Distribution Finance Capital Holdings (LSE:DFCH) — Annual Report 2023

0:01 Good afternoon, and welcome to the DISTRIBUTION FINANCE CAPITAL HOLDINGS PLC Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Simply type in your question and press send. Company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Carl Demassa, Chief Executive Officer. Good afternoon, sir.

0:31 Thanks very much, Paul. We're delighted to to be here today. I made an presentation on the investor meat company platform. I'm I'm joined today by Gavin Morris, who is our chief financial officer, and we'll take you through our full year results for 2023. But given that this is our our first presentation, we thought it'd be useful just to give you a bit of a backdrop and and and introduce what we what we actually do at at at DFCAPITAL for those of you that that don't know the don't know the firm. So we are a Manchester based specialist lender who provides working capital solutions to manufacturers, distributors, and and and dealers across the The UK.

1:18 The firm was founded in 2016 with the investment from Arrowcrest Master Fund, And we were originally part of the true Finn stable of of of businesses, but we demerged from true Finn in May 2019 through an IPO joining AIM. We decided, having been a specialist nonbank lender, to pursue a banking license and seek full authorization from the Prudential Regulation Authority to become a bank, and we successfully received authorization in September 2020. And that gives us access to the retail deposit markets, which is our our primary source of of of funding and liquidity that supports our our lending operation.

2:07 We feature on the Best Buy tables, and we have an online platform that our depositors use to to transact their banking with us and to to save save with us. Since authorization, we've been very much focused on ensuring that we get to profitability as quickly as we possibly could. So we're we've now sufficiently scaled the bank, you know, to a point within two years of authorization that we we reached profitability, which was which was last year. And now we're supporting over £1,000,000,000 worth of new lending each year to more than a thousand dealers and 89 manufacturers to help them sell products and services.

2:54 So to give you a a brief introduction on the on the on the core lending products, I think, you know, you will understand the the the savings proposition that we that we have. But our working capital allows manufacturers to to ship products to to dealers. That product sits on the dealer's forecourt so that their customers can can can view the product. We're advancing against the the wholesale price, which is important to know, the wholesale price, the factory gate price that the manufacturer sells the their their product to the to the dealer. The dealer is our obligor. We have title to the asset as it leaves the manufacturer, and we are repaid by the dealer once the the asset is is is is sold.

3:43 So it's quite a neat, you know, working capital solution for for for for the thousand or so dealers that we we work with. We're operating across a diverse number of of of sectors. A number of those are consumer or leisure focused, so lodges, holiday homes, motorhomes, caravans as examples, marine, motorcycles, and and automotive. And then we have a number of what we would call nonleisure or commercial segments or transport, industrial, agricultural, plant machinery, those sorts of things. So as I say, a very diversified number of sectors that we that we support. Just in relation to our our lending products at the summary level, I mentioned earlier that we we advance against the factory gate price. We take title of of of the assets. So we we have a strong security strong security position as far as our loans are are concerned.

4:39 And because we are advancing a wholesale prices, and we we typically talk around an LTV or a loan to value of 85% against the the wholesale value, we do have, you know, additional protection as far as our security is concerned against the retail prices, which which generally equates to about a 20 20% additional additional cover. So we're we're typically 65 to 70% advanced against against retail prices. As I said, we are repaid by the dealer when when the asset is is is sold. Because we have eighty eighty nine manufacturer relationships, the extent to those relationships do give us some additional support.

5:27 You know, dealers do hit a, you know, a a rough patch, which which, you know, which can happen, you know, through the life of a of of a loan. And that that that business we call program business through manufacturer programs where we get access to the manufacturer's entire dealer base, but we also, you know, have the benefits of repurchase in some cases and redistribution, you know, through the through the manufacturer's network, which, you know, gives us that additional security on about 60% of our our lending. This is a working capital product. It is fairly short in its lending tenor, and our typical loan duration is about a hundred and and fifty days.

6:16 Gavin will talk about some of the financial dynamics later in the presentation, but it's important to note that this is really a fee based product. So, you know, we we charge fees as an asset, you know, hits the dealers forecourt as it leaves the dealer's forecourt and, you know, for every period that an asset is on the on the dealer's dealer's forecourt. But as a as a gross yield to enable comparisons, this is a, you know, double digit gross yield product. I think given the the short tenor of of the lending and the strong security position that we have, our losses and impairments in normal times are are very, very low. And we see through the cycle losses and impairments of no greater than than than than one percent.

7:05 You'll hear later in the presentation as well that we we do get very, very strong fellowship from from the dealers and and from the manufacturers. And that's not only demonstrated through the growth in in lending that we've we've seen, but also through the customer satisfaction scores that we have. And in particular, we use a a net promoter score to to ensure that we're on track and delivering for the customers' requirements. So that was a a whistle stop tour of of the business and a bit of a bit of background. Let me let me talk about 2023 and and and the outturn. Well, I just wanna start off by saying, you know, as a firm, we're we're absolutely delighted with with our our full year results. I think as we as we talk through this, you'll see all of the inputs that ultimately, you know, drive out the the the the improvement in pretax profit are all pretty amazing in what we've what we've achieved.

8:00 So we've we've seen, you know, over threefold increase in our pretax profit this year, closing 2023 at £4,600,000 worth of profit from a £1,300,000 maiden profit in 2022. We've reported at the end of at the end of twenty twenty three, ten consecutive quarters of of of loan book growth since we were authorized in in 2020. We've actually already surpassed that milestone by reports at the end of q one, just having closed that out, our eleventh consecutive quarter of of of loan book growth. New lending has reached record levels in the year, up 20% on 2022 to 1,200,000,000.

8:47 And we've we've we've grown the the facilities that we provide to our to our dealers by 26% to over over over 1,000,000,000. All of that new lending activity has seen our loan book reach an all time high of 581,000,000, up 32% on the prior year, and that does include some new lending products that we've entered that I'll talk about a little bit later on.

9:16 One of the key drivers, I think, for our our growth story has been making sure that, you know, the products continue to resonate with with our dealers and manufacturers, and we've consistently added new dealers year on year. We added 330 new dealers last year that work with our 89 manufacturers. I think those of you that that that that follow banks will know that in addition to having access to liquidity to support lending, having, you know, sufficient capital to support loan book growth is is is a key requirement. And we've been really pleased to unlock capacity to grow our our our loan book to an excess of 800,000,000 over the over the medium term through the enable BBB, British Business Bank, enable guarantee scheme, and also us taking some tier two capital, £20,000,000 worth of tier two capital with British business investments.

10:17 So we can get to a loan book in excess of 800,000,000 without the requirement for any additional dilutive tier tier one equity raise. I think as we've, you know, as we've looked to scale the the firm, we've materially improved returns. And, you know, our earnings per share has has increased on an adjusted basis, and our tangible net asset value per share is just shy of of of $56.06 pence a share. That sustainable growth really has been been been under underpinned by, you know, improvements in the overall dynamics of the profitability. So Gavin will talk a little bit more about our net interest margin and how that's improved from our target of of of 6% to 7.6%, you know, through through the year.

11:14 We've also seen a significant widening in the jaws between our income generation and our our cost improvement. So, you know, we're generating three and a half times more income than the additional cost that's that's gone into into into the firm to support the growth. And that's taken our cost to income ratio down from 82% in 2022 to 58%. And we're expecting, you know, those jaws to widen further as we as we continue to scale the the firm. Portfolio quality has been has been strong through the the period. We've had 30 dealers in in arrears.

12:00 I think it's important to note that unlike a lot of lenders who will report arrears one calendar month past due, we actually report our arrears cases one day past due. So the number of cases that we have one day past due or in legal recovery were 30 at the year end, but we've already, through the first quarter, seen a significant improvement in in in that in that k in that KPI. You know, from an overall percentage, very, very small number of our of our dealers that are in are in arrears. We've continued to reduce the the loan to value. And as mentioned earlier, we've got, you know, the additional protection against the the retail margin of of of circa 20%.

12:49 So, you know, we're in that sort of 65, 70% versus retail prices and 85% to to wholesale prices as far as our our lending is concerned. You'll hear a little bit later on from from from Gavin that we've we've really focused as we brought on more dealers on ensuring that we, you know, bring on high quality dealer relationships. And we now have, you know, almost three quarters of our of our dealers in our highest two highest quality risk bands, our two highest quality risk risk bands. Now aside from the the the unique single provision that we've needed to make this year in relation to to Royal Life, which has been, you know, fully provided in our 2023 accounts.

13:42 You know, our cost of risk on an underlying basis has been has been very, very low. Point 53%, which is well below our 1% through the cycle, which is modestly up on on the point half a percent, point 5% in 2022.

14:06 I think the other thing that we're really, really pleased about is just the general level of our of our service service proposition. And I mentioned earlier that our lending is supported by, you know, retail retail deposits. We have a, you know, a really excellent deposit raising capability. People can open accounts very quickly in in a matter of in a matter of minutes. And we've raised 575,000,000 of of of deposits in in aggregate and, you know, over 15,000 accounts we have in operation today. In the year, we've we've extended our range of of of savings products to include an easy access product as well, and that was a very successful launch that we that we had raising 44,000,000 deposits across over a thousand accounts in about thirty six hours. So gives you a feel for the not only the the size of the markets that we operate, but the the quality and of our service proposition that allows us to raise deposits to support our lending growth very, very quickly.

15:12 The extent of our service is so good that we see about 75% of our maturing deposits retained, you know, through through loyalty products or just the seamless transfer on the online on the online platform. Services the quality services echoed by our retail depositors through the three FIFO scores. We had last year over 1,800 reviews on FIFO. We received the platinum trusted award from FIFO for the first time, and our score was 4.7 stars. That's actually increased in the first quarter to 4.8, so we're we're really pleased with that. And our obligors, our dealers, and our manufacturers also rate us highly against our external benchmark on our net promoter score of plus 37 is what we've achieved against the plus 30 target.

16:11 I think one of the things that we're most proud about is, you know, the journey that we've progressed through as a as a bank and the, you know, the culture that we've created in the firm that's, know, driven, I suppose, the the extent of these sterling results. Our our employees think, you know, working at DISTRIBUTION CAPITAL is is is fabulous. Our recent best company survey where, you know, over 90% of our employees participated. We were rated as a three star best company, which is, you know, offering world class levels of employee engagement. It's the highest rating that you can achieve, you know, from best companies. So I think, you know, in relation to to all of that, you can see why, you know, we're very, very pleased with, you know, the results for 2023.

17:03 So I'll hand over to Gavin now to go into a little bit more detail in relation to to the results. Thanks, Carl, and good afternoon to everyone. So if I start off on this first financial slide, it's looking at the financial momentum in the year. As I go through these slides, I'm gonna give a bit more detail around some of the points that Carl raised. So this first slide encapsulates has a number of graph that encapsulates the significant financial momentum through 2023 we've had through continued scaling. Profit before tax, '25 250% increase to 4,600,000. This is being driven by a 20% increase in our loan originations to 1,200,000,000, and that was key to our loan book increasing by 32% from GBP $439,000,000 to $581,000,000.

17:52 The bottom three graphs show the fundamental ratios that underpin this P and L performance. The NIM has increased from 6.5% to 7.6%, and I'll touch on the reasons for that a little bit later. The cost of risk excluding real was largely unchanged at 53 basis points. However, if you take into account the Royal Life exposure and the full provision against that, that increased from 74 to two point two eight percent seventy four basis points to 2.28%. Now our cost to income ratio has significantly reduced from 82% to 58%. And as Carl mentioned, this reflects the significant operational leverage we have as we grow the loan book with that cost to grow the loan book outstripping the growth in income, clearly outstripping the costs in a factor of 3.5 to one. And as Carl said, we expect those jaws to widen as we continue to grow the loan book and really benefit from that.

18:49 Moving on to the next slide.

18:52 The aim of this slide is to show the key underlying drivers of movement in profit before tax from the 1,300,000 in 2022. So if we start off, we get 1,300,000 in 2022. The growth in the average loan book gave us around 13,000,000 additional profit. NIM increased from '22 to '23 from six and a half to 7.6%. That gives us about an extra 5,000,000. And we we know that in the longer term, we do expect that to come down to back towards 6%. And that, again, I'll I'll touch on that later. Operating cost growth was around £5,500,000. This includes the introduction of the BBB enabled guarantee scheme that Carl mentioned earlier. That enables us to sweat our capital, and there's a small cost involved in that.

19:44 And then, obviously, as the loan book increases, you you would expect your cost of risk to increase. The 3,000,000 here we have in the chart, that that assumes through the cycle 1% loss rate. Our actual losses excluding Royal, as we said, was about 50 bps. But if we assume that it was a through the cycle loss rate of 1%, that would be 3,000,000. So that would get you to a normalized profit before tax of £11,000,000. Now at that level, you'd have a return on equity of four and a half sorry. An EPS of four and a half p, and you'd have a return on equity of about 11%. Obviously, we did have the royal life provision. So if if if you then add that into the mix, that gives gets you back to your 4,600,000 PBT.

20:35 So so the headline numbers is is the EPS went from 4.4 p to 1.8 p, but on a normalized basis, that would have been closer to four and a half p. Tangible net asset value per share went up from 53.2 to 55.6. Again, on a more normalized basis, that would have been closer to 58.4 p. Moving on to the next slide, which is our income statement. Kicking off with the gross revenues, these were up over a 125% to 60,000,000, and there's two underlying elements driving this. The first one is is the increase in the loan book, and then the second one is gross yield we charge to customers. It increased from an average of 8.2% to 11.1%.

21:25 It's worth just spending a bit of time on that. So under the contractual agreement with our dealers, as base rate rises, we can pass those base rate rises onto our dealers. This is not on existing book. This is on any new loans they write post the the change in in the base rate.

21:44 The fact that we've been able to grow grow the loan book to to the extent we have shows the ability of us to be able to pass on that base rate movement. The average life of the loans is about a hundred and fifty days. So it it, therefore, it takes about a hundred and fifty days for those base rate rises to start flowing through the book. On the interest expense side, this has increased from 6,400,000 to 22,300,000, and that reflects the average cost of our retail deposits that fund the loan book increasing to an average of 4.3% from 1.8%. And that's, again, reflective of as base rates have gone up, deposit rates have gone up, we pass those on to our retail customers. And therefore, it's the interplay of the revenue and the interest expense, which gives us our NIM increase from six and a half to 7.6%.

22:36 And that's because the loan book is pricing more quickly. It's at about a hundred and fifty days. So about five months, the the changes in base rate have flowed through to the loan book. Whereas, add deposits, the the deposit tenors, they mature on a longer basis. Our our deposit book is a mix of easy access notice accounts, but it's predominantly fixed rate bonds, which tend to be one and two year. So the average term of those is is about six to nine months overall on a blended basis, And therefore, the increase in base rates takes has taken longer to flow through the deposit book. As a result of that, we've benefited from that, and our NIM has increased to that 7.6%. As I said, in the longer term, as base rates start to come down, we'd expect that to start to trend back towards the 6%.

23:28 Looking at OpEx. During 2022, we upgraded our commercial and retail and relationship management teams, and then we had the full benefit from an income perspective, but also you got the full cost of that during 2023. So OpEx increased by 5,000,000 in the year, but that compares to net income increasing by 17,600,000. So that's a more than threefold increase. And again, that clearly demonstrates the operational leverage we have and underpins that reduction from 82% to 58% in the cost income ratio. It's worth stressing that the cost to grow our loan book in the medium term and our core product, they're largely embedded. There will be additional cost when we go into an HP product that we'll come on to later. But in terms of our core product book, our costs are largely embedded given where we are today.

24:21 I won't touch on the cost of risk because we we touched on that earlier. So if we move on to the next slide. This next slide looks at how our increased capital efficiency supports our ongoing lending growth. Now with the strength of our dealer and manufacturer relationships, it's given us record originations, and that's helped drive the loan book increase of 32%. Within that loan book increase, we've also had 18,000,000 of new products. Carl mentioned as a bank, obviously, capital is key for us as a bank. Our CET one ratio is a reflection of the level of capital we have divided by the regulatory risk weighting of our lending assets and that the PRA set a ratio above which we have to remain above.

25:12 And although the loan book has increased by 32%, our c t one ratio, which everything else remaining equal, you would have then thought would drop. Our c t one ratio has not reduced, but it's increased, and that's due to the implementation of the British Business Bank Enable Guarantee scheme that reduces the average risk weighting of the assets together with the tier two capital that we we drew down. And as I said earlier, effectively, British business bank, Enable Guarantee, and Tier two Capital, that just enables us to sweat our capital more effectively. The impairment coverage, that's increased to two and a half percent from the point 84%, and that largely reflects the provision on royal royal life.

25:58 If I look at state one and two provisions, which are more, you know, old school terms, general provision, that's remained steady at just under half a percent. And within that, we put in a model overlay, so an increase to reflect the current macroeconomic uncertainties that are out there. And I think Carl's touched on the strong LTV position we've got. Moving on. In terms of the quality of our our dealer base from a credit perspective, I guess we're very vigilant around the credit risks given the macroeconomic uncertainties. So we're not we're not myopic on dealer growth. We're really focused on building high quality, scalable relationships.

26:45 And this is evidenced in the graphs on this page. So you can see that during 2023, of the 149,000,000 of facility limits approved, 74% were in our highest quality ratings, which is risk rating one and two. This has increased the portfolio as a whole, the quality. One and two risk ratings is now at 74% compared to 62% at the end of December twenty two. And if you look at risk ratings one to five, which are the high quality risk ratings, we've now got 93% in those high quality profiles. Moving on to the next slide. This just reiterates the point Carl was making about the strong portfolio quality and the underlying low arrears.

27:34 The left graph just looks at the number of dealers in arrears. And, again, to stress, this is one day or more in arrears. Of our 1,200 dealers at the year end, there were 30 in arrears. So that that's sort of circa two and a half percent. In terms of the underlying balance in arrears, excluding Royal Life, that was point 7% of the loan book at the end of twenty three, a very slight increase in compared to '22. And then the underlying performance in terms of cost of risk, we talk about it being through the cycle of 1%. And, again, excluding the Royal Life impairment, that's at just over 50 basis points. So well under that through the cycle target.

28:27 We then move on to the next slide, and this this this looks at sort of how we scaled our lending. It it it goes back to show the significant growth we've had since the bank authorization. So we were authorized as a bank in September 2020. At the end of twenty twenty, our loan book was a 113,000,000, and you can see the cumulative annual growth rate of 72 since that date to take us to 581,000,000 at the end of twenty twenty three. And we generated that growth despite the faster loan repayment trends that we've seen post pandemic, and that's driven by our significant year on year origination increases. And then moving on to the final slide in the financial section.

29:15 This looks at our portfolio. You can clearly see that we've got strong diversification across our sectors at the year end.

29:23 In terms of aging, they remain in line with our expectations with an average loan age of sort of hundred and forty eight days. That's well within our two hundred and forty day risk tolerance. What what do we mean by risk tolerance? I mean, if if the assets are sitting on the dealer forecourt a period of time and they're not selling, that's the point at which we get concerned. And portfolio as a whole, that's around two hundred forty days. You can see we're well off that. We looked at a more granular level at sector detail, and in the appendix, you can see this tolerance variance by by sector together with the the actuals we're seeing in each sector. One area I would just highlight on this page is Motoma Caravan, which is 23% of our portfolio. What what we've seen in Motown and Caravan is very strong volumes, but faster than expected sales. What that, I guess, shows to us is although faster sales, it can impact slightly on your loan book coming down, it's positive that we've got that dealer vitality going through that sector, e e even in the time of year when you wouldn't necessarily expect that.

30:29 So I think in terms of finishing on portfolio performance, it's a good segue back to Carl to talk about how the portfolio is performing in q one. Thanks very much, Gavin. So look, the moment momentum that we've, you know, we've seen through 2023 is very much, you know, continued. We've had very, very strong loan origination in the first in the first quarter, up actually 22% on the same quarter last last year to 330,000,000, which is not quite a record for us, but, you know, certainly getting, you know, very close to to that. You know, our loan book quarter quarter one last year to quarter one this year is up over 100,000,000 to 610,000,000, which is, you know, 5% growth over the the end of the end of year numbers that we've just we've just spoken about.

31:27 As Gavin mentioned, we're expecting our net interest margin to be elevated above the 6% target, you know, certainly through this year into in into next. So, you know, that's, you know, obviously going to be a, you know, a feature of, you know, our performance, you know, for for for this year. Our stock turn, which is, you know, the

31:52 average age of outstanding loan, has slowed slightly from where we were at the end of the year to a hundred and fifty days as we've gone through the quieter or should be a normal time, the quieter, you know, period for for for sales. And, you know, and that's well within our weighted risk tolerance of of of two hundred and forty days. So, you know, two hundred and forty days is when we're, you know, approaching on a portfolio basis, you know, the the extent of our risk appetite, and we get, you know, concerned about dealer vitality that we've mentioned, you know, through this. Whilst not myopic on the on the growth of dealers, we have seen, you know, dealer number grow through the through the first quarter. So we've now got over over 1,200,

32:40 and we've extended now credit facilities of of 1,100,000,000 to to those 1,200 or so counterparties. The the portfolio quality, portfolio performance, arrears, in in particular, has been very strong through the quarter. The 30 dealers that we talked about at the end of the year is now down to to 18 dealers, one day past due or in in legal recoveries. And if we exclude the the royal balance, then, you know, arrears is now point 3%

33:16 of the the entire loan book, which is, you know, significantly below, you know, our our expectations. So I think, you know, whilst it is early in the in the year, you know, we're really pleased with, you know, with q one, how things have have have unfolded both from a financial and operational perspective and is, you know, falling in line with, you know, our expectations of year over year improvement. So just thinking about, you know, some of the things that, you know, will support, you know, future growth. I mean, one of the things that, you know, we realize that, you know, at DFCAPITAL is that, you know, we're certainly you know, whilst we're focused very much on manufacturers and and dealer relationships and building our, you know, proposition around that as a special specialist lender, we certainly are never short of of opportunities to to consider consider growth.

34:13 However, what we do look to do is do that in a very controlled and considered

34:17 way so we manage, you know, risk appropriately. So, you know, where do we see, you know, future growth coming from? Well, there's no doubt, you know, there is, you you know, market share growth in the in the sectors which we operate, you know, to to today. But we also see, you know, new sectors where we can take the core inventory finance, stock finance, you know, product and and proposition and technology capability. You know, specialist automotive is one that we've we've recently recently pushed on, and we've already exceeding £15,000,000 worth of worth of lending there, which is almost double where we closed, you know, 2023. We've we've just started a relationship with the renewables renewable space, which will be, you know, solar panels and and and and the like. And we think, actually, you know, those sort of serialized what arguably are faster moving goods, you know, with the right technology could be, you know, an area of significant growth, you know, for us at the right risk adjusted returns.

35:26 And we've also, you know, launched, you know, alongside the core product invoice discounting, you know, with a with a partner who has strong technology capabilities here to, you know, to give, I guess, alternate solutions for our existing dealer manufacturer relationships to help them with their their working capital needs. Over and above that, we we do see some new old new product adjacencies that we've that we've entered, you know, wholesale funding, you know, to partners so that I lending to lenders, I suppose, is the best way to describe that, and develop developments and and receivables financing for the existing dealer and manufacturer and distributor network.

36:11 You know, a a two products in their in their own right, which we would see as complementary and and and additive to the the relationships that we have. But I should say that, you know, whilst, you know, they are they offer, you know, great returns for us, we we don't want that to be more than 10 to 15% of our of our loan book as we as we move as we move forward. One of the one of the things that I'm sure will be obvious to you, and we've we've talked about, you know, financing assets on the on the forecourt. And I'm sure you will recognize that, you know, as as many of those, you know, assets leave the forecourt, they're generally financed by by banks.

36:57 And we don't provide currently any financing beyond beyond the forecourt. So we have, on the back of strong requests from our existing dealer and manufacturer partners, we have started to to build our own higher purchase capability, which will allow us to to finance assets as they are sold to to to end users of the of of of of of the product. And I think, you know, when when you look at the perhaps an earlier slide that Gavin present presented in relation to new loans increasing at pace, but was also having, I guess, fast repayments, which demonstrates this vitality of the the underlying markets.

37:44 I mean, it'd be great for us to be in that position where, you know, those loan repayments where the stock is sold for that to be converted into a into another another lending product. So as markets are having very, very strong end user sales, we can benefit, you know, from that as well with our higher purchase capability. So we're pushing on with that this year. It's about a £2,000,000 investment that's that's factored into to our forecasts for this year, and I'd very much hope that, you once we've got the relevant regulatory approvals and are alike, we should be ready to to lend in in in in 2025. We're also testing and learning around geographic expansion in a very controlled and considered way. That's what we tend to do with any of our new lending ideas that will we'll almost put them in a sandpit and an incubator type approach.

38:41 And we are using partners in Ireland, Republic Of Ireland, and The Netherlands, you know, for us to look at that, I guess, Eurozone multicurrency capability and how we could, you know, bring that to life given that we we see a number of our pan European, you know, competitors, you know, looking to to retrench for for various various reasons. One of the things that we've been really successful that's that's driven an awful lot of the the cost income ratio improvement has been our focus on leveraging technology for automation. And we're gonna continue to deploy robotic process automation and optical character recognition to enhance our proposition whilst always maintaining things that are important to our customers, whether those are depositors or borrowers.

39:33 They love speaking to human beings. So we're, you know, we're we're very focused on leveraging leveraging technology, but still ensuring that we offer great intimacy through our through our proposition. Just on the on the deposit raising side of things, whilst the whilst the retail markets are significant, we we we have decided to to to build and and and a launch in our own business or SME deposit account. We think that will allow us give us access to, know, some pools of of of cheaper deposits as we as we look to move forward, and we should be launching our our maiden SME deposit account during this this quarter, the second quarter of this year.

40:22 One of the things that we have been very active in is the pursuit of inorganic product development opportunities to support growth. So I guess that's a smart way of saying m and a to accelerate their product development, you know, side of side of things. You know, particularly where it would accelerate our growth, give us access to new capabilities, or actually drive capital accretion. Whilst we've whilst we've courted an awful lot of of parties, we've not found the the perfect, you know, strategic fit, but we're con continuing to be opportunistic in our our pursuit of those inorganic opportunities. So I think just just looking at and and we'll we'll launch into into to q and a then. But just looking at the, you know, this final outlook for the for the year.

41:17 Look. We we we're you know, we've mentioned about the net interest margin. We're expecting, you know, that to be above that 6% target, you know, for, you know, certainly for the balance of this year and the medium in the medium term. We're expecting operational leverage to continue with a reduction in cost income ratio as we continue to scale the firm. You know, we we we definitely are not complacent in relation to credit risk. You've seen that we're very disciplined in the onboarding of of of of of dealers. And we do actually want to be really rather than, you know, totally focused as it may appear on growth in dealer numbers. We wanna make sure that we've got high quality scalable dealer relationships to support, you know, our growth moving moving forward.

42:06 You know, whilst we're absolutely delighted with the arrears performance in the first quarter and the, you know, the underlying, you know, cost of risk performances that we've we've talked about extensively through the the presentation. I think it's inevitable that we'll see some normalization in that, you know, through, you know, through this year as we continue to to scale the firm. And we are expecting to close the year, you know, with a with a loan book of about $6.50 to 700,000,000 in that in that that range. I think, you know, giving you, you know, some confident about our ability to, you know, to continue with the the pace of growth, we have got, know, sufficient capital to get us to a loan book north of 800,000,000. And when we get to 800,000,000, we think without tier one capital, we can grow at a steady roughly £100,000,000 a year, you know, beyond that and and and generate very healthy risk adjusted returns, you know, at that point.

43:08 We're a 100% committed to to being a multiproduct lending franchise. You've seen that the opportunity is there. You know, we're gonna continue to develop our our products and services, and we see, you know, that alongside, you know, scaling the the firm as the key ingredients, you know, towards achieving, you know, mid to high teen returns on on on capital over the over the medium term. So I guess just in in in in overall summary, and then we'll open it up to questions. Yeah. I'll just go through the the, you know, the ticks in the boxes as far as, you know, 2023 is is concerned. We've delivered at significant scale and and and and growth. We've we've improved returns, be that through net interest margin or the the cost cost income ratio improvements.

44:02 Portfolio quality is is very good as we enter 2024. And the the royal life, you know, situation, which we've covered, you know, extensively in our in our annual annual report that's published today, you know, that is fully provided. So we're not expecting any, you know, further impact off off the back of that, but we are diligently, you know, pursuing recovery of of of losses where we where we can. Talked about growth, new product development, whether that's in the core business, higher purchase, the adjacencies, and the capital. So a big, you know, big tick in the box there. I But think, ultimately, hopefully, you're taking away, you know, from this from this presentation that, you know, the culture in the firm is, you know, exceptionally good, whether that's providing the right outcomes, you know, for our customers, providing great service to them, leveraging technology whilst being intimate in the relationships.

45:10 You know, we're not caught up in the the FCA motor finance review, which I think is gonna be a significant distraction, you know, for a number of of of banks that operate in in the in in the in the space, you know, certainly the higher purchase space for sure. And I think that presents us with opportunity. I think also, you know, the fact that our employees think we're a great place to work. We're a three star, you know, best company, world class place to to work. So when you put, you know, all those, you know, ingredients, you know, together, You know, we think, you know, what we've done and where we're heading in DFCAPITAL is is amazing, and we're looking forward to the to the journey ahead. So just as I I mentioned, and then we'll open up for for q and a.

46:00 You know, we have published our annual report on accounts today. That has an awful lot of detail that supports this presentation. It is available on our investor website, www.dfcapital-investors.com. And you'll also be able to you know, we'll we'll be putting this this presentation, this video presentation on there as well for those of you that want to to have a have a recap. So I think that's it. I think we'll open Time for questions. Carl and Gavin, thank you very much indeed for the presentation. As Carl says, ladies and gentlemen, please do continue to submit your questions just using that Q and A tab situated in the top right hand corner of your screen. But while the team take a few moments to review those questions submitted today, I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q and A, can be accessed via your investor dashboard.

46:51 Carl Gavin, as you can see, we've received a number of questions throughout today's presentation. Thank you to all the investors for submitting those. Could I please just ask you to click on that Q and A tab? And where appropriate to do so, just read out the question and give your response, and I'll pick up from you at the end. Thank you. Great. So we we we have had a question in relation to to to to Royal Life. It it's it's one actually that we could probably spend, you know, certainly another, you know, half an hour talking around. But, you know, the question's, you know, really focused on what are the lessons learned, and we will provide a more comprehensive response actually to this in in in written form. But I suppose the summary point is lessons learned. I mean, there there have been a number.

47:37 You know, this is a client that's been working with the firm since 2000 and '18, A very complex set of businesses. I can't call it a group because it didn't have a group structure in place. The thing that knitted these businesses together was a was a common shareholder. I think it's I think it's fair to say the complexity the complexity of debt stack, the complexity of organization legal structure, the complexity around, you know, cash flows, and, I guess, you know, the the the the character at the at the at the top of the the firm are all things that we've, you know, reflected on, you know, since 2000 and and '22, actually, because we've not we've not put any new money out to this this firm since 2022.

48:23 And you can see in the in the numbers that, you know, it's a situation that's built over over over time. But, you know, there there have been, you know, significant learnings that have been reflected in our credit policy. You know, the board who have have followed this, you know, right through its journey have, you know, have, you know, certainly, you know, seen, you know, the you know, how how how we've managed this and how we can, you know, for sure, you know, make sure that, you know, this doesn't occur again. Pleased to say that we don't have any other similar situations in our our portfolio, you know, of this of this nature. I think it'd be wrong just for for, you know, people to think that because it was large, it was it was the problem.

49:09 You know, I think if it were even if it had been a a, you know, a smaller land, the the complexity here was something that, you know, has driven the the the the loss in itself. As I say, we'll we'll provide a a more detailed response, and it is comprehensively covered in the in the in the annual in the annual report. Got a question on on on on capital. We may have we may have answered, you know, this. I mean, there's two elements to it. You know, how do we feel about, you know, retail investors and, you know, what, you know, do do we feel that, you know, a lack of access to equity capital is gonna is gonna hold us hold us back and should we be, you know, considering, you know, strategic strategic review if equity is not available. Well, look. I think, you know, I'll deal with the the the latter part of the the question first.

50:05 You know, we've just laid out that we've got, you know, sufficient runway in our capital stack to get us to to 800,800,000,000. We think growing at about a 100,000,000 a year is sensible from a risk management, you know, perspective. We wanna be very, you know, careful and considered with with with with with the growth. So, you know, we're not seeing any immediate requirements, you know, to, you know, to to to need to raise capital support to support growth. And, you when we when we get to 800,000,000, you know, profitability is is such that we can continue to grow at, you know, a 100,000,000 a year. You know, it it it's no doubt that, you know, the the state of the equity markets at the moment, you know, in the driving, you know, some of that could be grow at a faster pace if if if equity capital was was available. Yeah. We we we probably we probably could, but we don't need to, you know, raise capital to support support support growth.

51:07 And as far as retail investors are, you know, concerned, I mean, we are you know, our register is is largely dominated by institutional institutional investors. We do think, you know, diversifying over time and and having more retail investors is is is important, and we'd we'd want to, you know, to make sure if we did go down, you know, any any other routes of of raising capital that we were able to pursue that diversification strategy from a share register perspective. I think yeah. I don't Gavin, I don't know if you wanna I mean, how should I deal with the other investor? We've got some more investor questions, investor relations. Why new broker appointed, and what are relations like with institutional investors?

51:57 I mean, I'll I'll I'll let Gavin speak as well to this, but, you know, I think we've got, you know, really strong relationships with our institutional investors. They've been very supportive of of our journey and the results that, you know, we've we've achieved. You know, that that being said, it's a tough place being a full manager right now. And, you know, there's there's no doubt that, you know, whilst, you know, we have got, you know, a a supportive register, you know, there are a number of funds that, you know, have had outflows. You know, it's very well well reported, and that means they have to adjust their position not only, you know, with, you know, DFCH capital shares, but also across their their their portfolios. I think that presents opportunity to other investors, whether it's a retail or or institutional.

52:45 But I would say, you know, very good, strong, supportive institutional investors. Why why the change in broker? Well, we we've we've not appointed a new broker. We've just actually, you know, focused on one. We've had a, you know, joint broker arrangement between Investec and and and Liberum certainly over the over the the the last year. And I think, you know, we've had a, you know, great journey with Investec. But as we're looking forward over the next few years, we think Liberum will be most appropriate to support, you know, our needs and those of, you know, the the investor community that they they interface they interface with. Just did on the institutional investor relationship. Just, I guess, I would reiterate Carl's point.

53:35 I mean, most of the institutional investors have been around for some time now. I think they understand our business very well. We've we've done many presentations to them. And I think the the key key thing for us that that investors like is we've delivered on what we said we're going to deliver. So I think we've got very good relationships. We obviously, we're looking to expand the investor base as much as we can, but the existing institutional investors, I think we've got very good relationships with. And as Carl said, the fundamental issue you have is is is around liquidity in the market, not it's not DFCH Capital specific. Yeah. Got one on HP experience. What experience the company have with HP lending? Risk profile is different.

54:22 I won't reveal all of the the the parameters of our risk risk policy, but in I think, yeah, as a domestic community, I mean, you should, you know, take comfort that, you know, most of the senior management team here have have experience of, you know, lending across an awful lot of lending products and HP being a, you know, a key a key feature of that. Both Gavin and I have spent, you know, extensive times operating with with HP HP in our lending portfolio. And, you know, where we where we have got gaps, you know, as part of the, you know, the the of the build to make sure that we're recruiting the, you know, the right, you know, operational, I suppose, expertise where we've got any deficiencies. So, you know, rest assured, you know, we're not gonna be rushing this thing out, you know, and and we have to jump through a number of hoops with the regulator as well to make sure that we're doing things in the right way in a in a confident way. So, yeah, this is this is part of our strategy to divide diversify our product set, and we've made sure that there is capacity both in the the senior and and and the middle management both from an experience perspective, but also a capability perspective as as as as well.

55:42 What else have we got here? Go on. Have you got any how and when does management expect the discount to tangible net asset net net assets to close? Well, I'm I'm I'm really pleased that, you know, somebody's somebody's pointed that one out, you know, because we are you know, tangible net assets is at, you know, 56 p and, you know, share price is materially below, you know, that. I think when you, you know, you draw, you know, comparisons against, you know, the bank stocks, the ratios look, you know, very, very similar. I mean, clearly, you know, we are, you know, disappointed with where the market's at, but, you know, we consistently get told by our investor base that, you know, this is is not something that is, you know, a DFCH capital point per se. You know, this is, you know, more structural point around, you know, small cap per equity. So I'm not sure beyond actually doing what we're continuing to do, which is delivering the results, you know, delivering the growth, delivering the increases in profitability as we have done in 2023, but also looking to continue to diversify the register as we as we are. I think that's that's probably as much as we can control, you know, the the share price. I mean, we've gotta be focused on controlling what we, you know, controllables, I suppose.

57:06 I guess on that on that call, if we if we continue to hit our numbers and and gradually expect grow with the cost income ratio coming down, you'd you'd expect your return on equity to get into double digits. I mean, we talked about normalized this year. It would've would've done that '23, but I think if you've got an ROE in in double digits, that that should significantly help that as well. Got a a question. What role do you see technology play in expanding your offering and increasing increasing margins? Well, I think, you know, as we look to continue to scale the, you know, the firm, you are gonna see that the jaws widen on the cost to income ratio. We think, you know, cost income ratio will probably land somewhere in the forties, probably at the at the lower end.

57:52 But, again, you know, HP is a great example that we're we're looking to leverage the best technology, the best capabilities, deliver automation up, you know, upfront. So it is inherent as it has been in both our deposit raising and our and our core inventory finance products, you know, from the outset, you know, that we can sufficiently scale the, you know, the the the the lending and deliver great great risk adjusted returns from the the outset whilst providing the intimacy of of relationship management that, you know, our dealers and our customers will will expect and probably aren't getting elsewhere in the in in the market right now. So I think that is everything.

58:39 Yeah. Fantastic. Carl, Gavin, of course, any further questions that do come through, you'll have the ability to review those, and we can publish questions on the investment company platform, and they'll be available on the dashboard. Perhaps just before redirecting investors to provide their feedback, which I know is particularly important to you and the company, Carl, I could just ask you for a few closing comments, please. No. It's been it's been a a delight to be able to, you know, to present, you know, to to investors today, you know, whether those are already invested or those potential investors. I mean, I, you know, I really enjoy, you know, talking about, you know, the the firm's performance and what we've done and what, you know, the I'm very proud of what we've achieved as a, you know, as a team here at DFCH Capital. But just like to say, you know, thank you to everybody, and thank you, Paul, for hosting this.

59:26 Thank you very much indeed. Carl, Gavin, thanks for updating investors today. Can I please ask investors not to close the sessions? We automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, and that is greatly valued by the company. On behalf of the management team of DISTRIBUTION FINANCE CAPITAL HOLDINGS PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.