Shine Justice Ltd (SHJ) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Shine Justice Ltd 2024 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 to the FY '24 H1 results for Shine Justice. My name is Simon Morrison. I'm the Managing Director and CEO of Shine. Speaking with me today is our CFO, Ravin Raj. We might get straight to it. We'll start with Slide #5 and the key metrics for the half. There are 3 areas I will talk to in respect to those results, and Ravin will provide us some more detail later in the presentation. So I'd like to start with cash. Our primary objective in the FY '24 was to focus intently on our cash generation in the business. Pleasingly, we achieved $29.11 million in gross operating cash flow for the half. That was nearly a $40 million turnaround on the PCP number. The other pleasing number for us is that our personal injuries practice [ billed ] fees more than 15% on the PCP, so we're running well in the first half. We have work to do in the second half. We are expecting good cash as well in the second half for Shine. I then want to turn to some factors affecting our earnings lines in H1. And the first and the biggest one, of course, which we previously announced, was the Ethicon and Boston WIP write-down that we took to bring closure to our fee recovery in both of those legacy class actions. That was a big chunk impacting the earnings, but the upside is we've brought closure to those costs. Secondly, as an adjunct to our cost reduction program, we have embarked on some restructuring on the fess -- fee-earning side of our business to enable us to focus on more profitable areas in the firm moving forward. And that has come at a cost in the first half. And finally, I just want to touch on operational performance. There were a number of areas that affected us in H1. The war for talent in legal services hasn't abated, and turnover remains an issue in our firm. It remains an issue in our sector. And the lost productivity as we replaced head count was an issue in H1. Utilization was an issue that we could improve on, as was our WIP efficiency in how we progress our files. Finally, I want to speak to the dividend. And as people know, we didn't pay dividends at H2 FY '23. However, our strong cash has enabled us to return to dividends, which was pleasing. I'll now hand to Ravin to walk us through the financials in a bit more detailed -- I'm going to hand to Ravin...

Yes.

I'll talk to our progress on our group strategy. I'm on Slide 6. Now there are 3 things I'd like to speak to: firstly, an operational update for the first 6 months. As we reported previously, we have started on a program of works to reduce our cost base. And we started with our shared services part of our business, which is our non-fee-earning staff. In the first half, we have done work to align our fee earner numbers to the files in our business so that we get our capacity right moving forward. We have significant focus on improving our cash drivers, and they seem to be working well; and our case resolutions. On the growth front, there are a couple of concentrated things that we've been working on. Firstly, we want to focus heavily on our core personal injury practice and our Class Action market share. Queensland remains the powerhouse of our PI engine. We did embark on a new targeted advertising campaign, which is producing record inquiries for the firm, which is very encouraging [ for ] revenues. I'll talk to class actions a bit later, but we have been doing work quietly on our international alliances, which will drive further pipeline opportunities into the Australian practice. And finally, the emphasis will be on organic growth in the business, at least in the near term. On the financial drivers, as you will see from the financials, strong cash has enabled us to pay down debt, which is pleasing. Our cash conversion rate is improving rapidly. And the work we're doing to reset our operational cost base and our fee earner base will set us up well for streamlined cash and earnings performance moving forward. I'll now hand to Ravin.

Thank you, Simon. As Simon indicated, the highlight for the financial results is the gross operating cash flow which was up 427% at $29.1 million compared to PCP negative of $8.9 million. Revenue was down 9.47% at $100 million compared to PCP of $111 million. Adjusted EBITDA was down 17.48% at $22.2 million from PCP of $26.91 million. Adjusted EBITDA reflects a number of one-off nonrecurring items that Simon indicated, billing write-offs on Ethicon and Boston mesh cases, restructuring costs and also a fair value adjustment on deferred consideration. Adjusted NPAT was down 39.9% at $6.4 million from a PCP of $10.7 million. Going through the numbers in a little bit more detail. Revenue was -- as I indicated, revenue was down 9.47%. As I said, revenue was impacted by the Ethicon and Boston WIP write-offs. And as Simon indicated, we had less fee earners in the business this half compared to PCP, so segment -- if you look at it on a segment point of view, the PI segment revenue decreased by 1% and the NPA segment decreased by 7%. The lower revenue flowed through to the lower adjusted EBITDA result, which was down 17.5%. And that included -- on top of the things I was just talking about, that included restructuring costs; the fair value adjustment; and also in our class actions business, some disbursements that have been written off. So the segment margins are probably the lowest they have been for a while. The PI segment reduced to 21% and the NPA segment margin [ reduced to 17% ]. I expect margins to normalize in the near future. As Simon indicated, we -- there's been concerted effort to reduce expenses. We want to eliminate waste within the business and we want to exit nonperforming businesses, but these initiatives are being clouded in the FY '24 results due to those one-off items that I mentioned. However, if you look at the P&L, you will see that there have been significant reductions in our employee benefits expense, our marketing expense and also our HR costs. However, those -- they are being masked by increased depreciation and amortization, which is mainly due to capitalization of projects in the past couple of years. Finance costs: And we continue to write off the mesh interest, pending the resolution [ of that hand ]; and then some disbursements that we write off, as I indicated, on our class actions business. I now move to Page 9, the dividend. The adjusted EPS is $0.036 per share compared to PCP of $0.0618 per share. The interim dividend has been held steady at $0.015 compared to PCP. However, it was decided to pay the higher dividend -- to pay the dividend due to the higher cash conversion in H1 and also to reflect the underlying performance. The dividend is within [ forward range ] in H1. And the H2 dividend will be reviewed by the Board once H2 performance is clearer. I'll now move to Slide 10 and which effectively is a waterfall of the items that make up the adjusted EBITDA. In terms of the balance sheet, on Page 11, cash on hand remains consistent at $20.9 million. Our WIP dropped slightly mainly due to resolution of class action cases. Our [ trade debt has ] remained steady. However, our debt reduced to $49 million versus $64 million at 30 June; and I'll talk about that in a minute. If we go to Slide 12. That's our GOCF slide, probably the best H1 GOCF in the history [ it has been on that slide ]. There has been an improvement in our fees billed. We've had good settlements in our class actions business. We've controlled overheads and we've controlled CapEx. In terms of capital management, our strategy is pretty clear in terms of the future. We want to continue our hard focus on cash conversion. We want to continue to reduce debt and we want to build cash reserves. In terms of our cash position, you will note that our operations produced a significant amount of cash in H1, 24 million versus negative [ 16 million ] in PCP. And we spent very little money on investing activities, so they will scale back significantly in the period and -- [ 1.2 million ] versus [ 5.5 million ] in PCP. And in terms of our debt, we reduced our borrowings by approximately $16 million, which has now reflect -- net debt is now reflected at $20 million -- approximately $20 million compared to $40 million in PCP. I hand back to Simon.

Thanks, Ravin. I'm on Slide 14 and I want to talk to our Class Action practice. This is a major pillar underpinning our future growth at Shine. So I will start with the current class actions. As we've reported previously, we have a very deliberate strategy at Shine to have a broad mix across the portfolio to position our company well in this sector, so we have a pretty even mix across employment class actions; product liability; indigenous interest cases; financial services; securities; travel; and what we call other, which picks up environmental, privacy and data and human rights. We filed 3 new class actions in H1, the Rest superannuation case, the KFC "underpayment of wages" case and the BT funds management class action. We received settlement fees in a number of cases in H1; a couple, I've spoken to previously, the Ethicon and Boston cases, which had a significant legacy on them, and more recently the super PFAS and Wreck Bay cases. We achieved settlements in 2 class actions in H1 for which we will see fees flow through in H2 and beyond. Those were stolen wages WA settlement, which was a historic result; and the Evans Dixon class action. We have a number of class actions under investigation. In total, we have circa 60 cases on our books, ranging from billing investigation right through to resolutions. What we have been doing is quietly building a large portfolio of cases that will underpin our future growth of revenues at Shine. We go then to Slide 16 to round out the balance of the year. Our focus, as Ravin indicated, is heavily on our cash generation. We want to complete the restructures of our legal business and costs in the second half. We want to retain our focus in core PI and class actions, as we spoke to earlier. We want to reset our cost base, which will drive growth in earnings beyond. We will keep working on our cash conversion, which we expect to be very good again in H2. We have now one of the largest geographical footprints in the country, and we want to take advantage of that in respect to our organic growth. And we want to increase our engine, which is our Queensland market share, so in short, the 3 things we're focusing on are keep driving our cash conversion; clean up the business, reset the cost base; and position us for future growth. That concludes the presentation. We're happy to take in questions.

[Operator Instructions] Our first question comes from Oliver Porter of MA Moelis Australia.

Just a couple from me, on the strategic priorities and outlook. You mentioned that finalized restructure of legal business and costs in the second half. Could you put some color around that? Like what has been done, so far? And what's left to do?

Yes. So on the first piece of work was the -- getting the capacity right that I spoke to earlier, was aligning the fee earners to the size of the cabinet. The second piece of work is a review of those parts of the practice that aren't generating the profits [ that we want to see ] and taking some action [ on those ]...

And then on the shared services side, Oliver, we've looked at -- we have a number of shared services businesses or units within Shine. And while the legal side of the business was being scaled back a little bit and -- we decided that it was appropriate to scale back the shared services costs, which had increased over the years, and just for better alignment at the end of the day.

Yes, okay, that makes sense. [ And I mean good ] segue, moving on to sort of the simplified business focus and honing in on PI and Class Action. Can you speak to a bit more specifically what that means for some of your NPA offerings?

Yes. So [ NPA ] remains a pillar of the business. There's no question about that, but in terms of where we apply our resourcing, Oliver, the 2 areas that are poised for the best growth -- class actions is the first. And as you would probably know, market share opportunity is still a significant opportunity for Shine to be pursuing in the core PI business.

Okay, sure. So it's more about the opportunity in front of those 2 areas rather than the remaining [ contracting. Is that fair ]?

[indiscernible].

Yes, great. Last one for me and I'll let you go, but the case velocity has been flagged in the past as a priority for the team. It sounds like you're making some progress. Can you just let us know what's required to reach your internal goals? Like what's left to do?

Yes. So it is a significant priority. We have made progress, evidenced by the cash receipts in H1, but there is more work to do. In short, our objective is to get every case from start to finish in the shortest possible time frame. And that varies from practice area to practice area, but there is a team working intently on that as we speak.

[Operator Instructions] Our next question comes from Peter Drew of Carter Bar Securities.

I've just got a couple of questions. Can you just give a bit more color on sort of what happened in PI in the first half just with respect to the revenues going backwards? Is that -- was that across the board, or is that more driven by you stepping away from Abuse? I'm just trying to understand what the growth rates are across motor vehicle, workers comp, dust and abuse in -- within PI, please.

Simon can talk about growth, but I'll quickly talk about PI, Pete. Generally speaking, if you look at, if we look at the eastern seaboard, Queensland has always been relatively strong. And it's New South Wales and Victoria that's dragged -- that's -- have been a drag on results. So that has continued a little bit in H1. We -- a couple of years ago, we made a decision -- so let's take New South Wales an -- as an example. And we decided to move into statutory claims because of the regulation that came into the New South Wales market. And in H1, we've decided to not be in that sector anymore, so we've had to take some write-offs there. And then similarly, in Victoria, while generally Victoria is improving in line with what we've indicated in previous years -- but we had one branch and -- which had higher write-offs than we expected. Queensland is doing all right. There is a bit of an impact of the Abuse portfolio moving into core PI in terms of progressing those in terms of what Simon was talking about in terms of case resolution.

Yes. So I'll add to that, Peter. So Abuse has come off. We thought it would plateau. It's coming off. There have been a couple of court decisions which have certainly slowed the pace at which cases have been able to progress. There's no question about that. In the wider PI business, as I touched on earlier, we're getting very good inquiry into the business. Our conversion of that inquiry is something that we're focused pretty heavily on at the moment. What we have our eye on was that the new practice areas can keep growing. As I said earlier, what we have our eye on is that share of market that's available for us. We really want to make some inroads moving forward in that.

So I mean -- so should I interpret that as you did get cash flow growth, but that was more than offset by -- with write-offs effectively?

I wouldn't say growth, Pete. What I would say was we...

Okay, that's all right. And then what about in the second -- so should we assume it's kind -- it will be lower in the second half as well versus second half '23?

In terms of growth...

Revenue from -- revenue in PI, second half revenue...

I think H2 revenue will be higher, but it may not be as high as PCP.

Yes, okay. And then I guess just the reclassification of some of the verticals makes the new practice areas a little bit more confusing for me, so I'm just wondering. So you -- is there a big step-up in revenue in new practice in the second half? Are you expecting -- like I look at FY '23. First half, you did [ 33 ]. Second half, you did [ 42 ]. Is that -- and now you've done [ 31 ] in the first half. Is that -- is there a kind of $8 million, $9 million delta there, like a seasonal delta?

Not in FY '24...

Yes, okay. So it will be more -- so we should expect the second half to be broadly in line or similar to the first half.

Yes.

Yes. Okay, that's good. And then just one other question. Just in the P&L, there was a bit of an increase in write-offs of unbilled disbursements. And you don't appear to have backed that out from your normalized EBITDA. I'm just wondering. What does that relate to?

Pete, in our class actions business, we took on the Star case, class action. And in the end, we lost carriage of that class action to another firm. And so we had to write off our disbursements of -- on the case that we'd incurred. So that's the majority of the increase that you see there.

Yes, yes, okay. And then I guess, the last question, just with respect to, I guess, your general OpEx build. So I mean, what will that look like in the second half? Like what areas will go up? What will go down? And kind of, I guess, how do you sort of see it -- total OpEx in the first half was about $85 million, $86 million. What do you think it will look like in the second half? And what are the moving parts?

I think the -- I mean I -- as we indicated, we're going through a cost reduction on the OpEx side of the business, so what you'll see is -- so a lot of the work was done in H1, so you'll see the benefit of that in the second half, but really just to answer the question slightly differently: The full impact will really be felt -- of the cost reductions will really be felt in FY '25, in terms of the annual impact.

Yes, okay, so it'll -- you'll see some incremental improvement through second half, but it will be more fully annualized next financial year.

Yes.

There are no further questions at this time.

Thank you, everyone, for attending. And we look forward to seeing people next week, on the road shows. Thank you.

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