Turners delivers record earnings
Turners Automotive Group has reported record earnings for the past financial year.
That’s despite disruptions from Covid-19 lockdowns, and the more recent impact of the omicron outbreak on consumer demand and operational resource.
Key financial highlights for the 12 months to March 31 include revenue climbing by 15 per cent to $342 million and an 11 per cent climb in earnings before interest and tax.
Net profit before profit (NPBT) and after tax rose by 15 and 16 per cent to $43.1m and $31.3m respectively, while underlying NPBT jumped by 29 per cent to $44.1m.
Turners has declared a full-year dividend of 23 cents per share, up by 15 per cent, with earnings per share increasing by 16 per cent to 36.4c.
Highlights of 2021/22 included record earnings from automotive retail, finance and insurance (F&I) divisions operating in the used-car market.
Market share has continued to grow in car sales, with a “good pipeline of new branches building”, and there were improved annuity earnings from F&I.
Debt load has been returning slowly in credit management, but the environment should be more productive in the 2023 financial year.
Turners reports employee engagement is at an all-time high and has continued to increase at a time when retention and recruitment have been under significant pressure.
When it comes to inflation and interest rates, these are starting to impact with the “speed of change the biggest challenge”.
Profits boomed in each of Turners’ three largest businesses, which represent 94 per cent of divisional operating profit. Profit grew by 24 per cent in insurance, 14 per cent in finance and 26 per cent in automotive retail, although profit in the credit management business dropped by 40 per cent.
Todd Hunter, chief executive officer, says: “Our team has continued to deliver for our customers and shareholders.
“Our focus on quality is paying off and our team’s engagement levels have never been higher at a time in the economy when retention and recruitment is a real challenge. Our brand value is growing across all our key business divisions, but the investment we have made in the Turners brand has created tangible value internally and externally.
“While the near-term economic outlook is looking much more uncertain, our business has never been in better shape. We are ready for whatever comes next.”
“The organic growth we have built in this business is a real success story,” adds chairman Grant Baker. “Our internal confidence to keep expanding our auto retail footprint is high and, combined with property investments we’ve made into network expansion, is delivering further gains to shareholders.
“Unrecognised property gains across our property portfolio now add up to 22 cents per share on top of share-price growth and dividends over the past 12 months.
“Our company continues to extend its competitive moat and build scale. As we head into an economic environment that will offer up different challenges and opportunities, the business has already been significantly de-risked.
“The work we have done on local sourcing of vehicles, building quality into the finance book and adding distribution to insurance means the business is positioned to withstand or potentially take advantage of some of these changing conditions.
“One of the most attractive aspects of the used-car market is that it’s a needs-based purchase and less affected by changing economic conditions.”
Automotive retail
Revenue came in at $242.5m, up by 21 per cent, while NPBT climbed by 26 per cent to $19.4m during 2021/22, meaning it has returned to being the group’s most profitable business after being briefly overtaken by finance.
Gross margins on “owned” fleet have continued to improve – up eight per cent to $818 per unit due to buying improvement initiatives, more retail sales and the constrained supply of used cars nationally.
Turner’s market share has grown off the back of its retail optimisation and expansion strategy, with retail – BuyNow – sales up six per cent.
“We launched a new branch in Rotorua during the year and are redeveloping this site and developing a new site in Nelson,” reports Hunter. “We’ve also secured new sites in Timaru and Napier, and are working on further opportunities.
“Sourcing vehicles in the local market has been a top priority and our investment in the popular Tina from Turners [pictured] campaign has helped build our inventory of locally owned cars with ‘owned’ inventory sales up by 25 per cent on the 2021 financial year.
“Another goal is to increase our Finance Attach rate to further realise the synergies of our related businesses. Despite disruption caused by the CCCFA [Credit Contracts and Consumer Finance Act] and changes in December 2021, we have improved our finance attach rate to 32.7 per cent compared to 30.6 per cent in FY21.”
Finance
Revenue for the past financial year was $51.9m, up by eight per cent, while NPBT was $18m for a rise of 14 per cent.
The company’s risk-pricing model and focus on premium borrowers was successful over the past 12 months with the loan book growing by 28 per cent to $423m. Premium borrower lending now accounts for more than 50 per cent of monthly lending.
Hunter says: “We were pleased with how the business navigated the CCCFA changes, which generated further market-share growth opportunities as other providers struggled to cope with the change in process.”
Arrears continue to track down at historic low levels. Consumer arrears came in at two per cent at the end of March compared to 4.9 per cent over the previous 12-month period, while commercial arrears were 0.5 per cent compared to 1.8 per cent.
“The business is still retaining a Covid-19 arrears provision buffer to allow for any unemployment increase in future months,” notes Hunter.
Insurance
Revenue division dropped four per cent to $40.4m, but NPBT was $11.6m – up by 24 per cent.
Strong market-share gains and distribution agreements helped drive strong policy sales with gross written premium up six per cent on 2020/21 to $39.9m despite the impact of lockdowns.
“Our distribution arrangements are working well – MTF, Marac Finance and Motorcentral using Autosure API – and there is a good pipeline of these opportunities ahead,” says Hunter.
“Claims costs are 1.2 per cent down on FY21. However, parts price inflation and labour-rate increases are offsetting our parts procurement initiatives and less vehicle movement in lockdown periods.”
Credit management
Revenue fell to $9.7m and by 24 per cent, while NPBT tumbled by 40 per cent to $3m.
This division continues to have lower debt-load levels due to the historically low consumer arrears and corporates working back into recovery action post-pandemic. Debt load in 2021/22 was down by 54 per cent on pre-pandemic levels and debt collected down 35 per cent.
“This is a significant hit to revenues,” says Hunter. “Although debt load is down, we are seeing positive signs in debt-recovery rates due to the new ‘resolution’ collections strategy implemented during the year.”
The proportions for the 2022 financial year were 34 per cent compared to 24 per cent for 2021. “With the economic environment expected to deteriorate, we expect debt load levels to increase as a result. A similar pattern was experienced post-GFC prior to a busy collection period.”
Property gains
Turners has continued to build its portfolio of property over the past seven years and generated unrecognised gains on its seven developed sites of just under $19m or 22 cents per share over this time and 5.6cps in 2021/22.
Combining the seven developed sites with the new sites in Rotorua and Nelson, along with the 3 committed sites in Napier, Timaru and Tauranga (Tauriko), the company has just under $95m worth of property in its portfolio.
In addition, it has offers and negotiations under way in East Auckland, Tauranga and Christchurch, and it continues to see property ownership as a key strategy that will ensure the “long-term resilience” of the business.
Organic growth
Four key areas will underpin Turners’ earnings growth, the company reports to the NZX. These will be a combination of physical and digital investments. They are
• Retail optimisation and expansion across people, property and processes. This includes expanding the physical branch network with two new sites Rotorua and Nelson, developing three new sites to develop this financial year and further investment in the Tina from Turners campaign.
• Vehicle purchasing decision-making using data and tools to help identify new sourcing opportunities, and leveraging brand strength to generate local sourcing leads.
• Margin management and premium lending in finance.
• Continued investment in digital and improving Turners’ omni-channel consumer experience that allows customers to engage with the company “however, whenever and wherever they want”.
Outlook
“Despite the omicron impacts still being felt, the year has started well with April 2022’s results ahead of April 2021,” says Hunter. “However, while pandemic uncertainty has decreased, New Zealand’s economic uncertainty has increased.
“In automotive retail, we expect to see upside from our new branches in the second half [of the current financial year], and the supply-constrained market to continue primarily due to impacts on the new-car supply chain and government regulation.
“With the rapidly changing interest-rate environment, our priority in finance shifts to margin management. In insurance, we expect policy sales to be buoyant based on our distribution and market-share gains and claims ratios to stabilise. In credit management, levels of bad debt recovery are slowly starting to build.
“We are confident we have good growth prospects in auto retail and insurance. Finance margins will be impacted in the short term as we deal with the rapidly changing interest-rate environment. Credit management is expected to perform better as economic conditions worsen and the resultant impact on consumer arrears.
“Looking beyond financial year 2023, we remain very confident about further growth over the medium to longer term. We have updated our three-year rolling target to cross over $50m of profit before tax by financial year 2025. Overall, we are ready for what is next and the business is in the best shape it has ever been.”
