Humm Group Limited

Good day and thank you for standing by. Welcome to HUM Group's full year 24 results conference call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To redraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers, Stuart Grimshaw, Chief Executive Officer. Please go ahead.

Thank you. Good morning and thank you for joining us today as we release the financial 2024 results for Hummer Group Limited. My name is Stuart Grimshaw and I'm the Chief Executive Officer of Hummer Group. Also joining me today is Adrian Fisk, our Chief Financial Officer, and David Grevler, our Head of Investor Relations. On slide three, you'll see the agenda for today, and Adrian and I will walk you through the slides. We'll start by turning to slide, to page five, where the highlights for the year are presented. The year was characterized by the comparative performance of the financial half years. The half year and half year comparison demonstrates the efforts of management in improving the performance of the company. The success of these actions is shown in the four columns. Firstly, we delivered an 18% increase in receivables to $5 billion, a record level for the group. Secondly, in the second half of the financial year, cost savings of $13.6 million were achieved when compared to the first half. Thirdly, net interest margins stabilised in the second half to 5.5%. This was achieved after several periods of rapid interest rate increases and the benefit of interest rate hedges eliminated as they expired and rolled off our portfolios. Of importance, our exit NIM was also 5.5%. And lastly, the strong risk credentials of the organisation were shown with credit losses maintained at the historic lows of 1.8% of average net receivables. We turn to the next page. During financial year 2024, we continued to strengthen the balance sheet. As mentioned, we achieved $5 billion in receivables. We also had a 6% increase in volumes from continuing businesses to $3.8 billion, which was significant given the previous year's volumes benefited from the instant asset write-off program introduced by the government that was ceased this year. We also finished the year with $125.1 million in unrestricted cash. We had strong net operating income with NIMS stabilising the second half to 5.5%. the gross yield improving by 50 basis points through selective pricing initiatives to 11.6% and credit losses contained to the 1.8% of average net receivables. We had a strong operating income performance coupled with improving cost efficiency. Our second half cost to income ratio reduced by 780 basis points to 56.2% from 64% in the first half. This ratio was underpinned by a 13.6 million reduction in operating cost supported with a further $4.9 million reduction in origination costs, with some of these savings coming from the exit of little things in our Australian business. From this base, we're able to record a $7.1 million statutory profit, which was up from $2.9 million in the previous year. About a $60.6 million normalised cash profit after tax, which was down 19% on the prior year, However, as mentioned previously, the second half of the year produced a 16% improvement on the first half and normalised profits. We have a fully franked dividend for the year of 2 cents with a fully franked dividend of 1.25 cents for the second half. We completed the 10 million share buyback as well as the purchase of a further $6 million of shares to satisfy long-term employee incentive obligations. Together, this accounts for around 6% of outstanding shares. Turning to page seven, In the first graph, you can see the strong growth in the commercial portfolio. I would point you to 2021, when the average receivable balance was just $0.7 billion. Now, the close of 2024 has grown to $2.7 billion, a remarkable period of growth for the business, which shows that we're hitting the mark with our brokers. The chart below that evidences the strong credit culture that permeates throughout the company, with net loss to average net receivable stabilising at a low 1.8%. also highlighting the positive mix effect the secured commercial portfolio has on this measure. The top right chart shows the impact of interest rate changes on the net interest margin of the business. The majority of our swap portfolio has run off, and we're now seeing the stabilising of the net interest margin. The final chart in the bottom right-hand corner highlights the continued success of management to manage the expense line at a time of heightened inflationary pressure. Turn to page 8. From this base, Flexi Commercial closed the year at a record $3 billion in receivables. This has been achieved through doing more with existing and proven creditworthy customers. Speed in decisioning and closing, sometimes approving and closing deals on the same day, has continued to be attractive to the broker network and it continues to set us apart from our competitors. We've also expanded our offering to new regions. We've increased our teams in Western Australia as well as regional New South Wales and Queensland. We're also expanding our focus into other sectors such as agribusiness. The consumer story was one of improvement over the financial year as we focused on rebuilding the businesses and refocusing around the customer. We're seeing the benefit of this renewed energy with the improvement of the second half normalised profit to $11.8 million from $6.5 million in the first half. We have a very successful card brand in New Zealand, the Q brand. We will continue to focus the New Zealand business around this brand and leverage our position as a major competitor to the New Zealand banks. In the Australian cards business, we deliberately slowed the growth as we tightened our credit standards, resulting in a 22% reduction to credit impairment charges for the second half of the year. And we'll introduce a regulated hybrid loan structure for our merchant partners in the first half of financial year 2025, This will allow us to provide merchant-specific offerings that will set us apart from our competitors. Internationally, ex-New Zealand, we're seeing good growth potential with Ireland returning positive numbers and Canada starting to grow volumes in preferred verticals. In addition to the above, we're investing resources to enhance our current technology platforms that will improve our customer and merchant value propositions. I'll now hand you over to Adrian to take you through the group financials.

Thanks, Stuart, and good morning. I'm here today to discuss the financial performance of Humber for the full year ended 30 June 24. The second half of the year saw a 16% increase in normalised cash profit from $28.1 million to $32.5 million, to bring our full year normalised cash profit to $60.6 million. The strongest second half performance saw a 5% increase in net interest income, with NIMS stabilising the second half, following unprecedented rate rise in 2022. I'll walk through this in more detail on the following slide. Fee and other income was up in the second half, but shows reductions year on year, attached to the exit of little things that had relatively high fees but did not meet our goals from the unit economics perspective. We also had a reduction in early termination fees in the commercial business, noting that customers are less likely to terminate their loans in this high rate environment. Net losses have increased from dollar terms half on half, as expected, that are down year on year and flat at 1.8% on a net loss for NR basis. The increase in net losses in dollar terms relates to the commercial business, where we have seen, as expected, a catch-up in losses following a period of high growth in 2022 and 2023. Noting that losses have increased only 20 basis points from 50 basis points to 70 basis basic points and advice. I'll comment in more detail on our losses in a separate slide shortly, but we remain confident in the continued performance of our portfolio, given the improved credit quality, lower readers, and overall strength. Operating expenses are down 40% half on half, and are reflecting significant growth by management to remove costs across the business, and I'll cover this in the following to $15.9 million in FY24, with $7.7 million recognised in the second half. All remaining costs have either been removed from the business or absorbed into new product development, and we will not be reporting no further suspended costs in future years. Our capex was $15 million for the year, a drop from $18 million in the prior year. Finally, through discussions within and we'll be moving to a cash profit metric. The deduction of statutory profit, non-cash items such as AASB 9 provisions, depreciation and other items such as amortisation of intangibles. The board and management consider that cash profit is the best measure of our ongoing earnings and the long-term performance as we have now navigated this transition phase and have stabilised our consumer business. dissect them and make their own judgments. On slide 11, net interest margin, this slide is an update from prior years and sets out the movement in net interest margin for the portfolio. Over the period, it's set out in orange. Along with the exit NIM, we have delivery across our business in the final months of the period, which is then set out in grey. On the right, it shows that net interest margins stabilised in the second half at 5.5%, down from 5.6%. The 10 basis point reduction margin in the second half did not come from margin compression, which is shown at 0.0%. Rather, it related to higher capital efficiency, which increases interest expense, but frees up capital for investment and boosts return on investment. As an example, if we improve warehouse efficiency from 5% to 2%, we replace the 3% of capital that we have invested in the warehouse with debt. And while we pay interest on that debt, that 3%, we invest this capital into growing the business and further generating returns to shareholders. On the left of this diagram, in the first half of FY24, we saw a 50 basis point production margin from all the swaps that were written at as the underlying assets have matured, and that has now been replaced by new funding or new assets that have been written in the current higher interest rate environment. The first half also saw a 50 basis point improvement in capital efficiency. The business continues to prioritise margin and pricing across consumer and commercial, with consumer focused on unit economics per merchant to ensure that finance is appropriately priced and meets our target returns. has seen an exit NIM increase from 5.1% in June 23 to 5.5% in June 24. Exit NIM is now in line with portfolio NIM after several periods of waiting behind. In Treasury, we are observing credit spreads accrue from increases experienced in FY22 and 23, and we've been able to achieve more favourable pricing in transactions such as sole or private placement, which was executed at a material discount to our positivity warehouse. On base rates, we continue to hedge our fixed portfolios to 100% and are evolving our hedging strategies as we transition to the next cycle of interest rates. On slide 12 in credit risk management, we're pleased to report that the net loss to AMR was maintained at 1.8%, which is a historical low for the home group and is an outcome over the last three years. Commercial losses as a percentage of A&R increased from 50 basis points to 70 basis points in line with our expectations. And it's still below our long-term expectations of around 100 basis points. These are exceptional loss rates for this book and reflect the secure nature and the diversification of this portfolio. Consumer losses have fallen 20 basis points to 3.3%, PLOS PP has fallen to 60 basis points, which is a result of the closure of suspended products, including bundle and little things, that have high loss rates, along with a tightening of credit settings for big things over the last two years. Cards AU returned to more normalised levels of 4%, and Cards NZ has lifted by 10 basis points, noting that we're watching carefully the New Zealand economy portfolio for signs of stress. In dollar terms, to 81.4 million in FY24. Whilst over the same period, the average net receivables has grown from 2.7 billion to 4.6 billion, demonstrating where we've been growing recently. We continue to monitor closely the economy, our customers, by geography and vertical to identify early signs of potential issues and adjust our settings accordingly. Note the bottom left graph shows the arrears for our AU businesses, both in CARD and HUM AU, which is showing normal arrears levels. It is important to recognise that at 30 June 2024, we have a balance sheet coverage of 2.8%, but averaging at some 100 basis points in excess of our current loss rates. On slide 13, committed to cost efficiency, the HUM Group executive has made good progress on our cost-out initiatives. and have delivered $13.2 million in savings this year and $31.8 million in savings since the commencement of the program in the first half of 2023. These savings have offset the impact of inflation and allowed us to invest in frontline capability across the front office and our delivery team. After considering inflation with another $4.3 million in savings in marketing, attached to reductions related to suspended products, $1.3 million in payroll savings, that have also seen a reduction of 27 AFTN people and increases due to expanding capability in customer-facing teams. 3.5 million have been achieved in risk and regulation, largely associated with insurance costs, and 4.1 has been achieved in consolidating technologies and other savings. We consider there still to be areas of opportunity and to continue to drive cost savings and have launched a range of initiatives our next range of cost efficiencies. We've reduced our costs associated with suspended products from $33.2 million FY23 to $15.9 million FY24. And as mentioned earlier, we've either removed these costs from the business or absorbed them into new product development. And as such, we will be reporting no further suspended costs in the future years. Our cost-to-income ratio calculated on a normalised basis operating income reduced by 280 basis points from 61% to 58.2% for the year. Importantly, we note a reduction in the second half, 24%, from 64% in the first half to 53% in the second half, which is a step in the right direction. On slide 14, our differentiated funding platform. Home Group has been funding our assets for many years. public transaction in 2011. We've built a differentiated funding platform that has enabled us to continue to grow while some of our competitors have been constrained. During the year we executed 3.5 billion funding transactions including term deals, private placements, refinances, etc. Our funding plan is a combination of warehouse structures, public and private and international debt investors. Innovations have included recent private placements along with our solar farming transaction. The graph on the top right sets out the well-publicized growth in private credit since 2010 and the potential to grow to a 2.3 trillion industry global by 27. This growth demonstrates the opportunity that exists for our business to leverage this global trend HUM as an experienced player can originate high-quality, medium-term, consumer and SME credit assets to this sector that will enable Australian and international investors to diversify their investment portfolios. We're already seeing the benefits of this trend with high demand for lending in Australian commercial business and expanding interest in mezzanine across our entire portfolio. On the bottom line, private and public transactions, and reinvesting the cash in growth. You can see that our capital efficiency, which is mentioned as statutory equity over tangible assets, has grown to 10.9% in FY24, and the approximate $200 million lease has funded about $2.4 million in asset growth. Our unrestricted cash balance for the year increased to $125.1 million, This increase came after we paid $15 million in debt from our growth facility, which now stands at $60 million, and $16 million in payments related to on-market buyback and purchase of shares to satisfy the FY23 grant from our Altip program. Next on slide 15, today we announced a new program that adds a new layer to our existing funding plan for commercials. We've executed a partnership and a forward flow program with MAE as financial sponsor. The forward flow program arrangement is something that is used extensively in the United States and is relatively new to Australia and has the following key features. Flexi Commercial will continue to originate, credit assess and service receivables through our broker network. This capital light model, where we do not require any capital for this facility, Humber Group does not incur any credit losses on these receivables and we do recognise these assets off our balance sheet. The group will continue to receive upfront reimbursement of origination costs through fees, along with servicing fees and a share in the upside of these transactions. We note that under this strategy, Flexi Commercial will continue to use warehouses, facilities and term deals for about 70% of the assets originated. of this business. The facility has the following benefits. It increases our capacity for capital-like growth in commercial without the need to raise significant equity and dollar shareholders. It is hourly accretive as the forward flow grows the income. Our business transforms from an existing business to an origination asset management platform. It also diversifies our funding platform to protect the business in the event of closure of term markets and allows us to continue to originate receivables for our customers in difficult environments. And we see this as an opportunity to expand this program to other asset classes, including non-limited solar. We've set out below the accounting differences between a forward flow and warehouse facility on the bottom right. and that being replaced with fee income. On slide 16, we set out the efficient and effective use of our capital. The core objectives of our capital strategy is to balance growth while maximising percentage of shareholders. Today, we have grown our balance sheet prudently while maintaining credit losses at historic lows. This year, our receivables grew 18% continue to be enhanced through the Forward Flyer program. We also pay dividends with a payout ratio between 30 and 40% of free cash flow, being the normalized cash profit adjusted for capex of working capital. We've announced a 1.25 cents dividend, taking our annual dividend to 2 cents per share, and pre-tax return of 6.02 cents, based on average share price of 47.5 cents per year. Further, we announced in June and that a total of 31.2 million shares were purchased through the program to satisfy LTI grants. The purchase of LTI grants to FY23 ensures that our employee share plan was not diluted. We consider that these actions, along with our focus on unit economics, capital allocation and cost out, will deliver enhanced long-term shareholder value. I thank you for your time and I'll now hand back to Stuart to continue our presentation.

Thanks, Adrian. Turning to commercial on page 18. As I mentioned earlier, commercial has performed exceptionally well over the last four years. This year, the business returned a normalised cash profit after tax of $42.8 million, which was slightly up on last year's result. As we dissect the numbers, we can see that the interest income grew by 19%, from $78.6 million to 93.8%. despite interest expense growing by 80% against the 52% increase in interest income. We experienced some margin compression in the first half as loans written in early years rolled off and were replaced by loans written in the current environment with much tighter margins. As expected, we saw a $9.5 million increase in net losses as the higher volume growth experienced in 2022-23 caught up with the more stable volumes and receivables in the current period. Typically, we see losses from loans occur if they are to occur after 24 months on the books. Importantly, net losses as a percentage of the average net receivables was only up 20 basis points to 0.7%, which is still a very low loss experience. The business was positively skewed to operational leverage with a 26% increase in receivables and a 19% increase in net operating income, only having a 4% increase in operating expenses. Moving to page 19, The real message here is around diversification. When we look to investor, geography and customer, we are well diversified. We have strong positions in the tools of trade sector, which have retained values with a strong secondary resale market. We therefore remain well diversified, fully secured, with a low sector and state-based concentration. We have a diverse customer base with no single exposure greater than $4 million. And our repeat customer business now accounts for 42% of our volume up from 38% in financial year 2023. These repeat customers typically have lower loss rates as we have a track record of payment history and credit performance. And it means we're doing something right. The chart on the bottom left also shows how the quality of customers we do business with has improved over the years and critically has improved as we've increased volumes. Turning now to page 21. The consumer business had an improved performance in the second half as the initiatives commenced in the first half of the year gained traction. The major impacts could be seen through the stabilisation of NIM at 8.2% after several periods of compression, reductions in origination costs, lower net losses following tightening of credit settings in the exit of Little Things, and lower operating expenses, particularly in the second half. Next, page 22. We highlight here three of the major businesses that make up consumer, New Zealand Cards, Australian Cards, and Hum Australia. As we focus our efforts in rebuilding these businesses, it's pleasing to see increases in product contribution and growing interest-bearing balances. In Cards New Zealand, we saw a growth in receivables through the year supported by an increased revolve rate from 61.3% to 64.1% on a half-on-half basis. This resulted in a normalised cash net profit after tax improvement in the second half of $1 million from $7.8 million to $8.8 billion. Australian cards, as expected, we saw a reduction in normalised cash net profit after tax following our decision to slow growth on the platform, exit and run down our closed products at once in Lombard and tighten the credit settings. Offsetting these measures to a degree was an increase in product yield from 18.6% to 19.6% on a year-on-year basis, and a higher revolve rate in the second half of 58.5% compared to 56% in the first half. For Hunt Australia, second half normalized cash net profit after tax of $0.8 million was up from the first half, which recorded a loss of $2.5 million. This positive change was driven by management actions around firstly optimising the unit economics with continuing reviews of product and merchants, economy costs being managed well with the recent issuance of a solar private placement, we have lower net losses and we're experiencing further growth in our international businesses. We turn to the summary on page 24. We've continued to strengthen our balance sheet and have built an efficient and diversified funding platform that underpins future balance sheet growth. Our risk metrics continue to perform well and are supported by a large, secured commercial portfolio. We remain focused on operational efficiency and will continue to pursue a lower cost-to-income outcome. The success we have seen in our commercial business by focusing on the customer is being replicated in our consumer business. We have seen the stabilisation of net interest margin, which is pleasing. Thank you everyone for joining us today and that concludes our presentation. I will now hand back to the moderator who will open up the conference for questions.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To return your question, please press star 1-1 again. To ask a question or comment on the web, please type your question in the box located on the left-hand side of the screen. Please stand by while we compile the Q&A roster.

Once again, if you have a question on the phone lines, please press star 1-1. I'm sure no questions on the phone lines at this time, sir.

I don't think we have anything on the web either. So thank you, everyone, for joining us on the call today. Both Adrian and myself will be available for any calls outside of this conference, should you wish it. And to the shareholders, thank you for your support through the air. Thanks, everyone.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.