Solvar Limited (SVR) Earnings Call Transcript & Summary

Good morning, everybody. It's Tom Ng here, Investor Relations Manager at Solvar. Good morning to everybody. Thank you for joining our call for the first half FY '24 results. On the phone today, I've got the Managing Director and CEO of the company, Scott Baldwin; and the Chief Financial Officer, Siva Subramani. Just a couple of admin points before, then -- firstly, Scott, if you can just unmute to make sure that we can all hear you.

Good morning, Tom.

Perfect. So just everybody on the line, a couple of admin points before we start the call. First one is, you can ask questions at the end. Scott and Siva will run through the short presentation. [Operator Instructions] So with that, I'll hand over to Scott and Siva.

Thank you, Tom, and thank you, investors, for joining us today. I understand that some people had some challenges accessing the link to get into the meeting today, so apologies for that. It looks like there's quite a good attendance. So thank you for taking the time to listen to us. Maybe if you go to the first page, Tom. Okay. So let's talk about the highlights of the business and how we've been going over the first -- the first half of the year. We'll start with the loan book, $942 million of receivables is where we closed out at the 31st of December, really good result, good growth. We started the financial year at $910 million, grew to $942 million. Most of that growth -- nearly all of that growth, I should say, has come out of the Australian business. Some $58 million of loan book growth has come out of the Australian business. And as we planned, in New Zealand, there's actually been some contraction. So while the loan book has grown some $30 million, $58 million has come from Australia and a $27 million reduction in New Zealand. This is all in line with our focus to grow the Australian business given the macroeconomic headwinds that we're facing in New Zealand. Just moving on from the loan book to originations. Originations in Australia, principally flat over PCP. While in New Zealand is just started to highlight, we've certainly initiated a review of our position in the market in New Zealand, which has meant that we are not -- we are continuing the right loans, but we certainly scaled back our new monthly originations. Our plan in New Zealand is certainly to start with reviewing our people, then our processes and our products that we offer in New Zealand. And while that is underway, it's why you're seeing the reduction in the volumes for the half there. We continue to review that. What we're seeing in the market that's driving our originations, we're certainly being very much focused on improving the quality of our loan book base given the macroeconomic headwinds, which has meant just a lot more work going into the credit acceptance of our business and looking for ways to improve the overall credit quality of the business. I know that you will look through to the credit quality slide, which Siva will talk to, and you will see a slight deterioration, but we're very happy with where we are. We are still in a very good position in terms of our overall credit quality, our cash flow and our business and bad debts. On new originations, we're expecting a good second half. We're expecting, in the Aussie business, to continue to see good monthly originations coming out of the business now. We saw last year, a record year for new car sales. And what we tend to see there is that creates a used car sometime in the future after it gets traded in and then resold. So we are seeing good demand in both Australia and New Zealand, we are seeing less competitors in the market, but we are certainly seeing a competitive market at the moment, even though we're in that macroeconomic backdrop of high inflation. Moving on to cash collections. Cash collections, $270 million, one of the strongest halves we've had for cash collections. I really want to call out New Zealand. It's the strongest 6 months of cash collections that business has ever done, some $53.7 million collected in the 6 months. To put that in context, over the last 6 months, we've changed the leadership team in New Zealand. We've put some new people in place in terms of focusing on the executive of that business, with a real strong focus on cash collections. I feel we turned the corner in New Zealand and certainly in terms of picking up our cash collections over the half. The context I'm trying to give here is we started this period somewhat challenged compared to other halves. In a lot of the assets, the cars that had been repossessed had some flood damage. So over the last 6 months, we have seen a lower price for our assets than we would normally hit as they're repossessed and sold. All of that is starting to normalize now. So what we come into second half, which is a strong expectation of good cash collections coming out of New Zealand, good prices for our cars that are then resold as we've dealt with the ones that were affected by the one-off weather events that we saw at the start of 2023. And we also are feeling the productivity benefits of the dedicated focus of the new team over there. Let's move on to revenue, up 6% year-to-year on PCP, $110 million, good revenue. The best indicator I can give you of what revenue looks like in the second half is to go back to the loan book. When the loan book grows, it drives higher cash collection, which then drives an uplift in revenue. So given that our loan book is growing, we've seen a very resilient consumer continuing to pay their loans down quite quickly. We anticipate revenue going up again in the second half. Net profit after tax, underlying net profit at $14.6 million. Just to call out here the $2 million of difference between the statutory number and -- sorry, the tax effect of $2 million to $14.6 million is the fees associated with the regulatory action, the legal fees associated with the regulatory action is currently afoot, so we don't anticipate them being there. So we're trying to take them out of the underlying business so that you can see how the underlying business is performing without them there. Moving on to bad debts. So bad debt is 4.2%, well within the range that we target, the 3.5% to 4.5%. Bad debts are up principally because of New Zealand. If you look at PCP, New Zealand had an over $3 million uplift, even though their loan book declined. This is a result of us, I would say, the tail end of what we saw with the extreme weather events as well as some resourcing challenges in that business as well. So as we start the new calendar year, why we're optimistic that New Zealand's bad debts don't look the same in the second half as we have a new team leading our collections activity in New Zealand. We also have dealt with the last tail end of customers that were affected by extreme weather. And a lot of that has come through as write-off. The Australian business, yes, as it starts to normalize, we're coming off a historically low bad debt profile as a result of COVID when we had all that stimulus in the market. But just compared to PCP, the bad debts in the Aussie business are up $2 million, which I think, given the loan book growth, is still well within our target and [ schedule ]. I'm not really mentioning the AFS business, I think bad debt for the first half was about $100,000, so it really is immaterial relative to that business given that it's a very prime loan book. So just talking about our focus across the group over this half and the last half. We have spent a lot of time looking at our product that we offer to consumers with a strong focus of lifting the minimum credit acceptance criteria across our business, trying to drive consumers into our portfolio that are more resilient that can deal with any potential recessionary environment we might have. We've also invested quite a bit in technology. You'll note -- I'm sure, as you start to go through the accounts, you will note the increase in operational expenditure. There's about $800,000 to $1 million that we spent through projects on technology over the half. So firstly, what we did is completed a project we started a little over 12 months ago now to move all of the Australian businesses onto a single loans management platform. That is now complete. We've also retired quite a lot of website infrastructure. So if you are looking at our variety of websites, given the acquisitions we've made, they were managed by a number of third-parties. All of that infrastructure will now sit on a common content management platform and common infrastructure so that we can make changes there quicker and easier. And just to round off technology because we will talk a bit about uplift in expenditure over the half, we have commenced the project seeking to get certification ISO 27001 certification. But there's also a program of work that sits around that to make sure that our infrastructure is as resilient as it can be from cybersecurity attacks. Anyone that follows the media would be aware that so many companies are experiencing challenges as a result of hacking and cybersecurity. So we have made a significant investment in both internal resources as well as engaging with third-parties to improve our posture from a cyber resilience point of view. And just closing out the highlights page, we are paying a $0.05 fully franked dividend which will be payable on the 19th of April. If we just go on to the next page there, looking at Group performance. Strong growth over a number of years in the business. And if we start with the loan book again, we expect to see the Australian business as we focus on it, continuing to drive growth in those receivables. You'll see at the end, we sort of estimate somewhere between $950 million and $1 billion is where we think that, that loan book will finish at the end of the year. Obviously, market will dictate where that lands. I really want to call out our very strong cash collections in New Zealand is part of the reason why you will see that good revenue coming through in the first half and very much evidence that the changes we've made to the management in New Zealand are starting to work and drive those changes to the business. As we continue to review the operations in New Zealand though, our intent is to is to continue at the reduced level of monthly originations while we make some further changes to our business. Just finally on the Group performance slide. I know many of you will be looking at how are we going in terms of pricing across our product portfolio. All of our businesses have lifted the pricing that they charge customers over the last 6 months. And that is ongoing work. It will continue to happen. You will note that the yield on our portfolio deep lift coming into the first quarter, in particular, and that has sort of maintained at that level throughout the second quarter. Our business units continue to do -- they do see competition. There's no doubt that some of the bigger players in the space with strong balance sheets are not passing on the full impact of that, which creates a bit of competitive tension, but we continue to reprice in small increments and at the same time, try and manage our monthly volumes as well. Just moving on to the specific slides on country performance. Let's talk about the Australian loan book. We do know that coming into this half, there will be strong competition, but there will be less people competing for that market. And we think that puts us in good stead to take some market share. We're also looking at our products, continuing to focus on products that complement our spectrum of credit quality and looking to write more business in that lower credit risk segment over there. Just looking at the New Zealand revenue. That revenue has come down. Investors should expect that to come down again in the second half and be offset by growth in the Australian business coming down because we have worked on, firstly, improving our funding stack. We have 3 funders in New Zealand. We are working towards reducing that number and improving just the efficiency of that as well as the efficiency of our people by looking at our processes and how they operate and work there. I think that is working well. New Zealand cash collection is up over $1 million, even though the loan book has declined compared to PCP. So certainly see New Zealand improving coming into the second half, but Australia continuing its growth. We'll just move on to the financial results slide. I'll hand over to Siva and he will take you through the results and explain a bit more of that movement as a result of the regulatory action that we've taken, explain the difference there.

Thank you, Scott, and good morning, everyone. As Scott mentioned in the highlights section -- I'll touch on some of the key points in the financial results section, having covered a number of them in the previous slides. The headline message is, as Scott mentioned earlier, the results of our Australian operations are growing very strongly, both at the topline as well as at the bottom line. The contraction in the loan book in New Zealand has resulted in a lower contribution of NZ to the group results, and that is something we can see in the net results of our financial results. Now again, before I go into each line item in specific, you would note that we have normalized the costs related to the regulatory legal action in order to show what is our true underlying performance of the business. And that's at $2 million is what you see in the adjustments column in the format of the financial results. Touching on some of the key points on each of the line items. Revenue grew by 6%, with Australian operations growing revenue by a strong 14%. Bad debts has increased half-on-half pretty much driven by the bad debts in the New Zealand operations. In Australia, the bad debt ratio to loan book has been quite stable at around 3.5% on an annualized basis over half-on-half. Operating expenses, there are three key factors that has contributed to increase in operating expense, starting with the employment cost, there's been wage inflation, which we have to deal with as well as the increased resources in our risk and compliance function, and cyber. There has also been a general increase in our supplier pricing due to inflation that we had to deal with during this current financial year. And finally, the $2 million legal costs around the regulatory action, which is what is normalized to ensure underlying profit is the third contributor. Interest expense, as you can see, has grown half-on-half, but it is below our budgeted expectations. As you may recall in our profit guidance, we didn't mention that we had -- we had taken into account two rate rises. So far, there has been one rate rise that's benefited compared to our expectations. And secondly, we have consciously used more of our free cash balance to support loan book growth as opposed to borrowing more. So these two factors has contributed to the number being lower than our budgeted expectations. However, compared to last half, it still appears higher. And as you may appreciate, there were a series of rate rises that happened over the course of last 18 months, the full year effect of which is what is contributing in the current half. Moving on to the debt facility slide in Page 8. The key message here is we are in the process of rightsizing the debt facilities in each of our business units aligned with the growth trajectory as well as to manage cost and complexity. In Australian operations, we are in the process of expanding the facilities from $600 million towards the $700 million mark. And in New Zealand, you'll see the opposite. We currently have 3 facilities, and we are in the process of consolidating them into 1 facility to manage cost and complexity there. At 31 December, we still have -- the free cash position was in excess of $50 million. And as mentioned earlier, we will continue to use our free cash in the near future to fund loan book growth as opposed to borrowing more. Moving on to next slide, on loan book quality. I think the key takeaway message here, to Scott's point earlier, there has been a 1% -- circa 1% deterioration in the loan book quality when you compare to June 2023 to December 2023, which is effectively moving in the watch list zone, away from the strong category. However, as you may see on the slide, compared to the pre-COVID levels, the strong category has been performing quite well, which is the bottom bar in the graph compared to the top bar. And this is despite strong increase in inflation and tight macroeconomic conditions. So overall, the portfolio has been maintaining quite well across all levels despite these challenges in the last few years.

It might be worth pointing out, too, Siva, the movement in provisions. As a result of that, you have taken a stronger provision against our loan book to ensure that we have covered that deterioration.

That is correct, Scott. And our bad debt has also been within range over the last few years, so that's a good news story as well. With that, I will hand it over back to Scott.

Thanks, Siva. So just in terms of, I guess, the elephant in the room, our regulatory challenges, I've got with us today, Leath Nicholson, our external legal counsel; and Kate Robb, our Chair of the Audit, Risk and Compliance Committee. I asked them along today just to speak particularly to the regulatory matters that are currently afoot. And I think what I'll do is I'll hand to Leath, maybe to just say a few words to give the investors an update on how -- on where we are with ASIC and the Commerce Commission of New Zealand's regulatory intentions.

Thanks, Scott, and good morning, everyone. I'll be fairly brief in this summary because, as you'll expect, it's generally not advantageous for a party in our position to give running commentary on how we see the progress of litigation arising. But generally speaking, in relation to ASIC, I would say that the process thus far is what we would probably describe as fairly typical for this type of litigation. We would expect probably based on progress to date, subject to, of course, to availability of the court, that we may look to have a hearing in the first half of next year. As I said, that is subject to various factors, including the judges' availability. But based on experience, one would expect that's probably the likely timetable. In relation to the Commerce Commission in New Zealand, as you're aware, they announced in January that they intend to commence proceedings. Again, their flagged is relating to responsible lending. Although the New Zealand business is a separate business with separate processes, underwriting guidelines and a separate regulatory regime, that regime does have a somewhat similar responsible lending overarching concept in it. At this stage, we haven't received the claim from the Commerce Commission. It's only being flagged as coming. In terms of timing, we would expect we would probably receive that at the end of this month or at the start of next month. We can't be certain, but that's the timetable that has been flagged. Once we've got that, obviously, we'll be able to make some public comments about the claim and its nature. The last thing I wanted to mention, and this has come up in conversation and quite regularly, is the concept of settling proceedings and resolving them prior to a hearing. Obviously, it's always prudent to consider a commercial resolution of any litigation. There's obviously costs involved in conducting litigation. There's management distraction and other costs. So regardless of our view of the merits of the proceeding, it's always worthwhile keeping in mind the prospect of a commercial resolution. At this stage, an appropriate opportunity hasn't presented itself. But I think it's fair to say that Scott and the team are keeping an open mind and will always look at what is the best commercial outcome given all of those factors. So at this stage, that hasn't arisen, but it's obviously something that we should keep an open mind about.

I think one of the things that has come up in terms of questions from investors has just been not only the timing, which Leath has discussed, but the workload. Our view in terms of our preparation for these regulatory matters is that the next -- what investors saw in the first half, a lot of that work will happen in the first half and this half. But while we expect, as Leath was calling out, that potentially end of this year, early next year for completion, a lot of the work does have -- will happen in financial year '24. So thanks for that, Leath. We'll just move on to the second page, which is our risk and governance section. And Kate is here if -- because we expect some shareholders may have some questions, but just to talk about some of the things that we've changed. So in both regions, we've spent a lot of time looking at our product. We've talked quite a bit about how we've set up an established governance functions. One of those is a dedicated credit risk team. They have looked at our products. And we have made adjustments through our credit acceptance criteria with all -- with the intent to lower our portfolio risk of our business. And that is really starting to come through in both businesses. So that change has occurred in our business. We've also spent a lot of time looking at our training and our education of our people across the business. So nearly everyone here has, since we received that first notice from ASIC, participated in a lot more responsible lending training as well as other training that we deemed was relevant. Most of that's been provided by an external party that we know would be considered one of the leading trainers for credit and credit knowledge within the industry. In terms of New Zealand, we've also stepped up a lot more of our engagement with consumer advocate groups just to make sure that we're hearing some of those concerns directly from them and are working quite closely with both parties. Across the group, we certainly have spent a lot of time building out the functions that focus on credit risk, the dedicated functions that are looking at compliance across our group policies, procedures, making sure that we are compliant. A dedicated compliance team that sits there and works across the group, works with our ombudsman in both countries. We've also put a lot more resources around our audit team -- our internal audit team, I should call that. And finally, cyber. Cyber has -- we've seen what's happened in the world that's led us to conclude that we think we should have a dedicated team. And that's a mix of internal and external expertise there. And that's -- I have to think of that as an insurance policy to protect our business from the unknown. So that's -- I mean there's been quite a bit of work around establishing and uplifting those teams within the business. I see that as being -- it's never complete, but I don't see us adding more people into those functions coming into the second half of this year on FY '25. I think we have a solid foundation of team and functional resources now that is right for our business, of the size that it is today, but also setting a strong foundation for us to grow into the future. Okay. We will move to our summary and outlook and just talk a little bit more to give you an overview. So I know we've talked a lot about simplification. So our intent is to reduce the number of funders that we do have across our business. What we believe is that as time goes on, as we borrow more from a smaller group of funders, that we should be able to drive some efficiencies in our business there. But also particularly in our New Zealand business, more than anywhere, we had set ourselves up for a funding structure for a business that we thought was going to be a lot bigger, so just looking at simplification and taking some costs out of that business. In terms of our operations, we're very much focused on credit risk, credit risk and education through our business, and uplifting that to ensure that we are at the best possible place that we can be. We continue to reprice our products on a monthly basis. We continue to look at that. We have found -- experience has shown that trying to gain a whole 25 basis points of rate rise in 1 month, when they come out, that does impact volume significantly. So making lots of changes has worked better for us. And you have seen that start to come through in the first half in terms of improved topline yield across the group. Productivity initiatives with the change of staff in New Zealand. I feel really comfortable where that's going, certainly seen a record half of cash collections. And off the back of that also, the productivity coming out of the collections team in New Zealand has continued to improve. So that will start to translate into better performance over time. And finally, we -- shareholders who read the annual report over the last 2 years would see that we've made a number of changes around our investment in carbon reduction as well as philanthropic efforts. So we've continued those through the first half with donations to The Big Group Hug, the big buddy program in New Zealand, and Go Do Good, which has been good for staff as well as community groups. Just finally, in terms of the outlook before we open for questions. In terms of the macroeconomic environment, I mean, particularly in Australia, there was a record demand for new vehicles in the last 12 months. Why that is relevant to us is because typically, when a new car is sold, a used car is traded in and the used car market is our target market. So we think there will be very strong demand for vehicle financing moving forward. And as we look at our credit risk profile, we expect to see our average car size increase slightly, not materially, movements from there. But the average car size increase our loan size, improve as a result, and the underlying asset that we're funding is getting younger across the portfolio. That's what we're looking at. We do recognize that there is a higher inflationary environment, particularly in New Zealand, and that there's a risk in terms of unemployment. So we do keep our eye on that. Hence, why we keep looking at the cash flow and making sure that, that is as strong as we possibly can in our business. In terms of what we are looking at, continue to look at the pricing of our product and ways to simplify our product is a monthly activity that the general managers of our business are focused on. We also have a number of initiatives around reducing the bits of technology in our business to drive productivity and cost out, particularly as we've acquired a number of businesses trying to align everyone on the same loans management platform, same telephony platform and same lead management and capture platform through our websites. We are almost there with all of that transformation. And just in terms of financial outlook, we think that our loan book will be -- will grow a similar amount in the second half as the first half. I think there will still be contraction in New Zealand, so much of that growth. The net growth you'll see is in that sort of $970 million to $1 billion range, will come out of the Australian business. We think the bad debt stay within our target range. And if anything there, we call out that there was a $3.1 million PCP uplift in New Zealand. It's not going to be the same level in the second half. We expect bad debt in New Zealand to moderate somewhat in coming into the second half. And finally, we reiterate our forecast for net profit after tax in that $25 million to $30 million range. I'm sure that there are some questions. So I'll hand back to Tom -- to ask your questions. Thank you.

Thanks, Scott. There are some questions. So the first one, and I'm just trying to sort through. Actually, Marcus Barnard is asking questions. So Marcus, I'll push you -- or I'll let you through, Marcus. I think you should be able to speak now.

Can you hear me okay?

Loud and clear, Marcus.

Just can you -- I think you mentioned a couple of things that the revised New Zealand team are going to improve. I think you mentioned sort of regulatory compliance and credit acceptance. But what else is their sort of mandate? And how do you think they're going to improve the group? And also linked to that, are you planning any product changes in New Zealand? I'm thinking more akin to the AFS type product, I think you already do that, a bit over there, but any plans there? And as a sort of third question, can you discuss how you see the current merits in Australia of your M3 lending versus AFS, particularly in terms of volume demand, margins and returns? Was a few things to get through there.

I might tackle the from the last one first and remind me what the first question was. Let's start with Money3, AFS. So Money3 is very much focused on that near prime or lower prime segment, however you want to refer to it. That business is -- we've made a number of changes to the product offering there. The higher credit risk part of that portfolio is what we're not offering to the same degree as what we did in the past, very much focused on growing that business, and a lot of growth has come through from there. And yes, the yield is higher in that business, so is the staff related to managing that business, the bad debt and the cost of funding. So the prime portfolio versus the near prime portfolio do have quite different characteristics. And that's what you're alluding to, like how are they different. I mean given they have a different target market, but in terms of how you want to model them, there's some -- I'm trying to think of the best place to start to answer your question, Marcus. The yield on the AFS product is around that 13.5%. But if you work it through the number of staff servicing that portfolio, it's about 10% of the Money3 staff. The bad debt -- I think bad debts running for the first half are around that $100,000. So there's a lot of metrics differences. But when you come down to the bottom line, both of these businesses, given the amount of capital that we employ into them in terms of the equity layer of their receivables, have the ability to produce similar returns. The AFS, as it grows, we'll be able to do that because if you look at -- since we acquired that business a couple of years ago, -- we've only added a couple of headcount in that business. It is -- with some scale, that profit will come out of the AFS business.

I guess asking the question in a slightly different way then. If you had some excess capital, would you rather grow M3? Or would you rather grow AFS? Or net-net, it -- is it all about the same at the moment?

Yes. Look, I mean, that is exactly how we look at it today. Certainly, in our business, the Money3 business produces a greater return for the equity that is given there. So in terms of that order of priority, when Siva is looking at how do we apportion our capital, Money3, AFS then Go Car Finance. Now those returns will change. And certainly, Go Car can do a lot better than what it has over the last 6-months. But AFS is a business unit that we should start to see improving returns out of that business.

So Scott, just to summarize, Marcus' first question for you, just to go back. It was -- look, the question was really you spoke about changes in the New Zealand business. He asked for a bit more color on what the changes are and how that's going to improve performance in New Zealand. That was the first question. And wrapped into that was you mentioned in particular cause of regulatory changes in New Zealand and credit acceptance and products. I think that was the kind of first two questions in summary. [Operator Instructions] Back to you, Scott.

Thanks, Tom. One of the challenges that we had in the New Zealand operation, coming out of COVID, we saw a high level of churn in our staff. We also experienced a period of time where there was a significant one-off weather event. So we certainly -- and coupled with that was inflation. Inflation was what's driving some of that churning stuff, too. A little over half of the staff that left our organization left the country, so it was a challenging period of time, which led us to make some changes to the leadership team in New Zealand. And Pushkar stepped into that role with some basic areas to focus on. Improving our cash collection in that business was the #1 thing that we asked him to do. And that has really started to come through in the last 6-months, particularly towards the back end there. So we had a number of customers that had challenges in paying their loans because they had issues with their motor vehicle. We've now been working through that. We also had challenges with team knowledge and experience around collections where the previous management team that -- we had hired some people that needed more training and uplift of knowledge in their roles. And that is now done. We've brought in some external trainers. So what I'm trying to say here is that we have invested significantly in our team of people in New Zealand, and that team of people now are achieving more in less time. And we have more work to go. I don't shy away from that, but we do need to continue to invest in our team in New Zealand to improve that. And we started to see that performance come through in stronger cash collections. In terms of the lending there, the credit risk team here, there are some -- 2 years ago, there was some change in legislation, became more prescriptive in terms of the credit acceptance legislation in New Zealand for responsible lending obligations. So we've gone through all of our policies and procedures and looked at those. We feel really comfortable with where we are. There hasn't been a material change there, but it was important for us to go through our policies and procedures in our business to make sure that we were comfortable with where they are and make sure our people were trained against them. But the first stage really was about getting the right people in the right roles, make sure our funding structure was fit for purpose, and Siva continues to work at rightsizing that. Investors should expect, over the coming month or so, some further announcements as we hit those milestones. Not quite there for today, but they should expect that to continue to come and then just the focus of the business there. Marcus, was there anything else that I may have missed because you asked a few questions in one go there?

No, that's great. I'll hand the mic back to other questions.

Thanks, Marcus from Bell Potter. Let me just get you back to mute. Allan Franklin from Canaccord has got a question, Scott, so I'll let him through. Allan, you should be there.

I think I am. Maybe you guys got me?

Yes, we do. Thank you, that is Allan from Canaccord.

Just a quick one, if I may, either for Siva or for Scott, but just thinking through the book gearing. Yes, I guess as implied in the first half, you're happy to lean a bit more on existing cash reserves and put that out the door. I'm assuming it will be a sort of a similar dynamic in the second half. Or how should we think about that? And I guess, the flow-through to second half interest costs, if possible.

Look, we are -- I think we're saying here that we are engaged in negotiations. We are almost there. What we -- I mean, we're not quite there yet, Allan, but we expect that our senior facilities in Australia will be increased and that we will be in a position to make an announcement soon. So we do have cash available on our balance sheet to continue to fund the business here in Australia, we have cash flow surplus in New Zealand as a result of contracting that loan book a little bit. So we are able to continue to manage and grow. But we expect to continue to fund the ongoing growth of the Australian business with a new funding facility with an increased senior partner there. Siva, I might -- if you want to offer some more color for Allan.

No, definitely. Thank you, Scott. I think, Allan, with respect to how we want to deal with our free cash balance, obviously, we want to maintain a minimum amount of free cash for liquidity purposes. But compared to the range that we used to have, circa $100 million a year or so back, that's the portion that we want to continue to use to grow our loan book in the absence of any other acquisitions coming along the way. To answer your question on gearing, what we are trying to achieve is to keep our gearing very similar to what we had -- currently. And that would mean that there is optimal use of free cash as well as the cost of funds being very similar to what you saw in the first half results versus in the second half.

Helpful. And then sorry, just a quick clarification. I think it was stated a bit, just to double-check, so it was a uplift of $3 million of bad debts in the New Zealand market flowing through in that period in the first half?

$3.1 million, yes.

Thanks, Allan. There's a couple of questions coming, Scott, over the Q&A function. So let me just spend a minute to sort through those. But let me just -- so the first one is from Joe Longbottom. He says, "Can you please ask the question, to what extent is the increase in other operating expenses from $30.3 million to $39.2 million due to one-off factors?" So that might be one for Siva.

Happy to speak of that, or you can Siva?

I think the key ones are, as we highlighted, the legal cost related to regulatory action is clearly related to the current position, so it's definitely not an ongoing cost, however, subject to -- as we try and resolve the matter. There are investments in technology, as Scott pointed out earlier, circa $1 million that we can consider to help uplift some of our efficiencies into the business. And as we start to realize those efficiencies, these costs can truly become nonrecurring in nature. Probably -- first, just to say if -- Scott, if you want to add anything else?

The biggest increase in our OpEx piece is wages. There's no doubt that we have seen increasing wage inflation. But it's also not just wage inflation but superannuation, payroll tax plus the Victorian budget repair levy that's there until 2033. So I think the message we want to send here is that, yes, we acknowledge that, that -- this $4-odd million increase in wages. We don't expect that similar uplift in wages to occur again where revenue should continue to grow from here. In terms of the one-off nature, certainly, the professional and legal fees, they will conclude when the regulatory action concludes. As we called out that they are at least a $2 million uplift. There's also around $1 million -- about $800,000 to $1 million of expense that is one-off in nature that is a result of closing off a piece of software and terminating an agreement in New Zealand as well as shifting our technology here onto a single platform for the loan funds management as well as the websites as well. I hope that answers your questions, Joe.

Thank you, Scott. There's one here that's coming over the Q&A function, on competition. It's just about some clarification around -- the question is, I understood -- or I'm not sure, but I understand there will be more competition from less competitors in the second half of the year. If so, who's exited the market? So maybe you can just touch on the competitive environment, Scott, in both the Australian and New Zealand markets.

Yes. Let me give one example in both markets. If I look to New Zealand, Thorn was a lender in New Zealand that provided -- which was part of the Thorn EMI group but not connected to the Australian business at all. But that business stopped originating loans at the end of last year and has been sold, to the best of my knowledge. So that's an example. And that was a business that was a similar size to Go Car, if not bigger, in terms of its monthly originations for cars. So they pulled out of the market, they've left. If we then come across to the Australian market, I think you can find this in the financial review, so it should be public that there's a business here, it [indiscernible], but it was loans you will get was a reasonable size, funder of used motor vehicles. To the best of my knowledge, they've pulled out of the market as a result of losing their funding and plus a few other business issues there, but they are no longer funding in Australia. And I guess what I think we're going to see is that the smaller businesses will find it harder to operate in this environment. Certainly, the regulatory watermark of expectation continues to rise, whether that's at the ombudsman or at ASIC. So that creates a barrier of entry. Cost of funding and availability of funding is another challenge. So smaller operators in this space, we feel that are consolidating or leaving the industry. In the last 6-months, a car dealership that used to fund car sold its loan book and it's providing that volume into lenders like us. So yes, some examples there of why we see the market consolidating over time. Although I'd say not necessarily consolidation through acquisition because the examples I've given you have sold the assets out.

Scott, thank you. There are two questions related to the regulatory proceedings on the Q&A that have come in. So let me summarize for those -- those two questions. So the first one is what are the expected legal costs of the legal proceedings? And a related question, so the second part of that question is, look, if there are penalties handed down by the ASIC or Com. Com., is there insurance coverage for this? Or does the insurance only cover kind of the legal costs?

It's Leath here. I can answer that. So in terms of expected legal costs, I think Scott alluded to that earlier, where he looked at the current run rate and indicated that he would expect that run rate to generally continue into the second half of this year.

I will call out just to say we have specialist legal advice in relation to the asset matter. So Leath is not commenting on his firm's fees.

No, no. This is external lawyers and also barristers on the matter.

So I think it is reasonable to say while we expect the bulk of the cost to be contained to FY '24, I mean it is -- there is a lot of unknown here, but a similar fee in the second half that we'll call out and we'll explain is probably reasonable to expect.

And in terms of insurance, insurance doesn't cover penalties. So that's the short answer on that.

Thank you. One final question has come in, Scott. Let me just summarize it. Scott, can you please give some color on the low yield that fixed lines made when interest rates were low and funding was unhedged, how quickly will these lines roll out of the book?

Might let Siva -- I'll talk about yield but I'll let Siva talk about hedging first, if that makes sense.

Yes, happy to. I think there are two parts to the question, but if I address the hedging part first. The low-yield part of our portfolio is in the AFS business unit, which is fully hedged. So the portion that is unhedged at the moment is on the Money3 and the Go Car book, which are reasonably high margin, high-yielding portfolios. Having said that, our intention on the hedging is we will continue to increase our hedging position on Money3 as well as Go Car Finance. In the meantime, we are continuing to monitor the swap costs vis-a-vis the base rate/interest rate changes before we increase our positions on hedging and Money3 and Go Car Finance.

And just the velocity of that turning over, if I take people back to the highlights section, so we collected $270 million out of our receivable, of which $110 million was revenue. So crudely speaking, you could call $160 million for the half was the reduction. That was the churn in the loan book, and we replaced that with over $230 million of new business. So if you said that, in that range of around $320 million to $350 million of our loan book will roll over, but please keep in mind the AFS business is 100% hedged. It was just the -- that legacy Money3 warehouse that wasn't and that velocity of that cash is around, across our portfolio, a little over 1/3 of our book moves every year. And you can see that, that is starting to roll off in the increase in group portfolio yield that came through in the first half and particularly the first quarter. Shareholders won't see that in the second half because as a result of the decline in Go Car Finance. It means as the pack will call out that the portion of receivables that are originated by AFS that are in that -- we're originating today sort of at 13.5% to 14% gross yield, we'll drag the overall portfolio down. But it shouldn't change the profitability characteristics.

Thanks, Scott. We've got 2 minutes left on the call. There's one final question that's come in. What is underpinning the increased cash collections in New Zealand, from Alex.

Look, I think a lot of that has been focused. So we've seen our staff retention stabilized in New Zealand, which has been great. Pushkar Pendse, the Group's Chief Operating Officer, is now leading that team. So look, what's underpinning it. Focus and stability has made a big difference there. And that team has been very focused on improving that cash collection in that business. And across our group, we have benefited as we often do, when things get tight, consumers pay a little bit more into their loans. Like, a lot of our loans are structured that there's no penalty for early payouts. So slightly different with the ones that have in the prime space, but certainly the Money3 and Go Car Finance businesses, there's no penalty for people paying it early. So our good customers have paid ahead of their schedule and that's partly why we're seeing a strong half of cash collection.

Thank you. I'll -- I'd just like to wrap up here and say thank you to everyone for their time on the call. A reminder, anybody else have any questions or clarifications, reach out to me. And I can either get you a time or get back to you. But other than that, thank you for your time, and speak to you soon.

Thanks, Tom. Thank you for that. Just to reiterate, Tom's e-mail address is on the back page of the investor deck. If there are questions that we've failed to answer today, do encourage you to e-mail Tom, and we will come back to you. Thanks for tuning in today. Thank you.

Thank you all.