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

Good morning, everyone. Thank you for joining the FY 2026 Cash Converters Earnings Call. By way of introduction, we will run through our investor presentation, which hopefully you can see on screen. And in the room with me today, it's myself, Sam Budiselik, CEO and Managing Director of Cash Converters; David Rose, CFO of Cash Converters; and some of the management team. I guess just before I do start on the presentation, it's been a big 18 to 24 months for the company. The investors that are on the call that have followed our story will recall that we signaled that period ago that we were making a significant strategic change in terms of our lending business, ultimately, exiting the small amount loan space commonly referred to as payday loans in the market. And with that book at that period over $100 million in size, a substantial contributor to our earnings profile and fairly well established through our franchise and corporate store network. It was a huge move strategically. And as a result, there are many different outcomes that have played through, pleasingly, as predicted, and we'll talk about that as we move through the earnings call that some short-term headwinds as a result of that product change will hopefully lead the company to a position where we can refinance our securitization and banking facilities. We do still remain unbanked largely as a function of historically offering that product. As we look forward -- well, as we sort of touch on the strategy and look forward, we did communicate that we were hoping to offset some of the short-term earnings impact of the lending product change by acquiring our franchise stores in the core markets of Australia and the U.K. and also New Zealand. Those three core markets we operate as the master franchisor, and we're very much committed to really corporatizing those markets and growing those markets. With the change to the small loan product, we also executed a series of other changes that meant that we really focus now on a single personal loan product. We're on the slide showing now, hopefully, the Cash Converters now. On the lending side, it's a single personal loan product that we offer in Australia, rates ranging from 19.95% per annum up to loan sizes of about $10,000. And this loan product is very different, not only from a regulatory perspective, but from a credit risk perspective. We've got much lower loss rates, a very different looking loan book due to a very different customer now that we're focused on, and we'll talk about that as we move through the presentation. So that's been a terrific outcome for our business as we've executed what is a significant pivot. And like I say, I think the core benefit of refinancing our lending facilities is still to come. The retail network, pleasingly, the earnings mix of the business in the short term has balanced a bit more where retail has had a terrific 12 months. We've acquired stores, like I say, predominantly in the U.K. and Australia, our franchise stores. But we've also seen very strong same-store growth in Australia of around 13% year-on-year and in the U.K., 6%. And I think if you look in the retail market at other listed retailers and performance, our same-store growth rates, they are exceptionally strong. And the mix of inventory and store type moving towards luxury higher-end inventory has been terrific for our retail business, and we'll talk about that as we move through the results. In summary, that leaves us with 200 corporate stores across Australia and the U.K. predominantly. We still have 164 franchise stores in those markets. So we've got a strong pipeline of potential acquisitions lined up in front of us. These stores are on our point of sale. They're branded Cash Converters. It's a simple operational integration of these acquisitions. So we're pacing ourselves through that pipeline and our strategy remains one of acquiring those franchise stores where the seller is -- has reasonable price expectations, and we can reach a good outcome. Just to touch on a simplified business now. We sort of think about our customers in two kind of verticals. We've got our personal loan customers, the cash loan customers. That personal loan product, it's only offered in Australia. That loan book grew almost 5x in the 12 months to in excess of $110 million. That loan book is, I think, demonstrating strong brand reach and trust for the Cash Converters brand, both online and in stores. And it's also symbolic of a nonbank lending market in Australia that is significant as the banks have really exited personal loan lending, but in general, really sort of taken a more risk-off approach. Nonbank lenders have really managed to sort of fill that space. But we're different because we are very much focused on meeting our customers in-store and online. And those customers are sub or near prime customers. So that's typically customers with a credit score around 550. And for those who do follow their credit score closely, prime credit score's around 1,000. Our customers sort of sit a bit below that. Feel very comfortable serving a growing market there. And that based on our loss rates falling, is working very well for us. On the retail side, so in Australia, the U.K. and New Zealand, where we have our corporate stores, we've seen just a general shift in that business. I think we've got a much better set of management reporting and operational reporting wrapped around that business now having invested in our technology. We are certainly leveraging AI and pricing technology to grow a new range in our stores. So we've always had the capability to really buy and sell across a vast line of inventory. AI has helped us establish a new line of handbags and high-end shoes and higher-end inventory through the stores. So the two pillars of the business operate well. They're slightly different in terms of, like I say, the personal lending in Australia complementing the store network, whereas in the U.K., it's a retail buy-sell and [ pawnbroking ] network that we've got. And some metrics down the bottom, we just call out that we are a large business dealing with a lot of customers, and we retain a lot of data that we then use to feed our credit models in particular. We've included some visuals of the new luxury store in Perth City. So this store concept, we piloted in Bondi about two years ago now. That first pilot was extremely successful, and we've ended up expanding across the major capital cities in Australia. The store format obviously looks very different. It's a higher-end fit out. The inventory is different. It's only high-end luxury, whether that's handbags, watches, jewelry or high-end consumer electronics. The mix of inventory is obviously different. So these stores do acquire a lot of inventory that we can put out into the suburban stores. But I think as flagship stores, we're getting a lot of really strong customer feedback about the look, the feel and the service offering. It's so unique to have a repurpose reseller by our size and scale with our brand strength operating in the capital cities now, and that's doing a lot of good for us winning new customers into both parts of our business. We did just add a snapshot of some of the inventory available online, too. I think there is a perception that Cash is still really just predominantly focused on tools and some of the traditional product lines that we've been known for. But some of these unique pieces that we're now getting and the availability of new is sometimes almost impossible to acquire. We've got these items available. This is just a standard snapshot of the website. This is not an AI-generated image. It's stuff that we've got now that we're selling through our stores and all the stuff that's in stores is available online. So I think just trying to summarize what is still a little bit of a washing machine in terms of our earnings as we finalize our transition. We've really thought about this financial year as a strategic reset year. So we're very excited about what we've achieved considering the large strategic changes that we've made that we touched upon at the start of the call. FY '27, it's really a matter of powering up and investing and scaling in our core product and market mix and executing -- continuing to execute our strategy. I think the acquisition of the stores, we always thought was important because we've got an intent to corporatize our network. And they immediately add some earnings cover for the underlying personal finance changes that we've made. As we grow the new Personal Finance book, the nature of the ECL, the upfront loss provisioning, means that we're expensing upfront for future losses. The growth of that book comes with a bit of drag. So I think both of those strategies together have meant that we've actually delivered a really strong result, knowing that we have the benefit now of some clear air with our lending business. And then as we turn our minds to FY '28 as that line of credit, that new loan book grows and matures and seasons, the lending business should come back online and contribute to our overall earnings profile. So just to move forward to the financial highlights. I might just ask David to touch on a few key callouts, relatively new to the business, probably around for nearly nine months now. It's been great having David on the team. And David, if you'd like to just carry us through the financial highlights.

Yes. Thank you, Sam, and good morning to everybody. So just talking to Slide 8 at the moment in the deck and leading with a couple of record numbers, record revenue of $429 million, up 11% on the prior period and feeding into an operating EBITDA, which is a record number of $67 million, also up 11% and showing how our expanded store network is now carrying our earnings in the business as we've completed the lending change that Sam alluded to earlier on. The operating NPAT figure of $23.2 million, although down, is a deliberate impact of our strategic change rather than a deterioration with our legacy books running off faster than the new Cashies Loan scaled and the increase of depreciation and amortization and some more finance costs from the expanded store network. Statutory NPAT was at just a shade under $20 million, and that includes a charge of $3.5 million in relation to transition and acquisition costs. If you strip those out and you add them back, you're at $23.2 million of operating result and those are the same items that we disclosed at the half. The Cashies Loan book, Sam has already touched on at $114 million, is up 5x from where it was this time last year. That's the future growth engine, and it's in place and it's seasoning nicely. Cash of $37.2 million is down, but simply reflects the cash that we deployed into the accretive store acquisitions, not any underlying cash burn issue. We're paying a sixth consecutive fully franked $0.02 per share dividend for the whole year. We have undrawn facilities still in place on our securitization. And overall, that dividend leads to a 6.7% yield on the stocks at a 30% (sic) [ 30-cent ] share price. Moving now to the next slide. And really, this story is the story of the year in what -- this chart is the story of the year in a single chart. The rundown loan books were 40% of our revenue back in FY 2022, and they are now 15%, as you can see from the chart on the left. The U.K. and New Zealand have gone from 4% of our book to 30% and the AU stores have similarly increased now at 56% of the total from 49%. So the Australian stores and the U.K. EBITDA has tripled since FY '22, and that's a broader high-quality base, which has been deliberately built to replace that legacy lending runoff and the exit from payday. The EBITDA composition is now heavily weighted to Australian stores at $46.8 million. The PF or Personal Finance and the legacy lending is now under $20 million. U.K. and N.Z. stores $26 million, and then you've got the head office costs, which pleasingly, you can see over the last five years representing a very flat trend. So that legacy book now represents a relatively small proportion of the total gross loan book, meaning that the highest risk tail in our business has largely gone. And the NPAT step down from the $25.1 million peak last year, we believe is the sort of near-term cost of that transition, the legacy runoff outpacing the realization of the new book earnings. It's simply a timing issue as we go through this year. Turning to the next slide. Slide 10 illustrates that transition really neatly. And you'll see working from the left-hand side, the bridge in NPAT from last year to this year, the store revenue and the lower bad debts largely offsetting the planned $18.1 million of financial services decline. So net store revenue is nicely up. And really, really pleasingly, 10 points of that net store revenue that was up 35% came from existing stores, like-for-like basis; 25 points came from the new stores. Pawn income continues to be an important part of our business model and was up 31%, largely from the new stores and helps to offset the personal finance and vehicle rundown on that payday and vehicle lending exit. Employee costs were up, but the new stores add $16.2 million of that because like-for-like costs in the stores dropped by $2.8 million. So the existing base is getting more efficient. Bad debts were down 52% on those smaller legacy books and the improved credit quality, meaning our overall net loss rate was 11% versus the previous 16%. And our finance costs increased on the cost of the Lloyds Bank facility in the U.K. funding our new stores and also the -- largely on the U.K. facility. Moving quickly to Slide 11, the balance sheet. Loan receivables are flat on the year, but the composition has been transformed as part of this strategic pivot. The core loan book has increased 165% and has fully offset the rundown books, which are now sitting at $72.8 million of our total book. Goodwill and intangible growth has been significant, and it is a direct result of the M&A work that we've done in the U.K. and Australian acquisitions. That same M&A lifted inventories, lifted PP&E and right-of-use assets. The cash, as I mentioned before, is down 50% to $37.2 million, but is the mirror simply [ about ] acquisition outlay. Borrowings are down very slightly. The Fortress facility reduced by a single percentage point to $114 million, and that's as the legacy SACC and vehicle finance transitions into the Cashies Loan. All net assets increased to $253.8 million, strengthening of the balance sheet through the transition, not a stretching of the balance sheet. Two more quick slides on the cash flow, Slide 12. The operating cash flow at $33.5 million and free cash flow, importantly, was $20.3 million after allowing for our CapEx on our stores, meaning that the dividend is self-funded. Customer receipts increased and the business acquisition outflow that I've referenced a couple of times there is clearly shown as the primary driver of the cash movement, a deliberate growth choice on our part. The net personal loans advanced were reduced by just under $10 million, and that reflects the capital that's running into growing the new Cashies book. And financing was $24.1 million, which was the November 2025 raise to support the CCIG acquisition in Australia, offset by dividends, offset by the borrowings and the lease, and you see the net cash position. And the last slide before I'll touch on before I hand back to Sam is the segment performance. The store segments really have carried the group this year as is the story. The Australian stores EBITDA is just a shade under 50% U.K. at 21.7% and New Zealand at $4.4 million. Same-store sales increased 13%. We have called this out a number of times, and I think it will come up further in our conversations. And in the U.K., up 6%. So the growth is underlying in the business, not just acquired growth. Personal Finance, as we've discussed, is the transition drag with the revenue down 40% and EBIT down 60%, but that is a deliberate legacy runoff of that book and the earnings rebuild is expected in FY '27 as the new cash loan seasons and continues to grow. Vehicle financing revenue, that reduction is the tail of that strategic exit. The origination was actually ceased in June 2024. It's not any reflection of any demand issue. In New Zealand, we also ceased payday lending in Q4 of this year and are redeploying the capital. So you'll see a PBT swing of $2 million. Group PBT of $28.8 million includes $2.2 million of that nonoperating M&A and transition costs that I referred to earlier on. So with that, I'll hand back to Sam just to finish off with a view on our growth prospects and outlook.

Thank you, David. I think as we touched upon on the way into the call, we're very confident in the strategy that we've executed to date, particularly over the last 12 months. Our focus really remains on leveraging what is a uniquely positioned retail offering through our store network as cost of living is increasing as the acceptance of repurpose inventory and the aspirational affluent segment that we service is growing, we remain committed to growing our store network. So we target -- we'll be acquiring target store numbers of something around 15 to 20 stores in FY '27 across the major markets of Australia and the U.K. And we look to open 5 to 10 greenfields across those markets. So we still see strong store network growth this year occurring off the 200 base, up 10% or 15%, 20%, something like that. In terms of the lending business, we do still carry some additional overheads to where we'll end up once we fully exited the legacy book runoff. And we wind down the associated operations teams. And going forward, we'll be talking solely about the Cashies loan, the new flexible line of credit product that we're offering with lower loss rates and a lower cost to serve over time as the customers that are won into that book continue redrawing as they have need to (sic) [ for ] credit going forward. I think overall, when we're looking at our loss rates, we're targeting obviously a reduction on where we were in the past. Whilst the SACC small loan product was high yield, it was high loss and it brought, as I said at the start of the call, some other impediments such as funding onshore and accessing the banking system. And so with the exit of that loan book now largely complete, we turn our minds to refinancing our business, optimizing our balance sheet, as David touched on, and really executing on the pipeline of franchise acquisitions that we've got in front of us and in terms of growing our loan book. I think with the -- we have had questions over time in terms of the metrics around the store acquisition. So we have added some slides. Slide 17 talks about some of the standard metrics across our store network. For those that are looking at the store network from a retail perspective, our inventory turnover at around 2.4x in Aus is blended with jewelry being a little bit lower and general merchandise being a little bit higher. I think as you see the mix of inventory changing to that higher-end luxury inventory mix that we touched on, the turn rate will increase. But I think it's safe to say we've really got good scorecards in place now and a good view on the global store network as we compare the stores across the network. We're seeing opportunity to continue to optimize and in particular, the same-store sales growth is a strong lever for us across the network. And we have on the next slide, Slide 18, included just some general metrics to outline how we look about the acquisition pipeline. We're still buying in a very disciplined way when we're striking these deals even for the bigger networks, which would be at the higher end of that multiple range, but the pretty compelling opportunities when you think about the lower level of risk on integration and obviously, the view of the business that we have with those stores being on our platform. So we remain -- we do remain committed to focusing really predominantly on the AU and U.K. markets due to the size of the residual franchise networks. And then just to close out, like we said with the outlook, we're very much focused on continuing to execute in '27. We will be really starting now to turn our minds to funding and our balance sheet and ensuring we're well capitalized to continue taking advantage of the opportunities that are in front of us, but doing so in a steady way as we have done over the past few years. And I think as we're looking through, whilst we're probably on a 3-year time line here in this slide, we're very comfortable with the way that the new loan book is growing, but that's going to have a great future benefit for our business that we're not seeing in these numbers. So we feel pretty comfortable. We've got a pretty good catalyst in our refinancing, and then we've got some great growth levers that are really yielding results. And we finished on our investment highlights slide, which I think hopefully underlines all of that. So we were planning on taking some questions. I don't think we've had any come through. I do appreciate everybody dialing in and listening to the call. We're obviously happy to take questions direct if you do have anything that comes up. And hopefully, we look forward to seeing many of you over the next week or two, either on investor calls through the brokers or at the meetings. Thank you very much for your time, and we look forward to being in touch again soon.