Smartgroup Corporation Ltd (SIQ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Smartgroup full year results briefing conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Deven Billimoria, CEO. Please go ahead.

Thank you, Kayla. And good morning, everyone, and thank you for joining us on the call today. My name is Deven Billimoria, and I'm the Managing Director and CEO of Smartgroup. Joining me on the call today is Tim Looi, our CFO. Tim and I will provide an overview of our financial performance for the past year and also take you through some key operational highlights. We'll then take your questions. Now let's turn to the investor presentation. As shown on Slide 1, Smartgroup has delivered another year of growth despite a more challenging industry backdrop. First, we delivered revenues for the full year of $249.8 million and NPATA of $81 million. Top and bottom line numbers are up on the prior year by 3% and 4%, respectively. Second, we continue to grow Smartgroup's packaging, leasing, fleet and payroll businesses. Third, we've continued to transform Smartgroup's business operations, including further automation and integration of our service delivery platforms as well as the expansion of our service offerings. Fourth, we're pleased to declare a final dividend of $0.215 per share. This brings our total ordinary dividend for CY 2019 to $0.43 per share, fully franked, up 4% from CY 2018. This is in addition to the $0.20 per share special dividend we paid in May. And finally, this is a pleasing performance in the context of some industry headwinds. Turning to Slide 2. We see continued growth in revenues and earnings versus CY 2018. Looking at the bottom table on Slide 2, we can see that our salary packages, novated leases, fleet vehicles under management also continued to grow. When coupled with diminished FTE numbers, this represents an efficiency savings of approximately 6%. Turning to Slide 3. You can see that our growth has continued since our IPO in 2014. On Slide 4, you can see that our salary packages, novated leases under management have continued -- have increased as a result of organic activities. Pleasingly, our service offering continues to resonate with the vast majority of our clients, and we successfully renewed Victorian health contracts representing circa 12,000 packages in H2 2019. Turning to Slide 5. You can see the continued growth in our fleet management footprint as a result of organic activities. Our payroll solutions business has also performed well with the number of employees paid growing to 3,800 during CY 2019. On Slide 6, you can see that our client base has continued to grow and diversified with key end markets being PBIs, hospitals, government and education, all attractive sectors within the Australian workforce. Our largest clients now represent a smaller and decreasing percentage of total revenues due to the overall growth of the business. On Slide 7, you can see the relative performance of Smartgroup's novated leasing volumes. While market volumes have declined 8% in 2019, Smartgroup volumes have increased by 4%. On Slide 8, you can see the long-term improvement in customer service adoption of digital channels across Smartgroup. In addition, 49 robotic processes have now been implemented, doing the work of approximately 55 FTEs, augmenting the capabilities and enriching the roles of our talented staff, enabling them to deliver better customer outcomes. On Slide 9, you can see staffing levels across the business reflect the continued focus on operational efficiencies as well as IT -- as well as investments in IT and sales and marketing. Now turning to Slide 10. We're pleased to be recognized once again this year as one of Australia's most customer-centric companies. In addition, Smartgroup was recognized as an inclusive and diverse employer. We're also pleased to be included in the Forbes Asia Top 200 Best Under A Billion List for 2019. On Slide 11, we continue to see success in delivering multiple services with 200 clients now using 2 or more service offerings. This is a growing element of our differentiated service offering to clients. Now turning to Slide 12. We continue to integrate our acquired businesses and consolidate our salary packaging service delivery. Now let me hand you over to Tim, who will take you through the financial results in more detail.

Thank you, Deven, and good morning, everyone. Turning to Slide 14. As Deven previously mentioned, the 2019 year has seen Smartgroup with core steady growth, revenue up 3% to $249.8 million and EBITDA up 3% to $118.2 million. Our financials have a level of noncash, nonrecurring amortization from acquisitions. As such, net profit after tax is not a relevant measure. The most relevant measure for us is posttax profit and net profit after tax adjusted for the impact of this nonrecurring and noncash amortization or NPATA. NPATA is up 4% to $81 million. The NPATA of $81 million excludes several nonoperational and nonrecurring items that are not representative of our financial performance. A full reconciliation of these adjusted financials to the statutory audited accounts is provided in the appendix to this presentation. On Slide 15, I'm pleased to report cash flow from operations was $89.4 million. This is 110% of our after-tax profits measured by NPATA. Our strong cash flow conversion is a result of our capital-light business model. Our CapEx remains low at $900,000. This is a bit higher than previous year as we had undergone an office fit-out in a new premise in Adelaide. Turning to Slide 16 and our balance sheet. Our cash balance at the end of December stands at $39.6 million with our noncurrent interest-bearing debt at $60.4 million. As the acquisitions undertaken over several years have been asset-light businesses, we do have a higher level of goodwill and identifiable intangibles on our balance sheet. The noncash annualized amortization charge on this is approximately $21 million in 2019 and a similar rate for 2020. During the year, we made a special fully franked dividend payment of $0.20 per share, which equated to approximately $26 million. Net debt for 2019 stood at $21 million, representing 0.2x of EBITDA. On Slide 17, we have summarized the 2 regulatory reviews in relation to add-on insurances, 1 from ASIC and the other from the Australian Department of Treasury, both of which are ongoing. As these reviews are still ongoing, we're not in a position to speculate on the outcome. We have disclosed the annual revenues that we generate from a sale of add-on insurance covered by these reviews. The $17 million of revenue is the residual revenue after the insurance underwriter changes announced in December 2019. We will continue to consult with both ASIC and Treasury in relation to proposed reforms. Now turning to Slide 18. As announced in November, Deven is to retire as Managing Director and CEO of Smartgroup at the end of February, following which I'll commence in these roles. I would like to thank Deven for his long and significant contribution to Smartgroup, acknowledge Deven's pivotal role in leading our organization and its outstanding growth during his tenure. I wish him well in all his future endeavors. I would also like to take this opportunity to highlight the recent appointments we have made to Smartgroup's senior management team. Over the past few months, we have recruited a number of talented executives that add experience and capability. The fact that Smartgroup has been able to attract high-caliber individuals such as Nigel, Angus and Tony speaks to the appeal of our culture. Now I'd like to hand back to Deven for closing remarks.

Thank you, Tim. In summary, turning to Slide 20. Despite some industry headwinds, 2019 marks another year of positive financial and operating results. The business is in great shape with more customers and a broader product offering than ever before. That concludes our presentation, and I thank you for joining us on the call this morning. This being the last result that I'm so privileged to deliver, I have a few thank yous to say. First and foremost, thanks to all the incredibly passionate people who have ever worked for the company. I'd also like to thank our talented executive team, our very experienced Board of Directors, our remarkably loyal customers, our shareholders and, of course, Tim Looi, our new CEO; and our Chairman, Michael Carapiet. It has been an incredibly rewarding time over the past 2 decades, and I have a deep sense of gratitude for all the opportunities that Smartgroup has offered me. It's been a real pleasure and such a great life experience. Thank you so much. Now let me hand you back to our moderator, Kayla, and provide you with a chance to ask some questions.

[Operator Instructions] Your first question comes from Phil Chippindale from Ord Minnett.

A couple of questions from me. Firstly, can you just make a comment as to business conditions since the 1st of January? Obviously, new car sales volumes have been pretty tough since then. I'm just wondering how that's translated into novated volumes, which you guys are seeing.

Phil, it's Tim here. Well, as per usual, right, we don't really want to comment on any few prospective statements. I think January itself and February, listen, it's 6 weeks in the year, right? I don't think we're in a position to say anything about our business yet.

Okay. Maybe just moving to financing then. Yes, could you just describe what you've seen over sort of the last 6 months in terms of appetite from the banks? I'd be particularly interested in sort of observations regarding rates of approval from the banks that are on your panel.

Yes. Thanks, Phil. We haven't seen any difficulties in more recent times around rates of approval. You might notice that, in August, we came out in the early part of 2019. We had a bit of a drop in approval rates. That has now since recovered. We have a panel of 3 funders, and 2 of the funders have shown no diminished appetite with regards to funding novated leases. So we believe we're very well placed.

Okay. And then just on Slide 17, I know it's still relatively early in the process in terms of add-on insurance, but I'm just hoping we can maybe unpack this a bit more. Can you give us sort of initial impressions of the direction of these reviews, particularly the Treasury one? That's maybe a little clear at this point in time. Would just be interested in that. And then the second part of this question is you've highlighted the $17 million of revenue, in terms of the impact on PBT -- or the PBT contribution from that $17 million, should we assume that pretty much all of that flows through the bottom line?

Phil, it's Tim. So the -- in relation to Treasury, look, we've had a good look at the proposed deferral methodology, and it's fair to say that now we're -- we're not unhappy with it, right? It does fit into our process with some tweaks. As you know, the novated process has a number of pause points and natural deferrals in it anyway. So I think that the Treasury recommendation will fall within what we do. The second thing with the $17 million, look, I think there's a couple of things. The first one is, in relation to the December announcement, that announcement was pretty much just a margin hit as the margins had just been reviewed here. So there's no cost associated with that. With the $17 million, we do spend a bit of time from start by just selling insurances to educate people. So there will be some costs in relation to that. I think it's fair to say that we can't give any guidance or any outlook on the $17 million. What we can say is that these products that we do sell are popular with our consumers. It will be hard to see suddenly 1 day, though -- sorry, the next day the $17 million being -- not being there. So I think the $17 million was given for transparency reasons to investors, but I think we do have underlying confidence that the product represents good value. And that's the way it lands. I think it's sort of really secular.

Your next question comes from Tim Lawson from Macquarie.

Just in terms of the $17 million, I appreciate you can't comment in regard to what the regulatory reviews might exactly mean. But from an underwriter perspective, have -- are you comfortable with that $17 million just reset from your partners' point of view?

Tim, well, I think from an underwriters' perspective, we've talked about this in December. From the underwriters' perspective, right, they believe that the changes they have made in relation to the price point to the consumer is sustainable. But ultimately as to what happens in that space is a matter for ASIC to determine. As you know, we are a reseller of the product. We don't determine the end price point. What we do determine is how we sell it, what we sell, what we disclose and the methodology we use to sell it. All those things within our control, we're very happy with, we're comfortable with. But as to the product construct and product pricing, that is a matter for the underwriter.

Okay. And just you've called out that $17 million and identified those 2 specific reviews. There's obviously quite a lot of other reviews in financial services going through Treasury and ASIC at the moment. Can you make any comment on your expectations around impacting other parts of your business?

I think the only other relevant part of the reviews currently is antihawking provision, and we don't do any hawking, so I think we're okay there.

Okay. And then just a second question in terms of the contract rights, the $4.5 million, can you just give us a quick overview on what that relates to, please?

Sure. That's a payment we made to a customer in Victorian health to secure their contract for the next couple of years. So that contract right is amortized through the P&L. So the expense is included in NPATA but EBITDA -- it's not included in EBITDA.

And that's about $900,000 a year. And is there effectively -- there's no margin on that -- the margin effectively through the normal leases.

That's correct.

Yes. Okay. And are there sort of -- with that sort of payment, are there access or success type arrangements with Vic health to try and increase penetration that might come from that sort of upfront payment?