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

Good morning everyone. My name is Grant Baker, and I'm the Chairman of Turners. Thanks for joining us at the 2025 Annual Meeting of Shareholders. There's a few housekeeping matters before we start. The place catches on fire, go back out those doors and down the escalators and apparently there'll be a fire wardens there to help you. The bathrooms are outside and on the right. The Notice of Meeting and 2025 annual report and financial statements have been circulated and made available to shareholders. And for those of you here in the room, there's a complementary tiny air freshener on your seat, I believe. They're on the table Okay. it straight on. Okay, not for the first time here. A quorum is present, and therefore, I declare the meeting open. Now I'd like to introduce my fellow directors. Matt Harrison, Alistair Petrie, John Roberts, Lauren Quaintance, Anthony Vriens and Todd Hunter. Also at the table right at the end there is Aaron Saunders, who's the company's Chief Financial Officer. There's also a number of our senior managers and staff here today. So thanks for coming along. Welcome. Also in attendance today are the company's auditors, Staples Rodway; our legal advisers, Chapman Tripp and other advisers. So thanks to all these firms for coming along and providing valuable services to Turners. Today, you'll hear presentations from myself and Todd covering our business direction and the opportunities available to us and the progress we're making with those opportunities. Following the presentation, there will be an opportunity for discussion, any questions that you may have. We'll answer questions on the resolutions at the time they're proposed, and there will be a further opportunity at the end of the meeting to ask any other general questions about the company and about our operations. This is probably sounding quite familiar, but we've had another record year for the business, and we keep doing what we say we're going to do. Our business model is standing up every challenging micro or macro condition, and our Turners team continued to do an outstanding job, and our confidence in the business -- the future of the business continues to build. We've shown this historic perspective before, and it's important to reflect on the progress we've made. Apart from COVID impacted FY '20, we've delivered growth in every year over the last 11. Our track record speaks for itself and for me as a substantial shareholder, and [indiscernible] shareholders. This is a fantastic outcome. The best news though is that we're not finished, and we remain very focused on our growth opportunities. So FY '25 is our first record result in a row. And despite a very challenging macro environment, the businesses the challenging macro environment the business was operating with them. We've done very well. But it was definitely a year of 2 halves as we will go into later. Our team did a great job of reacting to the challenges and they remain focused and motivated. Three out of 4 of our businesses are materially ahead of the previous year, and the other business had its second best year ever. The value of our diversified business and strong market position continues to be a major strength. I'm not going to talk about the FY '25 result as Todd and Aaron have covered these when we announced in May. But I do want to talk about the simple formula we operate on. And I tend to repeat this every year, but it's still applicable. So the formula is if we provide a quality environment and conditions for our people, this will give us the best chance of providing a quality experience for our customers, and this should lead to quality outcomes for you and me as shareholders. So I want to drill into each of the parts of this equation a little bit further. Our strong culture is a huge strength in this business. Our very high levels of employee engagement, combined with our employee share scheme ownership gives us one of Turners superpowers. We benchmarked our engagement scores against some very well-known New Zealand companies, and we stack up very well against them. We have over 53% of our team owning shares and Turners, and we hope to see this number closer to 60% after we launched the 2025 scheme shortly. The combination of our highly engaged team and great customer experiences underpins the returns we can deliver to you and the shareholders. Now I also rather funded this graph, obviously, as Chairman and as a shareholder, the compound annual growth rate is a pretty impressive 14% over this 11-year period and very few NZX companies can lay claim to stats like that. Shareholders should be happy with their returns over the last month as not only have they received record levels of dividends, but we've also had a material uplift in our share price as well. We've talked previously about our level of confidence in our organic growth plan. We're executing well and there's still plenty of runway for delivering on the plan. I try to take a 100-year view on this company Turners have been around since 1967, and we want to be making decisions now that position it for the next 50 years. We try and bring similar mindset to the team at Mainfreight. While we are in the short term, we're also highly motivated by long-term value creation for all shareholders. That leads me to my order shop. Why order shop is now getting rebranded as Turners servicing and repairs. We reentered at the moment, and we're seeing a lot of momentum in this business. We've started selling multiyear service plans through the Turners branch network, and we're very pleased with the early takeup on these. We're also just about to launch a material marketing campaign in Auckland using Tina under Turners brand to create some awareness of the mobile servicing offering. We believe this is a very good example of an investment that makes long-term strategic sense for the Turners Automotive Group of businesses. Vehicle repairs is a huge business in New Zealand, and we want to be a big part of it. Now teams worked incredibly hard to ensure that some of the toughest economic conditions we face didn't derail our growth strategy. Auto Retail remains our largest division and the pressure acetated in the first half was no small matter. And what we're arguably conditions worse than the GFC, we proved that the demand for used vehicles is resilient and though margins are squeezed for a period, our ability to proactively manage those margins during the recovery in H2 was very pleasing. With Water retail firmly back in growth mode, we entered FY '26 with a strong momentum across all segments, and we believe we're on track to reach our FY '28 target earlier than expected. So there's a lot to feel good about. So the key takeaways, we're leveraging our scale to our advantage. Our track record speaks for itself, and there's much more to come. The business has stood up very well to the challenges of the economy, we have a special culture in the Turners business, very customer focused and highly engaged with 53% of our team owning shares. That's only supercharges the care factor in Turners. We have some big growth opportunities and everyone involved in the business is aligned. So I can't finish this talk without mentioning Tina, of course. So Tina 2.0 dropped in April, and we've been running the song since then. We've now had over 3.3 million views of the 60-second ad on YouTube and 2.7 million views of the 90-second version. It's been a phenomenal success, which doesn't often happen with updated aids and campaigns. We spent a material amount more on media over April, May as well as June, which no helped contribute to us knocking off ANZ and ASP of the top spot for the first time since December '23, as New Zealand's favorite ad. And the good news is we have more Tina content to come over the next few years. Before I hand over to Todd, I'd like to acknowledge the efforts of our team, and that's from our Board. Thank you, through the operational teams, who delivered day out for the business and for our shareholders. This group of people have been totally committed and always are prepared to go above and beyond. We're really lucky to have such a talent and hard-working group of people in the business. So I'll now hand over to Todd. Thank you.

Thanks, Grant. So I've got a little bit of a cough. So I might need to stop occasionally and either hack my way through this or take a glass of water. But great to be here again and seeing everyone in the room. So let's sort of kick things off. Yes. I think we're really pleased to be in the used car market at the moment. I think the new care guys have been finding things pretty tough. And as you can see from this graph here, I was just trying to demonstrate really our resilient the used car category is in New Zealand. And although people are definitely spending lease on cars, which is kind of obvious when we're going through the crunch that we are -- there's still lots of cars, changing hands in New Zealand. So overall used car volumes sort of April to August this year, tracking around 3% here to the same period last year. So we've definitely seen a sort of lift in activity. But with the continued pressure on household budgets, we're still seeing demand for those lower value cars at the expense of the high-value cars be very strong. And our expectation is that we'll that will just revert as the economy improves. And sort of unsurprising, I suppose, with a tough economy and particularly tough to source cars, we've seen a lot of dealers really start to leave the market. And you can see that red line really starting to tail off in the last sort of 6 months or so. There's quite a strong correlation between dealer numbers and the number of used imports coming into the country, and certainly, it's getting difficult to make those used imports work. So it's another reason we're seeing dealers leave. In terms of the business divisions, yes, the Turners brand is obviously still very, very strong, in fact, probably growing stronger, I would say. We've continued to improve the way we source vehicles, and we've really continued to speed up our operational agility. Auto Retail revenue and profit were down for the year, reflecting particularly that very tough kind of period we went through the first half of last year, but we saw margins and volumes improve in the second half, supported by kind of our disciplined approach to pricing a lot of focus on aged stock and the proportion of domestic sourcing increasing. I would like to point out this is the second highest ever auto retail results, though went down and sort of relative history, it's still a very, very good result. So Tina did a super job. We've seen this slide before. And we've done a lot in the last 12 months in particular. So all of those sort of green lines are projects that we've delivered with really the big highlight this year being the 3 new branches in Christchurch, which I'll talk about shortly. So the property team and our operational teams have been very busy bringing these projects on stream. They've done an amazing job. And I think we've demonstrated that we've got some real capacity to do a lot of these projects at the same time, but some genuine capability around delivering these projects sort of on budget and generally ahead of time. But as you can see, really, our focus now is on not what we've done, but what we're going to do. And I really want to bring your attention to that list on the right. So we have a number of live offers that we are working on, a mix of kind of either in negotiation or conditional offers that we are working through or completing due diligence on a number of targets. So yes, there's a good pipeline building. So you should feel confident as shareholders that there's plenty of opportunities still ahead of us, and we're working hard on that. And just a little reminder again that we carry all of these properties on our balance sheet at cost. So there is going to be an uplift in the valuations on these sites over time. Yes, I just wanted to quickly show you some of the newest branches in the network as well. So this is -- it's hard to portray kind of really what's going on in Invervargill with one photo. But this is an almost triple-sized site that we've opened up there. So we've moved from a 2,000 square meter site to a 5,500 square meter site couple of months ago. So a good change for us. And the trading that we've been doing since then is materially higher than what we were doing on a 2,000 square meter site. So nothing really surprising out of that. but good to see nonetheless. And then this is what's happened in Christchurch. So is a map of Christchurch, you can see the red -- red dot in the middle was where we were we've kind of spread ourselves out across the city. So we've had 3 projects on the go. And I've got a couple of little videos just to show you. So the first one is Turners cars and [indiscernible], which is the one in the West sort of Southwest, I guess, of the city. And that came on stream April, Aaron? Yes. [Presentation]

So you can see why we like that site so much, busy arterial roads, corner site massive blue building, very recognizable what we're about and what we're doing there. And again, I would say the trading that we've done there has been very, very good since we've opened. This was the second site we've delivered. So just down the road from our old side on Moorhouse Ave, which is the kind of main vehicle selling kind of road and Christchurch. So we're always keen to have a presence there, pretty expensive land in a much smaller site, but here's a little short of what that looks like. [Presentation]

Hopefully, you get a sense from that site again that we're almost trying to bring this sort of new car kind of field to use cars. It's very identifiable. This sort of iterative process now that we've had around branches is really kind of sped up our delivery and kind of what we know works and the right configuration between operations and office and Edmond sort of space and how we can figure the processing part compared to the retailing part of those sites. So yes, the team are really kind of getting the cadence going on this. And we've got a very kind of cookie cutter approach to this now. So yes, no prizes for casing the similarities you can see in the third site. So it's almost a dental in terms of the footprint and things. But this is out by -- the airport runs alongside State Highway 1 and again, he's another video. [Presentation]

We probably took that video slightly earlier like there's a few gaps in there. So we're busy filling it up at the moment. It's only been in operation for sort of month, right, Greg, if that -- but running along state Higher One, the profile is amazing. Again, nice corner sight. So collectively, those 3 projects, we've invested about $35 million, $36 million into Christchurch. We own all of those sites. And I think pretty quickly, we'll be looking for a fourth. So based on the way things are tracking so far. And we're definitely seeing upside from the 3 over the 1. So it's been a great move for us. Okay. Continuing on, moving on to finance. So yes, I mean, finance for us has been a very strong performer in FY '25. We have continued to maintain our discipline around credit quality that is sort of sacrosanct to us, and we've seen sort of further improvements in our overall lending KPIs. The weighted average interest rate is up, loan arrears continue to perform materially better than the market average. So it was useful just to give you some sense of kind of what's happened in the last sort of 4 months or so. So you can see that sort of plateauing period where we were really kind of dealing with the interest rate hiking cycle, we were having to focus very hard on our pricing and maintaining our margins. And we were quite prepared to let our loan book drop a little, and we weren't sort of focused around growth. We're really focused around margin and credit quality. And what we've seen sort of this year is we've got a bit more confidence in the outlook. We've seen our loan book really start to grow, and that's coming out of market share wins that we're getting. So we've seen 5% growth in our loan book just over the first 4 months of this financial year. So a really solid growth in origination, which is great to see. But I can reassure you that we are not taking on more risk off the back of that growth. So our average credit score continues to lift. So in the first sort of 4 months of this year, running at 745, slightly higher than where we ran out in the second half of last financial year. And that premium borrower risk segment, so super prime, we would call that makes up 56.4% of our loan book. So we have a very, very high-quality loan book, as you can see from this chart here. So the red line being information we get from Centrix, which shows the average arrears for the model loan portfolio in New Zealand compared to our arrears running at sort of half of that. So we think this focus on quality is absolutely the right strategy for us and running this finance book. Okay. Moving on to insurance. We've had a good, strong premium growth across all our insurance portfolios with particularly some of our key distribution partnerships continuing to deliver significant value. So those are the large dealers and finance brokers that we partner with. Also our comprehensive motor vehicle insurance portfolio, which is underwritten by Suncorp has increased 25% over FY '24. And we've launched our new digital platform, enhanced our direct-to-consumer capabilities and build a partnership with the New Zealand AA as well, which has successfully launched and showing early signs of promise. Claims ratio is a very important sort of area for us to focus on in terms of running this insurance business. They're continuing to just drop down, probably leveling out now. But certainly, this focus for us around risk pricing, it's making sure we get the right return for the risks that we're taking on in the insurance portfolio, particularly around our mechanical breakdown insurance. So that means we price European car is much higher than we price Japanese cars, for example. And we've laid in much more levels of risk over the last 12 months. So we've moved from 6 risk categories to 14, which just means we're pricing more accurately that risk that we're taking and making sure that we get the right return for that risk. So we're much more sort of sophisticated and detailed in this than our competitors. In credit management, we're continuing to see the business rebuild from that low point in 2023, revenue up 5% and profit up 11%. We continued to see deload building in line with the tightening economy. Collections is a little tougher. Certainly, the arrangements that we're putting in place are for longer and lesser amounts. Again, probably not a surprise given the economy we're operating in. And we've recently onboarded a major new corporate customer, so that's Westpac Bank. We're seeing a good increase in that first referred debt we get from our corporate customers. And this is some data we get from Centric. So just mapping New Zealand wide credit metrics, and you can see we're still at 8-year lows. Nothing is really improving in this space. So there is a tailwind of kind of deload to come for EC credit. With funding, really my key message for you is that our banks remain very, very supportive. I think the track record that we have with them, they can see the way we manage this business from a risk perspective, they have a high degree of comfort with us as one of the customers. So we've got plenty of funding capacity and it would see plenty of opportunity from them to get more funding if we need it. So we've got funding capacity in place to support the current committed branch expansion plans and certainly to support the sort of Oxford growth we expect over the next sort of 12 to 18 months. Okay. This is -- I mean the next 2 slides are probably all of the 2 slides everyone wants to hear about -- care about those other ones. So yes, in terms of outlook, we've seen a bit of a change in the auto retail business, in terms of that mix between consignment cars and own cars in the first half, lease volumes are definitely down. I think a large number of those corporate lease customers have just extending leases and not taking on new commitments, which has meant we've got less cars coming back. But I would consider that a timing issue. Those cars will come back, so they haven't come back in the first half. But Greg and his team have done a super job kind of making up for that by buying more cars locally. So we're still running ahead in terms of unit sales on last year. I think we've also seen a bit of profit sort of impact from that transition in Christchurch. So and again, unsurprisingly, when you move from 1 to 3 and all the people kind of moving from 1 branch to 3, and there's just a lot of disruption that's been going on there. I think we're going to see that lift up really quickly, but there has been some disruption around there in the first quarter. And we've also absorbed a bunch of spend around that relaunch of that tender campaign. So it's about 600k of additional media spend that we put into that campaign this year than last year. Right thing to do, but obviously, there's a kind of one-off associated with that. But we're still expecting the second half to deliver strong vehicle margins and volumes as the economy improves and overall demand improves. And we'll see a positive impact from the tenure investment and the benefits of that new Christchurch branch footprint. In finance, we'll be maintaining our credit discipline. It's an absolute nonnegotiable for us. and I think solid book growth with stable margins. And in insurance earned premiums holding up very well. Claims ratios are stable, and we're seeing good traction in our digital sales. So we should see good progress there. And finally, credit management and Payment Bank is rebuilding as debt load increases from the tightening economic conditions. So yes, while the economies best to be described as patchy, we've certainly seen consumer confidence deteriorate since Liberation Day. So in a very strong sort of January to March period and then it really tailed off kind of April onwards. And I think with interest rates still being restrictive in unemployment increasing, the economy is still clearly bouncing along the bottom as good news yesterday. It's clear we need to see more cards as a country. Despite those challenges, we're still expecting a record first half performance. So we're guiding to have net profit before tax at least 10% ahead at the first half. And we should be operating in a more positive environment. So we're still on track, well on track, I would say, to achieving our midterm target of $65 million PBT by FY '28 earlier in FY '20. So I'll now hand back to Grant for discussion in relation to the annual report or today's presentations.

Yes. What's worth starting over in a car together all day yesterday, and I think you want to get given it to me. So thanks, Todd. Are there any questions on the presentations or the results?

Grant, Alan Best, I'm from New Zealand shareholders' association with it as well as myself. And happy, I might say on rates or fabulous in a pretty difficult market. I was wondering with the -- well, Todd could tell us a bit more about the total used car market in New Zealand. And we know there's quite a bit of rubbish there and Turners is trying to position itself above that rubbish, which I think is the right way to go. So what is the share of a pretty big and diverse market at the moment? And how do you identify the consumer segment that you're really looking after?

Okay, you're going to answer that, Todd? Yes. Thanks.

Thanks, Alan. Yes, so our share runs at sort of just under 10%. We kind of bounce around up to 10% and depending on what's happening in the market, when we look at the opportunity plenty of opportunity here. So it's a good insight. And you're right. We do try and position ourselves away from -- as a trusted brand and a trusted place to buy and sell cars. I mean one of the things I'd say is the existing fleet in New Zealand is old. We have roughly 20% of cars in New Zealand that are more than 20 years old. You kind of think about that for a minute. It's 800,000, 900,000 cars in New Zealand that are more than 20 years old, which is effectively a pass the scrapping age. So one of the things we do, we try and sell cars that are newer than that. We had this great combination of those sort of consignment cars, those x lease cars we get, which are generally 3- to 4-year-old cars tend to be the more expensive cars. Cars that we are buying locally or inputting our sales tend to be under that price point. But generally in that sort of $8,000 to $15,000 to $20,000 kind of range. And depending what's happening where we see demand in the market will pivot the bottom end of that or the upper end of that. So yes, that's how we're thinking about the market, Alan.

With your Tina profile, obviously, you have to do some consumer research. How do you identify the consumers that you're really targeting?

Well, I mean, generally, we're trying to appeal to anyone in New Zealand who wants to buy a car. And the research tells us that 60% of New Zealand has been less than $10,000 on a car. 80% spend less than $20,000 on a car. So New Zealanders actually don't have a lot of money to spend on cars, neither do they spend a lot of money on cars. So if you kind of think about that for a second, that's why we are trying to position our stock largely, and that sub $20,000 car. Once you get above that price point, you start getting pretty thin in terms of addressable market pretty quickly. But our brand is a broad church. That is the reality. And Tina has been unbelievable in terms of creating that broad church appeal. I mean it still staggers me that you get a 4-year-old who loves Tina and a 74-year-old. It's a very unusual outcome to happen. And that is a massive credit to our marketing team and Greg's team in terms of the way they've executed on that campaign.

It's a very ordinary looking heroine.

I guess that's part of your appeal, right? Is exactly that. Yes.

That's great. In the annual report, you're talking about 4% of the Japanese fleet being electric vehicle. That seems a surprisingly low proportion of new sales in Japan. Does that mean that you face a lot of competition in bidding for cars in Japan?

Well, there is a lot of competition for particularly international competition now for used imports in Japan. But the number there, Alan, is really highlighting how hard it is to get used EVs. They are not sold and great numbers in Japan because of essentially those manufacturers have pursued a hybrid strategy, let alone the kind of shipping complications. A lot of shippers don't want those cars on their boats anymore because of the fire risks and hazards and things. But yes, it's essentially -- it's super hard to get used DVs. And the way the market has gone, we do not really want to own us DVs either. It seems to be a way to take some money and lose it.

Todd or Grant, so you've talked about my auto shop, when do you think you'll better to report it as a segment?

It's Aaron, probably isn't it?

Yes. So at the moment, we are 50% of that business. And we have options over the next kind of 12 to 24 months to increase our stake. And I think at the time it becomes a subsidiary, we will start to disclose quite a bit more information about their business. So within the next 12 to 24 months.

My name is [indiscernible], Head of JS Elfa and shareholder. On Page 8 I think it was, [ 0.7 ], you said that you're expecting a slowly recovering economy. Yesterday, the Central Bank was stocking the opposite. And as a matter of fact, in July, something seem to have snapped in New Zealand. I'm not sure you've seen the continuous news. Credit card spending was down 4% in Auckland in July was down 20% on K Road. From aviation, we had similar news. So I was wondering if in your business in July also something happened. When you say compare May, June and July year-on-year, was there a steadiness of slow growth? Or did something -- could you see something in July as well?

Firstly, I'd like to say that in our view, the reserve bank got it horribly wrong in July by holding rates. And what's happening, and I have some sympathy for them. There is definitely a 2-speed economy. So the South Island is just going great guns. And anecdotally, there's evidence around unemployment, which supports that. So unemployment in Auckland unemployment under neatness 3%. So essentially, it's a full employment economy across the South Island. For our business, as Todd said, we're a broad church. People need to change their cars. So we have seen -- I mean it feels like grumpy growth, but we have seen growth in the first quarter -- on the first quarter last year across just about all of our segments. So we're happy. The business is still performing really well in what are still I guess, best described as mixed trading conditions. But certainly, the South Island, the Lower North Island, excluding Wellington, those parts of the country performing really, really strongly for us and for others, I believe. Auckland is just diabolical at the moment, Yuri, and your spending figures kind of highlight that. And I think that probably the thing that's different from when we publish the annual report is what's happened with CPI is it's hitting people when money they can avoid spending. They cannot -- people can't avoid buying groceries. They can't avoid paying insurance and rates or they shouldn't avoid paying insurance and rates. So I think the experience of CPI for people is higher than what the official numbers are perhaps. But I definitely think interest rates are still restrictive. In 2019, recovered, the OCR was 1.75%, even after yesterday's cut, it's still 3%. So I think interest rates are still restricting the recovery. And the reason for that is the Reserve Bank are worried that so much money is going into rural areas with high agricultural commodity prices. But certainly, interest rates need to come down to restart the Auckland economy. And finally, it seems that they realize that. So to be applauded, I think, for that, albeit relatedly realizing that. Thank you.

Aaron did a much better job answering that than I would have.

To you, Todd, you mentioned that the company owns 17 of its sites and carry those sites at cost in the company's books. Is there a potential for sale and leaseback kind of arrangement somewhere in the future?

Yes. There's certainly an opportunity to recycle capital if we need to. I would say we like owning those sites. Strategically, those sites, we want some protection around them. We want the control over what happens to them. So it makes complete sense for us to own them, which is why we are trying to own more of them. I mean, Aaron will tell you, if we're going into a new location, we always like to benchmark a lease option against an owned option and kind of use the 2 to test our conviction and thinking around the kind of costs that we're taking on. But I think increasingly, you can come back to the strategic rationale for owning these sites. I mean one really good example, I think, is we bought a piece of land out in Ross Common Road and worry 2014, 10,000 square meters. We'll be running our trucks and machinery business out there very successfully. But obviously, things have changed and worry over the last 10 years, so we would like to repurpose that site now as a car site. So the trucks and machinery site will move -- business will move further out. We move the car side on to the air. But in the long term, we may not be the best economic user of that land, we'll recycle the capital and go again. So -- but I think it's -- we get the choice around that if we own it. The next question is just so obvious. I don't know why anybody -- nobody asks it. And I don't know why you don't comment on it. It goes to the expansion of the company, either via organic growth, which is what you're doing or takeover -- do you ever consider taking over 2 cars? Is that something you've considered? I think I have answered this at a previous meeting, but no, is the short answer. I mean, we do we are interested in M&A, but you've got to find the right thing, and we're growing 14% year-on-year. We're growing quite fast, and it's just got to be the right thing. And we're always on the look at, but we've never found the right thing.

Okay. But I wouldn't mind you amplifying on why that is the wrong thing.

Well, I think it is the right thing. If you could find the right acquisition, I mean, my history of businesses, I think.

Is your question rate specifically to 2 cars, specifically, why that isn't a right acquisition for us?

Yes. Well, want to be disparaging about 2G cars. But I guess from what Todd was saying before, they're operating in a different segment than us. So if we're in that sort of $10,000 and up, I'm not sure what their parameters are, but more likely to be $10,000 and down as their name would suggest. So it's not a market we want to play in. Sorry, a couple of people.