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

[Audio Gap] So there are just some significant shifts going on in terms of the composition of that new car market. And obviously, it's the Chinese brands that are really making a big difference here. I was saying to someone earlier, the pie is essentially the same size. It's just being cut up into infinitely small bits. So yes, some challenges in that new car space for sure. In terms of the business divisions, one of the key messages at our Investor Day was that we have great businesses, but they are even better together. And with the level of integration, data analytics, the lead generation that's happening across the group, there is no doubt that those businesses are much stronger for being part of this group. And what we are doing is continuing to build out and perfect this used car platform that we have put together. So just starting on the left, very simple, but we want to sell someone a car. We want to lend them the money to buy that car. We then want to protect that car through our insurance products. We want to look after and maintain that car through the life of that ownership. And then at the end, we want to buy that car back off that person and put them back to the beginning again and sell them another car. It's pretty straightforward, right? But I just think it's worth sort of explaining why we are doing what we're doing. And to put it simply, we're just trying to take a little bit of margin through each part of out of those steps and to have as many customers as possible using every one of those components as well. I'm not going to spend too long here reviewing what we did last year, but we were obviously very pleased with a record year in the Auto Retail division. And as I mentioned before, what turned out to be a pretty tough first half and a much stronger second half as the economy in New Zealand kicked back into gear. And as we called out in May, trading has definitely been impacted by the Middle East conflict. We think this is short term in nature, but selling diesel and larger engine SUV type product has been very challenging and the prices on those units have unsurprisingly dropped and by some quite material percentages. Our expectation is that this will improve, and we generally see an uplift through the spring and summer period, and we're hopeful we'll see that again. It's what we've typically experienced. What I do want to spend some time on is probably more about the medium-term kind of things that we're doing to keep growing our business, and that's really our branch expansion plans. So we have 6 projects underway at the moment and another 5 opportunities that we are in various stages of negotiation around. So you can see that at the top of that right-hand side there. So we're confident that our expansion pipeline is filling really, really nicely. And as we signaled at our Investor Day, we're targeting another 15 branches by FY '31, which helps drive us towards that $100 million profit target. As the slide says, there's no profit impact from those new branches in FY '27. This is very much a build year for us. We obviously made these purchases and got these deals in place. And so this is the year that we are digging in the ground and building and things like that to get them ready for FY '28. But we think this property ownership aspect of our business is largely overlooked by the market. And I think as Grant mentioned before, owning properties for us is part of this 100-year view. We'll be building up this really nice property asset that over time will grow in value and is just another value sort of accretion opportunity for our shareholders. So what I wanted to do is just quickly go through each of the projects that we've got on the go at the moment. So starting with a new Turners car site in Wiri. So this was a property -- I think it was our second property we bought Aaron. Yes. Out in Roscommon Road. So 10,000 square meters. We've been running a trucks and machinery branch there. And when we first moved into that site, there was very little around us actually, and it's all sort of grown as you'd expect. But we think that's a great location now for a cars branch. So trucks and machinery move out to Drury, and we'll have a cars branch there in the next financial year, and that will contribute sort of another [ $700,000-odd ] to our bottom line as a result of that. So as you can see, a very high-profile site on Roscommon Road and very adjacent to the motorway and things. So I think that will work really well. That's what it will look like. It's -- we've sort of essentially got the offices there already as part of the trucks and machinery operation, but the processing site at the sort of left-hand side of that picture is new. This is another exciting project we've got in Tauranga. So this will be our second branch in Tauranga, so really extending our footprint in that important geography for us. So it's in Greerton. I can't quite see from that picture, but it's very close to sort of the township level. It's got around about sort of very adjacent on that sort of bottom right-hand corner of the site. Quite a big project for us in terms of there's an old RSA there, and we're in the process of -- well, it's demoed now. This is what the site currently looks like. So quite a big project in terms of what needed to happen to get that site ready for building, but we think it's going to be a great location for us. It's a very good catchment area. And that's a sort of site looking what it will look like eventually when we finish building. So yes, another exciting project happening there. Whanganui is another new location for us. We've got good experience now in terms of how we enter these new markets. This will be the smallest catchment area, Mark, that we've been in, right? Yes. Yes. So catchment area is sort of 50,000 to 60,000 people. You can see, again, it's sort of very high-profile site. We're sort of well advanced there. I think the likelihood is we'll probably have that sooner than Q1 FY '28, but we'll see how the project sort of evolves. That's -- we've had to demo a couple of residential houses in an old restaurant that was on the site. So again, contractors working very well there and kind of running ahead of time. So we're going well on that one. A more recent one that we purchased is a new site in Hastings, and this is -- has been an existing new car dealership that's being out of business for a little bit. So we've bought the site. So you can see there, it's a kind of corner site. We're demoing the buildings on that sort of right-hand corner, sort of in the process of consenting and getting things ready for works to start. So this will be the second site for us in the Hawke's Bay, which is something that we've been targeting for a while, just had to find the right place, and we think we've definitely got the right place now. That's what the site will look like. So we keep the existing building kind of on the left-hand side there and essentially create a big yard to present the vehicles. So that, again, will be a very good catchment area for us. We've also just this year, bought some new land in Hamilton. So this is on Te Rapa Road. It was land owned by foodstuff. So there's a new world next door, and this was excess land. And this is a replacement for our big -- kind of last of our sort of big super sites that was on Avalon Drive down there. So we're currently in a lease there, and we're pretty keen to get to get to a new site. So a bit like Christchurch, where we had to sort of put the bits of the puzzle in place. This is the first bit of the puzzle for us. So yes, again, very, very good opportunity for us down there. And to be honest, in a much more higher profile location than we are now. So that's good. That's underway, and that's what that site will look like eventually. You can see a very consistent kind of look and feel now we have the processing shed at one end and then the office space on the right. And obviously, it's very blue. We love blue. And then this is the new home for our trucks and machinery business, so the one that's relocating from Wiri. This is further down on State High 1 down in Dury. It's a lease site. And again, the project running well ahead of time and will be a very high-profile site for us running down the edge of the motorway there on the right-hand side as you're heading south. So yes, looking forward to having that in place. So as you can see, lots of work going on in terms of those branch expansion plans. Mark Wells and the team doing a great job there. Okay. So that's kind of auto. Moving on to finance. Yes, I mean, a very strong performer for us in FY '26, 1 of the 3 divisions that had a record profit. What I suppose I want to reassure people is that we're continuing to maintain our discipline around credit quality, and we've seen even further kind of improvements in our quality metrics. So that is a nonnegotiable for us around growing this loan book. And this is probably the one highlight I'd really like to flag with you today is that it's this consistent growth that we're now getting out of finance. So finance is very much back into growth mode. We had strong growth over FY '26. So the loan book was up 27% over that 12-month period. And in the first 4 months of this year, we've grown that a further 7.5% since the end of March. So we've seen that momentum really continue, which is great. So that loan book now almost, I think, probably this month, we'll hit through $600 million in total loan book, which is a great good milestone to achieve. And as you can see here, it's a slide we've shown before, consumer arrears tracking at 2.1% in July against the industry figure of 5.2% for auto loans. So the top red line is the auto loan industry in New Zealand. The blue line is our line. And as you can see, over time, those jaws are starting to open up. So the industry gets higher and we get lower. And this means we're outperforming the arrears in the broader market. So absolutely validates our strategy of being focused on the quality end of the borrower market. I think the other really big benefit from focusing on that quality end is that it delivers us great operating leverage. So we're growing our loan book, but having to add very few people to help service those customers because those customers are so reliable because they stick to their commitments and thus they're easy to serve. So we can grow the loan book, but don't have to grow the number of people we have in the business. So the upside for us is much, much greater. Okay. On to insurance. So like auto retail and finance, insurance also had a record year of profit performance, very stable and consistently performing division in the group. Our distribution networks are strategically important, and we're continuing to build out our digital direct capability as our additional growth channel. We've had good strong premium growth across all our portfolios and our dealer and finance broker partnerships are the sort of key driver there. In Turner servicing and repairs, we continue to get to gain traction in the servicing and repairs business. Our partnership with VTNZ, where we've integrated into their failed WoF process and comms is starting to deliver repair bookings. So we're focused primarily on the Auckland market there. It's still very much in its infancy, but we expect that to be a really good growth driver for bookings for servicing and repairs. And we've seen some good wins with small fleet owners and with one of Turner's major lease vendors who now offer mobile servicing to their lease customers. And so we're starting to take bookings for those lease customers. So we're really starting to see this integration thing working well. Lastly, for credit management, FY '26 debt referrals were constrained, and we talked about this at the year-end because several of our large clients, so essentially the banks have been through these kind of temporary holds on debt referrals as they sort of undertake big system change-outs for their collections area. So whilst they've been going through those system changes, they haven't been referring debt to us. That's starting to come back on stream now. But as a result, revenue was down 17%. And because of that, segment profits were down 49%. You may recall that we also wrote down the goodwill on EC credit by $7.5 million at the year-end. And with that new intangible valuation reflecting just our more conservative future earnings forecast for this business. But so far, in FY '27, we've seen all but one of those banks recommence their debt load, and we're seeing really good improvement in profit performance in the first part of this financial year. So yes, good to see those guys back on track. This is the latest data from Credit Bureau, Centrix. New Zealand credit metrics have somewhat surprisingly continued to improve and are at their lowest level since 2021. What this suggests to me is that people are much more aware of their credit scores and the impact of defaults that they might have. I think there's just a general broader awareness of credit scores now. But I think what we are seeing is people actively acting conservatively by building savings buffers and keeping on top of their commitments. Consumer behavior is being shaped by concerns around interest rates, unemployment and political uncertainty. And the result is less spend on discretionary items. So consumers are being cautious rather than stressed, spending less, but staying on top of their financial commitments is our interpretation of this data. And just to round out sort of the business stuff. So our key message around funding is that our banks are being very, very supportive of this business. Aaron and his team have done some great work over the last 12 months to improve our funding structures. And the result of that is we've been able to improve our pricing with the banks. They've increased our credit limits and they've reduced the amount of capital that we require to support that funding. And just to give you a quick example of that, we now have enough capital in Oxford Finance to grow that loan book by essentially another 50% to get it up to that sort of $800 million level without adding any more capital in. So we're very well positioned with the banks. Okay. And then just to wrap up before I hand back to Grant. We -- with the outlook, we thought a good way of showing this was to highlight sort of what has changed and what has not changed since we last updated the market in May of this year. And first to start with what has changed. I mean, obviously, this conflict in the Middle East has persisted much longer than everyone expected it to. That has slowed New Zealand's economic recovery without any doubt, and it has dented consumer confidence. Higher fuel prices have materially reduced demand for diesel and larger petrol engine vehicles, making the first half of FY '27 a far harder trading environment than either of the 2 prior first halves. And although we -- the team in auto retail repositioned inventory quickly, the effect on vehicle margins, so the cars that we own that we sell through the network has been longer and larger than we anticipated in May. On top of this, we've had lower sales of [ big ] leased cars. The reduction in market prices for diesel Us and petrol SUVs has reduced the levels of sales as those lease vendors just take time to adjust to the new market prices. This is an effect we have seen over the 20 years that Aaron and I have been involved in this business. We've seen this a number of times as prices come down, those lease vendors just take time to adjust. So consignment units sold are down 14% for the first 4 months of July. What I would just remind people about, though, that we still have those cars. We will sell them. It's just a timing issue, and they're already starting to adjust their prices more aggressively than we've seen them in the first sort of 3 to 4 months of this year. So we will still get to sell those cars. Secondly, what has not changed? The diversification in this group continues to deliver earnings stability. Finance growth -- so that's profit growth in finance has more than offset the reduction that we've seen in auto retail profits. And group net profit before tax for April to July is 4% ahead of the same time last year. So we've got challenges, but we're still producing group profits ahead of last year. And I think it's a great result given the conditions that we've been operating in. We've seen strong loan book growth continue at 7.5% since March and arrears still tracking at very low levels despite the pressure on New Zealand consumers. And insurance and credit management are both broadly in line with last year. Most importantly, what has not changed is our long-term strategy. We remain extremely confident and continue to work at pace on both our auto retail branch network expansion and our finance book growth opportunities. We are absolutely 100% confident in that strategy, And so what does that all mean? We continue to target $65 million profit before tax in FY '27. So you may recall that was our FY '28 target, and we called out at the end of last financial year that we would achieve that a year earlier. We're still pushing very, very hard to achieve that number a year earlier. But without a resolution to the Middle East situation and the volatile swings in oil prices and a recovery in consumer confidence, sales of large engine vehicles and diesel product, we think, are still going to be challenging. And that creates some short-term uncertainty and some risk in achieving that $65 million a year earlier. What I would point out, though, is a faster recovery around that situation has the opposite effect. Consumers will be more confident, margins will improve, and so we get that kind of opposite impact. We're just calling out that there is some risk at the moment. But I want to reiterate the short-term nature of this environment and that we fully expect strong earnings growth momentum to return in FY '28. Nothing has changed in management's conviction in that medium-term plan. Turners is tracking well towards its $100 million net profit before tax target by FY '31. Thanks very much, everyone, and I'll hand back to Grant now.

Thanks, Todd. [Operator Instructions].

Alan Best, shareholder and proxy holder for members of the Shareholders' Association. I'm interested and we recognize that this is fairly early days for the service side of the business. But having been a manager in charge of services, I appreciate that there's some very specific challenges First of all, maintaining a staff of reliable and qualified people to do that out and about type service. Secondly, the operating within the margin limits and management has a challenge to make sure that they do operate within those guidances. And finally, there's a brand challenge always in when you're operating in a service business because you're dealing with a very splinted market as you have done with secondhand car sales. So I wondered if you could comment a little bit on the structure and the challenges that you're overcoming with that particular business.

Yes, sure. If I just touch on each of those. So -- we don't typically have a challenge finding people. Most of the technicians are happy to get out of a workshop and have a bit more control over their day-to-day working life and being in a van and sort of moving around Auckland or Hamilton or Tauranga, they enjoy the variety rather than having some workshop manager be mean to them. So that's not a challenge. We are certainly looking to prove this model out. And our focus is really for Richard Wafer, who runs that business. So he still owns half of the business with his co-founder. We really want to see improve this Auckland market out first. So we're focused fully on that before we roll out to any more locations. The big -- the #1 challenge is just is building demand in building awareness that having your car serviced and repaired in your driveway or at your work is an option. And so that's our challenge.

Okay. Ron Robertson, that was a great presentation, very informative. And it more than covered the only question that I really have, which wasn't in regard to this year's earnings, but that you have reaffirmed the 5-year goals, aspirations of the company and the $100 million profit before tax. You've already covered it very well. Anything additionally you'd care to say about that?

Well, I don't know what to add really, but we're trying really hard towards it. And when we set goals, we like to overachieve them as well. So that's all I'd add. It seems to be all the questions. Okay. I'd now like to move to the resolutions before the meeting. These were notified in the Notice of Meeting and explanatory notes have been provided. Voting on each of the resolutions in the Notice of Meeting will be by way of poll. Baker Tilly Staples Rodway, the company's auditors, will act as scrutineers. Please use the voting paper used in the [indiscernible] you used. It doesn't quite make sense, but voting paper you received in the mail or were given when you registered for this meeting. If you don't have a voting paper, you'll be able to request one from the scrutineers. Only shareholders, proxy holders or corporate representatives of a shareholder may vote on today's resolutions. So Resolution 1 is to record the reappointment of Staples Rodway as auditors of the company and authorize the directors to fix the auditor's remuneration. Does anyone have any questions or matters for discussion on Staples Radway? Alan?

Mr. Chairman, I think I'm raising something that's already been answered partly by Todd. But the NZSA Shareholders' Association has asked a question of the company about whether there's any appetite to put the audit business up for tender because it is rested with Staples Roadway for so many years without much change. And it's important that we get an idea from you of the internal procedures, I suppose, that enable you to preserve that or to ensure on behalf of shareholders that there is sufficient independence of the auditor. Just having one aside on that, too, I do remember that as a shareholders' association, we were very keen a few years ago to see that other auditors be entered into the race for auditing and rather than simply follow the big 4. So we're very pleased that Staples Roadway is one of those that has come in to a larger and growing company on that matter. So could you make us a few comments on the internal audit procedures?

Yes. We might pass that one on to Aaron because he's the closest to that side of the business.

Thanks, Alan. Yes, in terms of the appointment or ongoing appointment of Baker Tilly Staples Rodway, I think that -- we are comfortable as a group that there is appropriate auditor independence because they do follow strict partner rotation policies and guidelines as outlined by the FMA. And it's my understanding that Turners is one of their larger customers. So what that means is that our audit file gets significant FMA scrutiny when FMA are reviewing the work of Baker Tilly Staples Rodway. So I think where we value Baker Tilly in particular, is that it does provide some diversity from the big 4. They are extremely price competitive. They value our business, but we're equally comfortable that the independence, there's no issues with independence. And in particular, the heightened level, I would argue, of scrutiny that they get us being one of their larger, if not largest clients from the FMA kind of should give our shareholders some comfort that auditor independence is being pretty strictly followed.

Thanks, Aaron. We got someone down the back there, Barbara. Yes.

Do you still get price indications from the other auditors as to what they'll charge?

We haven't done a pricing exercise for a number of years, but it's pretty public information. You can see in an annual report what the price levels are for NZX 50 listed companies, and that does give us a lot of comfort. And we typically -- we're pretty -- I would -- well, not mean, but we're pretty disciplined around cost in this business.

No one else? Okay. Resolutions 2 -- actually, I should do the formal part here. I'd like to move this motion. Do I have a seconder? Thank you. The next 3 resolutions are in regard to director elections for Matthew Harrison, Lauren Quaintance and Antony Vriens. We believe that having to -- saying how good you are. I can't blame myself here, John Roberts. We believe that having directors with relevant industry, commercial and governance skills is essential for the continuing success of the Turners Group. Continuity of people in this group is also very important. We currently have directors with hands-on experience in the finance, insurance and debt management sectors as well as directors with expertise in governance and diverse experience and entrepreneurial skills in sales, digital marketing and communications and business growth. So I'll ask each of Matt, Lauren and John to come up and speak in support of their reelection. And then after they do that, well, part of that is you can ask questions. And after they do that, we'll do the proposing and seconding. So can we start with Matt.

Thank you, Grant. Good morning, everyone. It's a pleasure to be here. My name is Matthew Harrison, and I'm very proud to be standing here today as a Director of Turners. Turners is an exceptional company, one which I absolutely love dealing. I also love cars, so that helps a bit like Grant here. And I'm very proud to have been sitting on the Board since 2012. I also want to acknowledge our fantastic management team that we have, led by Todd and Aaron. They do an absolutely amazing job. I think we're very lucky and probably one of the luckiest NZX listed companies. I'd also like to say thanks to our fellow Board members who are very exceptional in their role, led by a fantastic Chairman, Mr. Baker, who's been there for a while, but he's doing a great job. Most importantly, I also want to say thanks to our staff at Turners, Autosure, Oxford and EC Credit. Without this large team of dedicated and passionate people, we simply wouldn't have the great business that you see here today. So thanks, team. As you may be aware, I joined the Board when I sold EC Credit Control to Dorchester Pacific, which was back in 2012. I've been fortunate to have been involved with Dorchester and then Turner since this time. My family is quite fortunate to have a combined shareholding of approximately 6% in the company, and I'm very proud to represent these interests at the Board level. I firmly believe that our family's goals and views as shareholders are very much aligned with every shareholder in the company. We certainly share all the same goals with growth in dividend, sales and obviously, growth in the share price. Presently, I'm Chairperson of the Lending and Credit Committee. This is a role, which I very much enjoyed. And I think given my history within the credit industry, I believe that I can add some value to this role. Our LCC has been able to improve the performance of our finance business over the last few years as you've seen. And we've also seen some very good growth in the loan book over the last couple of years. In addition to this, I also sit on the Board of our property company. I'm quite involved in this, mainly because it's something I very much enjoy. I think Mark Wells, who leads that part of the business, probably doesn't agree with me all the time. But yes, we seem to get a few things done, and we're certainly doing quite a good job with adding to the property portfolio. I've really embraced this, and I believe that the acquisition and the development of our property footprint is extremely valuable. And over time, we will certainly generate lots of shareholder wealth. I stand here before you asking for your support in my reelection as a Director of Turners again, which in my very humble opinion, we are one of the best run and most impressive businesses on the NZX. That's it. Thank you, everyone. Any questions? I'll hand back to Grant.

Thank you, Matthew, very eloquent. I would like to move the motion of renewing Matthew Harrison's directorship. Do I have a seconder? Thank you. [ Do I have a seconder? ]. Thank you. Lauren, could you please come up and speak.