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Edited Transcript of SHJ.AX earnings conference call or presentation 28-Feb-20 12:30am GMT

Half Year 2020 Shine Corporate Ltd Earnings Call

BRISBANE Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Shine Corporate Ltd earnings conference call or presentation Friday, February 28, 2020 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

* James Lawrence

Morgans Financial Limited, 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 Ltd FY '20 Half Year Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Simon Morrison, Managing Director and CEO. 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, Ashley. Welcome, everyone. Our apologies for the late start. A couple of technical issues at our end. Can I start by introducing our team? Firstly, our CFO, Ravin Raj. Ravin is a well-credentialed, long-standing public company CFO, of more than 2 decades, notably a long tenure at Watpac, and has been now with Shine for 3.5 years. John George, Head of Investor Relations. John himself, a former director of Shine and former executive of Shine. And he is a director of other ASX-listed companies. I'm the MD and CEO of the company. I've been with Shine for 32 years, spent about half of that as a litigator and the other half in various management roles.

So we'll go straight to Slide 6, the overview of the company, largely for the benefit of new participants in the conference. Shine is basically broken into 2 parts. What we call our core Personal Injury offering and what we call our new practice areas. We operate as a multi-brand model with brands in both Australia and New Zealand. For those who recall, when we listed the company, we had a very deliberate diversification strategy to build out our offering outside core Personal Injury. We identified, in prospectus, back then that our primary operating risk is totally from Personal Injury. So we have been on a successful mission to build out the other parts of that business over time.

If we move to Slide 7, the highlights for the first half of FY '20. We've met our guidance, which we're happy about. The 2 smaller acquisitions we did, being ACA Lawyers, which was a boutique class action practice in Sydney; and Carr & Co, a family law practice in Perth, are both integrated and going very well. As Ravin will allude to, we are making good gains with litigation, funding and disbursement funding in respect to our cash flows. We are integrating subsidiaries at the moment, and that is progressing. And the key highlight for the first half, which we did previously report, was our record judgments in the initial class action against Johnson & Johnson, paving the way for vantages for thousands of women. Also the strategy of the company, we've been doing some work on our brand strategy across the group, and I'll touch on that a bit later.

Our disruptive model, Claimify, is in a run mode at the moment. And we've already settled a number of cases in that model, and early results are very, very encouraging. Our class action pipeline continues to grow strongly for us. Those following class actions might be familiar with the high court decision in the Westpac case dealing with the issue of common funding orders. It was a mixed trial, that judgment. The downside is some perceived that it might slow class action activity. Our view on that judgment is twofold. One is, we think it will probably favor the bigger funders in the game and the bigger class action law firms in the game. And to date, that's been our experience. And secondly, we're observing interim judgments that the courts are dealing with the high court decision in a fair way that still preserves what, I think, was intended by the scheme.

Our financials, Ravin will report on in more detail, but our numbers were up and pleasing. And the dividend -- interim dividend of $0.015 has been declared unfranked. On that note, I'll switch to Ravin to 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. Before I go through the numbers, I thought I'd just say that the 3 new accounting standards were adopted back in the first half of '19 -- FY '19, and they're embedded in the business. They're reflected in monthly reporting. The key financial standards are: AASB 9, financial instruments; AASB 15, revenues from contracts with customers; and AASB 16, which is the leasing standard. In terms of the financial statements, AASB 15 and AASB 16 had the most impact on the financial results.

Looking at the results on Slide 9, and looking at revenue. Revenue was up 3.53% at $89.44 million compared to PCP at $86.39 million. NPAT was $8.83 million, up 299.5% from $2.21 million. And you've got to remember that PCP was impacted by a $5 million impairment at that time. So when you apply that $5 million impairment, NPAT -- underlying NPAT is up 22.4%.

In terms of EBITDA, EBITDA is up 10.78% at $21.67 million, and gross operating cash flow pleasingly is up 97.9% at $13.1 million. As Simon said, the interim dividend has been declared at $0.015 per share, which is up 20% on PCP.

In drilling down through the numbers in a little bit more detail. I'll talk about the 2 key segments that we have in the business, which is the Personal Injury segment and also the NPA segment. Looking at revenue, I indicated that revenue has -- is up by 3.53% overall. But there were some variabilities in the 2 segments. The segment -- the Personal Injury segment was actually down 4.3% in revenue, and that was due to a slight nonperformance in the Personal Injury business in the first half. And also, it's the impact of the downsizing and also the impact of New South Wales, tort reform. In terms of the segment -- NPA segment, that grew by 17.7%. And the majority of growth in revenues in that segment was due to the Carr & Co acquisition and also the growth in the abuse business.

Looking at the segment results, in terms of EBITDA. While revenue was up 3.53%, EBITDA growth was actually 10.78%. If you look at it on a segment-by-segment basis, I've indicated that the Personal Injury business had its slow start to the financial year, and its performance was behind the prior year performance, but we expect it to normalize in the second half.

In terms of the NPA segment, the contribution was better than prior year, again, mainly due to growth in the abuse business, plus the contribution from Carr acquisition. You will note when you go through the financials that the marketing expense was higher than last year. It's currently sitting at $1.25 million over budget. And that's due to a new marketing campaign. Now that's also impacting the PI segment results because the majority of the marketing expenses are allocated to the Personal Injury segment. But we're expecting that the marketing expense will normalize in the second half. In terms of impairment, the PCP results reflect a $5 million impairment, which the market knows about.

Moving to -- finally, in respect to the financial results. I talked about marketing being over budget, but the balance of the financial -- balance of the expenses are within budget.

Going through Page 11, Slide 11. EPS was $0.0508 per share, and that's an increase of 296.88% on PCP. The dividend is at $0.015, which is up 20%. The dividend policy or the assessment of the dividend, the dividend assessment has been made at the lower end of the range, and the Board will look at that again at the full year.

Go to Slide 12, balance sheet. The key highlights there are the cash has remained relatively stable when compared to 30 June. The only other major movement is growth in WIP. And that's largely due to the influx of the abuse cases into the abuse business.

We've talked about new accounting standard, you'll see that we have 2 new assets, which were also there last year as well because we early adopted the right-of-use asset and also right-of-use liability. There's been a marginal decrease in borrowings in the period.

Moving to Slide 13, gross operating cash flow. That's a waterfall chart of GOCF. The business has -- traditionally had a low first half and a big second half, and we are working towards evening these cash flows. The gross operating cash flow that we're reporting is $13.1 million, up 97.9% on PCP. On that basis, the cash conversion ratio was 60.45%. Again, our target is to get cash conversion to between 70% and 90%.

Moving to Slide 14. We have been on a journey in terms of improving our cash flow. And one of those elements has been improving our cash flow through the elimination of Shine funded disbursements. We commenced this process 2 years ago, and you can see that it's starting to bear fruit. We implemented a new disbursement funder 18 months ago, and we have been well supported with -- from that disbursement -- we've received good support from that disbursement funder, and that's helped us improve our cash flow. In terms of litigation funding, all new class actions are being funded through litigation funders. That's it on the finance numbers. Simon, back to you.

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

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Thanks, Ravin. We also announced a proposed name change of our parent company from Shine Corporate Ltd to Shine Justice Ltd. The reasoning for this proposed name change is the word justice. This describes the common element of all of the businesses we are currently in and intend moving to in the future.

As we've previously predicted, we can foresee into the future that the current company will be probably the mix of both law firms and non-law firms, delivering justice remedies for our clients. We have an AGM scheduled for the period of March this year. Our ticker code will remain as SHJ.

Moving to strategy and outlook for the remainder of the year, on then to Slide 18. So if we start with our growth plans. We are working pretty hard behind the scenes on building referral relationships to find new channels for the company, different technologies, focusing on digital channels for our marketing. Pleasingly, our inquiries are up in the half, which is a good indicator that those initiatives are working well. The area we're working on are, significantly at the moment, these are what we call our conversions, in other words, turning those inquiries into cases.

On the acquisition front, we continue to field a number of healthy inquiries. Acquisitions aren't our immediate priority at the moment, but I am pleased to report that the view of the vendor market is changing to what we think is a far more realistic valuation model.

In terms of strengthening the business, we're in integration mode with our subsidiaries, as we mentioned. We continue to leverage our litigation funding and disbursement funding. And we've had a renewed focus on our investment in training for our people.

On the innovation front, we're pleased with the early results with the Claimify and looking for opportunities to build on that front.

So far as our clients are concerned, we are working behind the scenes at the moment to enable our clients to have a more transparent view of what's happening in their cases as each milestone is in their litigation.

If we move to the outlook for this year, so organic growth is a key component of our strategy at the moment. In terms of our operations, we've said this constantly since being a listed company; the better we manage our work in progress, the better financial returns we have for the company.

In terms of our financial and earnings growth, we are focused heavily on improving our earnings, particularly our profit margins. And finally, on acquisitions, as I touched on, we continue to explore opportunity, and when the timing is right, we will move on those.

In terms of the outlook, the Board reaffirms our guidance at 10% increase in the underlying EBITDA from the previous year.

And finally, as announced this morning, an update on our Board renewal program that we've been working on consistently for a good over 18 months now. We are very pleased to announce that 3 new directors who joined the company, Teresa Dyson and David Bayes, joined effectively -- effective immediately. And Brian Bradley will join the board on the 1st of July. All 3 are very well-credentialed, high-caliber directors. So we are thrilled to have them join the company.

We've said farewell to Carolyn Barker as a Director of the company. Carolyn actually joined Shine as a Director, while we were a private company back in 2009. So Carolyn has been with us for a long part of that journey. She has been instrumental in helping us, particularly with our marketing and innovation strategies. So we wish her all the best.

That concludes the formal presentation. Ashley, I'll hand back to you for 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 James Lawrence with Morgans.

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James Lawrence, Morgans Financial Limited, Research Division - Analyst [2]

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Simon and Ravin, congratulations on a solid set of numbers. I've just 3 quick questions, if I may. Just 1 on mesh damages and harm in there. Can you provide a bit of an update on that?

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

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So the damages have been assessed for the 3 lead applicants, James. So those numbers are now agreed and locked in. Those numbers will form a template, if I could use that phrase, to inform what the damages numbers might look like for balance of the group. We have a court-ordered mediation, which I think will be proceeding in the first week of May, so not too far away. And the purpose of that process will be to try and reach a landing on how we agree on the numbers for damages for the balance of the group.

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James Lawrence, Morgans Financial Limited, Research Division - Analyst [4]

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Yes. That's perfect. And you briefly touched on the Claimify business. Can you provide just a bit more commentary on what's happening there? And I guess, you had your first settlement with that business.

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

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Yes. So just to recap on Claimify and why we're doing it. Our industry, like most, I think, will at some point in time, be susceptible to disruption, and our view was to be in front of that before we had to confront it at the hands of somebody else. So we built an offering that focused heavily on a few things. One was how to use automation better in the process, how to take labor costs out of the process, and how to use artificial intelligence to guide our projections for what the cases look like. So all of those components have gone into rebuilding the process. We directed it at the lower end of our motor accident market, which is largely work that the mainstream law firm can't do that profitably. And I can tell you anecdotally that the cycle times have reduced by almost 50%, and the profitability has improved at least by 1/3. So the early signs are encouraging, James.

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Operator [6]

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Your next question comes from Brendon Kelly with Moelis Australia.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [7]

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A couple of questions from me. Just firstly, on the Personal Injury segment, I mean, you touched on the New South Wales, tort reform still carrying through an impact there. Can you give us a sense to the other areas in the Personal Injury segment, which has been underperforming or outperforming relative to expectations?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [8]

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Okay. Let's go around the grounds, Brendon. So yes, New South Wales, it's largely a byproduct of tort reform changes, and we're working our way through that. Victoria has been underperforming for no reasons related to tort reform, more internal reasons. And we're in a process in our Victorian practice at the moment to improve the operating performance in that part of the business. Queensland has been -- has held a time. I guess the 1 variable in Queensland in parts of the business is probably write-offs. In some parts of the business, we managed it well. In other parts, it hasn't been so well. But by and large, it is holding its own. And WA has been pretty strong for Shine moving forward.

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Ravin Raj, Shine Corporate Ltd - CFO & Company Secretary [9]

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Yes, I can probably add a little bit to that also, Simon. I think in terms of our half-year results, Brendon, I think it's more a timing issue because when we look forward to the full year, I believe you'll see a different result from PI. So it's more an issue of 2 different halves, more than anything else.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [10]

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Perfect. So we can expect some stronger performance from PI, and hopefully, returning to growth in the second half then?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [11]

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Yes. Well, it won't be the 17.6% growth, that's for sure. I'm not sure at this stage, I can give you any growth projections. But it won't be as far a run below previous year.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [12]

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And then secondly for me, just on the class actions, thoughts on -- you called out that you think it's pretty strong. Can you just give us a bit of a sense for where you're seeing the growth in class actions?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [13]

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Sure. So, mesh, we've talked about already. In terms of our contamination work, we announced yesterday a settlement of the first 2 of our PFAS cases against the Commonwealth government. We have another 9 to run in the pipeline. So that's going to be a nice, healthy process moving forward for the business. Off the back of the Royal Commission, we've commenced class actions against Colonial First State AMP and now IOOF, so they're early stages.

So yes, generally speaking, good pipeline. The challenge, I guess, Brendon, is navigating the Westpac decision. The practical consequence of that for the time being is that it will take us back to the earlier days of what we call book building, where a requirement of the fund will be -- we go and actually build the book sufficiently large for the funder to see its returns and the action viable from their point of view.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [14]

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And has that actually started to take place already in terms of netting to build your own for, for the new cases?

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Simon Michael Morrison, Shine Corporate Ltd - Co-Founder, CEO, MD & Executive Director [15]

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Yes. I mean we've been doing that anyway as a business, particularly in open class actions. But there is certainly a more focused activity on that, as we speak. But as I touched on earlier, our view and, I think, IMF might have said something similar to the market a few months ago. Our view is this change will actually favor the bigger funders and the bigger law firms. And the reason for that, from our point of view, is we have the manpower to send -- to deploy a team to go to a particular location and build the book for an extended period of time, a lot of the smaller boutique class action firms don't have that manpower available to them. So we see that as an advantage.

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Operator [16]

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(Operator Instructions) There are no further questions at this time. And 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 [17]

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Thank you.