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

Okay. We've clicked over to 10:30 so we'll get on with things. So welcome, everyone, this morning. Thanks for taking the time to join the call today. Looks like we've got a good solid group of people online. So thank you very much. Usual team presenting, so Aaron Saunders with me, the Group CFO; and myself, Todd Hunter, the group CEO. So we'll go through the results and we'll open up for Q&A, so people can just use the raise hand function. Great to see James and Kieran have already got their hands up. So I look forward to that. Or alternately, you can just use the chat and we can see the questions come up. So either is good for us. And we'll just open the audio as well. So you should -- I think you can probably just do it yourself. We'll sort that out when we get to the end. So let's sort of kick off with things. I think we're really pleased with the 6 months just completed. Now the record result for the business, highlighting it again the consistent earnings trajectory for the Group. Turners has continued to grow earnings despite what has felt like a very, very challenging macro environment for us to operate in, particularly sort of the change from the beginning of the calendar year into that sort of April, May, June period. Turners has -- we've seen vehicle margins grown. Finance has been an absolute standout result and insurance has delivered really good growth as well. And we've also taken a number of steps, which Aaron will go into, to improve our capital effectiveness. In short, I think this is another great result for Turners. Yes. The used car market itself has recovered somewhat over the last year. But really, the big change is being the reduction in used imports coming into the country and it's sort of driven the fastest aging of the fleet than we've ever seen before. And largely, that's just simply down to the government regulation that's been in place with the Clean Car Standard. So that has put quite a lot of pressure on securing stock locally. It's just sort of forced more dealers into that sort of local sourcing channel, but our expectation is that we'll reduce with the announcements this week around the relaxation to the Clean Car Standard, that will certainly open up the import channel and make it more viable going forward. We believe there are a number of benefits for Turners with more replacements, more placement of older vehicles, leading to increased volume for our damage and end of life division, more transactions in the market, which just drive opportunity for Oxford and Autosure. And just going back to that earlier comment, it should reduce competition for local stock as more display sort of import dealers go back to Japan. So I think net-net definitely a benefit for the Group. That pressure on securing stock has forced a number of these smaller sort of marginal operators to lead the market. And it's an interesting graph when you kind of look at that over that sort of 7 or 8-year period, just how much that has dropped, so 27%. But you have to go back to 2012 to find dealer numbers as low as they are now. Okay. I'll just hand over to Aaron now who's going to take you through in the next sort of 10 or so slides.

Thanks, Todd, and good morning, everyone. Results-wise, we're pleased we've eked out a good increase in revenues, particularly in the auto businesses and profit lines, profit before tax and profit after tax, both up, 13% earnings per share, up 11% and the directors have declared a fully imputed dividend of $0.08 per share, which will result in a slightly over 10% increase in the full year forecast dividend. In terms of profit growth, it's been well distributed through the auto-focused businesses with a little bit of interest cost savings coming out of corporate. Auto retail profits have lifted due to improvements in owned car margins and a stronger commercial business, and that's our trucks and damaged and end of life business. Finance profits are being boosted by solid growth in the loan book and an improving net interest margin. And Insurance has seen good growth in the premium base, which will underpin higher profits going forward. In terms of the balance sheet, Inventory levels have grown since September '24, but they do remain low relative to historical levels, and we would certainly like to grow these further at the moment. Finance receivable growth has come about as a result of strong market share gains across the originator base. Our property, plant and equipment assets are up, and that's off the back of completion of new owned sites in Christchurch and Napier and the purchase of a new site in Dunedin. The borrowings are up in line with the increase in finance receivables. And importantly for us, we've deployed no additional capital to support the increased lending in their business. The business continues to be well funded. We've made some really good progress in the last 12 months just reshaping our facilities. Our corporate capacity is more than sufficient to support our committed branch expansion plans in auto, which is sites at Auckland, Tauranga, Whangarei and Dunedin. And there's a strong appetite from our lenders to support us further.

Sorry, I'm just going to make sure I've got everyone muted here.

We have completed our inaugural public turnout transaction out of the securitization warehouse and that executed on the tenth of October. That's a really big step in the funding of Turners in Oxford Finance. It's our first public transaction. So the main warehouse -- mezzanine warehouse funded by BNZ, and we've essentially brought on 13 new investors into that public deal. And yes, particularly well supported by local institutions as well as a couple out of Australia. The structure gives us quite a significantly improved capital effectiveness, which really well support our growth objectives in Oxford without that requirement to put any further capital into the business. So to give you an example of how this structure is landed, our capital requirement has reduced from 8% or $16 million on the $200 million facility, down to 1.4% or just under $3 million. So that's a real win for us in terms of enabling further growth in Oxford. Which leads me to our capital effectiveness, which is something we are prioritizing across the business. So that's at a board and management level. We're prioritizing increasing our capital efficiency and the way we allocate to ensure the business remains agile and also focused on the highest returning opportunities. The recently completed term-out has not only reduced our capital requirements, but contributed to a reduction in funding costs. And we're developing a deeper capital management framework across the business, really optimizing our finance structures, reallocating surplus capital from lower return areas and driving targeted growth, particularly in Auto, Retail and Finance. These initiatives, I believe, supported by the strong culture in the business and a highly engaged workforce just on 2/3 of own shares in the business through participation in the employee share scheme really position Turners to capture further upside as the market conditions improve. In terms of our dividend forecast, shareholders continue to be rewarded with a payout ratio of just under 70% of net profit after tax and that will take this year's forecast dividend up to $0.32. That's a cumulative annual growth rate of 11% over the last 12 years based on a share price of around $7.70, that results in a gross yield of 5.7%.

Great. Thanks, Aaron. We'll just go over the segments now. So yes, let's start with auto. Auto retail revenue up 6%, profits up 9%, which is good, good to see that operating leverage, growth driven by an increase in locally-owned units and higher margins on the locally-owned stock. As many of you will know, we sort of relaunched Tina campaign this year, so Tina 2.0 and the associated sort of uplift in marketing spend of about $600,000 over the first half last year. And we've had a very positive response there, new campaign. We have seen a reduction in the number of lease consignment cars through the business, so down around 8% and we've also had a lower proportion of retail cars sold mainly due to vendors prioritizing speed to sale, so their auction channel over the retail channel. It's just that prioritization of speed over return in what's been a pretty challenging demand environment. And also, we are purchasing a higher number of older cars, which kind of reflect what's happening in the fleet with a rapid aging going on at the moment, which means we've just got lease retail suitable units being purchased. Margins have improved. So despite the macro challenges, the division has delivered margin and profit growth half-on-half. And then yes, the rapid aging of that New Zealand vehicle fleet has resulted in more end-of-life vehicles being purchased, which as we've said before, unsuitable for retail. But that non-insurance written-off segment as a growing opportunity for our damage and an end of life business. You can see that in the red part of those bars there. In terms of our branch expansion plans, we've delivered 5 new projects over the last 6 months. So that's a larger site in Invercargill, the 3 sites in Christchurch and a Napier commercial site. So we are really pleased with the progress we've made on that front. And also really pleased with how the pipeline is building. So we've added Dunedin in there and we've got Roscommon Road, Tauranga, Whangarei now all sort of locked in for delivery, which is great to see. And the pipeline of opportunities is continuing -- is a continued sort of focus for us. So we here have got a number of sort of in progress negotiations at the moment. They're not sort of concluded, but certainly kind of a lot of lead in the year in terms of things that we're working on, which is good. Finance, yes, super result for the Oxford team in the Finance division. So revenue up 10%, signaling profit, up 18% and that book is definitely back in growth mode, which is great to see. We're continuing to sort of grow our quality metrics or improve our quality metrics. So we're certainly not foregoing any sort of downgrade in terms of the quality of loans that we're looking to onboard. And we've managed to achieve a small amount of NIM expansion over the 6 months as well, which is really positive. So you can see just -- we've had a really solid growth in the first half, 13% up over first half last year. And I wanted to let you all know today as well that we've actually just broken through $500 million yesterday. So the team are stoked with that. And certainly, that's been achieved much earlier than we had anticipated at the beginning of the year. So it's good to see the momentum in finance continue into the second half. Yes. Our quality focus hasn't shifted. We're still seeing sort of small lifts in our overall credit scores, which is good. And that's just as a result of us continuing to tweak and tighten our credit policy for the opportunities where we see to do that. So yes, I think everyone should take comfort from the fact that we still have a laser-like focus around the quality of this loan book. And yes, I mean, this is a slide we've shown many times before, but I think it's important to just review that quality focus leads to very good arrears performance. So we are tracking at generally less than half of what the industry average is for the auto loan book across New Zealand. And also good to see our hardship applications have sort of backed off a little. So you can see here, we've moved from 67 in the first half last year down to 55 a month in the first half this year. So yes, I suppose I'd take that as another small sign that things are improving more broadly. And then lastly, yes, that's just a nice little lift in NIM off the back of some of the improvements in funding that Aaron was talking about and just a continued -- really disciplined approach to our risk pricing, which is helping as well. Okay. So let's talk about insurance quickly. Gross written premium, up 10% in the first half. And obviously, that flows into our earned premium going forward. So really good to see that top line revenue growth and the reason that has happened is we've increased the breadth of distribution in our dealers and brokers and our digital direct offering is certainly starting to get some traction, which is always what we plan for, and we're continuing to see good growth in the MBI, comprehensive motor vehicle insurance partnership with Vero. Our risk pricing is more layered, leading to the improving claims ratios and the quality of the portfolio. And just a reminder that we don't underwrite that motor vehicle insurance risk, we just take an earn on every policy sold and every policy renewed. So that's the growth in the motor vehicle insurance portfolio. So you won't see those revenue numbers flow through our accounts just the commission that we earn. It's a digital direct. And just the fact that claims continue to be well managed, as you can see on the left-hand side of that slide with aircraft here, there's a little bit of claims, sort of claims inflation. It seems to be pretty specific to a certain category of cars, which unsurprisingly to those who've heard from us before it relates to European cars. And it's something that we're just keeping an eye on going forward. So just wanted to call it out. In credit management, the recovery here has been challenging. And you can see that was revenue down 14% and profits down 42%. There's no doubt the economic situation is having a negative impact on consumers' ability to meet arrangement. So our keeper promise rates have dropped. And we've also seen a number of major clients go through system projects. So we've changed out the collections software, and that has resulted in extended periods of debt not being loaded -- so debt load is down 24% half-on-half. We should see net debt load improve as those system projects are completed and debt load normalizes. But the challenging trading conditions are resulting in a slower turnaround in this business than we expected. So as a result, our plan is to review the carrying value of that business at year-end based on the second half performance and the momentum and outlook that we see for that business going forward. In Turners Servicing & Repairs, yes, we've been busy rebranding that [ motor ] shop business to Turners Servicing & Repairs. Largely, that's completed now. We've lifted the number of technicians since the beginning of -- since the first half last year. And really seeing a great developing relationship with BTNZ as well. So we've taken over the prepurchase inspection product in Auckland and looking to roll that out in further locations around the country. And yes, we've now clipped over more than 4,000 Google reviews now of an average score of 4.9. So we know we continue to deliver a great customer experience in this business. Okay. Just a few comments around the outlook. We feel like the risk outlook has remained pretty stable for us. A number of our particularly regulatory risks have improved with changes to the Clean Car Standard, the climate reporting threshold increasing and some of the changes the government have introduced around the CCCFA as well. So that feels like that aspect of our risk has definitely improved. I think we continue to feel the recession risk has decreased and trading conditions should improve as the impact of those lower interest rates flow through and the primary sector kind of trickles down through the economy. More specifically, pretty much the same game plan for us. So a continuation of our branch expansion plans. We think we'll see some recovery in lease units and improvement in retail numbers as the economy continues to track out of recession, consumer confidence builds and consumer demand builds off the back of that and vehicle pricing, certainly should lift off the back of that, which will be supportive of margins. In Finance, yes, we maintain our accretive discipline. That remains a key priority. We are seeing the expected improved performance in FY '26 as a result of lower-than-expected payments and credit losses and improvements and interest margin, and we'll see continued growth in origination in the second half. Insurance. Growth in gross written premiums will flow into those forward earnings, claims ratio is stable and just bear the contribution from the new distribution arrangements we have in place. And in credit, the challenging conditions feel like they'll remain and we'll review that carrying value at the end of the year. So guidance wise, yes, I mean, clearly, there's still some sensitivity around the pace of recovery in the economy. No one will be too surprised about that. But we feel like we're certainly on track to deliver a result around $60 million in profit before tax and that will deliver an expected dividend payout of at least $0.32 per share. So just a final few comments from me just before we open up for questions. I think this year, so far, reminded me of that Mike Tyson quote, which is "Everyone has a plan until they get punched in the face". And it's fair to say that the first half has definitely unfolded differently than we expected. I think it's been probably much harder than we anticipated when we kind of got through the last quarter of last year. So that recovery has been much slower. The demand has been more impacted. We've had lower consignment volumes and more competition for local stock. But despite the punch in the face, we've reacted. The team has done an outstanding job and we've still delivered a record result in the first half of this year, which just goes back to demonstrating the Group's resilience and agility in keeping us on track for delivering another record full year outcome. Our teams have continued to press forward regardless of the challenges to keep expanding the branch network, grow the loan book in size and quality and grow insurance revenues. And we think, yes, that second half is definitely going to be more favorable than the first half as the economy improves.

Okay. We'll open up for questions now. So James, do you want to kick off?

More than happy to. Yes. Thank you, team, and congrats on a good performance. It's an easy game to avoid recessions obviously. Just going back to the comment with regard to inventory looking a bit light. I mean obviously, the branch expansion is probably helping you source more but can you talk to anything else that could sort of improve that? Just sort of interested in sort of price versus margin, et cetera, if there's anything that could be done to improve volume or you prefer to take the margin?

Yes. I mean it's a delicate balance, isn't it, James because we could quite successfully go buy a lot of cars very quickly, but buy a lot of problems. So it's always a managed effort. What we have done in the last sort of probably a couple of months has put quite a lot more focus into the actual cars that we're trying to target the kind of response and kind of customer kind of content plan that we have around getting people to the branch and just being, I'd say, more reactive. And it has certainly worked. We've really prioritized to our branch managers that they need to be personally involved in these transactions like that is their #1 focus at the moment. And we've seen quite a good uplift in our buying over the last sort of 4 to 6 weeks. So inventory is back lifting again. We're back sort of over that sort of 3,000 units owned which is really, really positive for us leading into these critical sort of summer months of trading for us. It's typically a higher demand period. People kind of come out of the winter period. They're just feeling better about life because the sun is shining and then there's rain, and they've got more time on their hands to go and purchase cars and combined with that sort of recovery in the economy and confidence of things we're seeing the right things happen. So yes, we're -- I think we're seeing the right things, James, and the kind of focus that we're giving it is seeing us improve.

And obviously, on the system side of things as well, sort of -- as far as avoiding the wrong type of cars for losses. How is that going across the country?

Yes, it's going well. I mean if you recall, sort of over the last 2 years or so, we kind of deliberately targeted that lower-priced stock because that was where the demand in the market was. That the demand had kind of leaked away for those cars sort of north of $20,000. And so we're kind of going back into that space as well. So I think we're -- again, we're kind of positioning for this recovery focusing on the kind of right price points for where we think the demand is going to be.

And obviously, your chart with regard to dealer numbers falling, has that provided any opportunities from a further site acquisition perspective? I would imagine sort of weak economy and easy to say those dealers being in trouble with other -- is it spurring up other options for yourselves?

Yes, I think it has I mean, Aaron you probably want to talk about it, Invercargill is good example of that.

Yes, definitely, James. So we -- on the 1st of April, we moved into a new site in Invercargill which is about 2.5x bigger than our existing site. And that was -- that had been a competitor of ours who pulled out of that market. Similarly, the site that we just purchased in Dunedin was previously came in to buy a car dealer who had shut up shop. So certainly, yes, the state of the economy and the car market, in particular, is throwing up quite a bit of opportunity for us. It does feel like now is the time to go harder in terms of our branch expansion strategy.

Yes, and I'd probably concur on that. A nice work on the finance book. I can see that through 500. Maybe just talk about sort of aspirations for that book and where in that sort of premium space that you are, where do you think your market share is and could go to?

Yes. We -- so our market share in Oxford sort of tracks at around 8%. So yes, I mean, there's plenty of opportunity for us from a market share perspective, no question. We've had good success in terms of traction with the broker community in New Zealand. So that's kind of -- that's been very positive for us. And the traction that we're getting is around the speed of response that we can give dealers and brokers. It's the speed of an answer whether that's a no or yes, we can give them an answer very, very quickly and not take any more risk on in that decision from our side. So we've really put a lot of effort into making sure we get the critical information upfront, but not get more information than what we need to make the right decision. So yes, that's working really, really well. And in terms of our aspirations, I mean, we're growing really well at the moment. There's no reason that they can't continue. So yes, we're thinking big here.

Yes. Thanks. And then second thing, obviously, the 17 technicians and servicing and repairs, et cetera, that seems like a low number relative to the number of sites around the country for Turners itself. And I assume many of those sites would have the potential for 2 or 3 or more vans, I would have thought. So can you talk about what that could look like? Is that a 50 or 100 in a few years' time?

Yes, it could be up, yes. I think we're taking a measured approach to this. We just want to make sure we're bidding in the model, making sure that we can see the growth in demand to support that. I think -- I mean, probably what has surprised us a little has been -- I think the economic sort of environment has probably caused people to kind of delay some of that vehicle maintenance and servicing. So we probably haven't seen demand growing quite as quickly as we would have liked. I think they have all changed. But we're going to take a measured and sort of responsible approach to that.

Last one from me and I'll pass it over to others. But maybe just more on the credit management review with regard to the goodwill there. So roughly sort of $25 million potentially of goodwill there, albeit some of the comments that you talked to were sounded more one-off in nature with regard to the impacts on the credit management side I think, so just sort of interested about what's driven your view to need to review that to the downside? Or is it just a permanent view that it's going to be a small business and tighter margins?

Yes. I mean I think there certainly have been structural changes in the credit market, James, over the last 5 years. For instance, the revamp of the CCCFA. I mean I guess the thing that kind of stands out for me is before that, every couple of months, you get a letter in the post from the bank saying your credit card limit has gone up by a couple of thousand dollars. Now that doesn't happen now. In fact, to increase your credit card limit, you pretty much got to go through a whole new application process as the banks apply those affordability requirements of the CCCFA. So I think the big kind of opportunities in that business are really around growing share of what appears to be a slightly smaller market and particularly in terms of collecting unsecured debt on behalf of big corporates like the banks. So yes, perhaps what's changed is our view that some structural factors have changed in that market. And that's kind of borne out by the fact that we're just not seeing the recovery that we have expected over the last couple of years in that business. And yes, there have been some point areas where banks have been upgrading systems and things like that. But yes, I think we just want to have a look at that business, revisit the trajectory, really look at where we think we can grow it and then just assist that business. Off the basis of the fact that it isn't part of the core auto story and our focus and our significant competitive advantage lies in that used car ecosystem.

Yes. And then from that, does it sort of increase the potential that a disposed always is being thought about?

It doesn't reduce it, James.

Yes. Very good. I'll pass it back to others. And again, well done as an outstanding result for a dodgy economy that we've all been experiencing. So well done. Thanks.

Thanks, James. Kieran, should we hand over to you? Can you unmute yourself, I think, hopefully?

Thanks for the presentation and well done on another strong result. First one from me is just on auto. We've seen the margins on owned units tick up 17% from what was a fairly soft prior period, but they are down 16% from 2H '25 levels. So can you just talk us through what drove the half-on-half decline? Was it digestion of the new Christchurch sites, the weaker economic conditions? And maybe just talk to the seasonality of the margin profile in that business as well?

Yes. I mean, my view is always that margins -- transaction volumes is normally a bit lower during the summer half for us, which is the October to March period, but margins are always stronger. I think the other thing probably that I'd call out is that we have ended up buying more older vehicles at lower values, which have still delivered positively for us, but slightly lower dollar margins than we see on the kind of higher ticket price vehicles. I'm pretty comfortable with where margins landed in the first half, given that the first half of this year, for us, the April to September period was just felt almost like a rerun of April to September last year and that reasonable momentum coming out of summer and in April, whether that was Liberation Day or people getting a reality check post-summer holidays, but demand...

Employment, unemployment...

Yes, it just felt like it materially softened in the April to June quarter, which is exactly what happened in the year before. So we're hoping that we'll get out of that cycle in the year ahead. But certainly, there is a spring lift in margins. There's more buyers in the market. Inventory is somewhat constrained. So I feel that whilst we haven't broken the seasonal pattern, we're coming into the better part of that seasonal pattern now.

Yes. Margins are tracking kind of $100 north of where we ended up in the average for the first half year and into the second half. So yes, you're kind of seeing that left already.