBP 105 million in the table in the middle on the slide. And similar lending in Aspen, we're at GBP 102.8 million versus GBP 106.4 million last year offset by better collections performance in Advantage and also the slower repayment profile I mentioned in Aspen, alongside GBP 9.7 million of dividend payments made in the first half as well. That has ultimately led, as Anthony mentioned, to group gearing increasing over the period. So we've increased from 97% to 114% as at the 5th of August. And then just moving on to treasury and funding. So net borrowings of GBP 285 million sit comfortably within our GBP 330 million of committed facilities currently. Since the period end, Advantage has required additional funding to support growth, whereas Aspen has remained fairly neutral following a catch-up in those expected repayments. Obviously, we expect the growth observed during the period to continue alongside our mantra of strong sustainable growth. And therefore, we are in the latter stages of our securitization project. So we've put an update here. Essentially, we've substantially concluded the legal process on 2 new 3-year private warehouses, one for each of Advantage and Aspen, which alongside a small RCF facility would increase our funding capacity from GBP 337 million to GBP 650 million, giving us the room to grow the business as we want, whilst also having the added benefit of reducing the overall finance cost to the group. We hope to sign and draw down on these facilities in October. So I'll now hand over to Karl to talk through Advantage.

Thanks, Chris. On the first slide, you'll see some awards there. It's really good to see these peer judged by senior managers across the industry. So that means a lot as does the recognition it gives to our entire team. We're highlighting there the best response to market conditions, which the category for that was meant to measure those that respond to difficult macros as well as all the regulatory change we've seen over the last couple of years. So that's a real opportunity to give credit to our risk and our operations teams. The second one, best technology provider against 30-something other competing firms, many of the biggest names in our industry in financial services generally. So that's huge kudos to our collections and IT teams. And then in the world of Motor Finance against all others to be named Car Finance Provider of the Year across the whole market was especially pleasing.

Can I just jump in there? Spare your blushes, but the one award that I'm extremely impressed of was for Motor Finance Chief Executive of the year, it wasn't just Motor Finance, it was Chief Executive of the Year and that was won by Karl himself. So he's too modest to say that, but very well reserved for the brilliant job he is doing.

Thank you. You said that just as we rehearsed it -- so if we turn to lending, thank you. We see a trend continuing of sustainable, profitable growth. We illustrate for you the credit mix by risk, augmented by a huge upgrade in our credit risk capabilities and machinery in November of last year. We see month-on-month increase in lending in a difficult market from the macros, but we are getting up to 10 months into our 60-month strategy, executing it to plan to significantly grow our market share to a point at which it would represent a doubling of market share by the end of that 5-year period, and we are halfway through year 1 of that plan. There is strong demand out there that we can grow into whilst maintaining rate and return, and we will do that. Our right to win is based not only on our longevity and the quality of our team back in Lincolnshire, but especially our innovative plan to expand our origination channels into other areas where motor finance is originated. As you'll see with the award from AI and other things I'll mention on the tech front, a strong culture of innovation and fueled by the funding that Chris spoke about a moment ago. If we turn to the other side of the business, the collecting side, tracking broadly in line to budget for H1, again, some difficult macros out there. And you'll see the broader trends across all motor finance, if not financial services markets that deal with that. I'm especially pleased to see two things. One, that the VTs consider to continue to be volatile as they are in their reporting cycle, but where we expect them to be, if not slightly below, and also the crystallized bad debt, which is not management of early arrears, but our recoveries from later arrears is tracking to be well within budget. Turning mainly then to our customers. On this slide is really just a quick summary of some of those change highlights. It really has been a half year of innovation and some significant investment in change, as it says on the front sheet gearing for growth. Our augmentation of credit risk capabilities are ongoing. We are being very successful with scaling our AI investment. We have AI engineering expertise in recruited and in-house. We've built 3 products, and we'll be releasing another fourth this side of Christmas, not to mention the difference building out a new treasury function represents to our future growth. So a high level of satisfaction, our growth underpinned by channels, capabilities, people and the opportunities that exist in the market. My final slide is just a quick regulatory touch base. We have what we need in place to manage the last elements of the FCA commission issue. As you'll recall from our earlier announcements, we are mainly required to administer complaints rather than remediate customers, and we're tracking well with that with a dedicated remediation team in place. We have very good, healthy, proactive and positive engagements with our regulators. And in terms of a great measure of how we look after our customers has always been this cause lead table, and we're pleased to continue to be in the top tier. And with that, I will hand over to Chris.

Thanks, Karl. So the next 3 slides will be familiar to most, but take a closer look at our Advantage book debt performance. So during the period, we originated 10,660 deals on a slightly lower average balance of GBP 9,848 and a slightly lower customer score down at 890, which has also given us the opportunity to increase the flat interest rate per annum to 14.8% from its low last year of 13.5%. Cost of sales have improved on last year as well, have been reduced in part alongside the reduction in the average advance. If we then move on to first repayment quality. So historically, there's been a strong correlation between first payments made by customers and bad debt and outcomes after 5 years. So the blue line in access is first payments made, red line access is bad debts and the dotted line is expected bad debts. So following the rebalancing of our book, I mentioned earlier, from Q3 '25 onwards, we've seen first payments decline from recent highs, albeit they're well within our recent history over the last 10 years. And happily, we've seen the bad debt and outcomes expected by the dotted line continue to improve, reflecting our improving collections performance, as Karl has mentioned. And then finally, just in terms of book debt performance at the 5th of August versus year-end based on arrears status for the reasons already mentioned around collections performance, we have more of the debt in the up-to-date category at 73.1% versus 71.8% at year-end. And we also have fewer accounts in the 6-plus arrears category at 4.4% versus 5.7% at year-end, and that has continued to improve post period end as well. I'll now hand over to Ed to talk you through Aspen.

Thank you, Chris. So at Aspen, we continue our growth journey in what's been a subdued market so far this year. We've talked about the PBT and the comparison impact of a larger recovery last year. But we've grown the receivables to a record level of GBP 199.9 million. This is largely to do with our longer-term bridge and buy-to-let offerings. And those also come with a slightly longer later profit profile, as mentioned earlier. So we're obviously investing in that. Our lending is broadly the same as it was last year. And although our repayments have been lower, this is primarily due to the success of the longer-term products and also customers just using more of the term to the end of term before repaying. Despite all of that, our quality remains strong. Levels of overdue numbers are similar to last year, but proportionately much lower given the larger book that we have today. And over a number of years now, we've managed to achieve an annual growth of 16%, and we believe in our ability to continue this progress in the future. Next slide. Just opening up, we've shown you this slide before. So we continue the story of how the portfolio has been developing. But I think it's important to just hover over the first perspective, which is we've had an intense focus on quality and always have done. And it's pleasing to see that we've continued with that GBP 897 million of capital deployed with only 0.03% of capital losses, which is obviously extremely good and good for the business. So just picking out some of the other items on that slide, a slight uptick in the average loan size where it had been coming down last year, slightly higher on the cost of sales where it's a competitive market and been a tough market, we're paying a little bit more away in terms of commission, holding strong on the LTV. And just on the blended original blended yield rates, you'll see that really, if you look at what's happened to that rate over the last few years, it largely follows what's happened with the base rate, which is predominantly where rates are pitched for bridging in this market. On the next slide, you can see the impact of the average terms where they've been lengthening and as discussed, what that does to help us both on growth, but obviously, longer term. I think it's worth also reflecting that thinking back over time in '18, '19, we had GBP 22 million worth of lending and GBP 0.8 million of profit, and we've come a long way since then. Just on my last slide, a few key points to draw out from this. So we continue to progress with our longer-term products that are serving us well in this market and attracting investors. And also investing from an IT perspective. We're starting our own AI journey this quarter, starting in October following in some of the footsteps of Advantage to help us improve our efficiency and prepare ourselves and support future growth. And lastly and definitely not least is the investment we continue to make in our staff in training and skills. They are the backbone of our success. And I'll now hand back over to Anthony.

Thank you. Well, I hope that you've seen that and that impressed you. In particular, before we get to questions, there are obviously quite a lot of questions on our new securitization funding. Before I get there, I'd like to just make the point that we haven't arranged GBP 600 million worth of securitization facilities against the current level of GBP 330 million just for fun or it has been an interesting exercise. It's because this is how we anticipate growing the business in the next few years. But I think the point that I would like to -- or the slide I'd like to draw your attention to is the last point on Advantage, where it says that exceptional customer demand, and we have about 300,000 applications for finance per month. Okay, probably about 180, 200 of those are serious. We do 2,000 of those. There's a huge amount of potential for growth. But that's why Karl is absolutely right to target to double our size of our book in the next 5 years and we do that on a very firm basis. We've got excellent customer relations, very good relationships with the regulator, the Finance Conduct Authority and plans for new distribution planning channels to add to our existing broker channels, which I think will enable us to achieve that kind of growth. Aspen is going through choppier waters at the moment for the very simple reason that the residential housing market is not as buoyant as any of us would like it. We hope that the new Help to Buy scheme introduced or announced yesterday by the government is going to do something to help that. Possibly, interest rates will follow a slightly more benign path than is currently anticipated. And we hope that the budget will recognize sensible growth in the housing market as being important for the general economy as well as people's housing needs. But we're confident that we're in a market generally, which is going to mean that we can improve Britain's currently rather under par housing stock as well as the amount of housing stock in the country. In a growing population, we need more of it, and we need it to be better. And the kind of people we serve are doing both, both building and refurbishing. And just finally, the S&U, although we've got these new initiatives that we are growth orientated and we're ambitious. But we do that on the basis that we've always aimed for steady, sustainable growth. It's terribly easy to grow a book in the finance business and not be sustainable. And anybody can lend money, it's actually getting it back in a sensible and sustainable and responsible way. And we've got about 88 years of doing that at S&U. We've got the management team, which has got that level of experience. I say 88 years, I'm not quite that old. But -- but nevertheless, we've got a continuity of management and a very clear business philosophy. And we believe that, obviously, securitization will transform our ability to grow the business, and we anticipate that, that will produce profit and dividends in the next few years. So with that, can I thank you for your attendance and now move on to questions from -- we've got Simon, Ian, James, Javier and Jamie, all asking questions.

And I think I'm going to move to the first one, which is Simon. A lot of them are about securitization. And Simon asks, what proportion of each pool are the two banks funding versus S&U's own retained junior interest? Zeus own note pays this at 20%, 25% for a private deal. Can you confirm the actual structure falls in that range? I mean I'll ask Chris to do this. But because the deal is not yet quite concluded. We anticipate that in the next week. I think we've got to be a little bit careful about what we review, but I think you can give a general tone, Chris.

Yes, yes, absolutely. I mean I think in short, the answer is yes. We are in the range that Zeus provided of between 20% and 25%. In my understanding, that's quite typical in a private warehouse deal. Obviously, as we get further down the path and hopefully, at the end of this deal, potentially move to a public securitization deal for Advantage, we'd expect that sort of junior interest element to reduce. But no, that Zeus predictive range is accurate.

Good. Thank you. And I'm going to move on now, I'm going to stay with the securitization. James has asked a question, with the new securitization funding strategy, is it currently envisaged that you will issue public ABS to institutional investors currently? Securitization can naturally offer higher gearing than is currently the case with bank financing. Do you think the gearing advantage will increase going forward? I'll ask you that, Chris.

Yes. Thanks, Anthony. So yes, exactly that. We've done or we're in the process of agreeing 2 private securitizations. The public securitization for Advantage would be something we'd look at, at the end of this current deal. You're absolutely right that the securitization does offer higher gearing, and we're expecting to take advantage of that, pardon the pun, in the years to come. Obviously, once the securitization is embedded, we'll be doing another reforecasting exercise to provide a bit more surety on that going forward.

And we've got another question from Jamie on funding. We've got to be a little bit careful about what we say here. We don't normally give this kind of information, and possibly Chris will answer in the appropriate way. Is your RCF priced off of LIBOR, price of LIBOR? And if so, what is the margin you pay over that? How does the cost of securitization compared to that in terms of equivalent interest cost? Chris?