Announcement PDF 1H24 Investor Presentation David Stevens CEO and Managing Director Simon Ward CFO All values in $AUD unless stated otherwise HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 1 1 Important notice and disclaimer The material in this presentation is provided for general information purposes only and is current as at the date of this presentation. It is not a prospectus or product disclosure statement, financial product or investment advice or a recommendation or offer to acquire Harmoney shares or other securities. It is not intended to be relied upon as advice to investors and does not take into account the investment objectives, financial situation or needs of any particular investor. Investors should assess their own financial circumstances and seek professional legal, tax, business and/or financial advice before making any investment decision. The information in this presentation does not purport to be complete. It should be read in conjunction with Harmoney’s other periodic and continuous disclosure announcements lodged with the Australian Securities Exchange, which are available at www.asx.com.au. This presentation may contain forward looking statements including statements regarding our intent, belief or current expectations with respect to Harmoney Group’s business and operations, market conditions, results of operations and financial condition, specific provisions and risk management practices. Such forward looking statements involve known and unknown risks, uncertainties, assumptions and other important factors, many of which are beyond the control of Harmoney Group and which may cause actual results, performance or achievements to differ materially from those expressed or implied by such statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date thereof. Past performance is not indicative of future performance. HARMONEY ©2024 No representation or warranty, express or implied, is made as to the fairness, completeness, accuracy, adequacy or reliability of information, opinions or conclusions in this presentation, including the financial information. To the maximum extent permitted by law, none of Harmoney, or its related bodies corporate, or their respective directors, officers, employees, contractors or agents, accept liability or responsibility for any loss or damage resulting from the use or reliance on this presentation or its contents or otherwise arising in connection with it by any person, including, without limitation, any liability from fault or negligence. The financial information in this presentation has not been audited. This presentation contains certain non-IFRS measures that Harmoney believes are relevant and appropriate to understanding its business. Investors should refer to the FY24 Half Year Report for further details. All values are expressed in Australian currency unless otherwise stated. All intellectual property rights in this presentation are owned by Harmoney. 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 2 Join our Investor Hub: harmoney.com.au/invest ● Investor Hub is the best way to stay informed and connected with all things HMY.ASX ● See videos accompanying our ASX announcements, interviews, research reports, and webinars. ● Engage directly with Harmoney’s leadership team. Comment and ask questions. ● Join our mailing list to receive the latest news and updates from Harmoney by email. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 3 Contents 1. 2. 3. 4. Delivering results 1H24 Overview of business model Financial results Strategy and outlook HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 4 Delivering results 1H24 HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 5 1H24 key achievements ACHIEVED Cash NPAT Profitable 4th consecutive half of Cash NPAT profitability ACHIEVED New platform launched Stellare® 2.0 developed in-house, unlocks 25x faster release cadence and incorporates state of the art cloud native core banking system (used by Global Tier 1 banks). HARMONEY ©2024 ACHIEVED GROWTH Loan book growth Loan book continued to grow profitably despite higher interest rate environment ACHIEVED Peer-to-peer closed Remaining retail peer-to-peer lenders repaid, enabling the retirement of legacy peer-to-peer infrastructure. 1H24 INVESTOR PRESENTATION $200m NZ ABS Successfully completed New Zealand’s first ever unsecured personal loan backed ABS 1 MARKET LEADING Cost to income % Automation drove continued efficiency gains with cost to income down to 24%. Further gains from new platform now being realised. 23 FEBRUARY 2024 GROWTH Warehouse capacity extended New $140m warehouse added and three existing facilities extended for two years each, creating growth capacity of ~$250m GROWTH Corporate debt upsized Refinanced corporate debt with limit increased 50% providing junior note capacity for up to ~$200m additional loan book growth. 6 Profitability continues through rising interest rate cycle 1H24 2H23 1H23 Loan book $756m $744m $701m Revenue $60.4m $57.0m $50.1m Net Interest Margin 9.2% 9.4% 9.8% Credit losses 4.2% 4.0% 3.1% 90+ day arrears 65bps 58bps 46bps Cost to income ratio 24% 28% 29% Cash NPAT $0.5m $2.4m $2.3m HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 7 Key points you should know about Harmoney Financial Customer value Risk management - Cash NPAT profitable. - Cost to income ratio of 24%. - Unrestricted cash of $21m. - Undrawn warehouse capacity of ~$250m. Customers rate us! Google & Shopper Approved 4.8/5 overall rating from >55,000 reviews. Quality portfolio. ~40% Homeowners. 4.2% losses. 0.65% 90+ day arrears. Attractive 9.2% net interest margin. Ability to easily adjust rates due to consumer-direct model. Existing customers return for future loans creating annuity stream - at minimal Customer Acquisition Cost (CAC). Diversified funding from 3 of the “Big 4” Australian banks + securitisation programs in AU and NZ. Target of Cash Return on Equity of 20% during FY25. Trans-Tasman appeal with Australia now 52% of loan book. 89% of borrowings hedged to mitigate impact of interest rate movements. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 8 Overview of business model HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 9 Customer value proposition Delivering faster, fairer loans through our smart technology Use of funds • Personalised fixed rates based on customer credit characteristics. • Loans up to $70,000 with terms of 3, 5 and 7 years. Renovation Loans Debt Consolidation Car Loans Education Loans Travel Loans Wedding Loans • Average new loan size $20,000. • Dispersal to customers in minutes. • One upfront loan establishment fee. No other fees. • Loans fully compliant with consumer lending codes in AU/NZ. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 10 Data + AI + Automation Every month, over 10,000 new customer applications help us improve our AI and automation 2021 & 2023 High volumes of up-to-the-moment consumer financial data – combined with our 9+ years of historic data – supercharges training of our AI models, helping us optimise for: ● Highly efficient marketing with Google producing high volumes of desirable customers at low cost. ● Risk Adjusted Income of 5% through more accurate assessment of customers. Quality, first-party, consumer-direct data (e.g. bank statements, credit file, ID) to fuel our AI models has been a core feature of Harmoney since our inception. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 11 The Harmoney business model maximises customer lifetime value Right customer Great experience Massive scale • Build reliable target customer model through AI and high quality first-party consumer data. • First-class customer experience creates annuity revenue as customers return with minimal customer acquisition cost (CAC). • Exploit tech to build scale, speed, and automation to decouple costs from growth - Harmoney has a market leading 24% cost to income ratio which continues to reduce. • Partner with large-scale platforms (e.g. Google, Microsoft Ads, Facebook) to • Highly automated simple and implement cost-effective customer streamlined 100% online process. acquisition channels. • Use direct relationship and customer segment fit to devise and offer new products and services. 4.8/5 overall rating >55,000 reviews HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 12 Financial results HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 13 Key performance indicators 1H24 1H23 Change Loan book $756m $701m 8% Revenue $60.4m $50.1m 21% Net interest income % 9.2% 9.8% (60bps) Risk adjusted income % 5.0% 6.7% (170bps) Acquisition costs $5.4m $6.5m (17%) Cost to income ratio 24% 29% (500bps) Statutory NPAT $(0.6m) $(3.4m) 82% Cash NPAT $0.5m $2.3m (78%) HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 14 Loan book and revenue growth continue Revenue growth 21% on pcp Group revenue growth ● Group loan book $756m, up 8% on pcp, with growth in both countries, and Australia now 52% of total loan portfolio. CAGR 37% ● Higher market interest rates constraining borrower appetite and capacity. ● Revenue grew by $10m to $60m, up 21% on pcp. ● Average interest rate 16.1%, up from 15.4% pcp. Will continue building as earlier, lower rate loans repay. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 15 Acquisition costs reduce 17% Flexible consumer-direct model ● Responsive to lower consumer borrowing appetite and capacity from rising market interest rates. ● Acquisition cost to income ratio falls to 9% (13% pcp). ● Small increase in CAC% to originations due to lower existing customer (near zero cost) originations. Historic trend expected to return with origination growth. ● Direct relationship means existing customers return at near zero CAC next time they want help to start something new. HARMONEY ©2024 1H24 INVESTOR PRESENTATION CAC % to originations 23 FEBRUARY 2024 16 Deep data and AI deliver prime loan book Portfolio Risk Adjusted Income (after losses) 5% Static loss rate ● ● Lower originations increased portfolio “seasoning” to 13 months (1H23: 9 months) placing higher proportion in “peak hazard” loss period. Improved Australian credit scorecard implemented over 18 months ago exhibiting lower loss rate, setting expectation for lower portfolio loss. ● Risk adjusted income at 5% remains enviable within the consumer lending market. ● Loan portfolio comprised of 74% employed in either professional, office or trades roles and 87% aged 30+. Earlier AU scorecard Rest of portfolio Composition 31 Dec 2023 Low 90+ day arrears 1.31% 0.65% *Source: Equifax Australian Consumer Credit Demand Index 2023 Q4, Personal Loan series. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 17 Diversified funding and hedging program lower risk Funding from 3 of the “Big 4” banks ● Poised for portfolio growth with: ○ Unused warehouse capacity: ~$250m ○ Unused corporate debt capacity: $7.5m ○ Unrestricted cash $20.7m ● Capital efficient with borrowings 95% of loan book (incl. restricted cash). ● Average funding rate 7.2%, +150bps on pcp. Hedging coverage 89%. ● NIM 9.2%, within target range of 9%-10%. HARMONEY ©2024 1H24 INVESTOR PRESENTATION Average funding rate Interest rate % 23 FEBRUARY 2024 Hedging coverage % 18 Stellare® automation powers scalability Scalability drives profitability ● Cost to income ratio improves further to 24%. Cost to income ratio at 24% Cost to income % Loan book $ ● Highly automated Stellare® platform enables loan book to scale faster than operating expenses. ● Stellare®’s scalability underpins delivery of: ● Fourth consecutive Cash NPAT profit, maintained during interest rate tightening cycle; and ● Target 20% Cash Return on Equity run rate in FY25. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 19 Strategy and outlook HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 20 Continue AU expansion, a large addressable market AU replicating in 9x market Huge potential for Harmoney in $145bn market1 ● Stable market and an enormous growth opportunity for Harmoney as consumers gravitate online, with the vast majority of personal lending still provided by banks and traditional lenders. ● Harmoney’s Australian new customer lending in FY23 was $177m. Australia is mirroring New Zealand performance and is on track for these new customers to add ~140% in repeat lending over the next six years, at minimal CAC. ▬ AU Market 1 ▬ Harmoney & listed peers2 % ■ NZ ■ AU from IPO HARMONEY ©2024 1. Source RBA, ‘D2 Lending And Credit Aggregates - Credit; Other personal’, which covers all personal credit (non-business, non-housing/mortgage), incl. e.g. personal loans, car loans and credit cards. 2. Listed personal lending peers comprise Wisr, MoneyMe & Plenti with loan balances sourced from their latest market trading updates. 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 21 Stellare® 2.0 Core banking + Automation = Market opportunity Core banking - Cloud native 100% Process automation Market Opportunity Implemented a Tier 1 cloud native core banking suite, used by Global Banks. Automated platform enabling scale, speed and a superior customer experience, making the complex feel simple. Core banking platform plus process automation reduces implementation time, complexity and risk - growing market opportunities. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 22 Stellare® 2.0 improved customer experience drives conversion Australian new customer launch complete Customer growth After a 12 month build and launch by our internal team, Stellare® 2.0 is starting to deliver customer value in the Australian market: Stellare® 2.0 focus now moves to launching improved features and products to convert more prime accounts to new customers. New customers 100% Automation Instant Credit Decision 20x Non-prime accounts Faster Onboarding Application to Settlement New accounts Prospecting HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 Prime accounts 23 Stellare® 2.0 unlocks an expanded product offering Stellare® 2.0 represents a significant modernisation of our technology stack, and allows us to innovate on new products faster than ever before, while delivering further efficiency and scalability. 25x 12% Technology cost saving run rate on 1H24 from infrastructure and headcount efficiencies Code releases per week compared to Stellare® 1.0 Unsecured personal loan HARMONEY ©2024 Secured car loan 1H24 INVESTOR PRESENTATION New potential financial products (e.g. line of credit, credit cards, home loans) 23 FEBRUARY 2024 24 Outlook - Targeting 20% Cash RoE Interest rates & asset quality Growth outlook Ability to pass through targeted interest rate increases to maintain 9-10% net interest margin. Harmoney’s consumer-direct model is taking market share from banks in $145bn Australian market. Funding costs managed with a diversified funding panel of three Big 4 banks and three mezzanine funders with 89% of borrowings hedged. FY24/FY25 outlook Working with Google to implement leading AI technology to further enhance customer experience, lowering CAC and further reducing cost to income ratio. FY24 Outlook ● Continued loan book growth ● Net interest margin of 9% ● Positive Cash NPAT FY25 Outlook ● High quality diversified loan book 74% employed in either professional, office or trades roles. Low arrears rate. HARMONEY ©2024 ® Stellare 2.0 rollout across entire business (AU & NZ) set to increase revenue, lower costs and drive higher profitability. 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 Targeting a 20% Cash Return on Equity run rate in FY25 (Cash NPAT/Equity). 25 Outlook continued: 20% Cash RoE run rate in FY25 Pathways to 20% Cash RoE Average loan book required at RAI% ● Risk adjusted income 6.0% 5.5% 5.0% Required average loan book ($m) ● ● ● At the current equity of ~$50m, Cash NPAT of $10m delivers 20% Cash RoE. 20% Cash RoE run rate in FY25 is in reach through loan book and/or risk adjusted income1 growth. Table shows historically achieved risk adjusted income % and loan book growth pathways to reaching 20% Cash RoE.2 783 855 940 Required growth from current loan book 4% 13% 24% Risk adjusted income ($m) 47 47 47 Customer acquisition expenses ($m) (11) (11) (11) Cash operating expenses ($m) (27) (27) (27) Cash NPAT 9 9 9 Average equity 45 45 45 Cash RoE 20% 20% 20% Acquisition and operating expenses include a 5% inflation buffer, although historically stable or falling due to efficiency gains.3 1. Risk adjusted income (RAI) is income after funding costs and incurred credit losses. 2. Risk adjusted income %: 1H24: 5%, FY23: 6%. Loan book: Two year cumulative annual growth rate (CAGR) 33%. 3. Customer acquisition expenses reduced in each of 1H24 and FY23. Cash operating expenses have remained flat in 1H24 on FY23. HARMONEY ©2024 1H24 INVESTOR PRESENTATION Disclaimer: This is an indicative model of Harmoney's business. It is not a forecast but instead represents an illustrative model extrapolating costs and historically achieved risk adjusted income levels to various average loan book scenarios and may vary due to changes in a range of underlying assumptions or economic factors. 23 FEBRUARY 2024 26 Appendix HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 23FEBRUARY FEBRUARY2024 2024 27 $756m Loan Book Loan purpose HARMONEY ©2024 Employment status Region 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 28 Profit and loss 6 Months ended 6 Months ended 6 Months ended 31 December 2023 30 June 2023 31 December 2022 $'000 $'000 $'000 60,323 56,013 49,526 Interest income Other income 70 985 549 Total income 60,393 56,998 50,075 Interest expense 26,026 21,867 17,957 Incurred credit losses 15,643 14,525 10,027 Risk adjusted income 18,724 20,606 22,091 Customer acquisition expenses 5,414 5,777 6,539 Net operating income 13,310 14,829 15,552 Personnel expenses 5,297 5,481 5,512 Customer servicing expenses 3,208 3,090 3,084 Technology expenses 2,670 2,382 2,434 General and administrative expenses 1,629 1,491 2,179 Cash operating expenses 12,804 12,444 13,209 506 2,385 2,343 Movement in expected credit loss provision 533 (3,240) (4,587) Share based payment expenses (114) (1,937) - (1,522) (1,406) (1,139) (597) (4,198) (3,383) Income tax (expense) / benefit - Cash NPAT ¹ - Non-cash adjustments Depreciation and amortisation expenses Statutory loss after income tax 1 Cash NPAT provides a more accurate representation of the underlying profitability of the business, adjusting for the impact of non-cash items, most significantly the movement in expected credit loss provision, which is a non-cash provision for credit losses that may occur in future financial years from the existing loan book. With GAAP requiring recognition of an expected credit loss provision expense immediately on origination of a new loan, without any indication of loan impairment and significantly ahead of recognition of the interest income priced to compensate for the expected level of credit loss risk, the expected credit loss provision expense will suppress statutory net profit during periods of loan book growth, all other things being equal. HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 29 Key operating and financial metrics 6 Months ended 6 Months ended 6 Months ended 31 December 2023 30 June 2023 31 December 2022 Total originations ($'000) 165,932 185,698 240,536 New customer originations ($'000) 93,379 107,425 146,170 Existing customer originations ($'000) 72,553 78,273 94,366 Loan book (period end) ($'000) 756,329 744,000 701,035 Loan book (average) ($'000) Loan book value and growth 748,939 722,823 643,371 Average interest rate (%) 16.1% 15.5% 15.4% Average funding rate (%) 7.2% 6.3% 5.7% Net interest income (%) 9.2% 9.4% 9.8% Risk adjusted income (%) 5.0% 5.4% 6.7% 15,643 14,525 10,027 Incurred credit loss to average gross loans (%) 4.2% 4.0% 3.1% Provision rate (%) 4.8% 4.9% 4.8% Loan book quality Incurred credit loss ($'000) Productivity metrics Customer acquisition to origination ratio 3.3% 3.1% 2.7% Costs to income ratio 23.9% 27.7% 28.7% HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 30 Cash Flow 6 Months ended 6 Months ended 6 Months ended 31 December 2023 30 June 2023 31 December 2022 $'000 $'000 $'000 Cash flows from operating activities Interest received 59,220 54,427 48,131 Interest paid (27,527) (21,375) (17,359) Fee income rebated (1,076) (887) (797) Payments to suppliers and employees (21,169) (17,586) (20,617) 9,448 14,579 9,358 Net advances to customers (25,302) (62,258) (119,376) Payments for software intangibles and equipment (2,330) (2,602) (2,417) Net cash used in investing activities (27,632) (64,860) (121,793) Net proceeds from finance receivables borrowings 13,329 38,402 105,586 Net proceeds from debt financing 2,500 - 5,000 Principal element of lease payments (250) (220) (254) 15,579 38,182 110,332 Net cash generated by operating activities Cash flows from investing activities Cash flows from financing activities Net cash generated by financing activities Cash and cash equivalents at the beginning of the period 43,454 55,886 56,805 Net decrease in cash and cash equivalents (2,605) (12,099) (2,103) 133 (333) 1,184 40,982 43,454 55,886 Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the period 31 HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 Balance Sheet 31 December 2023 30 June 2023 $'000 $'000 31 December 2022 $'000 Cash and cash equivalents 40,982 43,454 55,886 Trade and other assets 2,671 1,968 2,495 Finance receivables 758,861 745,790 701,712 Expected credit loss provision (36,500) (36,919) (33,840) Property and equipment 3,372 3,717 148 Intangible assets 12,831 11,568 10,354 Deferred tax assets 11,740 8,467 7,868 Derivative financial instruments Total assets Payables and accruals Borrowings Provisions - 7,677 9,740 793,957 785,722 754,363 4,792 6,434 6,918 737,276 720,503 686,091 - 1,524 3,667 Lease liability 3,280 3,506 - Derivative financial instruments 3,091 - - Total liabilities 748,439 731,967 696,676 Net assets 45,518 53,755 57,687 Share capital 123,985 124,561 123,985 Foreign currency translation reserve (80) (367) 1 Share based payment reserve 2,961 3,820 1,688 Cash flow hedge reserve (2,228) 5,416 6,914 Accumulated losses (79,696) (79,099) (74,901) Equity 45,518 53,755 57,687 HARMONEY ©2024 1H24 INVESTOR PRESENTATION 23 FEBRUARY 2024 32