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Edited Transcript of FXL.AX earnings conference call or presentation 27-Aug-19 12:30am GMT

Full Year 2019 FlexiGroup Ltd Earnings Call

St Leonards NSW Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of FlexiGroup Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rebecca James

FlexiGroup Limited - CEO

* Ross D. Aucutt

FlexiGroup Limited - CFO

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Conference Call Participants

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* Apoorv Sehgal

UBS Investment Bank, Research Division - Associate Analyst

* Paul Buys

Crédit Suisse AG, Research Division - Head of Research and Director

* Scott Murdoch

Morgans Financial Limited, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the FlexiGroup Limited FXL full year results announcement. (Operator Instructions)

I would now like to hand the conference over to Ms. Rebecca James, CEO. Ms. James, please go ahead.

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Rebecca James, FlexiGroup Limited - CEO [2]

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Good morning. Thank you for joining us for our full year '19 results presentation. My name is Rebecca James, Chief Executive Officer of FlexiGroup and I'm joined today by our Chief Financial Officer, Ross Aucutt. We'd like to first run through our 2019 full year performance before I discuss the significant progress made against our new strategy that was laid out at our half year results in February. We will, as always, allow for your questions at the end of our presentation.

I'd first like to start with a brief overview of FlexiGroup. We've been helping Australians and New Zealanders fund their lifestyles for over 20 years. We have 1.7 million customers with over 80% choosing to use us frequently. In the last 12 months, investment in technology has seen us advance our credit analysis and collections capabilities, along with our digital and technology platforms. We also have a strong and stable funding lines with substantial headroom to meet our growth plans. And we've been profitable since inception, enabling the payment of a consistent dividend to our shareholders. We're a digital spending powerhouse, helping people to buy everything, everywhere, everyday.

I'd now like to turn to Slide 3 and discuss our position on responsible lending. This is the prism through which we look when you consider how we should operate as a company. We have long acknowledged that the community has high expectations of us and we have a history and a track record of adapting to, and leading industry and regulatory change. Over our 30 years of operations, we have engaged with a wide range of stakeholders on the importance of responsible lending. In the last 12 months, we've delivered our submission to the asset review with Buy Now Pay Later, participated in the Senate Inquiry into consumer leasing in Buy Now Pay Later and subsequently engaged with industry bodies and peers on developing a code of self-regulation in the Buy Now Pay Later space.

We do this because ultimately, our interests are aligned with that of our customers. Affordability of finance means reliability of payments, which is good for both parties. We believe that the right financial solution differs for each individual and occasion, which is why we pride ourselves on being flexible to our customers' needs.

Turning to Slide 4, you'll see our agenda for today's call. I'd like to frame today's call by talking a little bit about who we are today and what we want to become. FlexiGroup has been operating in Australia for over 20 years, serving over 1.7 million customers and in February, we announced our plans for ensuring that we remain the digital spending powerhouse, helping people buy everything, everywhere, everyday.

We plan to do this by rewriting the playbook for digital spending, having millions of customers using FlexiGroup products to pay everywhere, everyday. Our purpose is our desire to make an enriched life affordable for everyone. This is not about a life of money and opulence. It's about a rich -- a life rich in opportunities, experiences, variety and empowerment. It's about our customers having the confidence to create exactly the life they want and being able to live it.

We also set out our 4 simple steps to transformation, which you'll see on Slide 7. We are simplifying our offering in order to build profitability and brand strength, leading Buy Now Pay Later. After all, we started it. Streamlining originations with instant credit decisions and expanding our reach, our target market, our audience, our relevance. We've made good progress against each of these since February and I will discuss in greater detail progress made against each strategic pillar a little later in the presentation.

I'd now like to turn to Slide 9 and provide an overview of today's results before I hand over to Ross to take you through some of the financials in more detail. This year has been characterized by strong customer and volume growth, impacted by a one-off, large provision requirement in AU commercial. Total customer numbers have grown by 136,000 to reach 1.76 million active customers, up 8% on the prior comparable period, demonstrating continued strong demand for our products. We've also seen good traction with our retail partners, with a further 5,000 new partners added, with 65,000 partners in total.

This increase in customer numbers and new partners to our network has resulted in volume increasing to $2.56 billion, 12% up on the prior year. A good sign of momentum in our business is our receivables, up by 11% to $2.64 billion during the period, underscoring the strength of FlexiGroup's market position. Final cash NPAT for the period of $76.1 million was in line with the revised guidance, down 13% on the prior year as a result of a one-off impairment related to a vendor program in FlexiGroup's Australian Commercial Leasing division in the first half.

And our transformation program is well under way. I'm not going to spend too much time on this now, but here, you'll see how we're tracking against each of our objectives to simplify, lead, streamline and expand. We've reduced business complexity, launched humm with great momentum, improved arrears for digital-first positioning and an enhanced collections platform and are launching 4 new opportunities in our target customer segments.

I'd now like to hand over to Ross, who'll go into more detail on our financial performance for the period.

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Ross D. Aucutt, FlexiGroup Limited - CFO [3]

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Thank you, Rebecca. From the table on Slide 12, you'll see that underlying cash NPAT was $76.1 million, which is in line with our revised guidance and includes a $12 million post-tax impairment charge related to the insolvency of a commercial vendor partner.

As you can see, we've also listed the additional nonrecurring items, which equates to this year's statutory profit after tax of $61.7 million. One item which I want to explain in a little more detail is the line item, impairment of goodwill and other intangibles, where we've taken a $10.9 million pretax, $7.5 million post-tax impairment on our capitalized software balances. This charge is driven by 2 things: one, under the new strategy we are developing, new core platforms for all of our products. This ensures we are using the latest technology available. As a result, we have written off the residual carrying value of these assets due to decommissioning old platforms and replacing them with new platforms; and two, the investment we made in Lisa in 2018 was predicated on high volumes and customer take up than we achieved. As a result, the business case and financials that underpin the investment are no longer sustainable, so we've written this investment off.

In addition to this, we anticipate that over the next 12 months, we will complete the bulk of the systems transformation and there will be a further 9 -- $10 million of accelerated depreciation as the legacy systems are decommissioned.

The $6 million post-check -- tax charge listed as historical tax and accounting matters is the result of a review that we undertook during the year to improve our tax compliance and governance framework. This included proactively correcting and self-reporting historical underpayments of $6 million relating to periods as far back as 2014. As a result of this work, we're very confident in the integrity of our tax capability, compliance and governance processes going forward.

The directors have declared a fully franked dividend of $0.0385 per share for the second half. This equates to a full year dividend of $0.077 per share, flat to last year and a total payout for the year of around 39%, which is at the high end of our payout range.

Finally, in a year where we continue to invest heavily in growing the business, we maintained strong cost discipline and held our cost-to-income ratio flat year-on-year.

On Slide 13, turning now to the performances in the individual businesses. I want to first talk about the Buy Now Pay Later businesses. The rebuild of our Buy Now Pay Later products into one brand in Australia, humm, has been extremely successful.

humm volumes were up 6% on prior year and this has continued in FY '20, with 16% growth in customer numbers. humm's unique proposition of offering big things, longer-term installments and little things shorter term is resonating well with both retailers and consumers.

Profits were impacted this year as we took a $4 million post tax write-off related to the retired Oxipay product. Significant improvements are being made to upfront credit and fraud checks in the new humm product and arrears was 1.4% at June and continues to remain at these levels.

In New Zealand, in its second full year of operation, we've seen 383% growth in volumes, with significant retail signings, meaning that we are now a key player in this market. With 114,000 customers, we have a strong growth platform and given this is a scale product, we expect improvements in the cash NPAT in FY '20.

For the first time, we've separately shown out our Irish Buy Now Pay Later product, Flexi-Fi. In its second year of operation, we saw 77% growth in volumes, with fantastic growth in both customers and sellers. We see significant potential for this business going forward.

Turning to Slide 14, which summarizes the performance of the New Zealand -- sorry, the Australian and New Zealand cards businesses. We maintain momentum in our Australian cards business, with volume growth up 10% in a sluggish market that has seen overall cards account contract 3.1% year-on-year. Net portfolio income was up 39% as increased cards usage drove interest and annual fee income. Impairment losses were contained to a marginal increase of $1.1 million year-on-year despite increased provisioning requirements as well as a large write-off in H1.

The forecast improvements to our collections flowed through in H2 and we expect to see this trend to continue into FY '20. New Zealand cards have seen significant volume growth of 12%, which was an impressive result when compared to an overall market growth of 5%. Portfolio -- net portfolio income was up 7%. Impairments were 13% lower, reflecting strong underwriting and collections performance. Overall, cash NPAT was up 4%.

Slide 15. Our commercial business had a challenging year with overall cash NPAT down almost 70%. The main driver of this decline was the $12 million impairment related to the insolvency of the vendor program called out in H1. Operationally, volumes were up 27%, with the managed services and the broker channels performing particularly well.

Consumer leasing has not performed as well as we would have liked, primarily because Lisa volumes were down 28% on last year. Despite the poor performance of Lisa, cash NPAT, as you can see, is up strongly as we have driven operational efficiencies and increased digitization. This business has also benefited from the high-yielding FlexiRent runoff. Unfortunately, these positive tailwinds will reduce in FY '20.

Turning to Slide 16. While overall impairments in the Australian cards business were up marginally on last year, this includes the large H1 write-off I mentioned earlier. If the impact of this one-off is excluded, overall impairments are 26% better than prior year.

Just as importantly, there is more to come in FY '20. Half-on-half, we saw significant improvement, and this is attributable to the investments made in H1 to improve our collections capability.

New Zealand cards have shown stellar improvements in impairments with overall impairments at 1.5% for the year, down from 2.4% last year. Our team continue to improve underwriting and collections capability, and this has been helped by the introduction of comprehensive credit data in late 2018.

Turning to capital management on Slides 17 and 18. Funding continues to be one of our core strengths. We have access to a diverse range of funding sources with significant headroom to allow for growth. In H2, as promised, we established a funding facility for our Irish Buy Now Pay Later product, Flexi-Fi. This means that we now have stand-alone funding facilities for every product in the group. During the year, we continue to diversify our funding with over $600 million of term market securitizations, with a loyal and growing investor base in both Australia and New Zealand. We will be executing a master trust for our Australian credit cards during FY '20.

On Slide 19. Our access to recourse or on-balance sheet funding is unique in the nonbank sector and provides us with a backstop in these uncertain times. Our gearing remain flat year-on-year despite $80 million of additional provisioning required under AASB 9. Our headroom is now $100 million.

I'll now hand back to Rebecca to provide the strategic update.

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Rebecca James, FlexiGroup Limited - CEO [4]

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Thanks, Ross. I'm excited to now give you all an update on FlexiGroup's new strategy and direction. As I outlined earlier, the first of our 4 strategic pillars was to simplify our offering in order to build profitability and brand strength.

If you turn to Slide 22, you'll get a better visual representation of the complexity faced by the group. When I joined the business in October, we had numerous products sold under a range of brand banners with different pricing and credit profiles, not to mention the huge number of different applications and supporting platforms that were in operation, creating inefficiencies right across the business. We've been focused on consolidating into fewer, more desirable products as we simplify and streamline our back-end operations.

Today, I'm pleased to announce that we now have 3 clear propositions that are underpinned by unique, recognizable brands. In Buy Now Pay Later, we have humm, the only Buy Now Pay Later product in the market that offers up to $30,000, interest-free. We're also announcing an extension of our Buy Now Pay Later offering with the introduction of a new product that we believe is a real category killer.

In credit cards, we have a new direct-to-consumer brand that consolidates Skye, Once, Lombard and Q offerings all in one place. And in SME lending, we have new products that pivot to focus on small business lending which see -- which we see as a huge opportunity for our business.

Slide 24. However, to simplify doesn't mean to simplify our product offering. Slide 24 shows that we're also in the process of simplifying our systems. FlexiGroup's technology landscape was heavily customized to suit separate legacy systems and products. We now have an architectural roadmap in place to reduce 6 product systems to 1 Web origination platform; 3 buyer management systems to 1 CRM system; 3 fraud engines to 1 fraud platform; and 7 credit decisioning instances to 1 platform that is scalable for growth and works across markets.

We are simplifying our service. This means a digital-first approach with a single CRM for a buyer and seller and enhanced call center experience for our customers. We've removed duplicate positions from call center and back-office functions; introduced web chat, which has reduced all volumes by 20%; introduced apps for Buy Now Pay Later and cards, allowing customers to self-serve, all while maintaining or improving our NPS in Buy Now Pay Later now at 51% for humm.

Finally, we're simplifying our operations. We've completed an organization realignment, removed duplication of functions across each geography, introduced new roles, including innovation, digital and data, product management as well as investment and marketing. By simplifying our product suite, the areas we play in and moving fully to a shared services model, we believe that we can deliver a cost-to-income ratio of less than 40% over the next 3 years.

Next, we want to lead in Buy Now Pay Later, a space that we invented nearly 20 years ago. FlexiGroup had 2 invisible brands. These were unloved products with limited customer interface.

On Slide 26, you'll now see humm. To capitalize on our rich history in this space, we consolidated our 2 Buy Now Pay Later products, joining them together to create a compelling customer proposition as a new product to the market, humm. humm is the only product in the market that can service transactions from $1.00 all the way to $30,000, allowing customers to access $2,000 instantly, gives them more time to pay and allows them to shop confidently with pre-approval.

And our new product offering has been incredibly well-received by the market. Since the launch just 4 months ago, we've added 63,000 net new customers, added 5,000 new retail partners, a growth of 42%. And for FY '20 year-to-date, we've seen growth in volume for little things, up 36%; and big things, up 12%, with total transactions up 19%.

During the period, humm has also successfully integrated with a wide number of e-commerce and POS platforms to drive increased adoption with retailers. And we've added some big names to the platform, too: IKEA, Just Jeans, Myer, Bing Lee, to name but a few. However, this opportunity won't be realized unless we have a fit-for-purpose digital credit decision framework to help us grow. We are focused on streamlining our originations with instant credit decisions.

FlexiGroup's objective is to foster a credit platform that is agnostic to product and market and therefore, easily scaled for growth. Significant work has been undertaken in the 2019 financial year to decommission legacy systems and deliver a sophisticated proprietary decision engine that makes best use of the data reference points that we collect from customers.

During the period, we've delivered one enhanced and optimized collection system, which has been put in place for all products. We've introduced new credit score cards, which went live for Australia and New Zealand cards. We've entered a new partnership with GBG to deploy the latest fraud detection tools. And we've successfully deployed comprehensive credit reporting.

Work on this continues, but the company is already experiencing the benefits of the investment with early improvements in arrears due to enhanced decision-making and our collections platform that Ross touched on earlier. Finally, we wanted to increase our reach, our target market, our audience and our relevance. And today, I'm excited to announce a number of new initiatives that are being rolled out in the coming year to significantly expand the reach of FlexiGroup into new market segments.

On Slide 31, you'll see what we see as our key target customers, each now served by 1 or more of our products. You have the balancer, who lives for the moment, served by our new Buy Now Pay Later category killer. You have the amplifier, who lives life by making what they have go further, served by humm. You have the shopper, who lives a lifestyle to enjoy and can do so with our new direct-to-consumer credit card. You have the Nomad, who lives life prioritizing new experiences and does it through our partnership with Flight Centre. And finally, you have the founder, who lives to create, build, grow and can do so with either of our 2 new SME products. I mentioned the bouncer, a consumer who lives for the moment.

On the next slide, we will show you our new Buy Now Pay Later product that's aimed squarely at them. And apologies in advance for those of you who are not watching the webcast, this video will also be made available online.

(presentation)

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Rebecca James, FlexiGroup Limited - CEO [5]

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I'm delighted to introduce you to bundll, an extension of FlexiGroup's Buy Now Pay Later offering in a completely new category in the sector. In a strategic partnership with MasterCard, FlexiGroup has created an offer that will allow buy -- that will allow consumers to buy everything, everywhere and pay later. It's interest-free, it's Buy Now Pay Later in your pocket.

Bundll is the only Buy Now Pay Later product in the market that can facilitate multiple payments up to $1,000 at any retail that accepts MasterCard transactions. Customers simply download the bundll app directly to their phone in -- and register where in a few simple steps. They can use bundll for any purchases through Apple Pay, Google Pay and other electronic wallets for all their weekly purchases in order to bundle them into one place.

Customers then get up to 2 weeks to pay their bundll. If they're not ready to pay or need a bit more time, they can use a snooze to delay payment another 2 weeks. And if more time is needed, create a superbundll and repay in 6 fortnightly installments over 12 weeks.

And bundll has already signed 2 key partnerships ahead of launch. bundll has partnered with MasterCard in developing the product offering, with all transactions to be processed through its network.

And Raiz. Raiz is Australia's largest mobile-first, consumer-focused, financial services app. bundll will be co-branded and offered to over 200,000 Raiz customers as a means of creating instant liquidity in their Raiz accounts, funding purchases on bundll via Raiz. It will also allow our customers the opportunity to round up bundll purchases and invest via Raiz.

Loyalty offers will be available to customers via the bundll marketplace on the app and we'll be announcing our founding brand partners at launch. bundll is currently in beta and will launch in the second quarter of FY '20.

Turning to Slide 35 and our new card brand targeting the shopper, consumers who live a lifestyle to enjoy. FlexiGroup's credit card business continues to grow and to capitalize on this opportunity, the company is going direct to the consumer with a new brand, cartt.

FlexiGroup will continue to have one of the most competitive offers in the market whilst also marketing it aggressively and directly to consumers. To target the shopper, we will have a direct-to-customer acquisition approach in Australia. We will offer 90 days interest-free and no international transaction fees, everything that appeals to the dedicated shopper. This will be aided by a frictionless sign-up process, which is fast to join, provides an instant decision and instant provision directly into your digital wallet.

On Slide 36, you'll also see 2 new products, wiired lease and wiired money, aimed at the founder. There are approximately 2.3 million small businesses in Australia and 580,000 in New Zealand and for the majority, cash flow is their biggest concern.

B2B e-commerce is also set the become double the size of the B2C online market over the next 2 years. wiired lease is a product designed specifically for small and medium enterprises seeking a nimble and competitive leasing partner who can help finance technology investments for their business.

wiired is Australasia's first digital integrated leasing platform, providing instant decisions on commercial leases up to $100,000. wiired lease has already launched in New Zealand with Harvey Norman, Ingram Micro and OfficeMax as its first partners.

Complementing this is wiired money, an interest-free installment digital wallet. It can provide the founder with up to $30,000 instantly and FlexiGroup's existing ecosystem will make this the most widely accepted business installment product across Australia and New Zealand. Launch for this product is scheduled for Q4 FY '20.

In February, I laid out our ambitious plan to become a digital spending powerhouse, helping people buy everything, everywhere, everyday. And the steps taken over the last 6 months have catapulted us in that direction. We've done that by simplifying our products and brands to reduce effort, creating synergies and allowing us to focus on growth. Delivering customer experiences that create viral demand for our products, solving pain points others can't solve. Creating and delivering products that increase our reach and exposure and growing the value of customers seamlessly within digital wallets and product platforms, giving us higher profit per customer than our competition.

On Slide 38, I'm proud to introduce the new FlexiGroup's suite of brands: bundll, humm, cartt and wiired. Simple, lovable and most importantly, relevant.

Turning finally to our outlook on Slide 40. FlexiGroup is in the first year of a 3-year comprehensive business transformation plan designed to build on its first-mover advantage in nonbank consumer finance. Our objectives are clear: accelerate growth, reduce costs, deliver a best-in-class digital platform and invest in loved brands. The plan is progressing well.

The company does not propose to issue short-term earnings guidance, as it believes a focus on short-term profit objectives can contradict the broader goal of ensuring FlexiGroup achieves its medium-term goals and emerges as a strong, long-term industry leader. The company is on track and believes it can achieve its business improvement objectives while maintaining a key focus at all time on earnings and return on equity.

In FY '20, management expects volume to grow at least 15% as a result of new product launches, audience extension and new partnerships. The company also expects to balance margin with growth and to maintain a double-digit return on equity.

We believe that the steps taken over the next 18 months will deliver substantial returns and solidify FlexiGroup's position as the digital spending powerhouse, helping people buy everything, everywhere, everyday.

We have over 20 years of operational experience, $2.5 billion in receivables, a simplified offering and unlike many of our competitors, we're highly profitable.

So with that, I'd like to bring an end to our full year presentation. Thank you for your support, and I'd now like to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Apoorv Sehgal with UBS.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [2]

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Just wanted to ask on the outlook. You obviously haven't provided guidance and I understand it's difficult. But do you have a feeling for the level of cost investment to go direct in cards and accelerate the humm strategy in FY '20?

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Rebecca James, FlexiGroup Limited - CEO [3]

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We are in the first year of a 3-year transformation program.

We're incredibly profitable, and this does provide us the flexibility to self-fund reinvestments in brand and technology. And we will make these investments with discipline and absolutely with returns in mind, just as we have done over the past 6 months.

But we do think it's imprudent to focus more of our intention on the top line indicators of our business in the first phase of our transformation to ensure that we can continue to deliver long-term sustainable profits to our shareholders.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [4]

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Got it. Okay. Just on the humm strategy. I just want to understand the proportion of volumes coming from new merchants on the humm platform versus your existing merchants prior to the rebranding of humm?

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Rebecca James, FlexiGroup Limited - CEO [5]

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The volume -- the bulk of volume or the highest percentage in volume does continue to come from those that have been with the platform, the 12,000 sellers that we had on the platform. And that's largely due to the time that it takes for us to bring on these new brands and players.

We've integrated the majority of the brands which we've announced previously and now on board with humm. But a lot of those integrations took place in June, July and August and as a result, wouldn't be reflected in our FY '19 numbers.

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Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [6]

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Okay. That makes sense. Just a final one from me, please. Just around trading conditions so far over the last couple of months and maybe your view on the broader consumer spending backdrop?

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Rebecca James, FlexiGroup Limited - CEO [7]

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We -- I guess in the last couple of months, we have seen continued, strong volume of growth across all of our products. It's obviously -- I guess, from a broader economic perspective, there's obviously been lots of commentary around a slight softening in the retail economy. But we have been partnering well with our retail partners through that period. We have been investing together heavily in cross-marketing campaigns. And as a result, our volumes across all of our products are showing strong growth year-to-date.

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Operator [8]

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The next question comes from Paul Buys with Crédit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [9]

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A quick one, just on Buy Now Pay Later and the Oxipay write-offs. Given that you have some other write-offs, that which you've have taken below the line as abnormal items. So I'm just curious to know why you didn't do that for Buy Now Pay Later.

And just confirm that is actually -- regardless of how you accreted it, that a one-off impact on the profitability in that division?

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Ross D. Aucutt, FlexiGroup Limited - CFO [10]

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Yes, it's a good question, Paul. It's Ross here. For -- I mean we've never taken necessarily ongoing business. [In BM], it's below the line. And we don't really feel like that's necessarily the right thing to do. I mean the exposure in commercial was taken above the line, so we've just followed that with Oxipay. I mean Oxipay is being replaced, obviously, by humm little things. And as we called out, it was very much a one-off relating to the Oxipay business, which probably didn't have as good a fraud protection controls as we now have through our humm business and the investment that we've undertaken.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [11]

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Okay. And then just on the consumer leasing. And you called out that the profitability in that division is currently still supported by FlexiRent rentals. Just wondering if you can give a little bit color on or quantum on the proportion that business currently supported by FlexiRent and the expected time for runoff?

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Ross D. Aucutt, FlexiGroup Limited - CFO [12]

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Yes. Paul, a sizable portion of that is FlexiRent. I mean the runoff of that book is quite high. It has a sort of quite a high half-life, so you'd expect most of that to have runoff by the end of this year -- this financial year, FY '20.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [13]

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And then the last one just on the card business. In previous results, you've had issues around historic collection issues or collection to do with the legacy business. I' just -- I 'm just hoping for an update there. And an idea of whether or not you are still enduring that in the half just passed? And indeed, therefore, kind of the growth outlook for the business on the back of that?

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Ross D. Aucutt, FlexiGroup Limited - CFO [14]

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Yes. I mean last year, as we called out, and even in this -- the first half, the disappointment around our collections. I mean -- the really -- the important thing was we called it out as a collections issue and not a credit issue and that's proven to be correct.

And as you see from our presentation, impairments in our AU cards saw strong improvement in H2, and we're continuing to see those improvements in FY '20. The improvements made will have a lasting impact.

The frustrating thing is that these have taken a long time to flow through. But we're continually improving our collections processes and you'll see that flowing through in FY '20.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [15]

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And final one, just relating again to cards.

In the past, the group -- I guess, not necessarily under this management team specifically, but the group's had a profitability target for the cards business.

I see you're stuck with the cost-to-income target of under 40% for 3 years. Do you still have the same profitability target for the cards business?

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Ross D. Aucutt, FlexiGroup Limited - CFO [16]

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Overall, I mean, the cost-to-income ratio is the big target. Our cards profitability, with the implementation of the new brand and as such, I mean, we're -- yes, we did have a little hiccup with our collections last year, but we're looking at strong volume growth. I mean I don't think we've -- we certainly haven't -- we're not providing any profit guidance on any of our businesses at this point.

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Operator [17]

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(Operator Instructions) There are no further questions at this time. I now hand back to -- I will now hand the call back over to Ms. James for any closing remarks.

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Rebecca James, FlexiGroup Limited - CEO [18]

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Thank you, everybody, for your time this morning. Oh, sorry. Is there one more question?

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Ross D. Aucutt, FlexiGroup Limited - CFO [19]

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Yes, I think. Question?

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Operator [20]

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From Scott Murdoch.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [21]

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Sorry about that. Didn't register properly. Sorry if I've missed any of this, a couple of calls on -- but I was just wondering if there was an update on the Flight Centre contract. I believe that was due for renewal sometime in the latter part of this year?

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Rebecca James, FlexiGroup Limited - CEO [22]

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Yes. We have a Trans-Tasman relationship with Flight Centre. Our contractual arrangements in New Zealand have another 2 years to go there and at some point in this financial year, we will be looking to renew with Flight Centre in Australia.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [23]

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Okay. And is that sort of a formal process that you're going through at the moment, or I think you solved it sort of around -- somewhere between August and December 3 years ago?

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Rebecca James, FlexiGroup Limited - CEO [24]

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Yes, we're having ongoing discussions with them. Yes, we are.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [25]

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Okay. Just a bit more -- a bit interested in maybe more detail around the commercial strategy. Obviously, you've got a few new products coming through and some consolidation of brands. But just -- I think there's a relatively vague comment around equipment finance there. Just interested in that broker channel and equipment finance, if that's considered noncore? And a bit more detail on your position there?

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Rebecca James, FlexiGroup Limited - CEO [26]

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Yes. We're definitely looking to pivot our business more to a focus on a SME audience and we will be evaluating the best distribution channels in order to capture -- and to capture that audience as well as managed services. So the strategic pivot that we're announcing today is probably more around a pivot from an audience perspective rather than necessarily a change -- a wholesale change in distribution.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [27]

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Okay. And so that audience -- the broker channels, the audience in this equipment finance, is -- I mean it's either an ongoing business or it's not really a -- I think you should have commented 6 months ago that the strategy would be sort of pretty firmed up by this point. I'm just sort of down...

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Rebecca James, FlexiGroup Limited - CEO [28]

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Yes. So we believe that focusing on SME and in leasing, as opposed to necessarily the number of -- or the focus that we've had on chattel mortgages by our brokers previously.

So our focus will be on a SME audience with the leasing product and also our installment product for the SME audience, but continuing to distribute through the broker channel.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [29]

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Okay. And just Ross, I think there's a [NZD 55 million] perpetual note out there that continues to step up or as close to a step up in coupon.

Just interested in what the plans are with that, given it's probably pretty -- entering a pretty expensive period?

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Ross D. Aucutt, FlexiGroup Limited - CFO [30]

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Look, that's something that obviously is a Board decision, but it's something that we review on a regular basis, Scott. But yes, you're right, it's still outstanding. It's a perpetual note outstanding.

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Scott Murdoch, Morgans Financial Limited, Research Division - Senior Analyst [31]

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But will you be able to refinance that with your current debt facilities, given a similar or a lower cost of funds that are 8% to 12% coupon?

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Ross D. Aucutt, FlexiGroup Limited - CFO [32]

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Yes. I mean as we look at everything, we look at everything based on the underlying products.

Yes, you can see that we've got headroom available in our funding facilities but you also need to look at the underlying note and how it's sort of -- how it's treated, I suppose, as well.

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Rebecca James, FlexiGroup Limited - CEO [33]

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I don't believe that there are any further questions, so we'll wrap up, and thank you all for your time today.