Shine Justice Ltd (SHJ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Shine Justice Limited FY '23 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 FY '23 for Shine Justice. Can I open by introducing our team. Firstly, our CFO, Ravin Raj, our Head of Investor Relations, [ John ] George; our Company Secretary and General Counsel; Annette O' Hara; and my name is Simon Morrison, the Managing Director and CEO. If we can go to Slide 4 of the deck just to outline our business across the group. Firstly, what we call our injury business, which runs across the following practice areas, motor vehicle workplace, public liability and abuse that is shared across a number of brands in the group, Shine Lawyers being the largest brand and the other brands are Sciaccas, Stephen Browne, Bradley Bayly and Claimify. We then have what we call our new practice areas, which are our specialist lines, and they run in the Shine lawyers brand, class actions being the largest of those practice areas, superannuation and disability, heat trauma, catastrophic injuries, [ dust ] disease, commercial disputes and medical [indiscernible] business. And then we have 2 family law firms in the group, Best Wilson Buckley in Queensland and Carr & Co in Western Australia. If we can turn to Slide 7 of the deck, and I'll walk through the headline results. Clearly, the H1 result has been a challenging one for us, the most challenging we've seen for many years in the company now. It has been a bit of an intersection of a couple of things that Ravin will talk through shortly. We have been investing pretty heavily in our growth journey, and we'll talk a little bit about that. So we've spent some money on that. And additionally, some expected cash to land in H1 has now been deferred. There's been an effect that Ravin will talk through and explain that full bridge. Importantly, H2 is traditionally very strong [ full ] time, and this half will be no exception. So to the headline numbers, revenue was up almost double digits, which we were happy with. EBITDA marginally under or flat at $26.91 million, Ravin will explain some movements in the EBITDA line and what that means moving through to H2. NPAT down by a greater number of that cash significantly down for us in the half, they're normally pretty tight H2 cash, but that combination of investments and deferred cash coming in has had that impact for the first half, but Ravin will talk us through the second half. The interim dividend has been declared at $0.015. The position taken on the dividend was we needed to reflect the reduction in cash in, but obviously demonstrate our view in respect to H2 for the company. And EPS, of course, has followed the other lines. If I can talk to other matters strategically that we've been working on in the first half. We have now for FY '23 filed 3 new class actions being some Princess case, the Blue sky case and the Star Entertainment case, of course, in recent times. We added 42 new fee owners. So we have a good block of lawyers to work on the cases. And we're about midway through our new market platform, which we think will bring great success to work. We settled a significant class action against the Commonwealth government on behalf of the Northern Territory style and generations for $50 million. We are establishing some alliances with law firms in the United States to increase the number of litigation-funded class actions we can bring into Australia. We opened 2 new offices in Victoria, both Pakenham and Melton. We've previously spoken about opportunities in Victoria. And organically, we've been working on building the offices that we opened in the previous financial year with pretty good results. We did roll out our Shine Case Tracker, and that's already having a positive impact on the business. And we've been working pretty hard on some enhancements to our class action technology platform to make that more efficient and effective. On that note, I'll hand to Ravin to talk us through the financials in a bit more detail.

Thanks, Simon. One of the things that we should be aware when we're looking at the financial results that you might remember, we sold our M&A business at -- in the June '22 financial results. And so PPP does not include M&A in the financial results. I'll repeat the results in terms of revenue, EBITDA, et cetera, and then I'll go through some reasons in relation to that. The revenue as Simon said, was up at 9.29% at $111 million. EBITDA was down to $26.91 million, NPAT was down 18.39% and gross operating cash flow, which is probably one of our major metrics, was negative $8.9 million compared to pcp of $6.68 million. So I'll talk about GOCF in a minute. But going through the segment results, in terms of that revenue growth at 9.29%. The PI segment actually grew by 10%, and it grew in Queensland PI. The new offices that we opened last year, the 4 new offices by [ sole ] contribution, increased contribution from Stephen Browne and our Sciaccas businesses. In terms of the NPA segment, it only grew at 5.9% this period, and that was really due to growth in our revenues contributed by our medical law and commercial dispute practice. So while revenue was up 9.29%. EBITDA growth was flat and marginally below PCP. If you look at the segment PI segment, its EBITDA margin dropped temporarily to 22.6% from 25.5%. And that's really due to extra provisioning that will require because we didn't sell as many cases to the first half or with group and therefore, we're required to provide positioning in respect of those -- that growth in that with -- in addition, expenses were higher in this half compared to PCP. We believe that margin will normalize once case resolution activity increases and expect are normalized in the near future once we're out with this growth phase. In terms of the NPA segment, EBITDA margin dropped temporarily from 27.1% from [ 33.2% ] Again, we're investigating a whole bunch of new class actions, and we're required under the revenue standard, we're required to 100% provide all our class action investigations. Again, from a couple of views, we expect that margin to normalize once case resolution activity increases in class actions and also expenses are controlled in the near future once we're out of our growth phase. In terms of expenses, there are quite a few expenses that are impacting EBITDA margin. Employee benefits expense is up significantly. As Simon indicated, we grew net 42 more figures this period compared to previous periods. That was mainly in core PI in Queensland, which was about half the growth in Queensland. Plus also, due to competitive pressures, we increased salaries across the group around [ 6%. ] Our marketing expenditure is up, we had a [indiscernible] new marketing campaign last year, and there was increased TV outdoor in digital. Our HR costs are up, as our staff numbers are growing. We're spending more money on internal training and conferences. And finally, our unbilled disbursements write-offs were also low. And that's mainly due to class action investigations that were required to write-off plus some [ personal ] injury case write-off. Moving to Slide 11, which is the dividend slide. [indiscernible] Previous on PCT, obviously, as a result of the lower after-tax profit result. Directors decided to pay an interim dividend of $0.015 compared to PCP of 2.25, and that was -- The reduced dividend was really a consequence of the lower cash conversion in H1. While the payout ratio is low in H1, the Board believes that once H2 cash conversion normalizes, they expect to increase the payout ratio in H2. Moving to Slide 12 which is the balance sheet. You'll see some movement there because of the low cash conversion in the first half, our cash reduced from $51.8 million to $23.4 million. And the cash reduction is really funding growth initiatives plus also operations in H1. You will see that [ WIP ] is growing in this period, and that's again due to lower case resolutions in H1. Similarly, disbursement debt as credits have grown. Trade debts are relatively steady. Apart from other operations strategic activities, we're also going through significant leasing and re-leasing and fit out across the group, and you'll see our PPM increased by $2.9 million. In terms of our strategic activity, you'll see intense [ catalog ] manageable assets growing. That's really a new marketing platform that we're working on. Our debt increased from $50.2 million to $53.3 million, and that really relates to the fit out of lease premises that I'm talking about and some capitalized items. If we go to Page 13, we thought that it would be good. We reported an EBITDA of $26.9 million, but there were a few mitigating factors in terms of what EBITDA we're going to actually report in. And they're on -- that's on Page 3, what we're calling normalized EBITDA. There are a number of one-off items that impacted the EBITDA result. I've mentioned increased provisioning. It's $5.8 million across both PI and NPA. When we recruit new staff, they are on a ramp-up in terms of -- they don't produce productivity straightaway. And the loss of productivity in terms of the staff that we've recruited is around $4 million. So we're expecting them to be 100% productive from December onwards. There are also other smaller items there in terms of-- That had an impact on EBITDA in this financial period. If you look at EBITDA that we reported, we reported EBITDA of $26.9 million, but there were a number of one-off factors that impacted EBITDA and normalized EBITDA would have been around $37.2 million. Similarly, with GOCF, which is on Slide 14, we've reported a negative EBITDA of $8.9 million. You'll see a number of mitigated factors that impacted that reported GOCF. And we've created a waterfall to normalize that GOCF. The first line is overdue from litigation funds. As everyone knows, we moved to litigation funding to improve our cash flow, but good financial period. We've had -- we've had a couple of issues with litigation funders. One of them is Sure Capital at the moment. And so some of our invoices have been delayed or were on a payment plan rather than paying out full outstanding invoices. And then on another case, where actually the case has gone a bit longer, and the litigation funder is not paying out fees until we go to mediation, which is due in March that Shine is having to carry with. In terms of the class action court approval deferred to H2. We always had the boxes, we're referring to the Boston plantation here. We always have the Boston class action in our H1 forecast. There were 2 court hearings prior to 31 can the court has deferred to H2. So it's a bit of a timing issue from our point of view. Similarly, [ the overview from the litigation funders ]. The cost of the extra new [ PMS ]the other item in terms of GOCS. We put the people on. They're not really productive at this point in time or they're ramping up productivity and they're certainly not producing any cash and cash will be -- they will produce cash down the track. The impact compared to PPP, we did have new -- we've opened 4 new offices at previous years, and that's just a comparison against PCP in terms of new offices. And finally, the other large number is the $1.7 million. As everyone knows, we are keen to grow our class actions business. We wanted to move into the Victoria market, where class actions can be operated on a contingency fee and we've spent about $1.7 million in investigating class actions in Victoria. And our hope is -- the purpose of this is that to convert those class-- to convert those investigations into real class actions in Victoria. So that is a reflection of where we thought our GOCS would be in terms of our forecasting compared to what we've reported. Back to you, Simon.

Thanks, Ravin. We move to Slide 16. So just on the topic of class actions, just a few things to update people on. We have been working very hard on building out this part of our practice. It will be a very important part of our revenue in the medium term. And there are 3 things that we have been focusing on. The first is the number of cases, as Ravin mentioned earlier, there are 56 opportunities in total, which is a combination of cases commenced in the court cases that are in what we call pipeline, which means we're commencing in the courts, all cases that are new and we're exploring those. The second thing we've been working on is broadening out the mix of cases in the class action practice. As you can see on the slide, we practice across employment, product liability, indigenous interest, financial services, securities, travel, and there's a few bits and pieces in the other category. We think that's an important strategic move on the part of our company to have a very diverse practice. And the third and very important [ under ] reliance on litigation funding in those class actions. As Ravin said, in H1, we had a couple of issues we're managing a timing issues, but litigation funding is a very important part of that strategy. Turning then to Slide 18, which is the outlook. I'll keep this brief for both the short-term view term. In the short term. There are 2 things which we are focused intently on in the next 6 months. The first, of course, is our case execution to get those cases that were delayed in resolution in the first half in October in the second half that converted to cash. And what goes with that is the cost management strategies. In the medium term, we have invested and spent to build up both work types and geographies. So we now have a very good spread across Australia and New Zealand across a very diverse range of practice areas with a good complement of a workforce to run those cases. So our key focus, having done that building, of course, is execution. And finally, with guidance, we confirm EBITDA growth in FY '23 in the order of low double-digit percentage increase, subject to, of course, 20 unforeseen economic conditions. That concludes the presentation. We're happy to take questions.

[Operator Instructions] Our first question comes from Daniel Seeney from QValue Research.

You said in the call that you expect margins in both of the divisional segments to normalize. What do you foresee those normal margin levels to be? I think you've mentioned 25% in personal injury before. Could you just give us a reminder of those levels?

Daniel I think what we've told the market on a number of occasions that ideally, personal injury margin should be around 25% to 28%. If they get to 30%, that's fantastic, but that's the range for personal injury. In terms of NPA, the range there is 30% to 35%. [indiscernible] that we will be in the margin in that sector.

Okay. And should we be thinking about those in the second half? Or is there still some ramp up with the new staff that have come on board?

Look, I think Daniel, you've been on the journey with the company for a while. We have been on a growth phase for the last 2 years. A lot of money has been expensed, et cetera, [indiscernible] new offices, a lot of money, investigating class actions. A lot of money is being spent on growth initiatives. And so partially, I think PI segment will improve because we'll have more resolutions in the second half. In terms of the NPA segment, while its impact-- It's more impacted by expenses. And I think that over the next 12-- I hope by FY '23, I think you'll see that we'll bring expenses back down again, and that we automate improved the EBITDA margin across both segments.

And just one more. Could you please provide an update on the mesh cases. There's been a bit of media commentary regarding the status of that case? It would be great if we could get some clarity there.

Certainly. So there are 2 mesh cases that are in the courts, pending approval at the moment, Ravin spoke to one, which is the Boston Scientific case. It had 2 hearing days in November and early December and I mentioned date a couple of weeks ago in court. A judgment is reserved, and we expect that to come down very soon. On the Ethicon case, we had the first approval hearing back in early December in the federal court. And the court had to consider approval settlement, approval of costs. During that hearing the contradictor, a [ contradictoris ] is someone appointed by the judge to represent the interest specifically of group members. A submission was raised about whether that would be a tender for the administration work. The judge did order a [ tinder ], our council then and now as opposed the concept of the [ tinder ] as being inappropriate for a case like the times case. The judge has heard submissions in respect to that number, again, adjustment instituting and we understood from the Federal court [indiscernible] both as simultaneously. So we haven't had some news pretty soon on both fronts.

Your next question comes from Peter Meichelboeck from Select Equities.

Just a couple of questions. Just on the dividend. Is the policy still a 30% to 50% payout of earnings. I know the first half, you spoke about the first half being lower because of cash generation. But even if I sort of look at the sort of historical half years, they've sort of been sort of 35% or thereabouts. In terms of sort of like the second half, should we be thinking that 30 to 50 or would it be possibly higher in the second half to make the catch up from the first?

Yes. I think -- let me come back to a couple of steps, Peter. The Board did deliver on the dividend. I think our conclusion was we'd be damned if we do, we'd be damned if we don't, in terms of paying some sort of an interim dividend. So the interim dividend, the decision to pay the interim dividend was really based on our view or the Board's view it or of the cash position. As I said in that normalized GOCS, there were a number of items that you occurred H1, which didn't occur in H2 and we're confident they're going to do H2. But given the low cash balance at 31% as it was decided to pay a lower dividend. Now in terms of the full year position, if once some of those things occur and also we improve our cash resolutions. In the class injury business, I think you'll see the total dividend for FY '23 match will be slightly higher than FY '22, subject to that [indiscernible]. So if that happens, the payout ratio is somewhere between 35% and 40%.

That's great. The other question I had was just you called out the overdue from the litigation fund is at 5.8 and you made some comments around that. I just want to clarify, is there any -- have you had to make any provision on any of that? Or is it just more of a timing issue?

Yes, it's a timing issue solely, Peter, there's a provision risk in either scenario.

And look, the last question I had was, I'm not sure if it was covered when you gave your commentary at the beginning. Just in terms of the class action business with the personnel changes, [ Jan ] has moved on or is moving on. Is that -- and some other people I'm not sure if you've made any comments on that. But can you provide us sort of any commentary on that and whether that's actually means? What does that actually mean for the business? Is there certain clients or anything like that?

Yes. So [ Jan said object ] the business, along with 3 other lawyers. We have a team of more than 80 in the class action practice. We don't actually know what they're doing. We understand [ and they set their own factors ] if that's the pace we certainly wish them well. [ Vicki and Salads and Craig also the joint debates. ] [indiscernible] Both have 40-odd years of experience between them. They are both probably the most experienced trial class actives we have in the practice. So we've got a good contingent of people in the business. I do have to say that naturally, you don't not lose any one from new business, but we wish them well. It certainly has opened up a number of opportunities that previously were a bit restrained if I could prove that one.

Peter, I can answer what Simon said. You might remember [ Prakoso ] came to us through the ACA acquisition about 3 years ago. And he was running [ ATA lawyers ], which are the big class action on. And I was always a little bit are, coming into shine and because we must pay a large class action practice.[ You might leave that is coming with China, and it's a very easy step up ] [indiscernible] for it to move from the role that he had previously into that leadership role in class actions.

I will now hand the conference over to Mr. Morrison for closing remarks.

Thank you, and thank you all for attending. We look forward to visiting people on the roadshow next week.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.