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

Thank you for standing by, and welcome to the SG Fleet Group Limited 2025 Half-Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Robbie Blau, CEO. Please go ahead.

Good morning, and thank you for joining us today. My name is Robbie Blau, CEO of SG Fleet. With me, as usual, today is Kevin Wundram, our CFO. I will refer to the slide numbers as I go through the presentation. Please turn to Slide #3 for a quick overview of the period. The performance of our businesses in Australia, New Zealand, and the U.K. has very much been a continuation of the previous period. Delivery numbers remained elevated and new business opportunities continued to emerge. While the operational environment differed somewhat between New Zealand and the U.K., both businesses made further progress in terms of customer wins. Our total funded fleet continued to grow, supported by the conversion of some of the Lite Fleet into funded via sale and leasebacks. Order pipeline numbers remained elevated and the rate of normalization slowed later in the period, meaning that the adjustment will continue into the next financial year. Used vehicle values softened further, but again, at a slower pace towards the period end. We are now nearing the final phases of the LeasePlan system migrations and our innovation drive is yielding clear results in terms of our efforts to boost revenue. In terms of financial outcomes, higher than budgeted delivery levels and disposal numbers have meant that NPATA for the half was in line with F '24 operationally and if annualized, is above the guidance we previously provided. However, we do expect disposal levels to reduce and used values to soften further in the second half, which should bring us back in line. The PEP scheme of arrangement process, which we announced on the 4th of December, is ongoing. Please turn to Slide 4 for a recap of the period in our Australian business. The first half of the 2025 financial year has seen the momentum from the previous period maintained in Australia and delivery numbers continue to be strong. Our business development teams are as busy as ever and the tender pipeline is feeding through new opportunities on an ongoing basis. We are also increasingly successful in bringing the Novated product to Corporate customers and outsource fleet management to those who previously only used us as a Novated provider. Our customer book has grown further in line with this. In terms of fulfilling this demand, we were again able to deliver in high volumes, which was also reflected in the higher disposal numbers. In the Corporate channel, sales and leasebacks continue to be an attractive solution. In many cases, this arrangement is applied to convert some of our Lite Fleet into finance units, as Kevin will explain a little later. Our partnership with Ayvens brings a significant number of referrals to us in this channel, again, opening up the opportunity to upsell Novated to new customers. I have mentioned increased product penetration on previous occasions, and this trend has continued during the period. The Inspect365 safety solution and the Bookingintelligence asset management tool, in particular, have seen a significant increase in interest. In the Novated channel, we continue to see strong interest from employers looking to offer vehicle salary packaging as a benefit to their staff. This has allowed us to grow our total eligible employee base, which combined with improving conversion is supporting growth in this channel. Our customer satisfaction measures are firmly pointing in the right direction. This was undoubtedly helped by our ability to deliver vehicles more rapidly, which in turn reduced the number of order cancellations. While in the overall market, the share of EVs did not grow, in Novated, they do still account for about 45% of new orders, and low-emission vehicles in total accounted for about 70% of new orders. Moving now to Slide 5 for a look at the New Zealand business. As was the case in Australia, our fortunes in New Zealand saw a little change. The general environment has stabilized after a softer period, and it is business as usual for us over there. National registration softened in 2024 and EVs accounted for a significant part of that decline, representing only 4% of registrations compared to about 12% in 2023 before the Clean Car discount was removed. Used values have now stabilized, and we are seeing some increases in certain segments and models. I've mentioned the fairly aggressive competitive behavior of one new entrant in that market before. This has now fallen away somewhat, so things are a bit more rational. We scored some promising wins and we were again successful in converting customers from unfunded to funded. Over the years, we've built an excellent reputation with the New Zealand government, and that further supported our efforts to make inroads into other public departments. In addition to signing up new customers, we also continue to increase product penetration within existing accounts in line with our efforts in Australia. Please turn to Slide 6 for an overview of the U.K. market. In the U.K., we are seeing a continued gradual improvement of the economic environment. Lower inflation has allowed interest rates to drift down as well. Combined with the rise in average wages, this has produced a more positive business climate. New car registrations rose in line with that. EV uptake in this market remains robust at a market share of about 20%, but this is almost all driven by tax incentives. Used EV values are gradually stabilizing. In line with all of that, the growth profile of our business here is very encouraging. We are signing up new customers and moving existing accounts to full outsourced services and adding the Novalease offering to our Tool-of-Trade customers. We've also found our way onto additional supplier panels. This is always promising for us because we have a really good record in progressing from panels to sole supply arrangements in that market. I'll now recap on the supply situation, order pipelines, and used vehicle values on Slide #7. Supply and used vehicle trends continued on from the second half of 2024, although normalization of the latter slowed later in this period. Supply has improved further, albeit that for some models, the wait is still very long. And in some cases, new orders are temporarily suspended to allow supply to catch up. Aftermarket accessories are also starting to be somewhat easier to come by. As I said earlier, our order pipeline remains elevated, and the pace at which it is normalizing slowed in the second quarter. Both the Tool-of-Trade and the Novated order pipeline remain about 2.5x what we would consider a normal pipeline level. As a result, we expect normalization to spill well into the next financial year. Used vehicle values continue to soften as expected, although again, the rate at which this happens slowed later in the period. Interest from secondhand dealers remains very strong, but used EVs are still struggling to attract significant numbers of buyers. I'll now hand over to Kevin for a look at the financials. Thank you.

Thanks, Robbie. If you could please turn to Slide 9. In the first half, we've had continued growth in delivery volumes, which has driven growth in most of our revenue line items. This growth was made possible by the continued normalization of new vehicle supply. The improved supply has, however, impacted secondhand values as expected, which has reduced our average End-of-Lease disposal profit. Fortunately, the growth in disposal volumes has offset this. In total, net revenue grew by 6.6%. As we flagged as part of the guidance we gave in August, operating expenses are higher as we head into the final phase of the LeasePlan migration. We've also incurred higher interest costs due to the unwind of the interest rate swap on our Corporate debt. The net result of all of this is that NPAT reduced by 9.8% versus PCP. If you could turn to Slide 10 for a look at the Corporate fleet movement. The improvements in supply of the mainstream vehicles that make up a typical Corporate fleet enabled us to grow Corporate deliveries by 12%. This stock availability has also meant that we had significantly fewer extensions in the period compared to PCP. In total, our Corporate fleet grew by 2%. Turning to Slide 11 for the Novated fleet movement. Both order and delivery growth were strong in the Novated channel coming in at 15.4% and 7.5%, respectively. As we've previously reported, this is largely driven by demand for electric and fed vehicles due to the 0 FPT incentive. Touching briefly on the Lite Fleet on Slide 12. The Lite Fleet reduced by 5.6% this year. This is partly due to the conversion of customers from unfunded to funded through sale and leaseback transactions and partly due to the strategic decision to exit certain low-margin LeasePlan customers. Turning to Slide 13 for a look at the individual net revenue streams. Net Rental & Finance income reduced by 19.2% due to 3 factors. Firstly, our strategy to improve the advance rate on the lease portfolio in order to release equity results in higher interest costs because of higher lease portfolio borrowings. Secondly, the improved new vehicle supply has meant we've had fewer vehicles in extensions and inertia. And finally, the soft used vehicle market has meant we've had higher depreciation on the on-balance sheet fleet. Over to Slide 14 and touching on net Mobility Services revenue. We were able to grow net mobility services revenue by 20% during the period, driven by growth in the fleet under management as well as continued cross-sell of SG Fleet product into LeasePlan customers. Please turn to Slide 15. Net Additional Products & Services income grew by 12.3%, driven by the growth in new funded deliveries, which resulted in a significant uptick in accessory sales and rebate income. We also earned higher early termination income as a result of some fleet optimization initiatives in a few of our Corporate customers. Over to Slide 16 to look at Finance Commission. Finance Commission was up by 25.7%, driven by growth of 7.5% in P&A funded deliveries and a 16.9% increase in Finance Commission per unit. The increase in Finance Commission per unit was driven by a combination of the higher average funded capital per unit as well as proportionately fewer extensions relative to new vehicles in the funding mix. Please turn to Slide 17. As expected, the improvements in new vehicle supply have caused used vehicle pricing to soften. Our average disposal profit per vehicle reduced by 27.2% versus PCP, but this was offset by higher disposal volumes. In-life Vehicle Risk Income grew because of improved maintenance margins on terminated vehicles as we continue to benefit from the return of underutilized fleet. Please turn to Slide 18 for a brief look at the Fleet & Credit provisions. As mentioned earlier, the improvements in new vehicle supply have impacted secondhand values. In relation to off-balance sheet funded operating leases, this triggers an increase in our residual value provision, whereas for on-balance sheet funded vehicles, it causes an increase in the depreciation expense, which I touched on earlier in the Net Rental Income slide. Over to Slide 19 for a look at operating expenses. Operating expenses grew by 11.7%, driven by increased project spend and head count due to the final phase of the LeasePlan migration. We also fully impaired our investment in Carly. On Slide 20, we've presented the detailed P&L, but since I've spoken to the key line items, I won't spend more time on this. Over to the financial position on Slide 21. The balance sheet obviously reflects the strong growth in the book and the related increase in lease portfolio borrowings. In this period, we've made further improvements in the advance rate on the lease portfolio from 88% to 90%, which has enabled us to release equity even though the book has grown significantly. Finally, turning to the cash flow statement on Slide 22, where you can see that the cash generation was strong, coming in at 105.5%. I'll now hand back to Robbie for summary.

Thanks, Kevin. In summary, the first half of 2025 has very much been a continuation of the previous financial year. In Australia, new business opportunities abounded both in the Corporate and the Novated channels, and we are working hard to convert these into new account wins. In New Zealand, the environment is stabilizing, and we continue to make inroads into new segments and with new products. The U.K. business has been on a steady customer growth course for some time now, and this has continued in this half. The supply and used values environment continue to normalize, although the pace of has slowed somewhat towards the end of the period. Similarly, order pipeline numbers continue to be elevated. The day-to-day business integration of LeasePlan is effectively complete as only a couple of system migration phases remain after which the full synergies will be realized. During the period, we have seen the positive impact of our accelerated innovation program and the introduction of new mobility products with growth in revenue from these products picking up pace. We've also taken significant steps forward with our effort to further optimize the digital journey of our customers. All in all, a period of good revenue growth and continued progress on which we intend to build further in future years. Thank you for your time. We will take your questions now.

[Operator Instructions] The first question today comes from Scott Hudson from MST.

Kevin, can you hear me okay? Just a couple of questions. Firstly, obviously, very strong growth in Novated orders through the period. Could you just maybe just talk about how that profile sort of, did it change at all through the half? I guess the vehicle order sales numbers that we saw from an industry perspective sort of slowed through the course of the half. Did you see a similar slowing in your order book?

No, we didn't. We've had, over the last periods, a significant number of customer wins as I think we've talked about over the last sort of 3 or 4 periods, and so that's eventuated into a bigger pool to attract orders from and so we actually didn't see a slowing. What we did see is obviously lots of demand for plug-in hybrid before the incentive ends and continued interest in electric and certainly very strong interest over the full period in normal hybrid assets.

So do you feel like the Novated pie has, I guess, is continuing to grow as more customers or more Corporates are attracted to the product set?

Yes. Look, we're positive about the Novated business and its ability to grow going forward, yes.

And just maybe if you could comment on, I guess, your comments around 70% of demand being sort of low emission driven. Is that a net positive from a yield perspective relative to FY '24?

Look, from a yield perspective, those assets are more expensive from a capital perspective than non-low-emission vehicles. So, from that perspective, it drives higher yields for us, yes.

And then maybe just changing tack to the Corporate fleet side of things. Could you maybe talk about the demand trends within that sector? And I guess what's driving the order supply improvement is helping the new deliveries. But could you talk about the demand backdrop from a fleet perspective?

Sure. Look, we continue to see new customer opportunities all the time. The demand for outsourcing has certainly not slowed down in any way. It's increasing. We, in some cases, clients should be thinking about rationalizing their fleet and how they optimize fleet management. And there's always some of that going on. And the other side of that coin is new entrants coming into the market and more fleet opportunities. So, we're not seeing demand slowdown at all; quite the opposite. We're seeing a very robust demand for outsourced fleet management and all of our add-on products that go with that. Both our customer service areas and new customer areas are very busy.

And in New Zealand, do you expect the activity levels to pick up through the second half as we sort of cycle through?

Look, I don't think they'll get worse. We've seen a much more stable half than the second half of '24. Whether they pick up, it's early to say. There's a brisk level of demand there for that market. I was over there last week. It feels like it's in a better place than 6 months ago, but whether there's a significant demand pickup is hard to say. What certainly has happened is that used vehicles have stabilized and are helping the industry there.

And then just lastly, I guess, in terms of the End-of-Lease income outlook, it feels like it's continuing to surprise on the upside, and it sounds from your commentary that the decline in the used vehicle prices kind of stabilized later in the half. Does that not suggest there's maybe an upside risk to your second-half expectations?

I think the pricing levels aren't surprising. It's kind of where we thought they'd be. What is surprising is the length of time it's taking to stabilize. So it's taking longer than we thought, which is some upside, as Kevin mentioned. But the levels are where we predicted they would be and where they'd head to.

And then could you remind me of the timing of the PEP transaction and when voting at various levels of things?

Yes. Look, we're in the process of finalizing scheme documentation. The expectation is that the first court date will be towards the end of this month and then the second court date towards the beginning of April.