Pioneer Credit Limited (PNC) Earnings Call Transcript & Summary

Welcome. My name is Chantelle Hadley. I'm the Head of Digital and Customer and part of the senior leadership team at Pioneer. Thank you for joining our half year results presentation. I'd like to also introduce our Managing Director, Keith John; and our Chief Financial Officer, Barry Hartnett, who will take you through our results. Please feel free to enter any questions that you might have using the Q&A box on your screen and Keith or Barry will answer those at the end of the formal presentation. Now I will start with Keith. [Audio Gap]

Thank you, Chantelle, and to everyone, good morning, and welcome to our half year '25 results presentation. As we get into the performance highlights, I received a text message this morning from one of our substantial shareholders talking about the results and how we've entered the virtuous cycle territory where growth in our PDP investment and the returns we have are now exceeding the funding cost in this business and obviously driving profits. And that's flywheel territory, which continues to grow from here. So we're very, very pleased to be there as we talk to you today about our performance. We have in front of us today, our results compared to last half, not to the prior corresponding period. And we've done that to try and show you very clearly the steady planned growth of this business and how we're performing. Cash collections up half-on-half, a couple of percent to $71.5 million. We're very, very happy with that. Traditionally, the second half is stronger than the first half in this business, you'd expect us to be growing those numbers a bit given the significant investment we've made across this business over the course of the last couple of years. EBITDA, it's a proxy for cash generation into this business, and it's where the cash is generated to fund PDP investment that we make each period. EBITDA on a statutory basis, $47.6 million. If we were to normalize that, it's flat half-on-half, very good performance. More importantly and much more impressively is our EBIT performance, which is up significantly to $22 million during the period. Finally, our net profit after taxation, we took a very aggressive stance with respect to expensing costs and ensuring that, that balance sheet stays super clean in this business, very, very easy to read. $3.6 million for the half, a result we're proud on and lines us up very neatly to meet our guidance of $9 million net profit after taxation for the full year. In terms of our portfolio highlights, we completed PDP investment of just shy of $30 million for the half. We've guided to $90 million for the full year. That is substantially underwritten. We'll get into that a little bit later into the pack, but a tremendous amount of opportunity for Pioneer to invest in portfolios in the current market. Our ERC estimated remaining collections is up 5%. Again, a number we should expect. This is the amount of money we expect to receive in future periods from our portfolios following significant investment during the last couple of years, that's growing very, very nicely. Our PA portfolio, largely flat, down a tad bit to $431 million. We expect to see that grow now through this half with the additional investment that we have coming through. And our PDP asset treated cautiously $329 million, up 2% through the period. In terms of the half, what have we achieved? It's been quite a remarkable half for this business and really, again, sets us up to deliver our guidance this year, but most importantly, that statutory net profit after taxation in '26 of at least $18 million. We closed our senior financing debt facility with $50 million of growth funding and a 4-year tenure at a materially reduced cost. We're starting to see that stuff come through now. We've had our first interest rate cut as part of this, what looks like an interest easing cycle. Every 25 bps is worth $700,000 to the business. So we're starting to see that come through. Clearly, if there are other cuts through the period, that's going to add up quite substantially for the business. And importantly, we've got the opportunity to continue to put pressure down on our funding costs over time, and we're working towards that. In terms of our expensing and our NPAT for the period, like I said, we've taken an aggressive approach with respect to how we expense items rather than booking them to the balance sheet. $1.7 million of project cost expense. You'll see on the balance sheet there, we've got intangibles of less than $1 million on our balance sheet, flat half-on-half. So taking an aggressive approach there. We've made significant progress on our core system replacement. Guidelines is within expectations, and we expect this to deliver further efficiencies to us in the future. The other thing that we completed during the half was we've completed the build of a modern data and analytics platform, which will help us improve decision-making and enable advanced analytics, and we expect this to add to the portfolio performance over time and how we continue to support our customers, support our vendors, but also obviously, to drive cash collections out of those portfolios that we invest in. And finally, we raised $10 million of equity to further strengthen the balance sheet. You can see that drop straight through on our net assets, which have increased by about $12 million over the half. [Audio Gap]

Thank you, and good morning, everyone. I'm pleased to share our financial results for the 1H '25 period, which reflect a strong recovery and operational improvements across the business. We are pleased to report a statutory net profit after tax of $1.7 million for the period with a normalized profit of $3.6 million after adjusting for one-off expenses. Total income for the period has grown to $47.9 million, and there is an impairment gain of $3.8 million on the portfolio. This is in comparison to an impairment loss of $18.1 million for the second half of '24. It's important to note that this gain is not a reversal of prior impairments, but rather a reflection of a cohort of outperforming assets that result in cash, and this underpins the quality of our portfolio. The company remains focused on cost discipline, and we are pleased to report that our cost of service is at 36%. That's from a statutory level, which is the midpoint of our target range between 35% and 37%. Moving forward, we will continue to streamline processes, leverage technology and enhance automation, ensuring that we maintain cost discipline without compromising quality. On the right-hand side of the slide, we've provided a breakdown of the adjustment from statutory to normalized NPAT. Callouts our project expenses of $1.7 million, which relate to consulting fees for our core system replacement and the implementation of a data analytics platform. Both of these are key investments in our transformation strategy. There's refinancing expenses of $1.1 million. This reflects the final costs associated with the refinancing that we completed in July '24. And there's $800,000 of a notional tax expense based on the other 2 adjustments. After these adjustments, our normalized net profit after tax stands at $3.6 million. Our balance sheet remains strong, providing a solid foundation for growth. In terms of key movements for the period, total assets increased to $370.7 million. And again, this is driven by higher PDP assets, which grew to $328.7 million. Cash balance of $600,000, which is lower than anticipated. However, this is purely based on the timing of receivables, which have now been received. Total liabilities decreased to $314.9 million, primarily due to lower trade and other payables, which declined to $14.5 million. This reduction was largely related to refi costs and PDP-related payments. At the period, the company has borrowings of $289.7 million with $46 million in unrestricted funding available. As Keith mentioned, our net assets increased to $55.8 million over the period. This increase in net assets is a key indicator of our disciplined capital management. Moving forward, our focus will be on reducing leverage, maintaining purchasing discipline, and maximizing returns on the deployed capital. And again, this will further strengthen our balance sheet.

Thank you, Barry. One of the other big changes in our business over the course of the last 6 months has been the number of new shareholders and the amount of new interest that's emerged in our business. We naturally expect that given the performance of our business and the outlook for us. For those of you new to our business, a quick overview about who we are. We're a debt recovery specialist that acquires and services purchase debt portfolios. Everything we work, we own, it's held on the balance sheet. We don't work for third parties on a fee-for-service basis. You're investing in real assets that are held on our balance sheet and have real value. We're a leader in the Australian PDP market. There is a near duopoly now. And still, we have a situation where competitors, albeit smaller now, are exiting the market. Since 2008, we've invested well in excess of AUD 0.75 billion across 790,000 customer accounts and almost $6 billion in receivables. That investment and that experience is vital and critical in enabling us to continue to underwrite well to make sure that when we invest our capital, your capital, which we're very, very conscious of, we do that in a very considered manner and one which is respectful of the returns that we need to get, particularly in future periods. We've got a current customer base. These are customers that we are working with now of some 210,000, almost $2 billion in receivables. And of that $431 million is already under a committed payment arrangement. These are customers who are paying us weekly, fortnightly or monthly. They clearly underpin our cash flow. And we employ people in Australia and the Philippines. One of the very big parts about our business is how we employ those people and what sort of people they are. And we describe them as people that are founded in good. We're looking for good people with a good, strong social conscience because they're the people who work best with our customers to get them back on track and relieve their debt stress. A couple of the highlights of our business and why this is such an investable business for shareholders, for equity market participants, but also for our vendors, why they choose to deal with us. One, we're one of few scaled participants with access to funding. In addition to our funding, and we've talked about the growth funding we have available in terms of our credit facilities, but we also generate significant free cash through each month and through each period, which substantially funds or wholly funds our investment through a year. We have a market-leading reputation, and this is very, very important. Banks want to deal with groups that they can trust, that they know will look after their brands and their customers as well. Pioneer is renowned for that. And we do not offer further credit. We do not compete with our clients. We're one of the few participants like that. And as the largest of those that don't offer further credit, it positions us ideally to be dealing with more and more vendors over time. In terms of the investment that we make and ERC, our estimated remaining collections, you will see through the period there, investment can be a little bit lumpy half-on-half in this business. But over the course of the last few years, we've been growing it nicely. We did $90 million last year, and we expect to do $90 million this year. We've guided $68 million in the second half. Most of that or a large portion of that, I should say, is already under contract. We currently have a very significant number of portfolio opportunities in front of our investment committee, which meets the next day that we are considering. We've never seen the volume of vendors coming to market. And certainly, the volume is increasing all the time. We had 15 unique vendor partnerships in the first half. That's 15 unique groups that we're buying from. And importantly, and as always, there are no payday loans or no SAC small account credit contracts in our portfolio. We are only focused on buying Tier 1 rated debt, those accounts that have the propensity to pay and the propensity to heal, and customers we can work with over time. On the right-hand side, we have the ERC by product type. You can see our very strong focus on credit cards and personal loans remains, as you would expect, with some exposure to other products, which we've had for a very long time as well. We've got a diverse vendor base. We've got a diverse product base, and we have limited or no concentration risk in our business, something that we've worked hard to achieve and which we think is very valuable. In terms of our returns, and collections by vintage, you will note [Technical Difficulty] My apologies I believe I dropped out there. In terms of collections and returns, as I said, we've just had our highest proportion in quite some time of accounts greater than 2 years old that have paid and contributed to cash collections through this period. That's part of what is reflected in that impairment gain that Barry referred to in the profit loss statement. In terms of our underwriting, that continues to progress very, very well. You'll see our performance, our ROI is well above in all historical periods, slightly below in the first half of '25, and that just reflects our cautious approach to how we value these portfolios and the fact that we've bought portfolios late in the half that haven't started actually actioning them as yet. So just a little bit below, but we'd expect to see that tip up by the full year. We have a Board delegation for investments of a net IRR of at least 15%. We have exceeded that on all vintages. In terms of shareholder alignment, we think this is critical in small financials. My family is the largest single shareholder in the business. In terms of funds, Samuel Terry is our largest shareholder with 13% of the equity and a range of other substantial shareholders. We also have numerous institutional funds that have joined us over the next 6 months. We look forward to their continuing support over the coming couple of years as we look upon delivering on our guidance. In terms of our long-term incentive program, you will be familiar if you've heard me talk before, no one in a leadership or executive position in this business has a short-term incentive. We've never done them. We never will. The incentive that we have in place is long-term. It is earned over 3 years. So we have 3 yearly targets, '23, '24 and '25. And on the basis that each of those targets are met, it carries forward and then we need to deliver on our FY '26 promise to you. That FY '26 is a statutory net profit after taxation of at least $18 million. In terms of our outlook and our guidance, this hasn't changed for some time in the way that we see the market. Strong tailwind opportunities for PDPs. We've got a lot of opportunities there. Our investment guidance was upgraded in December to greater than $90 million, and we look forward to delivering that for our vendors, for our customers and for you, our shareholders. We've got a -- there's a very strong regulatory focus in our industry. As you should well expect, our compliance record and our NPS are an advantage and one of the tangible ways that we demonstrate that to our vendor partners. We spent a lot of time working on unlocking the operating leverage in this business, and you have seen from a couple of years ago where our cost to serve was 44% and now it's at the midpoint of our range of 36%. We think there's a lot of potential there for this business. There are data improvements and cost-out opportunities that continue to present for us that we need to capture, which we're working on. We've got a tested and experienced management team, very, very critical founder-led business by myself and long-term executives with this business, an LTI that I just spoke about. Our guidance reiterated FY '25 NPAT of at least $9 million and an FY '26 NPAT of at least $18 million. Finally, there is a bridge to our FY '26 guidance. We've presented this before. It is where we are guiding the market to and how we expect to get there. Clearly, we're making some inroads into that now with the efficiencies that you can see coming through in our business, and we very much look forward to delivering that for shareholders. With that said, Chantelle, thank you for running that part of the presentation. If we've got any shareholder questions, we will gladly answer them now.

Thanks, Keith. We do have some. First, the share price performance of the company has been disappointing considering the earnings growth and outlook. What are you doing about that?

Thanks, Chantelle. Look, we share your disappointment, and certainly, I share your disappointment. The majority of my family's wealth is invested into this business and certainly, we believe that the share price should be materially higher than where it sits today. To that end, we are working with the institutional funds, and we're working with the brokers that support this stock and making sure that we're spreading our message and putting it in front of people. I think the other part to recognize is this business is recognized across the world and across the Northern Hemisphere as being materially undervalued. Certainly, as the year goes on, I will be exploring options around how we unlock that value. It's pointless continuing to go through equity markets where it's not recognized when there are other avenues to do that. And if we don't start getting appropriate recognition, appropriate share price appreciation in the near to medium term, we'll seek to change that and to unlock it in other ways.

This one says, "Fantastic presentation. I'd like to know what you view as the biggest risks to the business."

We get asked this question a lot. And it's -- from my view, it's genuinely one thing, and that's hubris. We live in an environment where we have full employment, and it doesn't really look like that's changing. And because of that, our customers have the capacity to pay. So we need to respect that and understand that. We also have an environment whereby we have limited competition and substantial opportunity. But we need to respect that situation, continue to act with integrity and continue to be disciplined in the way that we underwrite our business in the way that we tell our story to equity investors and the way we present ourselves to our vendor partners. So we're very, very focused on that. Keeping our feet grounded is critical. And I'm fortunate enough to have a very solid executive and leadership team around me that ensures that, that happens.

Another group yesterday mentioned that the PDP market had fewer sellers and the banks are selling less. So can you comment on that?

For sure. This has been a narrative that's been peddled by other groups for various reasons. From a competitive perspective, I think the reason that, that is being -- that narrative is being played out is because they compete with the vendors. And subsequently, people are less inclined to sell to them. That is not Pioneer's experience. The other side is groups talking about digital collections, contingent collections and the like. Our experience is somewhat different. $90 million is a significant investment to make in any one period, and we certainly have substantially more opportunity to capture than that right in front of us right now. The reason that we don't just go and grab more market share immediately is because we have to be able to operationalize it, and we have to ensure that it is repeatable for everyone. What we don't want to do is deliver $9 million this year, $18 million next year and have a gap or something else the year after. This is about building a sustainable business with long-term earnings growth as we have traditionally been $9 million, $18 million, $18 million plus some. So there's plenty of opportunity in the market. We disagree wholeheartedly. We think we've demonstrated that time and time again and look forward to proving it out over time with our earnings growth.

Keith, can you provide an update on the PwC matter?

For sure. You might recall at our AGM in late October last year, the matter was set down for what's called a strategic conference at the end of March. That is continuing. So we have a strategic conference at the end of March. We understand that it will set the timeline and the pace for the rest of this year where it progresses. Our council remains confident in our position. We've certainly had more work done with respect to that following the evidence that's been provided so far by the defendant, and we're very comfortable with our position and look forward to getting a good result for shareholders in time. At best, we think that's later this year, maybe it's a little later than that, but we're working to get the best result for all of us.

Of the $2 million in interest savings in the FY '26 bridge, what assumptions are around further rate cuts?

Not so much around -- well, Barry, actually, I should throw it to the CFO, given it's a financial question.

Yes. So there's no further rate cuts included in that number. We had 25 bps come through, which is in forecast. The balance is relating to the SPV that we set up last year for 2 large portfolios last December. That's an amortizing facility, and we expect that to be paid off by the end of the financial year and then crystallizing with the interest savings next year.

What are you doing about AI in your business?

Thanks, Chantelle. There's obviously been a lot of hype about AI. There's been a mountain of hype about AI in the collections and servicing space. We have invested heavily through the period in modernizing our data and analytics platform, as we've called out. I mean we've been using what people refer to as AI for some time, albeit on a lower or at the infancy of the journey. It's an important part of our solutions going forward. We're treating it carefully. We don't think it's a song and dance routine that requires explanation or presentation back to the market. We see it very much as a business-as-usual offering that supports what we've done in the past as opposed to replaces it. So in time and through time, we expect that to continue to put some pressure down on our cost to serve. But again, let us deliver on that first rather than make commitments and I think we need to show delivery of it over time, which is what we'll do.

Okay. We have time for one last question, and this one is for Barry. Is the forecast NPAT for this year and next year statutory or normalized?

The FY '25 guidance number is a normalized number, normalized only for project cost and the refi costs, which have occurred and the FY '26 number is a statutory number.

Okay. So we've reached the end of our question time slot. If we didn't get to your question, we will definitely reply to you via e-mail. And if you have anything else that you'd like to ask us, feel free to e-mail us @[email protected]. And to stay up-to-date with our latest news, you can also follow Pioneer Credit Limited on LinkedIn. Thank you all for joining.