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Thank you for standing by, and welcome to the Money3 Corporation Limited FY '20 Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Baldwin, Managing Director. Please go ahead.
Thank you, Lexie. Good morning, everybody. With me -- I'm Scott Baldwin, Managing Director of Money3. And I also have here Mr. Siva Subramani, Money3's CFO, with me here as well.As we go through the conference call, if you haven't already done so, I encourage you to have -- to open the first half FY '20 PowerPoint presentation that we've released on -- for the stock market this morning. So we will go through that presentation and then take questions at the end.So just starting off with Money3 consumer automotive finance. We have all but completed the transformation of the business into a consumer automotive finance company. For those of you that have been following the journey for some time, you would be aware that we divested our branch and online businesses early last year. As a result of that sale, we've taken all of the funds from that. That's pretty much all now being deployed back into secured automotive loans and has also supported the acquisition of a business in New Zealand.So now we sit here today as a very focused business, focused on providing loans for all vehicle types in a secured manner. For those of you that followed the results over the last 12 months, you'll see that the gold bar reflects the revenue from the divested operations, which we think has been a tremendous result. From this time last year, we've grown our secured receivables by 49%, which has come from a strong focus on our vision of becoming a nonbank provider of secured automotive finance. All that said, the business has also made some investments, and we're very focused on improving our application process and very focused on being a responsible vendor in this space and underpinned by our continual investments in technology in how we take those applications and the information that we get from clients.I'm also delighted to say that we have originated a record number of loans over the last 6 months, and we think that this is likely to continue given the current environment where there's less lending appetite from banks. So I think we'll have a few years of tailwinds in terms of getting our lending operations to go.So just moving on to the next slide, 3. We put this in here mainly so that you can see the story of the continuing operations of the automotive finance side of Money3 as the core business where we stand today. And you'll see -- hopefully people think that they're good results, and you should expect those principally to continue. Revenue will be up this year. The leading indicator for that has been the growth of our loan book both here and in New Zealand, where the good predictors of growth have probably been a little bit better than that 5-year trend in this 12-month period.In terms of EBITDA, as we manage the corporate expenses across what was a slightly smaller business, you should expect to see growth slightly under the 30% average but still growing quite strongly there. EPS growth likely to be above trend as we originate more business in this space and would benefit from that in the next 6 months. And we will discuss more on the loan booking details as we go through it. We believe that gross receivables at the end of the year will be in excess of $475 million.If we can now progress on to the half year results so that we can go through that slide. You can see that we've produced -- followed the trends on every metric that we measure the business by and then principally because we are just looking at the continuing operations here, and New Zealand wasn't part of those numbers 12 months ago. So we think that the investment into the business in New Zealand has been terrific for us. It's almost replaced half of the revenue and a considerable part of the profit that came out of our divested operations, and you should expect to see good growth out of New Zealand. That's not to mention the amazing growth out of Australian operations. Revenue is up significantly there as well off the back of continued loan book growth.I won't go through these in detail other than to say that the Board maintains a $0.10 dividend for the full year with $0.05 fully franked being declared for the first half.Moving on to the half year results. So as you can see good growth in revenue, no doubt investors will -- if you're looking at 4D and [ the lagging effect ] to the half year, you'll see that we've taken the time to split out bad debts from impairment for the bad debt line. Bad debts stood at 2.3% for the half, well in line with what we said at the AGM and half year -- I'm sorry, full year results where we are targeting 4.5% to 5.5% of the book for the year. In terms of bad debts, we're at 2.3%, at the bottom end of that range. And we think with where we are today, we expect bad debts to come in at the bottom end of our forecast range for the full year. So we think we've managed bad debts quite well in the last half. Calling it out because if you're looking at the 4D, you'll see an increase. And I'll let Siva just explain the impairment allowance, how it's grown from $800,000 to $2.8 million in terms of our new application of the new standards.
Yes. Sure. Thanks, Scott. With respect to the impairment allowance, one of the requirements under the standard is to look at future economic conditions and to factor that in, in the provisioning process. And what you see in the references at 30 June, the 6% impairment provision has marginally increased to 6.3%. This is now taking a conservative outlook of future economic conditions, but what is also pleasing to note is while the impairment provision has gone higher, our actual bad debt experience has gone lower compared to prior year.
Thanks, Siva. And just calling out the net profit just so that there's no confusion there as underlying operations produced a net profit of $15.7 million. The $2 million difference between this and the 4D is just the reversal of the provision that we had in terms of an allowance for the divested operations. So that is now -- we now have been paid back -- released back to the accounts, which means that our results this year are very similar to 12 months ago.Just moving on to the originations page where we give you a bit of color in terms of the cash-in and cash-out of the Australia and New Zealand operations. Both of those are up significantly on prior years. You can see strong growth in the Australian originations, and that's off the back of the new product launch that we did in August last year. It has taken about 3 months, I think, for them to gain traction in the broker market. But certainly, in the Christmas period, November, December and continuing on to January, we've seen very strong originations off the back of the launch of our new products there, which has been well received in the market.In New Zealand, this is the first time you're seeing these numbers. So nothing to compare them with in prior years. You'll start to see throughout the investor deck that the originations in New Zealand are up 50% from the time that we've acquired that business. And our focus has very much been about maintaining the cost pricing in New Zealand and in leveraging the Australian operations where they can so that they can write more loans. So we have had some discussion with investors about whether there's a lot of cost out. It's been more about redirecting our expenses in New Zealand to focus on more growth and then leveraging some of the operations here, which we think has been managed very well given the growth out of New Zealand. And we are delighted to see how that business has been performing.So now on to the next page in terms of the Australian market. We've seen a very stable market. I know there's been a lot of press in regards to the new car market. But in terms of used cars, we've seen a very stable and consistent market. If anything, a lot of the, I suppose our partners, there's a slight shortening in the time from a car gets listed as a used car for sale to when it is actually sold. But we've seen a lot of stability now post the Royal Commission from the brokers, the ones that are there investing and growing. The market is quite stable, and the tailwinds of the business are principally driven from a more conservative approach from the banks into lending in this space. So we continue to see very good tailwinds and interest in used car automated finance coming through to the Money3 Group. We have been -- it has been very well received. And the new products that we launched in August, we've also seen, I suppose, a growing number of new active originations, as we're starting to broaden the product offering of what we've got to address more of this market that we've got here. So more of that to come in future years. You should expect to see continued growth out of the Australian market, which is going very well.Just moving on to the New Zealand market. This is fairly new to us. So you'll start to see the way we present these results, the numbers we saw, and they're not presented the same way in New Zealand as they are in Australia. It's simply not as easy to get hold of, but what we do know is that it is a very large market. There are more cars per capita in New Zealand than there is in Australia, and the New Zealand market is principally a used car market. There's over -- about 140,000 cars are imported, mainly from Japan, and that has been our target market of the Go Car business in New Zealand. We've been broadening that target market. The team out there, I think, has done a fantastic job of introducing and bringing new dealers onto their platform since the acquisition and has also launched a direct business for customers that want to come directly to look for a car.You will see that we have had record originations out of New Zealand with that loan book growing around 50% in the time that we've had it. And you'll see further on in the presentation that we guide investors to gross loan receivables in New Zealand to be in excess of $100 million this year. We also expect by the end of this year to have introduced another distribution channel with more brokerage staff. In New Zealand, most of that business comes direct from dealers, and we are looking to broaden that over the next 12 months to capture a wider part of this market opportunity in New Zealand.Just moving over to the next page there, a little bit more on the New Zealand operations. Over 4% of new originations over the last 6 months out of our Kiwi business have been for brand-new cars, which is being very well received and part of our push to broaden the credit quality of applicants coming into Money3. So still early days in terms of that higher credit quality products. And similar to Australia, good initial volumes, and we are -- still, we need to perform well within the way the business works, so [indiscernible].Just moving on to the last bit on the New Zealand operations. The bit to call out is we think that the team that we have are very well positioned to see that loan book in New Zealand exceed $100 million in 2020. And it has grown over 50% since we've acquired that business. And we think that's been a result of a great team in New Zealand and their ability to leverage some of the other bits of the Australian operations. With a lot of demand for business in New Zealand, and we think that will continue to be -- come through in the results.So just moving through and finalizing in terms of our strategy and outlook for this year. We've been saying it for a while and I think we're there now where we can say our business is primarily focused on automotive finance, cars, bikes, boats or any vehicle that moves essentially. We have a small unsecured book, very small, mainly for repairs and maintenance of vehicles to our existing clients, and that's doing very well as well. We have multiple distribution channels that we are strengthening, indirect and direct to dealer, and that continues to be a focus for us. And we continue to be looked after very well by our broker network. As we expand our product mix into loan products that are targeted more to near-prime clients, we're finding that they've been very well received and we're finding that the market is quite favorable to us at this time given conservatism from the banking network.We still have just over $50 million of headroom in our funding facilities that we will call upon between now and when they refinance. We are working quite actively in terms of our refinancing project, and I think it's -- investors should expect something by the end of this financial year in terms of an announcement for that. But for this point, we say that we're well progressed on looking at other funding options and we will prepare for that.We're forecasting a $0.10 dividend for the full year, $0.05 fully franked for the first half. We have declared that today payable, and I think, in April. And we're maintaining our net profit forecast to be in excess of $30 million, which is in excess of $32 million when you include that provision write-back that we were able to do.I can say, in terms of the regulatory environment, it is -- it has calmed down. There's a lot more certainty in what we're doing now. We are very focused on the compliance of our business and looking for ways to make sure that we meet all of the responsible lending requirements and that we capture the data through that process, and that is going very well.So just in summary, we think that the business is -- the transformation to secured automated lending is now all but complete. We have replaced the revenue that we lost from the sale of divested businesses. The loan book has grown to the point where we know that our business now is as big as it was 12 months ago. So that puts us in a very good spot. We also think that there's still continuing tailwinds that will come to the business, either from the -- accessing the next level of debt funding for the business and then just for the market to be able to give us more automotive originations than we expect as we broaden our distribution through other channels, New Zealand, more dealers in Australia. It's more of a volume play given the time we've been with brokers and direct business.So we think we're well placed for another record year coming into FY '21. And I will see if there's any questions for Siva and myself.
[Operator Instructions] Your first question comes from Jonathon Higgins with Shaw and Partners.
Good set of results. First one, just in regards to -- let's just hit the guide straight away -- just in regards to the guidance. I can't remember a time sort of just being in -- with respect to from the first half, second half here as well as encompassing the fact that the loan book average is going to grow into more earnings. Just that guidance of $30 million plus at an underlying level and $32 million plus in terms of status, is that just an active conservatism around you guys? Can you able to just walk us through that just a little bit because obviously, the first half result is pretty good and implies a significantly better result than that.
In the second half, there's -- traditionally, we don't see as a good collection in the first couple of months after Christmas. And as a result of the new standards, we only recognize revenue on cash flow now. So we have taken a conservative view. We also think that there's a few more expenses, and I'm talking a couple of hundred thousand, not significant, but just as a result of our IT investment that we're doing at the moment to come through in the second half. But that's about it really. I think -- I'm assuming what you're alluding to is $15.7 million on continuing operations. If we double that, that's probably a result -- you should -- we're confident it being the same, in excess of $30 million. We're not seeing any concerns why we're not going to have a similar result in the second half to the first half.
Yes. Okay. No worries. And just in regards to just the impairment expense, probably a question more for Siva. Like obviously, your impairments, as you say it, as a percentage of your allowance have gone up, which you've called out. But you've also called around the bad debt for that experience, and the current loan book has been sort of like better than expected in terms of the given range. Is it -- I mean like what are you plugging in, in terms of -- if you look at sort of the future experience, what should we expect moving forward? Because it actually looks like that could potentially be a conservative -- a more conservative position, considering that the cash flow is better than the revenue and profit in the half.
That's correct, Jon. And the main factor, if I can point it out, is acquisition of New Zealand has been relatively new. So we are continuing to sort of -- taking a conservative view in terms of bad debt experience in there, and that's been factored into the provisioning, while the actual bad debts roll out based on how we manage it. So that's a key factor that's gone into provisioning model.
Yes. Okay. And just last one just for me, just around what's your current franking credit balance? And did you want to expand on that bit whatsoever?
Look, our current franking balance is around $50 million. We're continuing to explore options in terms of -- as to how we would probably look at that in the future.
Your next question comes from Peter Bell with Bellmont Securities.
Another great result. Just a couple of questions from me. Obviously, growing your loan book at a really rapid rate. Can you talk me through a little bit about how you're managing that growth? Because obviously, dealing with those customers, especially those who are behind in their payments, can be quite a specialized sort of role. So really interested in sort of how you're managing that process.And the second one is just wondering whether you are looking to integrate with car sales with their new innovation where they're looking to integrate for the online provision of finance in conjunction with dealers.
Thanks, Peter. Good questions. So I'll start with the car sales one first. Craig, our General Manager here, has been in conversation with them. We have done a few things with car sales. It hasn't really been a successful channel for us. So I think that's something that we will wait and see how that role -- that happens before we go back to that. We're finding a lot of volume coming from other parties. And what often tends to be a better strategy for us is another party to interact with car sales ideally for -- where the credit quality of people -- which lender that they're best suited to and then allowing them to then put that volume back to us. And that has been a reasonably successful strategy for us up to date. So no hefty strategy in terms of car sales at this point in time. We'll wait and see.Just in regard to volume, we have seen -- as we relaunched our new products in Australia and as we changed some of our distribution process in New Zealand, that some of the assets we have been financing, certainly new ones, is a bigger loan. So it takes the same amount of resource that we have to originate a loan, whether it's $8,000 or $40,000. And then your point's quite valid in terms of the collections. I do think that's one of our strengths. That's something that we have invested in over many years. Every time we add around 800 to 1,000 clients through our collections pool, we have to add another person on the phone to manage that client base, and that's very well managed. We are growing the loan book rapidly. However, the number of clients that we're adding, if you go back sort of 12 months, we -- 5,000 or 6,000 more clients. So I think when you sit down and think about our operating model, we're having to add another 8 or 9 people or 6 to 8 people to manage that growth. It hasn't been -- hasn't really been an issue for us. We have a good team of people with a proven model that they can roll out there in regard to managing people as they repay their loans.
Okay. Excellent. And can you just give me a bit of an idea what's the size of that team at the moment? So if you're adding sort of 5 or 6 people to that team, how many are in that team or were in that team previously?
It's between, say, between 60 and 70. I actually don't know the exact number off the top of my head, but it's between 60 and 70 people, both here in Bundoora. And then there are a handful of people in New Zealand as well managing the New Zealand receivables.
Your next question comes from Nick Caley with Baillieu.
Just a couple of quick ones. So just like the flow of -- loan origination flow at the moment, what percentage would still be in subprime versus prime and sort of used car versus maybe newer cars?
So the near-prime is still the lowest in volume. I must say we haven't got a percentage in terms of how we're tracking that at this point in time. But it's clear that it's -- I guess one of the challenges in answering that question is they are low in numbers, but the assets tend to be 3x the size of what you guided. So brand-new cars originating at around $40,000 where we would have been paying to the market, and we have that -- we are around $12,500 on average around that business. The good thing about that figure is that we've looked it up while in there, and around 15% of the applications are coming in into our -- what we would call our near-prime target segments.
Do you see an interest rate differential for foreign investors abroad?
Well, when we relaunched our products here, there is a growth in the interest rates. So think of it more along the lines of credit quality. The higher the credit quality -- the easiest way to explain that is the higher your credit score by one of the credit bureaus, the cheaper the interest rate you will be offered. Now our interest rates will go from 9.95% up to around 29%. The average across the business is around 22% to 24%. And a slight decline, I suppose, is what you should see as we -- as in -- sort of a 1% decline over the next 18 months is reasonable to expect, as we lose the percentage of the receivables that are classed under near prime. But over time, you will see that the gross yield start to trend down as we write a lot more business in that space. At the moment, it's going -- it's meeting all of our expectations. We're getting good volumes from there, approximately 15% of applications in that space.And the other thing I want to stress too is if we want to grow subprime of our origination, that has had some really strong growth at the same time. But we are growing both of those loan products at the same time in terms of absolute volumes.
And just lastly, are you still expecting sort of a 3% to 4% interest rate differential with your funding by moving back to traditional funding?
I think we're confident to say, as we've said for some time now, that we expected at least a 3% improvement in costs. We're very confident that it'll be in excess of 3%. And the challenge with guiding any -- many of these things is until you're there, often changes happen in the last couple of weeks of negotiation. So we're very confident it's going to be better than 3%. But we'd rather come back and delight you that it's even better than that -- than guide you to something that we're not 100% sure. But that will -- that project that Siva is running is now well progressed. And certainly, by the end of this financial year, there will be an update as in who and quantum.
[Operator Instructions] Your next question comes from [ Michael Abel ] with [ Wool Bay ].
Fantastic results. Really exciting. Everything seems to be going gangbusters, especially on that front. Just the big -- next big thing, of course, is this refinancing. We seem to be spreading around it a bit. But as I understood it, you could refinance sometime in June, as it is the earliest when the current facility expires. And although it's 4 months away, I'd be happy to hear certainly a bit more definitive in the -- for the last couple of years that made the banks didn't want to know you when you had the SACC business. Now you've got rid of that. So it's really looking forward now to when you can refinance that $100 million to $150 million at a substantial reduction on -- and of course, flow straight to the bottom line for all of next year. So can you give us a bit more information, please?
So I think we haven't -- the confidence that we see here is that we acquired a business in New Zealand. It is funded essentially by BNZ, which is owned by National Australia Bank. We have spent a lot of time explaining to the big banks -- big Australian banks that we have exited that space. We no longer provide small amount credit contracts. We have spent a lot of time explaining that we have changed the focus of the business. We've lifted the credit quality, and all of those things have been very well received. And we are essentially funded by one of the big 4 now, which drives a lot of our confidence that, that next level of funding is just around the corner. The earliest that we can refinance that, I'd just say, is June, somewhere between June and December. We are confident, [ Michael ], but I think we're just a bit nervous to be announcing anything until we're ready to announce it. It's been a project that's been on Siva's radar for some time. We are discussing our funding needs with a couple of parties at this point in time. And I would say that we are reasonably well advanced with those conversations, and the process we have been through is that they -- we've had people look at the business in terms of credit quality and also compliance to responsible lending. And there have been no issues raised so far. So we will make an announcement in the next couple of months because we -- I mean it's 4 months away. I am confident that we will meet everyone's expectations closer to the date when we can refinance that pretty soon.And I know that's not the announcement that people want to know exactly when it is. But we're just not quite there yet, and we're still a number of months away. We're confident that we have it in hand, and we're confident we're going to come out with a result that people [indiscernible]. And I think that's the takeaway that we'd like to leave you with at the moment, [ Michael ], if that's all right.
Okay. I'll respect your decision here. We're excitedly anxious for the next couple of months. Hopefully, it is resolved. I was happy it might have been almost a done deal or lay down [indiscernible] pass through your door, but now you've got rid of paydown lending. But okay, I'll wait patiently.
It's definitely been a very different reception to 12 or 18 months ago. It does feel like a new business internally, and I think banks can see that as well. So it's only a couple of away.
Well, I was on board, of course, when Westpac pulled that $30 million facility they had with you, and I think you said even your clients couldn't make deposits through Westpac. They have to go to Bank of Adelaide or something and all sorts of ridiculous restrictions on the business.
I know that was us. I mean we now have banking facilities with, I think, 3 of the major banks now, so -- including BNZ in New Zealand. So 2 here and 1 there, where we wouldn't have had those through the exit. So we do use transactional services with a couple of major banks now and I think they're all positive.
Well, I think you are in a strong position. You should be playing the 4 major jocks against each other to get the lowest possible interest rate. But they should be all wanting to lend you. Good luck.
I think you're doing a tremendous job, [ Michael ], in [indiscernible] on the call. But that's exactly what we wanted to say.
[Operator Instructions] Your next question comes from Daniel Chersky with Alceon.
Just a quick one from me in terms of understanding the underlying performance of the business. So I think you had still $2 million of one-offs in Q1 from the sale of the former business and restructuring. I just wanted to confirm that, that is in the numbers. And also how -- what the dollar impact was of moving the provision from 6% to 6.3%? On our numbers, that's sort of almost $1.5 million of noncash impairment that also is in the numbers. So confirmation of those two would be great.
Thanks, Daniel. It's Siva here. First of all, I would like to confirm that the continuing operations had an impact of $15.7 million, and the $2 million which relates to provision reversals is in the discontinuing operations. So in total, the statutory impact, it's $17.7 million. And Daniel, you're also right in pointing out that the change in provisioning from 6% to 6.3% has resulted in approximately $1.3 million in decrease in EBITDA, which is a noncash decrease in EBITDA.
Just on the first point, if I may just confirm that the one-off expenses that you mentioned in your Q1 results at the AGM, could you just talk us through what those were?
Those were primarily to -- in relation to the corporate overheads, which used to be shared across 3 divisions when we had the branch and online segments, which is now being carried under a small base and which you see that New Zealand continues to perform and becoming a -- taking a bigger share of the overall group operations, which start to sort of consume our shared proportion of the overheads. And hence, we consider that to be one-off in nature.
There are no further questions at this time. I'll now hand back to Mr. Baldwin for closing remarks.
Thanks, Lexie, and thank you, everyone, for joining the call. I know over the next couple of days, with the broker-originated road shows, that we will speak to many of you in person, but thank you for taking the time for listening to Siva and I. And we look forward to seeing many of you again in 3 months. And with that, Lexie, I'll hand back to you to close.
Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.