Good morning, everyone. Welcome to our half year 23 results briefing. Great to have you with us today. Just wanna introduce you to Aaron Saunders, our Group CFO. We'll go through today's half year results, and then we'll open the call for Q&A at the end. For those who've been on before, they'll know the drill, but it's basically two ways you can ask a question. You can use the Raise Your Hand function, which is in the Zoom controls at, probably at the bottom of your screen. If you just click that Raise Your Hand function, I can allow you to speak and talk and ask the questions that you would like to ask.
Just feel free to type into the Q&A, would be the other way that we can deal with any questions that you have at the end. If I could just get someone quickly to raise your hand, just so I can check that everyone can hear us okay. Great. Thank you very much. That's fantastic. Okay, we'll crack on. Yeah, we'll give a quick overview of the results, drill down into the segments, and then give you a sense for kind of what we're seeing out sort of over the rest of the year. Despite the macro context, I think the resilience and diversification of the group have really come to the fore again and, with a record half year performance for HY23 of NZD 23.4 million.
We're continuing to deliver robust earnings and consistent dividends for our shareholders. Directors have declared Q2 dividend at NZD 0.05 per share. Obviously the net profit, the record net profit, slightly ahead of the HY22 result, despite HY22 being or sorry, HY23 being slightly affected by the, by the pandemic earlier in the year. Despite the wider New Zealand car market being down sort of 7.5% in the first half, our Turners Auto Retail division has increased units sold and, as a result, grown market share. The growth in auto retail has offset the impact of the interest rate headwinds impacting Oxford Finance.
Based on what we've seen in H1 and the early trading in H2, we're expecting full year net profit before tax to be at or slightly above last year's record result, and full year dividends to be NZD 0.23 per share, which is in line with FY22. Overall, car market transaction levels are tracking well behind pre-pandemic levels, as you can see in the graph. Largely that's due to the Omicron impact in Q1, just affecting overall consumer demand, the rising interest rates, increased government regulation, both the CCCFA and the Clean Car Standards, and just overall decreased industry demand. Registered dealer numbers continue to decrease, and we're now at low points not seen since early 2014. Through our business, we've seen demand moderate for higher value vehicles and certainly strengthen for the lower price points.
What you see here is just used car transactions, the total New Zealand market over a slightly longer time period. 2022 is looking like a more recent low point in terms of overall transaction volumes. The recent change to mandatory ESC in cars and the Clean Car Discount and standard program are definitely restricting the volumes of cars, particularly used imports, coming into the country. The reduced supply of used imports into New Zealand has a very strong correlation to the numbers of registered used car dealers, as you can see on the right-hand side.
I won't go into too much detail on this slide, which is obviously available on our website and in the various releases, the key points reported net profit before tax, which is the basis for our full year guidance, up 1%, EBIT NZD 26.1 million, up 2%, and earnings per share of NZD 0.198 per share, up 1%. Probably more importantly, I was keen to share some insight into how we're going in the early part of Q3. In auto retail, car sales are holding up very well for us, and we are seeing margins improve on the levels experienced in Q1 and Q2. In finance, there is an increasing impact of the interest rate environment on our cost of funds and our net interest margin. Pleasingly our arrears continue to be stable.
Insurance claims continue to track below expectations. In credit management, we are seeing the debt load recover, but still slower than expected. I think in the broader context, what we're seeing market-wide, with information we get from the credit bureaus, that's showing New Zealand credit default metrics certainly starting to deteriorate. Just moving on to the results. We've covered these, so we'll move on to the detail. Revenue growth was solid, at 11% year-on-year and largely driven by an increase in the vehicle units sold through the Auto Retail business. Finance revenues have grown off the back of good loan book growth, and particularly in that premium borrower segment. With the net profit before tax bridge, that really, I think, demonstrates the resilience and diversification within the Turners business.
The Auto Retail results underpinned by the focus on domestic sourcing, market share gains in the new branch growth, but overall market-wide lower margins. Finance has been impacted by the sheer speed of the rising interest costs and the flow on impact on our interest margins. You've effectively had a kind of in and out with Auto Retail and Finance.
The insurance result reflects improvement in our investment returns and continued efficiencies in claims. The credit performance obviously reflects the lower debt loads still at reduced levels. It's also good to reflect over a slightly longer timeframe, the composition of the divisional operating profits. As you can see here, all three auto-related businesses have shown material growth from pre-pandemic levels. Credit management has been impacted by the no collect instructions from our large corporate customers and low market-wide defaults.
I think the mix of activity and annuity revenues provides the resilience to protect earnings stability during difficult times. This is always a table we've included historically just because of the sort of unusual items, particularly over the pandemic period. Whilst there were no lockdowns or hard lockdowns in FY 23, we certainly experienced disruptions from the Omicron outbreak. However, these, you know, were difficult to isolate and quantify the exact impact of those. Therefore, we have noted no material one-off gains or losses in FY 23. This slide demonstrates very well the strong track record of dividend growth we've been able to deliver over the last eight years.
We've declared our first two dividends for the year, both at NZD 0.05 per share. We're projecting full-year dividends to be at NZD 0.23, which based on a share price of around NZD 3.60, delivers shareholders a gross annual yield of nearly 9%. A few things to note on the balance sheet. Inventory levels are down as a result of the auto retail team's focus on improving processing times and overall stock turn metrics. The output of this is we're selling more cars on a reduced level of inventory, which is an excellent result. The increase in finance receivables reflects growth in Oxford and the completion of the new sites. Rotorua and Nelson have added to property, plant, and equipment. Obviously, the counter to the increase in Oxford receivables is the increase in borrowings.
In funding, firstly, I'd like to point out that 80% of our total borrowings relate to finance receivables in Oxford. Also, Oxford remains very conservatively geared, with an equity to total assets ratio of 22%. In our securitization warehouse, the BNZ now hold Class A and Class B notes as Turners refinanced the Class C notes in June. We're still very comfortable with the debt levels and debt capacity in the business. Let's drill down into the segment results now. We'll start with auto. Auto retail revenue was up 13%, reflecting the increase in both consignment units through the business and owned units. We've seen a drop in margin from last year's post-lockdown sort of sugar rush demand.
However, the Tina from Turners brand campaign, our focus on operational speed, continue to deliver, we think, structural long-term benefits for the business. Our market share of retail sales continues to improve, and our two new branches in Rotorua and Nelson are now complete and operating above expectations. Thought it was just be useful to drill down into a couple of things in auto, and one is speed to sale. Improving the time from receiving a car on-site to having it ready for sale and advertised has been critical to improving our stock turn and making our business more efficient. Through the use of measuring that process more accurately and using that data to help re-engineer our vehicle prep process, we've been able to address a number of key operational bottlenecks.
These improvements, plus upweighting the proportion of local sourcing, has resulted in more sales with less investment in inventory. That sort of segues nicely into local sourcing. We've very deliberately shifted our reliance off the used import channel over the last two years, as you can see from the bars on the graph here, with the green portion representing the number of units that we source domestically. Through more effective use of our vehicle sales data, a bigger and broader branch network the bigger investment and lead generation and the focus on our digital customer conversions have really helped drive these structural improvements in our vehicle sourcing and the margins compared to pre-pandemic levels. I thought it would be useful for people to understand how overall margins have been tracking over that five-year period.
The value of the Turners brand continues to grow as well. In September and October this year, our marketing team received some great industry recognition by winning the NZ Marketing Supreme Award at the NZ Marketing Awards and also taking home two Advertising Effectiveness Awards, Effie Awards for advertising effectiveness. This was a fantastic outcome from a campaign that we know is working very, very well for our business. Couple of photos of our newest branches. Rotorua, here is now fully operational, and the new building and site works now complete. We're operating off the full site. They've sold just under 500 units for the first half. With most of that period, in the first half looking like a construction site, we are definitely expecting those numbers to grow nicely for the second half.
This is sunny Nelson. Also complete now, looking, you know, looking fantastic. We started operating there towards the end of August and really, really pleased with the team that was assembled down there and the progress that that group of people are making in that area. It's really excellent to see. In terms of subscription, we're really, again, really pleased with the growth that we've seen here. We've broken through the milestone of 200 concurrent subscriptions in early October. As of today, I would say we've probably cracked through 250. We were at 248 yesterday. Excellent progress here. The average subscription period continues to expand and currently sits at 15 weeks per customer.
The average subscription payment is just over NZD 200 per week and trending up as demand increases. We now have vehicles available at all but 2 branches, I think now, around the country, and with subscribers mostly coming from the metro areas, with Auckland accounting for around three-quarters of our subscribers. We're seeing, yeah, really solid demand for a flexible way of accessing vehicle use. Moving on to finance now. Growth has moderated as quality and margin have become higher priorities for us. Our focus has very much been on pricing and margin management, which has been critical in dealing with the speed of interest rate rises that we've been experiencing. We've now pushed through 9 buy rate increases over the last 12 months, with probably another 1 expected this week.
Our premium tier business is holding up well and accounts for more than 50% of our new business per month. In fact, in November, it's accounting for over 65% of our new business. Our two best quality risk tiers account for over 80% of our new business every month. We are very focused around the quality of borrowers that we are lending money to at this time. We're very pleased with the new lending through our controlled channels. Those controlled channels being our own Turners Auto Retail network and our own direct channel out of Oxford direct to end users. That lending is up 13% half on half. Given the environment and the forecasts, we've continued to tighten our credit policy throughout the first six months of this year.
With this tightening of our credit policy, we've seen our quality metrics improve. The average credit scores of new customers is increasing, reflecting the higher proportion of premium business, but also the affordability hurdles we use to approve customers. We're really, you know, really pleased about the quality improvements that continue to be pushed through this book. It's no surprise that with our focus on bringing better quality borrowers into the loan book, our arrears levels have outperformed the broader market. The market, arrears are in the red line. Our, arrears performance on the blue line. We're still carrying forward a material provision buffer, and hardships are running at less than 10% of the FY 22 peak level.
In insurance, we've seen good market share gains continuing to provide robust policy sales despite the sort of wider market transactions being down 7.5%. Our distribution arrangements continue to work well. We have more to add in H2. Claims costs remain steady, with procurement remaining a key strength in offsetting parts inflation and labor rate increases. In credit management, the debt value loaded increased. We've definitely seen some improvement in debt load as the market-wide credit metrics continue to deteriorate. That bottom graph here is information from the Credit Bureau Centrix, just showing an index on credit defaults. Our promises to pay keep rate has remained stable throughout the last 12 months.
While many consumers have paid off and closed down credit cards during the pandemic, market-wide credit defaults are up 20% on last year, still lower at this stage than pre-pandemic levels. On this data, we expect to see debt load levels continue to lift. This division remains an important part of the diversification strategy and offers a natural hedge for a downturn scenario.
In what has been a very difficult time to retain and recruit digital talent, we are pleased to say we've got a fully resourced team of 40 people, and we've upped the number in that team as well over the last 12 months. In particular, we've strengthened our team in data and development. We're really happy with the progress that we've made, particularly on this data side of our business. It's helping in a number of key areas. It's helping in the measurement of critical ESG measures, particularly around carbon emissions. It's helping us do a much better job of our vehicle sourcing and providing great data insights from our customer data platform, which is helping drive our conversion rate, so we can really focus in on the critical parts of that customer journey.
The business has also started our cloud transformation, and we have our first three projects underway in that area. The graph here or, sorry, the picture here is of an online car buying wizard that we launched in June. That's using sort of a series of high-level questions to help people narrow down their selections. We've had over 14,000 users of that car wizard since we launched in June. Our team engagement scores are at record levels, and that, I think, really reflects the strong and positive culture that we have at Turners Automotive Group. I think it is one of the absolute parts, key parts of our competitive advantage. An engaged team is very important to us, particularly at a time when recruitment and retention is about as challenging as it has ever been.
We continue to invest at material levels in staff training, remuneration and other benefits. We've also launched an employee share scheme this year with just under 50% take up of that sort of initial offer. We are sure this will really add to the ownership mindset that our team brings to work every day.
Whilst pandemic uncertainty has decreased, New Zealand's economic uncertainty has certainly increased. There are challenges on the horizon. These challenges center largely around the health of the economy, the rapid increase in interest rates and inflation, the supply chain in new cars, recruitment and retention of people, and also the regulatory environment that we operate in.
What I'd like you to understand is that we understand these issues. We've already taken actions, and we feel we're well placed to minimize and mitigate their impact. Our competitive advantages are what gives us confidence about our ability to stand up to these challenges. We have high trust brands in markets that generally stand for the opposite of that. We know that consumers tend to move to brands that they trust in uncertain times.
We have the scale and reach that cannot be matched. We have unique diversified sources of cars that are very difficult to replicate. Our data and technology capability has positioned us well and will continue to do so. Lastly, as we mentioned on the earlier slide, we have a very highly engaged group and very capable group of people here at Turners. Based on our experience in the first half and early trading in H2, we expect FY23 net profit before tax to be at or slightly above last year's record result. At this year's level, we anticipate full-year fully imputed dividends of NZD 0.23 per share based on the current payout policy of 60%-70% of net profit after tax.
The auto retail business should continue to grow from the execution of our retail optimization strategy. Vehicle margins have shown positive momentum over the last few months and should hold at or near current levels. The impact of the interest rate environment on net interest margin will be more pronounced for us in the second half and probably in FY 2024.
It is also anticipated there will be some deterioration in arrears above seasonal norms as the cost of living pressures become more material for people. The growth in auto retail and improving investment returns and insurance will offset the material impact in funding costs being experienced through the finance business. With credit defaults lifting market wide, we should see improvement in the credit management results. I'd like to acknowledge and thank the wider Turners team for their efforts in the first half.
Certainly in Q1 we had periods where up to 25% of our team were away with COVID. It's been challenging, but they've all proven yet again to be resourceful, adaptable and committed to providing excellent customer service right across our four business divisions. Yeah, well done to this very dedicated group of people. Okay, we'll now open up for questions. If there are any questions, feel free to raise your hand, or you can ask through the Q&A. Grant, would you like to ask some questions?
Yeah. Hi, guys. Can you hear me okay?
Yeah.
So just around vehicle margins. Obviously they were, you know, very high through the peak of the pandemic and the like. In terms of the improving vehicle margins from here, can you just give us a bit more color around that? Particularly, I'm not sure if that's talking in terms of dollar margins or percentages, but particularly given the positioning towards smaller, cheaper vehicles, how you see that dynamic improving from here.
Do you want to take that?
Yeah.
Yeah.
Yeah. Hi, Grant. Aaron here. Yeah, well, certainly what we've seen, we kind of expected a bit of a bounce in spring. We've seen that really from sort of late August. We are currently seeing margins sort of back up on an average basis as at where they were, you know, last year. Our suspicion is that the difficulty in sourcing and landing imports, used imports from Japan, has really kind of seen margins kind of recover to where they were, last year. With the changes coming up in the Clean Car Standard, we really don't expect that to change for the foreseeable future.
We had to do a little bit of work in the first half ourselves to reposition our inventory lineup away from, really away from larger vehicles and into smaller vehicles. Certainly the supply situation means that margins feel like they're gonna be pretty firm, certainly through the rest of the year.
Got it. Okay. Thank you. In terms of the subscriptions business, you know, that was a very rapid growth in the last few months. Can you give us a sense around the economics of that business at the moment, presumably making, you know, a decent contribution at this these sorts of levels? Would that be correct?
At the level at the end of September, it was about breakeven. We're sort of, we're going forward from here, Grant.
Yeah.
Yeah, 200 odd car subscription level is breakeven for us.
Yeah. Okay. Is this kind of like a watch and see, at this stage for you guys? Or have you got sort of aspirations, earnings aspirations over the next couple of years where you'd like to get things through?
Yeah. I mean, I think what we're seeing, Grant, is that there is demand for this product. I'd say to some degree, the limitation is probably stock at the moment. Yeah, I mean, I think we're committed to seeing it grow further. It's just really at the pace that we have cars available and that the addressable market is there. I think we're getting confidence that the addressable market is there.
Yeah. Okay. That's great. In terms of finance receivables, NZD 20 million added through the period. I know that you guys are focused on, you know, pricing and margin management. Is it reasonable to expect sort of a similar level of growth in the second half from here?
To be honest, I would expect it to be between flat and that figure, Grant. Yeah, I mean, pick a midpoint if you like, for your model. Yeah, growth is certainly, you know. We're kind of at a position where we're comfortable if we are flat or with a little bit of growth in the second half.
Got it. Okay. You may have addressed this one earlier. I didn't quite catch what was said. Just in terms of credit management, obviously the debt loading in that business is subdued at the moment. You know, we're all sort of seeing early signs in the future, but in terms of arrears and defaults across the broader industry. Have you seen any signs of, you know, lifting debt loads at this stage in the early part of 2023 or is it too early at this stage?
We've definitely seen debt load increase. It's probably more modest than we expected to see at this stage based on sort of our business planning last year. But it's definitely starting to increase. I mean, I think you just have to kind of reflect on that bottom graph and yeah. Things are gonna get tougher for sure. Particularly kind of in that buy now, pay later sector, it seems arrears are increasing quite quickly. I would expect to see the other categories of lending follow.
That's great. Thank you very much, guys.
Great. Thanks, Grant. Quinn, do you wanna ask some questions? I see you've got your hand up there.
No, sorry. That was probably just a mistake.
Okay. All right. No, good. All good. Thanks. We've got a few questions come through on the Q&A, so I'll just read those out. First one from Richard Cotter. How has the theft of the car keys in Hamilton affected the business? How has this issue been resolved, and what measures have been taken to prevent this happening in the future?
Yeah.
Talk to that?
Yeah. It's been very difficult, as you'd expect for that business. We have just about replaced all 135 sets of keys, so we can give our customers confidence that they, you know, can buy vehicles from us without any issues. We're just going through the investigation process. We've hired a private investigator. He's done some great work getting CCTV footage. We believe we've identified the perpetrator, and we're working with the police to ensure that there are consequences. The branch itself, everyone has rallied around really well. Probably sales are down only marginally on where they were, but obviously, you know, there's been a bunch of costs in terms of added security.
We are currently, as you do when you have an experience like this, reviewing security across all our branches. There will be some learnings that we apply across the network.
Yeah. Next question from Kieran. In terms of the outlook for Oxford, are you able to provide any guidance around how you see NIM compression tracking through to the end of FY 2023 and into FY 2024? Sounds like another one for you.
Yeah. Hi, Kieran. I think we talked at the full year results briefing in May that it would take us sort of 18 months to two years to reprice the book. We're, you know, we're sort of still on that timeline, so another 12-18 months to see a material repricing. You know, I'd expect we'd see NIM compression similar to the level we've had in the last six months to continue through to the end of the year.
Then really it depends on where the, you know, where the OCR peaks and at what stage do we come down the, I guess, the rate path. My suspicion is we're closer to the peak than we were six or 12 months ago. Feels like the end is in sight from that point of view. Whilst the OCR is increasing, we will be under NIM pressure for roughly the 50% of the book that we don't have hedged.
Okay. Next question from Chris Tipton. Are you still looking for new retail locations? Yes is the answer to that, Chris. We have three in the pipeline, a larger site in Napier, new site in Timaru, and then a commercial site in Tauriko, just out of Tauranga. We are looking for other sites. I think it is a time where we need to be, you know, reasonably conservative around the prices that we're prepared to pay. I think there is an adjustment, sort of needing to flow through the market and probably vendor expectations.
Yeah, there are, there are certainly sort of key areas that we're still looking for, particularly sort of in places like Christchurch where we have one big site of 28,000 square meters and really we should have probably at least three or four sites of, you know, 8,000-12,000 square meters. That, that sort of retail transition is still, very much top of mind for us.
You've asked a secondary question, which is one of the key use cases for the subscription business customers. Sort of wide and varied is the short answer. Yeah, essentially, it's people who might be temporarily in an area, so, with a work contract, they have additional family members, coming back to stay with them.
That was certainly a strong use case during the pandemic where you had people coming back for, sort of three or four-month period, but needing a car over that time. There, there really are lots of different use cases. Essentially, it's where someone needs a car but wants some flexibility about when and how long they have their car for. Then Josh Wilson has asked a question.
Can you explain what the credit and finance sides of the business are? Does Turners provide finance outside of its car sales business? Yes. Dealing with the finance business first, Josh. Yes, absolutely. Around 20% of our loans are originated through our Turners Auto Retail network, and about 80% is originated through independent car dealers and finance brokers.
And about maybe kind of 85%, 90% of our lending is auto loans. Yeah. About 90% of our loans are secure loans for people to buy vehicles. The credit side of the business is where we are helping businesses with their hard-to-collect debts. We do a lot of work for the major banks and government departments like ACC, where they have had debt through their own internal credit teams, have been unsuccessful in collecting that debt, and then we take on that role for them on their behalf. That is the job that we do in the credit management business. Do a lot of that same work for SMEs in New Zealand and Australia as well.
It's, you know, helping organizations, you know, track down and try and put an arrangement in place with their customers to pay off the money that they owe those businesses. Okay. I think that's the end of the Q&A's or the questions that have been loaded. Probably just give everyone sort of one last crack to ask any questions that they might have before we wrap things up.
Anyone need to raise their hand and ask any questions? Okay. No? Well, I think that brings us to a conclusion. Thanks, everyone, for your time. If there are anything, any other questions that come up, please feel free to contact Darren or I directly. We're more than happy to deal with any queries that you have. Have a great day.
Thanks very much.
Thanks, everyone.