Solvar Limited (SVR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Stuart Robertson, and I'm the Chairman of Solvar Limited. On behalf of the Board, I'd like to welcome and thank you for taking the time to attend our 2023 Annual General Meeting of the company. This is our very first AGM to be held in a hybrid format and in the new location in the Melbourne CBD, allowing for greater shareholder participation. For those shareholders attending online, I can assure you that you will have the same opportunity to participate today as you would if you attended the meeting in-person. This includes being able to ask questions through our web phone system, the online platform and also vote using an electronic voting card online. I'll discuss these processes a little later. If you're having any difficulties in navigating the online portal, I encourage you to download the online portal guide from the bottom right-hand side of your screen. If we experience technical issues that impact the online portion of the meeting, I'll assess the circumstances and communicate further with you. If continuing the online portion of the meeting is impossible, you will be e-mailed instructions on how and when to rejoin the meeting if this is occurring. I hereby declare the meeting open. I'm advised by the company secretary that the notices of meeting have been properly dispatched and that a quorum of members is present and call the meeting to order. With us today, we have my fellow directors, Mr. Scott Baldwin, Managing Director; Mr. Symon Brewis-Weston, Non-Executive Director; and Ms. Kate Robb, Non-Executive Director. We also have our company Secretary, Ms. Terri Bakos; Chief Financial Officer, Mr. Siva Subramani; and from our auditors, BDO, Mr. Benjamin Lee. I'd like to start by reflecting on this year's achievements, and we'll conclude with comments regarding the outlook for FY '24. Following my address, Scott Borden, Managing Director, will give a short presentation on Solvar. FY '23 is best described as a year where we had strong accomplishments delivered in an environment of complex global macro challenges. During FY '23, the group continued growing its loan book to $910.1 million, up from $733.4 million the prior year, whilst revenue grew to $209.3 million, up from $187.9 million the prior year. Our strategy of not only growing the loan book, but also diversifying the business, both from a product and geographic perspective has been the correct strategy. In addition, our distribution remained well balanced between direct and intermediated channels, which has been an important focus for the group. The backdrop to these results was the macroenvironment in which we operate. The orders become more unstable and volatile since our last AGM. As a non-bank lender, movements in interest rates have an impact on the group's margins and the competitive environment. Whilst interest rate rises can be added to new loans written, the auto finance lending market is typically fixed rate. This means existing loans or the back book do not reprice and so it takes time for the new loans to become a material portion of the overall loan book. The magnitude and speed of interest rate changes with central bank interest rates both in Australia and New Zealand materially increased in a relative short space of time, had an adverse impact on the group's back book margins. The increased global volatility served to highlight the strength and resilience of our business. We've always focused on being a profitable business and not chasing growth at any price, and that continues to underpin how we grow. Quarter 1 FY '24 continued that approach with the group delivering $6.2 million in net profit after tax and a growing loan book, which ended the quarter at $925.7 million. Our strategic focus is on markets that are under service. At our core, Solvar addresses consumers nondiscretionary demand for finance. Whilst the make of a vehicle is discretionary, the need to have a vehicle for many is not. Families need cars to get their children to school, to get to work and participate in society. We operate in a market that funds $40 billion in annual lending volumes; and we are well placed with substantial headroom to increase our market share in the coming years. In May 2023 we announced that a subsidiary of the Group, Money3, had been served proceedings filed by ASIC in the Federal Court in relation to 5 consumer loans written between May 2019 and February 2021. The matter is still ongoing and therefore we are unable to comment, other than to say the next scheduled Court hearing is for mid-February next year and we are of the view we have appropriate processes in place that comply with our obligations for responsible lending. With deteriorating trading conditions in the second half of FY '23, the group delivered on the revised FY '23 guidance of $48 million statutory net profit after tax. This result was only possible due to the significant commitment of the wider Solvar team. The Group's loan book grew to $910.1 million, up 24.1% on the prior corresponding period. New loan originations of $535.3 million, which is up 14.6% on prior corresponding period and revenue of $209.3 million, which was up 11.4% on the prior corresponding period. The group currently has access to around $1 billion in wholesale funding provided by international institutions and major banks in Australia and New Zealand. Solvar has sufficient capacity to continue growing its loan book as planned. This is reinforced by the group's exceptionally strong balance sheet, providing flexibility to capitalize on opportunities as they arise. During FY '23, the group completed the $15 million share buyback and announced a total of $0.165 dividends, which were fully franked per share for the financial year. With the substantial franking credits available to the company, the Board was determined to maximize the value of these in the hands of shareholders, and therefore, in April, announced an increase in the maximum dividend payout ratio to 90% of net profit after tax. During FY '23, we increased resources focused on compliance, governance, risk and cyber resilience. The expansion in the group’s corporate head count is a strategic investment aimed at supporting our future growth plans. These new resources will assist our efforts to streamline operations and drive ongoing productivity improvements at business unit level. The International Monetary Fund's World Economic Outlook is forecasting advanced economies growth to slow to 1.4% in 2024 as policy tightening starts to bite, but with core inflation remaining stubbornly high and not returning to target until 2025 in most cases. Whilst the Australian market is on track for a relatively soft-landing; growth in the New Zealand market is likely to remain patchy. The impact of the interest rate increases I referred to earlier, along with the inflationary impact on the expenses of the business results in guidance of a full year normalized net profit after tax of $25 million to $30 million for FY '24. I thank my fellow Directors, our Managing Director Scott Baldwin, his management team and the staff of the Solvar Group for continuing to build the Company into a leader in the industry. Shareholders participating today can submit written questions at any time during the meeting proceedings by clicking on the ask-a-question button on their screen and then selecting general business or a specific resolution. Once you finalize your question, click on the submit button. To ensure questions reach us in time, I ask that you submit them during the course of the meeting. Shareholders wishing to participate and ask questions via our web phone facility should click on the ask-a-question button on their screen and then select go to web phone. By then clicking on the green phone button, you'll be connected to the meeting. And by pressing Star 1, you can ask a question specific to certain resolutions or general business. Shareholders participating in-person will have an opportunity to ask questions at set times during the procedure of the meeting. Please note, if you have a question that is specific to a resolution, we will answer it as we address the resolution. If you have a general shareholder question, you will be addressed after the formal business of the meeting is completed. If we are not able to get through all of the questions today or if there are specific questions that would be better addressed on an individual basis, we'll respond to them after the meeting. If we receive multiple questions that are similar, we'll try to amalgamate them into one or choose to answer the broadest question, which will cover off the others. I will now hand over to Scott to conduct the presentation.

Thank you, Stuart, and thank you, shareholders for attending today. We've been through the Board of Directors, but just to introduce the management team. Here with me today is Siva Subramani, the CFO. Since in the last 12 months, we've had Pushkar Pendse join us as Chief Operating Officer. He comes from BMW Finance, building out some of our skills in technology and operations. Tessa Georgis, our Head of People and Culture; Craig and Brian, who run our business units, Money3 and Automotive Financial Services. And you'll hear a lot about our discussing an increase in governance and compliance. Dave Morton as the Head of Credit Risk and Compliance is one of those additional heads to our executive team. The Solvar Group, much of this will likely be known to the shareholders, but we estimate our market opportunity is around $40 billion a year. And that is funded vehicles of all types, commercial and consumer, in Australia and New Zealand, the funding that occurs every year. The industry for the best that we can tell is growing about 1% to 3% a year across both countries. We do feel that there has been a backlog certainly in Australia. I think Equifax, the Credit Bureau has forecast recently, there's over 500,000 cars that weren't purchased over the COVID period. So, we're expecting higher-than-normal new car sales over the next few years. Now why new car sales are important to us? As a primary funder of used vehicles is typically every time a new car is sold, a used car is sold as well, because of the trade-in typically speaking. Our group, we forecast this year we'll fund north of $0.5 billion across Australia and New Zealand. We also think that our market share will continue to grow, particularly as we see a retreat in competition. In both markets, in Australia and New Zealand, we are starting to see other lenders in this space either pull back significantly or stop lending altogether. We think that the strength of our balance sheet and the management of our receivables and our track record of collections puts us in a strong stead to continue to grow our business through this period of time. Just to give you a little bit of flavor about what we are funding. 80% of that $925 million is cars, as you can see there, in the middle. We have a growing portion of commercial lending. That is a mixture of new vehicles and used. Still principally cars, I must add, but for commercial purposes. We have a small portfolio of personal loans, has been there for some times, very strategic importance to the group because what we try to do is bridge the gap between the first, second and third car that a person will buy by offering -- by funding their unsecured needs through that period of time. It hasn't been a part of our business that we strategically look to grow, but it has been important for us to keep consumers dealing with us for their borrowing needs. Our track record, as a group, we certainly have been around for over 20 years now, advanced well over $3 billion worth of funds into secured assets and, more importantly, collected over that period of time. Moving to the next slide. The business units that trade today. So you'll be aware if you followed our history, we acquired a few businesses. But the 3 that are trading today is Automotive Financial Services, which is focused on near-prime consumer credit risk as well as commercial. And then we have the Money3 brand, which provides a consumer product. And you would say that, that is a specialist focused older vehicles and slightly higher credit risk applicants. And Go Car Finance, which does the spectrum in New Zealand, Go Car is only in New Zealand. The assets that sit within that portfolio, just to give you a little bit more color of those that look -- you can see it's predominantly cars. There are motorbikes, [ yurts ], vans in there as well, but predominantly cars. In terms of our key strategy, one of the strengths we see of our business is our collection strength. We have a strong focus in Australia and New Zealand of strong, well-focused collections teams that are there to collect the funds from the customers. We also have a fairly conservatively leveraged business, which we think holds us in good stead through challenging times, particularly when we see the macroeconomic headwinds. The conservative balance sheet is putting us in a good shape to be able to weather this storm and come out at the other end in a stronger position than what we went into this. In terms of -- one of our other key strengths has been a diversified introduction source. So brokers, principally in Australia, but we deal with brokers in New Zealand, dealerships, we have direct relationships with dealerships. We also have relationships with a number of third parties that provide introduction services, typically ones that run websites and collect customers that way. And the final sort of arm to our diversified distribution strategy is direct to the group. So, we've always focused on having a broad spectrum, not just focused on one distribution channel, and that has and will continue to put us in good shape to be able to receive applicants from customers. The products that the group has. Now this has changed slightly over time. So, keeping you up-to-date with what's the other products that the group is offering. You can see there consumer finance with Money3, consumer and commercial with AFS. There is a tiny amount of commercial business in New Zealand, but it didn't warrant putting it here. But there's the focuses for our businesses. And with inflation and rising car prices, you'll note that the loan amounts are creeping up there. The average size loan is much lower. The average size loan in the Money3 consumer vehicle is only around that $12,000 to $15,000. In Automotive Financial Services, it's approximately $20,000 to $25,000, and similar at Go Car in New Zealand. There's been many questions over the last number of months about the interest rates we are charging to consumers. And you'll see there that we have a range of interest rates that are offered to consumers depending on their credit quality. Now that is our assessment of the consumer's credit quality, and that is the range for which we offer those interest rates to consumers. I'm trying to answer some questions before they may come up. But many people have asked, have we become conservative over the COVID period over the last 2 or 3 years. And you'll note that the top end of the interest rate range at Money3 has come down a little bit as we have stopped lending to riskier cohorts of borrowers, but still have quite a large addressable market and quite a large range of credit risk that we are funding today. Some of our historical performance. I always like to start with the loan book here because the loan book is the predictor of next year's revenue. The larger the loan book grows, the revenue will take care of itself through cash flow. But we're at $925 million today at the end of the quarter. This second quarter is typically the quarter where you'll see some good growth, particularly coming into the Christmas period. The standout for the first quarter has been the growth in the Australian business. There has been some contraction in New Zealand. We talked a lot about the headwinds that we faced in our business there as -- which all seem to start from the one-off extreme weather events that they went through in March, April earlier this year. They have impacted customers and our profitability, but -- and hence why we've had a cautious approach to lending there, and that loan book has actually contracted some. But the Australian business has grown, which has replaced all of that and grown through the first quarter. We think that a lot of the issues in New Zealand now are in the rear-vision mirror. We're starting to lend more into that market and start to see some better results coming out of there. We really think Q2 -- the second half of the year, is where we start to see some loan book stabilization and growth in New Zealand, which will accelerate those numbers toward $1 billion. Revenue is a function of cash collections. So for every dollar we collect, a percentage of that dollar is converted into revenue. So really, it's just a function of the loan book. We're quite comfortable with the growth that we've had, we certainly have called out that we think that we have some headwinds, but we'll still grow throughout this period of time organically. And I think one of the other opportunities we see to grow over the next 12 months will be the acquisition of other business assets if they come at reasonable prices. Just to call out a couple of things that we achieved last year or did, note that we paid $0.165 fully franked dividend. We also completed a $15 million share buyback last year, and the net tangible assets behind the company, so this is the equity portion, per share is around $1.62. Nearly all of that money is sitting in the loan book or in cash. Probably far more interest is the last quarter's results -- sorry, this is last year. I was getting ahead of myself. Quite good growth in the last financial year, driven by that loan book growth. I might -- I take it most people have seen this. I will move forward to interest expense and then Q1. What we've tried to do here is give people a bit more color of where our cost of funds are going. So, this is an update from what we put out a couple of months ago. We are anticipating that our -- the debt that we have in place today is sufficient to meet our goals of continuing to grow beyond $1 billion. The facilities that are there today, Solvar will continue to work to try and improve the cost of fundings. But you'll note that over the last 3 years, we've taken the -- if we just focus on the margin from 10% to 5%. So we have improved our cost of funds over a 3-year window by 5%. And I understand the last 10 months that we've lost quite a bit of that with interest rate increases -- base rate increases. But we still think that there is some room there, but it's probably not in the next 12 months. The other thing that has come up in terms of a lot of questions is about how much of our portfolio do we have hedged today, hedged against interest rate risk. One of our facilities is completely hedged, which represents around 30% of our total portfolio. We made a conscious decision not to hedge our high-margin business, but to hedge our low-margin business. And that policy decision stays in place today. And as our business continues to grow and as we continue to increase our market share of better quality applicants, investors should expect to see that percentage of hedged interest rate risk continue to increase. Q1 is where I was jumping ahead to before. Sorry. Revenue. Revenue growth has been good, $55 million. The bit that I'd like people to take away is that the -- as the back book rolls off, the front book that we have been writing is starting to impact and lift our revenue yield on our average portfolio. What I'm trying to say there is that old loans that we wrote in '21, '22 are paying out quite rapidly, which are at lower interest rates than the loans that we are writing today. So, the benefit is starting to come through, and you saw a little bit of that get there in Q1. Across the group, now we have another rate rise that occurred this week. So, there's more to pass on to end consumers. Our experience has been that when -- if we pass interest rates on through our lending products too quickly that our volumes of originations fall off quite quickly. So, we -- every time there's an interest rate rise, we step out over the next couple of months, interest rate increases in our products so that the front book does reprice up at a higher margin than it has been there. It just takes us a couple of months. So we still have more work to do to pass on what is now 425 points of rise in Australia. But we're sort of about 2/3 of the way there. And every time an interest rate increase comes through, yes, it affects around 70% of our portfolio, but we are passing that on, and you should expect to see that revenue yield continue to improve. Bad debt in the first quarter has, as we forecast, ticked up. A lot of that is actually movement in New Zealand. And as I was saying earlier, we expect the second half of this year to be better than the first half of this year, just in terms of bad debt performance as we get to the tail end of dealing with the one-off weather events that occurred in New Zealand. Loan book at $925 million and still growing. Q2 should be a fairly strong growth month for us. Just in terms of the outlook before I hand back to our Chairman, in terms of the market, we're actually seeing a reduction in competition. It's taken us a few years to get to $0.5 billion of lending per annum. We think we'll go north of that this year, again, and that is us taking market share from our competitors. We also think that the market is growing a little bit as well, which will help drive growth into the future as well. And I think the final part is we -- through COVID, we saw a massive amount of stimulus come from governments in both Australia and New Zealand, which had the impact of accelerated repayments to our customers on their loans. The loan book will grow as people trend back to paying out their loans on time, which will also help grow our loan book, and hence our revenue in the future. We've talked about those. We expect our loan book -- so just in terms of the financial outlook, we do foresee our loan book getting pretty close to just north of $1 billion this year. We're maintaining our guidance in -- our normalized guidance in the range of $25 million to $30 million per annum, and we're quite comfortable with where we see our arrears and bad debts trending for this year. And with that, I'll hand back to the Chairman, Stuart, to the rest of the formal part of the meeting.

Thank you, Scott. We'll now proceed to the formal aspects of the meeting. But before doing so, I would remind you all that only shareholders or their appointed proxies and corporate representatives are entitled to vote or speak at this meeting. As each of the resolutions before us today will be decided by poll, I hereby appoint Mr. Jim Kompogiorgas of Link Market Services as a returning officer for the meeting. Votes will be counted after the end of the meeting, and results will be published on the ASX and the company's website. Shareholders can cast their vote using the physical voting card that they received upon registering today or the electronic voting card that they received after validating their online registration. If you're participating online and have not yet received your voting card, press the get voting card button on your screen. You'll be asked to enter your securityholder reference number or holder identification number plus postcode if or in Australia or country if you're outside Australia. If you're attending in-person, you can vote as each resolution is heard. The returning officer will collect your voting cards at the conclusion of the formal aspects of today's meeting. If you are voting online, you'll be able to finalize and submit votes up until 5 minutes after the meeting ends. I'll remind you at the end of the meeting, the proxy votes that have been submitted prior to today's meeting will be set out on the slides shown for each resolution. For some context, the current number of Solvar shares on issue is approximately 209 million. Shareholders have appointed the Chair of today's meeting, myself, as proxy for up to 107 million shares to vote either for, against or with discretion for all resolutions. As indicated on the proxy form and in the Notice of Meeting, my intention as Chair to vote all discretionary or undirected proxies held by me in favor of each resolution. With the member's permission, I would like to take the notice of meeting, including explanatory memorandum as having been read. Now as to the formal business and resolutions. 2023 annual report. To receive the financial statements of Solvar Limited for the year ended 30 June 2023, together with the director's report, annual auditor's report as set out in the annual report. As advised, we have Benjamin Lee, our audit partner from BDO with us today. We have received no questions prior to the meeting on the accounts or conduct of the audit. Are there any questions in relation to these accounts and the conduct of the audit for the company's audits? Terri, have our online or web phone shareholders posed any further questions?

No, they haven't.

Okay. Thank you. As there are no questions, I hereby table the accounts, and we shall move on to the formal resolutions. Resolution 1, remuneration report. This resolution is to consider and adopt the remuneration report for the year ended 30th June, 2023. On screen now are details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Terri, are there any online or web phone questions in relation to this resolution?

No.

Thank you. I will now put the resolution to a vote. Please cast your vote if you wish to vote. Let's move to the next resolution, resolution 2. It's the reelection of Symon Brewis-Weston as a Director. This resolution is to consider the reelection of Mr. Symon Brewis-Weston as a Director of the company. Details of Mr. Brewis-Weston's qualifications, background and experience are contained in the explanatory memorandum attached to the notice of meeting. On screen now are the details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Terri, are there any online or web phone questions in relation to this resolution?

No, there's none, Stuart.

Thank you. I will now put the resolution to a vote. Please cast your vote if you wish to vote. Let's move to the next resolution, resolution #3. Issue of performance rights to Mr. Scott Baldwin under the employee equity plan. This resolution is to consider the issue of performance rights to Mr. Scott Baldwin. Details of issue to Mr. Baldwin are contained in the explanatory memorandum attached to the notice of meeting. On screen now are details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Yes.

I note that that the base for the LTI is $0.15 per share in earnings. I think that's about $31.5 million in net profit. We've already sort of heard that with the repricing of the back book and a lot of the business' profitability sort of should be restored. And I'm just sort of curious why that was the number that was sort of landed on when it just seems as if the repricing of the book as opposed to exceptional performance is going to exceed those -- that sort of profit and subsequently, the growth. So, I'm not quite sure what performance shareholders are actually paying for with respect to those numbers.

Thank you. I might -- so I'm going to just -- Committee Chairman, do you want me to answer that? Or do you want me to take it?

[indiscernible] start.

I'll start it. So thank you for the question. So the LTI obviously split 50-50 between EPS growth and total shareholder return. And on the EPS growth, what you're referring to in terms of the base number that we used.

Yes.

Yeah. And just to make sure we're on the same page, that LTI is vesting over 3 years at a compound annual growth rate has to exceed a certain percentage. I think it's above 10%. I don't have it in front. 12.5%, sorry. To get to that -- per year to get to that number. Now what we already know from the last couple of years is, a large part of our expense line is, to some extent, is market-driven, being interest rates. And so we felt that it was important to have a stretch target that was, to an extent, achievable as well on a compounded annual growth rate. So to your question there, on a 12.5% compound annual growth rate over 3 years on an EPS starting at 15%, you're well on your way back to where we said we would be with a little bit of wiggle room for the known unknown, being predominantly interest rates. So to answer your question, what are shareholders paying for. They're paying for Scott to lead the company to do everything internally that we can do to get the company beyond the $1 billion, beyond the $50 million in net profit after tax number. I don't know, Scott, if you want to -- sorry, Symon, if you want to take some more to that.

At the end of the day, what you're really trying to do is have market measurable data that empirically is very easy to see. So EPS is a great measure. There's a lot of companies in market to that. And secondly, on the other side of the coin, not only this management team, Scott, in particular, have to get a compound average growth rate. But on the other side of coin, they need to also compare to benchmarks in the ASX and to get for Scott to do exceptionally well. So he have to also be at not only 12.5% compound, but he also has to achieve in the top 75th percentile of companies that were indexed against the ASX 200 -- sorry, or 300. Sorry. So that's a dual mechanism. So one is certainly within his control. The second is actually how do our shareholders actually get rewarded beyond that. So, it's a dual-edge. Probably the final point to make is when you're setting these, we -- ultimately, the Board still has discretion. But it's a hefty component there, that's 50% is market comparable as well. So it's a fine line between setting something that's achievable and unachievable. And people often forget those that were set last year is a long way back from where that starting base comes. So these are done on an annual basis. So we get to reset the opportunity for the management team again next year given the circumstances that face and the issues that are facing shareholders. So people often forget that what was set last year and the year before, if you look at that from a management point of view, there's a lot of work to do over the next 12 months to get that anywhere near being in the money. So just looking at one unit set in isolation doesn't always give you the broader picture. So we felt that setting that target is a -- was a stretch for the team to get to, but not unachievable. And if we did that in conjunction with reaching the 75% comparable market share, then in terms of performance on a total shareholder return basis, then the management team would have done a pretty good job over the next 3 years. Thank you for the question.

Is there any further questions? No. Terri, are there any online or via web phone?

No, there's not.

Thank you. I got little ahead of myself there. We'll now put the resolution to a vote. Please cast your vote if you wish to vote. Okay. Ladies and gentlemen, that concludes the formal business of the meeting. The directors and company management would be pleased to take any questions you may have regarding the company after the formal closure of the meeting. If you have not yet voted and wish to do so, please vote now. Voting will be open for 5 minutes after the conclusion of the Q&A session. I thank you all for your attendance, and I close the meeting at 2:35 p.m. We'll now answer any questions from shareholders, including online questions and web phone. Terri, are there any questions that were submitted during the meeting?

At the moment, no, but I'm waiting for those to come through. But we actually have a few questions that were previously posed to us that we might address in the interim.

Let's go to these questions, and thank you for those who have submitted the questions. Is there any update on ASIC proceedings with management's view on likely financial and operations impacts? Scott, I will pass to you for that.

Thank you, Stuart. In regard to the matter with ASIC that's at hand at the moment, there really is not a lot that we can say because it's an open matter. Once there's something that we can comment on, we will make a market announcement. But I'm not in a position really to comment on that at this point in time. I will add, though, because in the second part of that question is, what are we doing -- what are we doing in our business today in response to the action brought by ASIC. We've called out in our expenses and part of the reason why we said our profit would be a little bit lower this year is an investment in a number of staff focused on compliance and governance like Dave Morton, who you saw in my executive team. There's also other staff that we've brought in with specific focus on internal audit. This is not a direct response to ASIC, but it is about us as we continue to grow, investing in compliance and governance for the group so that the business is well placed and on a well footing to continue to grow through this next cycle and have good governance and good controls within our business. I hope that answers the question.

Thank you. Next question. An update on the contracted margin position on the back book and whether there has been any improvement or further deterioration. Siva, I might ask you to respond to that question.

Thank you, Stuart. As we all know that there's been significant increase and actually accelerated increases in interest rates by the Central Banks, both in Australia and New Zealand. Over the course of FY '22, the rates increased, and there was one recent increase last week. Why I kind of highlight that is, in the FY '22 or FY '23 results, we had a partial impact of these rate raises as they were moving up, while in FY '24, we are feeling the full year impact of that. So that's primarily affecting the back book in terms of the margin. So the interest rate increases will directly affect the margins. What we are doing with that is, we started repricing our front book. So the back book is at a fixed rate, so we can't reprice the back book. So we alternatively started repricing the front book, and over the course of FY '23 and FY '24, and we are continuing the process of repricing it. What this means is the benefit of these repricing will start to come in FY '25 and '26 and partially in '24 as well. So this is one of the reasons why we had to deal with a significant reduction in our forecast guidance for FY '24 as in the timing of the interest cost increases predominantly coming in FY '24, while the benefit of the repricing coming in FY '25 and '26, which also gives us the confidence that by FY '26 we should restore a lot of the lost profitability that happened in FY '24 or expected in FY '24.

Thank you, Siva. Another question. I'll do this first, and then I'll go back to that. Any improvement in the operations of the New Zealand business. Scott, I might ask you to answer that question.

Thanks, Stuart. So over the last 6 months, we've made a lot of effort to change things in New Zealand. The first one being contracting the loan book. We have looked at the bottom credit risk portfolio that we have and we stopped lending to that segment, given that the country is in a recession and we think that things are going to deteriorate further. We also have made some changes to the management team in New Zealand and have leveraged pushed your strength there in terms of separating out and having focus on the collection side. We have really strong collections in the first quarter, which is why you've seen some good results coming out there. Also in the process of retiring some of the software in New Zealand to drive some operational efficiency in the group, we expect that to come through by the end of -- by Christmas is when we will have put notice through so that simplifying that business, trying to make it look a little bit more like the Australian operation and taking out any complexities there. There have been the key initiatives. I'm saying that I think this year New Zealand will continue to contract, but we are getting it ready for a period of growth. As I called out before, about some of the changes in government in New Zealand, there are opportunities that we think will come through with a new national government in New Zealand in the new year as they start to change policies, particularly around petrol-powered cars and removing of some taxes that we think is going to drive some growth in that better credit quality consumer segment in the business in New Zealand.

Thanks, Scott. Next question. You recently announced that legal action is being taken against Solvar. Are you able to update the progress of this to provide your most likely and worst estimates of its impact upon the company's profit? I might just jump in there and say that, look, it's too early for us to tell. It is ongoing. As I said, the next hearing is in February. What I will say is that it relates to 5 loans in the period where we wrote over 36,000 loans in that period. We're confident about our processes and our trading regime that we have in place. But as to estimates, it's way too early to get into that at the moment. The next question, you recently announced that a dip in margins was expected in the '24 and '25 financial year due to changes in interest rates and delays with passing these on. Are you able to provide estimates of the likely impact upon the company's profit? Scott, I want to start with you.

Look, we -- the headwinds that we identified coming into this year were principally bad debts, inflationary pressures in our OpEx and cost of funds. And the best estimate at the conclusion of going through multiple scenarios there was that we thought profit this year would be between $25 million and $30 million. We maintain that. You'll note that we did a slight increase at the end of the first quarter, because things are trading well, in line with what we expected and last year, we produced $48 million. So depending on where we land, we still maintain that we are going to be down around $20 million this year as a result of those 3 headwinds and a big part of that being the funding cost. I will add that, please look at the revenue yield that is coming off in Q1. It has improved, and we anticipate that shareholders should see that improve depending on the product mix throughout the rest of the year.

Thank you. One more question online, and then I'll ask the room. As the Solvar loan book grows, interest rate risk is much more important to the company, because nonequity-funded loans represent a much bigger proportion. What are the considerations to decide -- or in deciding the company's interest rate hedging policy? Should we have a clearer hedging policy given debt funded loan book growth going forward? Would higher proportion of hedging help reduce the earnings and share price volatility? I'll start and then I'll throw it to Scott and Siva. So historically, we've obviously been predominantly equity-funded as we moved up the credit curve into lower-yielding products and some more near-prime lending, which is technically a lower-margin business, that is fully hedged. I think Scott made the point previously, but that book is fully hedged. We chose and have chosen not to hedge the higher-margin business for a few reasons. Predominantly, firstly, hedging within a warehouse is not necessarily possible. We have warehouse facilities. It's not necessarily possible when you're doing a nonconforming loan book. So that's a hedging policy at the overall corporate level. So that's a little bit more complicated in doing that. Also, that we felt there was -- if we had hedged at the time of the rising interest rates, the cost of applying those hedges -- hedges aren't free. So the cost of applying those hedges would have reduced, to some extent, our FY '23 numbers as well. So, we took the decision not to hedge that book. Siva or Scott, I don't know if you want to add any more to those.

I might let Siva. Some analysis on that?

And I'm happy to sort of also share what our hedging policy as well. So to Scott and Stuart's point, where the margins in the business are low, we do go for 100% hedging. And across the book, as of today, that would be roughly 30%. But going back to the policy, we look at 2 key factors. One is how much of the portfolios within the book are leveraged. So i.e., how much of variable rate that we have. The other part is to do with the price elasticity of our lending products. So as in whether we can increase the forward book or front book, and that will compensate for the increase in the interest rates and the back book. And that has been part of the strategy that's been there for quite a number of years, and we'll continue to apply on the back of these accelerated interest rate rises to see whether we need to increase those limits than what we had in the past.

Thank you. There's no more online questions. I'll ask the room if there's any further questions. Sure.

So I was looking at [ Credicorp's ] results the other day, and they're sort of having a devil in car finance, and they're pretty familiar with sub-prime customers. And they didn't really have much detail, but they did mention that they were sort of pulling back from the market and the reason stated was to do with used car pricing. I know you guys don't seem overly concerned about that, and I was wondering, well, I guess the impact of used car pricing potentially on the quality that the security -- that the business holds, and why they're pulling back, yet Solvar is not.