Shine Justice Ltd (SHJ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Shine Justice Limited FY '23 Full 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 to the FY '23 full year results call. We can start by introducing our team here today. Firstly, with me is our Chief Financial Officer, Ravin Raj; and our Head of Investor Relations, John George; and our Company Secretary, Annette O' Hara; and I'm the managing director and CEO. Let's start with Slide 6 of the deck. To summarize, FY '23 ended up being one of our most challenging and difficult years on record. Revenue was up pleasingly by 7.7%, and continues to rise which we are encouraged by. Our adjusted EBITDA was 2.35% below PCP, $61.61 million, largely impacted by some late movements that Ravin will address in the financials. Our NPAT was markedly down, predominantly impacted by our decision to take up a full provisional adjustment of the $32 million interest associated with the Ethicon class action, pending further submissions to the court for an alternate amount of recovery that we have previously flagged to the market. Gross operating cash flow was down, and largely due to delays in billings and settlements, which we'll talk about in a moment, and the impact of the Ethicon case, which Ravin will address. Consequently, the directors declared that we wouldn't declare a dividend for the second half of FY '23, but our intention is to return to dividends during FY '24, subject, of course, to our improving cash position. Flowing through from the Ethicon adjustment, of course, the EPS is well down at $0.0192. If we move to Slide 7, we'll summarize what's happened during FY '23. Firstly, learnings for the business. Like many businesses, the labor market has impacted ours. Competition is high. There is still some overlay of fatigue COVID. We held our own pretty well, but nonetheless, it was a challenging year. Probably the biggest issue that impacted our business in '23 was our delayed settlements in parts of the business and approval of settlements, which affected our cash flow significantly. The good news is most of this is timing related and will flow through strong cash in future years, which I will address shortly. We did make some key changes in our class action practice. It's a part of the business we are investing in heavily, and we'll be improving efficiencies as we've moved forward. We did make some decisions to reshape our legal and management structures, largely to concentrate on reducing the cycle times so we can get our cases resolved faster. Against that, there were a number of achievements that I'd like to call out for the FY '23 year. Firstly, our Queensland core PI business continued to be a very strong performer in the group. We had one of the busiest years on record settlement class actions, settling 6 in total, which is an extraordinary number in 1 financial year with total compensation for our clients of just over $670 million. In the same year, we commenced 3 new class actions for approximately 25,000 new group members. We did resolve the largest medical device product liability case in Australian legal history, and I can't overstate the significance of this 10-year legal battle. As indicated, we reviewed our legal and operational cost base so that we can focus on parts of the business that we know will get us good returns moving forward. And finally, looking forward, our intentions for FY '24. FY '24 will be a strong cash flow year for the company for the reasons I've outlined a moment ago. We have continued to grow the baseline for our class action practice to build forward revenues. And importantly, we did a review of our cost base, particularly our management structure, to assist with future EBITDA, which we will touch on later in the presentation. I'm going to move to Slide 8. And against that backdrop, I just wanted to walk you through the past 4-year journey of the company. We have seen steady improvement in our revenues over the last 4-year period, which we are encouraged by. Aside from the FY '23 adjustments which Ravin will speak to, we've also enjoyed steady improvements in our EBITDA. If we move to Slide 9. Importantly, we have a very healthy forward book of work. We have some $670 million of forward cash revenues in our cabinets at the moment, backed by $386 million of work in progress to date. So the company is in good shape in terms of future work [indiscernible]. I'll now pass to Ravin to give us a deeper dive on the financials.

Thank you, Simon. I'm on Page 11 of the pack. Just repeating some of the numbers that Simon mentioned. Revenue was up 7.6% to $231.64 million. EBITDA was $61.61 million, down slightly on -- at 2.35%. NPAT was $3.31 million, down 89%. And the financial results were really impacted by the fair value adjustment of $32.4 million of interest relating to funded disbursements of the Ethicon case, which we'll talk about later. The financial performance was also impacted quite late in the piece by a number of actions that settled in mid to late August. There were 3 actions -- 3 class actions that settled -- 2 class actions that settled in late August, plus there was one other class action we were hoping to get a recovery of, which did not happen by the time we finalized the accounts. In terms of -- moving on. In terms of expenses. As we said at the half year, expenses were going to be high in FY '23 because we have commenced a particular journey. And overall, overheads were higher than PCP, mainly due to cybersecurity costs, marketing, new marketing platform, establishment of new sites, staff training and travel, interest, HR, amortization and depreciation. Our employee costs were also higher, mainly due to growth in staff numbers. We grew approximately 57 staff in the year and also increase in wage rates. Simon will talk about how we're arresting the growth in expenses moving forward. In terms of looking at the results a little bit deeper. In terms of the segments, you'll see that the PI segment had an 11.5% increase in revenue and also an improvement in EBITDA margin, which is now standing at 28.8%. The business has been on a bit of a journey in terms of our New South Wales and Victorian businesses to reorganize those businesses because they had previously been a drag on the performance. It's pleasing to report that the New South Wales business is now showing signs of improvement, but further work needs to be done in Victoria. These abuse practice also had lower performance in FY '23, and this also impacted the segment. However, notwithstanding that, we believe that the PI segment margin will continue to improve in future years. Looking at the NPA segment, it reflected only a -- less than 1% increase in revenue, but also a large decline in EBITDA margin. The cases that I talked about, the 2 class action cases that I talked about, significantly impacted the margin in that business, which dropped to 25% in FY '23. Again, I think that looking forward, we're expecting that margin to return to normal in FY '24. Moving to Slide 12. Simon indicated that EPS is down $0.0192 compared to PCP of $0.1802. That's mainly impacted by the $32.4 million fair value adjustment that we talked about. In terms of the dividend, obviously, lower profitability and lower GOCF resulting in the Board not declaring a final dividend. So the full year dividend is $0.015, which is, in fact, the half year dividend. In terms of dividend policy, Simon has indicated that the business looks to resume to paying dividends in FY '24. Moving to Slide 13. This is a bridge in terms of where the business is heading in terms of our financial results. As indicated on the bridge, we're reporting EBITDA of $61.6 million, but we had a number of class actions and also a major case which had adverse results pretty close to -- pretty close to finalization of year-end results. And hence, we have to take up those provisions and write-offs. We also did a bit of balance sheet cleanup. And if you add those items back, our normalized EBITDA in terms of what we presented to our Board initially was sitting around $66.23 million. Moving to the balance sheet. The balance sheet remains strong. You'll note that cash has reduced by about $30 million. We had to use that cash. Because we had a low cash year, we had to use cash to fund operational activities in FY '23. We did do a fair bit of work during the year. So you'll see growth in WIP, particularly in class actions, medical and head trauma, and we'll see a recovery of that in future years. Unbilled disbursements have reduced by the provisioning or the write-off that we've taken of $32.4 million. Borrowings have also gone up marginally. But the ratio is -- debt to equity ratio sitting at 23% is still pretty low by industry stands. Apart from that, there were no significant other movements to -- in the balance sheet to PCP. Moving to gross operating cash flow. For those who are on the call at the half year, the second half, we really had a much better second half in terms of GOCF. But overall, we're reporting a negative GOCF of negative $3.9 million. The GOCF number for FY '23 includes approximately $15.6 million of fees that we received on the Mesh case, but we ended up paying that to Moelis Australia to reduce our interest burden on that particular case. Our cash conversion was -- as Simon indicated, our cash conversion was lower than desired, but we expect to get the normal conversion of 65% to 70% in FY '24. On Slide 16, we've got the bridge there, which reflects an adjusted GOCF. We've got the reported GOCF of negative $3.9 million. We've got the orange item there, which is the Ethicon proceeds repaid to funder. We also had some delays in terms of our litigation funder which continued on from the half. And if we add all of those items up, we would have reported a GOCF -- notwithstanding our core business not performing, just those items would have resulted in the GOCF of $21.1 million. It's pleasing to note that in respect of the litigation funder amount of $9.4 million, the majority of that has now settled, and we should pick all of that up in H2. Back to you, Simon.

Thanks, Ravin. So let's turn to operational update. Slide 18. As I said, we continue to invest in our class action practice. In our current class actions, we have a very diverse mix. We do that deliberately so that it positions the company very well both on the competition and perform perspectives. The 3 filed class actions in FY '23 were evenly spread across product lines, and our investigations pipeline is also a good mix. Moving to Slide 19. It is 10 years since the company listed on the ASX. And during that time, we've seen good increases in the number of clients, fee earners, offices, revenue and EBITDA saving to the FY '23 adjustments, showing steady growth for the company over the period. Let's move then to Slide 21 and the outlook for FY '24. Obviously, our primary focus for the next 12 months will be the cash in the business, and there are 3 core areas that we are concentrating on. And firstly, in our BAU operations, there is significant focus on cycle time reduction strategies to get as many cases knocked over and billed as possible. As I touched on a moment ago, we are involved in a cost reduction program, which will benefit both operating cash and EBITDA. And finally, as Ravin indicated, we have a number of class actions that have now settled and expect strong receipts for those class actions, particularly in Page 1. I am pleased to announce that on Friday just gone, the 25th of August, the Federal Court approved our Simply PFAS class action settlement to the sum of -- some $132 million, with taxes $123 million, $132 million, which includes $8.45 million of cash that will be payable to Shine. Moving to Slide 22. I want to speak briefly to the cost base reduction program that we're going through. We did commence a broad review of the business. We want to simplify the operating structure and particularly the overhead line supporting it. We want to focus our resources on the areas that will give us meaningful growth. The program is aimed at a reduction of annualized cost at both corporate and business unit level. We will continue expansion of our product on the East Coast, but in specific markets, and we will see material savings from this program throughout the course of FY '24. So to close out our outlook for FY '24, while the company is expecting a strong cash year ahead and improving EBITDA, we have elected not to issue formal guidance at this point. We will, of course, review this at the end of the first half. That concludes the formal presentation. Ravin and I are happy to take questions.

[Operator Instructions] Your first question comes from [ Ashley Dylan, ] a private investor.

I've got a few, if you don't mind. The first one was around litigation funders payments being delayed and that it was stated that they should be recovered by this half. If you were to attribute a percent of certainty around that, what percentage would you give?

100%.

100%? Okay. Second question is related to some funding decisions around Ethicon. There's been a lot of speculation that Ravin Raj led those decisions. I'm just wondering what level of support you currently got from the Board? And why would you attribute that support?

Look, I'll answer the question this way. The decisions taken were proper decisions to resource that long-standing class action. Because the question of the interest recovery is pending in further submissions, there's not much more we can say at this point. We'll certainly have a bit to say after the conclusion of the court process.

Okay. And next question is related to the value of WIP. So there's quite a lot of doubt in the market and the media about the value of WIP. Is there any kind of plans to address these concerns by producing any data around the recoverability of WIP around forecasts and actuals? And if not, given the significant benefit that it would have to earnings, why not?

Look, I can answer that question in a financial sense, and then Simon can talk about it in the qualitative sense. In a quantitative sense, the business -- the recovery that we're getting on case is pretty high. Our recovery is around 85% mark -- or 84%, 85% mark, which is pretty strong. It's the strongest that it's been in the business. The situation that we had in FY '23 and probably to some extent in FY '22, is that, as Simon alluded to, there were certain parts of the business where the cases weren't being resolved for any number of reasons, and I'll get Simon to talk about that in a minute. But also, we were going through a growth phase in our class actions business where we're building up WIP. And you'll see the benefit of that in H1 FY '24. But to do it, just to answer your question to delay your fears, the reason WIP went up in FY '23 was mainly because we didn't resolve as many cases as we thought we would. Simon, do you want to add anything to that?

I'll speak to the qualitative aspect. Thanks for the question. So firstly, our provisioning rates that we -- are actually predicated on our recovery rates by practice area. We are seeing that rate improving. So that's a good sign. We've got a quality WIP in the [ near term ]. Now having said that, we are in the game of risk. As you know, we now see law practice. And we are not going to recover all of our work in progress before. That's just part of the risk that we build into running the business. So that's the nature of the game that we're in. The third point I'd like to make, and that goes to the restructures in the legal parts of the business, what we are focusing on, particularly are those parts of the business where we haven't enjoyed strong recovery of WIP and reallocating our resources moving forward to parts of the business where we did.

And just following up on that, you mentioned that WIP may not be fully recovered. Is there a plan then to write off any WIP off the balance sheet if it's just sitting there stale?

Yes. So we regularly write work in progress off the balance sheet. It's provisioned constantly. I don't know if you want to add to that?

Yes. Look, I just thought I'd add to what Simon's saying. The net figure that you see on the balance sheet has a provision of $82 million against it. So we've already provided significant provisioning against the WIP -- the net WIP that's sitting on the balance sheet.

[Operator Instructions] Thank you. There are no further questions at this time. I'll now hand back to Mr. Morrison for closing remarks.

Just in closing, thank you for joining us on the call. I'll just summarize again. It has been a difficult challenging year for the company. We are looking forward to FY '24 being very productive year for Shine moving forward, and we look forward to talking to investors on the road show. Thank you.

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