Good morning, everyone. Welcome to the Turners Automotive Group H1 results presentation. Thanks for taking the time to join the call today. The way we'll run this call is we'll just go over the presentation and then open up for Q&A at the end. I will just stop the camera while we're going through the presentation just so people can focus on the slides, and then switch it back on at the end. Joining me today here in Shortland Street is Aaron Saunders, our CFO, and Barbara Badish, our Group Financial Controller. The way we'll ask questions, I'll remind you again about this, there's a Q&A function on the webinar, so probably towards the bottom of your screen. The alternative way would be just to raise your hand, using the Raise the Hand button, and we can unmute people.
Just a reminder, if you could mute your audio just while we're going through the presentation, just to make it clear for everyone else. Just the last thing before we crack into it, just the photo there on the front is our brand-new operation out in Westgate here in Auckland. We started and launched the branch there in late October and we're really pleased with the way that operation is trading, the level of customers coming in and the buying and selling that we've been doing. Looks fantastic. Purpose-built for us, great corner site and very high profile. We're really looking forward to seeing what the newest branch in the group can deliver for us.
The agenda we'll follow here is H1 21 results, just a bit more detail on the segments, then just a bit of context for people and then finally a few comments on outlook. Clearly, this has been a six months like no other. We're really delighted with how our team has responded to improve our ability to operate in these pandemic conditions, as well as improving the resilience of the business to sustain the strong yields we provide. Our diversified business and the quality of our trusted brands proved robust in the face of the market uncertainty and enabled us to accelerate our strategic plan, particularly to lead in the digital space and strengthen our national position in auto retail. What we were anticipating to happen in early April clearly did not play out like we thought it would.
Consumer demand bounced back strongly from late May, and we've been pleased with levels of customer demand for cars, finance, and insurance products, particularly in Q2 once we were through the April, May catch-up sugar rush in June. These half-year numbers reflect what has been an equivalent four to five month trading period due to the lockdowns in April and August. We've seen used cars in short supply, due mainly to the flow-on effect from a new car supply chain being compromised. With the shortage of supply and the high levels of demand, we've seen margins and prices improve, particularly in Q2. New lending has been at record levels and arrears at historic lows in the Oxford loan book. Pleasingly, our share of high-quality borrowers has grown significantly.
Insurance policies have largely sold at levels above last year, putting aside April and May, and claims have been lower due to people driving less. Our credit management results have been down due to the much lower debt load from the large corporate sector in New Zealand, as they were rightfully focused on customer wellbeing than collecting dollars and cents. Overall, profit before tax is up 26% to NZD 18.7 million, with revenue and underlying earnings down, reflecting the reduced trading periods due to the lockdowns. I'm just having a couple of issues here with the slide deck. Reported net profit before tax, which is the basis for Turners' full-year guidance, increased 26% to NZD 18.7 million, with net profit after tax at NZD 13.4, up 25% on the same period last year.
Revenue and underlying earnings are down, reflecting the reduced trading periods due to lockdowns, with a material impact in Q1 and then a bounce back in Q2. Earnings per share for the first half were NZD 0.157 per share, up 27% on the previous year. Moving on to slide seven, the revenue bridge. You can clearly see that lockdown here has had a more pronounced effect on our activity-based businesses of auto retail and credit management, with finance and insurance impacted, but not to the same level given their annuity nature. The finance book also reflects a better quality business being written at those lower interest rates. On the net profit bridge, it has very much been a story of two quarters. Auto retail has seen a good improvement in margins in Q2, which has helped offset a reduction in sales volumes.
Finance has seen strong levels of new lending, further improvement in risk quality metrics, and historic low arrears. Our insurance result reflects improvement in claims and cost base and stronger than expected policy sales. The drop in credit management profit is simply a factor of the lower levels of commission due to the lower debt load. Pleasingly, across the business, we've seen post-September trading levels in the latter part of Q2 continue. On the reconciliation from reported net profit to underlying net profit, it's really important to remember that our first half reflects a five-month effective trading period if you take out the April lockdown period. Looking on a like-for-like basis, this would be circa 6% ahead of H1 FY 2020. If we further factor in the May and August lockdown impact, then we feel like trading is more like 10% ahead of prior year.
The property adjustment largely reflects an accounting gain from the exit of the Penrose Super site, offset by costs associated with exiting some of the smaller sites we've had in the network, particularly as we continue to progress our retail optimization plan. As part of our early COVID response, we did take the opportunity to review our cost base, and we've spent around NZD 2 million to achieve savings in the next year and ongoing of around NZD 4 million per annum. What we are particularly pleased about is that operating profit results since June right through to October have all tracked well ahead of the same months in FY 2020. Following the suspension of dividends during lockdown, the board resumed dividend payments with a Q1 dividend of NZD 0.04 per share, which was paid in October.
A further NZD 0.04 per share has been declared for Q2, taking half year dividends to NZD 0.08 per share. This reflects the policy adopted by the board last year to pay out 60%-70% of net profit after tax. There's not a lot of change in the balance sheet from last year. A couple of things to note. Inventory is reduced, reflecting largely a reduction in used imports within the business and reflects the supply constraints that we are currently experiencing. The increase in finance receivables reflects the growth in Oxford, offset by a rundown in the MTF funded receivables. There is a slight reduction in borrowings due to paying down some corporate debt. On funding mix, we've paid down some of that corporate debt and increased our funding of receivables due to the strong performance in Oxford.
We'd just like to note that around three-quarters of our borrowings relate to the finance receivables in Oxford. Moving on to the segment results. As you can see here, all parts of the business contributed to first half profit. This, I think, is a good moment to draw everyone's attention to the diversity of earnings within the group, which has been very helpful, particularly in this first half. We feel the company is very well-placed, assuming no further major COVID-19 disruption, to continue outperformance against last year's result. We'll just move through to the segment detail now. The Automotive Retail division revenue was 17% lower at NZD 96.1 million, reflecting suppressed activity during lockdown, but has seen a strong rebound since. Focus for the half was on the COVID-19 recovery and cost management.
Inventory levels are down due to the shortage of supply, but the main driver of improving profitability in the months since lockdown has been margin. Margin expansion is due to a number of buying initiatives we have implemented and by the tight supply of cars nationally due to the supply constraints in the new car business. As we've always talked about, the used car market has continued to demonstrate resilience, not just rebounding after lockdowns, but through the economic cycle. We continue to benefit from a diverse geographic footprint, which was well demonstrated during the recent partial lockdown in Auckland in August. Turners' diversified sources of supply and trusted brand position has proven highly valuable in times of uncertainty. Finance division contributed strongly to the first half, with annuity earnings definitely being helpful during lockdown.
Growing the ledger this year has been a great result, and we've grown our share of the high-quality borrower segment in particular. Oxford has benefited from higher margins, lower accruals, and greater cost efficiencies. Less than 70 customers of our entire customer base are currently in hardship status. At the peak in early May, we were around 1,750 customers in hardship. To get that below 70 now is a great result. The division's focus on high-quality borrowers has seen record low levels of arrears, reflecting the risk pricing strategy that we have implemented. Oxford has also built a material buffer in arrears provisioning to allow for any unemployment increase in future months. During the period, premium risk tier lending, that's the highest quality lending we do, increased to over 50% of our monthly lending, and finance continues to be a very strong performer within the group.
Insurance revenue decreased 5% to NZD 21.1 million due to the impact of lockdowns. However, net profit before tax was up 74% to NZD 4.5 million on higher margins, reducing overhead costs, and the finish of amortizing the acquired premium portfolio as part of the Autosure acquisition from Vero in 2017. We made excellent progress on building out distribution, as well as continuing our investment in digital and system integration. As with finance, the division continues to focus on quality, as was evidenced with the combined claims ratios improving from 69% in first half 2019 to 59% in first half 2021. AM Best have upgraded its credit rating and financial strength rating for the insurance business. Credit management revenue decreased 29% to NZD 7 million, and the impact of COVID-19 was visible in market-wide conservatism with respect to debt collection actions during the first phase of the pandemic.
Net profit before tax was down as a result, 17% to NZD 3 million. Credit management remains an important part of our diversification strategy, offering a hedge for any potential cyclical downturn ahead. The division has been successful in managing costs in a reduced debt load environment. The division is working closely with referrers to manage and improve customer outcomes as we go forward into an environment where bad debts are likely to increase and debt collection services will see increasing demand. Quality has been a real focus for the board and key leaders in the business over the last few years. We want to provide a quality experience for our customers, a quality environment and conditions for our team, and if we achieve that, we should be generating quality outcomes for our shareholders. This slide takes a closer look at our sustained improvement in earnings and dividend performance.
We've aggregated this into three-year periods to take out some of the year-to-year noise and show you the underlying trend. We believe these results are quality results and speak for themselves. We introduced dividends for our shareholders in FY 2014. Our current gross dividend yield currently sits above 7%. As dividend per share shows, we've succeeded in rebuilding the business earlier this decade. We've now created a stable and growing dividend stream. This is also reflected in our confidence to recently expand our dividend policy to between 60%-70% of net profit after tax. With management and directors owning and controlling over 30% of shares, there is a high degree of alignment between that group and all shareholders. We have a well-diversified business, both geographically and with annuity and activity earnings.
We have high trust brands, particularly in auto retail, with a strong trust platform, and the Turners brand operating in a used car market, which generally stands for the opposite of high trust. The changes we've made in our finance business are working, and our de-risk strategy is continuing to deliver results. In insurance, the investments we have made in technology are enabling us to be more agile and help build out our distribution. In credit management, we have been reminded of the value of our payment bank and seen an improvement in the conversion of promises to payments. COVID has absolutely been a stress test for this business. The Turners team have responded brilliantly, and we are optimistic about the future. We know the used car market is resilient, and since April, the used car market is down 8% compared to new cars, which are down over 30%.
The benefits of the group's strategy of diversification, digital leadership, national distribution, and the development of trusted brands is all helping us provide a strong and sustainable yield to shareholders. On focus for FY21 or the remainder of FY21, our number one focus in auto retail at the moment is stock acquisition, and we expect this to be the case for the remainder of the financial year. Almost all our efforts are being directed into supply currently. In finance, we continue to focus on growing our ledger with high-quality borrowers through data-driven risk pricing. In insurance, we have a number of distribution opportunities, which we are very focused on implementing. In credit management, it is about working closely with our large corporates to assist them in achieving good customer outcomes for their customers who are in financial difficulty.
In terms of the outlook and what we've seen in October and month-to-date of November, really key themes from Q2 have continued. We've seen continued supply constraints in auto, better-than-expected demand, and this is all contributing to margin improvement, particularly on the owned inventory that we have. In finance, we've seen strong new lending, and arrears continue to be at historic low levels. In insurance, we've continued to see strong sales of new policies and claims ratios improving. In credit management, we have seen debt load start to increase as corporate customers reinitiate collections actions. Building on continued robust performance thus far in Q3, the board expects to achieve toward the upper end of its FY 2021 net profit before tax guidance of NZD 28 million to NZD 31 million, as supplied to the market at September's annual shareholder meeting.
Of course, this assumes that there are no significant further lockdowns in New Zealand during FY21. At the midpoint of this guidance range, this would yield a full-year dividend of NZD 0.17 per share based on the board's dividend policy. That's the end of the presentation. Now I'll open up to the call for questions. If you'd like to ask a question, either raise your hand or type in a question via the Q&A.
Start the video. Oh, yeah.
We're just getting something going here. Christian, can you hear us?
Yep. Can you hear me?
I can. Yeah.
Cool. Hey, guys. Hey. Just the first one for me. The current car sales run rate, because just looking at the graph on slide 16, I know it's operating profit, but it's sort of starting to dip again in September. Is that more of the supply issue that you're talking about that's leading to the margin expansion as opposed to demand?
It's a bit of both, Christian, demand has been stronger than we thought it would be, supply has been significantly more constrained than we thought it would be. The weighting is probably more to the supply constraints than the demand environment. The dip in September is really a function of the lag of that August level three lockdown in Auckland. Essentially, you lose a bit of momentum as the lockdown progresses, and it takes a while to sort of spool up again.
Okay.
We're certainly seeing that line would be heading up above zero in October, and we're expecting it to stay that way in November as well.
Okay. While you guys are focusing on building inventory for the remainder of the year, do you still see that you're going to have enough supply yourselves to meet the demand?
Yeah, absolutely.
Okay.
Just to give you some speedup on that. The peak inventory mid-April would've been sort of NZD 46 million of stock, Aaron.
Yep.
Yeah. We're down in the range of 30-31 at the moment.
Okay.
That has been holding steady.
[inaudible]
Okay, sweet. You'd imagine that once supply sort of stabilizes, will those margins go back to more normal levels? Obviously offset by the return of more demand.
Yeah, it might pull back a little. We're pretty confident that we've done some smart things around our buying as well, Christian. We talked at the shareholders' meeting about the rollout of diagnostic tools to help us essentially eliminate the worst 5%-10% of our purchases, which has quite a drag effect on our margins. Yeah, we're confident that margins will probably stay elevated for the foreseeable future.
Christian, I just muted you because there was a bit of background noise coming through, so you might want to unmute yourself if you want to ask some more.
Sorry. Yeah, I know. I'm going to Zoom with a few people on the phone.
The next question was, how have receivables increased so much in the last few months when car sales are actually down?
Basically, we feel like we're taking share off other lenders.
Okay, cool. In the pie of things, is it the consumer is growing larger?
Consumer lending?
Yes.
Yeah.
Yeah.
Yeah. Remember we originate sort of roughly 20%-25% of that Oxford business through Turners Auto retail branches, and then 75% through independent dealers and brokers.
Yeah.
We feel like we're growing our share, particularly of that, obviously, that independent group of dealers and brokers, and particularly in the high-quality borrower segment. If you track across the last year, we've grown our high-quality segment from sub 10% of our monthly lending to more than 50%.
Okay, cool. How many more people have got their hands raised? I've got a few more questions for you.
No, you're all good.
Okay, cool.
No hands.
Oh, sweet. Yeah. I'll just keep going then.
Yeah. Keep going.
Just in terms of the de-risking strategy, how much further headroom have you got? For instance, how much lower can arrears go within finance?
Well, we still have a portfolio of loans originated before we introduced comprehensive credit reporting. There's still quite a way for that to play out, Christian. We also have taken a pretty conservative stance around our COVID overlay. Like many other lenders, our provisioning model is telling us to release provisions, but we are holding onto them just because the times still are uncertain and there's still some consensus from economists that unemployment rates will rise through the summer, and that's probably the key driver of arrears going forward.
Yeah. Okay. Cool. Next question. For the wage subsidy, are you planning on paying that back or no?
No, we don't.
Okay, cool. Before the COVID really started impacting, you drew down a bunch of debt as a prudency thing. You've paid most of that back now?
Yeah, most of that back and then some.
Okay, cool. Yeah. Just net debt's gone down quite a bit. Sorry, my notes are all over the place here. Oh, yeah. For the credit business, you're seeing sort of a reinitiation in the month of October.
Yeah.
What types of debt is that for?
This is mostly bank debt. It's personal unsecured lending. Credit card debt is normally the sort of debt that we collect for those businesses.
Okay. It's just all that sort of stuff.
Yeah. They've essentially been managing their own reputations in the first six months since March.
Yeah.
Yeah, they're very focused on ensuring that you're not overstepping the mark and really trying to take a more of a helpful approach to customers who are in financial difficulty.
Yeah. Cool. Then just the final one from me, was the cost out of NZD four mil from FY 2022, it's probably pretty obvious, but I'm assuming that's as you downsize your big car lots. You're going from 40,000 sq m, whatever it is, down to more like 10,000 sq m car lots. Is that the benefit of that?
It's a mix of people and property.
Yeah.
Certainly, we think or we know we can be more efficient on those smaller sites.
Yeah.
We've also surrendered a couple of our very small sites as well. We've taken, I guess, the opportunity provided to have a good hard look at our property footprint, particularly in Auckland. We've surrendered two sites and are just about to return the main Penrose site to Goodman at the end of December. yeah, it's a mix of people and property. We think there are further efficiency gains to make along the way.
Okay, cool. That was it from me. Thank you for answering my questions.
No problem. Is there any other questions from anyone?
Just a subscription question.
Wayne, you've asked a question about the subscription business. We launched late September, really very much a soft launch. We've started sort of ramping up a bit of the marketing and PR during October. We're pleased with the sort of level of inquiry that's coming in. The supply of cars has been a slight challenge. Nonetheless, I think we're up to 18 subscriptions out. People in cars. We've just taken our first payment from EECA, who are helping co-fund a number of the EVs in the fleet. We're really quite pleased with the level of interest, the level of customer inquiry coming in and see it just continuing to grow from here as we ramp up marketing and build stock levels. There's a question from Chris Steptoe on market share. Market share for us has held stable.
It's definitely been challenging to grow market share with the supply constraints in the market, and we know there is a direct correlation between the amount of stock that we have available for sale and the sales that we'll make. Yeah. My short answer to that question would be, it's been stable through the first six months, but it hasn't grown any. Wayne, I think you wanted to ask some questions here. If you just unmute yourself, you'll be able to.
No more questions, guys. Just congratulations for a great result.
Thanks, Wayne. Okay. Any other questions? We've answered the ones through the Q&A so far. If you want to ask a question in person, you can raise your hand. Okay. Looks like we've come to a natural conclusion. Look, thank you very much, everyone, for your time and your attention and your support. Obviously, if there's any other questions that you have subsequent, please feel free to get in touch with Aaron or I directly. We're more than happy to answer any other questions that you've got. Otherwise, have a great day. Thank you.
Thanks, everyone.