Turners Automotive Group Limited (TRA) Earnings Call Transcript & Summary

Hi. Good morning, everyone. We are at 10:30, so we'll get things underway. Hopefully, everyone can hear us loud and clear. Why don't I just get someone to maybe raise the hand on the call using Raise Hand function? Great. [indiscernible] Thank you very much. It's good to see lots of raised hand. That's good. So welcome, everyone. Thanks for taking the time to join the call today. With me here is Aaron Saunders, Turners Group CFO. Today, we'll go through our full year results and then open the call at the end for Q&A. People can use the Raise Hand function. When we get to that point, we can then open up the audio for the people who want to ask questions. Also, the image you see on the front here is the new Turners' Westgate branch in West Auckland. One of the newest branches in the network. And this was also the filming set for our new brand ads featuring [ team of inTurners ] a little fun fact for the morning. So let's just push on here. So we'll go through the following today. The FY '21 results, second results and we look forward. We feel we've had a real steep change in our business performance in FY '21 with a 19% increase in underlying profit before tax. Many of the changes we've made over the last 2 to 3 years, really starting to get traction. We'll be going into the plan for growth in the second half of the presentation, and pleasingly, FY '22 started positively, and using a more normal comparative before COVID struck, we are materially ahead of trading in April FY '19. Early signs that we've seen, very consistent results from the business divisions. Reflecting on the last 12 months, our team has responded incredibly well to the pandemic in the first half of the year. The high levels of engagement combined with the diversified nature of the business ensured we were well positioned as we moved out of the lockdown. As a group, we've continued to build quality customer experiences, improve the quality of our work environment for our people, which we believe will deliver quality returns for our shareholders. Our growth plans are working, and the exciting thing is there is more to come. We are targeting to have this business at $45 million in net profit before tax within 3 years. Net profit before tax is up 29% and what has effectively been a 10-month trading period due to the various lockdowns. Used vehicle supplies remain constrained through the year due to the new car supply chain issues, and our view is this will continue for some time. We've seen margin expansion in Auto Retail due to a number of sourcing initiatives, and this remains a key area of focus for us going forward. The finance book has continued to improve as we write better and better quality loans. We've delivered a record profit for the business and a record dividend payout for shareholders. Just looking at the results snapshot, net profit after tax of $26.9 million is up 28% on the same period last year. Underlying net profit before tax was up 19% to $34.3 million. Earnings per share for FY '21 were $0.314 per share, up 29% and a further $0.06 per share dividend has been declared for the final payment of the FY '21, and this will be payable in July. This takes full year dividends to $0.20 per share. And this reflects a dividend policy to pay out ratio of 60% to 70% of net profit after tax. Although it was a disrupted operating period, FY '21 revenue was down 11% to $296.5 million. We had a strong response from the business, including acceleration of our digital strategy and rigorous cost management saw 3 of the 4 segments lift profits strongly. Only credit management was down on last year's result, with a number of our corporate and bank customers reluctant to pursue debt aggressively over the COVID-19 period. Demonstrating the benefits of the group's diversified annuity and activity businesses, profits rose 50% in insurance, 30% in finance and 11% in Auto Retail, all helping contribute to a strong and sustainable yield. Profit in the Credit Management business was down 22%. Although a disrupted operating period saw FY '21 revenue down 11%, 3 of the 4 segments were directly impacted by the hard lockdown in April and May and the later regional lockdowns to a lesser extent. Credit was down on last year's result with a large number of our corporate and bank customers reluctant to pursue the debt aggressively over the COVID-19 period. Demonstrating the benefits of the group's diversified annuity and activity businesses, profits rose 50% in insurance, 30% in finance, 11% in Auto Retail. Profit in the Credit Management business down 22%. We went early on our cost reduction plans and a number of the changes we've made in the business over the last few years, put us in a position to be able to take advantage of the opportunities. To inform on COVID forecasting, the one business we thought was going to benefit the most from the pandemic, Credit Management, ended up being challenged the most out of our 4 businesses. [indiscernible]. So just talking about the reconciliation from reported net profit to underlying net profit. There were a number of one-off COVID-related impacts to profit in the first half, which you can see in this table. The key takeaway from this table is that second half operating profit has no one-off adjustments and reflects our expected run rate of $3 million plus operating profit per month. Underlying earnings have increased from around $29 million in FY '20 to nearly $34.5 million in FY '21, an increase of nearly 20%. Okay. We've got our slide changing sorted. Given the strong profit performance over the year and particularly in the second half, directors have increased the final dividend to $0.06 per share, giving a total $0.20 per share payout for FY '21. This equates to a payout ratio of 64%, almost right in the middle of our payout policy of 60% to 70%. Based on a share price of $3.75, this gives a very attractive gross yield of 7.4%. On the balance sheet, the reduction in cash balances reflect the precautionary levels we were holding as we went into lockdown last year. Inventory levels have reduced over the year as we've improved stock turn, and we have a historically low-age stock position. Finance receivables have grown nicely due to the great work going on in Oxford Finance. And our borrowing does reflect some deleveraging that occurred post-lockdown, offset by funding to support the growth in Oxford Finance lending. Turners' funding remains at conservative levels with plenty of headroom to support our growth plans. We've increased the size of the securitization warehouse from $250 million to $300 million, which you should take as a strong vote of confidence from the detailed credit analysis and scrutiny. I also want to point out that 3/4 of our total debt relates to the finance business. We are very comfortable with that, given the quality of the lending and a conservative capital position within Oxford Finance. We have plenty of capacity from a capital and funding point of view to keep Oxford Finance growing. The focus on our ESG strategy in FY '21 has mostly been on the social aspect, with the obvious focus on our customers, and staff safety and welfare, during the height of the pandemic. We have implemented Peakon during the year, which is an employee engagement survey, which gives our people a real opportunity to give us their feedback and gives us excellent information on a whole range of topics, including employee engagement. And the chart on this slide, you will see the positive improvement in score since launch, and are really pleased with the high levels of engagement right across the business. We're also doing a lot in the current business to help old and end-of-life cars off the road. And with Turners subscription, we will be putting a serious investment into increasing our electric vehicle fleet over the next 6 months. Now go into the segment results. You'll see from this slide that finance and insurance were the most improved with finance becoming the highest contribution to group net profit before tax and insurance profit growing by 50% year-on-year. These were the key streams of work completed by division over the last 12 months. We successfully completed the exit of our main Penrose supersite and set up 2 new branches at Westgate and Mount Richmond in Auckland, a huge achievement from our operational teams to get this done on budget and on time. I certainly want to salute their efforts in getting these important pieces of work completed. And finance and insurance will keep adjusting our risk appetite and pricing and look for new areas of distribution in both finance and insurance. Group wide, we've continued to push hard on developing and delivering our digital initiatives, and I'm very pleased with the disciplined shown and cost management right across the business. So just going into each of the divisions in a little more detail, starting with Auto Retail. COVID lockdowns have had a significant impact on sales during the year. The counter to this was margins on our own fleet have improved in FY '21 over FY '20. And as you can see in the chart on the left, sales through our BuyNow retail channel have tracked up to around 60% versus 50% a couple of years ago. This will continue to increase, and we are targeting 70%. Our diversified sources of supply have been a real competitive advantage, particularly as the used car supply chain, and Japan was impacted so significantly. There was a lot going on in the network with exiting the largest site and setting up new branches. And these decisions have been completely validated by the early superior performance of these new sites. We see this retail optimization strategy is delivering repeatable and dependable outcomes that go straight to our bottom line. Inventory levels have remained consistent through the second half of the year at around $30 million, which is around 30% down on the peak of April 2020. As we outlined in the Investor Day presentation in April, we've identified 5 key focus areas in Auto Retail that will generate the growth we desire. Firstly, sourcing. We're introducing a lot of time and resource into ways we can improve this capability in our business. Every car we buy is worth another $1,500 in profit to us. Secondly, our retail optimization strategy is progressing very well as well as optimizing and upgrading our current footprint, we're aiming to add at least 1 to 2 new sites per year, and we already have our next 2 sites locked in, which I'll show you shortly. Thirdly, finance and insurance add-on sales continue to be a big opportunity. With still roughly 40% of our sales going down the auction lanes, we have a significant revenue opportunity with these add-on products by shifting those sales into the retail BuyNow channel. Fourthly, in lead management, we've invested in technology and training to improve our conversion rates in both marketing and sales leads. For every 1% lift in sales leads, that will give us approximately another 1,000 sales. There is a substantial payback and opportunity for us here. And finally, we will continue to invest in our brand. It is already strong, the most trusted used car brand in New Zealand. It has higher awareness. But we believe that there is further opportunity to invest in it and develop it into one of New Zealand's most loved brands like [indiscernible] in New Zealand. We've just launched a new campaign featuring Tina from Turners, and the initial traction and feedback has been extremely positive. Now I'll just quickly show you the 2 new sites that we've secured. So we've purchased a 7,500 square meter site on Fairy Springs Road and Rotorua. This is a high-profile site, and it's being currently run as a Kia franchise yard. We hope to have this up and running while we redevelop the main building on the site in Q2 into a big blue Turners showroom and office. And here's just a quick photo from the road front here. As you can see, it's on a major traffic road, 4 lanes of traffic and handily placed right mix store to a large [indiscernible] supermarket. So in Q2 this year, you should see that up and running as we redevelop the main building on the site there that you can see. The other side that we've secured is in Nelson. We've secured a 6,000 square meter corner site, right in the center of Nelson City. This will require some demo works in redevelopment of an existing building to get it ready for a market launch. We expect this branch to come on stream in around Q1 of FY '23. The site is situated on Saint Vincent Street and Nelson is located handily between a PlaceMakers and a Harvey Norman store there. So plenty of traffic coming down that road, which is good. Moving on to finance. The finance division has gone from strength to strength over the last 12 months. And that claimed group rating rights by being the #1 business division by profit within the group over the last 12 months. Revenue for FY '21 was $47.9 million, up 5% on last year. And net profit before tax was $15.8 million, up 30% on the year prior. Again, this is both a record and indeed the highest contribution of any segment. Oxford continued to gain market share in the high-quality borrower segment of customers, providing more than 45% of the new loans written each month and the premium risk here. Targeting high-quality borrowers means arrears are at record low levels, with consumer arrears at 4.2%, and commercial arrears at 1.8%. Importantly, our expectation is our arrears will continue to improve given that the weighting towards newly introduced premium loans grows as a percentage of the book. And we'll show you that on the next slide. Meanwhile, to be prudent, Oxford has continued to take a conservative position on arrears provisioning and retained a COVID-19 buffer to allow for any unemployment increase in future months despite the fact that the economy has tracked surprisingly well over the last couple of quarters. This slide is a graph of new lending over the last 2 years, which highlights a few things. Firstly, we stopped lending during the lockdown in April and early May last year, and you can see the impact that obviously had on new lending. The second thing is a significant increase in monthly lending in FY '21 over FY '20. And also, the orange portion of the bar shows you the portion of premium tier quality business that we are writing each month and how that has increased over that 2-year period. The improvements we've made -- these are the improvements we've made to the Oxford business, that structural improvements that we've bedded in and are now optimizing. We are very confident there is more to come here. Three key things have been driving down our arrears. High-quality loans being originated at the front end through the early adoption of comprehensive credit reporting has assisted in helping us target their premium risk business. There's been a huge amount of great work done by our credit collectors and recoveries team working at the back end, and we've established a customer services team, which has allowed our credit collectors to really focus on their core roles of dealing with our customers who are in default. Moving on to insurance. Insurance revenue decreased 5% to $41.9 million due to the impact of the national and regional lockdowns. Gross written premium increased for the whole year due to a number of key competitive wins, market share gains and risk pricing adjustments, and despite the lockdowns, ended up being 2% ahead of FY '20. Segment profit was up 50% to $9.4 million, which was another segmental record and the highest growth of any segment. This was driven by higher margins, reduced claims, lower overhead costs and the finish of amortizing the acquired premium portfolio as part of the Autosure acquisition from Vero in 2017. Progress on building our distribution over the year included 2 sizable system integration projects completed with Marac Finance and MTF Finance. Combined claims ratios improved from 69% in FY '20 to 60% in FY '21. Credit management revenue decreased 29% to $12.8 million due to the impact of COVID-19 and the market-wide conservatism with respect to debt collection during the first phase of the pandemic. Many large corporate customers only recently, once again, began initiating collection actions. Despite total debt load being down 47%, the team have done a great job on the debt that we did have to work with segment profit, only down 22% to $5.1 million. The management team are working closely with debt recoverers to manage and improve customer outcomes as we operate in an environment where bad debts are likely to increase and debt collection services will see increase in demand. We have now seen lenders who were previously prioritizing reputation over collections, now reinitiate debt load and collections work. We actually experienced a very similar pattern in the industry post the GFC, but this was merely a precursor to a busy collection period starting. Now I shift to looking forward. A key part of our earnings growth relates to structural improvements we've made in the business to build quality. We've made a number of changes over the last 2 to 3 years, where we're already seeing major benefits. We believe we found the right formula, and more importantly, we will continue to further optimize these levers into the future. Retail optimization is the first one. We are -- we'll focus around property and customer experience being optimized for our retail consumer. The second area is around vehicle purchasing decision-making, providing diagnostic tools and the use of other data tools to improve on the percentage of profit-making vehicles we purchased. The third area is premium lending. We will continue to use comprehensive credit data to implement new risk pricing strategies, attracting higher-quality borrowers. Whilst it's low margins, this will be offset by much lower impairments and losses. In the last year -- we'll continue to invest in digital initiatives, in particular, enhancing the omnichannel customer experience we provide in Auto Retail. For FY '22, specifically, these are our work streams. In Auto Retail, stock acquisition is a single most important area of investment. Strategically, this is where our competitive moat becomes even wider. In finance, simplifying and automating as much of our lending process to ensure fast turnaround on our credit decisions, will be priority #1. And insurance continuing to expand our distribution as the top of our work stream list. And in credit management, investing in data initiatives to improve contact rates will be the most important area to work on. I thought it was important to be clear with shareholders on how we think about allocating capital in the business for supporting these growth plans. We've received very clear messaging from existing shareholders that they want to see yield and growth, but growth supported from the existing capital base. Our focus is on organic growth, which will be funded out of retained earnings and initiatives to make ourselves more capital efficient. Capital allocation will be broadly prioritized across the following categories: footprint expansion and Auto Retail can be funded largely through debt. Or lease premises and floor plan finance for inventory, but some capital investment is required for the fit-out of the new retail sites. In property, we feel that this derisks the auto business through controlling strategic sites and provides the cost -- more control over the cost base but provides opportunity for long-term capital growth. At the moment, all our properties are on balance sheet at cost. In Oxford Finance, the growth requires capital alongside the debt to grow receivables ledger and profits. And lastly, we'll focus the capital into digital initiatives across the group. And whilst a large portion of that is OpEx, there's always some capital required to be allocated to support the growth and future-proofing of the business. We wanted to communicate sort of our view around the next 2 to 3 years. We really feel we've reached an inflection point midway through FY '20. And since then, we've seen a steep change in the business as the initiatives that we've put in place have got traction. The key strategic investments, initiatives and changes that have been completed over the last 3 years are starting to deliver. We're very happy with the momentum and the plan and feel confident there's more to come. The next 2 slides give shareholders some insight into how we are thinking about the growth trajectory internally and which divisions the growth will come from. Within 3 years, we're targeting profit before tax of $45 million, and using our existing dividend policy, this would equate to a dividend payout of around $0.24 per share. In particular, the Auto Retail and credit management businesses are highly cash generative, which gives us the opportunity to deliver growth and yield for our shareholders. The main focus areas for growth will be Auto Retail and finance, with retail optimization, helping to deliver margin expansion and market share growth. Finance growth will come from distribution expansion and direct lending. We are confident that if we deliver the growth, the combination of higher earnings and an expanded valuation multiple should better reflect the value we are delivering for shareholders and the quality of the company we are building. Just on outlook now, April and early May have seen a continuation of the positive momentum Turners has enjoyed over the past few months. Our April '21 financial results are materially ahead of a more comparative period of April 2019. In Auto Retail, we're expecting the supply-constrained market to continue for another 12 to 18 months. This is primarily due to impacts on the new car supply chain. New lending in the finance business will be strong, and our expectation is our arrears will continue to improve due to the structural increase in the amount of low arrear premium lending. In insurance, we expect new policy sales to be buoyant and claims ratios to stabilize. And lastly, in credit management, debt recovery is returning as corporate customers start to get back to business as usual. Putting all this together, shareholders should expect to see a further improved result in FY '22, and accordingly, a corresponding increase in FY '22 dividends. We'll update on more specific FY '22 guidance over the coming months. Before we finish, I'd like to acknowledge the efforts of our team. From our Board of Directors and right through to the operational teams who deliver on a day in and day out basis for our customers and for our shareholders. This group of people have been totally committed and prepared to go above and beyond in difficult circumstances. It really has been a fantastic group of people to be involved and to be working alongside with. I also want to thank those landlords and business partners who extended a helping hand during the early part of the lockdown and was greatly appreciated. Finally, a quick hello to a couple of shareholders in my hometown of[indiscernible], Chief [indiscernible]; and also to [ Bill and Pam Hunter ], otherwise known as [indiscernible], thank you for your support. Finally, we've recently hosted an investor morning for fund managers, where we gave further details on our growth model I've discussed today. If you're interested in finding out more, please refer to our recent investor presentation, where you'll find a link to that on recent NZX announcement. So that was on the 14th of April for those who want to go and have a look at that. We'll now open up for questions. [indiscernible], could you just pass me down there?

So we just -- why don't you stop the share here?

Your presence in Auckland and Christchurch is lower than expected given the market size. What plans do you have to extend your presence? Do you want to comment on that, Aaron?

Yes, definitely.

Maybe just reread that question.

So your presence in Auckland and Christchurch is lower than expected given the market size. What plans do you have to increase your presence? In Auckland, I think it's fair to say we're happy with the number of sites. There's still some optimization to do around location. We'd like to have a bigger presence in South Auckland. So we are actively canvassing the area between Manukau and Takanini, just looking for options for bigger sites in that area. And probably the other option we would look towards in Auckland something to access the Hibiscus Coast, so somewhere around Orewa, Whangaparaoa [indiscernible]. So Auckland ahead with the number of sites, acknowledge that the distribution could probably be better, and that's something we're working on. And Christchurch, I think, yes, the model can support more sites. We've got a very successful site quite close to the CBD at Detroit Place. But I think given the growth in Christchurch post the earthquake recovery, we could probably support another 1 to 2 sites there, and we are looking at Christchurch as well at the moment.

Thanks, Aaron. [Operator Instructions]

Well done on the great results. After the Investor Day in April -- I've got [indiscernible] questions around the [indiscernible]

Grant, could you just talk a bit closer? You're just fading in and out of it.

Anything okay or nothing out there?

You're quite -- we've got you up on full volume, but you're with quite low volume.

Right. Well, in case [indiscernible] around the $45 million, can you just give a breakdown of how much of that is driven by existing improvements that you've made additional retail and how is reliant on improvements that you've currently got underway?

Did you catch that?

Yes. Yes, I think I caught it, Grant. So if I can paraphrase, how much of that increase in profits through to FY '24 is based on initiatives we have underway already? And how much is -- how much is still to come? I would say that with the purchase of sites in Nelson and Rotorua, we're looking at, I guess, about half of the auto retail improvement being in essence in [indiscernible] now. So about $1.7 million of -- through opening up in those 2 sites and optimizing our Auckland footprint. In terms of Oxford, really in Oxford, we are assuming continued major growth at a rate of around about $40 million, so just over 10% a year for the next few years. We've got deep capacity to deliver the bulk of that, and we feel like we've got the distribution to deliver that as well. Marginal improvements in insurance, which will come from some simply a continuation of the market share gains we've experienced over the last 12 months. So we're assuming premium growth in insurance of around about 3% a year over the next 3 years. And EC Credit, it's really a recovery to the deep low levels that we were enjoying pre-COVID. So again, not a particularly aggressive target there, but really just building back up to where we were in that business in 2020.

Grant, do you have any other questions?

No at this stage. I'll talk to you later in the day.

Okay. Great. Any other questions from anyone? [Operator Instructions] Looks like everyone's happy with what they've heard. People take that as a positive. Okay. Unless there's any other questions -- here we go. Mr. John Harrison.

Congratulations on a fantastic result. I've just got a few quick questions. On Slide 12, you show $60 million worth of property. And what is the realistic value do you think of that property? Because you've been purchasing for the last 2 years at quite a rate, and I wondered if that's a bit conservative.

Yes. Thanks, John. As Todd alluded to we're carrying the property at cost. Valuations have come in at the end of March, around about 20% above that carrying value.

Okay, 20%. Now on Slide 13, you show $3 million to MTF receivables. I thought we were out of that.

Yes. So that's just the rundown of the book, John. So it's probably another 12 months for that receivables book to run down to 0.

Okay. So in 12 months, it's all gone?

That's right. Yes.

Okay. On Slide 24, you note that you are carrying an arrears provision buffer, which is quite -- I don't know what it is. Can you give me an idea as to the amount in dollars?

Yes, sure. So you may recall from this time last year, we carried a COVID buffer of $1 million, and that was essentially to acknowledge that there were people who are probably going to come under pressure, particularly in tourism hospitality sectors. So we've continued to carry that buffer at the end of March this year, and we've added another $400,000 to it relating to a number of the accounts that entered hardship during that period. So we sort of worked through the rationale for that with our auditors. And I guess their feeling and ours was that a number of those people, whilst they may have recovered their position, were certainly financially a bit more stressed than perhaps the balance of our ledgers. So we're now running with a provision buffer of about $1.4 million in excess of what our standard provisioning model would indicate.

Well, that's very conservative. Finally, on Slide 35, you mentioned about the markedly improved April. Have you got a figure you can give us so we can compare to last year? Although April last year, of course, it was exactly COVID.

So I think what we can say is April is normally a reasonably challenging month, John, because of the timing of Easter and Anzac Day was school holiday. So it almost becomes like a December, January in terms of the statutory days. But pleasingly, this year, it was in line with our run rate over the last 6 months, which is an excess of $3 million a month. So what we can say is it's behaved exactly like a March, which is traditionally a much stronger month. So we're pretty happy with that.

Okay. Well, that's wonderful. I assume that because you are so conservative, we can look forward to another 3 profit upgrades in the next 10 to 12 months. But congratulations, what a wonderful year for you both and for the Board and, of course, the shareholders.

Thanks, John. We appreciate those comments. Okay. Any other questions anyone would like to ask before we wrap up? [Operator Instructions] Okay. I think we'll finish things there. Thank you for your time this morning. I hope it's been useful. And obviously, if there are any other questions that people have, please feel free to get in contact directly with Aaron or I. Contact details are on the last page of the presentation. Otherwise, enjoy your day, and thank you very much for your time.

Thank you, everyone.