Solvar Limited (SVR) Earnings Call Transcript & Summary

Good morning, and welcome to Money3's Results Call for the Financial Year 2021. On the call today from the company, we have Managing Director, Scott Baldwin; and Chief Financial Officer, Siva Subramani. The format of today's call will be Scott and Siva will go through the investor presentation released on the ASX this morning, and then shortly thereafter, we'll host a Q&A segment, which you can ask a question via the Q&A button at the bottom of the screen. I'll now hand it over to Scott and Siva to get started. Thanks very much.

Thank you for the introduction, Simon, and thank you, shareholders and other interested parties for taking the time to listen to Siva and I today. We will step through the PowerPoint presentation, which is on the screen or available on the ASX. So just the highlights of last year. I won't go through them individually, but as you can see, very strong set of results there. Loan book growth has been exceptional. If you look at that 38.5% growth, 23% of that was organic growth, and the rest was acquired through the 2 acquisitions we made. I'm very happy with the 2 businesses that we bought, one of them being General Motors Financial Australia, which is the -- traded as Holden Financial Services. That has been a great acquisition. It was a loan book that we acquired, $23 million of receivables, purchased for $17 million. So think of that, that there will be $6 million of revenue that comes off that book over a roughly 2-year period. And the other acquisition we made is the Automotive Financial Services business based in Sydney and Brisbane, a great business today. It wasn't originating loans when we acquired the business, so it was a little bit of a slow start. But as you will see from the media release, they have had an exceptional turnaround from January through to June, increasing the monthly originations fourfold over that period of time, and we believe that we're in a very strong position that, that will continue to grow. Just another point we're making here is about our debt funding. So subsequent to these results here, you would have seen that we announced that a major Australian bank doubled the facility for -- supporting the business as well. So that business of Automotive Financial Services has very good momentum for strong growth over the course of this year and is well funded through the increase of that major bank facility that we've got for it. And if investors are looking for a bit of a blueprint of how we are going to or how we think that should play out over time, the amazing results that you'll see coming through this result through this pack -- from Go Car Finance is a good proxy for how we think the AFS business will perform over time. And if you look at that in the last 12 months, the Go Car Finance book has had over 90% growth. It's a big chunk of that group growth over the last 12 months and has very much benefited from a strong economy in New Zealand. Net profit after tax, well, that's an exceptional result from my point of view. We've -- the team worked very hard to deliver those results, and that's after taking into consideration the one-off items of the Fortress expense being amortized earlier than otherwise would have been this year and some one-off costs in result of the acquisitions that we've done. One of the big call-outs for this year has been the fact that we have secured 3 banks to fund the business on a go-forward basis. Currently, as of June 30, there was over $170 million of funds available for the business supported by 4 banks, and 3 of those have joined us since the Credit Suisse announcement in November. We expect earnings per share and return on equity to continue to grow over the course of this year as a result of lifting our leverage. And just the final point on this page. The Board has seen fit to declare a $0.07 fully franked dividend, which will be paid in the next couple of months and brings the full year to $0.10. So moving forward, Money3, the group has 3 business units. Money3, the legacy business, very much focused on consumer loans and has had very strong momentum in terms of its growth, particularly since Easter. We see that continuing to grow. Queensland not being in lockdown has been great for our business. I know they've just come out. We've had strong demand. Interestingly, we still had good originations out of the New South Wales state, even though that they've been in lockdown, so that has been positive. You should expect good growth in Money3 for its consumer loan business. AFS is our other Australian business. Now AFS also introduces a near-prime consumer segment to the group, which we are able to leverage some of our existing distribution to really grow that business. So we've got broadened distribution as well as Money3 strong balance sheet supporting that business to grow, and we're delighted that post June 30, we also had that announcement about doubling the bank facility supporting the AFS business. So it's very well poised for growth. We're very happy with how that's going. And certainly, the standout for the last 12 months has been the Go Car Finance business in New Zealand, which is also a consumer loans business, very similar to Australia, and as you will see in the release notes, we think Go Car Finance has worked so well, particularly because of the cultural similarities between the 2 businesses. So it has worked very well for our group. One thing that's been core for Money3 for some time now, as you can see, is building strong, profitable growth, and as you've seen from the media release, we expect that to continue in excess of 20%. So all of these -- we expect all of these metrics as well as net profit to continue to grow over 20% in the next 12 months. We're very confident. What gives us that confidence going into this year is the fact that our loan book has exceeded $600 million at the start of the year. So a lot of Money3's revenue profile comes from work done in past years and going in with that strong growth in the business. And remember, we posted a 38.5% growth in that loan book over the course of the 12 months, and the lion's share of that growth was organic growth, which was the momentum that we've seen, particularly in the second half. So expect that to continue. This is a snapshot of our loan book to give you an idea of what our business looks like. So we currently have over 63,000 loans in our business. Most of our loans are secured by vehicle, and as you can see, predominantly a car, as you can see, with the 51,000 vehicles there. There are some other asset types that we fund. One of the things that the AFS business will bring strong growth in is the commercial ute-type asset van and caravan. They're particularly strong in those segments, and you can see that we now have 500 commercial loans. Just to give investors a flavor for what a commercial loan is, it's typically a ute car or a van used for commercial purposes, typically for a small business. We see quite a lot of people applying for those business loans, for that vehicle to support their business in one way -- for small business in one way or another. We currently have 12,500 personal loans in the business, and we expect that to also be a growth segment for the business. Today, it predominantly focuses on repairs and maintenance for the vehicle, and it's generally returning customers applying for that product. Money3 has had a long history of profitability, but anyone that's followed the story for some time will know in the last 5 years, in particular, we've tried to transform the business into a focused auto finance provider, and we sit here today having funded over $2 billion worth of vehicles on that journey. We know that this year we'll exceed $1 billion of revenue. That's not for these 12 months, but over our journey, we've now grown the business that we have got over $1 billion of revenue out of financing vehicles. Currently have over 60,000 active customers. One of the core strengths of this business is our customer care team and our collections ability. Unlike some other companies, we don't outsource that. It's well known that we participate in a wide variety of credit quality in terms of client applications, and our strength in our customer care team gives us really strong cash flows, really constant communication with our customers and an ability to be very flexible. Over 170,000 vehicles funded by the group over the last 5 years since we've really transformed and repositioned the business back towards automotive lending. Our financial performance for the year, I'd like to think that many people on the call think these are outstanding numbers. There's been a lot of hard work and dedication from the team to -- in order to produce these results. But a couple of standouts that I'm sure you're aware of. Impairment and credit losses are at record lows. That was principally as a result of very strong incoming cash flow from clients. So the loan book had a period of subdued growth, but it was predominantly due to the fact that we're writing more business. The customers were paying beyond their usual payment schedules, and we find that today, standout is very much the higher the credit quality, more likely our client is to pay early. And at this point in time, we find that, on average, 5- or 6-year loan is only going for 2 or 3 years because people are paying in excess of their schedule, which is driving up that revenue and driving down impairment losses. We do expect that to normalize a little bit over the next 12 months, but at this point, looking at July's numbers, we still sit ahead of the norm in terms of our incoming cash flows and our low bad debts. Expenses grew a little bit faster than revenue, but that's principally because we expensed all of the acquisition costs of the 2 businesses, a little over $1 million, and we accelerated the expense of the Fortress facility because it was planned to be expensed over the course of this year as well, but we brought all of that into last year. Average loan book is up significantly, and as you can see, with the 38% versus 32% here, a lot of the growth did come into the second half. Puts us in a very strong position to go into FY '22, though, because we have a large base of receivables that we know is going to form the bulk of the revenue that we will achieve this year. There's been many announcements this year since November in regard to our diversified plan and our strategy to have more than one bank funding the group. We've taken a conscious decision as a business that we think the right strategy is not to be tied to one lender, to have multiple banks funding the group. So today, we have 4 banks funding the Money3 group, 2 in New Zealand and 2 in Australia. That is all the debt funding that the business has today. Currently has $130 million of headroom. Some slight difference in numbers between here and the front page, so I'm just calling out that this is a snapshot as of today's date or as of yesterday when Siva put that together to reflect the increase in the major Australian bank facility that happened after June 30. Lifting headroom in -- increasing leverage within our business is what's going to drive our return on equity, currently sitting at 13% today. We've highlighted that we expect that to get towards 15% over the course of this year, and as that leverage continues to lift across the business, our return on equity will continue to grow as we move towards $1 billion. We'd like to point to the fact that we have secured 3 banks to fund the group over the course of the last 12 months. It's this participation from banks that gives us a lot of confidence that we can continue to leverage up our business over the next 24 months in order to get to our $1 billion of receivables, which we think is very achievable without any additional equity from what we've got today to continue to grow the business. So we've got the right momentum. We've got the right partners from banks to continue to increase their leverage over time. We have improving credit quality within our business, which is allowing us to lift the leverage over time in the group to continue to grow to that $1 billion without any additional equity. Credit quality. One of the most common questions that Siva and I have received from investors over the course of the year, "How is the business performing?" As you can see there, credit quality has continued to improve. You should think of strong and good as being all those loans in the old world, you possibly would have said they're down to 30 days in arrears. But think strong and good that they are customers that are performing well and performing to expectation within our business, and they have grown over the last 12 months. The strong call-out I wanted to make here is the yellow, the credit impaired, which is negligible within our business today. The loan book has never been in better shape than it is today. And with the addition of the AFS business, who has very minimal arrears and losses, we expect this to continue to grow -- continue to show improvement over the course of this year. So very happy with that. The other thing that I'm sure is on people's lips is how does this impact our impairment provision. I know our accounts have just come out today, and you'll need some time to digest those. But you will see that the impairment provision has declined over the course of the year by about almost 2% reduction in provisions across the portfolio. And a lot of what we took up as additional impairment last year has been absorbed within the business this year against the growth. So if we go back -- if you were looking at that P&L slide before where we saw minimal expenses in impairment and bad debt, that is because our -- from an absolute point of view, our impairment provisions have only grown 10%, where our book, our loan book has grown 40%. So a lot of that additional provision has been absorbed by the book growing and no P&L expense as the business has grown. In terms of operations for our business, I'll start with Go Car Finance. We acquired that a little over 2.5 years ago, has been exceptionally strong fit culturally within the business. Our approach to customers and the design of the business has been very similar. They have benefited from Money3's strong balance sheet, but also a few strategic things that we've done in regard to opening up new channels in New Zealand. So principally, the Go Car Finance business was a finance company directed directly to dealers. Since acquisition, we've launched a direct business, which if you think of that as being a website, taking online applications as well as an ability for customers to come back directly. And also, a broker channel in New Zealand has been launched as well. Both of those are still in their infancy today, but growing volume. And as you can see, we're very happy with how that's gone, a threefold increase since acquisition and up 90% this year in terms of its growth over the last 12 months, a 50% increase on revenues over the last 12 months. New Zealand has been in a very strong position. It's managed the COVID pandemic well. There has been good supply of vehicles, certainly seeing some pressure but not to the same extent to what we see in Australia. So we are expecting a very strong result out of Go Car yet again this year. Calling out that a lot of the really good things that we've learned and done out of Go Car, we're applying that same methodology to the AFS business. It was acquired in January this year. It was a subdued start as they relaunched their business after being turned off for some 9 months, but we're delighted that from January through to June, we grew those monthly originations by some 400%. So it comes in -- it starts FY '22 with very strong monthly momentum, writing north of $6 million a month of loans, and we expect that to continue to grow from there. And just to call out again, we've doubled the warehouse facility that supports that business, so there's no impediment to the AFS business continuing to grow. The Money3 business, our legacy business, since -- principally since Easter, but certainly in the second half, has had a lot of strong growth coming back into the business. Over the last 6 months, we have refinanced the -- what was the Fortress facility. Credit Suisse are now funding that business. So it's very well funded, lots of headroom in that facility and plenty of support for it to continue to grow. I'm expecting strong, organic growth out of the Money3 business over the course of this year, and if the opportunity presents with similar loan books, there may be an acquisition like we're seeing with the GMFA business. The very strong customer care team is roughly one person supporting that whole loan book today, but if we can roll that into that business and leverage our customer care teams, it will give us an incremental uplift on profitability there as well. And that's our 3 business units that we have at this point in time. Cash advanced. As you can see, very strong growth in the second half in Australia and very strong growth pretty much since the -- I mean last lockdown New Zealand had was sort of that July, August last year. So they've had a very strong, strong year. A little over 26,000 loans were financed in the last 12 months. So a lot of that growth you will see has occurred in the second half, which is why the numbers aren't quite -- which is why it's grown about a bit over 10%, but it would look like a lot more if it was over the whole 12 months. We're expecting to see good lending volumes continue to grow well beyond that 340. With all 3 businesses having a strong month, we will originate between $40 million and $50 million a month going forward from here. So there is some good momentum in the business. Next slide, please. Cash collections continue to be strong. We would expect this to plateau a little bit because a lot of the cash collection is beyond the schedule that people are entering into. We'd be quite comfortable with that. It would drive loan book growth, and we charge an interest on the outstanding balance of a loan. So we're very happy with where cash collected is. The cash collected at these levels is driving improvement in the quality of our loan book. And as I was saying before, we continue to see, through the month of July, that cash sits beyond the schedule for a customer to repay. So what I'm saying there is customers are still paying in advance to their original loan contract, which is quite positive and testament to the credit quality of the book. Some of the investment that we've been making in technology across the business in Australia and New Zealand has principally been around pushing the interaction to the business with both of our -- with all 3 of our businesses through a handheld device. These 2 technologies are being rolled out for our Go Car and Money3 business, and once they are established platforms, they will roll out to the AFS business. So what we see with our transport solution that we run in New Zealand is that through your mobile device, a lot more notifications coming through to you to help people manage the life cycle of their car so that they know when to arrange a service for the car. For any of the Kiwis on the call, they know when to Warrant to Fitness, which is basically the annual roadworthy certificate. They also can, with the tap of a button, find a local service center and book that in through the app without needing to go and do that somewhere else. So trying to bring a lot more customer service back to the client around the life cycle cost of a car and also creating an online way for that customer to communicate things like rescheduling or other payment questions that they may have. And if we move to the Money3 business, you can see here, this is our online portal that we have for customers, moving all of this to work across all handheld devices, whether they be Android or iPhone. And it really -- it's creating a very simple process for customers to reapply for a loan, reschedule their payments. It's giving them visibility of when the next payment is due, and it's giving them the ability to chat with the business. And just to close out, the outlook. What we're seeing within the industry is ever-so-slightly improving vehicle supply as we go on. We're not seeing the rapid increase in used vehicle pricing that we saw last year. It has stabilized, and we're seeing it sort of plateau. We're seeing a lot of volume of customers coming into the space. It's definitely post Royal Commission being a continual retreat from the provision of automotive and asset financed by banks, by large banks, and that is very much favoring the whole sector. So typically, we are seeing 10% or 20% growth in demand every month on the previous years for customers looking for loans. From a company point of view, we expect to continue our diversification strategy to build out our 3 distribution channels to the business and to leverage them across all 3 of our business units, and that's the broker channel, the direct or online channel and the direct-to-dealer channel. Having those support all 3 of our business units is accelerating our growth. We are leveraging technology, particularly around the online direct-to-business application channel for customers because it's making it easier for customers to reapply for a loan and lifting the number of customers coming back to us for a second and third loan. And a big focus this year in New Zealand will be expanding the distribution throughout all of New Zealand for the Go Car Finance product. And just to finalize, as we've said in the media release, strong momentum in the business driving revenue and profitability over the course of this year. We expect our loan book to be in that range of $760 million to $810 million, given the momentum we're seeing in the business today. We are very well funded with 4 banks funding the business or with the ability to lend us more over time as and when we need it, and we expect the business to move towards a 15% return on equity. I will pause now for questions.

Thanks, Scott. First question has come from Jonathon Higgins at Shaw and Partners. It's a 3-part question. "What are the targets for M&A across Australia? Are you seeing more opportunities?"

Our effort is split between 2 lines of thinking. Asset purchases, like you saw us do with the holder book, so we're actively looking for other businesses that have chosen not to continue in the provision of the space, and we will roll them in probably into the Money3 customer care team and collect those. So we are actively looking for businesses and loan books that have vehicles, whether a consumer or commercial, but vehicles that's in a space that we understand to acquire. And the second part of the strategy is look for businesses that can either give us an additional distribution strategy or an additional product that we don't have today. So that's basically the 2 -- our 2 strategies for looking for businesses to acquire.

"And you're not talking towards capital returns just yet, but no significant franking balance and discount to peers and flexible balance sheet. Do you have any thoughts here?"

As you can see, we've lifted the dividend. The Board is in constant conversation about that. It's a growing balance, but it's not a large balance. It's something that we think -- having healthy dividends will -- is one way to deal with it. And as it gets bigger over time, it makes it easier to look at some of the other ways to deal with that franking balance. But I think the message we have today is we plan to pay a healthy dividend, as you've seen, $0.07 this time, and that will slow some of the growth of that franking credit. But we don't see it as being a priority to come up with any special mechanism to deal with that just yet.

Great. Thanks. And final question from Jon, "Can you call out the actual one-off costs?"

I might let Siva speak to that.

Thanks, Scott. Just to sort of highlight before I go into the splits. If we had normalized it for all the one-off or noncash cost, NPAT would be roughly $41 million. But the breakup, there are a few things to consider in the breakup. As Scott mentioned, we had roughly $1 million in acquisition cost, Fortress, because we had refinanced and some of those borrowing costs had to be brought forward. So that's roughly $2 million. And we had AFS employee share scheme-type cost in the business that's around $1 million, and we did have a lot of investment in the technology front, both from a remote working point of view as well as some of the features that Scott mentioned about. So that's roughly $1.5 million totaling to $4.5 million, less JobKeeper of $2 million that would go the other way around, which, if you tax-effect, would roughly be $2 million on top of what we had presented as a statutory NPAT. Thank you.

Thanks, Siva. Next question, "Second half EBITDA and NPAT was steady with the first half, and yet loan book increased $474 million to $601 million. Why wasn't the second half quite a bit higher?"

A lot of that is to do with those one-off costs coming through in the second half. Both acquisitions settled in January, so those one-off costs Siva was talking about were principally taken up in the second half. The other thing, too, is when you originate the loan, there is a number of one-off costs, whether it's labor or bureau searches or other costs that run through the P&L. You take all the costs initially, and then after the loan settles, you've then got a period of time where the revenue comes off. So the benefit of that $600 million does very much start to come through from July because those lines have now written and settled. When you have a peak period of time of high origination, it does push your origination cost up. So that's -- it's a combination of -- there's no revenue for settling alone. Revenue starts to come as cash comes in. We don't recognize any revenue upfront on our loans. We only recognize that as the customer starts to repay. So you can settle a lot of loans in June, for example, and there'd be 0 revenue or costs. And then as the cash starts to come in the following month, the revenue starts to come back out. I hope that answers that question.

Great. Thanks, Scott. Next question, "How much do you expect to be able to grow your loan book, i.e. with $130 million available debt is less than the forecast loan book growth."

Yes. No, we're very comfortable with that. So like most of our facilities today, we sit at about 50% leverage. We're estimating over the course of this year to get to 60% leverage. We think that leverage can continue to grow closer to 70% in years to come. We haven't negotiated those facilities with banks at this time because there's loan fees associated with them. And we are confident that we will be able to increase our debt facilities over time as needed to continue to grow the business from $600 million to $1 billion.

Thanks, Scott. "How many years do you think it will take until your return on equity is closer to 20%?"

Look, there's a number of factors that make that not the easiest question to answer given the current COVID situation. But if investors were sitting there thinking that in the next 18 to 36 months, the business will hit that $1 billion because it's the year after we go past that 20% return is likely.

Great. Thanks, Scott. Final question was, "What's your current book value?"

At June 30, it was $601 million. It has continued to grow. Through the course of July, around $615 million, $616 million, where it was at the end of July.