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

Hello, and welcome to the Cash Converters' Earnings Results Call for FY 2024. Thank you for joining us. We appreciate your time. My name is Sam Budiselik, I'm the CEO and Managing Director of Cash Converters International Limited. And with me today, I'm joined by Jonty Gibbs, our Chief Financial Officer; and Andrew Kamp, our Chief Strategy and Commercial Development Officer. I will talk through our FY '24 result. That will be the basis for the presentation that were released to the ASX on Friday, the results presentation. This information is not only lodged on our website, but the ASX platform, obviously, and following the presentation, we'll move into Q&A. For the Q&A, if I could ask you to please submit any questions in the written format through the Q&A box. That will allow us to consolidate any similar questions. We might not be able to respond to all, but we'll do our best subject to any price-sensitive information, obviously, that not being disclosed or with the -- the company hasn't released any public information, which is, I'm sure, to be expected and pretty standard. I'll just present the presentation currently now. Hopefully, that becomes visible. Coming through now hopefully. Great. All right. Look, I just wanted to start on the first slide just by providing a brief update on management sentiment, I guess, for the company. We've had a terrific year this year. Obviously, posting strong top line revenue growth and a solid statutory profit of just over $17 million is terrific. I think the year was a significant one for the company because of the transition away from the small credit contracts, in particular, the small loan product off the back of the regulatory change introduced probably 18 months ago that we've, I think, messaged pretty consistently from thereon. As we've seen a big shift in the loan book and the associated margin with the high-yielding small loan contribution reducing, we've built a very well diversified and I think sustainable loan book moving forward. So that was a big change for the business to digest. And coupled with that loan book growth into the new product loans and the non-small loan products, we've added 50 stores throughout the financial year, and we'll talk a bit about that in a minute. And I think what we'll do with the presentation is I'll just give a brief overview as to the results. I'll ask Andrew to talk about our strategy in a little bit more detail, and then we'll finish with Jonty touching on some financials. But we had a big year increasing our securitization facility exiting our vehicle business, adding those stores that we mentioned, seeing some further investments offshore that we think provides great growth optionality for the business. Just briefly in terms of what we do for those that haven't visited the story for a little while or are looking for a brief recap. We think about our business with the 2 verticals, really, the retail operation and our lending business. The retail business contributes about 1/3 of our EBITDA and the lending business, about 2/3. So the lending business is obviously a lot larger in terms of earnings contribution. However, both of those channels work closely together. We really value the retail network for distribution, not only selling -- buying and selling preowned goods but providing a store network for our customers to come in and seek finance. And obviously, we do that online, too. But the retail network is a very close contact with our customers and provides us good quality borrowers and applications. The business really it's a large volume business, too. We sell about 1 million items a year. We received about 65,000 applications a month for the lending -- for the finance side. So what -- we're really fortunate to be in a dominant position in the market to have a good view of our customers and to understand what's going on through our customer segment in great detail. And obviously, that data allows us to power our credit models, which is really our core IP, and we'll talk about that in a bit more detail in a minute. I think the key call-out for us in terms of the about our slide is that the business is really positioned in -- right in the middle of the circular economy, and that's really a new age term for that old adage of buying and selling and trading second-hand goods, what we now call pre-owned. But our business model is such that, particularly in Europe, it's really prominent in the center of this circular economy. So the largest chain of high street stores facilitating that is becoming quite important to our customers and also government and the wider economy, which is terrific. And we geared up to continue growing that globally. But more importantly, I think Cash uses a brand that we've invested heavily in over the years. We do have higher brand awareness. And for our customers, high Net Promoter Scores with 50-plus Net Promoter, our customers trust the brand, love dealing with us, appreciate the support we give, and we're taking the brand into a new customer set now with some different retail offerings we'll talk about. And just as a result of the cost of living scores, I think people are looking at us as an option for either preowned goods or nonbank finance. Our global network briefly is outlined on Slide 4. We look at the network globally focused on the orange bubbles in the U.K., Australia and New Zealand being the geographic regions where we have company-owned stores, showing in the orange bubbles, the numbers of company-owned stores. The gray bubbles in those geographies represent the franchise stores operating in those geographies and we're the master franchisor on those 3 regions. So we operate those networks of the company-owned or franchise and our strategy has been, one, to consider acquiring back those franchise stores and growing that company-owned store network in those regions. The other parts of the world, we do have master franchisor partners, operating some fairly substantial networks, and we call those out. I think if anything, there's some growth optionality there over time, but it certainly helps us leverage our brand globally across the 669-odd stores that we have in those regions. The other geographies are fairly low touch and operate independently to head office here. The need for personal finance -- on the personal finance side of the business is really growing. I think as you'd expect, is the cost of living pressures of building on people and the bank's risk appetite is such that they're moving away from any sort of higher risk lending. Our markets are growing. So from a credit score perspective, we talk about sub and near-prime borrowers being in our market. They're traditionally borrowers who have had an event on the bank statement, some sort of default have temporary income or deemed too risky by the banks. They're very difficult to risk enterprise, and therein lies our advantage. I think having over many years built our models to give us a really good understanding of when an outlook comes into the business that's not standard, how we predict they may perform in a big and growing market. As I touched on to retail is interesting, that is changing for the first time probably in decades. We're seeing a real focus on luxury brands through our network. And we have launched 2 concept stores in Prahran in Victoria and soon into open in Bondi in New South Wales, smaller footprint, higher-value inventory. It allows for us to reduce wages and some leasing overheads. And at the same time, generate a good profit -- gross profit margin. So we're really thinking that the store model will change to become smaller and higher value, and that's quite exciting. And we've really built our capability to value and acquire a different set of inventory now around the handbags, the high-end watches, the sneakers, trainers are a big collectors market and the traditional jewelry market is what we're really focused on. Like I said, this has been really enabled through our technology. Our credit models are really core to our lending business. And as I said, that's the majority of our earnings. So we've really invested heavily there over the years to build. We're on a sixth generation of machine learning powered credit models. And that's really key for this part of the economy. A credit bureau won't really provide a good insight into how one of our borrowers might behave. It's really our own core IP that we use to assess that. And then the rails, the banking rails and the back end that we've got is really industry-leading. We're on a new payment platform. We can immediately disperse cash to bank accounts. We're using AI to authenticate handbags and some of the luxury goods, in particular, and we can authenticate quality and authenticity. And we've built a really, I think, amazing customer front end with apps and loan self-service and all of the modern day banking features you'd expect for our customers. I'd just take a pause there, and I'll hand over to Andrew to talk about our strategy because we have been consistently going about executing what we think is a sound strategy, trying to balance investment into our business and capitalizing on growth opportunities with some shareholder returns, paying a half yearly dividend. Andrew, over to you.

Thanks, Sam. I think if you flip to the next slide, we've outlined our strategy in the investor presentation if you want to run through it in more detail. But the primary element of our strategy is reacquiring the franchise stores, particularly through the U.K. and Australia. We see this as a really natural fit. We know the businesses really well. We've got really good visibility over their performance and their trade metrics and their outcomes. So we sort of know what we're getting into with those stores. And we've got the infrastructure and team in place to support them as they come on board into the corporate network. So for us, they look like good risk-managed acquisitions where we can sort of onboard their earnings into the corporate business. The recent acquisitions through Australia and the U.K. are delivering well into our expectations. I think on a recent -- our recent review of particularly the Australian acquisitions over the last 3 or so financial years, they're delivering to about 98% of our FY '24 NPAT target. So we're pretty happy with how those are tracking. Alongside those store acquisitions through Australia and the U.K., obviously, as this slide touches on, we've got some continuing expansion in our loan books with a particular focus for us on the MACC and Line of Credit books. If you can flip to the next slide, just wait for that to come up. So again, I guess sort of touching on the main focus in this slide, Australia and the U.K. store acquisitions for us. We've got a pipeline of about 39 stores that we're having a look at in Australia that's comprised 2 sort of major networks of franchise stores and a couple of smaller networks. In total, there's still 74 franchise stores in Australia for us to have a look at. And through the U.K., we've got 1 larger network sort of identified that we're in early discussions with and a couple of smaller ones representing about 12 stores in total with a long opportunity list of 143 stores through the U.K. that we can have a look at. Yes, jump to the next slide. I think maybe I'll just touch on one point on this slide, which is alongside of the Australian and U.K. store pipelines that we've sort of got and we're in early discussion with. We do have the opportunity in Spain. We've had a commercial loan into that business of about EUR 4.4 million for a while now. The business is -- management is doing a really good job with the network over there, and we're starting to evaluate some options about how that might play a part in our future, particularly as an expansion out of our primary U.K. hub that we've built over the last few years. That's probably it for the strategy section. Again, there's a bunch more detail in the investor deck as people want to walk through them.

Thanks, Andrew. Great. Thank you. And over to Jonty Gibbs, our CFO, for financial highlights.

Well, thank you, Sam, Andrew. I'll focus mainly on that slide up on the screen right now. Revenue and operating EBITDA. The improvement has been achieved despite the FY '23 legislative changes to the SACC products. And we have enjoyed a strong contribution from the owner-operated stores and the addition of the U.K. franchise business. The conversion rates of the increase in revenues to operate in EBITDA does experience some erosion for some of the costs that we do not pass on to customers. During FY '24, we received over 770,000 personal loan applications. This volume of activity does require investment in back office compliance technology to convert applications into responsibly profitable loan books. Looking forward, we expect the revenues and EBITDA to improve as we deliver on the organic business and explore strategic opportunities. Touching on the network as well that Andrew referred to. During FY '24, we invested $24 million in business combinations. This growth in the network is after paying dividends and has not taken on any corporate debt to fund the franchise acquisitions. As discussed by both Andrew and Sam, we have a pipeline of strategic opportunities that we are investigating and we'll explore funding opportunities on these. Touching on the gross loan book. The meaningful growth was achieved despite the changes in SACC legislation with the growth in the Line of Credit book and lending products in general. And we expect the product mix to continue as we move away from the SACC products. As announced, we have secured an increase in the Fortress facility to fund the ending books, and we believe that we are well placed to grow the loan books. We are running down the auto finance book and expect this to take 24 to 36 months. We continue to explore options to run down sooner than that but in a responsible manner. In New Zealand, you'll see that we recognized a noncash goodwill impairment. This is our first full year of ownership of the New Zealand operation, and we are pleased with the outcome and outlook. Our impairment is in line with general market sentiment in New Zealand, where we see others also recognizing impairments. Andrew, did touch on Spain. Spain is -- we continue to fund Spain, and this is consistent with our ongoing commitment to support our franchise networks and achieving their strategic goals. We do look to fund where their objectives are actually now aligned to our longer-term objectives. Finally, just on the dividend. This is the eighth straight dividend that we'll be declaring. So in total over the last 4 financial years, this is $50 million that has been returned to shareholders. Looking forward, we do not expect to see a change in this approach. Thank you, Sam.

Thank you, Jonty. Just in closing, I would like to briefly underline our outlook and just talk a little bit about how we're looking forward and where we're focused. And I think as Jonty touched on the review of the vehicle finance business, in particular, was quite a key review where we're really scrutinizing our return on our invested capital. And we're looking at deploying that capital sensibly and steadily into growth opportunities. And the store acquisitions for us are -- we perceive them as a low-risk way of growing earnings. We've got good visibility of the top line numbers. We then put a corporate cost overlay on to those acquisitions. And we price them at a fairly tight earnings multiple. So I think investing in growing that company-owned network in the U.K. and Australia provides some growth optionality. We're seeing our loan books growing as we're seeing continued demand feeding into the business. And the new loan products that we've mentioned are really performing well, and we're excited about that as we transition away from SACC. We have got a forward pipeline of opportunities that Andrew mentioned that we're evaluating, but hopefully give some comfort that we do deal very -- we get very detailed in the analysis, and we're tight with our pricing, consideration of our own multiple means that we keep a very close eye on valuation. We've renegotiated our finance securitization facility, increasing that to $200 million from $150 million, indicating strong support from our finance here to keep growing our loan books. And we see our balance sheet with $56 million of cash, putting us in a really strong position to continue balancing that growth with our shareholder returns. And we've got some financial highlights in the deck that we've touched on. And I think key, the growth of the loan book with the SACC transition, the small loan transition has been particularly impressive as we've managed to grow the overall loan book by 6%, really focused on that medium loan and the new loan products that are shown on the slide, whilst maintaining net loss rates at historical lows. That brings us to the close of the presentation, and thank you for listening.

What I would like to do is just to touch on some of the Q&A coming in, and we've got some great questions that have been posted. So first of all, we've had a question saying that we previously were talking about exiting SACC, the small loan product lending. The portfolio, the SACC portfolio in the end only fell modestly during '24, and we're using the phrasing transitioning away rather than exiting why did we not -- why did we decide not to exit SACC lending? That's an excellent question because it captures a few different considerations. I think initially, with the regulatory changes, making it harder to offer a SACC to a customer, we took the view that we would message exit. We felt that could be perceived in the market and politically to our own benefit. Even though that book remains extremely important in terms of earnings contribution, that SACC product, it's largely misunderstood, and it's always a focus of the political environment. So we initially were saying exiting. We had run some modeling internally, thinking we would transition more of the SACC customers into the medium loan product over time away from the small loan product. What we found is that where we could, we've done that, but a lot of customers due to risk profile, when looking for an unsecured loan product still would only qualify for a small loan. So we're viewing that more as a transition now as we're messaging that book falling to I think it's closed the year at around $54 million. We would anticipate that book to continue turning over around that level, maybe with some moderate growth as we're seeing demand increasing through the economy. Hopefully, that answers that question. Second question we've received is, can you talk more about the drop in net loss rate and whether anything structural has changed here and the various elements such as recoveries of movement in ECL? We have seen our net loss rate tailed down to 8% from historical, what I would say, normal levels of 11% to 12%. I think that's a really good indication of the strength of the economy, and we're particularly sensitive to unemployment rates in our part of the market. So our customers remain employed. They're performing well. We prepare for a normalization of that loss rate over time, particularly if the cost of living inflation continues to impact people as it has been. But we've seen the consumer digest that successfully and remain employed, which is key. And as a result, we've seen our loss rates dropped. We did see a slight increase in recoveries on the year. I think it's just a testament to continuing to improve our collections processes and ECL changes in the accounts that you're seeing are really a function of a change in the loan book composition. And as we're reducing our small loan book, which has provided a bit a higher rate because it's higher risk, we're seeing some release of the provision around that. But by and large, we haven't really changed our provisioning policy or overall rates. As a follow-on question, the medium loan book or a drop in balance in the past 6 months, any structural changes such as tightening in lending criteria there. We did make some changes to our lending criteria. We've increased slightly our profit thresholds on our credit models just to make sure that as demand is elevating, we're filling only good quality applicants and have just slightly improved the credit profile of the book as a result. I think over time, that provides us an opportunity to take some market share, grow the volumes a bit, would be more focused on a profit measure at the moment, trying to really lean into increased elevated demand and continue to grow earnings. And there is a bit of seasonality because running into Christmas that December 1st half, we'll see the loan books peak. They tend to pay down sort of through Easter into tax return time now to a low point in July and then they'll start growing again, but hopefully, higher lows and higher highs. And the loan book -- the vehicle loan book, there's a question does the vehicle loan book disproportionately contribute to net loss rate? Part of the challenge with the vehicle business was that -- whilst the loan was secured, it almost behaves like a medium loan and unsecured medium loan in terms of its performance. So we experienced loss rates that were similar to the unsecured medium loan even with that security pledged to the vehicle. I think being probably the third biggest offerer of finance in our customer segment with 2 big dominant lenders in that market meant that we were struggling to build scale. And when we looked at the overall returns on that loan book due to the amount of our cash equity that we had to invest in that book, we just made a decision to release that cash and run that book down. We did look at a sale process but felt that we're adequately provided on the book. We're comfortable with our collections process. We'll run that out, and we'll collect that out over a really -- a majority of that will be collected out over 36 months. We have a question here. How do you match interest charges and rates with your varying cost of funds? Great question. Under the National Credit Act, our fees and charges are largely regulated. So unlike a bank, we can't reprice our lending flows to offset our interest expenses increasing. So this results also weathered a big shift in additional interest expense. I think the total for the year in '24 was around $22 million. And it was about $16 million for prior year. So part of the renewal of the facility was obviously improved our pricing, but with that rate floating on the securitization facility, any interest rate reductions will feed through to bottom line earnings immediately. The way that facility is priced, it's on BBSW plus margin. So it kind of floats up and down with the reserve bank increasing and lowering the cash rates. Then we had another question on the time line of fully exiting the high-yield small loan market. As I said, we'll -- that book will be a smaller proportion of the total loan book but it will remain in place for the foreseeable future. And then we do have a question around the Fortress facility. Can you comment on the interest rate and what equity does CCV need to contribute to every dollar of loan growth? The way the facility is structured is that each of the loan products are structured in their own way. I think at a blended level, I think about on the $1, about $0.70 being provided by the facility and about $0.30 of cash depending on the eligibility of that receivable we sell in and we buy back through the course of the month, but it's roughly like that with no covenants on that facility and just some undertakings. It's a great facility for us and provides good flexibility. And when we've been out to market and compare it to other offers in the market, we're confident we've got really good pricing on that. We did announce -- we had a question you announced you are no longer going to provide a breakdown of your personal loans portfolio composition in the future. What is the reason for reducing the level of visibility provided to investors? It's really not a question of providing less visibility. We're still trying to determine what the best way to present the information is around the loan book. I think in summary, there's a lot of complexity with the loan book in that small loan category. We've now got 2 products in that bucket. That's a small amount of credit contract and a pay advance product. We've now introduced a Line of Credit product. We've got the medium amount loan product. Customers are moving through the loan book in a really nice way. I think as their credit profiles are improving, if they're starting with a small loan, they're moving into a medium loan. And hopefully, over time, they move into a Line of Credit, the Line of Credit being the lowest yield product for the business was the best for the customer in terms of cost and flexibility. But we need to have a good view of risk profile to enable that to happen. So when we look at lifetime value with the customer, the loan products are really designed in the loan book to retain customers that we might have been previously rehabilitating and then losing to other lenders. And I think the simplest way we think about the business is really looking at that gross loan book. We'll still provide some information around the different segments of the loan book. But I think it's less now about a product focus, and it's more about a customer focus for us. So whereas we traditionally only had the small loan in 2016, now with these other loan products, we're just viewing that loan book more homogeneously and in a different way as we sort of really center on the customer. We have a question. In your past experience for the U.K. and Australian store buybacks, what dissynergies and synergies have you experienced? It's another great question because we did establish or attempt to establish a corporate store network in the U.K. about over a decade ago. But opening greenfield stores, we took a strategy at the time to enter the U.K. by establishing our own company stores from scratch, and it was a difficult challenge establishing that network and opening stores and training staff and growing. I think similar to the way we grow in Australia through our franchise model. We changed our strategy to enable the growth to happen with the franchising network that now puts us in a position to consider acquiring these networks back into our corporate operation. Now that's been established. So we generally prefer to open greenfield sites using our franchise partners, in general, we do open some corporate that franchises are very good at opening new stores and establishing local community operations that then provides us an opportunity to fold into our company network. The U.K. and Australia sit on the same point-of-sale platform. There are a lot of similarities with those 2 networks that enable us to leverage that technology. And hence, the acquisitions are fairly straightforward. They're already on our retail platforms. And with the most recent acquisition in the U.K. of the 42 store network, another very important part of that was the management capability that came into the business with that acquisition. So that established as an onshore team with the capability required to manage that network. And importantly, the operators very well and to assist us in terms of identifying and executing opportunities. That's the end of the question. So thank you very much for your time listening. Thank you for the questions. In closing, I'd just like to thank you for joining our call today. Our next reporting event we plan to release a Q1 trading update in October for the September quarter end. So please do keep an eye out for that. Other investor and shareholder events to look out for are the Australian Microcap Conference in Melbourne in late October. We'll be attending that. And we have our AGM in November. I'd also point to our investor relations website, where we do have equity research undertaken by RaaS, Research as a Service, and that information is available for viewing under our Investor Center tab. So in saying that, thank you, Jonty. Thank you, Andrew. Thank you all for dialing in, and we look forward to speaking again shortly. Thank you.