SG Fleet Group Limited (SGF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SG Fleet-LeasePlan announcement conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Robbie Blau, Chief Executive Officer. Please go ahead.

Thank you very much. Good morning, everybody, and thank you for taking the time to join us at very short notice. My name is Robbie Blau, and I'm the CEO of SG Fleet. With me today is Kevin Wundram, our Group CFO. I'll refer to the slide numbers as I move through the presentation. Could you please turn to Slide #4 for the key points of today's announcement. You'll have all seen by now what we've announced today, but I'll run through the highlights for you again through this presentation. We intend to acquire both the Australian and New Zealand businesses of LeasePlan, in the process creating what will be a highly compelling fleet management and leasing offering across Australia and New Zealand. Obviously, for SG Fleet, this is a transformational acquisition, and we are very excited about this prospect. The acquisition is subject to the standard conditions and approvals. We expect the transaction to complete during the third quarter of this year. Most of you will be familiar with LeasePlan. It's a business similar to ours in that it also provides fleet management and leasing services to a well-diversified customer base. LeasePlan currently manages around 103,000 units across Australia and New Zealand and employs about 430 staff. The similarity, of course, means that it's a very complementary business to ours, not just in terms of business activities, but also in regards to customer and product quality and a very strong customer service culture. This obviously creates significant scope for synergies and the ability to add scale across operations and funding and procurement activities. A further benefit for us is that it would see us increase the proportion of full-service products such as operating leases in our product mix as well as an improvement in the proportion of recurring revenue relative to upfront and end-of-lease income. That, of course, means an improvement in the overall quality as well as the resilience of our earnings, something we've been working towards for some time now. Acquiring a business that funds our balance sheet also means we'll bring our funding mix to the proportions we were targeting when we announced our securitization project some 2 years ago. In other words, the proposed acquisition makes sense from a wide range of perspectives and realizes a number of our stated strategic goals. It clearly creates a platform off which we can grow and create further shareholder value. Part of the acquisition includes an International Alliance Agreement with LeasePlan Australia and New Zealand's vendor LeasePlan Corporation. We've agreed to share business opportunities in our respective geographies and exchange know-how in areas where we can be complementary in that respect post-completion. The agreement we will have in place will also cover the management and the integration process, as you would expect. This corporative relationship is reflected in the fact that LeasePlan Corporation will join our shareholder register. As I mentioned, there's significant scope for synergies and we expect to generate about $20 million in pretax run rate synergies per annum once we migrate LeasePlan's operations and systems. We expect this to occur around year 3. Underlying cash EPS accretion is expected to be about 5% in the early years, but will then accelerate to north of 20% post migration. LeasePlan is projected to generate pro forma underlying net profit after tax of about $27 million in the current calendar year. And post deal, our pro forma corporate leverage will sit at about 2.4x. As just mentioned, LeasePlan Corporation will join our register with Super Group's stake reducing to just over 52%. I'll come back to the funding and offer in more detail a little bit later. Could you please turn to Slide 6 for more on LeasePlan Australia and New Zealand. As I mentioned earlier, LeasePlan ANZ is a business that is quite similar to ours in terms of products and services offered, as well as in terms of geographical footprint. The business has operated in Australia and New Zealand since the late '80s and is a -- currently a wholly-owned subsidiary of Netherland-based LeasePlan Corporation. Globally, LeasePlan Corporation operates across 32 countries and manages several million vehicles. Clearly, we are very excited by the prospects of collaborating with an organization of this nature and will be welcoming an LeasePlan Corporation nominated Director to our Board after completion. Please turn to Slide #7. I discussed a few of these points earlier in the presentation in the executive summary, but I'd like to highlight some of the particular strategic objectives achieved by this acquisition. As I said, our respective business portfolios are highly synergistic and complementary. The businesses combine expertise and strength across different customer segments and product types. This means we can extend our customer base and introduce new products and services to those customers. This plan is one of the several competitors we come up against regularly in the pursuit of new business and we know it starts -- share our own strong customer-focused ethic. Obviously, we aim to tap into this extra knowledge and expertise that will become available to us upon completion. The increased scale would, of course, allow us to generate advantages in terms of procurement power as well as funding terms, and we'll be able to pass these benefits on to existing and prospective customers. We have told our shareholders over the years that we intend to increase the proportion of recurring income and diversify our funding methods, and this acquisition meets and actually accelerates our path towards both of those objectives. As to the integration process following completion, the proposed arrangement of LeasePlan Corporation gives us both flexibility in terms of services transition and a very attractive cooperation opportunity with a major global player. Please turn to Slide #8 for an overview of what the combined entity will look like. As I mentioned at the start, the acquisition would create a highly compelling fleet management and leasing offering across Australia and New Zealand, with a combined enterprise value of about $2.5 billion. We would manage a combined 250,000 or so vehicles, including our U.K. business, and the total funding book would be about $3.6 billion. Obviously, the vehicle number is an estimate only, as the market is highly competitive and it can fluctuate over time. As you can see on the slide, we have started making progress with our securitization project. But obviously, the addition of a predominantly warehouse-funded book shifts the funding mix instantly and noticeably in the direction we set ourselves 2 years ago. So that's another positive outcome of the acquisition. Please now turn to Slide #9. On this slide, you'll see the -- in percentages the beneficial products and customer base impact I referred to a little earlier. We retain a healthy mix of customers; in addition, the quality of the combined customer base increases and is further diversified by industry. The proportion of operating leases, which typically include a wider range of services and finance leases and, of course, managed-only arrangements, increases as a consequence of the acquisition. We also intend to further strengthen our offering to novated customers. Please now turn to Slide #10 for a look at the combined fleet size. The Australian market is highly dynamic, and the combination will create a very compelling fleet management and leasing offering in this market. As I just said, the transaction will also enhance our offering to novated customers. LeasePlan has a better presence in New Zealand so bringing the 2 businesses together there sees us also very well placed in that market. In summary, we'll be in a better position in 2 markets that are highly competitive and dynamic. Please now turn to Slide #12 for a little more detail on the positive financial impact of this transaction. The majority of about $20 million in available pretax run rate synergies per annum will be realized following the migration of LeasePlan's operations and systems. This is expected to occur during year 3. Prior to that, we'll however be able to extract some cost synergies across a number of areas. Similarly, underlying cash EPS accretion accelerates post migration from about 5% at the start to above 20% once we've achieved the operational and system migration. As I mentioned before, we will see a very beneficial shift in the proportion of recurring revenue, which will account for 70% of total net revenue of the group compared to 56% currently for SG fleet. I know that many of you have a keen interest in that number and for the right reasons. So we are very happy to also make progress in this regard. In summary, the platform created for the combined entity puts us in a very strong position to grow and create shareholder value for the longer term. Please now turn to Slide #13 for a closer look at where the synergies will come from. The vast majority of synergies come from cost savings in areas of systems and processes, procurement, as mentioned before, and in premises and employment. There are also clear revenue synergies arising from more effective funding and expanded products and services range in our disposal product (sic) [ model ] mix. Inevitably, there is some offset as a result of the occasional customer overlap, and we've certainly accounted for that in the way we've projected going forward. As just mentioned, significant synergy realization really kicks in after the system migration, which is expected to occur in year 3 and will require about $9 million of CapEx to realize that net system integration. If you can now turn to Slide #15 for a quick update on how we've traded since our half year results announcement about 6 weeks ago or so. Overall, the trends we observed at our half year results are still very much in place. The residual value environment continued to be very strong in Australia, New Zealand and the U.K. and we don't see any evidence the reports of supply constraints will ease much before the financial year-end. The lack of supply that has resulted in a greater number of extensions in our book, which, of course, means we are getting fewer vehicles back to dispose of. The Australian corporate business continued its strong performance from the first half. The challenge remains to [ perform ] out of any orders coming out of the wins achieved. In novated, the recovery in demand has continued in line with improving consumer sentiment, and we're now seeing the highest order levels since the end of calendar year 2019. As is the case in Corporate, the challenge is to get the cars to the drivers. This means that pipeline is growing very, very strongly. In the U.K., we are seeing signs that things will start to return to normal by midyear. The business continues to achieve success in a number of areas. As is the case elsewhere, extension numbers are up due to the supply disruptions and -- that we've been talking about. In New Zealand, the minor lockdowns have not really affected business levels and the business continues to see a large number of opportunities in that market. Recent highlights there include further wins in the energy sector as well as the long-term recontracting of one of our marquee customers. As to the outlook for the remainder of the financial year, we continue to expect a strong second half. In F '22, we expect growth across all revenue lines, except for the end-of-lease income as the residual value environment will probably start to normalize as we approach the end of this financial year. Please now turn to Slide #17 for more detail on the acquisition and the funding terms. The consideration paid for the acquisition is a combination of cash and scrip. The cash payment is $273 million funded through a new corporate debt facility, our own cash and an underwritten rights issue. LeasePlan Corporation will also receive a 13% interest in the company post dilution. The lease portfolio will be refinanced by our new securitization warehouse and revolver facilities. The proceeds of that will be used to repay the existing $600 million LeasePlan Australia securitization facility as well as $330 million in term debt with existing funders. LeasePlan will also receive precompletion profits and surplus cash on the target balance sheet at closing. Turning now to Slide #18. This provides a bit more detail on what I just summarized about the funding of the acquisition. The value of the scrip issue to LeasePlan Corporation is $113.9 million and the cash payment is made up of $175 million in debt, $11.7 million in cash and $86.3 million from the rights issue. There will be $175 million in new syndicated acquisition debt facility. Turning now to Slide #19. This slide provides additional detail on the lease portfolio refinance. We will create a new $1.1 billion securitization warehouse facility for Australia and a $310 million New Zealand dollar -- sorry, NZD 310 million warehouse facility in New Zealand. Receivables that are not able to be funded through the new warehouse securitization facilities will be funded by a revolving cash advance and a vendor financing facility. The existing $600 million LeasePlan Australia securitization facility will be repaid as well as $330 million in term debt to existing funders. $145.4 million in LeasePlan Corporation capital investment in the portfolio will also be returned. Turning now to Slide #20. Details of the equity raising can be seen on this page. At $2.45 per new share the offer price represents a very narrow 4.5% discount to TERP and a 5% discount to our last closing price. Our majority shareholder, Super Group, will be taking up its full entitlements of rights, and our directors have indicated they intend to participate in the offer. Please also -- now turn to Slide 21 for a look at the equity raising timetable. As you're all aware, we'll be conducting the institutional offer today, with the retail offer running from the 9th of April until the 23rd of April. Slide #22 now, where we presented the pro forma consolidated balance sheet showing the impact of the transaction and the offer on our balance sheet as at 31 December, 2020. Thank you, all. That now concludes the presentation. We're happy to take questions. Over to you.

[Operator Instructions] Your first question comes from Tim Lawson from Macquarie.

I actually have 3 questions. First, just on the systems. Just in terms of the systems across the 2 businesses, is there any overlap in the providers?

On systems, there would be overlap in noncore systems, obviously, in some of the product. But in the core system, there's no overlap at all and will ultimately be moving onto our systems.

Okay. Second question, just in terms of the warehouse pricing, can you talk to us about how that compares to, so for example, the recent ECX issue in terms of the final cost?

Look, I mean, the ECX issue was obviously a public issue. So our -- the pricing would be close, but obviously, being a private issue, it's not at the same level. But we're comfortable with where the transaction is priced. And we think that will set us up in a good position to originate new volumes going forward.

And you would anticipate issuing into the [ ABS ] market from the warehouse as volumes demand?

I mean, at the right time. These are substantial warehouses now. We're -- across the group, we now will have sort of effectively 3 securitization programs in place. And at the right time, when market conditions are appropriate and once we have got the book rated, then we'll do that. But that's probably not something that we'll undertake in the next couple of years.

Okay. And just in terms of the sort of contracting across both groups, will you get procurement or other benefits? Do any of the contracts sort of automatically pass that, since you got that buying advantage or other advantages through the customer. And so ultimately, do you just get more competitive? Or in the absence of having to pass those benefits on, you just grow margin?

A mix of both is the answer to your question. There would be some contracts in the book, some of the more [ setire ] customers that may require prospect, but there's certainly an opportunity for benefit. But certainly, it does make us more competitive on the buy side as well, which is obviously an opportunity for us and our customers.

Your next question comes from Chenny Wang from Morgan Stanley.

Look, thanks, both, taking my questions. Maybe I could just ask about the warehouse and how you're planning to use that going forward. I mean, obviously, the LeasePlan warehouse sounds like it encompasses the fleet side. But yes, how should we think about the usage of that warehouse versus P&A and the split for the combined entity?

Yes. Look, I mean, as we said a few years ago, our plan was to have about 30% of our business funded by securitization warehouse. This acquisition effectively gets us to that level. So we're pretty comfortable maintaining it at that level. So the business will continue to be funded predominantly by P&A arrangements, but now with some very substantial securitization warehouses alongside that. And so we're comfortable with the balance, and we'll look to maintain that going forward. Obviously, in the initial years post acquisition, until we are on one system, so each side of the business will continue with its current funding arrangements and we'll continue to grow our autonomy warehouse that we implemented just before Christmas.

Right. And then just in terms of sort of the existing LeasePlan warehouse, maybe it's just me. But who is funding that? And what sort of triggered a new warehouse facility?

So they only had a smaller warehouse in the Australian business. They had no warehouse in New Zealand. So we effectively had to raise 2 new warehouses to fund the full book. And then plus some additional corporate debt facilities to deal with any ineligible assets that might not be able to be put into the warehouse.

Sure. And then maybe just one last one. I mean, you guys sort of mentioned the potential for revenue synergies. But obviously, haven't sort of quantified that. But could you sort of elaborate on that? I think you mentioned your wire product services and disposals model. Can you sort of elaborate on that and also give us a sense of how the SG Fleet lineup -- product lineup does defer to LeasePlan in those respects?

Look, we've got a lot of very complementary product ranges. We do something slightly differently. As you know, we sell all of our vehicles through our own disposal channel. They sell through the auctions. There's probably some opportunity for us there. They have certain procurement arrangements with vendors where they -- there's some -- and vendor arrangements here that are different to the way we do business. There's some opportunities there for us. And so we think across the board, if we build a model that has the best outcomes for the customers and the best-of-breed sort of processes, we think there's some major opportunities quite significantly across that. And then there are other -- there are obviously other revenue synergies, which we haven't put in much for -- at this point, we want to deliver them before we do that. And so there's some opportunity there as well.

[Operator Instructions] Our next question comes from Yi-Chan Lee from Allan Gray Australia.

I would like to ask one information on your presentation, on Page 9, that you show LeasePlan has about 53% fleet managed. And to what I understand, that should be off-balance sheet, not funding on their balance sheet. But on Page 8, the LeasePlan has $1.4 billion asset pool size, while they have $1.2 billion lease portfolio funding mix on their warehouse. So I was just wondering, how do I reconcile these number? Is that correct number for number on page 9?

Yes. So the $1.2 billion lease portfolio will relate to the operating leases and the finance leases on Page 9, and the fleet managed is not funded.

So when you say it's off-balance sheet, it's actually not funded at all. So there's no funding for it anywhere. I think maybe that's a misnomer

So with the fleet managed, the customer funds the asset themselves.