Cash Converters International Limited (CCV.AX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Jason Kulas, and I'm the Chairman of Cash Converters International Limited. It gives me great pleasure to welcome you to the 2021 Annual General Meeting of the company. I'm advised that the necessary quorum of 5 shareholders is present and I declare the Annual General Meeting of the company open. Before I commence with the formal parts of the meeting, I will outline some procedural matters for the meeting. Considering the ongoing COVID-19 pandemic and restrictions on travel and physical gatherings, we felt it safest for everyone to host this AGM virtually. If you experience any difficulties during the meeting, we have published a virtual meeting guide on the ASX and our website, which includes how to seek assistance. A video explaining the virtual voting process played prior to the meeting, and I will explain the process again when we get to the formal items of business. I declare the poll open now, and shareholders can vote on all items of business at any time until the poll closes at the end of the meeting. The Board recommends that shareholders vote in favor of all items of business. If you are eligible to vote, a new polling icon will now appear on your screen. Shareholders can also submit questions online now any time up until the close of the meeting. Questions will be addressed at the relevant item of business. So please state the item number at the beginning of your question. Finally, in the event of any technical difficulties, we ask for your patience while we work to address the issue as quickly as we can. If a technical issue results in my being unable to continue sharing today's meeting. Our Executive Deputy Chairman will act in my place until the technical issues are resolved. I would now like to introduce you to my fellow directors, the company secretary and auditors joining us today. Joining us today is Sam Budiselik, Managing Director and Chief Executive Officer; Peter Cumins, Executive Deputy Chairman; Lachlan Given, Director; Julie Elliott, Director; Robert Hines, Director; Henry Scheiner, Director; Leslie Crockett, Company Secretary. I also welcome the company's auditors, Mrs. Liam Karanfields; and Mr. Nicolas Gordon from Deloitte who have joined the meeting. I will now provide some brief commentary on the 2021 financial year before we proceed to the formal business of the meeting. Following the formal close of the meeting, I will introduce the company's Managing Director and Chief Executive Officer, to provide his address. At last year's AGM, I highlighted the importance of the customer within Cash Converters' culture and how this would enable the company to adapt so readily to the challenges it faced. The results of FY 2021 reinforced this view. And we continue to challenge ourselves to deliver better products and services to continue this journey. On the 18th of December 2020, the Board had the pleasure of appointing Sam Budiselik, as Managing Director following his elevation to Chief Executive Officer in February of that same year. This occurred during a challenging period and the quality of any leader is measured by how they perform in these circumstances. The impact this team have had so rapidly adds to our confidence in the direction of the company. At the conclusion of the AGM, Sam will present further on this impact in the context of the past financial year and provide an update on early FY 2022. Shareholders should be encouraged by the company's trajectory. This cautious optimism is shared by the Board as the world continues to adjust to the pandemic. Underpinning this optimism is the simple but effective strategy developed by your management team. Although still in its early stages of execution, significant progress has been made towards each strategic pillar of product development, network expansion and operational excellence. These pillars combined to allow cash converters to consolidate optimize and grow its position at the forefront of subprime lending and secondhand retail. On the first of July 2021, we welcomed Henry Scheiner to the Board as an independent non-Executive Director. Henry's appointment complements the Board's existing capabilities and reflects Cash Converters' strategic direction to expand its store network and leverage its online assets. On the same day, we announced the appointment of Leslie Crockett as Company Secretary in addition to his continuing role as Chief Financial Officer. We welcome Henry to his first AGM for the company and welcome back Leslie. The payment of a fully franked $0.01 final dividend for FY 2021 and was supported by the Board based on the financial performance of the company during that period. The continued payment of the dividend will be reviewed at each half in the context of the company's current and forecast financial performance. We will provide a dividend update in our H1 FY 2022 financial results release scheduled for late February 2022. I would like to thank my fellow Board members, company management and employees for their continued resilience amidst a prolonged period of challenge and uncertainty within the broader economy. Finally, I acknowledge and thank our shareholders for their continued support and look forward to the year ahead. Before proceeding to the formal business of the meeting, as described in the Notice of Meeting, I will outline the process for voting and ask for questions. Voting on all resolutions will be conducted by way of a poll. The proxy votes submitted for each resolution will be shown on your screen at the relevant time. If you are eligible to vote, a polling icon will have appeared on your screen. Selecting this icon will bring up a list of resolutions and present you with voting options. Select one of the options to cast your vote. There is no need to click or submit or enter button as the vote is automatically recorded. You can change your vote up until the time that the poll closes at the end of the meeting. Lisa Ahwan from Computershare has agreed to be returning officer today. And following confirmation by Computershare, final results will be announced to the ASX later today. This release will also be available on the company's website. You can submit questions at any time, and you do not need to wait until the relevant item of business. We encourage you to submit your questions as soon as possible so that they can be reviewed by our moderators. We will seek to address your questions during the relevant item of business. If we are unable to provide an answer during the meeting, we will endeavor to provide an answer once the meeting is closed. You will receive a confirmation when your question has been sent. In the interest of orderly discussion, shareholders should limit themselves to submitting 1 question at a time to ensure that each question is as succinct as possible. And I'm sure your questions are relevant to the business of the meeting. Questions sent via the online meeting platform may be moderated to avoid repetition. And if questions are particularly lengthy, we may need to summarize them in the interest of time. The purpose of today's meeting is to present the accounts of the company, together with the Director's report for the year ended the 30th of June 2021 and to deal with the ordinary business and special business set out in the notice of meeting. Shareholders will be asked to vote on the formal resolutions for the reelection of 1 director, the election of 2 directors who have joined the Board since the last AGM, the adoption of the remuneration report, the approval of the equity incentive plan rules, approval of grant of performance rights to the Managing Director and Chief Executive Officer, and the adoption of the changes to the company's constitution. The first item of business deals with the financial statements and reports. These financial statements and reports are for the calendar financial year ended 30th of June 2021 and are taken as laid before the meeting. Please note, there is no resolution for this item of business. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. As I've advised, Leanne Karamfiles representing the company's auditors, Deloitte, is in attendance to answer any questions shareholders may wish to direct to her in relation to the conduct of their audit or in relation to the preparation of the financial statements.

Jason, I have 1 question from a shareholder, for Deloitte, for Leanne. The question for the auditor. It appears from the substantial increase in the audit fee from the long run average, up 60% in 2 years. But the order process must have taken significantly longer to complete this year. What was the key driver of the additional audit procedures and thus, the audit partner in the underlying business as being significantly riskier now as the key audit matters appear materially unchanged can I draw the question please?

Yes. Thank you for your question. The audit -- the risk profile of the audit overall has remained consistent this year compared to last year. The audit fee is a function of the mix of expertise that we use on the audit as well as the hours on the audit. The key areas that we focus during the audit are as we have laid out in our audit opinion. And the necessary expertise that we use for those key areas, specifically around the ECL or the provision for the the against the receivables does require expert partner time. And these factors, along with general increases I suppose, in the cost of delivering an audit is the key underlying drivers of the audit fee.

Thank you, Leanne. Sorry, I have 1 further question here in relation to Item 1 in the 2020 accounts, commissions were [ $13 million ]. This year, Note 1A outlines a change in the presentation of the accounts that is supposed to provide more relevant information to stakeholders. In this note, the prior year gross FS interest revenue is adjusted by the current year's expense. There is no further breakdown of the commissions in the notes. This appears to remove the accounts from the accounts material year-on-year $4 million increase in commissions. Why was it presented this way? I can direct that question to our Chief Financial Officer, Leslie Crockett to answer, please.

Thank you very much for the question. I will guide you, if I may, to Page 50 of the notes of the annual report or the notes of the financial statements. In Note 1A, we have highlighted the change in presentation and the reason for that change with respect to the change in presentation of commissions. We've outlined in that note that the commissions expense has been included in interest revenue and prepaid commissions have been included in the note receivables and highlighted the reclassification of the comparative. We have also highlighted there was no impact on net assets or net profit. This is a reclassification within the notes. The quantums of that reclassification or highlighted in that note. And I think beyond that, if there's anything further that's unclear on that, we'd be happy to deal with that offline.

Thank you, Leslie. No further questions, Chair.

Okay. Thank you. There being no more questions, we will now move on to the second item of business and the formal resolutions. I confirm that I'm holding open proxies in my capacity as Chair of the meeting and intend to vote all of those open proxies in favor of each formal resolution. The first resolution is ordinary business and relates to the reelection of Mr. Peter Cumins as a Director. It reads that Mr. Peter Cumins being a Director of the company, who retires by rotation under Clause 52.1 of the company's constitution and being eligible, is reelected as a Director of the company. Mr. Cumins biography and experience is set out in the explanatory memorandum accompanying the notice of meeting. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. And please refer to the screen for the results of the proxy voting on the formal resolution. There being no questions, I put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item.

Sorry, Jason, there is a question that has just come in if I could present that, please. Item 2, as Mr. Cumins is the longest-serving board member and seeking reelection today. Can he please make reference to the capital raise over the last decade and resulting increase in shares on issue from 240 million to 640 million shares prior to day's option grants? Does Mr. Cumins believe the capital has been allocated appropriately and to shareholders or can shareholders expect more of the same moving forward? Jason, can I direct that question to Peter to answer that one or?

Yes.

That's quite a question regarding some very deep recollections. But I would say, yes, all of the capital raised over that period of time was raised for specific acquisitions to enhance the earnings and the the size of the business. The issue in regards to going forward, the company is now well capitalized, and we don't see any need to be raising further capital, expanding that share base numbers in the foreseeable future. And so part of that capital raising, if you look back over the records was also to raise money to safeguard the company's position during a very difficult period when we were fighting a number of class actions, which could have put the company in a very difficult position. Have we not had access to capital. So my view is that all of the capital raisings that were for specific acquisitions have been successful. One of them, as I said, was to protect ourselves against a class action, which didn't then require the payment of over $45 million. And have we not raised capital at that time, we wouldn't have been in a position to manage that. And we're now well capitalized to continue on this growth strategy as outlined by the management team. So I hope that answers that question.

Thank you, Peter. Jason, as a follow-up question in relation to queries around buybacks and referenced to earlier this month, is [indiscernible] accumulating 13 million shares, taking advantage of the current discount. And instead of acquiring the shares of Cash Converters, the Board are proceeded with a number of different investment initiatives, including purchasing stores? And if I potentially was significantly lower returns as the proposition than a share buyback. If I could just briefly touch on that on behalf of the Board. As I will outline in my address, we've established a Board investment subcommittee to review all possible capital investment and allocation options that are presented to us. And we do continue to be weighing financial and operational considerations against a fairly robust investment framework with return hurdles anchored around our weighted average cost of capital of 10.6%. So as we look at a number of opportunities to grow the company and further invest in the business and consider the returns to shareholders that we've commenced. That's all done under that investment committee framework. So I hope that answers that question, too. Thank you, Jason, for the questions.

Thank you, Sam. Okay. So there'll be no more questions. I'll put the resolution to the meeting. You haven't already done so, please now cast your vote on this item, and I'll move to the next order of business. The second resolution is ordinary business and relates to the election of Mr. Sam Budiselik, as Managing Director. It reads that Mr. Sam Budiselik, who having been appointed Managing Director of the company since the last Annual General Meeting is elected as Managing Director of the company. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. Mr. Budiselik's biography and experience is set out in the explanatory memorandum accompanying the notice of meeting. Please refer to the screen for the results of the proxy voting on the formal resolution.

No questions, Jason.

Okay. Okay. There being no questions, I put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item, and I will now move to the next order of business. The third resolution is ordinary business and relates to the election of Mr. Henry Scheiner as a Director. It reads that Mr. Henry Scheiner, who haven't been appointed a Director of the company since the last Annual General Meeting, retires under Clause 51.2 of the company's constitution being eligible, is elected as a Director of the company. I now invite shareholders to comment and ask any questions. Please limit your questions at this time the matters related to this agenda item. Mr. Scheiner biography and experience is set out in the explanatory memorandum accompanying the notice of meeting. Please refer to the screen for the results of the proxy voting on the formal resolution.

No questions received, Jason. Thank you.

Okay. Thank you. There being no questions, I'll put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item. I will now move to the next order of business. The next item of business asks shareholders to adopt the company's remuneration report for the year ended the 30th of June 2021. The fourth resolution is an advisory resolution only. It reads that the remuneration report of the company for the financial year ended the 30th of June 2021 be adopted. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. Please refer to the screen for the results of the proxy voting on the formal resolution.

No further questions, Jason. Thank you.

Okay. Thank you. There being no questions, I put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item. We now move on to the special business of the meeting. The next item of the business -- of business asks shareholders to adopt the company's equity incentive plan rules. The fifth resolution is an ordinary resolution only. It reads that for the purposes of Listing Rule 7.2 Exception 13B and for all other purposes, approval be given for the issue of securities under the company's equity incentive plan as described in the explanatory memorandum. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. And please refer to the screen for the results of the proxy voting on the formal resolution.

No questions for safe, Jason. Thank you.

Thank you. There being no questions, I put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item. The next item of business asks shareholders to approve the grant of performance rights to the Chief Executive Officer and Managing Director. The sixth resolution is an ordinary resolution only. It reads that for the purpose of access listing rule 10.14 and all other purposes, approval be given for the grant of 3,256,578 performance rights to Mr. Sam Budiselik, Chief Executive Officer and Managing Director of the company under the company's equity incentive plan on the terms described in the explanatory memorandum. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item, and please refer to the screen for the results of the proxy voting on the formal resolution.

Jason, I have 2 questions received so far. I'll just give a brief outline. If you are comfortable with me providing my response from the management side as to how the scheme works, so might then ask Julie Elliott is Chair of GRNC Rem Committee if she has anything to add. In summary, question is around resolution 6 for the options vesting at 0 sets a stretched target of EPS 4.3% -- $0.43 apologies, with management having until 2024 to exceed that hurdle. The long-run average EPS of the business when excluding one-off items, not here historically attributed to the management team is around $0.5. How are the EPS targets set for the plan and how shareholders have comfort that interest has been aligned when the remuneration committee is setting these targets? The question goes on to outline general industry practice. There is a point around the latest tranche of these options, bringing the total number of options issued over the past 18 months when share prices at all time lines following a number of significant one-off events. And why is the Remuneration Committee issuing shares at vest at 0 out of line with general industry practice? I think just to briefly touch on the executive incentive scheme through the COVID period. As the business has traded directionally, the plan allows for the baseline to be set at the NPAT or EPS equivalent for the year and then looking forward to set targets around increasing that. The management team has worked really hard to present a set of numbers that doesn't involve any adjustments. And the plan then operates a threshold, target and stretch lift off that base EPS amount. So certain hurdles are very clearly known to the management team aligned to our earnings or our profit and our total shareholder return in order for the gates to open on the plant. And for them, the level of EPS generated to determine whether any of the grants vest. Julie, would you like to elaborate at all in your capacity as Chair of the GRNC to the approach we've taken this year with a review of the plan, the setting of the targets?

Thanks, Sam. In the review of the line that's being presented, we saw expert advice in this regard. It's not something that we just developed internally. So we rely on that advice for external validation as well and degrees of appropriateness. Of course, then the Board and the Rem Committee make their own determination around that. But it isn't something that was just developed internally. And I think the only other thing I would add, Sam, is that the Board and the room committee are very conscious that the organization has been through a very turbulent period for a length of time. And as part of that, it's really important that we've stabilized the organization and have the ability to attract and retain talent in a very competitive market. So we've taken all those factors into account in presenting the plan as it is presented today.

Sam, I'll also add that I agree with both sets of comments. And I would add that we're very pleased with what we've seen from this new team. It was very important to the Board as we went through this process with the external advice we received to properly incent the management team to continue to perform.

Thank you, Jason. I should just add that their performance rights under the plan, not options, just to clarify that terminology too. Thank you.

Any further questions on that one?

No further questions, Jason. Thank you.

Thank you. There being no more questions, I'll put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item. The next item of business asks shareholders to adopt the changes to the company's constitution. The sixth resolution is a special resolution related to the amendment to the constitution of the company. For this resolution to be passed, at least 75% of the votes cast by the company's shareholders will need to be in favor of the resolution. It reads that the changes to the company's constitution described in the explanatory note to this resolution and is tabled at the Annual General Meeting and signed by the Chair of the Annual General Meeting for identification purposes be made with effect from the close of the Annual General Meeting. I now invite shareholders to comment and ask any questions. Please limit your questions at this time to matters related to this agenda item. And please refer to the screen for the results of the proxy voting on the formal resolution.

No questions received, Jason. Thank you.

Okay. Thank you. There being no questions. I put the resolution to the meeting. If you haven't already done so, please now cast your vote on this item. Ladies and gentlemen, that concludes the resolutions to be presented to the meeting. The poll on all items will close in 30 seconds. I now ask all shareholders to complete their voting before the poll closes. [Voting]

The poll has now closed. As noted earlier, these results will be posted on the company's website and on the ASX later today. With the formal proceedings over, I now formally declare the meeting closed and hand over to Sam to provide his address. Sam?

Thank you, Jason, and good morning, fellow shareholders. I would like to start by briefly summarizing our achievements in financial year 2021. Prior to providing an update on the earnings momentum that has continued into the first quarter of financial year 2022. Your management team is pleased to have delivered a strong result for the financial year 2021 in the context of a challenging social and economic environment over the past 18 months. Looking back, I'm proud of what was a newly formed leadership team that came together during difficult circumstances, delivering a solid profit result by reviewing costs across the business, developing and leveraging technology securing funding and optimizing the operations of the business. These actions not only ensure that we remain in a strong financial position but enabled us to capitalize on opportunities to grow that ultimately presented. To borrow a sporting outage, the past financial year felt like a game of 2 halves. The first half was impacted by reduced credit demand with record levels of government stimulus flooding our customer segment. Our Retail business reported sales volumes and gross profit margins that reflected the financial support that was injected back into the economy. As we moved into the second half of financial year 2021, our loan book stabilized and began to regrow as credit demand normalizes with the total gross book value up 8% during the financial year and up 27% from the low point in September 2020. The return on the years of investment in our digital assets was realized as COVID lockdowns took hold in Australia with online lending increasing 13% and online retail sales turnover increasing 14% on the previous year. Importantly, this investment ensured our customers could have access to our products online with business continuity largely maintained as a result. Having now once again established our own collections function, it was pleasing to observe promising early improvements in recoveries, which will continue to contribute to better outcomes for all stakeholders in our business. I wanted to take this opportunity to thank everyone across our business who contributed to this result, particularly our store colleagues who safely operated our corporate and franchise stores across the globe, ensuring that we were there when our customers needed us most. I will now turn to our recent trading performance to provide an update on the first quarter of the new financial year 2022. Unless otherwise stated, comparisons to the previous corresponding period referred to the first quarter of the prior financial year 2021 as at 30 September 2020. We've had a pleasing start to the new financial year with first quarter consolidated revenue of $55.4 million, resulting in EBITDA of $15.5 million. The strength of this first quarter was a result of our diversified business model with unexpected and prolonged lockdowns in New South Wales and Victoria, having a significant negative impact on our results. Positively, our Personal Finance business exceeded expectations as earnings quality continued to benefit from historically low bad debt levels and continued online lending growth. Personal and vehicle loan origination was up 85% on a PCP basis, reaching $49.9 million against Q1 FY 2021 amount of $21.6 million. Our store retail sales and pawnbroking book values were lower than forecast, but we remain cautiously optimistic that state governments will continue to lift lockdowns as vaccination rates increase and that this important part of our business will return to more normal trading conditions. Moving on to our gross loan book. The table summarizing the value of our loan book is displayed on screen and is included in the documents lodged on the ASX this morning. As outlined previously, we continue to leverage our data analytics and dominant market position to reach new customers, and we remain committed to providing longer-term lower cost line solutions to customers. To that point, our focus on the $2,000 to $5,000 borrowing range continues with the medium amount credit contract or MAC, loan book growing 4.7% across the quarter and now up 101% on a PCP basis. Serving the borrowing native employee customers have seen this loan will grow rapidly over the past 12 months with a strong credit profile across the loan book and our proprietary credit risk models deployed to ensure yield optimization as the book continues to grow. Green like auto, GLA provides vehicle finance through an established network of brokers and car dealers together with the direct-to-customer offering. The release of the new online portal with integrated banking and credit data enables us to now generate an indicative rate to our partners with applications fully approved within minutes and funded within the hour. To give the relaunch of this business some context, in October 2020, GLA financed approximately $150,000 in car loans. In September 2021, we funded more than $1.3 million, and we expect the GLA book to resume growing across the second half of the financial year. As we head into the second quarter of the financial year, we are preparing for a busy Christmas period with lockdowns hopefully ending and demand for credit continuing to increase. Moving to a strategy update. We continue a disciplined execution of our strategy with new product development, network expansion and operational excellence initiatives progressing well. Looking forward, we anticipate continued MAC loan book growth, continued vehicle finance lending growth and the contribution from new product development as we establish new and growing loan books. A new earned wage access, online-only product innovation called Advance paid, UC Pay Advance was successfully piloted during the quarter, designed as a simple low-cost advance on earned income. This product is repaid in a single low-cost 5% installment and intended to address a short-term customer need whilst introducing new customers to our longer-term lower cost loan products. The product has now been released to market and is beating internal plan expectations. Based on our internal research, we see this product appealing to over 100,000 new and existing customers over time. We continue to innovate and develop the next generation of longer-term, lower-cost finance products as outlined in our full year presentation. The store network also continues to serve as an important distribution channel for our products with the acquisition of 3 franchise stores in Victoria, in Geelong, Corio and Dandenong, meeting our investment return hurdles and importantly, allowing us to grow in regions where we have historically been underrepresented. As demographic changes occur over time, we believe we are well placed to further invest in certain regions, deploying a new small store concept that has been successfully trialed over the past 18 months. We now have 6 of these stores operating, focused on lending and high-value retail trading, and we remain committed to expanding our domestic network to reach more customers. Finally, we continue to observe the recovery of our international franchise operations as the ongoing economic impacts of COVID [ vain ]. Several acquisition opportunities are also currently being assessed to strategically grow our domestic business and to realize the value of our international network. All investment opportunities are captured within a formal investment decisioning framework, overseen by Board Investment subcommittee. And if determined to strategically aligned, undergo authority diligence process that includes assessing against return hurdles, benchmark to a post-tax discount capital cost rate of at least 10.6%. Cash Converters' unique business model continues to demonstrate its strength, leveraging an extensive store and online network to serve a growing number of customers within Australia and overseas. The company remains well capitalized with a strong balance sheet and facility borrowing capacity available to support loan book growth. We remain focused on product innovation leveraging our technology to expand our customer reach and drive loan origination growth in the process establishing new line books to further diversify our revenue base moving to longer-term lower loss and lower-cost finance products. We also continue to explore exciting partnership opportunities, such as that recently announced with the global hypermarket operator Carrefour contributing in a meaningful way to reducing manufacturing and landfill by facilitating a circular economy. Managed by Cash Converters, this store within a store concept is intended to facilitate sustainable consumerism, buying and selling second-hand items with a large-scale rollout planned according to Carrefour, which has a network that exceeds 12,225 stores in over 30 countries. Cash Converters remains focused on the benefit that reuse delivers to the environment and is actively seeking other partnerships with retailers to further these cause. In closing, I would like to thank my colleagues across the business for their unwavering focus on our customers and to our shareholders. I thank you for your continued support, and I look forward to providing another strategy, execution and trading update at the conclusion of the half year period. That now draws our meeting to a close. Thank you for your attendance.