Shine Justice Ltd (SHJ) Earnings Call Transcript & Summary

Good morning, everyone, and welcome, and thank you for joining us today. My name is Allen Chan from Bridge Street Capital, and we are pleased to be hosting Shine Justice for their half year result. Joining us today, we have Simon Morrison, MD; Carolyn Barker, newly appointed CEO; and CFO, Marc Devine. But before we start, we will have a Q&A session after the presentation. And if you would like to put a question into the chat box, I'll address it at the end. Simon, Marc, over to you. Thank you.

Thank you, Allen, and welcome, everyone, to the half presentation for FY '25. I start by just introducing the team here today. Firstly, welcoming our CFO, Marc Devine, who joined us during the year, the financial year. He's been on board now 5 months. Marc has come from being the CFO of ASX-listed Airline, Alliance Airlines, held that role for 7 years, prior to that worked in health services in key financial roles. At the same time, I want to pay tribute to our outgoing CFO, Ravin Raj, who retired during the first half. Ravin was with the company for 8 years and did an extraordinary job during that time. So thank you, Ravin. Welcome our incoming CEO, Carolyn Barker, a very highly experienced CEO and well known to this company. I'll have a lot more to say about Carolyn during the course of the presentation. Finally, John George, our Head of Investor Relations, joins us. John is a former Non-Executive Director of the company. He's ex ASIC. He runs a business consultancy advising businesses. He's a former Non-Executive Director of another ASX-listed company. Let's kick off at Slide #4 and I'll start with the work that we've been doing now for a couple of years to try and simplify the business. We decided there are 2 parts of the business we want to focus on, those being our personal injury practice and their Class Action practice. So we have been busy either retiring or running down other parts of the business, so that we can reallocate our resources to these 2 key parts of Shine. The personal injury business comprises a number of practice areas, motor accident practice, workplace injuries, public liability claims, abuse, superannuation and disability, dust disease and medical negligence, and that's a national profile we hold. Our Class Action practice is quite diverse, and we'll talk about both of these businesses shortly, but it involves Consumer Class Actions, Employment, Environmental, Financial Services, First Nations. We are probably the most prolific firm helping First Nations people and class action litigation in the country, medical product liability cases, data breach and securities cases. Our footprint, we have just under 50 offices all around the country and 2 via our affiliate in New Zealand. We do have the largest footprint of our peers in the country, and we do hope to expand on that footprint. We track in real time the damages that we recover and the number of clients that we recover damages for and I'm pleased to report that we are currently at $9.2 billion or just shy of 90,000 clients across the country. We are fast approaching the $10 billion mark, which will be a major milestone for the company and I expect that will coincide with our 50-year celebration next year, where Shine will have been operating for half a century. Let's move to Slide 5, and we'll talk to the headline metrics. Marc will go into more detail, but I'll just give you the overview. So revenue was healthy for the half. We did declare a fully franked interim dividend of $0.015. We regard this as a key milestone in the company. We have been unfranked for much of our life as a listed company, and that is good news that we've moved into franking. Our Class Action business continues to develop, and I'll talk more about what's happening behind the scenes there, but we're looking for a good second half in class actions. Our EBITDA numbers were impacted by a $4 million noncash loss we took on the deferred consideration of the sale of one of our subsidiary businesses. So not connected to the underlying operations of the company. Our cash flow at $4 million or $4.1 million was impacted by the delay in receipt of some $14 million from an approved class action we expected we'd get in H1, but we will now get in H2, which will be an added bolster to our cash flows. We had a busy 6 months in our cases. We knocked over 2,264 cases. I think that's almost a record for the half of $579 million in damages. So that augurs well. In the Class Action space, we got approval on the WA stolen wages case that we had previously reported on. And of most significance is we have approved that $14 million of cash receipts that will come to us in the second half. We settled another indigenous class action during the half, the Northern Territory case for a record $202 million. That case is pending approval in the Federal Court as we speak. We move to Slide 6. So for those who've been following the company, you'll be familiar with this data. This is public data published by IBIS World. The good news for Shine is, we are gaining market share. In the last 12 months, we have increased by 8.8%. We're clawing into that part of the market not occupied by the large 3 players. So we are encouraged by that move. I'll have a bit more to say that the execution of the PI business later in the presentation. Move to Slide 7, where we will talk about the PI business. The net income was pretty solid at $82 million. That was impacted by a take-up in effective provision in respect mainly to our abuse practice. So that was a $5 million take-up that we took, impacting both the revenue and EBITDA lines. That take-up was largely off the back of a couple of adverse high court decisions in the abuse practice area. One of them, we were successful in overturning in subsequent high court case, which we talked about in the announcement. So we hope that is good news in terms of those recoveries moving forward. And finally, we have been on a program of works that we previously reported on that we call our WIP to cash program where we're trying to move older cases that have been sitting around. The good news is that helps cash receipts. The challenges that does impact WIP recoveries, but we are well through that program. So to round out the PI business for the half. The good news is, we are sitting well in terms of our organic position and incoming work, I'll talk to that a bit later in the presentation. The thing we need to focus on, obviously, is the execution of the cases once they're in the door, and you'll hear me explain that Carolyn's role as the CEO will play a key role in improving that execution. We move to Slide 8, our Class Actions overview. So these are familiar pie charts for those who followed us. I'll start with our investigations. So we have 27 cases in investigation at varying levels of maturity. Some of those are almost ready to be filed in the court and others were in early stage. The most significant thing I'll draw to your attention on our investigations is that we are very deliberate in the diversification of the Class Action business, and we do that for 2 reasons. One is what we call competition risk. So there are some aspects of Class Action work where we see a lot of competition. And our strategy as a company is to have a very diverse portfolio to mitigate any of those competition issues. And the second one is regulatory risk. And again, for those who follow the company for any time, you'll know that there are particular types of Class Actions that are in the firing line for regulatory risk and securities cases chief amongst them. On our current cases, we have 23 in litigation at the moment and again, reasonably well split across the portfolio. If we move to Slide 9, we'll drill into the Class Action business in a bit more detail. And I speak firstly to the graphs because they may at first blush appear odd. The data in the graph does include what we call the special practice areas. So previously, Class Actions were in another segment, we call special practice areas and included other parts of the business. When you strip those out and we have a pure class actions to class actions comparator, those numbers tend to smooth out a lot more. The second thing I'll point out is under the accounting standards, for all of the class action investigation work we do and there are significant volumes of work being done on investigations. We don't record any effective revenue until such time as those cases have been approved for funding or have been filed in the court. So we do have a bank of work done that we are expecting to convert to both earnings and cash flow once those cases move through. So in terms of the performance of the Class Action business, so for the first half, we did expect filings more than we achieved, and they will flow into the second half. And for the reasons I just explained, that, that defers the upside of both earnings and cash flow for those cases. We have been very busy building the pipeline, and I am pleased to say that we have a very healthy incoming pipeline, both domestically and internationally. As again, people know, we have been concentrating on bringing work in, notably from the United States to bolster our class action practice in Australia. And then the third piece we're working on is to find a better funding solution for our class action practice. So at the moment, it's what we call silo funded. We go and seek funding case by case, and we're looking for a more portfolio-based solution. It's a significant piece of work that the company is focused on at the moment. But once secured, will be a game changer in terms of both earnings and cash in future periods. So to round out the Class Action practice, the good news is incoming work is strong, both inside Australia and from the U.S. Our challenge in that business from an execution point of view is getting cases filed in the courts faster and getting funding faster. I'll now hand over to Marc to talk us through the financials in a bit more detail.

Thanks, Simon. Thanks for setting my thunder around accounting standards, but lot of them, that's what I guess talk about, anyway. Good morning, everyone. I'm glad to be here, and I'm going to run through some of the highlights from the P&L statement, balance sheet and cash flow. Some of this may be a little bit repetitive, but I'll try not to go into too much detail on what Simon has already explained. I think headline number, revenue and income up by $2.4 million. Considering, as Simon mentioned, that includes the constraint of additional constraint of $5 million, that's a pretty good outcome for the half. And obviously, as we move to the future that we're hoping to reduce that constraint each month that goes by. Adjusted EBITDA, again, $16.2 million this half as opposed to $22.2 million in the prior comparative period. In that prior comparative period, there's an adjustment write-back of $7.3 million, which related to a write-off of the mesh revenue and also $1.5 million of other items, including some one-off cost transformation costs. $16.2 million in the current half is the statutory EBITDA plus the included Fx the $4 million of the fair value losses in the half. So that's how we get to those numbers. Loss after tax, it's a bit of a quirky one this one. Due to the fact that we've recognized that $4 million of fair value loss, you actually can't claim that as a tax deduction. So in the tax line, there's $1.2 million of tax expense, which is actually calculated off on the face of a loss before tax number. So that explains the reason why there's a tax expense line even though we're not lost position before tax. I'll touch on employee benefit expense. We had increased by 3.2% in the half, even though we had less fee earners during the same period. I think the average increase in staff costs that came into effect on 1 July was around 3%, which is part of the reason for that increase. And also, there was a $1 million worth of bonuses that carried forward from the last financial year, which wasn't actually recognized last financial year. So that hit the numbers this year. But we hope that, that cost line now sort of stays pretty flat. And I guess the pleasing thing there is that even though there are less employees and sorry, fee earners, the revenue numbers are still above what they have been in previous periods. And the operating costs, excluding that fair value loss were pretty much stable. So $96.9 million for this half versus $97.1 million in the prior comparative. So again, I think the company's focus on controlling costs, whilst at the same time trying to increase the revenue is definitely showing through that overhead and operating cost number. We'll move on to Slide 11, the cash flow. I guess the main point here, as Simon mentioned is that the GOCF was $4.1 million and the operating cash flow comes out at negative $1.8 million. The reason for those 2 sort of lower-than-expected numbers is definitely the $14 million in Class Action [ private ]. We were expecting to come in the first half. Good that it will come in the second half, but hasn't shown those numbers as too positive in the first half. Pleasingly, personal injury cash fees was 5% higher in the first half this year as opposed to the prior comparative period. So again, personal injury a good outcome and class action unfortunately the delay those receipts I was trying in the numbers. I guess as a result of the operating costs being pretty stable, payments to suppliers are pretty much in the same ballpark as the comparative period. Disbursement paid was also lower. I guess that's a result in some cases of WIP increase in us holding more matters until settlement without having to pay them. Finance costs reduced by $1.3 million in the half year. I think the group has managed debt and interest a lot better over the last -- which has resulted in lower costs over the last 12 months. In the main, that reduction in finance cost is due to debt reduction, both in our self sort of funded disbursement category and the reduction in borrowing as well. And obviously, the income tax being paid there, $4 million for the year which has allowed us to obviously provide some fully franked dividends as well. So we are in a cash tax payable position now and into the future. So it's a good outcome in some ways. PP&E increased by $600,000 during the year, mainly on IT asset refresh and out of a new office in Adelaide. And then also in that investing line, we received $1 million for some files that we previously sold, which is a good outcome on those files. And then financing activity in the main that move relates to this $7 million of dividends that were paid during the year, $4 million of principal lease payments having 49 offices is quite a substantial amount in rentals. $3.3 million reduction in borrowings and the rest just relates to small movements in the disbursement category. So nothing unexpected there. Move to the balance sheet, quite stable and strong, still which is great. Cash reduction over the period, obviously, is a result of sort of I think mentioned in the past, mainly tax dividends and obviously, the fees built for Class Action if that has come in, then that should be quite a healthy cash bank balance for the half. Receivables reduced over time. I think there was a number of outstanding items at 30 June, which have been paid and that hasn't been repeated at 31 December. WIP increased by $15.2 million or 4.2% in the half. A lot of that WIP increase relates to not being able to build those Class Action matters. We obviously relates to once those matters are billed. And obviously, we mentioned the personal injury WIP increase in the half, but some of that was offset by that additional provision that we took up. Just on the provision that now sits at $102 million, which is up from $87 million. And again, as Simon mentioned, a large portion of that increase is to do with Class Action investigations, which we can't actually recognize any revenue for until it's filed. So it's fully provisioned at a 100% till that time. Not much other material movements on the balance sheet, PP&E and other. There was a reduction on the face of it in the half by about $8 million. That's to do with us bringing across Shine New Zealand under accounting control. So they are now consolidated into the group. And what that has meant for that line is that the previous line that was out to that company is now consolidated and eliminated on consolidation. So that's the reason for that movement. And then disbursement creditors and borrowings, that's where we refinanced $18.8 million worth of disbursement creditors. So we took out of disbursement creditors and refinanced them through the [ CBA ] Bank to achieve a much lower interest rate for ourselves and enable us to save money on some interest. So those numbers are pretty much like-for-like if you look at the movements on either side. Move to Slide 13. Just to touch on the debt. It obviously looks like we've increased the debt we have, majority of those are $18.8 million. So overall, if you look at debt disbursement funding, no real increase. But from a borrowing perspective, $18.8 million is now included. So gross debt is $72 million. Net debt up to $61.2 million from $26.1 million. Now that's again a substantial number. However, $18.8 million of that is from the debt and the balance is pretty much delay in those receipts from the Class Actions. So like so, again, take those 2 numbers into consideration, it's not a bad outcome. Probably the last thing on the debt post the year-end, we actually finalized the restructure of the debt facilities of the Commonwealth Bank, simplified the facilities, made a number of different pieces in the deck. Simplified those, achieved no interest savings from that piece, but no interest increase and also extended the debt out to 3 years. So now for 3 years, we can continue to focus on running the business and trying to delever at the appropriate time. And just on the next Slide 14. As Simon alluded to, the first fully franked interim dividend declared since 2018, $0.015. I think that's a very good outcome for the half year. Obviously, with the knowledge of the $14 million coming in the first half -- sorry, in the second half, that provides this company to be able to declare and pay the dividend. And at the same time, we've still got the share buyback in play, which will recommence post the results and we'll continue to focus on capital management in the interest of shareholders.

Thanks, Marc. So let's move to Slide 15, I just want to highlight 3 key strategies that we're focused on in the organization right now. The first, we've spoken about a lot, which is the simplification of the business. So we're largely there with the PI and Class Actions practice. The good news from the company's point of view moving forward is, we have more resourcing to bolster both those important parts of the business. The second part of our strategy then is the driving of revenue into the businesses. And as I talked to earlier, in both the PI and Class Actions business, the inflows are very strong. We're very comfortable with that. The area we want to concentrate heavily on now is obviously the execution of those cases and making sure we get the best outcomes as they move through the process to billing. And then the final piece driven by our increasing market share in Australia. We do have the largest footprint, but we do want to gain on that footprint to help more people around the country. Can we move to Slide 16, and I'm delighted to announce the appointment of Carolyn Barker as the Chief Executive Officer of Shine. I've known Carolyn for 20 years or more. She is a seasoned CEO in both listed and private equity-owned companies in Australia. She's a very experienced company director. Her appointment takes place effective today. I can tell you she's already been busy in meetings with legal managers this morning, focusing on the execution issues I just spoke to. She will be responsible for the leadership and direction of running the day-to-day operations reporting to me as the Managing Director. My focus, obviously, will be overseeing the company as I have done for the last decade. It will allow me to devote more time to the development of our international inflow practice into the Class Action business. That is a key strategic initiative of this company where we see significant opportunities for revenue moving forward. Carolyn has a long history with Shine. She joined us back in 2009. She was the first Non-Executive director on our Board as a private company back then, and she was the only director to move over into the listed space, and she stayed on as a Non-Exec Director until 2020 when the Board was renewed. So I'm thrilled she's on board, and she's heavily focused, as I said, on the execution of our operations, which will be a great addition to our resources. We move to Slide 17, the outlook and I just wanted to update you on where we are up to after the half with the key initiatives. So I've spoken at length about the focus on the 2 operating segments if as I said, we're nearly there. Organic growth has been strong. I've spoken to the increase in market share. I've spoken to the number of class action opportunities coming into the business. Our U.S. strategy is developing very well. We have now launched 3 class action investigations from our U.S. pipeline. All 3 are very significant Class Action opportunities for the company. We have a portfolio significantly break up that we are examining to bring more cases in. We introduced our new marketing system into the business, and we have had extraordinary results in the short time that it's been in operation. It has been reported to me, we have seen a 17% increase in inquiry into the personal injury business. So that augurs very well into the inflows of work for the business. As Marc and I have both spoken to, the injection of $14 million in Class Actions will get us off to a great start in H2, where we expect a good performance in respect to cash generation. And then finally, I can't underscore enough the significant work going on in putting together a portfolio funding solution into the Class Action business that will just take us to a different level in terms of our ability to execute, produce earnings and produce cash in the business. So that concludes the formal part of the presentation. Allen, why don't we take questions?

Good. Thank you, Simon and Marc. The first question comes from Daniel [indiscernible]. Can you provide some more color on how advanced the new funding solution for the Class Action is and your expected time line to finalize this?

Certainly. So a series of meetings were held in the first half with big funders out of the United States, John George and I attended those funding meetings in New York City. We have a short list of funders that we are focused on for the portfolio. We are hoping that we can have that bedded down no later than 30 June 2025, but we will report on progress.

Another question from Daniel. How many fee earners were in the business at 31st December? And in the current half, do you expect this to increase or decrease?

I can't tell you off the top of my head how many were in the business, but the averages were average in the first half this period, 507 average in the same corresponding period, 559. So quite a reduction. I think I alluded to the fact that our current fee owners are more productive. So they're billing more and putting more revenues through. At this stage, I think if there is any increase in head count, it won't be material. And I guess we'd like to try and reach those productivity levels more so that is a focus for now rather just getting more head count to try and get the same outcome.

Thank you. And in regards to the PI market, what sort of market share target do you think Shine can aspire to in the Australian credit market over the next 3 to 5 years?

Yes. It's a great question. I think when I first started publishing data, which was maybe 3 or 4 years ago, I think we started at circa 6.8%, something like that, maybe 7%. We're just shy of 10% now 3 years on. So it's been slow. We have seen a jump in our market share in this period, which I'm encouraged by. The other thing that does give me more confidence is the new marketing system that's been put into the business has produced extraordinary results in a short space of time. So that certainly gives me confidence that we should be able to move the needle faster than we have in the last 3 to 4-year period. I don't know that I would make a prediction yet, Daniel, as to what that would look like. But I suspect in the next 12 months, we'll have more clarity over what the trajectory is looking like.

Thank you. Next question. Can you provide any sort of update on how the first 2 months of the second half are tracking and what the market should be expecting in terms of revenue growth and margin in the second half compared to the first half?

That's a very hard question, not hard question to answer question I should be answering. Look, I guess, as we've alluded to, personal injury in the first half in fees be higher than the prior comparative period. We did take up an additional constraint in the WIP for the abuse matters, which we're hoping to reverse over time. And likewise, with the Class Action segment being able to file some of those cases in the second half will release a lot of WIP back into revenue. So we are confident of increases in both of those metrics in the second half as to what extent really depends on how -- on the Class Action side, how many cases we can file and what we can settle on top of what we know in the personal injury side, it's just we mentioned around productivity of fee earners and how we can -- how many cases we can settle. So yes, we do -- I think we put in the outlook statement and the bottom of the chart here, we do expect growth in both parts of the business. And I guess the question at what level it sounds that that's something that we can't answer for now.

Thanks, Marc. That was the last question so far. Sorry, one question, please. Just on capital management, how is the Board weighing up the buyback versus dividends? And how does this change the ability now to pay franked dividends?

A very good question. Thanks a lot, we are ending 5 months. Look, I think -- I mean, obviously, it's a topic of conversation with the Board as to if there is excess capital, which way to go about recognizing that value to shareholders. I think the franked dividend at this stage is an option that a lot of shareholders be quite happy with. So I think that shows through in the $0.015 being declared for the interim dividend. So I don't think that locked into any specific way at this stage. But obviously, I think there's some intention here with the interim dividend being declared at that level and with the expectations of increased cash flow in the second half, there would be as [indiscernible] be able to find more dividends to the shareholders. Not to say we won't focus on the capital management program, but I guess we'll weigh everything up at the time that we can.

Yes, that was the last question in queue. If there are any final questions, feel please, enter them in system, I'll address them. Okay. Well that concludes the questions. Again, the webinar is recorded. Simon and Marc, thank you. Simon, if there's any final remarks you'd like to make?

Thank you, everyone, for attending. We're very grateful. We commenced roadshows Monday morning in Sydney and concluded in Melbourne on Wednesday, and we look forward to talking to everyone at the full year result.

Fantastic. Thank you, Simon. Thank you, Marc.

Thanks, Allen.

Thank you, guys.

Thank you to both.