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

Welcome to the 22nd Annual General Meeting of the Shareholders of Credit Corp Group Limited. I am Eric Dodd, Chairman of the Board of Directors of Credit Corp Group Limited. And in accordance with the company's constitution, I am also Chairman of this meeting. Today's meeting is being held both in-person and online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. Online attendees can watch a live broadcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and to submit votes. I thank you all for joining us and trust that you're safe and well wherever you are. I'd like to acknowledge and pay my respects to the Gadigal people of the Eora nation, the traditional custodians of the land on which I'm speaking to you from today. I also acknowledge the traditional custodians of the lands on which each of you are working from today. I'd like to pay my respects to the oldest past, present, and emerging. As we have a quorum present, I declare the meeting officially open. I'll now ask the company secretary, Mr. Thomas Beregi, to advise whether we have any apologies.

No apologies, Eric.

No apologies. Thank you, Thomas. He has a greater speaking part later. I'd like to introduce you to our company's directors who are all here with me today and ask each of you just to raise your hand. Mr. James Millar, a Non-Executive Director and Chairman of the Audit and Risk Committee; Ms. Trudy Vonhoff, Non-Executive Director and Chairman of the Remuneration and HR Committee; Ms. Leslie Martin, Non-Executive Director and a member of the Audit and Risk Committee; Mr. Richard Thomas, Non-Executive Director and member of the Nomination Committee; and Mr. Phil Aris, Non-Executive Director and a member of the Nomination and Remuneration and HR committees. I'm also joined by the company's Chief Executive Officer, Mr. Thomas Beregi. Other members of Thomas' executive team are either here today or have joined the meeting online. Can I please ask those present to stand and make themselves known to the meeting as I introduce them? Mr. Matt Angell, our Chief Operating Officer; Mr. Michael Eadie, our Chief Financial Officer and Company Secretary; Mr. Martin Wu, our Chief Analytics Officer; Ms. Stephanie Palmer, our Chief People Officer; Mr. Tim Cullen, our Chief Information Officer; Mr. Chris Midlam, Head of Client Services; and David Brand, Head of Marketing and Product Development. We also have others present. I haven't introduced them by name, but we'll have a chance to talk to all of them at the later stage. As well as being available for me to call on to assist in answering any questions during the meeting, the executive team as well as myself and the rest of the Board would welcome the opportunity to speak informally with any meeting attendees at the conclusion of this meeting. Also joining us today are the company's legal adviser, Mr. Guy Sanderson from Hamilton Locke and Mr. Drew Townsend from Hall Chadwick, the company's auditor. I'll call upon Guy and Drew to answer any relevant questions as required during the meeting. 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, which will include the opportunity to ask questions on each item of ordinary business. Following that, we'll open the meeting up to questions covering any aspect of the meeting, which includes my address, the CEO's quarterly update presentation or any other relevant matter a shareholder wishes to raise. I'll now run through some instructions for asking questions and voting for both those attending online and in the room today. [indiscernible] attendance, I hope it's a smooth experience and facilitate strong engagement and participation. Questions can be submitted at any time. Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that if we receive the same or similar written questions on a topic, we reserve the right to provide an amalgamated response. [Operator Instructions] Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Shortly, I will declare voting open on all items of business. At that time, those eligible to vote at this meeting, a new voting tab will appear. Selecting this tab will bring up a list of resolutions and present you with one of the voting options. To cast your vote, simply select one of the options. There's no need to press a submit or enter button as your vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare the meeting closed. So now for in-room attendees to ask a question, you can join the queue by pressing the microphone button on your handsets, followed by the green square to confirm. When it's your turn to speak, please put your hand up and we'll bring a microphone over to you. To leave the questions queue, please press the microphone button again followed by the green square to confirm. Once voting opens, the room attendees will be presented with a list of today's resolutions, select the item you wish to vote on using the scroll wheel and press green button to select. Your selected item will appear, press the green square to bring the voting options. Press 1 to vote for, 2 for against or 3 to abstain. Use the green square to move to the next item or press the red triangle to return to the full list of items. I now declare voting open on all items of business. For online attendees, the voting table soon appear, please submit your votes at any time, and I will give you a warning before I move to close voting. I'll now commence my address. It gives me a great pleasure to report on a strong performance in 2022 and a promising outlook for 2023. During the year, Credit Corp expanded on the foundations established over a long period. These foundations comprise a strong portfolio of businesses, leveraging our core expertise in working with credit-impaired consumers and the ongoing development of the unique capabilities to ensure sustained performance. It is this focus on maintaining and enhancing our portfolio of businesses and capabilities, which has continued to provide the company with the flexibility to respond to varying circumstances while preserving Credit Corp's long-term prospects. The success of the strategic diversification of Credit Corp, which has taken place over many years was starkly demonstrated in 2022. Company's commitment to solve strategic planning has long recognized the challenges of sustaining growth as a listed debt by operating in Australia and New Zealand. Both strategic growth initiatives in consumer lending and US debt buying have developed organically over the last decade and have transformed Credit Corp into the diversified financial services business it is today. In 2022, these growth initiatives produced over 40% of earnings and in 2023, are expected to account for half of all of our earnings. Alongside these growth initiatives, the Board recognizes the continued importance of the core business, debt buying, of which the foundations of this company have been built. The Australian and New Zealand debt purchasing segment made a positive contribution to the company's performance despite ongoing adverse market conditions. The core business continued to serve as an excellent base for the development of resources critical to the growth of the company as a whole. In 2022, this comprised of the transfer of key talent and the development of common systems. During 2022, 98 people were transferred or seconded to other segments. The platform facilitating digital interaction with customers was enhanced and the initial implementation of Speech Analytics was completed. These important systems will facilitate ongoing improvements in customer experience and are now scheduled to be deployed across the United States debt purchasing and lending segments. COVID has had an adverse impact on the supply of purchase debt ledgers or PDLs, from traditional credit issuers in Australia and New Zealand. The accumulation of consumer savings arising from the COVID response continued to suppress both credit arrears and mainstream unsecured credit demand. As has been the case over recent years, Credit Corp was able to apply its strong balance sheet and superior analytics to secure some attractive one-off purchased debt ledger acquisitions. Following the purchase of Baycorp for AUD 65 million in 2019 and collection houses, Australian PDLs were AUD 160 million in 2021. Credit Corp secured Thorn Group's Radio Rentals assets were AUD 60 million and collection houses, New Zealand PDLs for AUD 12 million in 2022. These purchases helped to produce a solid earnings result for the year. The US debt purchasing segment demonstrated its potential for sustained growth while COVID had a similar adverse impact on the supply of PDLs to that experience in Australia, US unsecured credit demand recovered rapidly over the course of the year. Credit Corp took the opportunity to increase share from existing clients while establishing some new relationships. Purchasing accelerated over the last few months of 2022 as PDL supply increased, delivering a strong investment pipeline for 2023. As a consequence, Credit Corp's US business grew to become one of the leading debt purchases in the market. Operating metrics show that the business remains very competitive and ongoing improvement should enhance this position. Increased purchasing has established the operation as among the 5 largest US debt purchases. The key challenge, however, for growing the US business has been workforce shortages. Various actions were taken to address this, including the redeployment of a component of the company's Philippines workforce to the US. We are currently organizing the redeployment of some of our Australian workforce to the US as well. It's this ability to divert resources to the businesses with greater investment opportunity, which demonstrates the flexibility of Credit Corp's portfolio approach. Credit Corp's category-leading Wallet Wizard cash lending product produced strong loan volumes during the year. As the impacts of COVID stimulus dissipated and the economy reopened, credit impaired consumers return to borrowing as the cheapest and most sustainable offering in this category Wallet Wizard experienced strong demand. This, combined with the relaunch of the company's auto lending product to grow the loan book to a record balance of AUD 251 million by the end of the year beyond our pre-COVID peak of AUD 230 million. Strong businesses and the flexibility to adapt to change circumstances must be supported by key capabilities. Credit Corp has always worked hard to ensure that it's been a leader in sustainable practice, operational performance and analytics to support investment and other decisions. During 2022, Credit Corp continued to critically assess these capabilities with a view to continuous improvement. In terms of sustainable and compliant practices, Credit Corp maintained its record of low compliant rates and the delivery of genuine solutions to customers. Expectations of conduct are, however, always increasing, and it's important that Credit Corp strives to achieve high standards. Building on an existing control framework, new automated tools were implemented to better monitor customer interactions. These tools will help ensure today adherence while identifying opportunities for further systemic improvements to the control framework over-time. I think it's worth noting that these enhanced controls detected the issues with the calculation of interest on some customer accounts that are currently being remediated. Operational performance in 2022 was strong. The company reporting high asset turnover and low cost to collect across debt purchasing operations and a consistent return on assets for our lending operations. Credit Corp operates in increasingly competitive markets and must ensure that it remains at the forefront of performance. Enhanced digital and scheduling capabilities were implemented to support collection operations. Ongoing refinements were made to improve the accuracy of lending decisions and marketing expenditures. These improvements will help enhance Credit Corp's long-term competitive position. Credit Corp maintained its disciplined and analytical approach to investment decisions during 2022. Ongoing development identified additional variables and learnings that will help improve the accuracy of PDL pricing and lending decisions in the future. Strong businesses and capabilities are built by people and a positive culture. The values of transparency, accountability and discipline define the culture at Credit Corp. Transparency serves to honestly appraise business prospects, identify shortcomings and set a plan of action. Accountability serves to embrace challenging goals. Discipline serves to follow through with the right execution to deliver sustainable long-term outcomes. It's the day-to-day application of these values by Credit Corp's people that underpins the actions and outcomes that are building momentum. I'd like to thank my fellow directors, our CEO, Thomas Beregi and his management team for their leadership of Credit Corp, particularly during what have been challenging business and economic conditions over the last 2 years. On behalf of the Board and shareholders, I also thank all employees for their ongoing commitment and dedication to the company. Thank you. Thomas will now provide you with an update on the company's performance so far this financial year. He'll also give you an assessment of the outlook for the balance of the financial year. And after his presentation, we'll move to the formal resolutions. I'm pleased to hand over to our CEO, Thomas Beregi. Thank you, Thomas.

Thank you, Eric, and it's great to see so many shareholders attending both in person and online today. Just to recap, our objective here at 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 obligation. We operate in very competitive businesses, and there are 3 competencies that are critical to our success. We must have superior analytics and discipline because our business is all about pricing and managing risk, whether that's pricing a purchased debt ledger or determining who and how much we lend money to. Our operations must be strong to compete and we must be sustainable and compliant to deliver on our promise to our debt sale clients, other stakeholders and the community. This ensures that our business can continue into the future. Applying these competencies, we target to deliver strong earnings growth into the future while producing acceptable returns, which we define as a return on equity in the range of 16% to 18% with a conservative financial structure. And as you can see, we have strong metrics and approaches for each of these competencies across our 3 businesses. So continued leadership has delivered a strong purchased debt ledger investment pipeline, while the US accounts for the bulk of our current pipeline, a recent secondary purchase and some forward floating renewals in Australia have contributed to growth in the pipeline over the last few months. Continued leadership has also produced record lending volumes. We are lending twice as much as we were during the pre-COVID peak of 2019 and we are doing so without extra risk, because our credit settings remain conservative and recent losses remain below those pre-COVID levels. Leading indicators show that Australian purchased debt ledger supply will continue to be constrained over the next 12 months. Interest-bearing credit card balances are at historic lows and look to have bottomed. And based on experience from our own lending customer base, we would expect the credit card balances should build from here, but that won't happen in the short term. It will take some time before this translates into purchased debt ledger supply into the PDLs that we purchase and drive earnings in our core business. In the US, supply is increasing, and the indication suggests it should now grow much more rapidly. Credit card balances are already more than 10% above their pre-COVID peaks. And if you think back to a kind of there was concern about those pre-COVID peaks, we're now already 10% above that, so the US is moving very fast. And in the face of labor market challenges, we've aligned our resources to meet the US purchased debt ledger opportunity. In the past, I've talked about our flexibility to allocate capital to segments where we can achieve targeted returns. So potentially more into lending if that's where there's greater opportunity rather than purchasing debts in Australia. But in the current year, we've been able to do something similar with our workforce. We have almost 100 people in the Philippines who were working debts in Australia and New Zealand, who are now on a night shift calling into the US. And that's been going for a few months now, and it appears to be achieving the goals we set forward. Next month, we'll have a group of experienced Australians start work on a new early morning shift into the US. So they'll be calling US consumers and collecting our US debts from Australia. We've also recently opened a purely remote workforce in the new location, the new US location of North Carolina. And in terms of recruitment, that's going very well. Operational performance in our purchased debt ledger businesses is on track. While Australia and New Zealand collections have declined, this is a function of a 25% reduction in purchasing over the last 12 months. So that impact of COVID reducing unsecured credit balances, reducing charge-offs, that's translated to a 25% decline in purchasing. And as you can see from the chart there, we've been able to manage that to only a 7% reduction in collections. In the US, where the story is different, where purchasing is growing, our payment arrangement book there points to stronger collection results over the balance of the year. And you can see that component of our book has grown by 12% on a constant currency basis, so that's a strong metric. And we continue to invest in new sales sources of long-term growth. This is not a business where we can sort of turn up every day and just sort of count the money and sit back and it just ticks over. We have to face strategic challenges that confront us everywhere, and that's all about reinventing, changing the business, doing things differently, going into new markets. And that's what we're always doing. And we've probably got a busier agenda there than we've ever had. We've got record auto lending volumes, a pilot in US lending and several new product pilots in our consumer lending business in Australia and some pretty exciting initiatives there. Also, just over the last few days, we completed the acquisition of collection houses, one of our competitors collection services business that will double the revenue in that segment in our business, making us one of the leading operators in that segment across Australia and New Zealand. So overall, we've had a really solid start to the year. Purchased debt ledger investment is now likely to fall within the range of AUD 240 million to AUD 260 million, so higher than we indicated a few months ago. Net lending is definitely on track for AUD 50 million to AUD 60 million, and we'll have to monitor that over the coming months given the strong demand that we're experiencing. And net profit after tax will be in the range of AUD 90 million to AUD 97 million for the year. So thank you for your attention. I look forward to your questions, and I'll hand back to Eric.

Thank you, Thomas. As I noted earlier, we will now move to the formal business of the meeting, including questions in respect of each of the items of business and then open the meeting up to general questions after the formal resolutions have been put. In taking questions, I'll first address questions that have been lodged before the meeting and then take questions alternatively between text questions that have come through via the Lumi online platform, online audio questions from virtual attendees and verbal questions from attendees in the room. Voting on the resolutions will remain open until the end of the meeting by the Lumi online platform. Valid proxies given will be shown to the meeting as each resolution is tabled. So we're now moving to the formal component of the meeting, in which only the items of business to come before the meeting today will be those specified in the notice of meeting. We have 3 ordinary items of ordinary business, 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. Votes on each resolution that a subject of this meeting will be taken by way of a poll, which is opened via the Lumi online platform just prior to the end of the meeting. Nakul Joglekar, of Boardroom Limited, our share registry, will act as returning officer in relation to the poll, and 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 relevant resolution. Item 1 on the agenda is to receive and consider the financial report, the director's report and the auditor's report of Credit Corp for the year ended 30th of June 2022. There will be no formal vote on this item. So I now invite questions in respect to this item. Remember, if you're in the room, please use your Lumi device to indicate you'd like to ask a question by pressing the microphone button. Can I please call on the company secretary to read out the first question or invite the first questioner to asked their question. Michael?

We have a question in the room from Mr. Howard Coleman. So I assume it's in relation to Item 1. So if that's the case, then we'll bring in a microphone to you.

[indiscernible]

Thank you, Mr. Coleman, There are no other questions, Chairman.

No other questions. Okay. Company secretary has confirmed that no more questions in respect of this item. So I'll move on to Item 2 on the agenda, being the reelection of directors. Item 2A concerns the reelection of Ms. Trudy Vonhoff as a Director of the company. I'd like to invite Ms. Vonhoff to say a few words. Trudy?

Thank you, Eric, and good morning all. I've served on the Credit Corp Board since September 2019, so a little over 3 years. When I was first elected, I spoke of what compelled me to join the Board. The fact that Credit Corp was both a great company and a good company. Great in the sense that the company is growing, is profitable and is sustainable. And good in that it achieves these outcomes in a challenging customer segment in a respectful and values-driven way. Pleasingly, my view remains the same. Nothing has changed, particularly so as the company has navigated the ups and downs of cover, resource shortages and a challenging economic environment. We've made some sizable acquisitions. These have been analyzed well and executed well. Additionally, we've seen the increasing strategic importance of our US operations. And all of this has been achieved whilst the company continues with the things that does best. As Thomas outlined earlier, operational excellence, superior analytics and strong compliance and pursuing sustainable and organic growth in a disciplined way. As mentioned in the Notice of Meeting, my executive background is in leading businesses in financial services with skills in finance, retail and business banking, operations and technology. I continue to develop these skills and others by serving as a Non-executive Director on ASX listed Boards, APRA-regulated financial institutions and public and private companies across a range of industries. I have and continued to chair board committees in audit, risk and remuneration. I bring these skills and experiences to the Credit Corp table. So with your support and together with this experienced board, I welcome the opportunity to play my part in representing shareholders around the Board table and to hold management to account in driving shareholder value by pursuing both great and good initiatives. Thank you.

Thank you, Trudy. Resolution reads as Vonhoff retires and being eligible, 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 shown on the slide. As already noted, voting is by way of a poll, which will close just prior to the end of the meeting. I now invite any questions anyone may wishes to have in relation to this resolution.

Chairman, there are no questions.

Okay. Thank you. There being no questions, I'll move on to Item 2B, which concerns the reelection of Mr. James Millar as a Director of the company. I'd like to invite Mr. Millar to say a few words. Thanks.

Thank you, Eric. I'd like being called Mr. Millar. I think my dad is in the room, but I'm James. I have the privilege this morning of having my appointment as a Non-Executive Director confirmed or otherwise by you, the shareholders. And I was honored to join the Board of Credit Corp in December last year. So I haven't yet been here a year. So I can only talk as a newbie. I come to Credit Corp after an executive career as a corporate reconstruction professional, as a former CEO of one of the 4 major consulting firms and those 2 roles spanning to come 35-odd years in executive life. That period was spent refining and rebooting a very large number of businesses in various states of financial and operational distress. It was a learning career where one is exposed to every reason why companies fail and joyously through the process, you do see some of the things why businesses succeed. And I think that learning helped me grow in terms of why businesses succeed and do well and probably some of the obvious funds why they do fall over. Over the last 12 years, I've served as an independent director and chair on a dozen or so companies, both public and private across industries as diverse as property, banking, print and broadcast media, forestry and travel. So Credit Corp has grown strongly over the last decade or so. I believe that the next decade will again see this business, as Thomas has referenced in his words, step-up another notch as I look back in my time coming in, just being what has been achieved. And then what is on the planning board, it looks like there's some great opportunities as it deploys its considerable human and financial capital in the pursuit of its goals. I believe that I bring to the Board the skills and learnings from both my Board and executive careers. In my role as Chair of the Audit and Risk Committee, I'll work with fellow Board members and management to lead and navigate the management of risks and challenges because I think with growth and with expansion and offshore expansion, particularly, I think those risks tend to go up exponentially. So those risks looking at managing those both in the core business and in the opportunities as they're presented to us as we go forward. So I thank you for your support this morning. Thanks.

Thank you, James. I did query, by the way, the need for me to refer to Ms. Vonhoff and Mr. Millar that was told by our masters that had to line up with the notice of meeting. So I have suddenly become -- so just to clear that up. The resolution reads, Mr. Millar retires and being eligible offers himself for reelection in accordance with clause 19.5 of the company's constitution. Proxy votes received in respect of this resolution are shown on the slide. As already noted, voting is by way of a poll, which will close just prior to the end of the meeting. I now invite any questions in respect to this resolution. Can I please call on the company's secretary to read out the first question or invite the first question to ask. Are there any questions, Michael?

We have a question from the Australian Shareholders' Association. Can I just confirm it's on resolution 2b? It's not, it's okay, apologies. In that case, we have no questions on resolution 2b.

[indiscernible] my previous one and put in a question for this one, but it obviously -- I didn't do the right. Yes, not a big problem. Mr. Chairman, firstly, I'd like to congratulate you, your Board and Thomas and his team on remaining one of our wealth winners in Teaminvest. I'm a shareholder in my own right, or sit through my super fund and about 400 of our Teaminvest members, we estimate would own shares in Credit Corp, probably to the tune of somewhere around about AUD 120 million. So we'd be cumulatively quite a lot. But my question on this particular resolution is one of the things we've identified over many years about Wealth Winners is that the Board has skin in the game. I noticed, James, that you don't yet have any shares in Credit Corp. I realize the only windows at certain times of the year when it's appropriate for you to purchase shares on market. But I'd like a commitment from you that you intend joining us as shareholders in being an at least reasonably sized shareholder if you're going to be representing us on the Board. Thank you.

Would you like to respond, James?

I would. Thank you. I haven't bought a share since January 20 this year in anything. So my issue at the moment is the macro environment, not critical. And yes, I will buy shares at the appropriate time. But I'm not a believer in the current global macro situation. Nothing to do with Credit Corp.

Perhaps you should join Teaminvest and learn a little bit more.

Thank you. I'm happy to.

And we may be referring to that issue more broadly in the next item that we cover. All right. If there are no more questions...

There are no more questions on resolution 2b.

All right. Let's move then to Item 3 on the agenda, being the adoption of the remuneration report for the year ended 30th of June 2022. The text of the resolution is on the slide now. Resolution to adopt the remuneration report is a non-binding 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 key management personnel where all the directors and members of the management whose remuneration is detailed in the Annual Report and their closely related parties such as their families. However, those persons can vote as proxies of other eligible shareholders where they have been directed 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 report be adopted or any failure to pass that resolution is advisory only and does not bind the company or its directors. Proxy votes received in respect of this resolution are shown on the slide displayed. I'll now invite questions in respect to this resolution. Can I please call on the Company Secretary to read out the first question or invite the first questioner to ask that question. Michael?

Comes from the Australian Shareholders' Association. We will just bring the microphone.

Thank you. And firstly, congratulations on a good year for the company, Mr. Chairman. And we like the sort of the sustainability and performance and the staff statistics, which certainly emphasize the culture within the company and you have 33% of the directors female. However, one concern is that 2 of the directors have been on the board for longer than we like to be sure that they can still be regarded as independent. One of these is yourself, Mr. Dodd and I'll talk about you in a moment and the other is Mr. Thomas. Realizing that Eric Dodd has only been here for one year, we presume he would envisage having longer to carry out his plans for the company. But is there any succession plan for the Board or plans to more renewal of it? And a basic question on the REM. Do we want the Board to think only about wages as rewards earned each year for their work. The opposite way is for them to think of the company as a long-term enterprise where both staff and shareholders benefit for the long-term building up of the company. There's quite a lot in the Annual Report about growing the company, but the way the managers are rewarded does not appear to engender long-term thinking. So the ASA will be voting against the remuneration report this year. I have proxies for 60 other shareholders and near shareholder myself, and we have hundreds of thousands of votes, probably not as many as Teaminvest, but still a significant representation among shareholders who are predominantly are shareholders for the long term. And against that, the short-term incentives are purely in cash and none of them is held over to any future period. The long-term investment incentive scheme is assessed and delivered over 3 years and has become more short term this year than it was previously. So while you say it's delivered in equity to align the interests of executives and shareholders, the company policy of not requiring executives to retain a minimum shareholding in the company results in most executives selling their shares upon vesting, thus not aligning their interests with those of shareholders. And also the calculation of the performance rights is something called fair value, but it works out over-time as inflated hugely by value, which is not really fair. And the side of the main issue, the '19 to '21 remuneration plan delivered the CEO and LTI of AUD 1.11 million, but the sale of these shares post vesting delivered an actual value of AUD 7.1 million and approximately AUD 2.9 million of this was due to share price appreciation over-time, whereas around AUD 3.1 million was due to the use of fair value in determining the number of rights.

Okay. Thank you for the question.

Sorry, it was a bit long-winded. It's hard to get over the technicalities.

No, we're happy to address all of those issues. I'll attempt to do so and I might call on the expertise of Trudy and Michael, particularly on the fair value issue at some later point. To start with the issue of the board renewal, we certainly are acutely aware of that. We have commenced already, as you're aware, 2 of our longer-serving directors step down to the Board from the Board over recent years. We have got a current program underway looking at the skills that we require for this organization we've talked about as we've diversified into different areas that requires a different skill base and expertise and experience level. That is all underway formally at the moment. We're talking to potential candidates. I dare say that half of this Board will probably be stepping down over the next 2 to 3 years. We have to balance that, though, with the need to maintain all that experience and corporate knowledge, one of a better word and not do it all at once, if you like. And so that's the program that's underway, but we fully accept that it's probably few of us would have retired out, and the Board is actively pursuing that program at the moment. In relation to the remuneration system itself, we have discussed with yourselves and many others, the philosophy that we have. We do believe that the lines with the longer-term interest of the organization and our shareholders, in particular, in relation to value creation, we believe the LTI program and the STI program are 2 very separate programs. And as such, a focus on different outcomes. One is the longer term, obviously, increasing value, which we need to align our executives with the fortunes, if you like, of our shareholders. And in the short term, those are immediate results driven objectives that we set for our executives. There have been some misinterpretations, others in terms of some of the proxy votes in relation to the actual payment of LTI. There was an assumption that the payment that actually related to 3 years applied to 1 year, and that was incorrect. And Thomas might wish to elaborate on that. And the only thing I'll say to that is I think it's unfortunate that some of that interpretation was not checked with us before in relation to that. But in any event, we are very open to suggestions, as you know, to changes to our policy. Trudy has done an enormous amount of work with one of the major accounting firms and looking at each and every bit of feedback we've received and taking a view on those areas that we should improve on. We don't believe we're infallible, but there are others where we basically respond by way of that is the company's philosophy and in our view and the view of the Board that has served the company very well over the last 10 years in particular. Trudy, do you want to add anything to that?

Yes, probably. So can we have my microphone on. Yes. So thank you for the question. And we have had opportunity to have a dialogue with the ASA, which has been both welcomed and informative. So I guess I'll talk about, I think, the essence of your question with respect to the LTI program and our REM framework overall, which is, I think, the absence of having a minimum shareholding policy in place for either NEDs or our KMP. So currently, we don't have a policy or a rule that says non-executive directors or KMP need to hold a certain amount of shares, but it would be fair to say that we absolutely understand the desire for both NEDs as people have raised as well as KMP have some skin in the game and demonstrate that alignment with shareholder outcomes. So for directors, you can see our shareholding in the REM Report. And for executives, we also just make the point that the LTI consists of deferred equity for our executives and does provide some alignment. But having said that, I think the point is well made, and it's on our agenda for review over the coming year. Did you want me to have a crack at the fair value versus face value conversation? I'm happy to do that because again, we've had good dialogue with the ASA. And for those of you who have agreed as of the remuneration reports revamp our remuneration report this year and improved and increased the amount of disclosure. And in that, we disclosed how we calculated the performance rights to be allocated. And the wording in the REM report read, we use fair value by Monte Carlo simulation and binomial tree valuation models using the VWAP over 90 days. And so it's correct that we report those performance rights using fair value under the accounting standards and there is a view that fair value incorporating the discount for dividends foregone is a more accurate way of allocating to executives. But having said that, we absolutely acknowledge the point that's being raised. And we note that in recent years, a number of listed companies have moved to using face value for the allocation of equity, which does assist comparability across companies as well as transparency. So we would, again, take on board that feedback in determining whether we use face value or we use fair value, but it does require some considered thought taking into account market practice, which people are used to seeing as well as our overall remuneration strategy and the role of the LTI grants as part of our REM framework. So again, we will review that over the coming year, but it does require some considered thought, and we're very cognizant of where the market is moving in this particular area. If you have anything further?

Yes, if I might just address the final part of your question, Patricia. Just in respect of the LTI program that vested last fiscal year, which was the FY 2019 to '21 program that you referred to, that was actually the last of a 3-year bullet LTI program. So what we have now is a kind of a rolling 3-year performance period with an annual grant of performance rights. But what we had at that point was actually a bullet grant, which actually covered 3 years. So in terms of that sort of calculation that you've quoted, you've actually got to multiply that AUD 1.1 million by 3, in fact, is a bit more than that. It's closer to about AUD 4 million over 3 years. Yes. Well, it's certainly it represented 3 years. So I guess it's the equivalent of 3 annual grants under the present methodology. So I just wanted to sort of clarify that point. So the sort of impact of the use of the fair value is far less significant than what you've got in your question. Thank you.

Okay. Is there any other questions?

Yes. The next question is from Mrs. [ Lindsey Sherman ]. If Mrs. Sherman could make herself known, and one of my colleagues will bring a microphone to you. Thank you.

Good morning. I'm also a member of Teaminvest, and I'm asking a question on behalf of Ray Tollefsen from Teaminvest. I refer to the statement on page 49 of the annual report that half of the performance rights issued under the FY '20 to '22 LTI scheme are not likely to vest due to the relatively low TSR. Surely, incentives should be something that management has control over. As TSR includes the share price, which is outside of the control of management, how can it be considered an incentive? Will the Board reconsider changing this component to straight percentage increase in earnings per share.

Thank you. Trudy will probably give you a better answer than I will on that, Lindsey. But I guess the principle that we put in place, as I say, distinguishing between the STI and the LTI is exactly the point you make there. The STI is very much dependent upon management actions and performance in a particular one-year period, whereas the LTI does take into account other factors. Yes, some of them outside of management's control, but that alignment is with the long term increasing wealth, if you like, of our shareholders. So that alignment is a very, if you like, separate although related one to the STI program itself. And I think one of the things in terms of the philosophy of the company in relation to a very high performance-based component for our senior executives is that has aligned over-time to the improved value that our shareholders have received from the Holdings Credit Corp, and that's also applied in the short term, by the way. I mean we had a situation 2 years ago where through no fault of management, we were hit with the pandemic [indiscernible]. If the performance of the management team was excellent as we like to think it always is, but I think that showed up the validity, if you like, of our remuneration scheme. Now it does align with those particular objectives every year. Trudy, do you want to add to that?

Yes, I will. I think I asked this question last year from memory. So you will be pleased to know, that we did take that into account. I mean we do look at our rem framework and the system that we use annually and periodically, just to make sure that it is working for us. So just for everyone in the room, the way our LTI works is, first of all, we have the ROE gate opener. So in the very first instance, the company must perform a return on equity of 16% to basically open the gate and get through the door. And then after that, we have some performance hurdles. And the first one is 50% weighting to the compound annual growth rate of our earnings, and the other 50% is based on relative TSR. So we think we've got the balance right. I think there are shortcomings of every measure that you use, be it relative TSR, absolute TSR or EPS. And we do look at what others use and how they're using it. But for our business, in terms of how it operates and how we use our capital, we're of the view that this remains the best in terms of how we go through, making sure that we're getting the right long-term sustainable outcomes.

Thanks, Trudy. Any other questions, Michael?

Yes. Next question is from Howard Coleman.

A few things, a few comments and questions at the same time, it's sort of all wrapped in one. Firstly, in terms of Board renewal, we will accept as shareholders that many of us be included, are getting increasingly mature, and the time will come when we can't do the same things that we used to do. However, in terms of Board renewal, I worry when formulas are put forward about how long somebody should be on a Board and how much time they should spend there. I'd hate to be -- when the time comes that when they need an operation, to be lying on the operating theater table, the surgeon comes in and I say to him, how many of these operations have you performed before? And he says, no, I'm new, because I'm independent. So I would far rather have somebody operating on me who knows the business really well, and I think we should apply the same principles. It's only logical to board renewal. So yes, there will be times when some of you, like me, reach a point that you no longer can or want to do it, but I don't think we should rush that process in any hurry. The second thing is in terms of fair value; the problem was fair value, and we discussed this often at Teaminvest meetings around the country; is they are complex formulas that are used Black-Scholes binomial method, et cetera, multi [ column ] simulations. The mathematics behind it is extremely complicated. And in fact, we should remember that the people who started the Black-Scholes method, ran a business later on that went broke. So that does -- they've got a Nobel prize, by the way, before that. So what is academically sound, may not make good business practice. And in Teaminvest meetings, we joke that fair value is similar to countries that call themselves the Democratic Republic of. One thing you know for sure is, they aren't democratic. And fair value is not fair, because it's totally dependent on the inputs. In terms of what should be in a remuneration structure in our opinion and Teaminvest, I take the point that Australian Shareholders Association, many of them just want TSR in it as well as earnings per share. But the share price, in fact, is the PE ratio times the earnings per share. That's exactly what the share price is by definition. So seen as the earnings per share is something that the Board and management can control, and the PE ratio is something that the Board and management can never control, nor would we want them to be trying to control that. It's totally based on market sentiment. It's completely illogical to motivate people based on something that has to do with market sentiment. So we would far prefer that you went entirely to your gate opening of return on equity, which I think is essential in this business, and our Teaminvest members all feel that. But get rid of the silly idea of TSR, because in the end, the share prices, the EPS times the PE ratio and the EPS will drive the share price in the long term. The PE ratio only drives it in the short term. So those were my main comments. Thanks very much.

Thank you for those comments. I think we probably agree with virtually all of them. So thank you for the comments. Well, we constantly are reviewing, as Trudy has mentioned, the whole system. So thank you for those comments. Are there any other questions, Michael?

Yes. The next question is a written question from [ Stephen Maine ], asking which of the proxy advisers recommended against the remuneration report today and what concerns did they raise?

Right. I think we're allowed to reveal that. I would have thought it's publicly available...

Yes.

I will hand that to Trudy actually, because there are 2 main proxy advisers that -- we spent time with them. Some of them -- it was disappointing that they have taken that view, because we put a lot of time into explaining our situation with them. In one case, there was a clear error, is what they come up with. And so we won't name exactly who that is. But Trudy, she will never go through this delicately.

So it's fine for me to reveal those details? Yes?

Yes.

Okay. So the proxy advisers that voted against the remuneration report were ISS and Ownership Matters. ISS raised the issue which Eric alluded to earlier around the LTI program. We had reduced the size of the LTI pool. And again, this was the back of -- on the back of a COVID decision, where we had previously increased the size of the pool, and we had said in last year's rem report that we would review that and make sure it was still aligned with shareholder interests. And when we reviewed the outcome of the LTI program, it paid out, it was expected to. And as a consequence of that, we reduced the pool size of the 2 tranches of the LTI program. And I guess, as a function of that, it changed our timing and process. So we had in this year's rem report considered 2 tranches. These were the 2 tranches where we reduced the pool size, as well as the current tranche that we would normally issue every year. And ISS have bundled those up into one allocation for the year and says that it had inflated the CEO's remuneration. I guess all I can say is that, we did ask to have a meeting with ISS and that request was declined. I think it would be fair to say that we will be responding in writing to ISS around that particular issue. The other one was Ownership Matters. They did not mention or have the same issue at all around the LTI program. I do know that one of their concerns was around the use of an NPAT target in both our STI assessment, as well as our LTI assessment. In terms of the STI bearing in mind, I've outlined the LTI program previously. The STI program in terms of, again, opening its gate, we do need to achieve an NPAT target. So we have an NPAT target before we can open the gate. And then after those gates are open for the STI program, we then look at financial metrics and operational metrics, when we're assessing the performance outcomes of our KMP. And as I previously stated, with our LTI program, 50% of the hurdle is on a compound earnings basis, in terms of whether there is a payout or a vesting of performance rights. We see those as 2 very separate uses of NPAT. One is short term, and it assesses the year in play, and did we achieve our outcomes. The other one is applied in a longer term -- with a longer-term focus, what was the compound annual growth rate over the 3 years, and we see them quite separately. The other proxy adviser was CGI Glass Lewis and they voted in favor of the remuneration report.