Keith has an in-depth discussion with Scott Phillips on The Good Oil

00;00;02;25 - 00;00;21;11

Keith John

It's scary and it's exciting and it's invigorating and it's frustrating and it's all of those things at once. But it's having a crack and having the gumption to get up there and literally pick up the phone and make that phone call to Scott Phillips and say, Scott, it's Keith, how are you going? I'm starting business and I'd like some business from you.

00;00;23;00 - 00;00;45;22

Scott Phillips

G’day, I am Scott Phillips, the chief investment officer of The Motley Fool. And welcome to The Good Oil. Now, if you're not familiar with the phrase The Good Oil is giving someone the good stuff, the important stuff and the real stuff. And that's exactly what we try to do with this podcast. We bring you conversations of entrepreneurs, executives and experts, the people who know what's going on and the people who make things happen.

00;00;45;22 - 00;01;02;07

Scott Phillips

And as usual, today's guest is someone who does really know what's going on. He is the CEO of a really interesting business in a fascinating part of the Australian economy. He is Keith John, CEO of Pioneer Credit. Keith, thank you for joining us on The Good Oil.

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Keith John

Thanks so much, Scott. Pleasure to be with you.

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Scott Phillips

I'm really, really glad I'm speaking to you. Mate, let's let's kick off big picture, we’ll move from there. But I’ll have to date start this because such is the moving face of the Australian economy right now. We're recording this in the middle of April 2023, hopefully when people look back, we'll be able to see what happened since. But Keith, from your particular vantage point,

00;01;23;25 - 00;01;33;25

Scott Phillips

we’ll talk about your business in a minute, but from your particular vantage point, what are you seeing in the economy? Is it business as usual? Are things changing? Is it improving? Is it deteriorating? From your particular perch, what are you seeing?

00;01;34;14 - 00;02;00;02

Keith John

Look, as you said, Scott, it's a really interesting time. I mean, from our perspective, we deal with consumers that are generally not home owners, but come out of the big banks. So good quality consumers and what we're seeing at the moment is clearly signs of distress. The average payment that we receive from our customers has decreased over the last 12 months, about 8%.

00;02;00;15 - 00;02;09;12

Keith John

On the flip side, everyone's got a job. So we've got this really unique situation at the moment where there's all of this stress in the economy, but everyone still employed. It's quite unique.

00;02;09;19 - 00;02;29;00

Scott Phillips

We say over the last 12 months down about 8%. Is there any sign that either accelerating or is it lessening off or is it, I think, business as usual? I'm just curious, obviously as rates have gone up over that last 12 month period, they've kind of stepped up bit by bit by bit. Now, as you say, they're not necessarily homeowners, but maybe inflation is taking a bite out of people in that continues apace.

00;02;29;08 - 00;02;32;24

Scott Phillips

Is there any change in more recent times mate or is the trend pretty consistent?

00;02;33;12 - 00;02;56;18

Keith John

Yeah, look, it's been pretty consistent. I suppose the bit of the trend that we pick up is when we're speaking to our customers, we've got about 250,000 customers and about 40,000 that are actively paying us on a regular basis. And when we speak to those guys, you know, they talk to us about how they're concerned, about how they're worried about the future.

00;02;56;18 - 00;03;09;17

Keith John

And I think the real problem for the consumers, Scott, is going to come when this mortgage cliff comes. There are a number of people, a lot of people that have investment properties, and that's going to impact the rental market heavily.

00;03;09;23 - 00;03;26;11

Scott Phillips

And that's your, kind of sounds like from what you were saying, most of your customers aren’t homeowners. So that's very much your sweet spot. Let's go to Pioneer Credit and we'll kind of work from there. So you guys are in the debt collection business. We'll talk about that a little bit. You also what I know is the purchased debt ledger business.

00;03;26;11 - 00;03;39;14

Scott Phillips

So there's got to be a lot of terms in bits and pieces. We'll try and keep it really simple. Maybe just describe for me what Pioneer Credit does and what the overall credit collection industry you and your peers do in the Australian economy.

00;03;39;24 - 00;04;05;00

Keith John

For sure, so Pioneer is a pure play debt purchaser. We don't do work for any third party. So all of the assets that we own, we buy by ourselves and we work with those customers over time to get them back on track. So where we specialise, Scott, is we predominantly buy out of the big banks. We don't buy payday lending or any of those, you know, really lower quality credit products.

00;04;05;05 - 00;04;29;14

Keith John

We're looking for consumers that can get ahead. That's important for us, because in times like this, obviously you'll appreciate, if things get really rough for the consumer that's going to impact our business. So the resilience in our business is built around good quality consumers that have capacity and have the ability to get ahead. So in terms of the economy, the sector is incredibly important.

00;04;30;20 - 00;04;58;16

Keith John

You know, it spans the breadth of the economy from agencies dealing with small businesses, trying to recover $2,000 or $3,000 at a time to organisations like ours, like Pioneer Credit, where we invest tens of millions of dollars each year in buying portfolios off the banks. And the reason the banks sell it to us is because we're better at managing consumers in hardship or suffering some form of financial distress than they are.

00;04;59;03 - 00;05;10;02

Keith John

So as your readers or your listeners will no doubt appreciate, banks are really good, are lending money and we're really good at servicing that if you get into some form of trouble.

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Scott Phillips

So you talked about purchasing debt versus collecting on behalf of others and yet I know your industry a little bit, so I'm going to try and describe it in my words and get you to tell me where I'm wrong. Well, maybe add some colour, add some value to it. So if a debt is not being able or hasn't been able to be collected or isn't being collected by a major institution, in this case a bank, as you said, those institutions have two options.

00;05;30;10 - 00;05;49;24

Scott Phillips

They can simply say, you know what, we're going to sell this debt to someone. I owe you $100, you go “I haven't paid you back”. You can sell that to somebody else and say “You know what? I'm washing my hands. If you collect it, if you get some money for it, then good on you”. Or you can actually collect on behalf of them where they can use a third party organisation, say “We will try and collect that debt.

00;05;49;24 - 00;06;04;01

Scott Phillips

And if we do, we'll get a payment or we get paid per effort”. So that's kind of it, I don't it's a commission or whether it's a pay per effort, but there's those two sides, right? One is collecting on behalf of someone else's as an agent. The other is to actually purchase the debt, take it over and then see what you can recover.

00;06;04;01 - 00;06;06;03

Scott Phillips

Is that is that a reasonable summation of the industry?

00;06;06;23 - 00;06;28;10

Keith John

100%. Yep. No, that's bang on. I think the thing to note, though, Scott, is in the industry now. We've actually only just seen it last week with the Government's announcement on robo debt. The history of this industry was built up through outsourcing and, you know, agencies earning a commission. I think we're seeing a pretty significant move away from that.

00;06;28;12 - 00;07;09;26

Keith John

It's going to accelerate from here. And the reason for it is when we buy the debt, we've got much more onerous obligations on us about the way we conduct ourselves and the licensing obligations, but also with the groups that we deal with, with the banks, they're pushing down compliance and governance and regulation very heavily. So there's actually much more protection for the consumer in having the account sold to someone like us who has to maintain an incredibly high level of standards to keep the relationship with banks and regulators going forward so we can continue to invest in the sector.

00;07;10;08 - 00;07;22;15

Scott Phillips

I want to get back to regulations mate, but let me ask about, you know, plenty people are listening now will be saying “What do you mean the banks aren't very good at collecting debts?”. I mean, it would seem like, I'm not badmouthing the banks by the way, but it would seem like kind of core business.

00;07;22;15 - 00;07;35;06

Scott Phillips

Right. If you’re in the business of lending, you're in the business of collecting at the same time, it would probably surprise a whole lot of people to know, you know, maybe you buy debt off Telstra, maybe you buy it off a gas company, maybe you buy it from somewhere else but I would have thought, this is what I thought,

00;07;35;06 - 00;07;45;10

Scott Phillips

“Gee, the big banks, this would be their bread and butter”. Why is there such a gap on opportunity for you guys? Why did the banks find it easier to say “You know what, just Pioneer can look after it?”.

00;07;45;25 - 00;08;06;18

Keith John

So, look, I think the banks are good at certain parts of collecting debt. So if you've got a large secured debt whereby, for the benefit of your listeners, you know there's a mortgage over a company or there's a mortgage over some assets. They're good at managing that. And it's not just about collecting the debts, but it's actually about managing consumer through it.

00;08;06;18 - 00;08;25;23

Keith John

Banks don't want defaults. They're not looking to wind you up. They're not looking to harm you. They actually want to get paid and they want you to succeed so you can borrow more money. But at a retail level, across credit cards and personal loans, they're smaller, smaller accounts. So our average customer owes about $11,000 per product with us.

00;08;26;07 - 00;08;40;14

Keith John

And banks are an expert at that. So what they do is they sell it to someone like us. They trust us. We've been dealing with them for a very, very long time and then they recycle that capital back into their lending operations, which is what they're actually expert at.

00;08;41;03 - 00;08;59;18

Scott Phillips

Talk to us too about what it means to buy a debt. I mean, again, I'm a bit more familiar with this. I've held shares in a couple of your competitors at different times in my investing career, I know a little bit of it, but how do you buy a debt? I mean, just talk us through what that looks like and how the kind of the mechanics work.

00;08;59;27 - 00;09;30;04

Keith John

The banks generally sell their accounts at 180 days past due. So from the date someone stops paying or doesn't meet their minimum monthly payment, 180 days later, that's when they sell the accounts. And what that looks like is we get offered a big basket of accounts, let's say 1000 at a time, and we would use our analytics to work out what the propensity to pay is and to heel is.

00;09;30;15 - 00;09;51;11

Keith John

And then we sign an agreement with those banks and they become ours. And from that point in time, the consumer's our customer, and then we deal with them as if they're our customer. So we send them a welcome to Pioneer Credit letter. You know, we understand you, you have an account that's outstanding and let's work with it together.

00;09;51;23 - 00;10;07;01

Scott Phillips

When it comes to that process, obviously, and I don't know. I'm not can ask you to disclose your numbers of course but some sort of industry average. I'm just pick some numbers you can kind of tell me whether they were roughly right. You know, I owe the bank a hundred bucks, six months, 180 days. As you say, I haven't paid them anything.

00;10;07;01 - 00;10;18;18

Scott Phillips

They're like, all right, Phillips is not paying it back here. We don't want to go and collect for him. We’re going to get Pioneer to do it for us. Now, obviously, if I owe the bank, $100, you're not going to pay that $100 because (a) if you only get back what you pay for it, then there's nothing in it for you.

00;10;18;28 - 00;10;37;12

Scott Phillips

Also too I guess you got to figure that me and the other 999 people in that bundle, some of them are going to pay back or take a very long time to pay back. And so you've got to pay a price that gives the bank as much as they want. But also it's cheap enough for you to make a margin after you've spent all your time and effort and staff costs collecting, knowing again you won't collect some of that either.

00;10;38;00 - 00;10;48;26

Scott Phillips

So can you kind of just, a ballpark or, and I don’t want you to be specific about Pioneer on this as you've shared this publicly already, but what sort of metrics are we looking at? How would you describe what that looks like for our listeners?

00;10;49;09 - 00;11;08;21

Keith John

For sure. We do disclose our metrics, so I'm happy to talk to them. Happy to talk to them, Scott. In our business, so we pay on average about $0.18 in the dollar for the customer accounts that we buy and we seek to, to earn back about two and a half to three times our money.

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Scott Phillips

Right. Okay.

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Keith John

Now that's over a period of 4 to 6 years. Some of it can go much longer. So it's not a windfall or anything like that. And we operate a really, a really costly business. There is a lot of governance in this business, there's a lot of compliance and our consumers all look the same

00;11;30;26 - 00;11;55;25

Keith John

Scott, you'll appreciate this when I say it. What happens with people is they go along with life and they're living to the limit. You know, they've got a $10,000 credit card. They use it each month and then they have a life event. Death, divorce, sickness, might have lost their job, increasingly domestic violence. And it's that event that stops them from paying for some period of time.

00;11;56;15 - 00;12;11;25

Keith John

So most people out of the big banks don't get in trouble simply because they overspent. They get in trouble because of another reason and what they need to get through that generally is time. And that's why it takes us time to work with those consumers for them to start paying back.

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Scott Phillips

Let me throw something directly at you. The debt collection industry is in public opinion, in public, you know, fiction that the bloke in the corner who'll break your knee caps if you don't pay back that kind of stuff. When you said Welcome to Pioneer letter, I imagine that some people aren't as happy to get a welcome letter as they might for other things.

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Scott Phillips

For example, being welcomed to a debt collection agency is not the sort of letter most people want, though, as you say, you try and find a way for them to get through, which I know actually goes really well for a lot of people. But maybe you can just talk to the industry's reputation and the reality of that. And I imagine, you know, there's a casual barbecue you go to “What do you do for a quid?”.

00;12;51;09 - 00;13;11;26

Scott Phillips

“Oh gee, I’m the bloke that sends out those letters to collect money from you when you defaulted on your bank”. It's an industry that, as you say, is important. It's important for the banks, it's important for the consumers. But it has got a reasonably bad public, I would say, reputation, because I don't mean about you guys, but the perception isn't always of a highly professional, well-regulated system because of some of that payday lending

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Scott Phillips

you mentioned, the shady bloke in the corner of the pub and I know that's obviously a, you know, a stereotype, but maybe you can just talk to the industry itself and the reputation and how you kind of deal with that sort of stuff.

00;13;24;13 - 00;13;57;03

Keith John

For sure, without sort of diminishing what you've just said, I think it's true of every industry. So if I look at sport, for example, there are you know, there's a really bad reputation that sits around some parts of sporting codes, NRL has it’s issues. AFL has it’s issues and we're the same. What I would say is that it's confined to an exceptionally small part of our industry and unfortunately it's that part of the industry that gives everyone a bad name.

00;13;57;03 - 00;14;26;25

Keith John

But that's true for almost all parts of society. You know, the more reputable players of which Pioneer is absolutely one in this space, are so far ahead of regulation in terms of minimum standards as that it's not even a consideration in the context of our business. We're miles ahead of what the minimum standards are. And so for us, we work hard on explaining that and then telling that message across a range of factors.

00;14;26;25 - 00;14;47;00

Keith John

Customers need to know that they can trust us because otherwise they won't talk to us. The markets, in our case need to know because we want their support in the stock market. And of course, the banks won't sell to you unless you're squeaky clean and subsequently, there's really only a couple of players at the moment that the banks will sell to, which Pioneer is obviously one of them.

00;14;47;24 - 00;15;07;15

Scott Phillips

I'm curious why you only buy from the banks and some of your competitors do buy utilities or other things. And also you don't collect on behalf of others that I assume both of those decisions are very, very specific strategic decisions. Maybe just talk to us about the different parts of the industry and why Pioneer is chosen to deal only with the banks.

00;15;07;28 - 00;15;28;03

Keith John

What I like about the banks is that their entirely predictable. So what that means is in our business, what we're buying is entirely predictable. So if you think about the Australian banking sector, we've got four banks, they're all the same by the colour of the jumper. They all sell exactly the same product to exactly the same consumer at exactly the same price.

00;15;28;25 - 00;16;01;15

Keith John

Okay, so because their origination is and their processes and systems are the same, what comes out the other end is a really, really neat group of consumers that we can work with and we're really good at working with that in terms of why we don't buy utilities and telco and anything else, we're not good at it. You know, we're not we're good at building relationships with people, which is obviously more akin to larger type amounts rather than the smaller ones.

00;16;01;15 - 00;16;13;27

Scott Phillips

Yeah. Okay. So a $100 phone bill different from, as you say, an $11,000 average credit card or personal loan collectible, a very different part of the market, if not feel like the same kind of thing. The amount of money that type of person sounds particularly different.

00;16;14;18 - 00;16;33;20

Keith John

Absolutely. And in terms of, you know, payday or the like, as I've spoken to before, that's not our wheelhouse. You know, we're not about, this is not a business that's focused about extracting as much money out of you today, Scott. It's a business focused on building a relationship with you so you can get back on track. We'll get paid.

00;16;33;20 - 00;16;41;10

Keith John

It's no problem there. We need you to get paid. It all to be able to pay and be happy about it. And that's what our way is.

00;16;41;10 - 00;17;03;10

Scott Phillips

I’m thinking if you're a business like yours, mate, you're ASX listed as you've said, you therefore are expected to grow. I'm sure you've met your own growth expectations of yourselves. Is there some discipline required? I imagine there are more than one conversation you have with someone in your team or a director or front manager or something at some point who says “But you could just go and do that thing”.

00;17;03;10 - 00;17;25;11

Scott Phillips

There's there's a market out there and banks are certain size, but there's overseas or there's other sectors or there's you know, at some point there are a couple of players, as you say, you guys end up, you know, butting heads on offer the same volumes. I guess the volumes grow slowly over time, but there must be some thought somewhere in the organisation above or below saying “Well, we could just go and do this, or why don't we go and investigate that?”.

00;17;25;11 - 00;17;35;23

Scott Phillips

You know, that that kind of idea of an adjacent market that is big and might give you some sort of turbocharge growth, how do you, I guess, consider those options? How do you remain disciplined in the face of them?

00;17;36;13 - 00;18;07;04

Keith John

Yeah. So look, discipline, I think in financial services business and particularly in small financials comes through the way people are rewarded. So in our business, no one in leadership is entitled to a short term incentive. So we can have a cracking year this year and that's fantastic, but no one gets a reward for that. What we do have is a leadership and executive that's rewarded through long term incentive and those incentives generally roll off.

00;18;07;13 - 00;18;29;10

Keith John

So they're generally paid out over 3 to 5 years. So we've always been like that and that creates incredible discipline and that inside of the way we construct that, you know, the CFO should be the most conservative. So he gets most of his in five years, which he thinks is unfair compared to the COO that's responsible for driving the business.

00;18;29;10 - 00;18;37;17

Keith John

And she gets most of hers in three years. So there's tension through the process. And I sit in the middle. I've got to try and balance the

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Scott Phillips

You're the referee.

00;18;38;25 - 00;19;04;21

Keith John

Yeah, I'm the referee. Correct. So yeah, that's one way of ensuring that it happens. The other is, look, there's plenty of growth in the market for us at the moment. I mean, the non-banks so the guys sit just below the banks who we also deal with there's plenty of growth in that market. They've written a lot of business and you know, so there's lots of growth for us for the next couple of years.

00;19;04;21 - 00;19;14;17

Keith John

Beyond that, we've got plenty of growth opportunities and they come around how we deal with our consumers and the relationship we've got with them. But we're a while away from that yet.

00;19;14;26 - 00;19;32;12

Scott Phillips

For our listeners, I didn't know, I'm not a Pioneer shareholder for the record. I didn't know about the incentive plan. I just want to call out as someone who's, you know, an investor and an investment adviser in my day job, having no short term incentive is something that many, many, many more businesses should do. Having it roll off over 3 to 5 years is also something else.

00;19;32;12 - 00;19;50;06

Scott Phillips

Huge credit from me. Now, a lot of fundies would like shorter term incentives because it means the share price might pop if things go really well and they want to short term trade this stuff. But at the Motley Fool where long term investors and I haven't looked at the details of your plan but that sort of thing is exactly what I think many, many, many more companies should do.

00;19;50;23 - 00;20;09;09

Scott Phillips

So just for the benefit of the listeners, this is exactly the sort of plan you should be looking for from a company you're investing in. And huge props to you and your business for doing exactly that because it really does focus on building long term value. Again, as you say, probably even more important in financial services, we get in trouble more quickly than most businesses can

00;20;09;15 - 00;20;25;21

Scott Phillips

getting it wrong. But yeah, I just wanted to give you a wrap and again, use as a teachable moment as the cool kids say for our listeners just to make that point as well, because that's exactly if you're a long term investor, and you should be, the sort of plan, the sort of approach we think that all businesses should take.

00;20;25;21 - 00;20;27;09

Scott Phillips

So congratulations and well done on doing that.

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Keith John

Appreciate it. Thank you.

00;20;34;05 - 00;20;56;00

Scott Phillips

Let's go to the back to the economy, because we are in a situation where obviously things are changing really rapidly. And I got to figure, you guys have got a lot of tap dancing to do to work out how much to pay for origination, to work out for the debt your purchasing, sorry, how much you can collect in a very rapidly changing environment.

00;20;56;00 - 00;21;12;24

Scott Phillips

So I'll ask a couple of question on this one, mate. The first one is how do rising interest rates impacts a business like yours? I mean, at one level, maybe it throws more people into, you know, default or not paying back. So it gives you more customers. On the other hand you've got a cost of capital because you're, as you say, paying some money now, getting it back over two, three, four years.

00;21;13;02 - 00;21;18;13

Scott Phillips

So that matters as well. How do interest rates impacts on credit collection, debt collection, businesses?

00;21;18;13 - 00;21;40;03

Keith John

Yeah. So certainly in our business, I mean ours is a capital intensive business, we have a portfolio of some 300 odd million dollars as is what it's carried at. We've got a lot of debt that finances that. So rising interest rates do have an impact on us at a corporate level. So we don't like those, it's just like no one else likes them.

00;21;40;09 - 00;21;41;07

Scott Phillips

00;21;41;07 - 00;21;41;28

Keith John

00;21;41;28 - 00;21;42;07

Scott Phillips

00;21;43;11 - 00;22;11;21

Keith John

On the flip side with the consumer and you know, to your point, Scott, this is what it's really all about. The impact to them is varied, you know, so we're seeing it come through the increase in rental costs. So that is being impacted by interest rate rises. It's also being impacted by shortage of supply. And we're also reading now, of course, about Airbnb and the actual impact that's having on the sector where people are doing short term rentals.

00;22;12;00 - 00;22;36;26

Keith John

So that's a big impact. And then of course, it is the inflationary aspect. You know, it is not all driven by supply chain type issues. In fact, very little of it is. Of course, now it was a very convenient argument for a long period of time for the government. But, you know, small business has extra costs in it.

00;22;36;26 - 00;22;42;12

Keith John

And part of that is interest rates. And that's really flowing through to the consumer.

00;22;43;02 - 00;22;56;19

Scott Phillips

How do you how do you manage your business in that context mate? You've got to look forward, I guess, to think about you buy some debt today or you bought. Let's go back. You bought debt two years ago. I'm going to assume, unless you guys are Nostradamus to have a crystal ball that works, unlike mine, you didn't think “Gee, you know what?

00;22;56;19 - 00;23;14;18

Scott Phillips

By the time we get to the middle of 2023, inflation will be 6.5% and interest rates will have gone from 0.1% to 3.6%”. You know, you have to allow for a range of scenarios, I guess. And then now you're buying debt today, tomorrow, next week, again, on the same sort of questions of how long does it take to recover and what will things look like by then?

00;23;14;28 - 00;23;28;09

Scott Phillips

How much more likely or less likely are those customers to actually repay the debt? How do you how do you go about, kind of, I know you use analytics to look at how much you think you can collect on an average debt in an average period of time. This is far from average.

00;23;28;19 - 00;23;46;20

Keith John

So we look at a range of things. I mean, the first of all, we look at originations, so has anything changed about the way someone is originating? Because if they're trying to grow their business simply by lending more money, that's going to mark down the value of it to us. So are those standards or do they remain?

00;23;46;29 - 00;24;11;22

Keith John

And then in terms of how we price our investments, we take, generally speaking, the most negative outlook that we can find from any of the economic forecasters. And there’s some pretty negative outlooks there. Yeah. I mean, we obviously avoid people calling for absolute Armageddon. But outside of that, we take that we feed that into our modeling.

00;24;11;28 - 00;24;44;23

Keith John

So we've assumed significantly higher unemployment than what we have today, you know, three and a half percent, you know, incredibly low. It's full employment. We've assumed a lot higher than that. We've assumed people will pay less for a longer period of time than what they have been in the past. And then, of course, as the discipline around your investment committee, you know, our investment committee consists of five members of the executive, of which I'm one, and everyone has an equal vote.

00;24;44;23 - 00;25;06;11

Keith John

And if it's not unanimous, then we don't proceed. And when you have got people that have got, you know, almost all of their wealth or, you know, a very significant part of their wealth tied up in this business, that then creates incredible discipline about making sure we're investing in the right consumers from the right originators at the right price.

00;25;07;21 - 00;25;21;15

Keith John

We don't always get it right, Scott. You know, that’s part of business. But I think having that discipline and people that are invested alongside your listeners is critical.

00;25;21;15 - 00;25;40;23

Scott Phillips

I love that. I love the any no votes or no. It gives everyone on the committee a veto vote effectively. How do you manage culture in that environment? I can imagine there's some, you mentioned the CFO whose job is to be the most conservative and the Chief Operating Officer maybe less so again by virtue of the jobs they have.

00;25;40;23 - 00;26;01;27

Scott Phillips

And I'm not necessarily saying how they would otherwise vote on that committee, but I am curious that internal friction, I don’t know if it boils over there or not, but that's going to be interesting and and challenging culturally. So maybe just moving away from pure finance and collections just to corporate management. How do you manage your team?

00;26;01;27 - 00;26;15;20

Scott Phillips

See, you know, I love the idea of everyone got a veto vote, but it must be frustrating if everyone's, there's one person on the committee almost always votes yes. Someone else who votes no more than the rest. You know, there's got to be kind of a look across time like, dude, come on, help us out. How do you manage culturally in that sort of environment?

00;26;16;04 - 00;26;37;29

Keith John

Yeah. Look, I think with respect to the committee in itself, I mean, one of the things is that the delegations that are sent from the board are really prescriptive. So, you know, there's a certain type of assets that we're allowed to deal in and there's a minimum return hurdle. So that saves, you know, a lot of angst, for lack of a better description.

00;26;38;10 - 00;27;01;28

Keith John

But in terms of culture, look, our culture is built on being completely open with each other, being entirely honest and having incredible integrity. And we spend a lot of time together. I mean we, you know, like most businesses, I mean, I spend more time with my CEO and my CFO and that team than I spend with my family on a daily basis.

00;27;01;28 - 00;27;25;11

Keith John

So we spend a lot of time together and we talk things through. But if you don't have respect going into the conversation, your culture will never survive. And that's the most important thing. So that's something we don't have to work on. That's something that is just built in inherent in the people that we certainly that are members of my executive but also in the people we employ.

00;27;25;11 - 00;27;50;21

Keith John

That's what we're trying to look for. And if you look at our website, what we talk about in our branding is to be good. So our diversity and inclusion statement, we call it belonging. The people that we look to employ at Pioneer is people that are founded in good. I can't, you know, I can’t cover off everything in your background, and nor should I.

00;27;50;21 - 00;28;03;16

Keith John

You have made mistakes as I have. But if you've got good intent, no one can beat that. And that's the big part of our culture that we think is, you know, unassailable. You can't get past that.

00;28;03;24 - 00;28;17;20

Scott Phillips

Yeah. I love that's really, really important. It does go to I think yeah. I've always often had a view that you hire for aptitude and attitude and you can teach anyone almost anything else, right? I mean if you don't have the aptitude for it, probably not going to be able to do it or want to do it.

00;28;18;00 - 00;28;31;28

Scott Phillips

If you don’t have the right attitude. Then if you, there’s always Warren Buffett's quote about, you know, you want someone with integrity and honesty and energy, because if they don't have, you know, two of them the other will kill you. That's the same kind of idea. The insurance industry is fascinating to me and I know you don’t do insurance.

00;28;31;28 - 00;28;49;11

Scott Phillips

But by way of analogy, the pricing can be hard or soft, as they say, and if you use that language in your business, the idea of sometimes, you know, just the margins are higher, sometimes they're lower and you want to play the game. You have to you have to play the game at the given price. Now, Berkshire Hathaway historically has said “If pricing is not good, i’m just not going to write the policy”.

00;28;49;11 - 00;29;05;15

Scott Phillips

And I have a really significantly fluctuating premium line because they just say we're not we're not going to play if we can't get a good price and we're okay with that, we're okay with that volatility now. Berkshire gets away with it because it's part of the business. And Buffett's got 60 years behind him to say “Yeah, trust me, I'm doing this thing”.

00;29;05;28 - 00;29;27;18

Scott Phillips

How do you guys cope in those sort of environments? You know, again, I've sort of held chairs, your competitors at different times in the past, and sometimes pricing is hard, sometimes it's soft, sometimes there are options for margin. How do you work out whether to you know, I guess, again, you're an ASX listed company, right? You got to explain to the market why revenue is going to fall or profits going to fall because we can't get the margins we want or conversely.

00;29;27;25 - 00;29;42;23

Scott Phillips

Yep. So well, margin going to be as great because we want to keep the business flowing. There are costs to pay. How do you manage that where you don't really control the pricing effectively? It's a you know, I've got a saying you're only as profitable as your least rational competitor allows you to be. How do you how do you manage in that environment?

00;29;43;00 - 00;30;09;19

Keith John

Yeah, I think there's a few things. I mean, the first of it is in the part of the market that we play substantially. It's an incredibly rational market because there are so few players and because the banks won't choose just one. So that's another reason we like that. Right. So, you know, they'll have at least two on a panel and we're on every panel so that feels really good and that sort of feels really nice to us.

00;30;09;27 - 00;30;34;12

Keith John

The second is we do exactly what Buffet does. I mean, we step out of the market and don't buy. Capital preservation, as you would appreciate, is everything. You know, you can never make back what you've lost or never get it back. It's gone. So if you look over our investment in PDPs over the last few years it has fluctuated and it has been down.

00;30;34;19 - 00;30;57;12

Keith John

But it was down for a reason. And the reason was, it wasn't a great time to be investing our money and the banks were selling less. Their back to selling now and that's good for us. So, you know, very much the same thing. You've got to, you know, if shareholders are with you for a long period of time, they'll get the value if you look after their money.

00;30;57;12 - 00;31;04;23

Keith John

And you're a good custodian through all of that period rather than just driving it, what's going to deliver next come 30 June?

00;31;05;04 - 00;31;25;01

Scott Phillips

You are the founder of the business, is the managing director. You've had the idea, you've got the business up. You've grown it to, as you say, a very significant size these days, $300 million you just mentioned of debt. Maybe talk us through the idea, talk us through how you go, I’m always fascinated people who go from executive roles to entrepreneurial roles.

00;31;25;01 - 00;31;39;13

Scott Phillips

Right. I've got a mate, a guy who I co-host the other podcast Motley Fool Money with, Andrew Page, who went for working for The Motley Fool to go and starting his own thing, he just wanted to do it right. I'm not necessarily someone who has that burning desire to go and kind of, you know, do something. I've got a good job.

00;31;39;13 - 00;31;52;26

Scott Phillips

I enjoy it. I'm happy doing what I'm doing. I'm trying to as well as I can and I'm hungry for improvement, but I don't need to go and jump, you know, it's something entirely different risk at all and you know, and go and try and make this great new thing. And you did. And you have, which I think is really impressive.

00;31;52;27 - 00;32;00;04

Scott Phillips

What's what was that journey like for you? What was the idea? And then the first couple of years, few years of Pioneer like for you?

00;32;00;24 - 00;32;19;10

Keith John

I find it interesting when people refer to me as an entrepreneur because I generally don't. And that's because I've only done one thing, which is what I'm doing now, and I'll talk you through it. So my background was debt collection and we did third party work, so we got paid just like everyone else.

00;32;19;20 - 00;32;41;04

Keith John

And this is going back, you know, through the eighties, nineties or late eighties, early nineties into the 2000s. And most of our business was focused on health care. So if you think about that, a large degree of empathy required. People are sick. Paying their bills is not what's on their mind. Getting better is, so large degree of empathy required.

00;32;41;16 - 00;33;01;22

Keith John

But it was clear that the world was changing back then. Technology was coming, becoming really important, and it was very expensive. We had a small business, I think we had 60 or 70 people in Perth and we had a small operation in Malaysia and I ended up selling that business to Credit Corp and was there for a few years.

00;33;01;23 - 00;33;25;13

Keith John

You might recall they got into a little bit of trouble in some period of time. I got offered the CEO's role there. We didn't agree to progress with that. We couldn't agree to terms. I wanted to stay in Perth and they wanted someone in Sydney and I left and at that time it was 2006, 2007, the GFC.

00;33;25;13 - 00;33;43;28

Keith John

There are a lot of opportunities around and I had a little bit of money and I had my CFO with me and we wanted to make sort of four or five bets into businesses. So smaller businesses give them some money and then bring some discipline to those businesses and financial acumen and start to grow them.

00;33;44;29 - 00;34;06;20

Keith John

But the thing was I couldn't because I just couldn't risk my capital because I just never knew enough. And that's how I ended up starting Pioneer again. So yeah, when you say entrepreneur, that's why I say it's really hard for me to recognise that or to accept that that's what I might be.

00;34;06;20 - 00;34;29;11

Keith John

Because, you know, all I've done my whole life really is one thing. I mean, I love this industry. And the reason this business is successful is because even through that period when I wasn't in it, you know, the people we deal with, their friends I've dealt with them my whole life and we've had a great relationship and a great time and been through a hell of a lot.

00;34;29;12 - 00;34;51;27

Keith John

I mean, this is a crazy world. The financial world, there's big ups, there's big downs. And there's rarely a time when it's just boring. And if you invest in people and you invest in relationships, you know, you can set up a great business again. And, and that's what we did and I was very lucky to have their support and still do.

00;34;51;27 - 00;35;14;29

Scott Phillips

Okay. So you say you’re not entrepreneur, but you started the collections business on behalf of other people. You sold that and you set up another business. Both times, I assume day one is an empty office, a computer and “Man, I better get some people to kind of do something here with me”. That's the entrepreneurial journey, right? You’re not buying an existing business and saying “I will buy Pioneer from somebody else and I'll go sit in the big chair, I'll see if I can improve it”.

00;35;15;04 - 00;35;30;07

Scott Phillips

Any successful CEO has an element of that because I need to maybe you're running Transurban, you don't need to. Although, again, I wouldn't say that’s entrepreneurial. But there's still that element, right. So maybe take us all the way back when you started your own collections business in the very first instance.

00;35;30;18 - 00;35;44;06

Scott Phillips

You say “You know what? I'm going to try to make some money for myself. I'm going to run my own business”. I'm going to, you know, again, walking on empty office, put a computer there, pick up a phone and say, well “I'm going to find some debt. I've got to find someone to collect it for me. I've got to get someone to pay the bills”.

00;35;44;18 - 00;35;46;18

Scott Phillips

What's that? What's that journey like?

00;35;47;21 - 00;36;10;27

Keith John

It is the most incredible journey that you will ever go on. I mean, I think that's true of starting any business. And you're right, it's not for everyone. It's scary and it's exciting and it's invigorating and it's frustrating and it's all of those things at once. But it's having a crack and having the gumption to get up there and literally pick up the phone and make that phone call to Scott Phillips and say “Scott, it's Keith.

00;36;11;04 - 00;36;33;06

Keith John

How you going? I'm starting business and I'd like some business from you” and you get a lot of no's, but then you get the one Yes. And it's like hitting the perfect golf shot. You know, it keeps you coming back tomorrow because you got the one Yes. And if you if you work hard enough, there's lots of Yeses out there because people want to deal with good businesses.

00;36;33;11 - 00;36;55;11

Keith John

And Australians are amazing people. I mean they want to give the new guy a go. You know, it's one of the things we talk about at Pioneer today is how do you stay fresh, relevant, excited to be dealing with that person that you've been dealing with for the last ten years because they want to give the new guy a go and we need to keep winning their support because we're not the new guy anymore.

00;36;55;23 - 00;37;21;07

Scott Phillips

I want to finish with a couple of questions about Pioneer, and we'll get to our favorite question at the end. Let me start with the company itself. You guys remain earnings negative. You're making losses last few years, obviously hoping to grow or turn that around or both. Maybe just again, for those of us who are interested in the company as a listed entity, maybe talk us through the current state of the business.

00;37;21;10 - 00;37;31;02

Scott Phillips

Plenty of people will say, you know “I'll wait till it turns profitable. Thank you very much”. You'll say, well, there's an option here to, you know, make some money by at a cheap price until we get to that point. But where is Pioneer on that journey in your eyes?

00;37;31;17 - 00;38;02;07

Keith John

Yeah, look. So we'll be profitable this year, Scott, and I'm talking statutory net profit after tax, not another type of number that seems to be around these days. Look, Pioneer has had a blessed journey from when it listed in 2014 through to about 2019. And in that year we actually signed a scheme of arrangement to privatise the business into the Carlyle Group.

00;38;02;14 - 00;38;24;09

Keith John

It was a great scheme. Shareholders had the opportunity to participate. Everything we do is focus on the shareholder and unfortunately Carlyle at the beginning of Covid and through Covid changed their mind. We ended up well, they didn't change their mind, they just didn't want to pay for the business. It was a very expensive exercise for us to get out.

00;38;24;11 - 00;38;51;27

Keith John

We needed to refinance through that period, which was prohibitive, and that's really what's driven the losses in this business over the last couple of years. Operationally, this business has been fantastic. It's not missed a beat and it's continued to have the support and the customer of the banks, which is critical. But we'll be back to profitability only as a slight profitability, but we'll be back to profitability for this financial year.

00;38;52;04 - 00;39;03;06

Keith John

And then next year, the outlook is much, much brighter as we move to refinancing again and reducing our cost of funds in a in a pretty good market for a business like ours in that regard.

00;39;03;22 - 00;39;18;22

Scott Phillips

I also might have to say on that side, this was the second question is going to ask you, but there's been a lot of director buying over the last couple of months. And it's KR John seems to be the bloke who's doing a lot of the buying. I'm going to suggest to you that they say direct yourself for many reasons, a buy only for one.

00;39;20;01 - 00;39;23;28

Scott Phillips

I don’t expect you to say anything different other than you're putting your money where your mouth is from the look of it.

00;39;24;17 - 00;39;40;27

Keith John

Oh, absolutely. I look, I love this business. I've got incredible faith in the business and in our people. It's not all my buying, by the way. There's my two sons that are out of school and in uni that I've got jobs. So they're buying as well.

00;39;42;01 - 00;39;44;26

Scott Phillips

On dad's recommendation or is it so what's the what's the story there.

00;39;45;24 - 00;39;56;24

Keith John

Well, no, not so much. I mean, they've got their own choices to make and they talk about it but it's their decision if they press go but I'll tell you what they're pretty tough taskmasters.

00;39;56;24 - 00;40;01;23

Scott Phillips

Family units take a different complexion when they got shares in the business aswell.

00;40;02;04 - 00;40;11;07

Keith John

When your sons go when your son's got $5,000 of his hard earned money in it let me tell you, it's that much harder than the funding with $1,000,000 or $5 million investment.

00;40;11;15 - 00;40;27;12

Scott Phillips

I'll bet, I’ll bet. You've been very generous with your time. Let's kick off that last question, of course our favorite question. We're on a podcast now, plenty of people listen to podcasts, watching things on TV, streaming, all that kind of stuff. Reading, a lot of book readers among our audience. What are you reading, watching, listening to at the moment?

00;40;28;02 - 00;40;44;17

Keith John

Yeah. So reading, the second time of Hawk by Blanche, his second wife. Yeah, it's about. It's about his leadership through his prime minister years. Incredible, incredible read. So I am really enjoying that at the moment.

00;40;44;25 - 00;40;59;26

Scott Phillips

That's awesome. I'll put that on the reading list. Obviously, the next question about trends and generally speaking, the trend people tend to go to is on this in their business and feel free to do that. But what trends are you watching now? What are you seeing out there? What's what's going on in your business or around the world that's kind of captivating you?

00;40;59;26 - 00;41;27;02

Keith John

Probably more interested in the health aspects of the world at the moment? I sort of you know, we seem to be a world that's I don't know. That's confused. And we're trying, we seem to be trying to work out a whole range of things. And it's all coming back to sort of basic, you know, sort of foundational type for process now.

00;41;27;02 - 00;41;48;02

Keith John

And you're seeing that with health and I think we're seeing with finances. And you know, I saw a thing on Instagram the other day which said, you know, everyone thought we’re, you know, thinks we're a much smarter people now than we were 40 years ago. But when 40 years ago, you come and you'll said, you know, if it's broken, here's how to fix the valve and now says, don't drink the dirty liquid from the battery.

00;41;48;12 - 00;42;01;06

Keith John

Yeah. Are we really that smart? So, you know, yeah, it's sort of this really, you know, this reward consumer shift. I think back to foundational type thinking.

00;42;01;17 - 00;42;17;18

Scott Phillips

It is fascinating. I've had something similar. I'm astounded at how little I can actually do compared to, say, my grandparents, for example, in terms of, you know, my mother's father built their house like a hammer and nail and it's sometimes straight. Look, I got a desk job and I bang away at a keyboard, and, you know, it's all it's all fine.

00;42;17;18 - 00;42;33;29

Scott Phillips

But yeah, there's a very big difference between yeah, I had a very, very, very broad range of skills. I could do a few things reasonably well. They could do a lot. I think there is something to that broadly as well. And yes, not drink the battery fluid is a very, very smart idea. But what advice would you give someone who was interested?

00;42;33;29 - 00;42;40;10

Scott Phillips

Maybe they're finishing uni, maybe the finishing school. I was looking for a career change. They're saying, you know what, this debt collection business might be okay, what advice would you give people?

00;42;40;26 - 00;43;06;11

Keith John

There's two things I'd say to people the first is the world's a magnificent place. Go for it. Grab every bit of that you can. My wife's got a saying which her mother said to her it was their 80th birthday yesterday, if you can dance, dance. We say that to our boys all the time. You know, just go because it's, you know, it's an incredible place with incredible opportunity.

00;43;06;24 - 00;43;25;13

Keith John

And the second is, is what Buffett says essentially. You know, in our business, I speak to the new starters in our business, they come into our contact centre and they say “Oh, I want to be like you, and how do I get ahead?” And I tell them all the same thing. It's application. You cannot beat application. If you work hard, you put your mind to it.

00;43;25;13 - 00;43;41;24

Keith John

You will learn what you need to learn and you'll be more successful. And, you know, we've all got so many resources available to us. You know, you got to do something that's going to differentiate you. And an application is what I think is the secret sauce.

00;43;41;24 - 00;44;01;03

Scott Phillips

Love it. My last question is normally still will be, what are you optimistic about? You give me two very optimistic answers to the advice piece about just going forward and applying yourselves. I love both of those, but what else? I make the assumption, I'm an optimist by nature, let me say that most people if you're running a business, if you're starting a business, owning a business, you can't expect the world to end tomorrow unless you're in the business of world ending.

00;44;01;03 - 00;44;04;04

Scott Phillips

So I'm going to assume you're optimistic. And if so, what are you optimistic about?

00;44;04;21 - 00;44;23;16

Keith John

Yeah, look, I am an optimist by nature as well. And I'm optimistic about everything, Scott. I mean, like I just said, I think the world is an incredible place. I think we've you know, we've come through a tough period. I think we're going to look back on that and go, you know, we've built some resilience in our young people through that.

00;44;23;16 - 00;44;48;08

Keith John

We've built some understanding that the world's not perfect all the time. And we built some hope and all of those things. You know, I'm incredibly excited by what's in front of us as a society and our young people. We have got two boys, 18 and 20 and watching them with their mates and trying to work out what they want to do and how to get ahead, it's just it's incredibly exciting.

00;44;48;09 - 00;44;52;08

Keith John

So, yeah, the world, the world, it's a beautiful place.

00;44;52;08 - 00;44;59;19

Scott Phillips

That is a fantastic way to finish. Keith John, founder and managing director of Pioneer Credit, thank you for joining me on The Good Oil.

00;44;59;19 - 00;45;03;21

Keith John

Absolute pleasure.

00;45;03;21 - 00;45;16;17

Scott Phillips