Pepper Money Limited (PPM) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Pepper Money Limited's Annual General Meeting. My name is John Williams, and I am the company's General Counsel and Company Secretary. I would like to begin by acknowledging the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. We pay our respects to each of their elders, past, present and emerging. Following an address by our Chair, Mike Culhane and our CEO, Mario Rehayem, we will move to the formal business of the meeting. Following that, shareholders will have an opportunity to ask questions of the Board and auditor, and we will also respond to questions that were provided prior to the meeting. If you wish to ask questions, please refer to the online guide, which is available on the Shareholders section of the Pepper Money website. I will now pass over to Mike Culhane to formally open the meeting.

Thanks, John. Good afternoon, everyone, and welcome to Pepper Money's Annual General Meeting for the financial year to 31st of December, 2022. Our Company Secretary has informed me that a quorum is present, and so I will formally declare the meeting open. I'm joined today by my fellow directors, Mike Cutter; Akiko Jackson; Des O'Shea; Justine Turnbull; and Rob Verlander; and CEO, Mario Rehayem, our CEO and Executive Director. A number of Pepper Money's executive team are also here today, including our CFO, Therese McGrath; and our General Counsel and Company Secretary, John Williams. Also present is Delarey Nell, from our external auditor, Deloitte Touche Tohmatsu. He is available to address any questions shareholders may have about the financial statements. We are holding our AGM as a virtual meeting to allow as many of our shareholders in the various locations around Australia and offshore to participate in the meeting today and to have the opportunity to ask questions of the Board and the auditor. Once we have concluded the address to the meeting by myself and our CEO, Mario Rehayem, we will allow an opportunity for any general questions from shareholders. We will then discuss and vote on each of the resolutions contained in the notice of meeting. Shareholders will have an opportunity to ask specific questions relevant to each item of the business before we vote on the resolutions. There are 2 ways you may ask questions today. First, you may type questions into the online platform. To do this, click ask a question and follow the prompts. Online questions that are relevant to the business of this meeting will be read aloud to me by our Company Secretary. We may consolidate questions if we receive multiple questions on the same topic. The second way is to ask a question by phone. The phone numbers to dial in to ask questions have been given to shareholder participants in the meeting through the Lumi platform. These numbers are now on screen. Please dial the number and follow the prompts. I will now summarize the voting procedures. All items of business will be voted on by poll, which is now open. If you did not cast your vote prior to the meeting, you may cast a live vote using the online platform. Please follow the prompts on the Lumi platform to cast your vote or refer to the online guide available on the company's website. You may cast your live vote at any time during the meeting. Live voting on the online platform will close 5 minutes after the close of the meeting. I will give you a warning when this 5-minute period starts. At the conclusion of the AGM, you will see a red bar appear along the top of the online platform with a countdown timer as to how long you've got remaining to cast your vote. You must be logged on to the platform to cast a live vote. You cannot cast a vote over the phone. To confirm, when undirected proxies have been given to me as Chair, I will vote in favor of the resolution to the extent permitted. During the meeting, we will display on the presentation slides the number of direct and proxy votes received prior to the meeting on each resolution. The final results will be released to the market as soon as they are available. If you experience any difficulties using the online platform, the helpline is displayed at the top of the page. I will now deliver my AGM address to shareholders. I'm exceptionally proud of how Pepper Money continues to navigate market complexities and volatility seen over 2022 to deliver our mission to help people succeed. Despite the market slowdown seen over the second half of 2022, given macroeconomic conditions, our strategy to drive volume in the first half saw the company deliver record originations of $9.2 billion for the year. The underlying performance of the company remained strong throughout the year, and we've delivered pro forma net profit after tax of $142 million, which was up from the $141.9 million delivered in calendar year 2021. Statutory NPAT increased 8% year-on-year to $140.5 million. Given the strength of these results, your Board was pleased to announce a final dividend to shareholders of $0.051 per share. Combined with the interim dividend announced in August 2022, Pepper Money delivered total dividend of $0.105 per share for the calendar year 2022, representing a dividend yield of 6.3% annualized. During 2022, we continued to demonstrate our strong track record in accessing debt capital markets, raising over $5 billion from our 4 public securitization issuances. The market recognized our efforts by awarding Pepper Money, the prestigious KangaNews Australian Nonbank Financial Institution Issuer of the year. In 2022, we continued to enhance our digital offering with the launch of our new retail customer site, mypeppermoney. Our purpose-built technology platforms for both Asset Finance, Mortgages and Customer Operations support our customers through their loan journey, efficiently integrate with our partners' customer management systems and drive our operational scale and efficiency. Our approach to sustainability aligns with our mission to help people succeed. Our commitment to sustainability is instilled through everything we do from our interactions with customers and employees through to our environmental impact on the local communities around us. Good corporate governance and responsible lending underpin our ability to manage sustainability risks and opportunities. During 2022, Pepper Money issued our first Social Bond and our second Green Bond as part of our funding transactions. We continue to demonstrate our commitment to the environment through our leading position in electrical vehicle financing. And to support our customers' transition to electric vehicles, we gave them a period of complementary access to Evie Network's fast charging network. Our focus on our communities continued over calendar year 2022 through the Pepper Shout Out awards, which recognize and help further the efforts of people making real life differences to others across Australia. This campaign included Pepper Money providing special equipment for a gym for people with disabilities, supporting wildlife sanctuaries and helping with the distribution of food and supplies into communities. Over 300 nominations were received and 58 awards given out to people nominated by others in their community. Diversity and inclusion has always been a part of Pepper Money's DNA, and I'm proud of how our D&I strategy is supported by our guiding principles of Allyship, Celebrate and Educate, or ACE. Our inclusiveness and diversity show through in our employee profile. As at 31 December, 2022, our team was 55% female, 45% male and 41% of our senior managers being female compared to 38% for the financial services and insurance sector in Australia. I am particularly proud by how engaged our employees remain with over 90% of our people participating in our annual employee engagement survey and the company receiving a score of 78, placing us in the top 10% of companies globally. The start to 2023 has again brought market challenges. Pepper Money continues to demonstrate its resilience and agility through the ability of the business to adapt and grow through all parts of the cycle. As we look to calendar year 2023, I believe Pepper money has never been better placed to help more customers to succeed and continue to capitalize on the scale benefits that our investment in data and technology bring to our platform. Our continuous investment in this area sets us up for future innovation and growth potential that we believe will keep us at the forefront of our industry. I would like to take this opportunity to thank my fellow directors for their support over the last 12 months. As a Board, we believe we have a good mix of skills and experience to set the strategy for the business and to assist management to deliver on that strategy. As you know from our notice of meeting, 2 of our directors are standing for election today: Akiko Jackson and Rob Verlander. I will ask each of them to say a few words when we come to the formal part of the meeting. I would like to thank Mario, his executive team and all of our employees across Australia, New Zealand and the Philippines who have contributed to the success that the company has achieved over the last 12 months. Finally, I would also like to thank you, our shareholders, for investing in Pepper Money. We appreciate your support and look forward to delivering on our strategy. I will now hand over to Mario to give his address.

Thank you, Mike, and good afternoon to everyone joining us today. Today, I will touch on Pepper Money's strong performance across key metrics in 2022 and the team's delivery of our results. We ended 2022 with a strong focus on driving volume to support AUM growth as we expected that macroeconomic condition and interest rate increases would see the market slow down over the second half of the year. It was this strategy to deliver a fast start in the first half that supported the business when markets materially softened over the second half of 2022. In the first half, we delivered above-systems growth with lending AUM at 30 June, 2022 of $18.3 billion: mortgage AUM increasing by 24% on the first half of calendar year 2021 to $14 billion and Asset Finance AUM increasing by 43% over the same period to a record $4.3 billion. Originations closed in the first half of 2022 at $5.6 billion in total, a growth of 53% on the first 6 months of 2021. The second half of the year saw a significant softening in the markets in which we operate, particularly Mortgages, as 8 consecutive interest rate rises by the RBA from May to December 2022, lifted the official cash rate in Australia from 10 basis points to 310 basis points. The impact of these rapid rate rises, coupled with the ongoing inflationary pressures and a notable deterioration in consumer sentiment, all contributed to a marked slowdown in the property market and a cooling off in property prices. By year-end, the Australian residential property market, excluding refinancing, had declined and CoreLogic reported that overall house prices had fallen 5% across Australia year-on-year. As the housing market softened, we saw competition for share of market amongst the major banks intensify with heavily discounting of prime lending rates and substantial cashback offers. At the same time, capital markets were experiencing volatile conditions, which impacted funding margins for non-deposit lenders. Entering the second half of 2022, given the breadth of our product offerings and the depth of our capability in pricing for risk, we shifted our business focus away from low-yielding prime residential mortgages to our higher-yielding nonconforming mortgages, commercial real estate and our Asset Finance portfolio. This resulted in the mix of our mortgage originations shifting in the second half of 2022 to 47% prime and 53% nonconforming compared to 58% prime and 42% nonconforming in the second half of 2021. While originations were down in the second half, most notably in our mortgage business, we added an additional $4 billion to our first half results to close the full year at the highest reported originations of $9.6 billion, a growth of 14% on 2021. Mortgages closed 2022 with originations of $6.8 billion, up 7% on PCP and Asset Finance grew originations by an impressive 35% to $2.8 billion. Lending AUM closed the year strong at $18.2 billion, up 15% on PCP and total AUM at $19.2 billion grew 13% on 2021. This record achievement in originations and AUM saw Pepper Money outpace the market in terms of growth for the full year with Mortgages growing 2x system and our Asset Finance business delivering 35x systems growth. For our customers and our partners, we strive to make the complex simple. Our credit decision consistency and turnaround times remain at the forefront of the market. We achieve this through our continued investment in our in-house purpose-built technology and how we leverage the data and insights we have built since business inception. The consistency in how we approach technology by reinvesting the same levels year-on-year sees not just our productivity improve, but demonstrates the business' strong capital discipline and ensures minimal change to depreciation charges. We continue to build and strengthen our distribution footprint with total accredited mortgage brokers across Australia and New Zealand increasing to 20,561 and accredited partners and introducers in Asset Finance growing to 1,996. Our mission to help people succeed saw 77,214 new customers onboarded over 2022, and we have now helped over 366,000 customers since 2004. Pepper Money's strong track record in accessing debt capital markets and the strength of our long-standing funder and investor relationships developed over the past 2 decades really shows through when market conditions are challenging, which was what we have seen in 2022. We welcomed 4 new investors. We increased our warehouse capacity to $11.3 billion, up 14% on December 2021. We successfully executed 7 public securitizations over the year, raising more than $5 billion in total. We also raised $1.8 billion through private term deals, and we have had a strong start to 2023, having already executed PRS 35 in March for $1 billion. Despite the challenging market conditions, we delivered pro forma NPAT of $142 million, in line with our record delivery in 2021 with statutory profit for 2022, growing 8% year-on-year to $140.5 million. Pepper Money is now entering its 23rd year of business. And year-on-year, we have been able to deliver disciplined growth, whether it be volume, customer, distribution footprint or profitability. There is little doubt that 2023 is likely to see the current challenging market conditions continue, particularly in the short term. While the reserve bank paused interest rate rises in April, the cash rate has already increased a further 50 basis points in this year. And the OCR now stands at 3.6% compared to 10 basis points just 12 months ago. Customers have now experienced 10 rate hikes since May last year, and market consensus is converging on the RBA increasing rates by a further 25 basis points next month. The combination of rising rates, high inflation and consumer uncertainty has impacted the overall market for Mortgages. Over the last 12 months to March 2023, Equifax data shows that mortgage credit inquiries have declined 15%. As interest rates rose, bank competition intensified and given funding cost volatility, we took the conscious decision over the second half of 2022 to slow down new applications and to shift focus to our nonconforming segment. So while this has seen our mortgage application volume decline, we have importantly maintained Mortgages AUM closing March 2023 at $13 billion in total. Before moving to Asset Finance, I would note that over March 2023, we started to see an increase in mortgage inquiries. And alongside this, our application volume is starting to increase as well. The story has been different in Asset Finance. While the market has slowed, the rate of decline has been significantly lower than in Mortgages with inquiries only down 5% for the year to March. The strength of our Asset Finance business is defined through our breadth of distribution, the ease of doing business with us, given our purpose-built technology and our position in EV and novated leasing has seen our applications grow 19% for the year to march. And I am extremely proud to say we have now achieved over $5 billion in AUM for Asset Finance as at 31 March, 2023. The ability to manage performance through capitalizing on different trends in Mortgages and Asset Finance markets shows the benefit having a balanced business portfolio. As ever, I am confident Pepper Money will continue to differentiate itself through its portfolio diversity, quality of assets, operational scale and efficiency underpinned by our core competencies of credit, funding, distribution and digitally enabled data. This positions us well to continue to manage through the cycle. Thank you. And I will now pass back to our Chair, Mike Culhane.

Thank you, Mario, for that update. I will now turn to the formal business of the meeting. The first item of business is to receive the company's financial report for the financial year ended 31st of December 2022. Mario and I have already discussed in some detail the company's financial performance over 2022 in our addresses, but are happy to respond to any questions from shareholders. As noted at the beginning of the meeting, Delarey Nell, representing our external auditor, Deloitte Touche Tohmatsu, is also available to take questions about the conduct of the audit and the preparation and content of the independent audit report. There will be no vote on this item. It is a discussion item only. I will now take questions received through the online platform about the company's financial statements, the performance of the company over the year, the directors' report or the auditors' report. As there is a separate agenda item dealing with the remuneration report, I will address questions about remuneration matters when we consider that item of business. John, have you had any questions received on this item?

No questions have been received on the financial statements.

Thank you. I will now take any questions received over the phone.

No questions have been received over the phone.

Thank you. We now move to consider each of the resolutions that were included as part of the notice of meeting for the AGM. Resolution #1. The first resolution is to consider the remuneration report, which commences on Page 50 of the 2022 annual report. The remuneration report sets out the Board's assessment of management's 2022 performance against the objectives established at the start of the year. The resolution on this item is advisory, but we will take shareholder feedback into consideration when formulating the company's future remuneration policies. I will now take questions on this item of business received through the online platform. John, any questions received?

Yes, we have received 2 questions from [ Stephen Mayne ]. The first question is, did any of the 5 main proxy advisers, ACSI, Ownership Matters, Glass Lewis, ISS and ASA, recommend a vote against any of today's resolutions? Which of the proxy advisers are covering Pepper Money? And then well done on disclosing the proxies to the ASX with the formal address and receiving strong support on all items. Why was KKR able to vote on the pay items given they have paid representatives on the Board? Did you seek legal advice on whether KKR should vote?

Right. Okay. Maybe I'll ask you to repeat those one at a time, John, just so I can address them specifically. But on the first one, I think we obviously acknowledge that proxy advisers have an important role to play. We're not -- don't necessarily think it's appropriate for us to comment on the individual recommendations to their clients per se. Let me answer to your first question. Maybe you can read the other ones out, so I didn't write them down quickly enough, John?

Yes. So I think which of the proxy advisers are covering us, and they are not as far as where we are?

Yes. Correct.

And the questions relating to why was KKR able to vote on the pay items given they have paid representatives on the Board, did you seek legal advice on whether KKR should vote?

Yes. I mean we obviously follow all good corporate guidelines in terms of taking legal advice on all these items. And so, yes, it was very clear that they were able to vote on this matter.

The second question also from Stephen Mayne. Why did you run a fully virtual rather than a hybrid AGM so that your 4,000 retail shareholders would have an opportunity to meet the directors? Will you commit to doing a hybrid next year as this is best practice for maximizing shareholder access and participation?

Yes. I mean I think we certainly will take that under advisement. It's a good suggestion. I think it's always a balance. But yes, I think now we're well past sort of the COVID period, which is obviously why we were in virtual last year. We can take that in mind ourselves as directors and consider that for future years.

Thank you. No further questions on the online platform.

Great. Operator, any questions on the phone?

Chair, I can confirm there are no questions on the phone.

Okay. So direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes are cast and they will be added to these votes and proxies and the final result will be lodged with the ASX. The next item of business is the reelection of Akiko Jackson as Director. Akiko is an Independent Non-Executive Director of Pepper Money, and was appointed to the Board in May 2021 just prior to the company's listing. Akiko is standing for reelection today to ensure that the company complies with the ASX Listing Rules requirement that a listed company, which has directors must hold an election of directors each year. Akiko is an internationally experienced Non-Executive Director and Strategy Adviser. Akiko has more than 30 years' experience as an executive in the financial services industry, including with CBA, Macquarie Bank and Westpac in Australia and MUFG and Shinsei Bank in Japan, and as a strategy management consultant in the U.S. and Australia, too. Akiko has worked in both the private and public sectors and large corporations and startups and has extensive experience in strategy and business development, risk management and large-scale transformation, including digital transformation. Akiko is a Non-Executive Director of the Australian Child's Education and Care Quality Authority and the Foundation and Friends of the Botanic Gardens, and a member of the Audit & Risk Committee of Infrastructure New South Wales and the Audit & Risk Committee of Transport for New South Wales. She also chairs the Finance, Audit & Risk Committee of the F&F and as Chair of the Audit & Risk Committee of ACECQA. Akiko's past directorships include a Non-Executive Director of 86 400 Limited as well as being a member of the Advisory Committee of the Australian Treasury, the Portfolio Advisory Council of Services Australia and the Strategy Advisory Committee of the Department of Immigration and Border Protection. Akiko is a Fulbright Scholar with an MBA from Stanford University in California and has a Bachelor of Law from Keio University in Tokyo. I will now ask Akiko to say a few words about her reelection.

Thank you, Mike. It has been my pleasure to be a Non-Executive Director of Pepper Money for the past 2 years, and I'm looking forward to being reelected for another term. My extensive experience in financial services have allowed me to make a positive contribution to the Pepper Money Board and Committees over the last 2 years. And my background in digital transformation means that I can provide a unique contribution to the Board as Pepper Money continues its digital journey. I look forward to continuing to work closely with my fellow directors and management as we execute on the company's strategy. Thank you.

Thanks, Akiko. The directors with Akiko abstaining unanimously appoint Akiko's reelection. I will now take any questions on this item of business received through the online platform. John, any questions?

We've received one question from Stephen Mayne.

Okay.

Given the interesting discussions across a range of topics today, including on director elections, could the Chair undertake to make an archived copy of the webcast, plus a full transcript of proceedings available on the company's website. The likes of 9, AGL, ASX, ANZ, Domino's and Lendlease, all produced their first audio transcripts in 2021. Will you follow suit today? This is something IAG have been doing since 2003.

Okay. That's an interesting thought. Thanks, Stephen. We'll definitely take that under consideration as well and come back to you with an answer shortly. Operator, any questions from the phone?

Chair, I can confirm there are no questions on the phone.

The direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes cast today will be added to these votes and proxies and the final result will be lodged with the ASX. Now I'll turn to Resolution #3. The next item of business is the reelection of Rob Verlander as Director. Rob is an Independent Non-Executive Director of Pepper Money, and was also appointed to the Board in May 2021 just prior to the company's listing. Rob is standing for reelection today to ensure that the company complies with the ASX Listing Rules requirement that a listed company which has directors must hold an election of directors each year. For over 35 years, Rob has held senior positions at investment and commercial banks in Australia and U.K. in the areas of fixed income, capital markets, infrastructure and securitization. Rob's roles have included Head of DCM Origination BZW Australia, Head of Fixed Income Commonwealth Bank of Australia, Europe, member of Management Committee, CBA, Europe, Head of [ Primary ] Markets CBA and a leading member of CQ CBA's Institutional Bank Diversity and Culture Council. Prior to his retirement from the banking industry in 2019, Rob was Head of the Securitization business at the Commonwealth Bank of Australia, where he acted as a banker to many of Australia's major non-bank lenders, including Pepper Money. Rob holds a Bachelor of Arts and Law from the University of Melbourne, Master of Applied Finance from Macquarie University and a Graduate Diploma in Commercial Law from Monash University. I will now ask Rob to say a few words about his reelection.

Thank you, Mike. I'm Rob Verlander. It's been my privilege to be a Non-Executive Director of Pepper for the past 2 years. It will be a further privilege to be elected for an additional term. I've known Pepper Money well for a long period of time through my role at the Commonwealth Bank and was delighted to join the Board prior to listing in May 2021. I feel I've made a positive contribution to the Board through my role across all committees, as someone who has over 35 years executive experience in financial services, I believe my skills and experience are well suited to the Pepper Money Board. I look forward to continuing to work closely with my fellow directors and management as we execute on the company's strategy.

Yes. Thanks, Rob. The directors with Rob abstaining unanimously support Rob's reelection. I will now take any questions on this item of business received through the online platform. John, anything from you?

There are no questions received on this item.

Thank you. I'll now take any questions received over the phone. Operator, any questions?

Chair, I confirm there are no questions on the phone.

Thank you. The direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes cast today will be added to these votes and proxies and the final result will be lodged with the ASX. Resolution #5 -- no, Resolution #4. The next item of business relates to the grant of 1,529,120 performance rights under the Executive Rights Plan to the company's Chief Executive, Mario Rehayem. I will now take questions on this item of business received through the online platform. Anything from you, John?

We have seen -- received one question through the online platform from Stephen Mayne saying could the CEO summarize his past LTI grants as to whether they have vested or lapsed? Also, has he ever sold ordinary shares in the company [Technical Difficulty] on market without relying on [Technical Difficulty] position in the company?

Thanks for the question. I can confirm that the IPO has lapsed, so the [Technical Difficulty] have lapsed and none have vested to there, and I have not sold any shares during my time as CEO.

Thanks, Mario.

Thanks, Mario. Any questions from the phone?

Chair, I confirm there are no questions on the phone.

Thank you. The direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes cast today will be added to these votes and proxies and the final result will be lodged with the ASX. Now turning to Resolution #5. The next item of business relates to the grant of 207,038 restricted rights under the short-term variable remuneration plan to the company's Chief Executive Officer, Mario Rehayem. I will now take questions on this item of business received through the online platform. John, anything from you?

Yes, we received one question from Stephen Mayne. AustralianSuper, Australia's biggest industry, Super funded only substantial institutional shareholder with a 9.4% stake. They have more than $20 million [ under water ] on their investment. And when this happens, institutions sometimes lash out and vote against incentive grants. Have we had any engagement with AustralianSuper about the operation of the company and the resolutions up for voting today?

Yes, we have. So Mario and our senior team speaks with AustralianSuper on a regular basis about the performance of the company. And we did actually have a specific conversation with we being myself and Justine Turnbull and various members of the team with AustralianSuper prior to this AGM. Any questions from the phone?

Chair, I confirm there are no questions on the phone.

The direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes cast today will be added to these votes and proxies and the final result will be lodged with the ASX. Resolution #6. The next item of business relates to the grant of 854,749 service rights under the Executive Rights Plan to the company's Chief Executive Officer, Mario Rehayem. I will now take questions on this item of business received through the online platform. Anything from you, John?

No, no questions received on this item.

Operator, any questions from you?

Chair, I confirm there are no questions on the phone.

The direct votes and proxies received for this resolution are now shown on the presentation slide on your screen. After polls close at the end of this meeting, votes cast today will be added to these votes and proxies and the final result is lodged with the ASX. Now turning to my closing remarks. Thank you, everyone. This concludes the business for the meeting. I will just wait a minute for any final votes on the resolutions to allow shareholders and proxy holders to submit any final votes through the online platform. Thank you. We will now close the polls for voting on each resolution, and I'll also declare the AGM closed. The results of today's AGM will be released to the market and made available on the ASX website as soon as possible, which should be later this afternoon. If shareholders have any additional questions that have not been addressed in today's meeting, please submit them to us or questions relating to your shareholding, please contact the registry directly. Once again, thank you for participating in today's meeting and your ongoing support of Pepper Money.