Pioneer Credit Limited (PNC) Earnings Call Transcript & Summary

Good morning. I'm Chantelle Hadley from Pioneer Credit. Thank you for joining our half year results presentation for FY '26. I'm joined today by our Managing Director, Keith John; and our Chief Financial Officer, Barry Hartnett, who will be taking you through our presentation. [Operator Instructions]. So for now, we will start off with Keith.

Thank you, Chantelle, and welcome, everyone, to this morning's presentation. We're very, very pleased to take you through our results for the first half of financial year '26, another fantastic result for the company and really sets us up to deliver on our commitments to shareholder and exceed them for this year, but certainly deliver on them from hereon in. In terms of the highlights for financial year '26, PDP investment was subdued during the first half due to suspended forward flows. This has been well articulated elsewhere in the market. Obviously, when that happens, that has a slight downward impact on cash collections. So we're very, very pleased with how that performed in the half. Those forward flows have since resumed. Up until the end of the month of the half, we had $31 million invested, most of it again late in the half. Since then, we've done about another $20 million in the last 6 weeks, so $50 million to today, and we are contracted to deliver on our $80 million guidance through the rest of this half. And there's significant upside risk with respect to that. There are a lot of opportunities in the market and opportunities we expect to seek to capitalize on, particularly as we keep driving our cash collections in this half and beyond. Net revenue, so the margin that we earn on the portfolios that we buy on flat collections, up 5% on last half to $47.7 million. We think that's a fantastic result, really reflecting the quality of the underlying portfolios we buy and the relationship and the differentiated strategy that is appreciated by the people that we buy our portfolios from. That's flowed through to better margins and better returns to us and for our shareholders. Of course, through the half, we've spoken extensively about the work that we've done on our funding. And you'll remember that over the course of the last couple of years, we brought funding costs down dramatically. During the half, we also negotiated and repriced our senior facility down by 100 bps. This is a remarkable achievement. So early in a relationship with funders to have them reprice the facilities to ensure that they stay with us for as long as possible reflects the credit quality of Pioneer, the value of our business and how good a credit proposition that we are and clearly, the operating environment in which we operate in and how we operationalize our business. Shortly thereafter, we had a 15 bp reduction under ESG provisions. We're very pleased with that as well. We now have a senior funding cost of just 435 basis points plus BBSW, a very, very low cost of funds for our senior. Last year, we mentioned that we would move away from presenting normalized numbers and only report statutory numbers. At the the end of the day, that is what drives the profitability of the business. That is what will enable us to return to becoming a dividend-paying stock in the future. Statutory net profit after taxation of $10.2 million, more than what we achieved over the entirety of the last financial year. And as you well know, we're a preferred partner of the big 4 banks and the only debt purchaser in Australia in agreements with all 4 of them. In terms of our performance, as I mentioned, cash collections up a small amount, but steady through the last few halves now, $71.4 million. This really reflects 2 things. One is the sustained and subdued purchasing environment over the last few halves. That has now released and sales have resumed. As I mentioned, we did $30 million in the first half of this year. We've done $20 million in the next 6 weeks to today. EBITDA, up 7%. As you would expect, we've talked consistently about our focus on efficiency and on cost control, up 7% to $51.5 million. Our EBIT up 38% to $26.2 million, reflecting for a large part, the savings across our financing costs. And of course, the delivery of a $10.2 million statutory net profit after taxation. We're very, very pleased to deliver that number to shareholders today. In terms of our portfolio, as I've mentioned, relatively subdued or subdued investment now for some time. That will tick up markedly in this half. There is plenty of opportunity for us beyond that. As I said, we've already done $20 million worth in the first 6 weeks, and we're contracted to deliver on $50 million for the half to get us to our guidance. There is upside potential for us there. The PA portfolio down a little bit, really reflecting 2 things, the investments we had made in paying portfolios some time ago as they continue to run off, but more so the subdued environment that we've been operating in from an investment perspective. We clearly expect that to turn around. ERC, up a tad, really reflecting the late investment that we had to $708 million. And our PDP asset at $350 million. That portfolio or that asset is discounted at a rate of 34% to get to that number, quite a heavy discount rate, reflecting the caution that we exhibit right through the business. For the financial performance, I'll hand you over now to Chief Financial Officer, Barry Hartnett.

Good morning, and thank you for joining Pioneer's 1H FY '26 results presentation. The company is pleased to report a statutory net profit after tax of $10.2 million, which is more than double that of the prior reporting period. The first half results reflect stronger operating cash generation, continued cost discipline and a structurally lower cost of funding. Total income increased to $47.9 million despite more subdued investment in the first half. As Keith mentioned, with $20 million of investment completed in the second half to date and contracted PDP investment for the remainder of the year, we expect to contribute -- this to contribute more meaningfully in the second half. Employee expenses remained flat at $15.9 million, demonstrating our continued cost discipline. We do expect resourcing to increase modestly in the second half to support the PDP investment. Finance costs reduced materially following the repricing of the senior facility. The amendment has resulted in a $3.6 million noncash benefit, which is approximately $1.8 million better than our initial forecast. It's also noted that the company had forecasted a $2 million benefit in our previous NPAT guidance of $18 million. On the bottom right-hand side, you can see the cost of service ratio at 32%, which remains below our guidance range and is a key focus for the business. Net operating cash flow of approximately $34 million, up 19% on the prior period, driven by higher cash collections and a continued cost discipline. Importantly, the portfolio investment was substantially funded through internal cash generation. On the right-hand side, the graph shows that operating cash flow net of PDP investment has improved progressively over the last number of periods. And this year, you can see it moving into positive territory. The net interest paid slightly reduced to 15.3 million as only a partial benefit of the repricing was reflected in the period. The full cash benefit of the 115 basis point reduction will flow through in the second half of the year. Again, management remains focused on further optimizing cost of funding in the coming period. PDP assets increased to $350 million, reflecting disciplined investment in high-quality portfolios. We do have $25.2 million of undrawn facilities, providing flexibility to support further investment. And again, on the bottom right hand, you can see the net assets per share increasing progressively over the last number of periods. And again, our net assets of $70.6 million.

Thank you, Barry. For those in particular, that are new to Pioneer, a little bit about us. As shareholders are fully aware, we're a leading purchaser and servicer of purchase debt portfolios. We buy primarily of banks and major financial institutions. One of the key defining factors and one of the reasons why the market is so open to us while we're buying at better margins and why people want to be in a relationship with Pioneer is we do not participate in payday lending. and we do not lend to our customers in the future. And that means we're not competing with the people that sells the portfolios to us. This is a very critical thing and in a market where there is -- there are only a few players that are trusted, being the only player that has those 2 things that are unique about it positions us very, very well to invest well and also to do it at better margins. Since 2008, we've invested some AUD 835 million across near enough 900,000 customers. That gives us very, very deep data sets on which to do our modeling, on which to do our underwriting and our pricing and of course, on how to operationalize our customer accounts. You can see that coming through in our results now, and we expect that to continue into the future. From an investment perspective, you can see it's been relatively patchy over the last few years and quite subdued, but for a couple of performing portfolios. For FY '26, that is not the case. We're now back -- whilst the first half was somewhat subdued, $30 million in the first half. We've done $20 million in the last 6 weeks, and we'll deliver on the $80 million for this half. There is, in our view, significant upside to that number, subject to, of course, us acquiring portfolios that meet our standards from not just an underwriting perspective, but also the serviceability of them and their fit for our servicing operations. We're very confident that we'll deliver on that. In terms of ERC and returns, our estimated remaining collections, of which we expect to recover $708 million. Of that $708 million, about $410 million of it is already under an arrangement with a customer. So they're paying us back on a regular basis. You can see on the right-hand side, our underwriting. So what did we invest at, which you can see in the black and what we're returning and forecast to return for the remaining period, and things are looking very, very good for Pioneer. And again, those improving margins are coming through the financial statements. Another slide on our collections performance, of course, one of the things that you want to see and you need to see is our performance on accounts that are older. Anyone can recover on things that are new, of course because they're fresh and they're available. But recovering across the life of a portfolio or a vintage is really important. Pioneer has had another very strong half, 41% of recoveries coming from customer accounts or vintages that are more than 2 years old. We're very pleased with that. In terms of shareholder alignment, we've said repeatedly, in small financials such as Pioneer, having strong alignment of leadership and executive is critical in our view to the success of the business. It ensures discipline in the way that we invest our money, the way that we think about ourselves as custodians of your money and ensuring that we drive the right long-term outcomes. Pioneer management are the largest shareholder in this business, and our executives are aligned with rights that vest over a 4-year period. The hurdle to achieve for the last 4 years is $18 million statutory net profit after taxation for this year, a number which we are today upgrading the delivery of. The hurdle remains the same, but we're upgrading our guidance to the market to $20 million. So on to our outlook and our guidance. Firstly, strong tailwinds, as I've mentioned, subdued supply over the past 12 months, that's ended and supply is back in full force now with the expected return of the last of the banks to forward flow later in this financial half. So that will be a great boon for this business and for the sector. There are also significant inventory and one-off portfolios expected over the next 12 to 24 months. In that regard, Pioneer is very well funded. As Barry mentioned, $25 million of capacity in our facilities. There is ample opportunity for us to go and grow our funding capability if we require. Of course, that's all matched by or outweighed by significant cash generation in this business, which is where we largely come through in terms of funding our portfolios. Derisk PDP investment, as I mentioned, $50 million completed to today. Guidance is contracted up to $80 million for the half. So that will come through. We expect to see cash collections grow now as we've got this purchasing to support that, including what we've purchased in the past. There is upside opportunity. As I mentioned, we're pricing and portfolio quality attractive, and that's a really important thing for us. Now is not the time to get excited about simply spending money. Now is the time of getting excited about spending money and investing money in portfolios we know that will deliver improved margins, improved returns for our business and that match the quality that we have. You won't see us going down the quality scale. You'll see us staying exactly where we are and building on our commitment to you and building on what we've delivered. Unlocking operational leverage, our core system replacement project is on budget. We're now just subject to scheduling for deployment. So we expect to see some benefits from that starting to flow through in the next financial year. We have not forecast those in our outlooks internally. Data improvements and cost-out opportunities continue, of course, and you can see some of that coming through our financials. And importantly, our AI rollout has commenced cautiously. There's a lot of potential there for downward pressure on costs. We will take it cautiously. We're dealing with people. We're dealing with customer data. We're dealing with our own employees and of course, our own customers and our vendor partners. We're very, very conscious of that. We're very, very respectful of that. We think there will be great benefits for everyone involved through our rollout of AI as we do that and we continue to scale our business. Tested and experienced management, founder-led business, as you know, strongly aligned to shareholders, and we've got a long-term stable executive with deep personal investment in this business. We are there alongside you. We think that's critically important. And finally, and most pleasingly is us having the opportunity today to upgrade our statutory net profit after taxation from $18 million to at least $20 million. That concludes the formal part of the presentation. I will now move to questions.

The first question is for Barry. While statutory NPAT has reached a clear inflection point, Slide 5 shows cash collections have remained relatively flat at $70 million to $72 million over the last 4 halves. Is the current strategic priority to first finalize the structural operating platform, specifically the core system replacement to allow for margin expansion more aggressive -- before more aggressively scaling collections? And if so, when does management expect this top line growth to accelerate?

Thank you. So in terms of the flatness of the liquidations, I think this is down to a couple of factors and predominantly around the subdued investment over the last couple of periods. I think we've spoken about that in our recent results announcements. I think the important thing to highlight there is that as there has been some delays in our programs with our vendors, we have been able to maintain costs at a very, very low level. We have highlighted that now we expect the PDP investment to increase into the second half with $20 million already secured. So we do expect that there will be some uplift in that revenue line going forward. In terms of the core system, the core system will add some efficiency in terms of how we've operated. We haven't included any uplift to that in any of our projections at the moment.

Thanks, Barry. We've got a couple of questions with respect to the outlook for PDP investment. And with respect to, is there significant upside to the $80 million that we've forecast or that we've guided to at the moment, noting that our direct competitor increased their guidance by about 50%. Is there potential for us? And how do we think about that?

Yes. So I think on the $80 million this year, we've effectively secured what we've guided so far under forward flow agreements and what we've contracted to date. We do expect that there's going to be material opportunities that will come to market in the next couple of months. So I think there is potential that there is upside to the $80 million that we have guided so far. However, as we progress further and as we crystallize some of that, we will release that to the market.

Thanks, Barry. With respect to -- there's a few questions with respect to our financing. One of them was why did our lenders agree to cut the margin? I'll talk you through that in a short moment. And the second is with respect to the senior facility now compressed down to 435 bps. What is the opportunity on the medium-term notes given they're so much more expensive? With respect to the lenders, our senior lenders in particular, when we originally entered into that facility, Pioneer was coming out of a period of no profitability and have made commitments to the market and to the lenders as it does through that period. And also, you might recall going back a couple of years ago, 18 months ago, there became a flood of money into the private credit market and into alternative banks. Our syndicate is a very, very high-quality lenders. And one of the things that we had was the opportunity for us to refinance away from them after 2 years. In return for us extending that to 3 years, so we locked up with them for another year at least. We had a reduction in our margin of 100 bps. So that's -- that was the quid pro quo for lack of a better description. Of course, it reflects the underlying performance of this business, which obviously our lenders get to see at a much deeper level than anyone else and the outlook for our business going forward. So we're very, very pleased not just to achieve that result for shareholders and for the company, but also as a sign of investment by the lenders into our business and into the longevity of our funding and how they think about us as a credit proposition. In terms of the medium-term notes, we have been very clear over the course of the last period that we have an opportunity to further compress our lending. Clearly, they are very expensive. It is something that we are working through currently. We're quietly confident that we're going to get a good result in the near term. And as soon as we do, we'll obviously let shareholders know about that through an announcement to the ASX. The other question that we regularly get is when will the company start paying dividends again. Clearly, we would all like to start paying dividends. I think, as I've said previously, one of the things that's really, really important for Pioneer is we deliver on this year's commitment. Once we've actually delivered on it, and clearly, we're very, very confident of that given we've upgraded it today. Once we've delivered on that, then I think we can start having a conversation about what does capital management look like in the context of this business and what will it look like going forward. Clearly, we'll share that with shareholders as well as we understand their expectations, the requirements of the business, and we work through that with the Board. With respect to the PwC litigation, at the moment, there's not much more we can tell shareholders other than it is progressing. Our lawyers and advisers are very comfortable with our position and with the progress of that matter. Unfortunately, these things do take time, and our advisers remain of the view that we should remain silent on this matter until such time as there's some reasonable path or reasonable resolution, which we're hoping that we'll be able to work through. But nothing has changed from our resolute position to defend the practices of the company and to prosecute what we see as the poor advice that we received through that period and which obviously cost us a significant amount of money. We're confident that we'll deliver on that. The last question, Barry, if you don't mind, is with respect to the guidance. So we've upped it from $18 million to $20 million. Given the implied growth and we've already done $10 million in the first half, why hasn't it been upgraded higher to $21 million or $22 million?

Yes. So when we initially set the FY -- or sorry, the guidance to the market of $18 million, we included an interest benefit of about $2 million in that bridge that we presented to the market. We exceeded our expectations in terms of delivering a higher reduction in margin on the senior than we expected, which effectively resulted in a $3.8 million gain. So we've effectively done between $1.8 million and $2 million better off than what we expected. And hence, that's the rationale for increasing the guidance from $18 million to $20 million.

My apologies, I was on mute. The final part of that question is why haven't we upgraded to $21 million or $22 million, given we did over $10 million in the first half. And I think it's consistent with the way that we have approached everything at Pioneer and the discipline that we've really been focused on communicating to the market, which is overpromise -- sorry, underpromise and overdeliver. We fully expect to deliver on our guidance of $20 million. We've said at least $20 million. Once we get a little bit closer to the date, hopefully, we'll be able to update the market further as to where we'll end. That brings to a close the substantive part of this presentation and our question time. I thank you all for joining us and hand you back to Chantelle.

Thank you very much, Keith and Barry for taking us through the presentation and for going through the robust Q&A there. So if you have any further questions that you think of later on, you can always reach out to us. So e-mail, [email protected], or if you go to LinkedIn, you can find us and follow us Pioneer Credit Limited, and that's where we share all of our news and keep you up to date. So thank you for joining today.