Credit Corp Group Limited (CCP.AX) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the 20th Annual General Meeting of the Shareholders of Credit Corp Group and our first virtual AGM. I wish to welcome all shareholders joining us either via the Lumi online platform, via the teleconference or watching via the webcast. I thank you for joining us in these most unusual of times and trust you are all safe and well. The Lumi platform enables shareholders and proxies to ask questions and submit votes. In addition, shareholders and proxies accessing the AGM via the teleconference will also have the opportunity to ask questions. [Operator Instructions] I also hope that this new mode of undertaking the AGM is a smooth experience for you and facilitate strong engagement and participation. As we have a quorum present, I declare the meeting officially open. I am Donald McLay, Chairman of the Board of Directors of Credit Corp Group Limited, and in accordance with the company's constitution, I am the Chairman of the meeting. I will now ask the Company Secretary, Mr. Thomas Beregi, to advise whether there are any apologies for the meeting. Thomas? No apologies have been received. I would like to introduce your company's directors who are present here with me. They are Mr. Eric Dodd, Non-Executive Director and Chairman of the Remuneration and HR Committee; Mr. John Nesbitt, a Non-Executive Director and Chairman of the Audit and Risk Committee; Ms. Leslie Martin, a Non-Executive Director and a member of the Audit and Risk Committee. Due to social distancing requirements, our other 2 directors are joining us online. They are Mr. Richard Thomas, Non-Executive Director and a member of the Audit and Risk Committee; and Ms. Trudy Vonhoff, a Non-Executive Director and a member of the Remuneration and HR Committee. I'm also joined here by the company's Chief Executive Officer, Mr. Thomas Beregi. Other members of Thomas' executive team are either present here or alternatively joining the meeting online. Also here today is the company's legal adviser, Mr. Guy Sanderson from Baker McKenzie; and Mr. Sandeep Kumar from Hall Chadwick, the company's auditor. I'll call upon Guy and Sandeep to answer any relevant questions if required during the meeting. So I'm going to commence with the Chairman's address, which will be followed by the CEO's quarterly update presentation. We will then proceed to the ordinary business of the meeting. Following that, we will open up the meeting to questions covering any aspect of the meeting, either my address, the CEO's quarterly presentation, the ordinary business or any other relevant matter a shareholder wishes to raise. We are combining the questions into one session at this meeting because we will be receiving questions by both the online platform and through the teleconferencing system. As voting will remain open until the end of the meeting, this approach will not preclude the rights of any shareholder to be heard. [Operator Instructions] Please note that while you can submit questions from now on, I will not be addressing them until the relevant time of the meeting. If we receive multiple questions on the same topic, we will provide an amalgamated response. Voting today will be conducted by way of poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. When that happens, if you are eligible to vote at this meeting, a new polling icon will appear. 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, and there's no need to hit a submit or enter button because the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. So I now declare voting open on all items of business. The polling item will soon appear. Please submit your votes at any time. I will give you a warning before I move to close voting. Remember, you can only vote if using the Lumi online platform. I will now commence my address. At Credit Corp, leadership has always been about positioning the company to deliver long-term performance regardless of changes in the external environment. This has involved preparing for a range of external outcomes with the objective of developing the capacity and resilience to manage challenges and to seize opportunities. This approach has delivered sustained growth over a long period of time and has ensured that we can be flexible and decisive in our responses, both to industry behaviors and to disruptive events. It has not, however, insulated Credit Corp from short-term periods of underperformance before commercial reality returns. So in the final analysis, 2020 was a year of underperformance. While our operating results for the year were strong, our assessment of the economic impact of COVID-19 on our assets and commitments produced a $0.78 fall in net profit after tax to just $15.5 million, breaking an uninterrupted record of strong earnings growth over the past 11 years. Shareholders did not receive a final dividend and the company's share price finished the year below where it started. As a fellow investor, I share the disappointment felt by all shareholders. As Chairman, however, I'm immensely proud of Credit Corp's achievements over the course of the year, including our decisive and confident response to COVID-19. These moves will set us up well for this next business cycle. Our work over many years have put the company in a strong position at the start of 2019, '20. We had a strong record of consistent earnings growth while building solid platforms for further growth across all our businesses and locations. In our Australian and New Zealand debt buying businesses, we had seen off a period of excess competition and instances of unsustainable prices by holding our pricing discipline and reducing investment during that time. The inevitable fallout from this excess competition was starting to occur, with an easing in pricing conditions and an increased refocus by sellers on Credit Corp's clear leadership in compliance and reputation. As a consequence, we were starting to gain market share and grow our purchasing. In the United States debt buying business, conditions remained stable, and we had built a diversified set of purchasing relationships, together with sizable operational capacity. We were on track for a significant step-up investment, and we're looking forward to realize the considerable potential of the U.S. market. The Australian lending business had grown to become a large contributor to Credit Corp's earnings. The credit-impaired segment of the lending market was growing. And as the provider of the most affordable and responsible offering in the segment, we were experiencing solid volume growth. Across all our businesses, performance for the first 9 months of the year had been as strong as any period in the company's history. The fallout from excess competition created the opportunity to acquire the business and purchase debt ledger assets of the Australian and New Zealand arm of one of our global competitors. The acquisition of Baycorp was completed at an attractive price and without paying goodwill. Credit Corp management worked closely with the Baycorp team to promote -- to promptly realize annualized integration savings of $13 million and to improve overall returns. The acquisition provided Credit Corp with an expanded collection services business and an enlarged presence in New Zealand. Right from the beginning, performance of the acquired assets was strong and combined with ongoing purchasing, put our domestic collection business on track for record segment earnings. We were also successfully expanding our workforce in the U.S. Filling our collection facility in Utah early in the year, we opened a second U.S. location in Washington state, and we're on track to grow U.S. purchasing. Our industry leadership put us in a strong position to realize opportunities in relatively favorable conditions, and it has been particularly important in our response to the COVID-19 in the period from March 2020. Understanding our customers, that's those with the outstanding debts and loans, and responding to the circumstances has been a key pillar to our success in the credit-impaired consumer segment. The first element of our pandemic response was to implement a range of temporary measures to support our customers, including an interest freeze on debt purchase accounts and repayment moratoriums, together with the suspension of legal and credit reporting activity. Maintaining continuity of operations, while safeguarding the welfare of our staff, was another early challenge. We implemented COVID-19 safe protocols in line with local guidelines and kept our offices functioning for as long as possible. At the same time, large-scale work-from-home was implemented across all our locations. More recently, we had moved into a more sustainable form, with teams rotating back to our offices for 1 in every 4 weeks. We've also worked very closely with our clients, that is the sellers of charged-off debts. While some clients temporarily suspended sale, they are now returning to the market and debt sale continues to be an important component in their recovery processes. With the deteriorating and uncertain economic outlook post government support, it was clear that PDL prices would need to reduce to be sustainable. So we commenced a process to agree on appropriate reductions with our clients. The message to our clients was that despite the uncertain outlook, Credit Corp remained a keen buyer and will continue to make commitments to purchase debts into the future. To address the increased risk though associated with increased purchasing through a period of uncertainty and preparing for opportunity, we took action to strengthen an already conservative balance sheet. We tightened our consumer lending underwriting and implemented a range of temporary cost savings, including significant reductions in Board and executive remuneration. These measures contributed to $110 million in free cash flow over the second half of the financial year and combined with an equity raising, left the company debt-free, with cash and undrawn credit lines of $400 million at balance date. Credit Corp is now in a strong and confident position. We have assessed the outlook and have taken the necessary adjustments to our financial accounts in 2020. All our businesses are now on track for solid profits in 2021. Our client relationships are strong, and we have the financial and operating capacity to meet their needs as the ongoing economic impact of COVID-19 unfolds. So in closing my address, I would like to thank my fellow directors, our CEO, Thomas Beregi and his management team, all for their tireless and energetic dedication to the leadership of Credit Corp. We have all worked particularly hard over the past 6 months. It has been an extremely busy time for all. And in retrospect, good decisions had been made. So on behalf of the Board and shareholders, I also wish to thank all our employees, across 4 countries now, for their flexibility, adaptation and ongoing contribution to the success of the company during these difficult and unpredictable times. Thank you. Thomas will now provide you with an update on the company's performance so far this financial year. He will also give you an assessment of the outlook for the balance of the year, and then after his presentation, we will move to the formal resolutions. I'm pleased to hand over to the CEO, Mr. Thomas Beregi.

Thank you, Don, and it's great to have so many engaged shareholders attending our meeting online in this different format this year. As Don has mentioned, what I'll do is provide an update on the first 4 months of the year-to-date and also touch on our outlook for the full year. Just by way of background, our objective or the objective of Credit Corp is leadership of the credit-impaired consumer segment. We define our market as people who have had trouble with credit, most having defaulted on a previous credit obligation. We operate in very competitive businesses, and 3 competencies are critical to our success. We must have superior analytics and discipline because our business is all about pricing and managing risk. Our operations must be strong to compete. And we must be sustainable and compliant to deliver on the promise we make to our debt sale clients, other stakeholders and the community. This ensures that our business has the license to continue long into the future. Applying these competencies, we target to deliver strong earnings growth into the future while producing acceptable returns, and acceptable returns for us represent a return on equity in the range of 16% to 18% with a conservative financial structure. We have strong metrics and approaches for these 3 competencies across all of our businesses. So moving on to our performance. Continued leadership has delivered a solid start to the year for our debt buying businesses. We've had very solid collections growth in all our markets over the first quarter. Things have, however, softened as we've moved into October in Australia, and that lines up with the reduction in some key government support measures timed at the end of September. However, I will point out that, that is in accordance with our expectation and lines up with the assumptions underlying our full year guidance. Despite various challenges presented to us as a consequence of our response to COVID-19, we have maintained our operational effectiveness, and we've also maintained our capacity to service the potential for increased purchasing. Leadership has also helped us generate strong cash flow. Over the first quarter, we have grown our total reserves of cash and undrawn credit lines by more than $110 million, leaving us with the financial capacity to meet client needs as charge-off volumes increase over the course of the expected downturn. It also provides us with the ability to secure any potential one-off opportunities that may arise. We continue to lead on sustainable and compliant practices. Across all our markets, our dispute rates are significantly lower than our competitors, and in Australia, we are rated more highly by important consumer stakeholders in the not-for-profit financial counseling sector. And as a consequence of COVID-19, clients are placing an increased focus on sustainable practices, and for Credit Corp, that has translated into an improved purchasing pipeline. In Australia, we recently concluded purchasing commitments with 2 major sellers returning to sale after a brief pandemic-related hiatus. In the U.S., prices have not yet fallen to levels which align with our view of the collection outlook. So at this stage, we're yet to add significant volume in that market. Moving on to our lending business. The consumer lending book is now stabilizing, and it's stabilizing a bit ahead of our expectations. What we've seen over recent months is that consumer demand and the quality of the applicants who are applying for credit has improved. As a consequence, our lending volumes have built back to levels approaching 80% of pre-COVID expectations. And so that means, after 6 months of our loan book -- 6 consecutive months of our loan book being in runoff, it has now started to grow again in October. So just to summarize, taken as a whole, we've had a solid start to the year, in line with our expectations. In Australia and New Zealand, collections are tracking to expectation, and we are growing our purchasing as sellers return to sale. In the U.S., we are collecting ahead of expectations, but prices have not yet adjusted in line with our outlook for future collections, so we haven't built our purchasing pipeline there. And in our lending business, volumes are recovering a bit ahead of schedule. The solid start to the year means that we are confirming our full year guidance issued in July. And just to remind you, that means we're on track for purchased debt ledger investment in the range of $120 million to $180 million. We're still expecting net lending of around breakeven for the year. And net profit after tax will be in the range of $60 million to $75 million. So after all this, we would expect to end the 2021 financial year with an even stronger balance sheet and more investment capacity than we have even today. So our task, looking forward, will be to continue to identify investments, which meet our return criteria, and respond to opportunity as conditions unfold over what is likely to be a period of ongoing uncertainty. So thank you for your attention, and I'll now hand back to Don.

Thank you, Thomas. As noted earlier, we will now move to the formal business of the meeting and then open up for questions after the formal resolutions have been put. We will address questions that have been lodged before the meeting before taking questions that have come through via the Lumi online platform and via the teleconferencing. We will not have a separate question-and-answer session between each resolution due to the limitations of the virtual meeting format. However, please be assured that voting on all resolutions will not close until after there has been a comprehensive opportunity for questions from shareholders to be asked and answered. Voting on the resolutions will remain open until the end of the meeting via the Lumi online platform. And valid proxies will be given and shown to the meeting as each resolution is tabled. So we're now moving to the formal component of the meeting, in which only items of business to come before the meeting today will be those specified in the notice of meeting. So proceeding with the ordinary business, we have 3 items which you have had the opportunity to review and consider through the circulated notice of meeting, and I will take the notice of meeting as read. As required by the government's legislative instrument, which enables virtual meetings such as this, votes on each resolution that are the subject of this meeting will be taken by way of a poll, which is opened via the Lumi online platform until just prior to the end of the meeting. The poll will be taken on all resolutions and it is now open via the Lumi online platform and will remain open until just prior to the closing of the meeting. Lucas Jones of Boardroom Pty Limited, our share registry, will act as the returning officer in relation to the poll. The results of the poll will be released to the Australian Securities Exchange later today following the conclusion of the meeting. There have been proxies given in respect of today's resolutions, which I intend to disclose when those resolutions are considered. As mentioned in the notice of meeting, it's intended that any undirected proxies given to the Chair will be voted in favor of the resolution. So Item 1 on the agenda is to receive and consider the financial report, the director's report and the auditor's report of the group for the year ended June 30, 2020. Now there won't be a formal vote on this item. If you have a question, please ask it through the speech bubble icon, and it will be answered after all the formal resolutions have been put to the meeting. [Operator Instructions] So I now move to Item #2, being the reelection of directors. Item 2a concerns the reelection of Ms. Leslie Martin as a director of the company. I would like to invite Ms. Martin to say a few words. Leslie?

Thank you, Don. And I would like to add my welcome to this year's Annual General Meeting. Today is my third appearance before you as a candidate for director. I joined Credit Corp in March 2014, so I marked my sixth anniversary with the company during the time of COVID. At present, Credit Corp is the only listed company Board on which I serve. The balance of my portfolio is made up of privately held companies, mostly fintech start-ups, as well as some advisory work for the New South Wales Treasury. My background is commercial banking, and my previous Board roles were heavily focused on the payments industry, which, you could argue, my current involvement with financial technology companies reflects a certain extension of this domain. I've said before that I'm very proud of our results generally. And this year, I'm possibly even more proud of how those results are achieved. Considering our experience with COVID, this year has been particularly special, where the economic impacts have been felt acutely by our customers. Credit Corp occupies an extremely important role in both credit creation by the financial services industry and credit availability to the credit-challenged sector of the economy. What we do is important to the economy. How we do it is very important to the community. Our ability to continue in this pivotal role is anchored in the analytics and performance disciplines in our operations, along with our embedded commitment to doing the right thing, which we term compliance and sustainability. Sustainability of this nexus comes from our ability to produce the right risk-adjusted returns for shareholders, while also being the financial counseling industry's most highly ranked player in financial hardship times. So what of this is an ability to actually shape our future, and I would be honored to continue as a director of Credit Corp as we head into what can only be anticipated as a new normal. Thank you.

Thank you, Leslie. The resolution reads, Ms. Martin retires by rotation and offers herself for reelection, in accordance with clauses 20.1 and 20.7 of the company's constitution. Proxy votes received in respect of this resolution are now shown on the slide beside me. And as I've already noted, voting is by way of a poll, which will close just prior to the end of the meeting. I would now like to ask Mr. Eric Dodd to assume the chair.

Thank you, Don. Good morning, everyone. Item 2(b) concerns the reelection of Mr. Donald McLay as a Director of the company. I'd like to invite Mr. McLay to say a few words. Don?

Thank you, Eric. This is a remarkable company. It's caring. It's conservative. It's accountable. It's sustainable. It's comfortable on its own path rather than traveling with the crowd. It does good work promoting financial inclusion in an ethical way, and you all know this because you are shareholders. Who wouldn't want the privilege of serving in such an organization? COVID-19 has temporarily derailed expectations in the short term. Yet in the face of such a global tragedy, the company has never been better resource -- better resourced and financially stronger. There is work to be done, and thank you for your support for reelection to the Board.

Thank you, Don. The resolution reads, Mr. McLay retires by rotation and offers himself for reelection in accordance with clauses 20.1 and 20.7 of the company's constitution. Proxy votes received in respect of this resolution are shown on the slide beside me. As I've already noted, voting is by way of a poll, which will be closed just prior to the end of the meeting. The chair will now revert to Mr. McLay for the remainder of the meeting. Thank you.

Thank you, Eric. We now move to item 3 of the agenda, being the adoption of the remuneration report for the year ended 30th of June 2020. The text of the resolution is on the slide now. The resolution to adopt the remuneration report is a nonbinding resolution, and there is a voting restriction which applies to it. The company will disregard any votes cast in any capacity on this resolution by or on behalf of any of the key management personnel, that is the directors and members of management, whose remuneration is detailed in the annual report, and their closely related parties such as their families. However, those persons connect as proxies of other eligible shareholders where they have been directed on how to vote, and the Chairman can vote undirected proxies on behalf of eligible shareholders. Under the Corporations Act, the resolution of shareholders that the remuneration be adopted or any failure to pass that resolution is advisory only and does not bind the company or the directors. Proxy votes received in respect of this resolution is shown on the slide displayed. And as I have already noted, voting is by way of a poll, which will close just prior to the end of the meeting. So having completed the formal resolutions, we now move to questions. I will now invite questions from shareholders and proxies relating to any of the resolutions as well as my address, the CEO's presentation and any other relevant matter a shareholder or proxy wishes to raise. I will address questions provided in advance of the meeting first, followed by questions submitted through the Lumi online platform this morning. And then I will take questions from shareholders participating via the teleconferencing. Once we've gone through those questions, we will cycle back to any remaining questions submitted via the Lumi online platform over the course of the question-and-answer session. All questions must be addressed to myself as Chairman of the meeting and will only be considered if they're relevant to the business of the meeting. And where appropriate, I'll call on specific directors, management, the auditor and other advisers to respond to shareholder or proxy questions. In order to manage the volume of questions, we will take one question at a time from each shareholder or proxy and will revert -- rotate back in the event of shareholders wishing to ask multiple questions. And if we receive multiple questions on one topic, we will combine to provide one amalgamated answer. So the first question is?

Thanks, Don. Yes, the first question is received from a shareholder, [ Josephine Cong ]. "Mr. McLay, why did you sell more Credit Corp shares in FY '20 than your Board?"

Right. Thank you very much for the question. In reality, my personal shareholding actually increased during the year. There are 2 types of holdings that relate to reportable: One is the economic holding, which is what I personally am responsible for; and the other is the reportable holding, which includes related parties where I may be involved with but don't necessarily control the business of that party. So the reporting shareholder includes an indirect interest in an investment company that I share. That company restructured some of its investments during the year, including its holding in Credit Corp. So its holding went down, and that transaction actually masks the fact that my economic shareholding had actually increased during. Thank you. Another question?

Thanks, Don. We've received very similar questions from both the Australian Shareholders' Association and Howard Coleman on behalf of Teaminvest, essentially expressing a strong sort of preference for virtual AGMs going forward, subject to health restrictions allowing it, and asking us what is our position in terms of the format of future AGMs.

Thank you. Look, it's a topic there's a lot of discussion at the moment. We hold no fixed views at this stage. This year has been an interesting experience for us, and we'll be listening to feedback from our shareholders and from the marketplace to be able to determine what we do in the future. We certainly want the best for all shareholders. Next question.

Thanks, Don. Next question is from the Australian Shareholders' Association, asking if the Chair could advise of any retirement or succession plans for members of the Board given the longevity of some members in their role.

Thank you. Yes, as you are aware, as shareholders, we started our succession planning during the financial year prior -- during the 2018, '19 financial year. And we've already started that process. And that will continue over the next period of time as well. Next question.

Thanks, Don. Next question is from the Australian Shareholders' Association, just asking about the impact of the U.S. election outcome on our operation over there. Obviously, I guess the caveat is there's probably not a clear outcome. But just to provide, I guess, some feedback on what the potential impacts are anyway of the election.

I think that's a question that's on all our minds today. I'll hand over to our CEO, Thomas Beregi, to respond to that.

Thank you, Don, and thank you to the Australian Shareholders' Association for that question. I won't make the mistake of calling the U.S. election. I think other people have done that for us, and perhaps they won't be accurate. But look, I guess the premise of the question is what will happen if there is a change of regime, a change of presidency to the Democrats. And I guess that does create the specter of potentially a more active regulator in the U.S. market in our business and potentially other businesses as well. Having said that, it's possible that the ability to actually change legislation may be compromised because at this stage, anyway, it doesn't look like there will be any change in the balance of power in the Senate. But -- however, in terms of the executive arm, the administrative apparatus of the federal government in the U.S., it's possible that the key federal regulator there, the Consumer Financial Protection Bureau, may prove to be more active than it has been over recent years. In general, based on our performance and the dispute rates that I've shown through the course of my earlier performance update, our compliance and our approach to responsible practices and respectful dealings with our consumers has been very strong. And we think that will prove to be a differentiator, particularly if we're in an environment where there is more active enforcement of existing regulations. So overall, we think it might potentially assist us in differentiating ourselves in that market.