Shine Justice Ltd (SHJ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Shine Justice Limited FY '21 Half Year Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Simon Morrison, Managing Director and CEO. Please go ahead.

Thank you, and welcome, everyone, to the half year results for FY '21 for Shine Justice Limited. Can I start by introducing our team. Speaking with me today is our CFO, Ravin Raj. Ravin is a very experienced public company CFO, was CFO at Watpac for more than 20 years. John George, our Head of Investor Relations. John is a former director and executive of Shine Justice and sits on other public company boards and a former employee of ASIC. Can I also introduce our General Counsel and Company Secretary, Annette O'Hara. Annette is a very experienced corporate and governance lawyer of more than 20 years standing. I'm the MD and CEO of Shine. I've been with the company 33 years as a litigator in most of the areas we practice in and in the current role as MD and CEO. We'll start with just a brief description of the company. Most people are familiar with our company, we are specialist litigators across a number of practice areas, broken into core personal injury and what we define as new practice areas. Three elements to Shine, we are very much a purpose-driven company. We exist to right wrongs that we see and recover damages for our clients. As we'll talk about a bit later in the presentation, we're relatively immune to economic cycles, which is an advantage. And thirdly, as we'll also discuss today, there are significant growth opportunities that lie ahead. If we move to Slide #7, we'll start with the financial highlights for the first half. Look, we've had a good half. We're very with the performance and the results. Revenue at $93.57 million was up 4.6%; NPAT, $10.05 million, up almost 14%; EBITDA, $24.29 million, up 12.1%; gross operating cash flow $33.91 million, up 324.4%, that's unusually high for our company, $22 million of that cash flow number is in respect to the Mesh proceeds recovered on the 23rd of December last year. You may recall we issued an ASX announcement, confirming the receipt of a total of about $40 million. The balance, which is about $19 million-odd -- [Audio Gap] Which don't form part of our operating cash flows. Our dividend, we're pleased to announce a $0.02 dividend, which -- [Audio Gap] Percent and earnings per share at $0.058, up 14.2%. So a good solid result for the company in the first half. If we move to Slide 8, and we'll talk briefly to the highlights of the half, as many companies -- [Audio Gap] We're very pleased to announce that the company performed extremely well through that challenging period. We're busy working on our growth priorities in what we call a post-pandemic period. Our underlying profit was in line with guidance despite the COVID headwinds. We have been quietly working away on both organic and acquisitive opportunities for the company moving forward. And a fair bit of time on technology and innovation, which I'll come to a bit later in the presentation. And finally, we had our first forward, well half, reporting period with our new Board in place. [Audio Gap] I'll now hand it to Ravin to walk us through the financials. Ravin?

Thank you, Simon. I'm on Page 10 of the pack. Just repeating some of the numbers, headline numbers that Simon mentioned, revenue was up 4.6%, NPAT was up 13.9%, EBITDA was up 12.1%, GOCF was up on a like-for-like -- [Audio Gap] PCP was up 36.5%, and the interim dividend was up $0.02, up from $0.015 in the previous period. In giving you a little bit of color on the revenue, as I said, revenue is up 4.7%. But if you break the revenue up into the 2 key segments in the business, you'll notice that the PI segment dropped by about 13.2%. Background of previous downsizing and restructuring in our nonperforming areas in New South Wales -- [Audio Gap] 21, we took some additional provisions in FY '21 in respect of our Victorian business, and also slightly higher provisions in our Bradley Bayly business. Our NPA segment, however, grew by 36.7%. And the majority of growth in revenues in that segment was due to class actions in our abuse businesses. That's revenue. And while revenue went up by 4.6%, our EBITDA actually grew by 12.1%. And in breaking that up, I've already discussed the fact that PI had a bit of a slow start. So its margin dropped from 26% to 16.6%. As I've indicated, we took some one-off provisions in the first half. And under normal circumstances, the margin should improve in the second half. The NPA segment, for those that have been following the business for a while now, you would note that the business diversified away from personal injury into what we call the NPA areas, and that includes client's actions and abuse. And the EBITDA margin in that segment grew from 22.5% to 37.3%. In terms of our expenses, expenses have generally been under control in the first half. You will note that the marketing is slightly under budget, but that's just a timing difference. Moving to Slide 11. EPS grew in line with our financial results. EPS was up 14.2%. And as we indicated, the dividend is $0.02, up from $0.015 in PCP, up 33%. And the dividend payout ratio was 35%, which is slightly higher than our previous payout ratios, which have stood around 30%. Moving to Page 12, which is our balance sheet. You will notice that the cash on hand is higher. And that's been boosted by the $22.9 million of fees that we received on the Mesh case just before 31 December. The WIP -- the net WIP shows a marginal drop, but that's mainly due to the Mesh fees that came in. But if you strip the Mesh fees out, there's an underlying increase in WIP, and that's mainly in the class actions and abuse business. Our trade debtors were up when we compare to PCP and that was impacted by approximately $4 million worth of fees that we were due to receive by 31 December, which we received in early January. The only other thing to note on the balance sheet, there is a marginal decrease in borrowings, and that's how transformation costs that we funded a couple of years ago. So moving to Page 13. That's our waterfall chart of GOCF. Traditionally, we have a slow first half and a big second half. It's going to be slightly different this financial year, obviously, because of the Mesh funds that we received in the first half. If we exclude the Mesh funds, as I indicated previously, our GOCF was approximately $10.9 million and -- and against adjusted PCP of 7.98%, it was up 36.5%. Our target is to get GOCF conversion somewhere between 70% and 80%. Moving to Slide 14. That's a slide we've had in our pack for a couple of years now. And it really reflects a strategy that we commenced 2 years ago, that's now bearing fruit in terms of improving our cash conversion. I suppose that there were 2 elements to that strategy. One was disbursement funding. And that process is now working well within Shine, with good support from our disbursement funder. And the other strategy was litigation funding for all our class actions. And that is now also working quite well. Back to you, Simon.

Thanks, Ravin. Let's go to Slide 16 and talk a little bit about the operating environment. As we reported 6 months ago. There's a couple of areas of the business that we're focusing on heavily. [Audio Gap] Is our class actions practice. And as we reported at the full year, FY '20, we have a pretty significant pipeline of class actions for forward revenues for the next several years. So our objective now is moving cases from pipeline into filed, and we have a number of cases coming up for mediation and trial in the next 12-month period. The thing we'd like to call out about our class action book and this will be relevant when we get to reform issues in a moment. We have a very diversified class action practice, and that stands us in very good stead in respect of any of the potential reforms off the back of the inquiry. Secondly, in the PI practice, as we previously reported, the top 3 firms have quite a small percentage of the overall PI market. And we are working on deploying strategies to penetrate the remainder of that market moving forward. Let's move to Slide 17. As I touched on earlier, we are spending some time on -- [Audio Gap] Technology. Just some examples of things going on in the business. We have deployed some particularly clever technology recently to automate and -- [Audio Gap] And convert into the business. There are 2 effects for that. One is, to take the human hand out of that process as much as we can, and get the client retained as fast as possible. Secondly, as people who've been investors for some time would well know, we changed over operating systems some years ago to a product called Elite by Thomson Reuters. It's a globally recognized software system for law firms and a big enough engine to cope with growth moving forward. And finally, as people will know, we built our own disruptive model that's in a run phase at the moment. In the last 6 months, we have been deploying some of those technologies into other parts of our business, namely our disability insurance and superannuation. And our WIRO, which is statutory workers' comp cases in New South Wales. Let's move to Slide 18, talk about the reform agenda. The biggest reform, of course, was the parliamentary inquiry and 2 class actions and litigation funding. That report was received in December, and tabled with the government. There are a number of recommendations in the report. But one of those recommendations has already been announced by the government last week, and that is the temporary changes to continuous disclosure will now be made permanent, relating, of course, to securities class actions. We'll wait and see what the federal government does with the balance of the recommendations. Shine's view is that a number of them are sensible and pragmatic, some of them are ambitious, none of them have a significant negative effect on our business moving forward. Indeed, as I have reported earlier, I think, in time, these reforms will actually assist the larger class action firms in the market. And the other big news, of course, is the business interruption test case that went through the New South Wales Court of Appeal, where insurers were attempting to rely on exclusions in their policies for businesses hit by the pandemic that claimed on their BI cover. The Court of Appeal found that, that exclusion wasn't available to the insurers, and that matter is now on special leave to the high court. Shine is busy building a bank of clients, being businesses affected by this, and we'll watch that case with some interest if special leave is indeed granted. Let's move then to Slide 20. The outlook for the balance -- [Audio Gap] 2021. On the growth agenda, as I said before, we are looking at organic and acquisitive opportunities in both PI and class actions. We'll have more to say about that at the full year. We are looking at some service offerings inside the business. In strengthening the business as Ravin reported, our focus is to improve that cash conversion rate. [Audio Gap] In that respect. We are working on developing a new operating model, which we think will improve the efficiencies in the business. On the innovation front, we want to hit the accelerator on the technology framework that I touched on earlier. And finally, we're doing some work behind the scenes, just to improve the offerings for our clients in their experience with the company. And finally, I'm pleased to affirm that we expect a continuation of our EBITDA growth in FY '21 in the order of a high single-digit percentage increase, subject, of course, to any unforeseen COVID-19 impacts. That concludes the presentation. Ravin and I are happy to take questions.

[Operator Instructions] Your first question comes from Peter Drew with Carter Bar Securities.

Just like to start with the PI result. Could you maybe help me by unpacking that results in a bit more detail? I'm just trying to understand how much of that decline in revenue was due to WIP write-offs, relative to the prior period? And how much relates to kind of a rebasing of that revenue line? And then how do we think that will come through in the second half, please?

Pete, I don't know whether we want to give you all the detail. But certainly, the first half, we -- [Audio Gap] We'll call one-off type provisioning in the first half, in -- particularly in our Victorian business. And so the point that I made in my presentation was that they're not -- in essence, they're not going to be repeated in the second half. So both revenue and also margin is expected to improve in the second half.

Yes, right. Okay. And I guess, another question, just on that. I mean, are we sort of at the end of that, do you think the end of that Victorian cleanup? And then you also called out Bradley Bayly. Just wondering if there was anything in that business that we should -- that you should highlight?