Harmoney Corp Limited

Hello and welcome to Harmony's half year 2023 results presentation. I'm David Stevens, the CEO and Managing Director of Harmony. With me today is Simon Ward, our Chief Financial Officer. Just a reminder that from this half year we have changed our reporting currency to Australian dollars. All numbers in this presentation are in Australian dollars unless otherwise noted. Also in this half year and going forward we've also retired our pro forma reporting that was adopted as part of our IPO process. All numbers in this presentation are now on a statutory basis. We've also included in the appendix the translated historical numbers to Australian dollars on a statutory basis. Now turning to slide two. We bring to your attention important information relating to the disclosures in today's presentation. We leave this for you to review at your own leisure. Now turning to slide three. Today I'll begin with highlighting our results for half year 2023. I'll then go into an overview of our business model. Many of these themes will be familiar to you if you've followed our progress, but it's useful to keep these top of mind as we go over what this model is delivering today and we'll continue to do so into the future. I'll then hand over to Simon who will take you through our financial results. Finally, I'll discuss our strategy and outlook for financial year 23 before responding to your questions. You can submit a question on the webcast at any time during the presentation by typing it into the ask a question box and then hitting submit. We'll then endeavour to respond to your questions during the Q&A at the end. Now turning to slide four and then on to slide five. This slide presents our key performance metrics. For the six months, we grew originations by 23% to $241 million compared to PCP, from a combination of new business growth in Australia and existing customer growth across both Australia and New Zealand. This culminated in a loan book of $701 million at 31 December 2022. We also grew our revenue by 55% to $50.1 million. Very pleasingly and highlighting the scalability of our consumer direct business model, our cost to income ratio dropped by a massive 34% to a market leading 29%. Please note we have reclassified servicing and verification costs from our preliminary results released on 31 January 23 as this new classification will be used going forward. This all resulted in a cash impact for the year of $2.3 million, and for the first time we were able to report a cash return on equity which was 8%, with a medium term target to be achieving 20% cash return on equity. Now turning to slide six, where I'd like to provide some further context and perspective on these results. There are nine key points broken up into financial, customer value and risk management. Think of it this way. If you remember anything from today's presentation, these are the key points I'd like you to remember. In terms of financial, we've reported a cash NPAT of $2.3 million for the half-year with a cost-to-income ratio of 29% and unrestricted cash of $30 million. This is a significant endorsement of Harmony's 100% consumer direct model and our execution of it through technology and automation. Our net interest margin, or NIM, of 9.8% is testament to the power of Harmony's customer acquisition and credit assessment models, key components of our Stellair technology platform. It's also important to know that our 100% direct model allows us to more easily adjust rates. This is not something easily done in traditional broker models. We've also achieved an annualized 8% cash return on equity in the half year and are targeting a 20% cash return on equity in the medium term. This is the first time we've guided to a return on equity target. We feel this is achievable and at a level of a highly valuable technology business in financial services. In terms of customer value, our customer satisfaction record remains high with an average score of 4.7 out of 5 on over 50,000 reviews across both Google and Shopper approved. Of course, keeping our customers happy is why many return to Harmony for their future borrowing needs, and they do so at minimal customer acquisition cost to Harmony. Our Australian expansion continues at pace with the Australian loan book surpassing the New Zealand loan book for the first time. We feel this is an outstanding result considering our AFX listing was just over two years ago. In terms of risk management, our net interest margin is achievable with a quality portfolio with over 40% of borrowers owning their own home and when combined with lower arrears rate reflects quality throughout the entire loan book. We have a highly diversified funding. with warehouse facilities from three of the big four Australian banks and our own securitisation program. And finally, 75% of our floating rate borrowings are hedged to mitigate any impact from interest rate market movements. Now turning to slide seven. This slide presents other key metrics we share with investors at each update. First half 2023 has seen strong account growth of 18%, whilst at the same time reducing marketing by 3.6 million, being a significant 36% reduction. The underlying story here is our marketing algorithms are getting smarter and we're able to generate more accounts with less spend. New loan originations have grown 20% over the same period due to improved conversion of accounts to loans. Again, that's with a 36% reduction in marketing. So clearly to see that 20% growth with a third reduction in marketing is significant and shows the progress this business is making, particularly in Australia. The last column on this slide shows the customer annuity. Harmony's 100% consumer direct model delivers long-tail benefits in the form of an ongoing annuity, something we explore more on slide 13. Here we are graphing the cumulative originations over time, and it's useful to compare New Zealand's historic growth with Australia's, which shows clear similarities. What we saw in New Zealand is now being mirrored in Australia, and New Zealand experiences customers subsequently borrowed an additional 130% of their first loan amount over the next five years with minimal customer acquisition costs. This is starting to play out in Australia too, remembering a market nine times out of New Zealand. Now turning to slide eight. As mentioned, we listed on the ASX a little over two years ago with a goal of accelerating our growth in Australia, so it's pleasing to see how successful the expansion has been to date with the group loan book increasing 21% in the last six months to 31 December 22. In this first half year, our loan book Revenue grew by 55%, whilst the scalability of our data-driven, highly automated Stellair platform was able to deliver a cost-to-income reduction of 43% to 29%, this resulting in a cash-in pad of $2.3 million. Now turning to slide 9 and then to slide 10. Our loans are personalised to the customer, meaning interest rates and term options are matched to each person based on their individual credit characteristics. Our technology plays a big role here. We offer loans up to $70,000 with loan terms of three, five or seven years. Our average new loan size is $22,000. Our processes are fast and are intentionally designed to be simple for customers to use and understand. Again, our technology plays a key role here, enabling us to make a lending decision within minutes for most applications and funds arriving in bank accounts within 24 hours of the customer accepting the loan. Carrying on the theme of keeping it simple for customers, we have just one fee, a loan establishment fee. All loans of course are fully compliant with applicable laws and regulations in both countries. We offer loans to help customers start or achieve just about anything. The examples listed on the right are most common starting with renovation loans and debt consolidation through to helping people with life events such as travel, education and weddings. Now turning to slide 11. Our strategy is 100% consumer direct. There are a number of well-known distribution strategies in our industry, such as broker and broker-direct hybrids, but for Harmony, 100% direct has proven to be the right strategy for our unique business model. The reason for this is captured in the formula at the top of the slide. It shows how our deep consumer data and tech-driven strategy on the very left of the equation produces high shareholder returns on the very right. While in between sits four key value drivers connecting strategy to returns, These are lower acquisition costs, lower credit losses, lower funding costs while keeping operating expenses low. We'll come back to this formula throughout today's presentation to help illustrate how the results connect to this unique business model, but it's important to note here that personal loans are just a starting point for Harmony and that our consumer direct business model supports growth opportunities throughout a whole range of consumer finance products. In January we launched our new secured car loan product, which I'll talk about later, and you can see further diversification possible into other credit products such as line of credit, credit cards, right through to home loans, for example. Now turning to slide 12. This slide talks to the very left side of our business model formula on the last page, data machine learning and automation. To properly build scale it's clear that you need automation. For that, you need advanced and integrated machine learning capability. To do that successfully, you need more than just tech. It needs massive amounts of quality first-party data. We consistently attract over 12,000 new customer accounts each month. All of this data is used to constantly train our machine learning models. This is a huge number of new customers for any business. The high volume of consumer financial data combined with over eight years of historic data effectively supercharges training in our machine learning so we can optimize for sophisticated, highly efficient marketing with platforms such as Google giving us the right customers at a low cost. And you've seen that come through in our results this half with new originations growing by 20% and marketing reducing by 36%. Risk adjusted income of 7%, so this is after losses, gained through a more accurate risk assessment of customers. This combination of data, machine learning and automation built into our technology platform, Stellair, has been a core feature of Harmony since our inception. Now turning to slide 13. The power of Stellair's machine learning goes far beyond assessing customers at the point of their loan application. It plays a significant role throughout the entire lifetime of our relationship with the customer. As mentioned earlier, Machine learning is used to train our customer acquisition models so we can attract the right customers for the right cost. Harmony is highly selective when it comes to audience targeting. We have important responsibilities as a lender and we also need to ensure our marketing spend is efficient and effective. This is where sophisticated customer acquisition models play a key role and again where huge amounts of first party consumer data is key. With these models are used with powerful digital marketing platforms like Google, Microsoft, Ads and Facebook. the result is highly targeted and cost-effective customer acquisition. What this means in practice is that we can acquire the right customers for the right price at scale, and critically, we can forecast this with a high level of reliability. We can then use our direct relationship with the customer to tailor existing products to their needs and devise new services to offer. Proof of our ability to target the right customer with the right product is reflected in our Google reviews and Shopper approved scores. with over 50,000 reviews and an average score of 4.7 out of 5. Now moving to the second column. Nationally we work hard to ensure we deliver a great customer experience so we can create annuity revenue as satisfied customers return with minimal customer acquisition cost. This experience is underpinned by our automated, simple and streamlined 100% online process. In the third column, our ability to scale remains an important factor in the Harmony Model, and our continued investment in technology remains a key enabler. Already in this half year, we have achieved a cost-to-income ratio of 29%, which is exceptional. The diagram bottom right of the page shows how all these factors combine to support the lifetime value of a customer. Our customer acquisition model helps us attract the right customers Our application and loan experience is highly tuned to customer satisfaction, so customers return to harmony for their future needs. This virtuous cycle is expected to lead to 130% in additional originations to the same customers over the next five years at minimal customer acquisition cost. Now turning to slide 14, I'll now hand over to our Chief Financial Officer, Simon Ward, who will talk you through our financial results in more detail.

Thank you, David, and hello everybody. Please turn to slide 15, which summarizes our key financial performance metrics for the year. I'll begin by going through each of these items briefly now before going into more detail on the following slides. Beginning with the loan book, as David mentioned earlier, Harmony's loan book continues to grow rapidly, up 21% in the half and up 63% from the prior comparative half to $701 million. This loan book growth has driven revenue growth of 55%, up from $32 million in the prior comparative half to $50 million this half. Our net interest income percentage, which is our interest margin after funding costs, and our risk-adjusted income percentage, which is our interest margin after funding costs and incurred credit losses, are both down this half compared with the first half last year, driven primarily by increased funding costs central banks have lifted rates to combat inflation. Funding costs have increased more rapidly than the influence of increases to new lending rates on the average loan book lending rate.

It's important to note at this point that the prior comparative period did represent an exceptionally low point for funding costs, which I'll expand on later in the slide, and a corresponding high point for the net interest income of 13%. Harmony has a very strong margin, so even with increases to funding costs, using a dynamic pricing and hedging strategy, were able to target a net interest margin of 10% and risk-adjusted margin of 7%, achieving 9.8% net interest margin and 6.7% risk-adjusted margin for the half. Moving next to acquisition costs, Harmony was able to grow originations by 23% while reducing acquisition costs by 36%, providing further proof of the success of our data-driven Stellair marketing platform, twined with our consumer direct model. A consumer direct model is delivered through 100% online, highly automated platform. This high level of automation enables the business to scale rapidly without having to similarly scale OPEX, as demonstrated by a significant reduction in our cost-to-income ratio down from 43% to enviable 29%. These components combined enable Harmony to deliver a cash end pad of $2.3 million and annualized cash return on equity of 8%. Our statutory NPAT was a $3.4 million loss, with the main driver of the difference between this and our cash NPAT being the $4.6 million increase in our expected credit loss provision, with movements in that provision not included in our cash NPAT. Importantly, our cash NPAT does include all actual credit losses that were incurred during the period. The reason that we exclude movements in our expected credit loss provision from our cash MPAT is that this is not a cash expense. It's driven by our strong loan book growth with an accounting provision for expected future period losses being required to be taken on all new lending at a time of origination ahead of recognising any interest income that may be earned on that new lending. Now turning to slide 16 to look at revenue in a bit more detail. As mentioned earlier, the loan book grew by 63% on PCP to $701 million, which delivered revenue growth of 55% to $50 million. The Australian loan book growth continued to lead the way, up 130% to $351 million, now making up more than half of the total loan book. Revenue growth, while still very strong at 55%, was lower than loan book growth, as the average interest rate on the loan book reduced from 16.6% to 15.4% with a loan book weighting naturally shifting towards lower rate calendar year 2021 originations as earlier period loans paid down. This half average interest rate at 15.4% marks a low point with the average already increasing as the targeted rate increases passed through on new loans through calendar year 2022 become a larger portion of the loan book. Now turning to slide 17, providing more detail on acquisition costs. Now this is really a key slide as it focuses on the latest proof point of the power of our data-driven Stellaire marketing platform, twined with our consumer direct model. This half harmony was able to deliver a 23% increase in originations on PCP with a 36% or 3.6 million reduction in acquisition spend. How are we able to achieve this? For some of you this will just be a reminder. The first element is that Harmony's consumer direct model provides deep consumer data to which we apply continuous machine learning to focus our online marketing efforts on desirable high intent customers. This has proven successful in lowering marketing costs per origination in New Zealand and is now doing the same at scale in Australia. The second key element is that offering a great Customer direct experience means that our new and existing customers return to us the next time they want to start something new, and when they do, because of the existing direct relationship, those subsequent loans have minimal acquisition cost. This has long been a feature of the New Zealand business, where more than half of originations are from existing customers and is now replicating in Australia, our rapid expansion there. Combined, these two features drive our decreasing marketing cost to origination ratio, shown in the chart on the right. Over time, the Australian ratio should approach the New Zealand ratio as a mix of new to existing customer originations converge, with existing customers making up 60% of the first half originations in New Zealand, but only 25% in Australia. A final feature I'd like to point out here is that our prior year acquisition spend level was a one-off. As we sought to accelerate the training and learning of our Stellia marketing algorithm in Australia, we're not anticipating to return to that level. focusing on credit performance.