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

Okay. Good morning, everyone. Welcome to our Half Year '23 Results Briefing. Great to have you with us today. Just want to introduce you to Aaron Saunders, our Group CFO. So we'll go through today's half year results, and then we'll open the call for Q&A at the end. [Operator Instructions] Okay, we'll crack on. So, yes, we'll give a quick overview of the results, drill down into the segments, and then give you a sense for what we're seeing out over the rest of the year. Despite the macro context, I think the resilience and diversification of the group have really come to the fore again, with a record half year performance for HY '23 of $23.4 million, and we are continuing to deliver robust earnings and consistent dividends for our shareholders. Directors have declared Q2 dividend of $0.05 per share. And obviously, the net profit -- a record net profit slightly ahead of the HY '22 result despite HY '22 being -- sorry, HY '23 being slightly affected by the pandemic earlier in the year. Despite the wider New Zealand car market being down 7.5% in the first half, our Auto Retail division has increased units sold, and as a result, grown market share. The growth in Auto Retail has offset the impact of the interest rate headwinds impacting auto finance. And based on what we've seen in H1 and the early trading in H2, we're expecting full-year net profit before tax to be at or slightly above last year's record result and full year dividends to be $0.23 per share, which is in line with FY '22. Overall, car market transaction levels are tracking well behind pre-pandemic levels, as you can see in the graph. And largely, that's due to the Omicron impact in Q1, just affecting overall consumer demand, the rising interest rates, increased government regulation, both the CCCFA and the Clean Car Standards, and just overall decreased industry demand. Registered dealer numbers continued to decrease, and we're now at low points not seen since early 2014. And for the car business, we've seen demand moderate for high-value vehicles and certainly strengthen for the lower price points. What you see here is just used car transactions of total New Zealand market over a slightly longer time period. And 2022 is looking like a more recent low point in terms of overall transaction volumes. The recent change to mandatory ESC in cars and the clean car discount and standard program are definitely restricting the volumes of cars, particularly used imports coming into the country. The reduced supply of used imports into New Zealand has a very strong correlation to the numbers of registered used car dealers, as you can see on the right-hand side. I won't go into too much detail on this slide, which is obviously available on our website under previous releases, but the key points: reported net profit before tax, which is the basis for our full year guidance, up 1%; EBIT, $26.1 million, up 2%; and earnings per share of $0.198 per share, up 1%. Probably more importantly, I was keen to share insight into how we're going in the early part of Q3. In Auto Retail, car sales are holding up very well for us, and we are seeing margins improve on the levels experienced in Q1 and Q2. In Finance, there is an increasing impact of the interest rate environment on our cost of funds and on net interest margin. Pleasingly our arrears continue to be stable. And insurance claims continue to track below expectations. And in Credit Management, we are seeing the debt load recover but still slower than expected. But I think in the broader context, what we're seeing market-wide with information we get from the credit bureaus, that's showing New Zealand credit default metrics certainly starting to deteriorate. Just moving on to the results. We've covered these, so we'll move on to the detail. Revenue growth was solid at 11% year-on-year and largely driven by an increase in the vehicle units sold through the Auto Retail business. Finance revenues have grown off the back of good loan book growth and particularly in the premium borrower segment. With the net profit before tax bridge that, really, I think, demonstrates the resilience and diversification within the Turners' business. The Auto Retail results underpinned by the focus on domestic sourcing, market share gains, and the new branch growth, but overall market-wide lower margins. Finance has been impacted by the sheer speed of the rising interest costs and the [ flow-on ] impact on our interest margins, and you've effectively had a in and out with Auto Retail and Finance. The Insurance result reflects improvement in our investment returns and continued efficiencies in claims. And the Credit performance, obviously reflects the lower debt loads still at reduced levels. It's also good to reflect over a slightly longer timeframe, the composition of the divisional operating profits. As you can see here, all 3 auto-related businesses have shown material growth from pre-pandemic levels and Credit Management has been impacted by the no-collect constructions from our large corporate customers and low market-wide defaults. In fact, the mix of activity and annuity revenues provides the resilience to protect earnings stability during difficult times. This is always a table we've included historically just because of the unusual items, particularly over the pandemic period. And whilst there were no lockdowns or hard lockdowns in HY '23, we certainly experienced disruptions from the Omicron outbreak. However, these were difficult to isolate and quantify the exact impact of those. Therefore, we have noted no material one-off gains or losses in HY '23. This slide demonstrates very well the strong record of dividend growth. We've been able to deliver over the last 8 years. We've declared our first Q dividends for the year [ worth ] $0.05 per share, and we're projecting full year dividends to be at $0.23, which is based on a share price of around $3.60, delivers shareholders a gross annual yield of nearly 9%. So a few things to note on the balance sheet. Inventory levels are down as a result of the Auto Retail team's focus on improving processing times and overall stock turn metrics. And the output of this is we're selling more cars on a reduced level of inventory, which is an excellent result. The increase in finance receivables reflects growth in Oxford and the completion of the new sites in Rotorua and Nelson have added to property, plant and equipment. And obviously, the counter to the increase in Oxford receivables is the increase in borrowings. In funding, firstly, I'd like to point out that 80% of our total borrowings relate to finance receivables in Oxford and also that Oxford remains very conservatively geared with an equity to total assets ratio of 22%. And our securitization warehouse, the BNZ, now hold Class 1 and Class 2 notes as Turners has refinanced the Class 3 notes in June. We're still very comfortable with the debt levels and the capacity in the business. Okay. Let's drill down into the segment results now. So let's start with Auto. Auto Retail revenue was up 13%, reflecting the increase in both consignment units through the business and owned units. We've seen a drop in margin from last year's post-lockdown sugar rush demand. However, the Tina from Turners brand campaign, our focus on operational speed continue to deliver, we think, structural long-term benefits for the business. Our market share of retail sales continues to improve and our 2 new branches in Rotorua and Nelson are now complete and operating above expectations. I thought it would just be useful to drill down into a couple of things in [ Auto ] and [ 1cc ] is speed to sale, improving the time from receiving a car on site to having it ready for sale and amortize has been critical to improving our stock turn and making our business more efficient. Through the use of measuring that process more accurately and using that data to help reengineer our vehicle [ prices ], we've been able to address a number of key operational bottlenecks. These improvements, plus upweighting the proportion of local sourcing, has resulted in more sales with least investment in inventory. The next segues nicely into local sourcing. We've very deliberately shifted our reliance off the used import channel over the last 2 years, as you can see from the bars on the graph here, with the green portion representing the number of units that we source domestically. So through more effective use of our vehicle sales data, a bigger and broader branch network, and investment in lead generation, and the focus on our digital customer conversions have really helped drive these structural improvements in our vehicle sourcing and the margins compared to pre-pandemic levels. So I thought it would be useful for people to understand how our overall margins have been tracking over that 5-year period. The value of the Turners brand continues to grow as well. And in September and October this year, our marketing team received some great industry recognition by winning the Supreme Marketing Award at the New Zealand Marketing Awards and also taking home 2 Advertising Effectiveness awards, Effie awards for advertising effectiveness. So this was a fantastic outcome from a campaign that we know is working very, very well for our business. A couple of photos of our newest branches. So Rotorua here is now fully operational, and the new building and site works now complete, so we're operating off the full site. They've sold just under 500 units for the first half. And with most of that period in the first half looking like a construction site, we are definitely expecting those numbers to grow nicely for the second half. And this is sunny Nelson. So also complete now, looking fantastic. We started operating here towards the end of August, and really, really pleased with the team that we've assembled down there and the progress that that group of people are making in that area. It's really excellent to see. In terms of subscription, we're really -- again, really pleased with the growth that we've seen here. So we've broken through the milestone of 200 concurrent subscriptions in early October. And as of today, we, I would say, would probably crack through 250. We were at 248 yesterday. So excellent progress there. The average subscription period continues to expand and currently sits at 15 weeks per customer, and the average subscription payment is just over $200 per week and trending up as demand increases. We now have vehicles available at all but 2 branches, I think, now around the country and with subscribers mostly coming from the metro areas with Auckland accounting for around 3/4 of our subscribers. So we're seeing a really solid demand for a flexible way of accessing vehicle use. Moving on to Finance now. Growth has moderated as quality and margin have become higher priorities for us. Our focus has very much been on pricing and margin management, which has been critical in dealing with the speed of interest rate rises that we've been experiencing. We've now pushed through 9 buy rate increases over the last 12 months with probably another one expected this week. Our premium tier business is holding up well and accounts for more than 50% of our new business per month. And in fact, in November, it's accounting for over 65% of our new business. Our 2 best quality [ risk tiers ] account for over 80% of our new business every month. We are very focused around the quality of borrowers that we are leaving money to at this time. We're very pleased with the new lending through our controlled channels, so those controlled channels being our own Turners Auto Retail network and our own direct channel out of Oxford direct to end users, and that lending is up 13% half-on-half. And given the environment and the forecast, we've continued to tighten our credit policy throughout the first 6 months of this year. With the tightening of our credit policy, we've seen our quality metrics improve. The average credit scores of new customers is increasing, reflecting the higher proportion of premium business, but also the affordability hurdles we use to approve customers. We're really pleased about the quality improvements that continue to be pushed through this book. And it's no surprise that with our focus on bringing better quality borrowers into the loan book, our arrears levels have outperformed the broader market. So the market arrears are in the red line, our arrears performance on the blue line. We're still carrying forward a material provision buffer and hardships are running at less than 10% of the FY '22 peak level. In Insurance, we've seen good market share gains continuing to provide robust policy sales despite the wider market transactions being down 7.5%. Our distribution arrangements continue to work well, and we have more to add in H2. Claims costs remained steady with procurement remaining a key strength in offsetting parts inflation and labor rate increases. In Credit Management, the debt value loaded increased, so definitely seeing some improvement in debt load as the market-wide credit metrics continue to deteriorate. So that bottom graph here is information from the credit bureau Centrix just showing an index on credit defaults. Our Promises to Pay keep rate has remained stable throughout the last 12 months, and while many consumers have paid off and closed down credit cards during the pandemic, market-wide credit defaults are up 20% on last year, but still lower at this stage than pre- pandemic levels. On this data, we expect to see debt load levels continue to lift. This division remains an important part of the diversification strategy and offers a natural hedge for a downturn scenario. In what has been a very difficult time to retain and recruit digital talent. We are pleased to say we've got a fully resourced team of 40 people, and we've upped the number on that team as well over the last 12 months. And in particular, we've strengthened our team in data and development. And we're really happy with the progress that we've made, particularly on the data side of our business, and it's helping in a number of key areas. It's helping in the measurement of critical ESG measures, particularly around carbon emissions. That's helping us do a much better job of our vehicle sourcing and providing great data insights from our customer data platform, which is helping drive our conversion rates, so we can really focus in on the critical parts of that customer journey. The business has also started our cloud transformation, and we have our first 3 projects underway in that area. The graph here -- sorry, the depiction here is of our online car buying wizard that we launched in June. So that's using a series of high-level questions to help people narrow down their selections. And so we've had over 14,000 users of that car wizard since we launched in June. Our team engagement scores are at record levels. And that, I think, really reflects the strong positive culture that we have at Turners Auto Group. I think it is one of the absolute parts -- key parts of our competitive advantage. An engaged team is very important to us, particularly at a time when recruitment and retention is about as challenging as it has ever been. We continue to invest at material levels in staff training, remuneration, and other benefits. We've also launched an Employee Share Scheme this year with just under 50% take-up of that initial offer, and we assure this will really add to the ownership mindset that our team brings to work every day. Whilst pandemic uncertainty has decreased, New Zealand's economic uncertainty has certainly increased, and there are challenges on the horizon. These challenges center largely around the health of the economy, the rapid increase in interest rates and inflation, the supply chain and new cars, recruitment and retention of people, and also the regulatory environment that we operate in. What I'd like you to understand is that we understand these issues. We've already taken actions, and we feel we're well placed to minimize and mitigate their impact. Our competitive advantages are what gives us confidence about our ability to stand up to these challenges. We have high trust brands and markets that generally stand for the opposite of that. And we know that consumers tend to move to brands that they trust in uncertain times. We have the scale and reach that cannot be matched. And we have unique diversified sources of cars that are very, very difficult to replicate. Our data and technology capability has positioned us well and will continue to do so. And lastly, as we mentioned on the earlier slide, we have a very highly-engaged group and very capable group of people here at Turners. Based on our experience in the first half and early trading in H2, we expect FY '23 net profit before tax to be at or slightly above last year's record result. And at this year's level, we anticipate full year fully imputed dividends of $0.23 per share based on the current payout policy of 60% to 70% of net profit after tax. The Auto Retail business should continue to grow from the execution of our retail optimization strategy. Vehicle margins have shown positive momentum over the last few months and should hold at or near current levels. The impact of the interest rate environment on net interest margin will be more pronounced for us in the second half and probably in FY '24. It is also anticipated there will be some deterioration in arrears above seasonal norms as the cost of living pressures become more material for people. The growth in Auto Retail and improving investment returns in Insurance will offset the material impact on funding costs being experienced through the finance business. And with credit defaults lifting market-wide, we should see improvement in the credit management results. I'd like to acknowledge and thank the wider Turners team for their efforts in the first half. Certainly, in Q1, we had periods where up to 25% of our team were away with COVID. It's been challenging, but they've all proven yet again to be resourceful, adaptable, and committed to providing excellent customer service right across our 4 business divisions. Yes, well done to this very dedicated group of people. Okay. We'll now open up for questions. [Operator Instructions]

Grant, would you like to ask some questions?

Yes. Can you hear me okay?

Yes.

So just around vehicle margins. Obviously, they were fairly high through the peak of the pandemic [indiscernible]. But in terms of -- I'll come back a little bit. In terms of the improving vehicle margins from here, can you just give us a bit more color around that, particularly, I'm not sure if that's talking in terms of dollar margins or percentages, but particularly given the positioning towards smaller, cheaper vehicles, how you're seeing that dynamic improving from here.

Do you want to take that?

Yes. Grant, Aaron here. With certainly what we've seen, we expected a bit of a bounce in spring, and we've seen that really from late August. And we are currently seeing margins back up on an average basis at where they were last year. So our suspicion is that the difficulty in sourcing and landing imports -- used imports from Japan has really seen margins recover to where they were last year. And with the changes coming up in the Clean Car Standard, we really don't expect that to change for the foreseeable future. We had to do a little bit of work in the first half ourselves to reposition our inventory lineup away from -- really away from larger vehicles and into smaller vehicles. But certainly, the supply situation means that margins feel like they're going to be pretty firm certainly through the rest of the year.

Got it. Okay. In terms of the subscriptions business, obviously very rapid growth over the last few months. Can you give us a sense around the economics of that business at the moment, presumably making this contribution at these sort of levels, would that be correct?

The level at the end of September was about breakeven, so we're going forward from here, Grant. So yes, $200 on the car subscription level is breakeven for us.

Yes. Okay. And is this like what you can see at this stage for you guys? Or have you got aspirations -- [ unique ] aspirations over the next couple years [indiscernible] breakthrough?

Yes. I think what we've seen, Grant, is that there is demand for this product. I'd say to some degree, the limitation is probably stock at the moment. But yes, I think we are committed to seeing it grow further. It's just really at the pace that we have cars available and the addressable market is there. I think we're getting confidence that the addressable market is there.

Okay. That's great. In terms of finance receivables, $20 million added through the period, I know that you guys are focused on pricing and margin management. Is that reasonable to expect a similar level of growth in the second half from here?

To be honest, I would expect it to be between flat and that figure, Grant, so, yes, at the midpoint, if you like, for your model. But yes, growth is certainly -- we're at a position where we're comfortable if we are flat or with a little bit of growth in the second half.

Got it. Okay. And you may have addressed this one earlier. I didn't quite catch what was said. But just in terms of Credit Management, obviously, the debt loading in that business is subdued at the moment, but we're all seeing early signs of [ fatigue ] in terms of credit defaults across the broader industry. Have you seen any signs of lifting debt loads at this stage in the early part of 2H '23 or is it too early at this stage?

No, we've definitely seen debt load increase. It's probably more modest than we expected to see at this stage based on our business planning last year. but it's definitely starting to increase. I think you just have to reflect on that bottom graph and things are going to get tougher for sure, particularly our buy now pay later sector, it seems arrears are increasing quite quickly. And I would expect to see other categories of lending follow.

[ Quinn ], do you want to ask some questions? I see you've got your hand up there.

No, sorry, that was probably just a mistake.

Okay. All right, all good. We've got a few questions come through on the Q&A, so I'll just read those out. First one from [ Richard Cottee ]. How has the theft of the car keys in Hamilton affected the business? How has this issue been resolved and what measures have been taken to prevent this happening in the future? You want to talk to that?

Yes. It's been very difficult as you'd expect for that business. We have just about replaced 135 sets of keys, so we can give our customers confidence that they can buy vehicles from us without any issues. And we're just going through the investigation process. We've hired a private investigator. He's done some great work getting CCTV footage. We believe we've identified the perpetrator, and we're working with the police to ensure that there are consequences. But the branch itself, everyone has rallied around really well. Probably sales are down only marginally on where they were. But obviously, there's been a bunch of costs in terms of added security. And we are currently, as you do when you have an experience like this, reviewing security across all our branches. And there will be some learnings that we apply across the network.

Yes. Next question from [ Kieran ]. In terms of the outlook for Oxford, are you able to provide any guidance around how you see NIM compression tracking through to the end of FY '23 and into FY '24? Sounds like another one for you.

Kieran, I think we talked at the full year results briefing in May that it would take us 18 months to 2 years to reprice the book. So we're still on that timeline, so another 12 to 18 months to see a material repricing. So I'd expect we'd see NIM compression similar to the level we've had in the last 6 months to continue through to the end of the year. And then really, it depends on where the OCI peaks and at what stage do we come down, I guess, the rate path. My suspicion is we're closer to the peak than we were 6 or 12 months ago. Feels like the end is in sight from that point of view. But whilst the OCI is increasing, we will be under NIM pressure for roughly the 50% of the book that we don't have hedged.

Okay. Next question from [ Chris Titow ]. Are you still looking for new retail locations? Yes is the answer to that, Chris. So we have 3 in the pipeline, so a larger size in Napier than you saw in Timaru and a commercial site in Tauriko and just out of Tauranga, but we are looking for other sites. I think it is a time where we need to be reasonably conservative around the prices that we're prepared to pay. So I think there is an adjustment to needing to flow through the market and probably vendor expectations. But yes, there are certainly key areas that we're still looking for, particularly certain places like Christchurch, where we have one big site of 28,000 square meters, and really, we should have probably at least 3 or 4 sites of 8,000 to 12,000 square meters. So that retail transition is still very much top of mind for us. And you've asked a secondary question, which is what are the key use cases for the subscription business customers. Wide and varied is a short answer. But essentially, it's people who might be temporarily in an area, so with a work contract, they have additional family members coming back to stay with them, so that was certainly a strong use case during the pandemic. We had people coming back for 3- or 4-month period but needing a car over that time. So there really are lots of different use cases. But essentially, it's where someone needs a car but wants some flexibility about when and how long they have their car for. And then [ Josh Wilson ] has asked a question, can you explain what the credit and finance sides of the business are? Does Turners provide finance outside of its car sales business. Yes, so dealing with the finance business first, Josh. Yes, absolutely. So around 20% of our loans are originated through our Turners Auto Retail network and about 80% is originated through independent car dealers and finance brokers. And about -- it'd be 85%, 90% of our lending is auto loans. So yes, about 90% of our loans are secured loans for people to buy vehicles. The credit side of the business is where we are helping the businesses with the hard-to-collect debt. So we do a lot of work for the major banks and government departments like ACC, where they have, through their own internal credit teams, been unsuccessful in collecting that debt, and then we take on that role for them on their behalf. So that is the job that we do in the Credit Management business. We do a lot of that same work for [ SMEs ] in New Zealand and Australia as well. So it's helping organizations track down and try and put an arrangement in place with their customers to pay off the money that they owe those businesses. Okay. I think that's the end of the Q&As or the questions that have been loaded, probably just give everyone one last crack to ask any questions that they might have before we wrap things up. Anyone need to raise their hand and ask any questions? Okay, no. Well, I think that brings us to a conclusion. Thanks, everyone, for your time. And if there are anything -- any other questions that come up, please feel free to contact Aaron or I directly. We're more than happy to deal with any queries that you have, and have a great day. Thanks very much.

Thanks, everyone.