Release Date: August 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Latitude Group Holdings Ltd (ASX:LFS, Financial) reported a solid start to the 2024 financial year with a 14% increase in spending and lending volume, reaching $4.1 billion.
- The company's money division achieved a record high in originations, exceeding $1 billion.
- Credit card application volumes have returned to 2021 levels, indicating a recovery in demand for pay division products.
- Operating income for the first half increased by 2% year on year, reaching $342 million.
- Net interest margins improved by 31 basis points to 10.1%, reflecting successful margin management actions.
Negative Points
- Despite the positive financial performance, the dividend remains on hold as the company continues to invest in growth.
- Delinquencies are expected to revert back to historical norms, indicating potential future credit risk.
- The company's gearing ratio is slightly above the target range, which may impact future dividend decisions.
- Cost-of-living pressures are affecting customers, which could impact future spending and repayment behaviors.
- The company is still in a transitional phase, with significant work ahead to fully realize its strategic goals.
Q & A Highlights
Q: Can I ask around the repayment rates, should we expect our repayment rates to slip further from here and does that mean that in a balanced growth and should continue to pick up in terms of the growth rate?
A: Yeah, great question, Andrei. We do expect payment rates to moderate a little bit further. We don't expect them to dramatically change and get back to those pre-COVID levels that you see on the chart there in 2019. The overall environment and the increasing amount of card spend will likely elevate the payment rate slightly to counteract the reduction that we do expect to see going forward. So, a moderate reduction is what I would think going forward.
Q: I think some of the customer fees have been increasing. And I think there's been some more repricing in this new half in the December half. So how you're thinking about it, the pricing actions and know what kind of benefit could come through from that?
A: I'll take that one. So if you're talking about margin expansion, we do expect the fees and APR changes that we've already implemented in the first half of '24 to benefit us going forward. As I said before, margin expansion has been really good in this half, but we're on a journey, and we expect to expand those margins going forward.
Q: In terms of the non-interest fees, what sort of repricing actions have you taken?
A: We've probably made the majority of the changes in those types of fees that we've taken up account, keeping fees on our sales finance products by $1 this half as well as the payment handling fees and paper statement fees. We made those changes in this half as well. So that will give us benefit through into the second half and going forward. At this stage, we think we're pretty much done in those types of fees, but obviously, we'll manage our margins as we deem appropriate going forward.
Q: What kind of steps can you take to increase the penetration of interest-free products from your existing merchants?
A: It does take a little while to build that momentum back up. I'm really proud of the work the team's doing to work with all of our retailers to ensure that the value proposition is understood. We continue to invest in building those relationships as evidenced by a few new partnerships, very significant new partnerships that we've added to the portfolio in the first half. We believe that there's significant opportunity through marketing and promotion and just engagement with our existing set of retailers. I have every expectation that the new partners that we brought on board will help further support the growth in interest-free volumes in the coming months and quarters.
Q: What are you seeing in delinquency rates? Have you seen the typical seasonal improvement in the third quarter?
A: We've certainly seen the usual seasonal performance in the third quarter. We tend to get increased payments and low delinquencies in the third quarter, typically off the back of tax refund time. So we have seen that typical seasonal element in this quarter as well. However, we still expect an overall increase, but certainly seeing that seasonal reduction in the third quarter.
Q: The dividend is on pause again for this half. What would it take for the company to get more comfortable to reinstate the dividend?
A: We're really happy with the earnings and the cash generation in this half. But obviously, we're in a bit of a transient half in terms of earnings. We still believe that there is more cash and capital to invest in further growth and in building the profitability of the business. The TER at 7.2% is marginally above the range. We would expect that TERX dividend to be higher than the 7.2% number pre-dividend for us to be able to afford a dividend to be paid. We're really happy with the trajectory of our cash generation and earnings so far, just not quite big enough at this stage for us to resume that dividend because we think we can deploy that capital in growth and profitability.
Q: What are the key points in your outlook statement?
A: We are beginning to see the emergence of favorable macroeconomic settings, which we believe will continue to be supportive to Latitude's business model. We expect the growth experienced in the first half of this year to continue, focusing on new partnerships, marketing, and customer and retailer experience enhancements. Margins are expected to expand as we benefit from pricing and funding initiatives. Employment is expected to remain resilient and supportive of credit performance, though cost-of-living pressures are real and having an impact. We expect delinquencies to revert back to long-term historical norms. Cost discipline will continue to be a hallmark of this business, ensuring capital is deployed to strategic and growth initiatives. The work done in our treasury team has put the balance sheet in place to support our growth ambitions.
Q: Can you provide more details on the funding program's performance?
A: The funding program had a magnificent half with three really successful public transactions, raising $1.1 billion in debt, increasing our investor base to 56 investors, creating headroom for us to call our facilities going forward, and balancing our maturity profile. We also refinanced our corporate debt facility for another three years. The program is really well set up for strong second-half performance and into 2025.
Q: How has the company's credit quality been?
A: Our credit quality remains strong, with a high proportion of high-quality credit risks. This quality, underpinned by solid employment results, drives our delinquency and outlook going forward. We do expect to see a normalizing of our delinquencies back to historical ranges of pre-2019 levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
