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

Okay. We'll now commence. Welcome to the Cash Converters FY '23 Results Briefing Call. I would like to start this call by introducing myself, Sam Budiselik. I'm the Managing Director of Cash Converters International Limited. Also joining me on this call is Jonty Gibbs, our CFO. On the call this morning, I would like to start by giving a brief overview of our business, after which, I will hand over to Jonty to talk through the financial result highlights. I will then conclude with an update on our strategy and outlook, at which point we will open to Q&A. So, please post any questions to the Q&A chat box as we move through the presentation. Today, we'll be talking about our FY '23 results, referencing the slide presentation deck released to the ASX today along with our accounts. And you should be able to see that on your screens now. I want to start by saying on behalf of the management team that we're extremely pleased to be reporting strong financial operating results for FY '23. The year wasn't without its challenges. However, our headline numbers tell an exciting story with annual revenue growing 23% on the prior year and now exceeding $300 million. Our gross loan books growing 27% to now tower over $270 million and a strong balance sheet with over $70 million of cash on hand, positioning us to take advantage of market agents and consolidation brought about by legislative change in addition to meeting record underlying demand in our core customer markets. I'm most proud however of the headline numbers reflecting the efforts of our people in the business, in the stores, and across the globe [Technical difficulty] group of passionate people working hard day in and day out to help our customers get on with their lives. Turning to Slide 2. The presentation titled About Us. We exist to meet the cash need for our customers, whether that is buying from us, selling to us, or borrowing from us. We are one of Australia's most visible and well-known high street brands and also have a growing international footprint. Our success is embedded in our strong customer relationships. Our customers rate us highly with our net promoter score exceeding 60. Our ability to manage borrower risk and operate efficiently by leveraging our technology, data, and extensive customer modeling, should give investors confidence that our IP is hard to replicate, and our scale gives us dominance in our core markets. In other words, by leveraging our technology and scale, we can build risk profiles of borrowers that others can't, helping people that others won't, all the while managing customer outcomes with care. This is a core competency that is hard for our competitors to replicate that is now in place and that we are scaling up, and we believe the business has substantial organic upside, which I'll talk to further later. Due to recent legislative changes, we are also making a significant move to exit what has been a core product line for our business, the small amount of credit contracts, otherwise known as SACC loans. These loans are commonly referred to as payday loans in the media, and we will talk more about the significant strategic shift throughout the call. Our strategy is to grow other parts of our business and to continue to innovate new product solutions for our customers. This shift has been underway for some time and is already yielding strong results as can be seen in the segment level graphs later in the presentation. We also continue to remain the largest global operator of the unique circular economy store network, buying all of the inventory we sell to our customers from our customers. In that process, we acquire over 2 million unique items in Australia alone each year, preventing the need for new goods manufacturing and eliminating landfill by repurposing pre-owned goods. Finally, on the bottom right of your screen, you will see that our market valuation remains somewhat undemanding. With the June 30 share price of $0.225, we closed the full year with a price-to-earnings ratio of around 7x, a net tangible asset per share amount of around $0.29 per share and with this full year result, the Board has just declared the sixth straight half yearly dividend of $0.01 per share, and that dividend is fully franked. Turning to Slide 3, our global network. We have outlined our global store network of 683 individual stores globally. We operate corporately owned stores in Australia, New Zealand and the U.K., alongside a franchise network of stores, of which we are the master in those jurisdictions. This is perhaps much larger than is realized. In the other jurisdictions shown, we operate a franchise royalty model where master franchise partners operate the Cash Converters branded store networks, paying us a fee for that branding, IP, and trademarks. Of particular interest internationally in this financial year was the acquisition of the largest Cash Converters franchise network of 42 Capital Cash stores in the U.K., in addition to the acquisition of our New Zealand master franchise. We also provided a loan to our Spanish master franchise partners with future ownership options to enable them to continue growing. We operate out of our primary house in Australia and the U.K., and there remains plenty of opportunity to grow both domestically and internationally with our business model well established globally as shown and all core markets growing strongly. Turning to Slide 4, our business model. We show our business model on a page. Often thought as always a second-hand goods operator, store operator, you will see under one roof, we offer a range of secured and unsecured finance products alongside retail buy-sell services. These products and services are all seamlessly integrated through our stores and our online platform. The lending business is important from an earnings perspective, contributing approximately 2/3 of our segment operating EBITDA before head office costs, as outlined on Slide 23 of this presentation. The store retail operation is important in terms of distribution, acting like a bank branch network, reaching good borrowing customers where we can provide our high-touch customer service levels. The stores contribute approximately 25% of segment EBITDA prior to head office costs, generating income as a result of commission paid for the lending referred to the Personal Finance segment and making a direct margin on retail turnover and pawnbroking interest. Our vehicle finance business, Green Light Auto, and the U.K. operation contribute the remainder of our earnings with both segments growing strongly. Traditionally, customers borrowing from us have entered our business on the left-hand side of the page, using small SACC loans to establish credit profiles, moving across the page to the right as that profile improves with borrowing costs lowering as a result. SACC loans shown in Box 1A on the slide, a National Credit Act regulated small loans, up to $2,000 in 12 months in term. They are commonly referred to as payday loans in the media and often described in a negative way. Recent legislative changes, including capping SACC repayments at 10% into the borrower's income have in some instances made these loans up to 50% to 70% more expensive for our customers, as outlined in our Senate Committee submissions made in 2022 and available online. These changes will further marginalize a large part of society that is already excluded from most other forms of regulated credit and push people to unregulated credit options, including buy now pay later. As a result of these changes, and as previously announced, we have taken the decision to exit the product -- the SACC products segment. The changes render these products commercially unviable as it is evident from a number of providers now exiting the market. We are in a fortunate position with our scale and balance sheet to continue to support most of our customers who are impacted by launching new lower-cost products and growing new loan books as a result. Where we can help customers, we stand ready to offer the products that move across the page to the right. It should be stressed, however, that these products won't be available to all applicants. In order to pass on lower costs, we need to establish lower loss rates or in other words, can only offer these products to higher credit quality applicants. Customers who don't qualify for another lending product, and that number is in the many thousands as we currently already decline 7 out of 10 applicants, may find themselves without any other regulated credit option. Looking forward, we anticipate our non-SACC products shown to continue to grow. And in box #2, we are showing the new unsecured products that we have recently released. The line of credit product in box 2B, we think will be the future of our lending business, offering customers flexibility, paying interest only on the amount borrowed when they qualify. Turning to Slides 5 and 6. Our ecosystem and competitive advantage will move through quickly in the interest of time. However, a key callout is that the SACC change as outlined previously have been implemented at a time when we are experiencing record and growing demand. Hence, we have delivered record overall loan book growth. There continues to be a noticeable shift online, where we have invested heavily over recent years with 14% of retail sales and 60% of lending now transacting online. And as application numbers for personal loans near 800,000 per annum and growing, our non-SACC loan books are growing. I will now hand over to Jonty to expand on this and to run through the financial highlights starting from Slide 9.

Thank you, Sam. Turning to Slide 9, looking at the growth of our loan book since September 2018. We can isolate the period of impact on demand for our loan products during the COVID stimulus period. Coming out of COVID, we had strong demand for our lending products, closing June at a gross loan book value of $271 million. This is a 27% increase on June last year. Growth rates are trending back to pre-COVID levels across our lending books. In the graph on the bottom right, as Sam mentioned, you can see our demand for SACC small loans tapering off and replacing this with strong demand for our other products. The slowdown in SACC is a consideration in the exit strategy for this product. In future updates, new product loan books will be presented with current demand reflecting strong. Our recent U.K. acquisition will deliver strong growth in the international space going forward. In Slide 10 through 13. On Slide 10, there's additional information on our loan books and segments. On Slide 10, as Sam mentioned, we have commenced the transition of customers out of SACC loans, we're responsible and commercially viable to do so. Slide 12. Our vehicle business growing strongly as second-hand car markets normalize as we establish the distribution network nationally that we stepped away from during the COVID interrupted period. A call out on Slide 13. Strong revenue recovering to a 5-year high with stores opened and trading for the full period after an interrupted past few years. Also pleasing is the reduction in overall inventory on hand as we changed the mix of stock to higher-value products and smaller store footprints. Looking forward, we continue to explore greenfield and franchise opportunities. Moving on to Slide 14 with a summary of Slide 18 financial highlights. Compared to FY '22, group revenue is up 23% to $303 million. Operating EBITDA is up 8% to $57 million and operating net profit after tax is up 6% to $20 million. We closed the year on $72 million cash and cash equivalents after the acquisition of New Zealand and providing funding to our Spanish partners. The strong cash position funded the U.K. business acquisition in early July and allows another fully franked dividend of $0.01 per share. Our loss rates are still considered to be normalizing off in an unusual period of government stimulus. Currently at 11%, we are confident of managing this around these levels, subject to the economy not deteriorating significantly. We have seen some earning margin compression and costs -- as costs have increased, in particular with wage increases and interest expense. We have not passed these cost increases on to our customers. We are confident that we can continue to scale our business with the existing cost base in place. I will now hand back to Sam to continue.

Thank you, Jonty. As mentioned, Slide 14 shows the building momentum in revenue and earnings, Jonty has outlined. Strong underlying organic demand, coupled with our digital platforms, reaching younger customers in addition to offering new products is driving revenue and earnings across our Personal Finance business. We're also excited by the performance of the franchise store acquisitions made within Australia as we continue that acquisition program in addition to the network acquisitions continuing offshore. I'd like to finish this call focusing on Slide 16, titled Growth Strategy, talking to our strategy and outlook. Our business strategy is clustered around 3 key themes: inorganic expansion, organic optimization and customer and product. Whilst we are exiting the SACC market, we are confident that we can maintain the momentum in our business over time, offsetting the SACC contribution to earnings. We will do this by delivering and growing new loan products and books as we have seen throughout FY '23, continue growing our medium and vehicle loan books, meeting record underlying organic demand and continuing to acquire franchise stores both here in Australia and in the U.K. where we have established a corporate hub with the recent Capital Cash acquisition. We've also made a key management structure change, appointing Andrew Kamp as Chief of Strategy and Commercial Development. Andrew has worked in our business for many years as a partner within the recently acquired New Zealand business, bringing with him a great wealth of knowledge and expertise. Andrew will oversee our acquisitions function and ongoing strategy development and execution, and I'm excited about working with Andrew to continue driving inorganic growth in addition to evolving our global strategy. In closing, I see the future of our company as an opportunity to now take our amazing story to market. We are the largest non-bank lender in our markets with top line revenue now exceeding $300 million and growing. We will continue to leverage our scale to pivot our company away from the SACC market, providing an exciting opportunity to reinvigorate our brand and product offering and consolidate our position as the largest and most recognized lender in our markets. In summary, we believe we have the right strategy and building blocks in place to deliver an exciting future era for Cash Converters. And we will continue to build on the momentum of FY '23 and look forward to continuing to grow our business across the globe. I would like to take this opportunity now to thank our entire team here in Australia and across the globe for the past year's effort that is now reflected in this year's strong operating result. We will now turn to Q&A.

We have some questions that have been submitted. So thank you for that. I would just paraphrase the questions that have come in just to enable us to summarize the content and then to provide the response. First question we have is around revenue and key growth indicators being good, but profit growth being lower than the revenue growth increase. Revenue delivered was up 23%, profit up 8%. Typically, a business like Cash Converters that has a high fixed cost structure, you expect profit growth to exceed revenue growth. Can you give us some color around why that is happening? Thank you for the question. It's a good question. I think what's happened in the lending markets that we operate in and for a number of nonbank lenders, there's been a couple of factors that have impacted earnings and margins. One is an increase in interest cost, which we've called out in our commentary, and that's available online. Quite a significant increase in interest costs, as you would expect. And the second is an increase in FTE and wages expenses as we've reestablished our business coming out of a fairly significantly disrupted COVID period. So we've ensured we've got the right level of staff in stores to serve our customers. And we've added some additional overhead in head office to deal with some of the regulatory functions that we're addressing. Jonty, if you got anything further you would add to that?

No, no, I'm good with that.

The second question we have is, can you provide some more details on the Master Franchise arrangements? Also do you know how the operations are trading? Thank you for the question. Each of the jurisdictions is licensed under obviously an agreement and the agreements are largely similar, but change slightly depending on the jurisdiction. There are a percentage of turnover royalty fees generally and very little operational support provided to these operations as they're established in their own corporate right to operate their own networks. So Cash Converters will receive a payment for IP, trademarks, branding and business model advice. However, we have nothing to do with the day-to-day operations in the jurisdictions where we're not the Master Franchisor. These all jurisdictions are actually trading fairly strongly. I think it's a function of rising inflation globally and increasing cost of living pressures across the globe. The offshore operations don't offer unsecured finance generally. They're pawnbroking and retail model. However, that looks different in some jurisdictions. I hope that answers the question. Thank you for the question. We have got a question asking if we'll be doing any broker presentations. Looking to try and generate some more broker interest and we are looking at that, and we do have a couple of brokers covering us and we'll make the research available as it's published. We've got a question on Jonty around an outline of the capital requirements of the business that we shifted out of SACC loans and into longer term loans due to them being slower turning in nature. Do you have a high-level overview of the cash impacts of the SACC exit?

Sure. Thanks. Thank you for the question. We are well funded and capitalized at this point in time. We are exploring additional options to bring down the cost of debt. And we look to expand that into the foreign jurisdictions as well to grow the business.

Yes. Thanks, Jonty. I think it's a good segue into the next question at a high level with the loan book growing significantly and us drawing on our securitization facility and also cash funding some of that expansion. As we continue to grow our loan books with new products being introduced, can we provide some more information on capital moving forward? Thanks for the question. I think in summary, as we have shown the securitization facility with Fortress drawing throughout FY '23 after a period of being held at a minimum drawn level to fund the growth, we've seen in the loan books. We still have a supportive financier and significant cash on the balance sheet to enable us to either cash fund new product release or to continue growing the books into the facility also using our cash. I think at the growth rates that we're experiencing, we're comfortable that we're well supported, but I think going forward, we'll be looking at a bigger facility as we build bigger and growing loan books. We obviously are very cognizant of balancing the investment in acquisition, the funding of the loan book growth and capital return to shareholders. Thank you for the question. There is a question just querying if we could be more specific about why the regulatory name makes SACC commercially unviable? In summary, I think there's an arbitrary income cap that's been put in place on employed borrowers in the SACC market, which is key to the call out, resulting in, irrespective of an affordability position for a borrower, that customer being capped in terms of the income that can go towards repaying a SACC loan. And in summary, that's making the loans longer term for the borrower and more expensive for the borrower. And as a result, I think as term extends and cost increase the borrowers, the books will naturally start to fall and we believe we're better positioned to take the good SACC borrowers into other products and not have that restriction in place, which is quite unique. It's really the only restriction on a regulated credit product that I'm aware of. We have another question are the channels for originating medium-term loans LoC and others different from SACC loans? It's a great question. No. The infrastructure is built to enable us to originate 3 stores and online. Our credit models are advanced now enabling us to move into new markets and offer new products. I think the key challenge is we're receiving record demand for these new loan products is for us to continue funding the growth of these loan books. And it was -- it's a good one to have as something that we're looking at. We have a question here, how quickly is the corporate stock going forward and considerations given if we bring a potential acquisition of a franchise store? Thanks for the question. Look, I think we've put a domestic target of 200 stores in Australia in total. We currently have just over 150. So we do see good domestic growth opportunities. The trialing and the successful release of a smaller footprint store that Jonty touched upon with a different mix of merchandize is enabling us to move into new locations similar to Chapel Street in Prahran in Victoria. If you go into that store, it looks very different to one of the traditional suburban stores. So we think another approximately 50 greenfield sites would be available in Australia. We're happy for our franchisees to grow and they are. When we're acquiring the franchise stores, we run an evaluation having visibility of revenue applying a corporate overlay of costs to determine what we would say was a corporate earnings profile, and then we apply a multiple generally between 3x to 4x of those earnings to acquire the stores. And I think it's a great opportunity for us to bring not only the store into the network, but the store staff into the network and continue operating the store in a different way as a corporate owner. And a lot of our franchise partners are long serving and have owned these businesses for a long time. So it's a nice natural exit for those partners. We have got a question here, why is New Zealand loss making? I think -- it's a good question because I think on the acquisition of New Zealand when we brought that business into the corporate framework, we've applied certain accounting treatments and in particular, loan loss provisioning around the New Zealand loan book. That's one reason. There has been some new regulation over in New Zealand that we were aware of prior to the acquisition, which has changed the lending market somewhat. And New Zealand has had a bit of difficulty on the retail markets with the spate of theft and burglaries across the country and not just Cash Converters, targeting higher-end retailers. We've taken some precautionary measures now with our stores installing fog cannons, for example, to prevent the risk of theft and that's having a positive impact. But as we've sort of looked at the revenue side of the business and addressing some of those challenges, the original premise of the acquisition where we could realize a number of cost-saving synergies over 12 to 18 months, it's progressing well. And that I am confident will ensure that business becomes a profitable contributor as we forecast upon acquisition. There is a question just around comparing to the first half, the second half and a reported shift between head office and store operations. I think that might be in relation to expense increases. And as touched upon, we did hire into our store network to meet growing demand through that channel that we experienced into the second half. Having had some disruption through COVID, we needed to bring people on and train people and have our store network appropriately staffed. So we did see a lifting in some FTE wage expenses there. And head office primarily cost increases were around our risk and compliance function and bolstering those teams. And I think the key call out really is that we feel we've got an appropriate cost base now to continue scaling the business up and not growing that cost base as a result. That's the questions that have been submitted. Thank you very much for the questions and the interest. I hope that helps answer. If you do have anything further, please do drop a line through the info e-mail address in the results release, we can pick that up offline. Thank you for attending the call, and I look forward to talking soon. Thank you.