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Edited Transcript of SHJ.AX earnings conference call or presentation 28-Aug-19 12:30am GMT

Full Year 2019 Shine Corporate Ltd Earnings Call

BRISBANE Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Shine Corporate Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ravin Raj

Shine Corporate Ltd - CFO & Company Secretary

* Simon Michael Morrison

Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director

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Conference Call Participants

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* Brendon Kelly

Moelis Australia Securities Pty Ltd, Research Division - 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 Shine Corporate FY '19 Full Year Results Conference Call. (Operator Instructions)

I'd now like to hand the conference over to Mr. Simon Morrison, Managing Director. Please go ahead.

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [2]

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Thank you, and welcome, everyone, to our full year results presentation.

My name is Simon Morrison. Can I introduce our team? Firstly, speaking with me today, our CFO, Ravin Raj. Ravin is a highly experienced public company CFO, having spent more than 20 years at Watpac here in Brisbane. Prior to that, started his career at Touche Ross Accountants.

Can I also introduce John George, Head of Investor Relations. John is a Former Director and Executive of Shine and knows our company very well. I'm the Managing Director of Shine. I've been with the company for 31 years.

If we move to Slide #6. Very quickly, by way of overview, most people know our company pretty well.

We are broken into now 10 brands, operating in different areas of litigation and loss recovery.

We are broadly broken into 2 components: One is our Personal Injury business, which has been our core for a long time; and the other is our Emerging Practice areas, which are the newer areas of litigation that we've moved into.

We are now one of the largest providers in this space. You will see in the appendix some updated data from IBISWorld. We're gaining ground in terms of our market share and our size, comparable to our competitors. We've maintained our discipline of staying inside litigation and loss recovery. We've not merged out into legal transaction work, nor do we intend to. We've got a pretty good team that we've put together. We've spent a fair bit of time, particularly bolstering our legal skill in our leadership team.

If we move to Slide #7. Just some highlights of the year in review in terms of our legal operations. We resolved more than 6,000 cases in fiscal '19 and we recovered more than $650 million for each and every one of our clients.

We have now about 850 team members spread across 2 countries. Three areas continue to be good movers in the areas we practice in. Silicosis, very sadly, for those working in the stonemasonry industry, it's causing significant problems and we are quite active in that litigation. Again, sadly, Sic litigation is on the rise in this country and we're seeing increasing work coming from most parts of the country.

Our environmental work is growing as well and in particular, our Class Action activity in the firefighting foam litigation called PFAS is ramping up. We now have some 11 different sites that we've instituted class actions or instituting class actions on.

We recovered a very large settlement here in Queensland of $19 million for a brain-injured client, which we believe is a record settlement in our state. We also secured quite a large settlement for workplace bullying, which again, sadly, is another area of litigation that is on the rise.

So looking across the sort of global and national issues that we're quite active in, both in our presence and our litigation, contamination, I've spoken to; medical and professional negligence, you know well about our Mesh class action; and we are now moving into the area of nursing home litigation off the back of the current Royal Commission going on.

The financial sector, we're quite active in off the back of the Royal Commission, and there'll be some more work to come in that respect. We do work in employment and discrimination. And as I touched on, our dust disease practice is very active, notably with silicosis work.

We move over to Slide #8. I'll just walk through the group highlights for the year. Firstly, for the group, we landed within our guidance, which we were happy with. We completed our strategy of putting in place our Class Action litigation funding strategy together with implementing our disbursement funding strategy. So we're looking, as we move forward, to see some good improvements based on those 2 strategies, particularly in our cash flows.

The Class Action brought against Shine Corporate was settled and concluded. As we indicated, there's no impact to our balance sheet or our earnings.

We continued our integration of our practice management system and have started integrating into our subsidiary businesses.

In terms of our strategy for the year. We've done a fair bit of work on our segments and channels for our marketing, to try and get a more and more competitive edge for our organic work. We did some groundwork and bought a Family Law practice over in Western Australia and we'll continue to build out our national network. We've done a fair bit of work on scaling our technology, so that we can get the benefits of that across all of the practices we have in the country.

So far as the financial results are concerned, Ravin will talk you through the details, but at a glance, we were happy that we were within guidance on our numbers. It was a good result having regard to what was in front of us for the year.

We move over to Slide 9. Very quickly, we'll walk you through some highlights of our subsidiary companies.

Sciaccas have been doing some development work in both employment and industrial law, areas that we think have growth potential.

Emanate Legal has been challenging as we've previously reported, in relation to the mining and infrastructure industries. We took an impairment at the half year, as we've reported. Growth is coming, but far slower than we had anticipated, although we believe it will come back.

We had good results in the West from both our practice at Stephen Browne and Bradley Bayly. In the case of Bradley Bayly in particular, we are seeing a big increase in sexual abuse litigation emerging from the Royal Commission. And in our Family Law practices, as I've said, we will be focusing on building out our national footprint.

If we move to Slide 10. We made reference, I think, at the half that we have quietly been doing some work on building a disruptive model for our industry. We spent the last 12 months building the model and we're now in the live environment testing it. It's a very low-key operation for Shine. But we believe being a first-mover now, before our industry is actually disrupted, will put us in great stead.

I'll pass over to Ravin, who'll walk us through the financials.

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Ravin Raj, Shine Corporate Ltd - CFO & Company Secretary [3]

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Thank you, Simon. We're on Slide 12.

Before I start talking about the numbers, I think we should make the point that the financial statements and results this year reflected the adoption of 3 new accounting standards for the first time in FY '19, and that's the financial instrument standard AASB 9; AASB 15, which is the new revenue standard; and also AASB 16, which is the leasing standard.

In terms of the financial results, and we'll talk about these in a minute, AASB 15 and 16 had the most impact on the financial results. The impact of these new standards is reflected in Note 3 of the financial statements for those people who are interested.

But at a high level, the group results are reflected on Page 12. Revenue was relatively stable compared to PCP of $177.9 million. Net profit after tax and impairment was $14.03 million. But if we look at underlying NPAT, which is pre the impairment, our profit after tax was $19.03 million, which is less than 0.5% lower than last year.

EBITDAI was $47.44 million, up 25%. But if we take out the impact of AASB 15, the underlying EBITDAI, on a like-for-like basis, was $38.33 million, up 1.6%. The gross operating cash flow was also impacted by AASB 15. The number that we're reporting is $31.25 million which is up 42.9%. But again, looking at it on an underlying basis, on a like-for-like, it was up 1.3% to $22.15 million. We paid a final dividend of $0.025 per share, which was up 11% on PCP.

Moving through to Slide 13. Just to give you a bit of color around the numbers. As I said, revenue for the year stood at $177.9 million, down marginally on last year.

But people should be aware that this drop in revenue was against the background of downsizing and restructuring of a number of nonperforming areas and also aggregation of some business locations in New South Wales. Those activities had a dampening effect, both on group revenue and also net profit after tax.

In respect of the impairment, we took the impairment at the half year, a $5 million impairment, and that related to our Energy and Resources business. And that really related to goodwill paid for the acquisition back in 2014. The write-off is as -- is noncash and it doesn't impact underlying earnings. Therefore, if we add back some of -- if we add that impairment back, our underlying NPAT is $19.03 million, which is down only 0.4% on previous year. But after impairment, it's down 26.6%.

As I said previously, EBITDAI, as we're reporting, is up 25.8% but it was boosted by the adoption of the new accounting standard, AASB 16 which requires reclassifying operating lease payments and depreciation as appreciation and interest. So on a like-for-like basis, EBITDAI was $38.33 million compared to PCP of $37.7 million. So it was also up marginally on last year.

Overall, in terms of expenses, when you add the expenses on the face of the balance sheet and the notes, overall expenses reduced by $3 million in the financial year.

Moving to Slide 14. The EPS -- as we're reporting in FY '19, the reported EPS is $0.0806, but when you add back the impact of the goodwill write-off and also AASB, underlying EPS is $0.1181, so that's an increase, in reality, of 6.9%.

As I said previously, we've paid a final dividend of $0.025 and that's up 11.1%. The total dividend for the year was $0.0375 per share, up 15.4%.

If we move to the next slide, the balance sheet. The balance sheet has remained relatively stable between the 2 financial years. Cash on hand has grown and that's a result of our emerging strategies, cash management strategy that we put in place a couple of years ago. In respect of the operations, and they're really represented by debtors with unbilled disbursements and disbursement creditors. If you net all those together, there's some small growth in the operational side of the business, as reflected in the balance sheet.

As I said at the start of the presentation, the balance sheet includes 2 new items as a result of the adoption of AASB 16: that's the right-of-use asset, which we recorded $46 million; the liability, which we initially recorded at $48 million; and the difference between the 2 was a loss, which we took against opening retained earnings. And that's reflected in Note 3 of the financial statements.

Overall, net assets increased from $218 million to $222 million, but that's notwithstanding impact of impairment, the adoption of the new standards and also the payment of dividends in FY '19.

Moving to Slide 16. That's a waterfall of our gross operating cash flow. I think everyone knows that we start the year low in terms of our cash generation and we always have a second big half, and that's reflected in those numbers.

As mentioned earlier, while we are reporting $31.3 million as the gross operating cash flow, on a like-for-like basis, the gross operating cash flow was $22.15 million compared to $21.8 million last year. Overall, our gross conversion ratio was 57.8%, and our target in the medium term is to get that up to 70% to 80%.

If we move to the next slide, and this is a new slide that I've introduced this year. This slide effectively reflects our cash management strategies are working.

If you go back to 2016, Shine's unique balance sheet was carrying a significant amount of Shine-funded, equity-funded disbursements and that's about in the range of $32 million to $33 million. We've -- as indicated in previous presentations, we now have a long-term disbursement funder in place, and we're also funding our Class Actions through litigation funding.

Those activities have actually reduced the Shine equity investment in disbursements to below $20 million and I believe that trend will continue in the new financial year.

As indicated earlier, our medium-term aim is to improve our cash flow conversion to 60% to 70% and then to 80% in the long term.

The last slide for me is the debt slide. Marginal improve -- increase in debt and that's really related to the Carr & Co. Family Law business that we acquired in Perth.

Back to you, Simon.

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [4]

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Thanks, Ravin.

So looking then to the longer-term strategy of Shine, there are 4 pillars that we are focused on. The first is organic growth, which we think is the cornerstone to the success of this company moving forward, and we have been doing a fair bit of work on how we put ourselves in a better position than our competition to ensure that occurs, and we're confident that will happen moving forward.

On the financial front, as Ravin reported, the balance sheet's in good shape. We're pretty conservative in relation to our debt. We don't intend to change that position too much. Our key focus is to keep improving our operating cash flows.

Our earnings growth will come from largely 2 sources: one is changes to the top line revenue, but probably more importantly for us is changes to how we more effectively manage our work in progress, which will then drive increases in earnings.

We haven't reported for the last little while that although we paused acquisitions back in 2016, we did 2 small ones last year, we are continuing to look at opportunities. We're very selective in what we will look at and we've been on a journey of reeducating vendor firms that the valuations of businesses is changing these days. So we will continue that program.

Moving to Slide 21. Our priorities for the fiscal year ahead. Growth is a key priority for us. We are looking at organic opportunities and how we build that. We do plan to expand out our Family Law footprint nationally, as previously reported.

To strengthen our company, we're continuing to work on our reporting processes with a particular focus on our WIP management. For those who know this company well, that's the secret to increasing the earnings of this company, if we can manage that better and better.

On the innovation front. As I reported, we built our disruptive model last year. It's in a test environment this year, albeit on a low scale but we're expecting some good things.

And finally, our clients, without whom this company doesn't exist. We are concentrating on building our conversion rates inside the business, and having a higher focus on what our clients actually say and how they see our work.

So our brief for the last 2 years, after a period of some volatility back in 2016, was to stabilize the company and stabilize the earnings. And I am pleased to say that, that has been achieved by the company through a lot of hard work.

In the last 12 months, we are -- have also been quietly putting in place the building blocks to now enable us to [get a wider] view in relation to growth. And on that basis, we will be guiding to an increase in underlying EBITDAI of somewhere in the order of 10%.

That concludes the presentation. Happy 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 comes from Brendon Kelly with Moelis Australia.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [2]

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Just a couple of quick things from me.

Just firstly, on the EBITDAI guidance. Just wanting to understand what the implicit revenue growth is as shown within that guidance?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [3]

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Brendon, the implicit revenue growth will be around 10% as well. I think I've indicated to you that we're maintaining our expenses. So 10% to 15% revenue growth, which will then flow through to the bottom line.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [4]

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Sure. And then just in terms of the Class Actions. You've given us some color there around some of the key components within that. Just wanting to understand a little bit better, how the -- the overall size of that pipeline?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [5]

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For us currently?

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [6]

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Yes, exactly.

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [7]

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Yes. So we have about a dozen class actions that are active at the moment. They're in varying stages. So some are under investigation, some are well into proceedings. One, we're awaiting judgment, as everybody knows. So they're in varying levels.

The thing to remember about our Class Action practice, as it looks today compared to how it looked 3 years or 4 years ago, our book is litigation-funded these days. So we do go through a period where we're investigating a case where we await what we call unconditional funding by the lit funder. So we spend a fair bit of time looking into the merits of the case. We don't recognize revenue until we get effectively conditional funding or confirmation that the case is proceeding.

So for that reason, it may take some little time for some of the revenues to flow through on the Class Action practice.

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Operator [8]

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(Operator Instructions) There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [9]

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Thank you.