Zip Co Limited (ZIP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Extraordinary General Meeting of Zip Co Limited. My name is Philip Crutchfield, and I'm the Chairman. I'll be chairing the meeting today. It's now 10:00, and there being a quorum present, I declare the meeting open for business. I confirm that the meeting has been properly constituted. Given current restrictions and social distancing practices in place, we are unfortunately unable to meet with you in person today. But I would like to thank those shareholders that are joining us via the virtual meeting platform. Thank you for the interest you're taking in the affairs of the company. The virtual meeting platform allows shareholders, proxies and guests to attend the meeting virtually. All attendees can hear a live broadcast of the meeting. In addition, shareholders and proxies of shareholders have the ability to ask questions and submit votes virtually. In opening the meeting, I'd like to introduce my fellow Board members and management team of Zip Co Limited who are attending via the virtual platform. They are Mr. Larry Diamond, the Chief Executive Officer; Mr. Peter Gray, the Chief Operating Officer and an Executive Director; Mr. John Batistich, a Non-Executive Director; Ms. Dianne Challenor, a Non-Executive Director; Mr. Martin Brooke, the Chief Financial Officer; and Mr. Tommy Mermelshtayn, the Chief Strategy Officer. Also in attendance is our company's Secretary, Mr. David Franks; and also Mr. David Squires, representing Computershare Investor Services. There are no apologies for this meeting. The agenda for today's meeting is as follows: We will consider the formal matters included in the company's Notice of Extraordinary General Meeting. We will then conduct a poll. And following consideration of these matters, we will close the formal part of the meeting. There will not be any presentation or company update at today's meeting, noting that this meeting has been convened for specific purposes and is an extraordinary general meeting, and that a company update was released to the ASX on Thursday last week. This company update is also available through the podcast with Orient Capital. I'd just point out that only registered shareholders will be able to enter questions into the online question portal. We now move to the formal business as set out in the Notice of Meeting. That notice was provided to all registered members on the 30th of July and is to be taken as read. Voting on all resolutions will be conducted by poll. Proxies have been inspected, and all those validly lodged have been accepted. Proxies have been received, representing 201,833,067 shares or 51.7% of the issued capital of the company. Undirected proxies or open votes that have nominated the Chairman as their proxy will be cast for, in favor of each resolution in the Notice of Meeting. [Operator Instructions] Please note that while you may submit questions from now on, I will not address them until a relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on one topic, amalgamated together. Finally, due to time constraints, we'll need to monitor time to answer all your questions during the meeting. Voting today will be conducted by way of a poll on all items of business in order to provide you with enough time to vote. I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear on the virtual platform. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do have, however, have the ability to change your vote up until the time I declare voting closed. I now appoint David Squires [Audio Gap] poll and declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time. I'll give you a warning before I move to close the voting. We will now proceed to the resolutions set out in the Notice of Meeting. Resolution 1 is as follows, and out of prudence, I will -- it's slightly tedious, but I will read out the text of the entire resolution. To consider, and if thought fit, to pass with or without amendment the following resolution as an ordinary resolution that for the purposes of ASX listing Rule 7.1, Listing Rule 10.19 Sections 200B and 200E of the Corporations Act and for all other purposes, approval is given for the issue and allotment of the following shares in connection with the QuadPay acquisition: a, up to a maximum of 119 million shares to the QuadPay stockholders as the merger consideration shares at an issue price equal to the company's volume weighted average price of its shares on the ASX in the 15 trading days prior to completion; b, up to a maximum of 24,570,024 shares to the QuadPay founders as the performance consideration shares at an issue price equal to the higher of $3.70 per share and the company's volume weighted average price of its shares on the ASX in the 15 days -- trading days prior to the applicable issue date; and c, up to a maximum of 5 million shares to the QuadPay founders as the 10-year consideration shares at an issue price equal to the company's volume weighted average price of its shares on the ASX in the 15 trading days prior to the applicable issue date on the terms set out in the Explanatory Statement, which accompanies this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Philip, in relation to this resolution, we don't have any specific questions on the resolution. But we do have one question just asking, is there any member of the Australian Shareholders' Association online representing anybody at the moment? So maybe if there is anybody from the ASA, if you could just enter something into the Q&A or send a message, and I'll just note that. But no, there are no questions specific to this resolution.

Thank you, Mr. Franks. The proxies received in relation to this resolution will be shown on the screen.

Philip, just for good governance, I'll just read out those numbers for the audience. For resolution 1, 198,893,421 votes for the resolution; against the resolution, 270,521 votes; and open votes at the discretion of the proxyholder, 1,554,820 votes.

Thank you. So we have a percentage of 99.1% for the resolution and 0.13% against. I now put the motion. Shareholders can vote via the online portal. [Voting]

We will now proceed to resolution 2. Resolution 2 is as follows: to consider, and if thought fit, to pass with or without amendment the following resolution as an ordinary resolution that's subject to and conditional upon the passing of resolution 1. For the purposes of ASX Listing Rule 7.1 and for all other purposes, approval is given for the grant and allotment of up to a maximum of 12 million options to the QuadPay option holders in connection with the QuadPay acquisition and the issue and allotment of shares on the exercise of those options on the terms set out in the Explanatory Statement, which accompanies this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. I'll just give it another 30 seconds to see if any questions come through. We don't have any questions in relation to resolution 2.

Right. Thank you, Mr. Franks. The proxies received in relation to this resolution now appear on the screen. And for the resolution, we have 198,745,150 shares; against the resolution, we have 398,662 shares. So we have as a percentage 99.02% in favor of the resolution and 0.2% against the resolution. I now put the motion. Shareholders can vote via the online portal. [Voting]

And we will now proceed to resolution 3. Resolution 3 is as follows: to consider, and if thought fit, to pass with or without amendment the following resolution as an ordinary resolution that's subject to and conditional upon the passing of resolution 4. For the purposes of ASX Listing Rules 7.1 and for all other purposes, approval is given for the issue and allotment [Audio Gap] noteholder in connection with the convertible note raising and the issue and allotment of shares on the conversion of those convertible notes on the terms set out in the Explanatory Statement, which accompanies the Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. I'll just give it another 30 seconds. We don't have any questions that are coming through in terms of resolution 3.

Thank you, Mr. Franks. The proxies received in relation to this resolution are on the screen. For the resolution is 191,347,980 shares and against the resolution, 1,595,832, representing a 98.40% of shares voted in favor of the resolution and 0.82% of shares voted against the resolution. I now put the motion. Shareholders can vote via the online portal. [Voting]

We will now proceed to resolution 4. Resolution 4 is as follows: to consider, and if thought fit, to pass with or without amendment the following resolution as an ordinary resolution that's subject to and conditional upon the passing of resolution 3. For purposes of ASX Listing Rules 6.23.2, and for all other purposes, approval is given for the issue and allotment of 19,365,208 warrants to the noteholder in connection with the convertible note raising and the issue of shares on conversion of those warrants on the terms set out in the Explanatory Statement, which accompanies this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. I'll just give it a little bit more time. And Philip, I probably should also note that when we're reading out the proxies and the open votes that are noted on the screen, all of those votes, except for 42,008 votes are held by yourself as Chair, of which in the Notice of Meeting, we've stated that you'll be voting for the resolution. So it actually makes the position on some of those votes even stronger. In terms of resolution 4, there are no questions that have been lodged.

Thank you, Mr. Franks. The proxies received in relation to this resolution are on the screen. I now put the motion -- well, perhaps I should just apologize and read out that for the resolution, 192,538,509 shares and against the resolution, 389,219 shares, representing 99.02% of shares voted in favor of the resolution and 0.2% of shares voted against the resolution. I now put the motion. Shareholders can vote via the online portal. [Voting]

And I move to Resolution 5. Resolution 5 is as follows: to consider, and if thought fit, to pass for and for all other purposes shareholders ratify and approve the prior issue by the company of 16,216,216 shares issued to certain institutional, sophisticated and professional investors under the placement at the issue price of $3.70 per share as announced on 29 November 2019 and 2 December 2019 and otherwise on the terms and conditions set out in the Explanatory Statement accompanying this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. We'll just give a little bit of time. In relation to resolution 5, there have been no questions logged.

Thank you. The proxies received in relation to this resolution are now on the screen. There were 195,138,589 shares cast for the resolution and 1,082,831 shares cast against the resolution, such that 98.61% of shares were voted in favor of the resolution and 0.55% against the resolution. I now put the motion, and shareholders can vote via the online portal. [Voting]

And we'll now proceed to resolution 6, which is as follows: to consider, and if thought fit, to pass the following resolution as an ordinary resolution that for the purposes of ASX Listing Rule 7.4 and for all other purposes, shareholders ratify and approve the prior issue by the company of 14,615,000 warrants issued to an affiliate of Amazon, Amazon.com NV Investment Holdings LLC on the 6th of November 2019, as announced to the ASX on 7 November 2019 and otherwise on the terms and conditions set out in the Explanatory Statement accompanying this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. I'll just give it a little minute. There have been no questions received in relation to resolution 6.

Thank you. The proxies received in relation to this resolution are now on the screen. There was 198,944,304 shares cast for the resolution and 218,757 against, which in percentage terms is 99.13% in favor of the resolution and 0.11% against. I now put the motion. Shareholders can vote via the online portal. [Voting]

And we'll now proceed to resolution 7, which is the last resolution. It's as follows: to consider, and if thought fit, to pass the following resolution as an ordinary resolution that for the purposes of ASX Listing Rule 7.4 and for all other purposes, shareholders ratify and approve the prior issue by the company of 2,576,643 shares issued to the SpotCap vendors on the 7th of November 2019 in connection with the SpotCap acquisition, as announced on 6th September 2019 and otherwise on the terms and conditions set out in the Explanatory Statement accompanying this Notice of Meeting. If you wish to discuss this resolution, please submit your questions.

Thanks, Philip. Let's give it a few seconds. There are no questions received in relation to resolution 7.

Thank you. The proxies received in relation to this resolution are now on the screen. There was 198,836,899 shares cast in favor of the resolution and 202,600 cast against, which in percentage terms is 99.11% in favor and 0.1% against the resolution. I now put the motion. Shareholders can vote via the online portal. [Voting]

That concludes the resolutions to be voted on today. Can all shareholders voting online please now ensure they have submitted their votes? In a couple of minutes, I will close the voting system. Please ensure that you've cast your vote on all resolutions. I will now pause to allow you time to finalize those votes before we close the poll for online votes. [Voting]

Thanks, Philip. We'll just give it a minute or 2 just to make sure that nobody is having any difficulties, and I'll let you know if anything comes through the online portal in a minute or 2. Philip, we haven't received any queries or comments or any notes that anybody is having any difficulties lodging their votes. So that's been a couple of minutes now.

All right. Thank you. Well, I will declare the poll closed. The staff of Lumi will now process the poll, and the results of the poll will be announced to the ASX once they are available. Last item on the agenda is other business. Is there any other business that can lawfully be brought forward?

Once again, Philip, we'll just give it a little bit of time. But so far, there's been no formal business being raised online. I think we can say there's no questions or comments in relation to formal business -- other formal business.

All right. That concludes the business of the meeting. I think it would be remiss of me not, on behalf of the nonexecutive directors, to thank -- and perhaps hopefully on behalf of shareholders as well to thank management for all of their hard work on our behalves. And on that note, I declare the meeting closed at 10:23 a.m. Thank you very much for taking the time to attend.

Just general questions. Would you like me to read them out?

Yes, please.

One -- the first one is more of a comment than a question. Just in terms of resolution 1, VWAP. You read out voting weighted average price. There's just a comment that VWAP is volume weighted average price. I think it's just a comment from a stockbroker. Then there's a question that's not related to the resolutions. The question is, net bad debt of Zip increased from 1.63% in 2019 to 2.24% in 2020. Even though Afterpay halved its annual loss, what is the main reason for this? And do you have any plan for reducing the net bad debt? Management mentioned that the net bad debt is still lower than their expectations of 2.5%. How did you come up with a figure of 2.5%? Is Zip still making profit with the bad debt? As far as I know, the margin of Zip from merchants are lower than that of Afterpay. That's the question.

Thank you for the question. I might ask Mr. Diamond and Mr. Gray to answer the question. Although I should observe that a comparison between Afterpay and Zip in relation to bad debt is like comparing oranges and apples because it's a different calculation. But perhaps management can elaborate.

Yes. I'll take that one. So the net bad debt is performing directly in line with our expectations and the guidance we gave at the end of calendar year '19. I think we identified that bad debts for our business at sub-2% levels were potentially too low. And I think we identified a sort of target range more appropriate for our business in terms of maximizing the revenue on the front end without coming at the expense of the commercial bottom line in terms of losses somewhere in the vicinity of 2.5% to 3%. I think in terms of directly comparable, it's significantly lower than other market comps, credit cards, et cetera, which would be circa 3.5% to 4%. As Philip touched on, a comparison to the way I measure the bad debt is not relevant. They don't measure it as a percentage of receivables in the same way that we do. On a similar metric, their losses would be considerably higher than ours. I think going forward, you've seen that arrears would have of decreased, and we closed the half at 1.33%. This is a significant reduction. So losses would be -- arrears, beg your pardon, would be a forward indication of losses. So we did make some risk adjustments at the onset of COVID, so losses will follow the trend of arrears over the next 6 months. So you'll actually see them taper off over the next 6 months.

Yes. I think just the tail end of that question was just around unit economics. We obviously derive our income from merchant fees and customer fees, and we -- and there's a slide in the investor press from last week, Slide 40, if you go to, that shows revenue yield of about 16%. And if you look at the cost of goods, one of the big drivers of cost of goods is bad debts. And even including that, we have a 50% gross profit margin with the company generating positive cash EBITDA. So -- and that splits into the gross profit profile.

Still, we haven't had any other questions received.

All right. Thank you. Well, I will therefore close the meeting, and thanks again for everybody's attendance.