Pioneer Credit Limited (PNC) 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 '24 results presentation. I'd also like to introduce our Managing Director, Keith John, and our Chief Financial Officer, Barry Hartnett, who will be taking you through our results. Please feel free to share any questions that you have in the Q&A box that you can see on your screen and Keith or Barry will answer those at the end of our formal presentation. For now, we'll begin with Keith.

Thank you, Chantelle, and thank you to everyone for joining us today. In terms of our results, our highlights for FY '24, cash collections were up another 9% to $145 million. Our EBITDA is presented on a normalized basis given the refinancing and other costs incurred this year, which are genuinely one-off and not recurring EBITDA just shy of $100 million, $99.5 million, a 16% increase in showing the increasing margin that occurs within our business or is occurring within our business beyond just our normal operating and our collections. EBIT, up 13% to $35.3 million. And finally, and pleasingly, a normalized net profit after taxation of $1.2 million. In terms of our portfolio, PDP investments were really pleasing this year, again, up 58% to $93.7 million. We'll talk about the portfolio a little bit more later in the presentation, but really high-quality investments right throughout the period. Our ERC, estimated remaining collections, the amount of money we expect to recover from those portfolios that we've invested in over time, $641.7 million. Our PA portfolio down a little bit this year yet to $441 million. We're very, very pleased with the way that portfolio is performing. And the slight decrease continues this trend of consumers paying down debt strongly. And I'll talk about that in a bit as well. And finally, our PDP asset, $322.9 million. That is up 6%, and it is after we have taken a cautionary impairment of 5% or some $18 million. With respect to these accounts, this really is a critical year in the development and the ongoing story of Pioneer Credit. These results reflect the steps taken to strengthen and to position our business for sustained profitability, in particular, through the period, reduced cost of capital by unwinding the expensive funding that we had following the settlement of a 4-year $272 million senior finance facility. That facility will save us around $8 million this financial year. We've taken a precautionary $17.8 million to shield the company against potential economic deterioration. I'll talk through that in a second. It's a noncash item. We also recognized another noncash item, $21.4 million of deferred tax assets. I'll talk you through that. That, in particular, underscores the confidence in the company's sustained profitability. Of course, through the year, we continue with our targeted investment and consistent operational execution. I talked you through just a moment ago, cash collections up 10%, but with the margin widening for up 16%. We've had a strategic balance sheet reset with net asset improvement and effective liability management. Our funding now exists for 4 years. It's a long time. It provides a lot of security for our business. And importantly, we are leading the sector in Australia with enhanced performance reporting disclosures today in line with global best practice. With respect to the precautionary impairment, we've taken that it's roughly 5% or $17.8 million of our assets and has been applied proportionally across the portfolio. The most logical question, of course, is why do we call precautionary? Well, the impairment is consistent with economic data and [indiscernible] commentary that indicates consumer financial strength. Consumer confidence levels are at multiyear lows. Cost of living pressures persist from inflation, and there are strong expectations that debt stress will rise. Those things cause us caution. Of course, in our portfolio, as we have explained previously, and we continue to see there is no evidence of degradation in the portfolio performance. Cash collections continue in line with expectations. Customer payments remain healthy. Time to the first payment and the percentage of customers paying after 3, 6 and 12 months, all of those metrics are improving. The average payment across our payment arrangement portfolio, some 37,000 customers, and $441 million in receivables have improved 2.3% over the last 3 years. So in this environment where there is negative data, negative commentary, our portfolio continues to perform remarkably well and consumers continue to prioritize paying down their debt. The unemployment rate is higher, of course, but the population remains generally fully employed, and that supports our cash collections. So we've taken this precatory impairment because we have conflicting data, economic data, and market commentary that's negative and a portfolio where the metrics are positive. By taking this now, we believe we will shield ourselves from anything in the future should the situation deteriorate the economy. And importantly, at no stage will any impairment reversal be included in the calculation of NPAT hurdles for management incentives. So if this gets written back, it will not be included in the consideration of hurdles for management. With respect to our deferred tax asset, $21.4 million recognized at the end of the financial year with another $14.6 million to be recognized at a later date. I'll take you through this carefully because it is incredibly important to understand how a DTA is recognized, why it is recognized, and what it says about our business. The recognition of this DTA is prudent and it's based on our current 3-year forecast. The Board will continue to assess those forecasts and then assess the recognition of additional DTA in the future. The standard in particular, 1/12 of the Australian accounting standards says in particular, a deferred tax asset is recognized for the carry forward of unused tax losses to the extent that it is probable that future taxable profit will be available against which they can be used. As regards to the criteria, the Board has now considered it satisfied that it is probable the entity will have taxable profits to use those losses and the tax losses have resulted from identifiable quarters which are unlikely to occur. The Board has determined there is now convincing evidence of sufficient future taxable profits in the forecast period to utilize the recognized DTA. And as I said, at the end of each year, as we roll forward our forecast, we will then consider how appropriate it is to start booking the balance. Importantly, again, at no stage will any recognition of tax assets in the future be factored into the calculation of NPAT hurdles for management incentives. So our commitment to shareholders is that management incentives will only be awarded on the achievement of a statutory net profit after taxation of at least $18 million in FY '26 without these noncash items being considered. I'll now hand you over to Barry Hartnett, Chief Financial Officer, to walk you through our financial statements.

Thanks, Keith. In FY '24, the company is pleased to report normalized net profit after taxation of $1.2 million. Keith has already highlighted some of the significant costs and adjustments to the results this financial year. This is illustrated by the graph on the right-hand side of the slide, showing a bridge from net loss before taxation of $21.4 million to a normalized net profit after tax of $1.2 million. The key movements include the recognition of the deferred tax asset of $21.4 million to recognition highlight to shareholders that sufficient future tactical profits are probable in future periods and further demonstrated by the guidance that we will provide to the market today. The extinguishment or acceleration of costs relating to the old facility is approximately $2.2 million. There's $6 million in relation to new senior finance facility. And again, the company's preference was to expense as much as possible upfront to position us well for FY '25. Other significant one-off costs of approximately $2.9 million, and the result of that is a normalized NPAT of $1.2 million. On the balance sheet, the company has assets of $322.9 million. This is net of the precautionary impairments mentioned earlier by Keith. The company's borrowings of $286 million for the period. This relates to the old financing facility. The financial close of the new senior finance facility occurred in July '24, and that's a $272.5 million syndicated facility. The initial drawdown of that was $222.5 million, and there's $50 million of gross Tranche 2 funding. You can see the term of the expiry is July '28, so it gives us a good leeway with a significant reduction in cost of funds. The production is likely to save us in the vicinity of $8 million in FY '25. In December '23, Nomura provided funding of $24.5 million through an SPV or 2 discrete portfolio acquisitions. The paydown of this portfolio is ahead of schedule over $9 million of retail out so far, and the SPV is expected to be fully paid off by the end of the financial year.

Thanks, Barry. So I'm going to take us through a little bit about Pioneer and then get into the portfolio metrics. And of course, the part that we want to know about, in particular, the future of Pioneer and really what the outlook is. For those new to the Pioneer story, we're debt recovery specialists that acquire and service retail purchase debt portfolios. These are portfolios that we acquire from banks and financial institutions and major nonbank lenders and they held on balance sheet for our benefit. We do not do third-party work. We're a leader in the Australian PDP market that has an emerging or near duopoly situation now. Since 2008, we've invested over $739 million in PDP across $5.8 billion in receivables and 760,000 customer accounts. This data is incredibly powerful, not just in how we operationalize our business but then how we underwrite that business that we purchase. I'll talk to you about that in a moment. And the competence it gives us to underwrite and to make investments that are meaningful and beneficial for shareholders. We have a current customer base of 220,000 customers, about $2 billion in receivables. And as I've mentioned before, of that $2 billion, $441 million are already under payment arrangement. These are customers that are paying us on a weekly, fortnightly, or monthly basis. And as I mentioned at the start of this presentation, they are customers that are paying us more than they have in the past 3 years and more quickly than they have. And finally, and most importantly, are our people across Australia and the Philippines, they are founded in good. They have a strong social conscience, and this is incredibly valued as to why our debt vendors choose to deal with us. In terms of our growth opportunities, there are now high barriers to entry in this sector, particularly if you want to be a partner with the major banks. The standards around cyber, around IT, around data security, in addition to customer treatment, are increasing all the time. Our market position is incredibly strong. We're one of few scale participants with access to funding to take advantage of both returning vendors and new-to-market interest. We hold a market-leading reputation. Vendors choose to sell to us for our differentiated customer-first servicing approach and strong compliance record. We have a unique servicing approach. We work with our customers to understand their situation and to get mutually beneficial outcomes. And importantly, a massive differentiator from us and others. We do not offer further credit. The groups choosing to sell the Pioneer have a strong preference, a strong preference to not sell to people that compete with them. Pioneer does not do that. And in particular, it does not buy payday loans, and it does not sell payday loans. In terms of growth opportunities, there are numerous. There are a broad range of performing portfolios available to purchase. We expect this trend to continue, and we did some of that during the period as we've announced late last year. There are warehouse sales, where debt that is built over the years is becoming to market now for sale. There are alternative portfolios that are coming to sale, including insolvency and mortgage shortfalls. Pioneer has an incredibly strong franchise in mortgage shortfalls. We are the largest participant in that sector by a considerable margin. And there are entire portfolio acquisitions and M&A. You will be familiar with some of the press about some competitors that is in the market. It is an opportunity for us. And of course, we have an economy which supports our investment and a macro environment that continues to support the performance of our customers where everyone has a job. In terms of PDP investment, we've changed this slide now. We've previously provided you with the price that we have paid, which has been consistent for many, many years. What we've presented instead today is a very important graph that shows you our investment. Clearly, you need to know that, but also our cash collections and how that has performed in periods across investment. And what you will note in particular is from FY '18, where we had a strong investment of $84 million, down to only $31 million in FY '21, our cash collections were relatively stable at $100 million. That's a remarkable result, but it also evidences clearly the strength of our performance of our operating capabilities and how this business continues to extract value from the breadth of the vintages in which it's purchased. As I mentioned, historical investment of $739 million across some 760,000 accounts, extensive data for underwriting, and no payday or SAC loans. I just talked you through the cash collections, FY '18 to '21 inclusive of $100 million consistently on materially lower investments. We're now investing more and you can see how strong our cash collections have grown. There's an estimated market size of $400 million this year and Pioneer invested just 94 last year. So only about 25% of the market. We've got a strong opportunity to grow share. Our ERC, or PDP investment replacement rate, how much do we need to invest just to replace what we have to keep our business in check and consistent? Assuming a 2.4x money multiple is $56 million. We already have in place $61 million of investment for this year. It is the strongest start to a financial year in 6 years. It's an incredible investment, a very good investment from very well-trusted vendor partners with excellent returns for us and excellent outcomes for them. That part above $56 million, that's growth. That's our future. And as I just said, $61 million of investment in place across 13 vendors. In terms of our returns, for years, the market had asked for money multiples consistent with what is published in the Northern Hemisphere. In prior times, '18, '19, '17, Pioneer operated in a much more competitive market, and it was much smaller. We didn't have the scale that we have today, and it was very easy for competitors to read into what we were doing by publishing the information that we are today. We now have scale. We now operate in a different market, and we are now leading the way in publishing the information that gives you the insight into how we underwrite and how we operationalize our business so if you can make an even more informed decision about your investment in Pioneer. We believe these performance metrics set for themselves. So to take you through, underwriting is the forecast portfolio acquisition. The main model is a gross multiple return on the capital that we invest. The single largest impact on the money multiple is the product mix. Credit cards, for example, have a multiple of somewhere between 2.2% and 2.4x. Insolvency accounts have a multiple of 1.4x to 1.6x. So when people talk about our asset turnover in this industry, it is a ridiculous metric unless you tell people what you're investing in. If my money multiple is 1.1x because I recover everything inside 6 months, you should expect my business to turn over all my assets to turn over quickly. But if you're investing in long-term sustainable assets that are making multiples of your investment, it's going to take some time to extract all of that value. That's what Pioneer does. It's what's given us our strength and allowed us to get through for the last few years when many didn't think we would. And it's what's going to make this business incredibly successful from here. Historically, we outperformed underwriting for 4 key reasons: consistent, disciplined investment. The quality of the accounts that we buy, again, no payday, no low-quality accounts, our operational capabilities, and an executive and leadership that are appropriately incentivized to get returns for shareholders over the medium to long term. In addition to the money multiply, of course, we need to make sure that we recover that money and get the value from it in a reasonable time frame. We have an investment delegation from our Board that requires a net internal rate of return of at least 15%. And I am pleased to tell you that every vintage has exceeded that return since we commenced. In terms of our portfolio, what we've presented with you on the left-hand side is our investment over the last 3 years. So you can see exactly where we're investing our money, and you can see what that looks like from a concentration perspective. In FY '24, we dealt with some 20 unique individual parties. And over the course of the last 3 years, 30 different parties. We have excluded the one-off investments in Balbec, Panthera, and Max recoveries, predominantly groups or portfolios that we're exiting the market. We have excluded them from there. So you can see the genuine go-forward investment by the vendor. On the right-hand side, you can see our ERC, how that's broken up, 39% of our estimated remaining collections will come from credit cards, 42% from personal loans, exactly what you'd expect to see from a business that has told you exactly what it invested. 10% is coming from insolvency. You will note that we bought the Max recovery portfolio last year of insolvency accounts. These are customers that take away -- they're very, very safe investments for us with a very attractive yield. And in the particular case of that portfolio, it was an international party exiting the market that chose platform of Pioneer. 6% from mortgage and I explained to you before, we've got the largest majority in that sector in Australia by a long way. We're very, very proud of that. Alignment to shareholders. Nothing is more important in small financials than a management team and an executive that is aligned to you. We are investing your capital. We understand that. We respect that. And everything about our business is aligned to getting you a great financial outcome. That means we need to have a great operating environment, a very strong compliance program, excellent discipline in the way that we invest, and a strong commitment to delivering on all of the things that drive value into this business. As you can see, my family are 12% of the register. Other Board and management, another 2%. And then we've got a range of other substantial shareholders that have joined us over the course of the last year, which we're very, very pleased about. They're tough investors. They have asked the tough questions, and they've got confidence in the future of this business. In particular, what I think people like about our business, what I think separates us and it's always been the case. There are no short-term incentives for any leader or executive in this business. There never has been and there never will be. We have a long-term incentive plan that requires the achievement of targets over FY '23 to FY '25, each individual year. And for those years that it's met, they only invest if we hit a statutory net profit after taxation of at least $18 million to FY '26 for the next financial year. Now that target was set 3 years ago. It was very ambitious at the time. We have every confidence that we will deliver on that and we expect to deliver on it well, given the significant investment and the significant improvements that this business has made over the last couple of years. In terms of our outlook. Five key things to call out here. Firstly, strong tailwinds for PDP opportunities. There are near-term opportunities from competitors exiting. There is a significant supply of PDPs. We have both the cash generation and should it be required, the additional growth funding to enable us to make very serious investment this year, $61 million of investment already under contract. There is a continued industry regulatory focus. This regulatory focus is building a moat around our business. It's expensive. We've made the investment over numbers of years. And it's incredibly valuable the way that that's protecting this business and protecting the franchise and enabling us to access opportunities that smaller competitors can't. The operating leverage. You've seen it continue to open. We expect that to continue even more. CRM replacement is progressing. We've talked about that in the past and expected to deliver efficiencies from 2025 and data improvement and cost-out opportunities continue to exist for us with our scale. You have a tested and experienced management team. The extensive experience across the sector to a founder-led business with very strong alignment to shareholders. And as I mentioned before, management incentives vest on the achievement of a statutory net profit after taxation of at least $18 million next year. And I'm pleased today to put out an initial guidance for FY '25. PDP investment of at least $80 million this financial year and a statutory net profit after taxation of at least $9 million. Finally, is our bridge to our FY '26 target. We've been asked previously. How do you get there? When will you get there? We are supremely confident that we will get there. This bridge shows you -- demonstrates to you how we think about our business and what we expect. We've just given you the guidance of $9 million for this financial year. In the next financial year, in FY '26, we expect operational expenses to expand by $3.3 million, reflecting a broad range of things that need to occur in our business, including growing our head count. There will be additional interest savings of $2 million. There are cost savings. I talked about that just previously in terms of our scale of $1 million. There are efficiency gains, significant to be had through our business, $1.9 million and then, of course, with all of the investment that we've made and the investment we continue to make. I explained previously, $56 million holds us steady in terms of investment. We've already advised that we expect investment this year to be $80 million. That's growth. And we expect that net revenue growth to contribute $7.5 million to get us above that FY '26 total. Over the course of the journey, we expect to be able to update you further on this. With that, I thank you. I welcome your questions and look forward to answering them.

Thanks, Keith. We do have quite a few questions that have come in. The first one is for you. You must be pleased with how you pull through this period. How the motivation of your executive leadership now to deliver on the FY '26 management target?

Thank you for the question. Look, we have an executive and a management team that not only they're incredibly motivated, but they're an incredibly proud group of people. We've done the hard work. And I think I said in my press release and my comments today said now the great time to be at a Pioneer. We're into the future. We've got great funding, great cash flow, incredible opportunities. Now's the fun time. So, the motivation is high, that the interest is high, the excitement design, the energy levels are higher than ever. So, we're very, very committed, of course, we need to deliver this year. We've just guided to $9 million. I and the management team are not people that are happy just hitting targets, we want to be beating them, and we're working very hard to do that first and then to make sure that we obviously folk fill our commitment and our promise for FY '26.

Another one, you've recognized $21.4 million for the deferred tax assets. When can we expect the balance to be recognized?

For sure. So, the way the recognition happens is that the Board assesses our forecast period and says, what's reasonable to be usable during that period. And they've determined that $21.4 million is reasonable. As the periods go on, at the end of next year, those forecasts roll forward, our expectations are on board and the Board will make an assessment at that time it's about how much it starts booking. So, we expect that to occur at '25 or '26. Importantly, it's about what it says about today. The Board, which the auditors have signed off on are now very, very confident about the profitability of this business about the future of this business about what it says about FY '25 about FY '26 about FY '27.

There has been a lot of press about Panthera recently, and you bought a large CBA book of them. Are you now looking at buying the rest of that business?

So, look, we look at everything clearly. I'm not necessarily sure that that's a business that we want. And frankly, and I'm talking about the entirety of that business. And frankly, we have got an incredible range of opportunities that sit in front of us an incredible amount of work to do. We're not sitting here guiding $9 million next year is great or 18% the year after is great. We want to be a significantly larger business, getting significantly larger profit because we're a significantly better business. So will we continue to look at portfolios, yes. I don't think we're in the space to be looking at an entire business proposition in the terms of that business. That doesn't rule out M&A elsewhere, but it would need to be aligned to who we are as a business, the product types that we specialize in and be genuinely capable of having value.

When do you think the company will be able to pay a dividend?

We need to deliver on our commitments first. Certainly, something we can revisit in FY '26. We'll need to balance that against what's most prudent, the paydown of debt and decreasing the leverage, which we expect to happen over time, but we want to be doing that. The returns that we can get from portfolios if we can continue to invest at the rates of return that we have, then that might be more prudent than paying out money as dividends. But the Board will make that assessment, management will make its recommendations once we deliver on our commitments to shareholders.

What are the consulting costs relate to? And have they been paid in FY '24? Or will the cash outflow be in FY '25?

I might pass that over to Barry and let Barry address.

Thanks, Keith. So, the costs directly related to the refinancing of the senior facility and the medium-term notes. The majority of costs has been paid out in FY '24. A portion will be netted off against proceeds in FY '25, but the vast majority is in FY '24.

And Barry, do you expect cash collections to be higher in FY '25? And if you can't specifically say, can you talk to some factors that will drive collections higher?

Yes. So, look, we do expect it to be higher in FY '25. We have guided -- we have put guidance today. So, the expectation is that the revenue and liquidation line does increase. I think the key factors are the supply of portfolios in the markets. We've post-COVID move from a transitionary kind of phase where large lumpy portfolios were available in market. That's now going to transition back to forward flow contracts and the majority of vendors recommencing sales. We have a huge proportion of our FY '25 spend currently contracted. So, we do expect that to drive the increase in cash collections.

How is the new CRM project going?

Keith, do you want to address that one?

For sure. Thank you. Yes. Look, the CRM projects going incredibly well. It's an important project. It's a year's long program of work, which we've spoken about. We're looking forward to deploying it in '25 and starting to realize the operational efficiencies that we expect to come from that. We have not forecast those as yet. But certainly, once we start to understand exactly what they look like and what we can really extract from that program and work. It also is important around enabling us to improve our compliance regime, then we'll start to bring those into our numbers. But for the time being, we're very, very happy with the progress of it and looking forward to getting it into the business.

Yes, and another one for you Keith. Can you provide an update on the sale of the proceedings against PwC?

Thank you. Look, very, very difficult to talk about court cases obviously suffice to say, we have provided a broad range of evidence now as part of the proceedings, we expect some procedural items to be run through later in this year, which will hopefully push us towards the first formal mediation. Beyond that, it's a little difficult to say other than the fact that our lawyers and our council are very comfortable with our position, and we're pushing hard to make sure we get a successful outcome for shareholders.

Are all 4 major banks now selling debt case?

There's still one to go. So we expect them to come back in the current financial year. And we've certainly been in discussions with that bank. We're looking forward to them reentering the market.

And businesses are leaving the market. So how vendors managing this?

Yes, range ways. I mean I think the main driver in the way vendors are managing this is really about building closer relationships with group of Pioneer. So if I point towards CBA a couple of years ago now that ended a 5-year agreement with Pioneer, that was the first it's kind. I think we're going to see more of those things. We obviously like them. It build security around our business around our deal flow. And the other side is, the banks are getting closer and closer and closer to their management style is to have longer-term agreements and get close to the groups. That increases the moat around this business. So we think these are good things. We don't take it for granted. We work really hard to make sure that our relationships are solid and to make sure that people understand that we're investing in those relationships as much as it's about us buying off them as a very strong investment. We think it serves us well.

One for Keith, what is the [Technical Difficulty] for your business?

Now feels pretty close. It's a great market. There's not a lot of competition, consumers fully employed. We've got funding. We've got exceptional free cash flow. This environment is as good as I've seen it in my years in this business. And again, just like our vendors, I mean, I think the most important thing is not to take these things for granted. It's not to make assumptions and make easy choices, remaining incredibly disciplined, working exceptionally hard. Having incredible integrity are important parts to make sure that we capture appropriately the opportunity that's there for us now. We think we've evidenced that over the last couple of years, we're really looking forward to delivering on the next couple of years.

Now another one for Keith. What are the upside meters in order to get to the FY '26 product profit?

Thanks, Chantelle. Look, we've laid out the slide there. I mean, there's some cost savings, some interest savings and so forth as significant growth that is available to us or we should be extracting out of the portfolio that we've acquired. We expect to do that. Look, we think -- and we'd expect that we're going to do better than that. Like I said, that target was set a couple of years ago. The market has improved and continue to improve for us. We're an ambitious business. You should expect that we're going to work really, really hard to make sure we extract as much as possible for all shareholders.

I have a question for Barry. How do you look on recently purchased ledgers compared to previous years?

Yes. So the performance on the most recent vintages are outperforming historically. I think you see that from a money multiple perspective in the slide that Keith walked through a bit earlier, but also from an IRR perspective, they are performing. I think there's a couple of key factors in terms of why. I think the competitive landscape is obviously positive for Pioneer at the moment where there are pure deals that we want to buy. We're extremely disciplined in terms of how we invest our money. And then there's the operational capability and capacity we have worked those portfolios. So I think that's evolved over the last couple of years, and we're starting to see better returns, and we expect that to continue.

Okay. We've reached the end of our question time slot. So thank you so much, Keith and Barry for the presentation and the responses. If anyone has any further questions, please send us an e-mail at [email protected]. And you can also keep up today all the latest news if you're following Pioneer Credit Limited on LinkedIn. So thank you all for joining today.