Keith John charts Pioneer's growth path

00:00:00:00 - 00:00:23:08

Andrew

Thanks for joining everyone. Today as you know, we're speaking to Keith John, the managing director at Pioneer Credit, PNC is the ticker code there. Keith is the founder of the business and its largest shareholder. He's been running the show for well over 20 years now. The last ten as a listed company, and since listing the company seen some really great growth in its net revenue last year, generating over 80 million from their PDL book.

00:00:23:08 - 00:00:41:14

Andrew

That's going to be exceeded this year. So, things are going in the right direction, which is always great. This is our second discussion with Keith. We caught up in around about May of last year, so a bit of water under the bridge since then. So, we thought probably about time to sort of catch up on things and see how everything is tracking.

00:00:41:16 - 00:01:00:22

Andrew

If you are new to the business, I can recommend you go back to that initial recording. We covered a lot of foundational big-picture stuff there and that's still very much relevant today. If you really want a better understanding of the business, I'm sure we'll go over some of that territory again here today, but I'd still direct you there if you want a full-fledged picture.

00:01:00:24 - 00:01:21:06

Andrew

The TLDR as the cool kids say these days is that Pioneer deals in purchase debt ledgers. So, this is basically buying debt such as overdue bills from telcos and utilities or loans that are in arrears from the banks, and because of the status of these debts, you basically pay less than their face value. And the idea is, you know, you try and recover more than what you pay for it.

00:01:21:06 - 00:01:41:16

Andrew

That's it in a nutshell, and, you know, if it's done right, it's a win win situation. So, you know, the creditor gets to recoup some of their receivables, the debt gets to repair the credit status, get put on a payment plan and get back to the right path. And Pioneer gets a margin for managing the whole process.

00:01:41:18 - 00:02:01:14

Andrew

There's a lot more to it than that. You can get really into the weeds with PDL accounting and the rest of it, but that's the general overview as we go forward. I just really encourage anyone who's got a question to sing out. I'm going to pop the slido link in here and if you're on the website watching this, you can do that directly.

00:02:01:20 - 00:02:15:23

Andrew

If you're in Zoom with us here. Just please use the Zoom chat as well, whatever you prefer, or even just unmute yourself and say hi if you prefer. And the final thing that I'll say before I shut up and get out of the way is that as always, it's important to remember none of this is financial advice. So, we're all care

00:02:15:23 - 00:02:35:10

Andrew

no responsibility here at Strawman. Okay, well, that's out of the way. Keith, thanks so much for joining us again. Thank you, Andrew. Good to be with you. Now, I am sensitive you guys don't have your latest set of numbers out. That'll be due out before the end of the month. So, we're going to stay, obviously, a mile away from all of that stuff.

00:02:35:12 - 00:03:05:17

Andrew & Keith

But, you know, I gave a very rough and ready overview there. That's probably a good place to start. What did I miss out of that introduction that you think is important for investors to understand? I appreciate it. Thank you. I suppose one thing to clarify, Andrew, is that whilst our sector deals with overdue invoices across a broad spectrum of industries, Pioneer in itself doesn't buy telco or utility and we don't buy payday.

00:03:05:19 - 00:03:31:20

Keith

Sorry, my apologies Sorry. Not at all. But it's an important part to raise. So, one of the key differences between us and others is we focus solely on banking and finance. And the reason we do that is because we really understand it. And if you think about what we like about it is Aussie banks. The way I describe it is this there are four Aussie banks, they're all the same bar the colour of their jumper.

00:03:31:22 - 00:03:54:24

Keith

They sell exactly the same product for exactly the same price to exactly the same person. So, from our perspective, we've got this really homogenous group of people. And because banks are so predictable in the way that they behave and the way that they provide credit, we can then go and price that in a way where there's little risk to us.

00:03:55:01 - 00:04:27:15

Keith & Andrew

So that's a really good thing. It's been a fantastic thing over the last few years, there has been challenges in the economy and so on and so forth. And that's kept us really well protected. So that's just one thing to call out. But your characterisation of the industry's bang on. Right, I mean, like you said, that those that are new to this space would probably sort of want to know why would an outside party have a better insight into the customer base and loan book that the banks themselves have?

00:04:27:16 - 00:04:53:21

Andrew & Keith

And why would they not try and recover that debt themselves? Yeah, look, I think it’s an exceptionally important question. I mean at the outset banks are distribution engines. You know they're really good at going Andrew well I can provide him with $10,000. I know at $10,000 he won't get into trouble and getting that to you, okay, they're very, very efficient to that.

00:04:53:22 - 00:05:27:22

Keith

And then over time, I think even things like if you think about the way that the market has changed through broker channels, for example, because it's more efficient for brokers to distribute home loans than it is for the bank themselves. I think on the servicing side, there are a range of reasons that it occurs. The first is there is a very, very broad range of and far-reaching range of compliance obligations that sit with our organisation that we maintain and cover the whole way through.

00:05:27:24 - 00:05:51:09

Unknown

It's a little bit more difficult in the bank. They've got arrears at all different levels and they've got thousands of people trying to manage them. And as they go through the process, that sort of changes and becomes more challenging. That's one reason. But the primary reason is this. I mean, we're more efficient at it. We can understand the customer better and we don't have the capital requirements that the banks have.

00:05:51:09 - 00:06:14:18

Keith

And by that, what I mean is that in 180 days, the banks have to be fully provided for debt. So, if it's a $10,000 debt, they literally need $10,000 sitting there on the balance sheet. Whereas if they sell the account to us, we have a range of obligations around how we treat the customers. They get back, let's call it 20 cents on the dollar that they can go on.

00:06:14:18 - 00:06:38:09

Keith & Andrew

Then we use that capital and redistribute it back and they get, of course, leverage on that amount. In a home loan, it's 35 to 38 times. So much more efficient use of capital from their perspective. Yeah, and I know the last thing well, the last time we caught up, you made mention of, and you called special attention to some of the tech that you guys have developed in-house to sort of help you manage all of that.

00:06:38:09 - 00:07:03:15

Andrew & Keith

Can you elaborate a bit on that for those that are new to the business as well? Yeah, I think, you know, whilst we're not an overly tech heavy shop, that the requirement in our business is really around managing compliance and what that looks like is how do we safely communicate with customers at a time that's best for them.

00:07:03:17 - 00:07:36:12

Keith

So, there's a whole range of negative type obligations. Don't contact Andrew more than, you know, X number of times a week or so forth. We've got systems in place that make sure we don't inadvertently do that. But the really smart part where we spend our time is how can I best support Andrew? There's no point in me contacting Andrew saying, could you pay me today if Andrew's going through medical treatment and we know about it, or if Andrew's unemployed sorry to pick on you, you know, if Andrew's unemployed or whatever.

00:07:36:12 - 00:08:11:00

Keith

So, our business is about what's the right time to contact a person so that we do that in a manner that they can see a way forward, rather than one that's just completely inconvenient to them and convenient to us. That doesn't work. Yeah. And we're very, very good at that. And we've got a large team in our analytics and data science department led by a fella that's been with us for eight or nine years now very, very focused on how do we drive out best outcomes for our consumers.

00:08:11:00 - 00:08:34:15

Keith & Andrew

And if we can do that, then the banks will sell to us more frequently. Yeah, right. And that's something else that we touched on last time as well, is that there is a sensitivity from your clients as to who they partner with, because although the debt is no longer on their books, you are in effect representing them because you are you know, it's from the person who is in arrears.

00:08:34:15 - 00:08:53:06

Andrew & Keith

From their perspective, you're chasing a loan that was, say, initiated from the Commonwealth Bank or so. Is that something you'd stress? Is that something you see as a bit of a competitive advantage? And does that grow over time as you sort of, I guess, prove out the value prop amongst those clients? Yeah, I think it does.

00:08:53:06 - 00:09:24:15

Keith

Look, I hope it's a competitive advantage. We certainly put an incredible amount of time into not just the way that we run our relationships with our consumers, but also the way that we explain that to the people that we're buying debt from so they understand how we're thinking. So, I'll give you a couple of examples. It's really common in our industry and in lots of places with contact centers to have call scripts. You ring up, you say A, I say B, you say C, I say D.

00:09:24:17 - 00:09:46:07

Keith

Yeah, Pioneer doesn't do that. We don't have call scripts. What we're looking for is we're looking to employ really good people that are empathetic, that have life experience, but when you call up, they can relate to you and they can work with you through your situation. Okay, so we have free-flow conversations with all of our customers all of the time.

00:09:46:09 - 00:10:13:12

Keith

And as far as possible, the person on the end of the phone is there to reach a resolution. Yeah, so that's a really important sort of distinction that we use to try and demonstrate how we're different and the way that relates to consumers. The other part is we self-report. So, there are a range of things that happen from a compliance perspective.

00:10:13:12 - 00:10:37:12

Keith

If, you know, we're dealing with tens of thousands of phone calls across any one month we don't get every phone call right every time rather than having an organisation which is reactive and is looking for problems like a police officer. Our people are encouraged and in fact rewarded if they stick their hand up and go, you know what, I actually think I just got that wrong.

00:10:37:12 - 00:11:09:21

Keith

I didn't quite get this right or whatever. And that way I can be in touch with Andrew and make sure Andrew's actually okay because we might have let him down in some way, shape, or form. Yep. And I can continue to improve the value of our business back to the vendors. You know, obviously, we try and limit mistakes, but we're all human and, having a different approach to that's a really valuable way of increasing our worth to not just the vendors but also to our customers.

00:11:09:24 - 00:11:35:04

Andrew

Yeah, Yeah, absolutely. I'm wondering too if we can go a little bit into the mathematics. This is always sort of hard to do in a sort of video audio format, but when you're looking at a business like this, you know, in looking through your recent slide deck, there's a lot of, you know, charts that talk about the current inventory that you've got the budget to acquire more.

00:11:35:06 - 00:12:00:21

Andrew

You mentioned before that when vendors are selling you debt, they might hope for 20 cents kind of on the dollar. And you need to sort of try and make a margin on all of that. But someone who is new to this industry and they're looking at these charts and they're looking at these figures, what how would you guide them in terms of what they should be looking for and what are the like the big signals, particularly the forward-looking signals for a business like Pioneer?

00:12:00:23 - 00:12:22:04

Keith

Of course. So, I think there's clearly a few things we need to look at. The first is who are you buying from? Like, do you have a supply of inventory that's coming to you? Because just like any business, if you don't have any inventory, you can't grow. I mean Pioneer is in a magnificent position.

00:12:22:04 - 00:12:41:09

Keith

Now we're in a virtual duopoly in the banking and finance area, and we think we've got a really strong competitive advantage against the rest of the market in the non-bank financials, where we don't have a competing loan product. People like dealing with us because we don't compete with them. They know we'll keep them safe. So, I think that's the first part.

00:12:41:13 - 00:13:17:13

Keith

Yeah. The second is do they have a history of investing across this asset class over a long period of time without impairments. Yeah. You know, really strong, important way to think about this, about this business critically. Does management have a large stake in the company? Because at the end of the day if you invest in shares in Pioneer what you're actually doing is trusting me as part of a management team, as a custodian of your money and I'm investing it on your behalf.

00:13:17:15 - 00:13:46:00

Keith

Yeah. So, I think you want to make sure that I'm also investing my money there and so is the management team. Yeah, At Pioneer, we don't have short-term incentives, you know that the bulk of our revenue or the bulk of our earnings off the debt that we acquire is over periods sort of 3 to 5 years. So, our incentive scheme, there are no short-term incentives, but across the leadership there are incentives  in equity and they have to earn that over four years.

00:13:46:02 - 00:14:20:17

Keith

Yeah, that's a long way to get paid, but it's entirely appropriate because that's what you are trusting me to do with your money when you invest in me. Yeah. And then the third and most important, the profit loss statement you know it's important. It's relevant but cash flow is king. Yeah. Are we actually bringing in the cash that we say that we bring in and is it dropping out of the bottom line to fund both the growth of our business in terms of the way we invest and also the financial stability of the balance sheet?

00:14:20:19 - 00:14:44:00

Keith & Andrew

Yeah. So, understanding the cash flow statement is critical in this business. Yeah. And that can cause a bit of head scratching too cant it? Because you do have these assets amortized over their life and there are non-cash costs in all of that kind of stuff. So, and I guess in terms of the cash flow, while that I agree absolutely the place to look, there's going to be an inherent lumpiness there.

00:14:44:00 - 00:15:21:08

Andrew

If there are, say, big investments in PDLs during a particular period, perhaps it's an opportunistic purchase because the market conditions are good, you're seeing favourable pricing and we know at other times when things can get competitive, pricing is perhaps a little irrational and can lead to troubles in this kind of space as well. So, I guess that's why we've had one of our members sort of point it out with another provider in this space that it's all about trying to buy sensible amounts of inventory at sensible prices and managing that effectively because it can be quite a nice tidy business when done right.

00:15:21:08 - 00:15:40:10

Andrew

But maybe it's worth highlighting some of the risks when you don't get it right, because you've got to pay for all of this stuff up front and then hope to collect it afterwards. And obviously there's a lot of sort of actuarial almost kind of science that's in that. But how do you think about that risk, you know, particularly in light of what we've seen with some of the other players?

00:15:40:12 - 00:16:01:16

Keith

Yeah. So, when we think about I mean, that's all we think about really in terms of, you know, in terms of the way we invest, that's where our thought is. Is this the right inventory for us? Do we truly understand what it is? And will we/are we with a good partner that will continue to support us going forward, which is really important.

00:16:01:18 - 00:16:21:11

Keith

You know that the key part of this business, which so many people miss, is we make our money when we buy, we make our money when we buy, and our return is capped at 100 cents in the dollar. So, if I pay 50 cents for something, the best I can do is get to 100. I pay 20 cents.

00:16:21:11 - 00:16:48:05

Keith

I can still get to 100. So, the way that I invest that purchase is critical. What you typically see in this industry is when people spend too much money on investment. I think it's characterised by a few things. First of all, it invariably again involves a team with no management equity or no meaningful equity in the business.

00:16:48:07 - 00:17:17:01

Keith

I think in small financials, that's a big no-no. Yeah. The second is what typically happens is you pay too much. And because you start getting into trouble on your book, you go harder and harder at the consumer, it's the worst thing possible. You can do. These consumers are suffering a hardship today.  You know, the very vast majority of them will pay you if they can.

00:17:17:03 - 00:17:44:12

Keith

Yeah, but they can't. So, they need your support the way they deliver that is something that is important. You know, thirdly, I'd be looking at, you know, have you had any enforceable undertakings with the regulator? Have you had any fines from the regulator or whatever the case may be is the only group in the sector of size that's had none of those.

00:17:44:14 - 00:18:06:19

Keith

And it's telling. You know, we put a lot of effort into making sure that we operate not just within the law, but well ahead of the law in terms of the way we deal with our consumers and make sure it genuinely drives the best outcome for you. So, we demonstrate that through Net Promoter Score, which we're the only ones that do.

00:18:06:19 - 00:18:30:01

Keith

We've got a Net Promoter score plus 25 or 26, I think it is at the moment, which is incredibly positive when you think about, the business that we're in. But there's some of the things that you would look for and, of course this industry is front and center. You know, if we do the wrong thing and it's tied to a bank, you can be sure it's going to be in the press.

00:18:30:01 - 00:18:58:06

Keith & Andrew

Yep. So, it's pretty easy to see where challenges are occurring. Yeah, I guess it's worth emphasising to the journey that the businesses in this industry can go on throughout the economic cycle. There can be some counterintuitive aspects to it. On one hand, tougher economic conditions might make finding, you know, getting people to repay a bit more difficult.

00:18:58:08 - 00:19:14:08

Andrew

But at the same time, it sort of puts a bit more potential inventory out there on the market as well. Can you sort of thread that needle for us a bit? And just like should people think about, you know, not that we're macro investors per say, but it is always good to sort of get that perspective.

00:19:14:10 - 00:19:40:21

Keith

Yeah. What I will say at the outset is, you know, we're in what feels like a really challenging time at the moment and it's defied almost all odds, in the way that our book performs, what we see and what banks are seeing across their books. Yeah. So typically, when things are tough, obviously you would expect to see more defaults and it would be tougher to collect.

00:19:40:23 - 00:20:10:22

Keith

We haven't really seen that, which is a little unusual. What we are seeing is increased flows predominantly out of the non-banks but for a different reason. And that is because they have had high fixed funding costs and because they've got lower fixed interest rates or NIMs of the loans they have done and they need to sell to get the liquidity back into their businesses.

00:20:10:22 - 00:20:40:14

Keith

So that's been without being unreasonable about that, that’s been, a good thing for our business. And one of the things that those groups partner with us from a consumer perspective, if the real big swing factor in these businesses, in my experience and our experience, is unemployment rate, you know that unemployment rate starts going up, then people don't have the ability to pay.

00:20:40:16 - 00:21:00:17

Keith

In our business, we think it needs to be sort of approaching 7% before we have, you know, before it starts being meaningful. So, we're alert to that, you know, which is three, 4% now. There's no indication that we're going to get to seven, but you know, only a couple of years ago there was no indication interest rates were going to get to 4%.

00:21:00:17 - 00:21:30:06

Keith

So, you know, we're alert to those things. But the Australian consumer is I would characterise them as being exceptionally honourable. They want to pay back their bills. The real challenging part that we find frustrating when we think about the Australian consumer is the lack of understanding from bureaucrats and policy makers around how tough it really is.

00:21:30:08 - 00:21:54:01

Keith

Yes, they are making their repayments on their bills because they need to, they want to get ahead. Yeah, but they're doing that, forgoing other things. Children's Christmas presents are not what they were now, doesn't mean we're not talking new bikes, we're talking simple things. You know, they're talking about they're not having steak once a week. Now they're having mince instead because they can't afford steak.

00:21:54:03 - 00:22:16:04

Keith

You know, these are things that, I find challenging in our society. There's so much around and we sort of miss the basic parts of what's happening to, you know, that the normal consumer that's really just trying to get ahead. Yes. They're paying us back and they're paying the bank back. That's fantastic. But, yeah, you know, their quality of life isn't what it is.

00:22:16:04 - 00:22:38:24

Keith & Andrew

And the level of pressure that's on those people is, you know, approaching or if it's not already unreasonable. Yeah, it's such a good point. I mean those I mean shelter payment for shelter, whether it be rent or through repayments, is always going to be the last thing to go. I mean you're going to do everything you can to avoid sort of living in the car or on the street kind of thing.

00:22:38:24 - 00:22:55:04

Andrew

So, it makes a lot of sense. So, I was going to ask you your view of the lay of the land sort of economically, but it sounds as though, you know, for the most part now, it's, you know, at the coalface at least, there's no obvious cracks, not to try to presuppose that there should be or that needs to be expected.

00:22:55:04 - 00:23:16:16

Andrew

But it's not looking particularly spicy for one of the better terms at the moment. Yeah. No, look, it's pretty good. I said the consumers at our levels are in pretty good shape but we're just really conscious about the way we deal with consumers so that we support them on that journey rather than make life more difficult.

00:23:16:16 - 00:23:38:13

Keith

You know, our success is born out over many, many years, not really over what we do over the six months. That's interesting, but it's not it that doesn't build longevity. And if we can look after consumers well and treat them well and make sure that they can get back on with their lives, that'll be really good.

00:23:38:13 - 00:24:10:10

Keith

The reality is, you know, consumers fall in and out of hardship and life goes on. But, you know, we really hope that yeah, you really hope that decision makers and policy makers are thinking beyond what feels like a relatively blunt instrument in interest rates. Yeah, about the real impact that's happening in the suburbs, in the streets, you know, with the young family that bought their first house or wants to and has two young children.

00:24:10:10 - 00:24:34:00

Andrew

You know they're unique circumstances and I know people on this call and people watching this and lots of them will have been there. Yeah, it's a challenging time of life. We're going through the process right now. I can tell you it's particularly someone who is self-employed. It is a nightmare. Yeah, it is. Right. And I mean, we're you know, we make all of that stuff so incredibly difficult.

00:24:34:01 - 00:24:55:03

Keith

I mean, in Western Australia where I am, you know, we were walking down the beach yesterday and just lamenting the number of vans or whatever that was selling product along the beach because we've got this magnificent beachfront, but no one can afford to be there because there are so many permits and so many licenses simply to set up a Mr. Whippy van.

00:24:55:03 - 00:25:15:20

Keith

I mean, it's madness. At what point are we goig actually support people to get ahead and to actually, you know, strive and make something of their lives? Stage three tax cuts probably don't help matters. That's right. That's right. That everyone saves $3 a week now. But in a couple of years time you're going to be paying more.

00:25:15:20 - 00:25:36:18

Keith & Andrew

It's so short-sighted. Yeah. gosh. Yeah. That is a very tempting rabbit warren to go down. But I won't. But I totally hear what you're saying. Actually, one of the things I was going to ask you is from your customers standpoint, how long are they typically with, you know, not the seller of the debt, but the repayer of the debt?

00:25:36:18 - 00:25:57:16

Andrew & Keith

Do they have a relationship 3 to 5 years on average with Pioneer? Yeah, it's about three years on average. Andrew. I mean, so you have customers that, you know, that clearly recover quicker. You know, like something happens, they get their job back or they get over their sickness or something like that and they pay out quicker, and then you have customers that go on payment arrangements.

00:25:57:17 - 00:26:23:05

Keith

So, we've got about $460 or $470 million worth of customers on regular payment arrangements. Yep. Typically what happens is they start off paying us over a longer period of time, let's call it ten years, for example. And then as their circumstances improve, that comes in. Yeah, but on average about three years for customers take to clear their obligation.

00:26:23:07 - 00:26:43:00

Keith & Andrew

Yeah. Hopefully in a manner that is manageable for them. That's what we're trying to achieve. That's excellent. I'll go to a couple of questions here just so I don't hog everything and just a reminder, use that link. If anyone wants to jump in with anything, a question here saying what's the biggest achievement for Pioneer since you last presented to Strawman in May?

00:26:43:00 - 00:27:05:01

Andrew & Keith

And what has been the biggest challenge over the same period? Sure. So, I may last year. I mean, what we said at the time, I think from memory is we had a couple of opportunities returned to profitability. We've had a couple of challenging years because of some private equity activity that's behind us now. So, we got back to profitability for the full year.

00:27:05:06 - 00:27:37:04

Keith

We expect this year to be materially better and we're well-advanced now with the appointment of a senior financier so that we can refinance at materially lower interest rates. We expect to announce that in the next week or so. Yep. Beyond that, the biggest achievement is I mean, we've continued to grow our market share across banking and finance.

00:27:37:04 - 00:28:02:05

Keith

We did a large acquisition of a competitor of ours, Panthera Finance. I saw that yeah. Was a large book that was all Commonwealth Bank-originated debt and a good relationship with them and that was a really important acquisition for us and one we're very proud to have completed. There was no competition on that in the sense that they were dealing directly with us.

00:28:02:06 - 00:28:32:03

Keith

They felt safe doing that and clearly the bank did as well. So those were really good things for us. Yeah, the biggest challenge, the biggest challenge, you know, I'm a relatively impatient man, particularly after the last couple of years. We would have liked to have had our refinance announced earlier, but it's taken a little bit longer than we would have liked.

00:28:32:03 - 00:28:55:03

Keith

Christmas was really quiet this year. Lots of people committed to being around, but it was dead and I think everyone had enough of 2023. So slowed us down a few weeks. So that was really frustrating outside of that. Look on a personal level, I've been traveling a bit too much for my liking, so I don't particularly like being away from home.

00:28:55:05 - 00:29:20:19

Keith & Andrew

Yeah, other than being on holidays, of course. So that was, that was challenging. Yeah, I did see in the latest update. I mean, just speaking of things sort of turning around a little bit, the guidance that you've put out there. So, looking at a couple of years is for FY26 net profit of at least $18 million, correct.

00:29:20:21 - 00:29:46:13

Andrew

When you say a return to profitability, that's a big that's a big jump. But the bottom line and I guess just for context, for those listening, you know, the current market cap of Pioneer is 40 million. So, you know, a forward p e of two. Yeah. Basically, what's the market not getting then? Look, I don't know. You know, it's all speculation.

00:29:46:13 - 00:30:08:06

Andrew & Keith

I know that is an unfair question in a lot of ways. no. But look, look, I don't know. I mean, I think you know that the market, there’s fly, sorry. The market's waiting for us to complete our refinance and reduce our cost of funds. We're going to save in the vicinity of 10 million bucks as soon as we do that per annum.

00:30:08:10 - 00:30:33:04

Keith

And thats doing nothing else. No change in any assumptions, just the lower interest rate on the debt. Yeah, that's big 10 million. Yeah. And that gets us back to an interest rate that's still higher than before this sort of COVID activity that we encountered. Yeah. You know, this is a business that was producing 20 million bucks a year NPAT the FY26 goes right back to what I said at the outset.

00:30:33:04 - 00:31:01:02

Unknown

You know, our management team and there's 11 people in the leadership in executive that are incentivised to get their incentive. They have three yearly hurdles. So, they have a percentage of against that their base pay and vest in rights. And then there's a final hurdle, which is the fourth year, which is FY26. And we must hit that for anything else to vest.

00:31:01:04 - 00:31:26:06

Keith & Andrew

So, we have to deliver $18 million after-tax profit. Otherwise, the last four years works or incentive is lost. Yeah, so I would say we're very, very confident about it. Otherwise, we wouldn't, we wouldn't put it out there. But that's the, that's, that's what, we expect to deliver at a minimum. Well, with that interest rate, saving certainly gets you a good chunk of the way there.

00:31:26:06 - 00:31:54:13

Andrew & Keith

And I'll just speak personally, it is nice to see a hurdle based on NPAT as opposed to EBITDA or exclude, exclude, exclude. That's the way look. I mean we produce an EBITDA number in our decks for no other reason than so many people think that it's the standard. Yeah, yeah, yeah. But it's EBITDA it's not a big deal with seven asterisks and all the carve outs.

00:31:54:14 - 00:32:18:13

Keith

Yes. It's EBITDA, you know, NPAT is actually NPAT we don't have, you know, you see companies with cash operating profit, less cash operating profit after tax, but before amortisation is now we have a net profit after taxation, it's very simple. It is what it is and off we go. But look, we're supremely confident.

00:32:18:14 - 00:32:40:09

Keith

We've done so much work. And I think when you talk about what the market isn't getting at the moment, we've got really good interest from fundies. I mean, we've only really been back marketing to them for just over a year now. It takes time to build that trust and that confidence with that part of the market.

00:32:40:11 - 00:33:09:17

Keith

We do have some buying the stock, a couple of good ones where we expect there to be much more activity once we refinance, we are not far away from that now, you know, and you know, then outside of that, there's a broad range of opportunities. This business has performed remarkably well at an operational level. We kind of think as much as it's frustrating because I think the share price will take care of itself in time.

00:33:09:22 - 00:33:31:19

Andrew & Keith

It will. It always does. I put that without it, for better or for worse. It always does. Yes. It's a whole being. Graeme Boating, this is Wayne. Yeah. And you know, certainly you're familiar with this, but I mean I think I've spent, you know, personally spent sort of three and a half, $4 million in stock over the course of the last sort of 18 months.

00:33:31:19 - 00:33:53:24

Keith & Andrew

So, you know, I'm a big believer in what we're doing. Yeah, I love that. While we're on interest rates there, what is the interest rate risk? So, you know, obviously, as you said before, no one sort of saw that. I think it was the fastest tightening cycle in history before it happened. And everyone's expecting sort of things to fall away.

00:33:53:24 - 00:34:19:09

Andrew

But, you know, things can sort of land in unexpected ways. How should investors think about the potential for adverse interest rate changes? And I guess the second level to that is, just like what is the cost directly to Pioneer the business, but also how it the second order impacts of how that impacts the price of debt ledges and the consumer's ability to repay existing debt.

00:34:19:11 - 00:34:53:10

Keith

Yeah, for sure. So, I think sort of tackling that in terms of the price of debt ledgors, I mean, I think if there was any marked increase in the cost of debt from here that would be exceptionally problematic for the sellers of debt. I mean, I think prices would drop quite dramatically. Australia typically hasn't been that reactive to interest rate changes and pricing compared to Europe in particular, which is much more sensitive to those things.

00:34:53:10 - 00:35:24:15

Keith

But it's a much broader market with many more purchases in the market. Yeah, but that's certainly one challenge I think that would happen in terms of our book, the very vast majority of our customers don't own homes, so they aren't as directly affected or immediately affected by interest rate increases. But certainly to your point, you know, the cost of shelter rises and that has some impact through it.

00:35:24:19 - 00:35:57:00

Keith

I think the biggest impact for us would come from, you know, any sort of more marked increase in the cost of interest rates would drive business insolvencies and unemployment. And that's where the risk for this business comes. Yep. I would hope sincerely that, and I truly believe we've got strong protections in place in the way that we value our assets, in the way that we run our assets, that we could still withstand quite a marked increase.

00:35:57:06 - 00:36:28:02

Keith

Yeah, but that's certainly the risk there, you know, from our perspective, from a modelling perspective, I think most of the banks maintain in fact, Commonwealth Bank still maintain six interest rate decreases in the next sort of 18 months. You know, we're not banking those into our forecasts, and that's one way that we typically run, you know, run resilience sort of planning across our balance sheet.

00:36:28:04 - 00:36:51:12

Andrew

Yeah, Yeah. It makes a lot of sense. It's speaking of Ben Graham, it's the margin of safety, I guess, isn't it? Yeah. So, I guess the other side of all of this too is that you said that the market share is sort of growing here and that is largely a sort of a duopoly, which is a nice position to sort of be in.

00:36:51:14 - 00:37:16:24

Andrew & Keith

Is there a well, how do you view the regulatory landscape? And I guess on one hand that's potentially a risk, but on the other, it acts as a big barrier to entry. So yeah, can you expand on your thoughts from that angle? So, when I talk about a duopoly, I'm talking predominantly about in the big banks, which, I'm sorry, the vast majority.

00:37:17:01 - 00:37:41:12

Keith

Then when you go to the non-bank financials, it's a little more competitive, although we think we have a dominant position there. And then when you go to telco utility, it's much more, you know, in terms of if we talk about the duopoly, I mean the first part to recognise is that won't always exist. So, you know, we're fully aware of that.

00:37:41:12 - 00:38:04:05

Keith

At some point in time you're going to get competition. But what's stopping it from happening now is, you know, coming out of the royal commission and there's been a lot of work around remediation over the course of the last few years. There's also been challenges in our sector around customer treatment. So, banks have essentially gone. Do you know what?

00:38:04:07 - 00:38:33:11

Keith

There are two incumbent players. They're both rational and they both provide a service which we know won't get us into trouble. Let's just stay there for the time being. Yeah, that works really well in terms of regulation. APRA, as a regulator of the banks has said to them, you know, it's great that you meet a standard, Mr. Bank, but your suppliers and we as a supplier must also meet those standards based upon the level of supply.

00:38:33:17 - 00:39:00:22

Keith

Yeah. So, the regulation that's pushed through to our business is very significant. You know, our compliance cost has risen threefold over the last few years. It's a big impost, but it also creates that moat around our business that's going to be difficult for someone without a bank contract in place to be able to put in place. And you can't get a contract if you haven't got it.

00:39:00:24 - 00:39:31:20

Keith

So, like I said, you know, we're not going to have it our way forever. And I think that the way that we talk about it here is if you respect your position, you know, clearly we want to leverage it. But if you respect the position and don't, you know, be precipitous about what the outcome is for you or greedy, for lack of a better description, it'll last for a longer period of time.

00:39:31:22 - 00:39:51:18

Andrew

Yeah, perfectly rational. And look, we've seen what's happened. You know, I won't mention names that we've seen elsewhere. What's happens when people overreach. And I think it comes back. It's one of the things that really stood out the first time we chatted was I think that, and you've highlighted it again here, that remuneration structure and alignment of interest because it is the kind of business in the way that the maths and the accounts work.

00:39:51:18 - 00:40:10:22

Andrew

You can really squeeze that lemon really hard in the short term if you want to juice things. But it probably comes at long-term costs and impact and as you say, sort of staying power is something that's worth being mindful of. Keith, I actually got through most of the questions that I wanted to ask you.

00:40:10:22 - 00:40:29:12

So, I guess I'll put it back to you. Is there something that we didn't touch on that you would have liked to expand on a bit? No, no. Look, I think we've covered, as always, you know, sort of broad reaching and we've covered the main parts. I mean, you know, this business is about consumers. It's about supply of debt.

00:40:29:12 - 00:40:55:18

Keith & Andrew

We've covered that. It's about consumers and it's about alignment. And I think we've covered the main parts of all of that Andrew across our business. Well, let me ask you this,  thinking and to say going into a future where there's a lot more free cash around, how do you and the team think about capital management?

00:40:55:20 - 00:41:12:08

Andrew

It is the kind of business that in a way is capital intensive. You've got a pile of free cash left over after a very successful couple of years. You can give that to me as a dividend. That's nice but you could reinvest it at higher rates of return through some attractively priced PDLs and other opportunities that might come along.

00:41:12:08 - 00:41:28:12

Andrew & Keith

So, I guess that the big question is how do you think about capital management in general. Yeah. And is a dividend something that might be? Look, I'm not I don't want to suggest that it should or shouldn't be, by the way. But is that something that's sort of on the agenda for the board. Yeah. So maybe let me answer it this way.

00:41:28:14 - 00:42:05:22

Keith

When I founded this business and listed this business. We had a maximum LVR I think about it loan against our portfolio of 60% and we ran it at 55. So, we had headroom where we're, you know, well above that now because of the circumstances of the last few years, it's entirely manageable, but it's not at a level that I feel entirely comfortable or where I think we should be doing so that, you know, we can withstand a shock should that come again.

00:42:05:24 - 00:42:36:23

Keith

Yeah. So, we think about capital in a range of ways. The first is we need to develop enough or grow enough free cash flow. So, we've got those options. We think that starts happening soon as the refinance occurs. There will be a period of time whereby there will be modest pay down of debt, but also looking at the balance of what can we reasonably buy that we can service properly that will deliver that same outcome.

00:42:36:23 - 00:43:00:08

Keith

And if I can explain that to you, to your listeners and to our shareholders, then clearly I think that's what we should be doing now. And then the alternative is I think dividends are an important part of a financial services business. You know, we expect to be paying dividends in the not too distant future. We typically paid out 50% of NPAT as dividends.

00:43:00:08 - 00:43:28:15

Keith & Andrew

I can't see why that's not where we should be back again. So, I think there's a range of things that will come into this, this business over, you know, over the course of the next sort of 12, 18, 24 months. Yep. Well, my final question, I guess, Keith, would be, I mean, we've sort of looked ahead about two years, but where do you sort of see Pioneer in five or even in ten years, what's the ambition?

00:43:28:17 - 00:43:58:03

Keith

Yeah, I don't I'm not someone that believes in you should have a business plan and aim for there because the world changes. And I think you see too many times where someone goes, I've got an exit plan, so you build a business for exit. And of course, things are changed. You can't exit. I'm very strong in believing what you need to do is you need to build the best possible business you can today, understanding what tomorrow brings, and making sure you get your you're working through that.

00:43:58:05 - 00:44:26:23

Unknown

You know, this is, to my mind, is $1,000,000,000 business. We should be making. You know, $30-35 million NPAT at the low end and we can probably get to 50 or 55 million at the high end in the markets that we operate. Yeah, I think once we're there and we are obviously a few years off that, but not as far as it might seem, You know, once we're there, then we know, then we need to understand what we're going to do.

00:44:26:24 - 00:44:54:16

Keith

I think talking with shareholders is a really important part of that. You know, I think one of the challenges with public companies is this growth at all costs mindset. Yeah. And you know, sometimes shareholders are just happy to be in what they're in. And I understand that, and you know so I think there's a conversation to be had with shareholders at the appropriate time around where we grow.

00:44:54:16 - 00:45:23:23

Keith & Andrew

How we grow, why we grow, even if we grow beyond having this business that drives really nice cash in the future. But like I said, we're a few years away from that. Away from that yet. Yeah. And so, I'm sorry just to finish that of the potential that comes from a combination of a growing market and increased market share alone or are there other sort of levers to pull on that?

00:45:24:03 - 00:45:50:08

Keith

Yeah, there's those. There's also the efficiency with which we run our business. We've done a lot of work in the last few years, Andrew, about decreasing our cost to serve. So, we're sitting in the high forties, so we're spending half our money basically of what we recover in servicing. We're down to the mid-thirties now. I think there's some opportunity to decrease that a little bit further in the future.

00:45:50:08 - 00:46:13:05

Keith

We've got a new core system going in that will manage our customer base that improves the efficiency of some of the parts of our business. Yep. And then there's also what comes with scale, which is, you know, our ability to buy data at a cheaper price point, our ability to buy a telco at a cheaper price point.

00:46:13:07 - 00:46:35:16

Keith & Andrew

Yeah, telco services and all the things that we use. So, there's a lot there and there's of course market share. But look, it's a fascinating business Keith and you've really helped us wrap our heads around it because it isn’t obvious and is a little bit different from other businesses, but you've outlined it really well and it's exciting to see the potential that's there.

00:46:35:16 - 00:46:52:22

Andrew & Keith

So, look, we wish you the very best of luck and we'd love to stay in touch and keep track of progress. Yeah, no, I appreciate your interest. And as I said before, Andrew, I mean, if any of your listeners or subscribers have any queries, our details are sort of published anywhere. So, feel free to get in touch with us.

00:46:52:22 - 00:47:03:11

Andrew & Keith

Really appreciate it. That's fantastic. All right. I'll let you get back to it. And good luck surviving the heat over there. Thank you. All the best. Thank you. And thanks, everyone.