Pioneer Credit Limited (PNC.AX) Earnings Call Transcript & Summary

Good morning. My name is Chantelle Hadley, and I'm the Head of Digital and Customer and part of the senior leadership team at Pioneer. Thank you for joining our FY '25 results presentation. I'd like to also introduce our Managing Director, Keith John; and our Chief Financial Officer, Barry Hartnett, who will be taking you through our results today. [Operator Instructions] For now, we will start with Keith.

Thank you, Chantelle, and welcome from me to our financial year '25 results presentation. Today, I'll be taking you through the highlights. Barry will lead us through the financial performance, and then I'll take you through some of the detail about what's happened over the course of the past year and setting us up for FY '26. In terms of the highlights, we've had a remarkable year in FY '25. As we entered the year, we said this was a pivotal year, one where we needed to demonstrate and deliver for the market, and our team has done that in spades and more. The highlights include we have secured a number of forward flow agreement renewals at meaningful discounts to the last prices we were paying. Now this is very, very important. One, because we're buying the same quality portfolios at better prices that increases our returns. And once we get to Page 13 and you look at our underwriting to our expected recoveries, you'll see exactly what I'm talking about and the value of that to this business. More so, it's why. Why are people selling to Pioneer at better prices? It's because of our relationships. It's because of the way we position this business and treat their customers and our customers and the outcomes we get and the integrity in which we operate this business. It cannot be underestimated. We've delivered a net profit after taxation of $10.5 million against guidance of $9 million, a beat of 17%. From where we were last year and from the market's cautious and appropriately so, but cautious approach to how we were going to deliver that number, we have materially beaten it. And that is a result for which we're very, very proud, but also much more importantly, which sets us up with the momentum to deliver on our FY '26 guidance, and we'll get to that very, very soon. As you know, we refinanced our senior debt in late July 2024. There is some washup of that through the accounts, of course, which is why the results normalized this year as we called out very early on in the piece, but $8 million annualized pretax savings. And then for every 25 bps decrease in the cash rate with the RBA, we save about another $700,000 pretax annualized. These are great tailwinds for this business. Our PDP assets are up $20 million in a year of muted purchasing, but I'll get to that. Part of that or part of the headline number, of course, is the discount, the price we pay, but also because of what we were positioning for. We've got $34 million of undrawn facilities for growth if we need it. But of course, as a highly generative cash business, we don't need to draw heavily upon these. Net assets up strongly to $60.6 million. And then the most significant development in the Australian market over the last 6 or so years. The return of the fourth bank to the Australian PDP market. We have called out for some time that we expected this to occur. And we were questioned why only you, Pioneer? Why are you the only one saying this? And I explained time and time and time again, it is about deep, long-standing invested, interested relationships. And Pioneer is strong at that. This is more than just a business. These are lifelong partnerships with people that we trust who trust us. And I'm very pleased to announce today that Pioneer, besides just being a preferred partner of the big 4 banks, is the only debt purchaser in Australia with agreements in place with all 4. The only purchaser. And the importance of that and the lead up to that is partly why we paused our PDP acquisitions later in the year so that we could position to make sure that we were available to take full advantage of this most significant development. In terms of our performance through the year, cash collections, $142.2 million. We're pleased with the number, up 1%. We're certainly expecting to materially build upon that in FY '26. EBITDA up strongly to $94 million, more than our market cap as ridiculous as that might sound. EBIT up to $41.3 million, over 5x. And of course, our net profit after taxation up well ahead of guidance over 8x to $10.5 million. In terms of our portfolio highlights, I mentioned that we spent less than we had originally expected to spend because of what was emerging in the market during the second half and emerged quite quickly. You will see the graph on the left there, we spent $69 million. The light shaded gray are the one-off performing portfolios that we bought. So we're still growing our organic investment, but really, we were saving our balance sheet strength and our capacity to participate in what came in Q1 this year, but also as a beneficiary of those price decreases I talked about previously. Our performing portfolio down slightly at $419 million, reflecting the strong performance of those performing portfolios that are shaded in gray in the investment graph. Our expected remaining collections up to $701.7 million, and our PDP asset is also up a little bit less in terms of the percentage rise as we continue our cautious approach to the way we address our assets, $343 million. I will now hand you to our CFO, Barry Hartnett, who will take you through the financial performance.

Good morning, everyone. I'm pleased to share the FY '25 results marking a return to profitability, driven by strong collections and cost discipline. We are pleased to report a statutory net profit after tax of $6.7 million for the full year, with a normalized profit of $10.5 million, exceeding our guidance of $9 million. Total income grew to $93.5 million, supported by a net impairment gain of $4.8 million. The gain reflects outperforming assets with a carrying value of 0 rather than a reversal of prior losses. The company remains focused on cost discipline and our cost of service ratio is now 32%. This is below our guided range and again, demonstrates that operational efficiency is translating directly into improved profitability. Finance expenses down to $38 million, reduced following the completion of the refi that Keith mentioned in July 2024. Further reductions remain a key focus for FY '26 as we continue to manage funding costs. For context, every 25 basis points reduction in the cash rate translates to an annualized pretax saving of approximately $700,000. Interest expense had a 0 impact on reported earnings for the full year. Any interest expense was fully offset by the deferred tax asset. With one-off expenses of $3.8 million incurred during the year. This was mostly in the first half. These included $2.7 million for project-related costs to our core system and data platform implementation. The investment in this will continue to drive down the cost of service. Our balance sheet remains strong, providing a solid foundation for future growth. Key movements over the period include: Total assets increased to $389 million. That's up from $368 million in '24. Cash and cash equivalents of $3.6 million or $5.9 million prior to the release of the report. PDP assets increased to $343 million. That's up $20 million, driven by disciplined investment in higher quality PDP assets. And you'll see later in the slide that those assets are already delivering stronger collections and earnings. The deferred tax asset remained at $21.4 million for FY '25, with $1.2 million of additional DTA recognized during the year to fully offset the tax expense. Borrowings were $297 million, and with unrestricted funding of $34 million available to support growth. Our net assets position increased 37% to $60.6 million, again, reflecting a stronger profitability and our improved balance sheet. The company remains focused over the next period on reducing leverage through disciplined PDP acquisition, operational improvements and active funding cost management.

Thank you, Barry. In terms of our business, as you know, we focus exclusively on purchasing and servicing PDPs in the Australian marketplace. We have about 360 people working for our collective benefit in that regard. Importantly, we focus heavily on banking and finance, and that discipline is what you're seeing come through in the results today and what you should expect to see come through over the course of time in FY '26. We do not buy payday loans, and we do not extend credit to our customers. This is a very important point and one that is valued highly by our vendor partners. I mentioned before, Pioneer is now a preferred partner of the big 4 banks and the only debt purchaser in Australia with agreements with all 4. The importance of this cannot be estimated, underestimated, and it reinforces the quality and the reputation of this business and the growing moat around this business. Part of that is through our historical performance. We've invested some $813 million in the Australian marketplace across 822,000 customer accounts. This gives us a very deep and a very rich data set from which to operate this business, run our platform, apply our underwriting to make sure that we invest our capital, your capital, but our collective capital, we do it well and we do it with great discipline. In terms of our investment, you can see on the left-hand side there that we've been growing our investment, our organic investment for lack of a better description or BAU investment over the course of the last 5 years, those lightly shaded bits are the performing portfolios, the larger one-offs we've had, which we have announced to the market in the past. We're guiding to $80 million again this year. That is substantially done already, and we've had a very, very strong start to FY '26, clearly, with the last of those banks joining us on our -- as part of our program. In terms of our investment mix on the right-hand side, you can see that we continue to diversify our business across product types, but all focused of course, in banking and finance, which is our specialty and where we have deep experience, deep relationships and a very strong servicing ability. In terms of our returns, our ERC on the left-hand side, estimated remaining collections, you can see that is now $701.7 million. It's a remarkable amount of money that we're expecting to come back. And of that, some $415 million is already underwritten in payment arrangements. We're leveraging 17 years of performance data to drive our underwriting, which is very, very important, and that's obviously used in the creation of our ERC and the modeling for that. Our ERC is discounted at 34%. 34% to arrive at the carrying value of our portfolio of $343 million. In terms of our underwriting and our return on invested income, you can see there the performance over the last few years, in particular, has been quite remarkable. FY '25, again, you can see we are already forecasting a much improved return beyond underwriting as a result of the discipline, the pricing benefits that we have received and the relationships that we have with those vendors that are selling to us. In terms of our collections performance, very, very importantly, and we've spoken about this in the past, it's important that our cumulative collections are obviously growing at a rate faster than what our cumulative investment is, and that delta is widening, as you can see, and widening at a fast rate. It reflects our very strong underwriting discipline and our operational performance, which is continuing to increase right across our business. In our annual report, we talk about the impact that AI is having across our business as we improve efficiency. In our business, it has been focused around how do we lift quality and how do we absorb more or increase our productivity with the same headcount. And the people that we have running that program of work are very, very good. They're firstly working with our compliance team and our compliance team are an exceptionally talented group of people, very committed to our business and to our customers and making them more productive and more successful is having great impact into our business, including into the cost to serve, as Barry advised. In terms of our collections by vintage, on the left-hand side, you can see we're getting about 45% of our cash collections from accounts that are greater than 2 years old. It's really, really important. Obviously, you don't want us just from collecting from the front end. We need to be collecting from the majority or the breadth of our book and our business has been very successful at doing that, and they're getting better and better all the time, and we're very proud of that performance. In terms of how do we align with you, we've spoken through this time and again, and it is just so important. No executive and no leadership member has an STI in this business. We buy assets that take on average, 4 years for the majority of their value to be realized over. Subsequently, management is incentivized over that period so that we are investing right today for the benefit to come into the future. We're seeing that flow through right now. The LTI is designed to reward that discipline and long-term sustainable growth. In the course of the program that exists today, it was over a period of 3 years, FY '23, '24 and '25. And at the beginning of that period, the final hurdle, we needed to meet individual hurdles for those 3 years, which has been done. The final hurdle was an FY '26 number, which looked incredibly ambitious when it was set, a statutory net profit after taxation of $18 million. We are guiding for that right now. You have a management team that is among the largest shareholders in this business, and they are heavily invested alongside you. We are as committed as you could ever be to the success of this business. And finally, to our guidance. We've spoken a lot about what we needed to do, and we've done that in FY '25. That's the past. That's done, and we're very proud of that. We are 100% focused on delivering on our guidance, which we've repeatedly stated is a statutory net profit after taxation of at least $18 million this year. We will work incredibly hard to make sure we deliver upon that number. And of course, we are off to a running start. When we started this process and started talking heavily about this early last year, we were aiming for $9 million last year, and we delivered $10.5 million. We're ahead of the curve, and we've got some tailwinds, and we look forward to delivering upon this number, updating the market through the year and then delivering upon this number for the full year. I thank you very much for the formal part of our presentation, and we'll now move to questions.

Thanks, Keith. We have received quite a few questions. The first will be for Barry. How much do you think the purchases were below guidance due to achieving discounted prices versus holding back on purchasing?

So in terms of the discounted pricing, look, that was a pretty material shift in terms of what we've seen from price reduction. That was the first part. Second part is that we have a large number of deals that we've been working on that have just moved from the end of FY '25 into '26. So we think it's more of a transition from one period to the next. We've -- a lot of the purchasing that we have done and completed in '25, again, has been back ended to Q4. So we think we're really nicely placed and set up for '26. So yes, we're -- we think we're really well positioned.

Barry, what is the leverage ratio change year-on-year?

Last year, full year reporting was about 89% at a group level. That's reduced to about 86%. And again, as we mentioned, we have a continued focus to reduce that even further throughout this period with a range of initiatives.

Keith, in relation to vendors, what do you think you brought, Pioneer brought to the table versus others?

So thanks, Chantelle. I think this question is really relating to the new bank that's come to market. And you'll appreciate we've got deep confidentiality with that institution, but I can tell you very, very clearly, we have spoken repeatedly about the value of relationships and the need to invest in them. Institutions are run by people and people want to deal with people that understand them and understand what they're trying to achieve. And we've put an incredible amount of effort to making sure that, that institution, as we do with all institutions, understand who we are as an organization, understand what we bring to the table. And from our part, hopefully, that's something they want to buy. That's something they want to recognize and invest in. And of course, they do because it is a business that's operated with great discipline and great intent and great integrity. Now the extent to which we go to explain this has included -- we must have had some 50 different sessions with that institution over the last couple of years, including having all of our compliance team present to them, including having groups of people come over to Sydney and to Melbourne to meet with them. And these are really important things. They sound like things that are normal, but they're not in our business. They're not in our industry. They're something that Pioneer invests heavily in, and we're very sure that, that has really separated us from others. Of course, there are 2 other things, which should not be underestimated. One, we do not do payday lending. And the second is we do not extend credit to customers. These are important things. People are very concerned about their corporate reputations as they should be. Pioneer understands that.

Keith, could you clarify the comment about PDP guidance for FY '26 of $80 million being largely done?

Yes, for sure. I mean, look, we're obviously early into the year, but we've got long-term agreements in place that we've renewed. We've obviously won new work in the course of the first couple of months of this year. So we're very, very pleased with where we are. We were, of course, expecting it. We would have liked it if we could have settled some of that in late '25. These things take a lot of time, but we're very pleased with where we are.

Slightly related. How are you going to achieve $18 million NPAT given the lower-than-expected PDP investment in FY '25 and guidance of $80 million for PDP purchases in FY '26?

For sure. We're very confident in our ability to -- or very confident in our ability to deliver that number. It's why we've gone to great extents to reiterate it so firmly today. There's a range of things. One, whilst the headline number was $69 million last year, had we measured that against previous years, it would have been a well higher number given the pricing discounts we received, that's good. Number two, we've pushed things into the first part of this year. Number three, of course, our cost to serve has dropped quite remarkably, and we expect to continue to push cost out of this business. And finally, we're working hard to make sure that we continue operating in the fashion we are. We've started the year really, really well. We're really pleased with that. We've got a lot of work to do, but the team is committed towards delivering on that very firmly.

I have a bit of a longer one for Barry. So an excellent job collecting from older vintages. Is the second half '25 collections from the current year vintage at 32%, a low number because purchases were made late in the period, so collections will be strong in the first half of '26.

Yes. I think it's just a function of timing of purchasing. So it's a lower number than in previous quarters, but again, it's still a strong number. Part of that is driven by the increase in the older vintages as well. However, saying that with the purchasing that we've completed so far this year, we do expect 1H to be a stronger period.

Another one for Barry. Can we expect more impairment gains moving forward to reflect the last few years outperformance over the underwritten model?

We don't expect material gains or losses across the portfolio from a go-forward position. Again, saying that if we do continue to outperform the ERC and deliver strong results, then you will see some form of gains or losses, but we don't think this is going to be material.

Keith, do you have any thoughts on LTI post FY '26?

Sure. Thank you. Look, it's really, really important. I mean, I think lots of thoughts. We've got a highly motivated team that are heavily invested in this business. And as you know, they do not receive STIs. The other thing to note with this team is there have been no pay increases across leadership for 3 years and the executive for 4. We think that's really, really important. I think the job for us is deliver on '26. And once we know that we've delivered on it, we've proved to the market, then we should start talking about what the future looks like. But we've got a big job ahead of us this year. We know we'll deliver on it. But I want to make sure that my team is fully focused on the job at hand. We've come a long way in winning back the trust of equity markets. We want to see that reflected in the share price. That helps us drive opportunities as well, of course, and builds confidence right across the spectrum with people that we're dealing with. We'll deliver on that. And then once we get through that, we'll come back to LTI. But the one thing I can assure you is that it will remain at all times, aligned to the breadth for the purchasing and the liquidations of our portfolios. We won't be changing that. Alignment to shareholders is the only thing that matters with respect to rent.

Keith, how is your typical consumer coping with cost of living pressures?

Look, I think you can see through the performance. They're coping remarkably well. It's something that has literally defied logic, I suppose, for quite some time now. But across the board, consumers show a willingness to pay down debt. And the disappointing part of the Australian economy is the lack of understanding amongst the bureaucrats and the policy centers around the impact of cost of living and government spending, which is driving the vast majority of this challenge, but is the impact of that on the average Australian. And the average Australian are the people we deal with and their spending habits have changed. They are buying lower quality proteins. They are foregoing the things that are nice for children, Christmas presents and birthday presents and maybe the trip to Bali for their holidays. And this is where the impact is really being felt. So whilst they're paying us down, and that's really, really nice for our business, we're cognizant of the fact that people need help and people are finding it tough no matter what we're told in the press or in the press releases.

Barry, what is your guidance on dividends in respect to FY '26?

Barry, would you like to take that?

So look for FY '26, I think there's a few things. Obviously, we've got a large program of work that we need to deliver on. Obviously, the guidance of greater than $18 million NPAT. There's a strong focus on us to reduce the leverage in the business as well. We don't think we're overleveraged, but our preference is that, that is lower in due course. With both of those things happening, I think there obviously has to be consideration of when a dividend is paid, but it needs to be done in conjunction with the reduction in leverage and delivery on our guidance.

We've reached the end of our question time slot. So thank you so much to everyone for joining, for Keith and for Barry for your responses. And if you'd like to ask us anything further, you can e-mail us at [email protected], and you can also follow Pioneer Credit Limited on LinkedIn, so you can get the latest updates from us. So thank you so much for joining us today.