Solvar Limited (SVR) Earnings Call Transcript & Summary

Good morning, and welcome to Money3's investor webinar for the results released this morning for the first half of financial year '22. From the company today, we have Scott Baldwin, the Managing Director and CEO; and Siva Subramani, company's CFO. Scott and Siva will go through a presentation shortly that's up on the screen. But before we do so, I'd just remind you that this call is being recorded, and you can submit questions via the Q&A button at the bottom of the screen. But I'll now hand over to Scott to get started. Thanks very much.

Thanks, Simon, and thank you, shareholders and other interested parties, for joining the call today. We have some very good results to share with you. Please, myself and Siva Subramani, the CFO, is here. He's just off-camera at the moment, though. Let's go through the results. Highlights. This has been a standout half for the business. Many of you would -- anyone who's followed the story would know that the last couple of years have been interesting with the pandemic. Certainly a standout 56% increase in new loan originations for the half, which is a combination of organic and inorganic growth. You would appreciate we acquired Automotive Financial Services, the prime credit quality business, at the start of '21. So not all of that is flowing through. That's the inorganic path. The organic growth has very much come from the Money3 business, the core original business of the Money3 Group. And one thing for investors to take on board is a lot of that 31% growth through the Money3 business has come from increasing numbers of customers. So not only have we benefited from a little bit of asset depreciation. It's only about 5% in terms of average loans. We've very much benefited from serving more customers over the half when you compare it to the prior corresponding period. So 56% growth, a very good result for us, sets us up for a very strong FY '23. You'll note that the loan book is just under $700 million at the moment. We called out here that we believe we have all of the things we need and the right momentum for the loan book to finish the financial year at $800 million. So for many of you that have followed the story would know that, that puts our revenue next financial year in that sort of $240-plus million mark. So you -- the foundation is set for a very solid year in FY '23 as well as the second half of this year. Revenue, up 34%. Off the back of that growing loan book, you should be expecting similar sort of growth in revenue going into FY '23 as well. NPAT, up 29%. We have certainly benefited from improving credit quality in all markets. You'll see that in the first slide on credit quality. But our clients are generally telling us that we -- strong employment and strong asset pricing, that they are paying their loans back quicker than we would expect and that they are not experiencing any sort of challenges repaying their line, with many customers that are now in advance of their loan commitments. EBITDA growth has come through solid 27% growth year-on-year. Loan book, as we said, 47% year-on-year growth. 15% growth since June 30, $690 million today. We're calling out that we want investors to think that by June 30, we expect to be closing the year at around $800 million. And we think in the following year, calendar year, that our loan book starts to hit that $1 billion. Just in terms of debt funding, we have a mixture of debt and equity funding the business. And as we're calling out here, we have all the ingredients we need today to get our book to $950 million, so $250 million growth on top of where we are today. And we have confidence with the initiatives away in terms of approving our warehouse in New Zealand, adding an additional mezzanine funder and also just some retained profitability over the next 12 months of closing that gap to get to the $1 billion. That's the highlights for the half. Just moving on a little bit about the group. Many of you will already be existing shareholders and have heard this. I really want to call out the strengths of the business. At the heart of our group is a very well-positioned collections team. Our customer care team have been with the business for around 20 years now. They have a very strong strength of managing repayments for the client as and when needed. We do think that if there is a downturn in the market, that this team is what's going to set us apart from many of our peers in terms of our ability to collect on our receivables. New loans originations continue to grow, now peaking at around $40 million a month. We think we're set to start and break that regularly moving into this half and beyond, particularly as investors should expect strong growth from the Automotive Financial Services business, the prime credit quality business that we acquired at the start of last year, really starting to leverage the Money3 distribution network and grow its monthly settlements. As we've called out many times before, Money3 has invested significantly in technology along the journey. We have a lot of integration with our partners, which is why our number of customers continues to grow as we grow our business partners and as we grow the efficiency of our technology of acquiring a client that continues to improve every month within the business with investment we have in technology. We also have seen record levels of returning customers. For the core business of Money3, 1 in 3 customers over the last 6 months returned to us to buy a second, third or sometimes fourth car and have us funding it. That is improving our credit quality, is lowering our cost of client acquisition and is allowing us to continue the story with a customer that, as your journey continues with Money3 and you buy more assets over time, your funding continues to improve. Works for us, and it works for them. Many of the strategies we have in place for the Money3 Group, we are now starting to leverage in the 2 acquisitions that we've acquired, Go Car Finance and Automotive Financial Services. So you should be seeing greater presence from the group through our 3 dealer, broker and direct distribution channels. The acquisitions that we've made have broadened the addressable market. So if you consider consumer, commercial, personal lending across the 2 countries, I think the addressable market in its entirety is $33 billion. And then through this slide, we try and break it down so you can see that each segment, where its focus is. Just a little bit on each of the business units. Money3, that's the core business unit. It's been around for over 20 years now. We've originated that in -- through that business well over $2 billion worth of assets. And more importantly, we've also collected on well over $2 billion worth of lending in that segment as well. It's a very profitable, fast-growing part of our business. And I just want to call out that over the last 6 months, they've done a fantastic job of increasing their volume on the price going on PCP by over 30%. So a lot of the growth that you're seeing coming through in this half has come from the Money3 business unit, where if we were sitting here 12 months ago, you would have heard us talking about Go Car Finance being the driver of growth. It hasn't produced as much growth in this half, Go Car Finance and New Zealand operations, simply because of lockdowns. And Victoria's lockdown ending has driven Money3. And our growth engine that we acquired just on 12 months ago, Automotive Financial Services, that business already had 30 years of trading history. And what Money3 has very much been able to bring to that is an expanded distribution network. It's driving more growth through that business. Collectively, originating in Australia, approximately $25 million, $30 million a month. So relative to the whole market for new and used commercial vehicles, consumer vehicles, we're still a very small player in that $14 billion vehicle market. Moving on to the financials. As you'll see, 30% increase in revenue. Margins is probably the worth -- part to call out. We think -- we're starting to see a trend back to normal in bad debt. So that's why EBITDA margin has come back just a little bit, but we think north of 50% is where we continue as a business. NPAT margin. I know we've called this out in -- many times in the past. We think sort of that north of 25% is where we are. We continue to sit a little bit ahead of that as a result of good execution and some favorable bad debt, but we think that trend continues. Just calling out again, $690 million of loan book is where we finished for the half. It would have been more if we put it through our profile for standard cash collection, but we are still experiencing accelerated cash collection from our clients. But with New Zealand restrictions easing somewhat coming into the second half and then really starting to get back to their usual growth profile, we think getting to roughly $800 million at June 30 is very achievable for the group. So just calling out some highlights here. I want to take investors to the loan book because that's the best thing we can show you to predict the future. The largest section there, 60% of the business, is coming from the Money3 business unit. You'll see that Go Car has grown to 28%, and you'll see that AFS is 12%. As those other 2 businesses grow significantly in their relative markets and with the pie growing, what you'll start to see is their revenue contribution growing over time as well, in line with the loan book. There's just a lag. So Money3 in terms of revenue contribution will continue to decline. However, do expect the pie to continue to grow as well. So the loan book is the leading indicator of where revenue is going to come from in future periods. Just calling that out in our first 12 months, we managed to grow that business by almost 80%, and that was really by leveraging the Money3 tried and tested distribution channels. So that has been a solid contributor to that growth in AFS. In terms of -- it's further growth, we think that investors should expect a $10-plus million month starting to come through regularly for AFS. So that loan book percentage will continue to grow in the second half. Go Car Finance, over 300% growth since we acquired it. For those that have followed that journey, the earnout has come to an end. It's -- the management team there has -- is still in place and staying with the group. And we expect good growth to return out of the Go Car Finance business as pandemic restrictions ease. Money3, the core business unit, really the standout in the last 6 months, 30% plus growth in new loans, only a 5% increase in the average loan type. So calling that out given that there's been a lot of conversation about appreciating assets in the market. We have experienced that. It just may not be as much as what investors think. We feel that a lot of the increased asset pricing is starting to stabilize very much towards the end of last year. For those of you that remember last year, we negotiated with General Motors, and we bought the business that traded as Holden Financial Services or GMFA. The customer care team in the Money3 business continues to collect that. We're seeing some of those customers come back for a second loan already, which is delightful. We've also seen, given that many of those for the purchase of a Holden colorado that they've appreciated given the current market, people are interestingly paying out those loans so that -- and keeping those assets. It's been another acquisition that's been a very good contributor to our bottom line. Just moving on to our capital structure. A lot happening on this slide. Just calling out the loan book and our forecast. I think we get to June 30 with $800 million of receivables. Hopefully, as you build your models and start to look at the business, you can see that, that drives us to a revenue next year in the mid-200s. You can work out what that does to profitability. But we think that all the momentum is in place for a very solid result and uplift on this year in FY '23. Just moving on to -- I should call out the continual improvement in credit quality. So while that book is growing, the book is growing and the credit quality continues to improve. You can see that from the slide on the right. As that credit quality continues to improve, investors should expect to see the impairment provision across the portfolio continue to wind back a little bit and our ability to raise debt continue to increase. So improving quality is meaning that not only can we have higher leverage. It is also unlikely to drive down the cost of funding. The Money3 Group is a little bit late to that party in terms of acquiring debt. We're still principally funded by equity. I mean our loan book is principally funded by equity. Around $300 million of that $690 million is the equity of the business. That means that with that low leverage that we go into the second half, no, there won't be any repricing in what the equity costs. So we will not feel the -- any increase in debt like some others might. Also considering that we're a little bit late to acquiring debt, our debt costs are probably higher than some of our peers and likely to continue to trend down even in a rising interest rate environment, certainly in the near term because of improving credit quality, lifting leverage and our scale as we grow the amount of debt funding that we have. Currently funded by 4 banks and another institution across the group, all with appetite to grow their partnership with Money3. And we're just delighted that we have so many options in terms of funding now compared to where we were 2 or 3 years ago. Not only do we have the options. We have better pricing coming through and greater leverage. So all of those are going -- is why we say we have a lot of confidence of our return on equity continuing to improve towards that 20% mark as we put our capital management plan in place throughout our business. Just moving to the outlook before we take questions from shareholders. Forecasting that our NPAT will be in excess of $50 million this year. We're also forecasting or have declared a $0.06 fully franked dividend to be paid on the 29th of April for the first half. We're restating our dividend payout policy of 40% to 70%. We intend to stick to that moving forward so shareholders should have confidence that those dividends are within that range. Now we're also reintroducing the dividend reimbursement program. I think now is the right time. The volatility of the market seems to be returning back to the normal so we've reintroduced or activated the dividend reinvestment plan. We encourage all shareholders to participate in that as a small discount will apply. We have talked about our aspiration of getting to $1 billion. We think that that's next calendar year. We also have a lot of programs in place that will help us build the second $1 billion into our business organically, and we're also calling out that we think that the market will -- there will be opportunity in the market over the next 12 months to acquire some businesses that help us broaden our addressable market or improve our mix of products. We particularly think that the commercial loan sector, an opportunity may present itself or personal lending. That's the end of the presentation. We'll end that there, and Simon will take any questions from you that Siva or I can answer.

Thanks, Scott. First question, can you just talk to or explain the reasoning behind the higher bad debt expense as a percentage of revenue?

If you go back 12 months, because that's what you're comparing against, those bad debts, we would say, were artificially low. We called that out at the time that we're a large beneficiary of the superannuation release. When the government put that program in, in Australia, we found that many of our customers potentially utilize that program to pay down their debts, and it did drive down our bad debts to an artificially low level. Bad debts -- our annualized bad debts at the moment are trending at around 3.9% of the receivables. We think that is a more normalized amount of bad debts and what we think that we will deliver towards the end of this financial year. We think in the range of 3.5% to 4.5% is where we expect our bad debts to end, and that's a more normalized number. Last, it's not that they've gone up. It's just a return to normal.

Thanks, Scott. Next question from Jonathon Higgins at Shaw and Partners. Can you talk us through expectations on finance and in particular, milestones coming up and how the group can deliver funding reductions into a rising interest rate environment?

Look, it is a rising interest rate environment. There's been many questions on that. As a business, we were late to the party in terms of creating our warehouses, which means we have paid a little bit more than many of our peers. But in this current environment, because we're at that stage, we've improved the credit quality across our business. We've proved that we are able to manage and deliver that to banks. And we believe that there is still -- our next movement is probably a reduction in the cost of funding even in a rising interest rate environment. That's driven by low leverage, high credit quality of assets. A 3.9% annualized bad debts is lower than many of our peers, and some of them would argue that their credit quality is better. But we continue to improve credit quality. Low bad debts is what's allowing our funders to pass on some better cost of funding as well as that scale continuing to grow. Investors saw evidence of that just before Christmas in the relationship we have with Credit Suisse, where Credit Suisse was able to upsize the facility, also shave off some pricing in that facility, too, which we'll be able to deliver to the bottom line in the second half. And we think that trend continues across our business.

Thanks, Scott. Next question from Jonathon, bad debt expectations as COVID provisions are released and what you're seeing across your customer base.

Well, we're seeing a customer base that is managing the pandemic very well. We certainly have seen as the media drives concern, customers tend to repay their loans faster, and we benefited from very strong cash collections. There's no indication in our book that there's going to be any worsening of our bad debt over the next 6 months. If anything, we're expecting this normalized level where we are. 3.5% to 4.5% bad debts is probably the range we think that we're very comfortable that that's where it's going to land for this financial year. People should take on board that there are some things in investors -- in our customers' favor. Unemployment is very low at the moment. So it's very easy to be -- to have a job. There is some wage inflation that is going through, which is making it easier for customers to repay their loans. And finally, anyone that -- is turning over their vehicle at the moment. If you bought a car in the last 3 years, you're probably selling your car for more than you paid for it, which means it makes it very easy to pay out a loan. So there's a lot of tailwinds in terms of bad debt that we think benefit the group, particularly in the next 12 months.

Thanks, Scott. Final question from Jonathon. You're conserving your equity to book growth, but any other thoughts on capital uses?

Well, as you see, our business in terms of new originations grew 56% in the first half. So our focus very much is that strong organic growth through building out our -- or leveraging the 3 distribution channels across all of our network. So the #1 place we want to use the equity in our business is to support the equity layer in the warehouses that we've created and grow our receivables to that $1 billion as a short-term term step. So that's the #1, pushing for that growth. The second place we think there's opportunity to deploy our equity is potentially in acquiring either a book or a business that gives us greater distribution or another product. And finally, you'll see with the $0.06 dividend, we're starting to return to paying out good dividends from the business on a half yearly basis. I think that trend, investors should expect that to continue. Modest dividends but a strong focus on growth.

Great. Thanks, Scott. Next question is from John Hynd at Wilsons. Can you provide a little bit more color on the current environment? Have you seen demand change in the last month or 2 and more demand improve as travel opens up?

So demand has continued to be very strong, and I'll try to answer that by each business unit. The Money3 business unit is continuing strong demand for that product. Organic growth has been awesome from Money3, our high-margin business. So that we expect to continue through the second half. Now New Zealand, it was pretty much flat in the first half as a result of restrictions. Restrictions in New Zealand saw dealerships close and no trade happen. So that really did impact us. Group growth is going to appear stronger simply because New Zealand is starting to come back online. Midday today, the Ardern government sort of announces the next stage of restrictions. We expect the next level of restrictions easing. So we think New Zealand starts to get back to its usual growth profile, which means as a group, we are growing faster. AFS business, we newly acquired. We are writing circa $5 million to $8 million a month through that business today. We've been introducing that product, that prime credit quality product, to our distribution partners, and they have supported that very strongly. We think that continues. One of the things I want to call out with the AFS business that we have focused our energy on is supporting local Australian manufacturers. So there might be manufacturers and assemblers of assets, think caravans, think horse floats and think other sort of trailers, assets that are assembled or manufactured here in Australia, 1 in 3 of the assets that we funded over the last 6 months through AFS assets that are built in Australia, you could say. And we see strong growth continuing through that business segment moving forward.

Thanks, Scott. Just a follow-up question from John. How does the current environment position you for pricing? Can you raise rates?

That's not part of our strategy. You would probably appreciate that we are not the cheapest provider of financing in the market. That's not been our strategy. We seek out niches that have good margin. Many parts of our business have margins around 15% to 20%. We think that we can maintain those margins through this period of time. What -- so we don't plan to increase our cost. Our focus is very much broadening our addressable market. And we have called this out as we broadened our addressable market that we continue to expect about a 1% to 2% reduction in gross yield across the portfolio over the next 12 months as the business has more prime credit quality applicants coming in. So I hope that answers that question. We are a business that's still -- that manages some very good margins, but they have been in place for some 20 years now. We think that's the right sort of place to play, and we're growing our presence in that prime credit quality. It's probably going to bring it down 1% to 2% over the next 12 months.

Great. Thanks, Scott. Next question, what did New Zealand land per month in first half versus expectations?

I might have to defer to Siva for the exact numbers there.

Yes. Look, the average numbers in New Zealand for the first half were around $7 million to $7.5 million of lending, while the normal trend is well above $10 million. We expect that kind of normal to come back in the second half.

What we should say is that in New Zealand, we saw a significant reduction in loan volumes towards the end of August. September in New Zealand was less than -- is about 20% of usual volumes. And we only settled loans in New Zealand in September that were preapproved or assets in the pipeline because of the lockdown, dealerships closing. So September was about 1/3 of normal. And then it's taken a few months to build that pipeline back up again on preapproved loans for vehicles to get delivered. We've seen October start to return. But it wasn't until November and December that our monthly origination volume started to get back to the levels where we'd like to be, all of them still under July. And we're sort of seeing that softness continue in January, but really starting to pick up now in February. We're very optimistic of the Ardern government winding back their restrictions a little bit after today's announcement, which will just drive further growth or returning back to those normal volumes in New Zealand. But the callout here is it's mainly September. The month of September is where we saw a massive drop-off. Started to go down in August, massive drop-off in September, started to pick up in October and starting to return to normal sort of mid- to late November. And we think with further easing of restrictions, we get to the point where we're funding north of 500 vehicles every month in New Zealand moving forward.

Thanks, Scott. What is the gross loan book currently sitting at? And how should we expect the interest savings to improve into the second half?

Look, the gross loan book is currently sitting at $690 million as of the end of December. We haven't disclosed what it is today, but it's $690 million end of December. And we are confident of getting to $800 million by the end -- by 30 June of this year. Now I might let Siva make a comment on where he thinks the direction of how debt funding cost is going.

Thank you, Scott. I think with respect to the debt funding cost, Scott made some comments earlier. I'll just add to that, that we do have arrangements in our existing warehouse structure. That with additional volume, the margins are expected to go down. And we would expect by the second half, we will start to fully utilize those margin directions. Having said that, we do have a very low levered book, and the next stage in our debt strategy would be to increase leverage to optimal levels with a future step in terms of a securitization to come out well . I don't expect that to happen in this financial year, but that's kind of a next logical step we would pursue to have further reductions in our cost of funds.

Thanks, Siva. Should we expect a provision release in the second half? And what's the possible range?

You'll note that our provisions have been declining as a result of improving credit quality to now at low 5%. You should expect to see that continue to decline. Over the course of this year, investors would -- I'm assuming that, that conversation -- question is relating to the pandemic provision which we took a couple of years ago. By June 30 this year, that will have rolled into our normal provisioning. There's still a couple of million dollars of benefit that's likely to come through in the second half trending towards -- it will continue to trend down closer to 5% as we get to June 30. And look, I would say Siva spent a lot of time on building that model and estimating what unemployment looks like and other macroeconomic factors. They all look quite good at the moment. I know inflation and other things are coming. But strong asset pricing, a consumer base that's principally not owning its own home, so it doesn't have that same cost impact that some might appreciate. It's giving us a lot of confidence that it continues to come down over the next 6 months with the growing loan book.

Thanks, Scott. Next question. What gives you the confidence that you'll have the same success with acquisitions outside the auto sector as you've achieved with Go Car and AFS?

As a group, we have acquired many businesses over the last 10 years that I've been here. I think that -- the success comes down to we are looking for businesses that are within our wheelhouse. When we talk a little bit about commercial lending, what investors should hear from that is, are ute, a van or maybe a Bobcat. So it's assets that are within our dealer network that we already deal with today. We understand the asset. We understand how to price the asset, particularly if it's a used asset, and we understand where that asset goes at the end of its loan life cycle. So sticking to our strength, given that it's a very large market, we think sticking to what we know and what we know well is -- it gives us confidence that any acquisition will continue to deliver to the bottom line. That's why we would plan to do it. We also have significant organic growth. So I don't feel under any pressure to buy something. I just think that there is going to be a market where there's been a little bit of overexuberance, and we're in a good place to manage a portfolio of receivables if they come to market. And if investors are looking for what gives us the confidence, the New Zealand acquisition, amazing people have rolled into our culture. That business is now over 3x larger than it was when we acquired it. AFS, we acquired that a little over a year ago. It's now grown 70%. We've rolled those people into our corporate culture, and we've leveraged the distribution that we have today. Now we haven't really called this out because it's a rundown book, but we bought the Holden Financial Services loan book of General Motors. We've rolled that into the Money3 distribution network, and we actually haven't needed to acquire any staff for that business. The Money3 core team are able to absorb that in everything they do. So I think it's -- what gives us confidence is knowing what we want and focusing on those things that give us 1 or 2 things: Product expansion. So what will be key is growing our product portfolio within the ones we know, acquired loans for assets; or distribution expansion that would get us into another vertical to allow us to acquire more clients at a cheaper cost of client acquisition. The market right now is trending towards the high end. I mean there's -- you would appreciate there is quite a bit of competition. Competition has driven up the cost of client acquisition considerably. We're just lucky as a group that we have multiple business units, a very large database of well over 0.5 million clients, and we're a well-known brand -- 3 well-known brands. Generally, they've all been trading for over 20 years. So we're able to capitalize on that market presence with our 3 brands.

Thanks, Scott. That concludes the Q&A. I might just hand it back to you for closing remarks.

Thanks, Simon. Just to reiterate, the leading indicator in our business is loan book growth. We have a lot of confidence of our loan book exceeding $800 million by June 30 and exceeding $1 billion within the next 18 months. In order to get there, we need funding. We have secured funding through our warehouses today to get to $950 million, and we're confident with the partners, banks that we have today and our growing equity that we have everything we need for the next level of funding to take us well beyond $1 billion. We also think that we have -- at the heart of our business is a very strong collections culture, which puts us in very good stead to manage any receivables that we've got across our business. All of these things together give us confidence that FY '23 is going to be a record year for the group and that the growth momentum that you've seen over the last 12 months continues given the work that we're doing today. Thank you, everyone, for taking the time to listen to Siva and I, and I know that there's a few one-on-one calls with institutions coming over the next day or 2. We look to answer your questions there. For anyone else, if something's unanswered and would like more information, please reach out to our investors at money3.com.au, email to post that question or come back through Simon Hinsley. We look forward to hearing from you all shortly.

Thanks so much, Scott. Thanks, all, for joining.