Smartgroup Corporation Ltd (SIQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2020 Annual General Meeting of Smartgroup Corporation Ltd. I'm Michael Carapiet, the Chairman of the Board, and I would like to thank you all for attending our first-ever online AGM this morning. This AGM will be rather different to those held in the past. But we're pleased to be able to provide our shareholders the opportunity to participate in our AGM in a way that is safe and responsible. It is now 11:00 a.m., the nominated time for the meeting. I've been advised by the company secretary that a quorum is present, and so I'm pleased to declare the meeting open. The notice of meeting was given to shareholders and lodged with the ASX on 6 May 2020, and I propose to take the notice as read. Shareholders were also provided with a voting form, a question form and a virtual AGM online guide providing instructions on how to ask questions and vote at this meeting through the online platform. I will remind shareholders of the arrangements for questions and voting when we get to the formal business of the meeting. If you lose connection to the meeting at any time, you can log back into the AGM online platform by returning to the link login page and following the prompts. You will then receive an automated e-mail with a recovery link for you to click on. Click on this link to reconnect to the AGM. Alternatively, please call our share registry provider, Link Market Services, on 1 300-554-474 for assistance. Joining me here in Sydney today are Deborah Homewood, non-Executive Director; John Prendiville, non-Executive Director and Chair of the risk -- the Audit and Risk Committee; Tim Looi, our Managing Director and Chief Executive Officer; and Sophie MacIntosh, our Chief Legal Officer and Company Secretary. Our other non-Executive directors, Gavin Bell, Andrew Bolam, Carolyn Colley and Ian Watt, are attending this meeting via our online platform. Joe Sheeran, the audit partner from our auditor, PricewaterhouseCoopers, is also attending this meeting via our online platform and will be available via video link to answer questions from shareholders at the appropriate time in the meeting. Gavin Bell, and John Prendiville as chairs of the Human Resources and Remuneration Committee and the Audit and Risk Committee, respectively, would also be available to answer questions where appropriate. I will now make some brief comments about the company's performance in 2019 and so far in 2020, before handing over to Tim, our Managing Director and CEO to take you through these matters in more detail. I remind shareholders that our 2019 annual report is available on our website at www.smartgroup.com.au. 2019 delivered another year of earnings growth for Smartgroup with revenues up 3% to $249.8 million and after-tax profits represented by NPATA growing 4% to $81 million. The company declared a final dividend of $0.215 per share, fully franked, which was paid on 16 March 2020. The total ordinary dividends paid for the 2019 year were $0.43 per share, an increase of 4% from 2018. A special fully franked dividend of $0.20 per share was also paid in May 2019. Our strategy for success includes: maintaining exceptional customer service, a culture of innovation and an inclusive workplace. We believe that a productive and committed workforce is a key success factor as well as being a responsible corporate citizen. To this end, we are very proud to have been recognized as 1 of only 35 inclusive employers by the Diversity Council Australia for 2019-2020. We were also recently recognized as an employer of choice for gender equality by the Workplace Gender Equality Agency. This accreditation was achieved by fewer than 150 organizations in Australia. In February 2020, we farewelled Deven Billimoria as CEO after a remarkable and distinguished career and welcomed Tim Looi into the role. Tim has worked alongside Deven as Chief Financial Officer for the past 10 years, and has a deep understanding of the business and our customers' needs. Smartgroup delivered solid performance in the first quarter of 2020 with overall financial performance in line with the prior corresponding period. However, like many other businesses throughout Australia, the company has seen impacts from the COVID-19 pandemic through the latter part of March, April and May. Throughout this period, Smartgroup's focus has remained on safeguarding the well-being of its employees and customers as well as supporting and servicing those customers who provide essential services at this time such as employees in federal and state government, health care, aged care and charities. Smartgroup has put in place a range of initiatives to respond to the impacts of COVID-19. Tim will take you through these impacts and the Smartgroup response in more detail in his later presentation. He will also give more details in relation to how Smartgroup is performing in 2020. In conclusion, I would like to thank our new Managing Director and CEO, Tim Looi, the executive management team and all of our employees for delivering another solid result in 2019, and for responding to the COVID-19 pandemic with decisive and responsible actions to ensure we can safeguard our business for the future. Thanks to our people, Smartgroup has continued to deliver on our strategy of providing exceptional service to our clients through 2019 and despite the many challenges of COVID-19, into 2020. I would also like to thank our clients, suppliers and shareholders for their continued support and to take this opportunity to thank my fellow directors for their contribution and support during 2019 and the first 5 months of 2020. I will now hand over to Tim.

Thank you, Michael, and good morning, everyone. This morning, I'll talk to our 2019 results first. I'll then provide an update on our business and its performance to date for 2020. In 2019, Smartgroup delivered another year of growth despite a more challenging industry backdrop. First, we delivered another year of positive financial results. Revenue and NPATA were up on the prior year by 3% and 4%, respectively. Second, we continued to have success in growing our footprint of packaging and leasing. Third, we continued to integrate the acquisitions we had undertaken over the last several years. This included a simplification of our service delivery platform as well as selling more services to existing clients. Fourth, our capital-light business model translated to strong cash flow generation for 2019. This was a pleasing performance for 2019 in the context of some industry headwinds, which I will refer to later in the presentation. In 2019, we delivered revenue for the full year of $249.8 million and NPATA of $81 million. Top and bottom line numbers were up on the prior year by 3% and 4%. Smartgroup's packaging, leasing and fleet metrics presented good growth at 5% from the prior year. When coupled with a 1% reduction in resourcing, this represented an operational efficiency improvement of approximately 6%. Turning to Page 7, our 2019 growth has been a continued trend for the last several years. We paid fully franked dividends of $0.43 from our 2019 earnings as well as a special fully franked dividend of $0.20. On to Page 8, despite some client losses in Victorian Health in H1 2019, our salary packages and novated leases under management continue to increase. I'm pleased to say that the balance of our major Victorian Health clients have now re-signed to multiyear agreements. Now turning to Page 9, our fleet management footprint also continues to grow. Our payroll solutions business, while representing just a small proportion of our group performed well in 2019, with employees paid growing to 3,800 during the year. Now on Page 10, looking at the bottom left graph, our footprint is diversified, with 96% of our customers employed through public benevolent institutions, hospitals, education and government, all attractive sectors within the Australian workforce. Our largest client contracts now represent a smaller and decreasing percentage of total revenues due to the overall growth of the business. Now on Page 11, we continue to successfully integrate the acquisitions we have made. Operational efficiencies measured by packages and novated leases serviced per FTE improved through 2019. Now turning to Page 12, our business is one of Australia's most customer-centric companies as recognized by multiple external bodies over multiple years. Smartgroup is one of only a few organizations recognized as an inclusive and diverse employer by the Diversity Council Australia. I'm also pleased to say that in February 2020, we were recognized as an employer of choice for gender equality by the Workplace Gender Equality Agency. On Page 13, we have summarized the 2 regulatory reviews in relation to add-on insurances: one from ASIC and one from the Australian Department of Treasury. Treasury has put forward a proposal for a deferred sales model in relation to the sale of add-on insurance products. In May 2020, the government announced a 6-month deferral for the introduction of legislation to parliament for this model until December 2020. As both of these reviews continue to be ongoing, we're not in a position to speculate on the outcome. However, we have disclosed the annual revenue that we generated from the sale of add-on insurances expected to be covered by the reviews. The $17 million of revenue is a residual revenue after the insurance underwrite the changes announced in December 2019. Now I would like to give you an update on our business and its progress so far in 2020. Given the impacts of COVID-19, 2020 is going to be a year which is like no other year that we have seen. Our business was well positioned going into the COVID-19 period, with a capital-light business model, low debt levels and a stable customer base operating in essential areas of the economy. When COVID-19 commenced, Smartgroup quickly form a working group and within a matter of weeks, we had successfully transitioned 100% of our staff working from home. We also introduced new customer communication channels and implemented temporary cost containment measures. These measures included broad-based salary reductions, the suspension of commissions and short-term incentives, the restrictions of nonessential expenditure and a reduction of annual leave. These measures were quickly adopted by our team members. In the last month, we also introduced some further changes to streamline and simplify our business. Approximately 50 roles were impacted. We also refinanced and extended our debt facilities. At the end of May, we had $81 million in cash holdings and a net debt of $18 million. Throughout these times, our focus remains on safeguarding the well-being of our team members and ensuring we continue to provide a high level of service to our customers. Turning to Page 16. I'd like to remind shareholders that we operate in stable and attractive customer segments. Employees in government, health, education and the Public Benevolent Institution segments comprise 96% of our customer base. For the year-to-date, our salary packaging performance has remained resilient, and we are well progressed through our client renewal program for 2020. More recently, we are seeing more client sites requesting on-site presentations as restrictions ease. Turning to Page 17 and novated leasing. I should firstly note that the additional disclosure we have provided in the presentation is made to assist shareholders in understanding the impact of COVID-19 on our novated business. We typically do not provide this level of detail, but have done so, given the unique nature of the current environment. Our novated leasing business continues to perform well relative to the broader market. Our volumes in Q1 2020 were in line with the prior corresponding period despite the broader market being down more than 10%. COVID-19 has had an adverse impact on our performance since the end of March, April and May, but volumes down in line with the market. Our mix of refinance volumes from lease expiries has increased and overall yield has fallen due to the mix impact. From late March through the more recent weeks, we have seen increased volatility in our vehicle metrics. We've seen some positive increases in inquiries in more recent weeks. However, while these inquiries are positive relative to April, they remain lower than historical levels. While the increase in inquiries is encouraging, it is difficult to gauge with confidence the sustainability of any given trends given the short time frames and the changing consumer sentiment. Now turning to Page 18, we've had positive performance in Q1, but Q2 has been impacted by COVID-19 through lower novated leasing settlements. As mentioned earlier, while we're encouraged by the improvement in novated leasing inquiries in recent weeks, overall volumes remained below historical levels, and this upward trend is based on only a limited period of weeks. We currently expect our H1 2020 NPATA to be circa $32 million. This includes a before tax benefit of around $4 million of short-term temporary cost-saving measures. In 2019, Smartgroup delivered another year of positive results despite the continuing decline in private new car sales. While 2020 started soundly, COVID-19 has made trading conditions more challenging given the impact of the various restrictions on customer activities and consumer sentiment. I am proud of the way Smartgroup has acted quickly to respond appropriately to these challenges. We have and we will continue to do so, focus on safeguarding the well-being of our team members and the continued delivery of high-quality service to our customers. Our business is built on long-term clients operating in attractive segments. We have a capital-light business model that generates strong free cash flows. We also have a strong and flexible balance sheet. I'd like to say thank you to all customers and our committed and loyal team members for supporting Smartgroup through this time. Their dedication and positivity will ensure our business is well-managed through this period and beyond. Now I'd like to hand back to Michael for the formal part of this meeting.

Ladies and gentlemen, we will now move to the formal part of the meeting. I will have Sophie MacIntosh, our Chief Legal Officer and Company Secretary, explain the arrangements for asking questions and voting on the formal items of business. As this meeting is only being held online, these arrangements are a little different from the arrangements that shareholders are used to.

Thank you, Michael. If you are registered on the online platform as a shareholder or a proxy holder, you can submit questions by selecting the Ask a Question tab at the bottom of your screen. You can submit questions now or any time before the meeting considers the item of business to which your question relates, and they will be dealt with at the appropriate time. If you have a question already prepared, I encourage you to submit it now so that as many questions as possible can be answered. I ask that you keep your questions short and to the point so that as many shareholders as possible have the chance to ask a question. All questions will go through to me as the moderator for the meeting. I will identify the question, read it out and then pass the question on to our Chairman, who will either answer the question or pass it to the most appropriate person to answer. Where questions relating to an item of business have been received before the meeting through the question form, we will deal with these in the same way. We reserve the right to rule out questions that do not relate to the business of the meeting. We will also not answer questions that are the same or substantially similar to questions that have already been answered. Otherwise, we will endeavor to answer as many of the questions asked as we can. All resolutions to be considered at this meeting will be determined by a poll. In accordance with the company's constitution, the Board has determined that shareholders entitled to vote on a resolution at this meeting may exercise a direct vote on that resolution. The Board has approved rules governing direct voting, which are available on the company's website. Shareholders were given the opportunity to exercise a direct vote before the start of this meeting by lodging the voting form that accompanied the notice of meeting. Shareholders were also able to use the voting form to appoint a proxy to vote on their behalf at this meeting. As set out in the notice of meeting, our Chairman will vote all directed proxies in accordance with the directions provided by shareholders, and will vote all undirected proxies in favor of all resolutions. Shareholders who have not exercised a direct vote before this meeting and who have not appointed a proxy to vote on their behalf may cast a direct vote during the meeting using the electronic voting card that you received when you registered via the online platform. Those shareholders may cast a direct vote at any time from now until 5 minutes after the close of the meeting. If you have any questions about casting your vote online, please refer to the virtual AGM online guide that was issued with the notice of meeting or call our registry, Link Market Services on 1 300-554-474. I will now hand back to Michael to move to the formal business of the meeting.

Shareholders will be asked to consider the full resolution set out in the notice of meeting dated 6 May 2020. As I have previously explained, voting on each resolution will be by poll. The poll for each resolution is now open and will close 5 minutes after the end of the meeting. For each proposed resolution, I will introduce the resolution and display a slide showing the total direct votes and the proxy votes received on that resolution prior to the meeting. There will be an opportunity for shareholders to ask questions on the resolution through our online platform, in line with the processes that Sophie has previously described. Shareholders who have not already cast a direct vote or appointed a proxy to vote on their behalf at the meeting will be entitled to cast a direct vote on the resolution at any time before the close of the poll. Each resolution will be approved if a majority of the votes cast by members entitled to vote on the resolutions is in favor of the resolution. The results of the poll will be released on the ASX company announcements platform and made available on the company's website as soon as possible after the close of the meeting. The first item of formal business is to receive and consider the company's financial statements and reports for the financial year ended 31 December 2019 as set out in the 2019 annual report. This item of business does not require shareholders to vote on a resolution or to formally adopt the reports. Shareholders or their proxies may comment or ask questions about the financial statements and reports or about the management of the company. Shareholders may also ask questions of the company's auditor, PricewaterhouseCoopers, in relation to the conduct of the audit, the preparation and content of the audit report, accounting policies adopted by the company and the independence of the auditor in carrying out the audit. I will now address any questions relating to the item of business or any general business questions.

Michael, the first question is are you going to raise equity and/or implement a dividend reinvestment plan?

Thank you. Thank you for that question. As Tim mentioned in his presentation, Smartgroup is strongly capitalized with only $18 million of net debt and positive monthly cash flow. Therefore, there is no current need for Smartgroup to raise equity or implement a DRP.

There are no further questions on this item of business, Michael.

As there are no further questions, we will now move to the next item of business. We will now move to Resolution 1, which is the nonbinding and advisory vote on the company's remuneration report for the year ended 31 December 2019. The remuneration report is set out at Pages 37 to 50 of the annual report. After the resolution has been moved, there will be time for comments and questions. I now move that the remuneration report of the company for the year ended 31 December 2019 be adopted and approved. I'll now address any questions relating to the item of business.

Michael, we have received a question and a comment regarding the company's long-term incentive plan and the nonrecourse loan associated with this plan. Could you please provide some insight regarding the structure of the plan and the loan?

I might pass on to Mr. Gavin Bell, who's the Chair of our HR and Remuneration Committee. Gavin?

Thank you, Michael. And good morning, everybody. We introduced the long-term incentive plan in 2015 as an incentive arrangement that was focused on long-term growth, but had a subsidiary aim of ensuring that the executives' reward was aligned with shareholders' experience, primarily by linking the 2 with share price. The long-term plan is structured as a loan funded share plan. This has the financial effect of an option, is structured to do that with the same results. Key result of that is that the executor only receives the principal benefit of this scheme if there's an increase in the share price. So aligning it with shareholder experience. In addition, the full shares under the plan are only vested -- 2 other hurdles are achieved, long-term earnings growth and total shareholder return. The purchase of shares, initially, the shareholders about -- the executive are provided with a loan. The loan is structured as nonrecourse and interest free and did that primarily because that's what ASX requires. So an ASX regulatory guide and the relevant ASX class order relating into these sort of share schemes requires that the loans are both nonrecourse and interest free. So that's what -- the reason it's structured that way. In the end, the loan is repaid, [ the shares that are registered ], relevant targets are [ measured as best ], then the executive is required to repay the loan.

Thank you, Gavin. Are there any other questions?

There are no further questions on this item of business.

I will now put the resolution to the meeting. The direct votes and proxy votes received for this resolution are shown on this slide. If you wish to vote on Resolution 1 online using your electronic voting card and you have not already voted, please vote now. [Voting]

We will now move to Resolution 2, which is for the reelection of Deborah Homewood as a Director. Deborah is required to retire at this meeting in accordance with the company's constitution. And being eligible, offers herself for reelection. Information relevant to Deborah's proposed reelection is set out in the notice of meeting. And I note that each of the other directors supports Deborah's reelection. Deborah will now say a few words.

Thank you, Michael. Good morning, ladies and gentlemen. I joined the Board of Smartgroup in May 2016. I'm very pleased to be here today standing for reelection to the Smartgroup Board. I have a health and management background for over 25 years in the telecommunications sector, including 10 years as CEO of Pacnet, Australia and New Zealand. Previous organizations include Telstra, Motorola and Asia Netcom. I am currently the Managing Director of MAX Solutions, a human services organization, delivering services on behalf of the federal government. A position I've held for 8 years. In addition to being on the Board of Smartgroup, I am a member of the Human Resources and Remuneration Committee and IT and Innovation Committee. I'm also a current member of Chief Executive Women. It is both a privilege and a responsibility to serve you as a company -- as a director of this company. In my work here, I have drawn on much of my previous professional experience as well as the knowledge gained in my current role. Thank you, Michael.

Thank you, Deborah. I have the pleasure in moving that Ms. Deborah Homewood, who retires in accordance with the company's constitution and being eligible offers herself for reelection, be reelected as a director of the company. I will now address any questions relating to this item of business.

There's no questions on this item of business, Michael.

Thank you, Sophie. I will now put the resolution to the meeting. The direct votes and proxy votes received for this resolution are shown on this slide. If you wish to vote on Resolution 2 online using your electronic voting card and you have not already voted, please vote now. [Voting]

We will now move to Resolution 3, which is for the reelection of John Prendiville as a director. John is required to retire at this meeting in accordance with the company's constitution and being eligible, offers himself for reelection. Information relevant to John's proposed reelection is set out in the notice of meeting, and I note that each of the other directors supports John's reelection. John will now say a few words.

Thank you, Michael. Good morning, ladies and gentlemen. I joined the Board of Smartgroup in 2014, just prior to its listing on the stock exchange. I'm very pleased to be here today standing for reelection as a Director of Smartgroup. I have a finance, strategy and management background. Before I came to Smartgroup, I worked at Macquarie Bank and -- as an Executive Director for 20 or so years. I was a Senior Executive and Global Head of one of its groups within the investment banking operations. I'm also on the Board of Notre Dame University Australia and I'm on the Audit and Risk Committee of that organization. As well as the boards and various audit and risk and human resources committees for a range of private companies. In addition to being on the Board of Smartgroup, I am the Chairman of the Audit and Risk Committee and also a member of the Human Resources Committee. My experience as a corporate finance specialist and the various other roles listed earlier, has been invaluable to me in my position and contribution as a Director of the Board, and as the chair of the Audit and Risk Committee. I've very much enjoyed my role here at Smartgroup, and I look forward to continuing to realize the full potential of the company for us all. Thank you, Michael.

Thanks, John. I have pleasure in moving that Mr. John Prendiville, who retires in accordance with the company's constitution and being eligible offers himself for reelection, be reelected as a director of the company. I will now address any questions relating to this item of business.

There are no questions on this item of business, Michael.

Thank you, Sophie. I will now put the resolution to the meeting. The direct votes and proxy votes received for this resolution are shown on this slide. If you wish to vote on Resolution 3 online using your electronic voting card and you have not already voted, please vote now. [Voting]

We will now move to Resolution 4, which is for the approval to issue shares to Tim Looi, the company's Managing Director and CEO under the company's loan funded share plan. Detailed information about the proposed issue of shares, including a summary of the terms of the loan funded share plan is set out in the explanatory notes to the notice of meeting as required by the ASX listing rules. In summary, if shareholders approve Resolution 4, then, the company will issue to Tim 670,392 ordinary shares, which will vest at the end of a 3-year vesting period ending on 31 December 2022, subject to the satisfaction of the performance hurdles and other vesting conditions described in the explanatory notes to the notice of meeting. The performance hurdles are based on total shareholder return and earnings per share over the 3-year vesting period, with vesting of 75% of the shares tested against the earnings per share hurdle. And the remaining 25% tested against the total shareholder return hurdle. Any shares that do not vest at the end of the vesting period will be forfeited. The company will loan Tim an amount equal to the total issue price of all shares to be issued to him, with the issue price taken to be the 20-day volume weighted average price of shares traded on the ASX up until today. Tim cannot sell any shares that vest at the end of the vesting period until any outstanding balance on that loan is repaid. The Board believes that the performance hurdles strongly align Tim's ability to derive any value from the loan funded shares with Smartgroup's financial performance and the interest of Smartgroup's shareholders. I will now address any questions relating to this item of business.

We have one question on this item of business, Michael. One of our shareholders has asked about the 2019 remuneration report which shows Tim selling shares in the company. And they've asked Tim to talk about his confidence in the company's future performance.

Please go ahead, Tim.

Thank you, Michael. Thank you for the question. I think if you look at -- over the last several years, I've always sold shares every year and last year is no different. I still have a substantial interest in shares in relation to Smartgroup, and I've recently purchased more shares on market. In relation to the confidence -- my confidence in the company, I certainly wouldn't have signed up for the job if I didn't have that confidence. I think our company is well placed to perform through COVID-19. And certainly, if you look at the longevity of our business, if you look at the longevity of our clients and what we offer to them and our relationship with them, we are well placed to generate good performance over the next several years.

Are there any other questions?

There's no further questions, Michael.

Thank you, Sophie. I will now put the resolution to the meeting. The direct votes and proxy votes received for this resolution are shown on this slide. If you wish to vote on Resolution 4 online, using your electronic voting card, and you have not already voted, please vote now. [Voting]

That ends the formal part of the Annual General Meeting, and I now declare the meeting closed. As I said earlier, the poll will remain open for a further 5 minutes and shareholders who have not already voted may lodge their online votes during that time. The results of the meeting will be announced on the ASX company announcements platform and will be available on the company's website as soon as possible after the close of the meeting. Thank you for participating in our online meeting today. And we look forward to your continuing support in the coming year.