Solvar Limited (SVR) Earnings Call Transcript & Summary

This meeting is being recorded.

Good morning, and welcome to Solvar Limited's First Half of Financial Year 2023 Investor Presentation. On the call today, we have the company's CEO, Scott Baldwin; and the company's CFO, Siva Subramani. Before I hand it over to the guys, I'll remind you that you can ask questions following the presentation and do so via the Q&A button at the bottom of the screen. Scott and Siva, I'll now hand it over to you to get started. Thanks very much.

Thanks for the introduction, Simon. And we appreciate all the investors and other parties interested in our story joining the call today, and we will endeavor to answer all of your questions. So thank you for joining. Let's start with what is probably the elephant in the room and talk about the change of guidance. By now, you would have had a chance to read the media release and look at our investor presentation, where we have adjusted our guidance from $52 million back to $48 million NPAT for the full financial year. This is principally due to 2 one-off events that we see impacting our business. Firstly, and probably the largest impact, you would be aware that there has been quite extreme weather events in New Zealand. And like many businesses, we will be impacted by this. It -- from our point of view, this is an extreme one-off event. We've had floods here before. But what we've seen with the floods, rains and cyclone in New Zealand has had an unprecedented impact on our customer base. And we are predicting that we will have to see a blip in terms of our bad debt as a result of that extreme weather event in New Zealand. We believe it's one-off. We believe it's prudent to guide down as a result of that one-off event in New Zealand. And we also think it's an event that requires us to be quite generous with customers that are impacted by floods. So first -- the first main reason for our change of guidance is that extreme weather one-off event in New Zealand. The other one, you would have seen in our announcement last year that we increased our debt exposure with the introduction of a mezzanine facility. As part of the agreement with that facility, we drew down $50 million. We drew that down in anticipation for some organic growth and an acquisition that we thought was going to proceed. Neither of those came through. The organic growth really didn't start to pick up until September and continues through to today. You will see in the results that we'll talk about in a minute, we've had an outstanding Q2. And we've actually had an outstanding January result across our business as well. There's -- being mezzanine debt, it is pricey debt within the stack. However -- and we are bearing the cost of that $50 million over the course of this year, which will provide a drag on the P&L. We do see organic growth and other opportunities as part of our capital management plan to deploy that fund into our loan book. We anticipate when fully deployed that, that will produce an uplift of revenue by over $12 million. We've called that out in the media release in the presentation. So you can see the impact, the positive uplift. We just haven't -- we've got the cost today, and we haven't seen the uplift. We did think it was prudent to draw that down at the time considering we're concerned about availability of cash this year, and it puts us in a very strong position. We have $110 million of unrestricted cash that the business can use to deploy in many initiatives, primarily organic growth, any potential acquisitions or the share buyback or other endeavors that we see. If shareholders are looking for any sort of confidence across the board in our business, you will note that we -- the strong measure of confidence our Board took was the lifting of the dividend. Cash has been very strong across the business. Cash collections have been exceptionally strong over the first half. We are -- and as a result of that, we've increased the first half dividend by 25% to $0.075 for this first half of the year. With that said, I'd like to take you through the presentation. I'm assuming that there's quite a few investors on the call that are new to the company. So we will sift through a bit of background and then talk about the first half results. So as you'll see on the screen here, just an overview of the company. The Solvar Group, which is a collection of 3 brands, has been trading for over 20 years now. We have settled well over 1 million loans. And in terms of automotive, which is our core focus business, we settled over $2 billion in automotive loans, funded well over a couple of hundred thousand motor vehicles. And a stat that I'd like to refer to, if you want to see what our market opportunity is and you look in Australia and New Zealand today, we currently are funding 1 in 350 vehicles. It is a very large market. There is a huge opportunity for us to continue to grow. We believe that market opportunity is north of $40 billion a year when you add commercial in there across Australia and New Zealand. We're only a very small slice of that. And as we've broadened our brands and our credit appetite, we address more of that market every year. You'll see further in the presentation, we talk about our growing presence in commercial lending, but we are a business that principally provides secured and unsecured consumer loans and secured commercial loans. And by commercial, I mean loans for vehicles, typically huge vans and light commercial vehicles. One of the core -- 2 core strengths of our business that set us apart, given our journey, we have an exceptionally strong collections focus in our business. We have a large customer care team of over 120 professionals, which we think puts us in very good stead in a changing credit cycle that we will manage to be superior in our cash collection compared to many of our peers. The other part of our core strategy that separates us is we've invested over a number of years in integration with third parties, typically through API integration with numerous third parties that we are able to garner applications for automotive finance from a variety of channels, be it websites, dealers, brokers and other lead generation sources. If you want some evidence of our track record as a business, the Solvar Group with its roughly 20 years of history, this is what we've been doing over the last 5 years. I'd like to start with the loan book. Loan book is the leading indicator of what you should expect to happen with revenue. So the way our simple business works is we lend money for a car, it adds to a loan book. You'll see that we've had very good loan growth over the half, nearly $100 million of growth and most of that occurring in the second quarter. Loan book is sitting at $830 million. You can see the compound annual growth rate with that $830 million. We're predicting that we should get at least another $70 million of growth over the next 6 months. That will put us in a very good stead to continue that sort of growth in revenue the following year. So we originate the loans, loan book grows. As Simon called out in the introduction, one of our biggest challenge with loan book growth has absolutely been the strong economy that we've seen in Australia and New Zealand, where many of our customers have more disposable cash than we're used to, and hence, they're paying down their car loans quicker. But you'll see long-term average there, 25% -- 24% growth, I should say, in loan book. And the lagging indicator of our results will be loan book growth, which gets followed by revenue. So I sit here today knowing that you should have strong revenue growth next year off the back of that loan book growth. The other number I want to take you to is cash collections, $243 million, $244 million collected in the first half. We expect that to be similar in the second half even though that we had some loan book growth. As COVID stimulus comes off in both countries, we are anticipating still very strong cash flows across our business, but we're expecting that to taper a little bit. Earnings per share and DPS, I'm sure you're well aware, we carry a large balance of franking credits, which gives us a great ability to continue to pay dividends. You've seen that we've increased dividends of $0.075 for the half, really a measure of confidence of the Board about the position and the cash flow of the business. So moving on from the financials. As a group, we've made a conscious effort over the last 12 months to really increase our philanthropic and sustainability efforts. We've partnered with a group called Trace where they are planting trees, educating our staff and working through ways for us to get to a carbon-neutral status, which we achieved at the end of last year, mainly through offsetting the carbon that we produce. So we are working on reducing our carbon by changing light fittings and other things, but offsetting that. The other part I wanted to call out is we now donate to charity $10 from every loan that we settle in the business. This is a significant increase from where we have been in the past and part of our policy of being a good corporate citizen. We have, across Australia and New Zealand, 8 core partners in terms of our charitable giving. And we also sponsor a number of staff-initiated events as well. So our first half results, revenue is up 13%. The best indicator of where revenue is going for future periods is go back and look at that loan book, and you can estimate that out from there. EBITDA has been good, and that's principally off the well-managed OpEx figures and bad debts being at the bottom end of our target range. We are calling out our bad debts. We'll still stay within our 3.5% to 4.5% range. However, we are expecting, as a result of that one-off event in New Zealand, for it to tick up over 4% for the full year, hence, the change in guidance. You'll note that our NPAT margin has come off a little bit. Principally, that is the result of that one-off drawdown in mezzanine funding without the commensurate revenue coming from that as well, but we expect to see that normalizing in FY '24. Probably the other big highlight that we've put some time into is changing the group's name. You'll note that we're now called Solvar, a collection of 3 brands that provides secured and unsecured car loans as well as commercial loans. It's probably self-explanatory, this slide, I will call out the growth in revenue, 13%. We expect that to be quite strong in FY '24 as a result of that loan book picking up. The movement in impairment provisions, that is as a result of growth. So we -- across the group, when we write a loan, we take an upfront impairment provision. For the Money3 business, we also take all of the costs that originate in that loan and they're expensed in the period that the loan is written. So there's quite a bit of upfront expense that's gone through as a result of the uplift in originations that principally occurred in Q2, and the benefit of that growth will start to flow through in future periods. We have diversified our debt funding from where we were 3 years ago. We are now not expecting more facilities to be created. Shareholders should look forward to probably a consolidation back to 4 facilities across our group as we tidy things up across our stack. And when you see that come through in terms of the margin, we're expecting, particularly in New Zealand, to see about a 100-point benefit come. Most of that will start to benefit the business in FY '24, not this year. But there's 2 points to note from this slide. We have a lot of headroom to continue to grow, $335 million in the facilities. And at December, we had $110 million of unrestricted cash, unrestricted being that we can pay it in dividends, we can acquire a business or use it for organic growth. And just calling out again that you should expect some margin improvement in our cost of funding to come through next year as we, principally out of New Zealand, as we restructure that business. Strong loan book growth, particularly in the second quarter, continuing in the start of the third quarter. January has been very strong, which when we look at -- and I am calling out Australia there. New Zealand has been somewhat flat, which you will see from the results, and also the other things that are happening in New Zealand may -- has been somewhat flat, but the Australian business has performed exceptionally well. In a market where if you look at the credit bureau statistics suggesting that there's been a contraction in automotive applications for finance, the Solvar Group has been accelerating its growth through this period, looking at the rearview mirror that many of our competitors that I think are struggling with this changing credit cycle. So it has been a strong growth period for us. We will continue to price our new receivables, our front book prudently for growth and for margin maintenance across our business. Loan book quality. Look, you would say that our loan book quality has been stable and continues to be. The growth in better credit quality applicants is starting to come through. As you've seen over the last 2 years with the acquisitions that we've made, we are delighted that in this current environment that our loan book continues to perform very well. Our customers are in good shape. Employment is very strong in both countries. And if I look forward, there's a lot of signs that it continues to be that way, particularly in New Zealand as there's going to be a significant investment in cleanup there. So I'm expecting to continue to see solid employment across both areas, which will continue to drive loan book quality improvement on a minor scale, but across our business, we anticipate into next year. Our outlook. Siva and his team have done a lot of work on improving our debt funding stack. As we said earlier, we think that investors should benefit in '24 from improving cost of funding in terms of margin. So we understand that the base rate is going up. We understand that it's gone up faster than we anticipated like many, but we're also working with our debt funding partners that as our credit quality improves and as we borrow more, that we are able to offset some of that with the margin improvement across our business, which is a testament to the work that Siva has done in improving our access to debt. We have a number of partnerships that we've been working on for some time. For those that have followed the group, as stock starts to return to normal, we're expecting to see some growth in funding of new assets, particularly in New Zealand, and that's quite exciting for us. It will drive another channel of growth within the business. Just calling out, the $110 million of unrestricted cash gives us lots of optionality to take advantage of the market at this point in time to either grow organically, acquire businesses or take capital management and issues there. Just in terms of the financial outlook, just to wrap up, we're expecting to see good growth. You can look at the -- in the appendices there to see each loan book and how they performed over time. But we're expecting to hit around that $900 million, getting closer this calendar year to the $1 billion target we've worked on. And then we'll start sharing with investors our next growth aspiration after there. You can see from the work that we've done that revenue should exceed 10% growth next year. It is a lagging indicator in terms of our results from loan book growth, but you can already see the work we've done that it's going to go up by at least 10%. And the second half, we think will add more -- we'll accelerate that growth further, which will drive revenue growth beyond that in FY '24. Bad debts have been exceptionally good from our point of view, trending at the bottom end of our longer-term range. Just stressing that while we see a one-off event in New Zealand as a result of the extreme weather events, we still believe our bad debts will be within our target range of 3.5% to 4.5%. And as you'll see from the previous slide, there's no indicators that we see on the horizon that suggest that bad debts are going to balloon out other than that one-off event in New Zealand. Just reiterating, net profit after tax guidance of $48 million, as discussed at the start of the call. And I'll hand back to Simon if there are any questions of Siva or myself.

Perfect. Thanks, Scott.

First question is from Jon Higgins at Shaw and Partners. Can you quantify or bridge for the guidance change, i.e., the effect of New Zealand and mezzanine debt?

Look, New Zealand, we see as more than half of that reduction of $4 million. So we've changed our guidance by about 7%. We think -- I mean at this point in time, it's still unfolding. We know from our staff that power just came back on in New Zealand. So there's still a few days before the full extent of the bad debt exposure comes out, but we are predicting somewhere between $3 million and $5 million of the impact as a result of that event. If you look at the -- sorry?

No, I didn't say anything.

If you look at the mezzanine debt facility, full year, we expect there to be roughly a $6 million impact as a result of that. And the benefit of that won't come this year. We will carry the cost. It does mean that we have that unrestricted cash balance, which allows us to take on some of those initiatives. But the full year impact of that is around $6 million.

Great. Thanks. And just drilling down a bit further. A follow-up question from Jon. Can you just be clear regarding the outlook on NPAT, $48 million in NPAT is statutory or underlying? Start to the first half was $26.9 million and underlying ex ForEx was $25.7 million.

Yes. And you'll note that the largest change between last year and this year, and those 2 numbers quoted is our increasing interest rate cost. So in terms of the underlying business, if you take out those 2 one-off items, we would have been at $52 million. If you add the benefit of the $50 million back into our loan book, we expect a further uplift of around $12 million of revenue. And you can see that our typical margins would apply there that we would expect a mid-20% margin to come out from an NPAT point of view out of that $12 million, so driving on top of the $52 million from there.

Great. Thanks, Scott. And we had a question from a number of people. Just with regards to M&A, what are you sort of seeing in terms of opportunities? What type? Is it new products, distribution or loan books at discounts?

I would say that expectation has been quite high in terms of valuation. If you look at the group's valuation today, it is challenging. I mean, as a result of today, it is likely that our share price had come off a little bit. And one of the hard things for the Board to consider is given that we are trading not much above NTA, deploying that capital into share buyback is certainly prudent. We are looking at acquisition opportunities out there that we haven't been able to conclude any of them at this point in time. In terms of what do they look like, our desired growth, as we've highlighted a few times now, is to grow in the commercial sector along with our consumer businesses. So that's certainly an area of interest for us is to have another arm of our business that looks like a strong and growing commercial product. You'll note that we call out in here that our commercial product that we do have today has doubled in the last 12 months, it's around $30 million, and it is growing, but we see an opportunity to bolt on to our existing business a commercial opportunity.

Great. Thanks, Scott. There's a question, do you still have confidence you can manage your funding costs and NIM in a rising rate environment? The better pricing on the new loan facilities don't appear to have provided much of an offset in the first half.

You've got to dig into that and normalize out the impact of drawing that mezzanine facility. I mean we're a business that is still fairly lowly levered. And you're right, there's a -- in the way our business has been performing in terms of setting up the funding facilities is we've been able to gain access to funding through debt to continue to grow the business. But as we're highlighting here, sometimes, the cost comes first and the benefit comes later, and that's what we're expecting to see here. So funding benefits will come through, but I take on the point that particularly in the first half, investors haven't enjoyed that benefit.

And just to follow on from that, the 100 bps on the funding cost benefit in FY '24, is that across the entire book or just for the New Zealand book?