Zip Co Limited

Thank you for standing by and welcome to the ZIPCO Limited half year 24 results briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to the Director of Investor Relations and Sustainability, Vivienne Lee. Please go ahead.

Good morning and thank you for joining ZIP's first half 24 earnings call. To open the call, I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal of the Eora Nation and pay my respects to Elders past and present. This conference call is also being webcast and both the results presentation and call details are available on the ASX. I'm joined today by ZIPP's Group CEO, Cynthia Scott, Group CFO, Gordon Bell, and the Group Executive Team from ZIPP. We will start this call with some prepared remarks and then open up to questions. With that, I'll now hand over the call to our CEO, Cynthia Scott.

Thanks, Vivienne. Good morning, everyone, and welcome to ZIPP's first half 24 results presentation. At the start of FY24, we said that we would achieve positive cash EBIT TDA during the first half of 24. We achieved this important milestone in Q1 and have gone on to report a strong positive cash EBIT TDA result for the half of $30.8 million. This result was driven by successful execution of our strategy in our two core markets, ANZ and the Americas, and we're focused on maintaining that discipline and execution for the remainder of FY24. Our key financial highlights are set out on slide three. As you can see from the chart, the positive group cash EBIT TDA of $30.8 million for the half is a turnaround of $64 million from the prior corresponding period. Cash net transaction margin expanded 90 basis points to 3.5% and cash gross profit was up 45.9% with credit losses remaining stable at 1.9% of TTV. This performance was achieved despite a challenging external environment and a significant increase in interest rates, reinforcing the continued relevance of our products and the important role they play for our customers and merchants. Turning now to operating highlights on slide four. In the first six months of the year, we delivered $5 billion in transaction volumes from more than 38 million transactions. This was driven by a particularly strong performance in US volumes and increased customer engagement. Group revenue was up 28.9% to $430 million, and our revenue margin increased 130 basis points to 8.5%. Active customer numbers finished the half at 6.3 million, with customer growth impacted by our deliberately conservative risk settings. Merchants on our platforms grew 9.3% to over 76,000, reflecting the strong demand from merchants to have this available for their customers. Turning to slide five and our progress against our FY24 strategy. At the beginning of the year, we set out three clear priorities aligned to our regional strategies, capabilities and competitive position. We said that we would focus on driving profitable growth in our two core markets, innovate new products for our customers and merchants and continue to strengthen our balance sheet and deliver operating leverage. As you can see on the left, the US had a particularly strong seasonal half with record volumes up 33.3% year on year. This was achieved while maintaining strong credit performance in line with our strategy to deliver sustainable, profitable growth. In Australia, we launched a new product in November, Zip Plus, driving the next horizon of growth and designed for an environment where we may see higher for longer interest rates. In delivering on operational excellence, we took further actions to strengthen and simplify our balance sheet, with a new $150 million four-year corporate debt facility. We also saw continued deleveraging of the balance sheet, with ZIP's convertible notes reducing from a total of $340.2 million in June to $68.8 million at 31 December. Finally, we took actions to simplify our shareholder register, completing a small shareholding sale facility, which will deliver administrative cost savings to ZIP. The collective impact of these actions can be seen on the next slide, which captures the significant improvement in our financial performance. Twelve months ago, we reported a loss of $33 million. Today's result of positive cash EBIT TDA of $30.8 million reflects disciplined execution of our simplified strategy and reinforces our position as a self-sustaining business. Turning now to slide seven. Zip is committed to delivering sustainable outcomes for all its stakeholders. For our customers, we remain committed to responsible lending, advocating fit-for-purpose regulation with strong consumer safeguards, like Zip has in place, and supporting customers to develop financially responsible behaviour, such as through our work with debt relief charity WayForward or our financial education modules we provide US customers through our app. Zip remains focused on continuous improvements to our cyber security resilience and the protection of customer privacy and data. And during the half, we uplifted our policies and controls to align with the latest international information security standards. We're committed to driving gender balance at all levels of the company. Female representation is currently 43% of our total workforce, with 60% female representation on our boards. Finally, we continued our commitment to being climate neutral and progressed our work on climate-related disclosures. We measured and disclosed our scope 1, 2 and 3 greenhouse gas emissions and invested in carbon offsetting initiatives to neutralise our emissions, as we've done for the past three years. Before I step into the detailed performance of each region, slide 9 is a reminder of the important and unique role each of our core markets hold in the longer-term opportunities of this. As we continue our focus on driving sustainable profitability, in ANZ we will leverage our position as a profitable at-scale business with significant market share in unsecured consumer finance solutions. We're continuing to focus on product innovation that will drive the next phase of growth in Australia. This will include new capital-like products that broaden our financial services offering, increase our engagement with customers and deliver new revenue streams. In the US, Having reached cash EBIT TDA profitability, we're well positioned to drive incremental profitable growth and scale while we continue to innovate for our customers and merchants. On to slide 10 to discuss the performance of the America's business. Having spent some time earlier this month in the US, I was reminded of the sheer size of the $11 trillion payments opportunity and how early the point of sale credit journey is in the US, which is still below 2% of total payments. and which Zip is well-positioned to capture. There's a tremendous growth opportunity across both online and in-store for Zip's products. With more Americans wanting to budget in a way that is inclusive and flexible, Zip is playing a greater role in providing short-term unsecured credit to the over 100 million adult Americans underserved by the traditional finance industry. With a firm focus on strategy execution, The Americas business generated strong positive cash EBIT PDA in the first six months of FY24, demonstrating the potential of this market. Record top line growth of $3.1 billion in transaction volumes and $214.7 million in revenue was generated during a particularly strong seasonal uplift during the half. This was driven by increased customer engagement through higher margin channels such as the app and in-store. As reflected in the chart, TTV and transactions per active customer were up 36.2% and 30% respectively, well ahead of FY23 levels on an annualized basis. While customer numbers declined slightly versus the first half of 23, we've seen good momentum in the customer base, with MTUs up 10% on average versus the prior corresponding period. Our product strategy is progressing very well, with high engagement through our app. We're demonstrating product-market fit with our physical card, which is continuing to drive incremental volumes and engagement. We've continued to add cardholders, who are now generating over 30% of in-store volumes, up 311% year-on-year. And we've outperformed relative to the macro environment, with this volume growth at 33%, highlighting the strength of our product offering. Turning now to slide 11. This slide covers US credit performance in more detail and shows that as volume growth has accelerated, we've successfully maintained bad debt performance below our target levels. This reinforces the capabilities of our sophisticated credit decisioning platform that enables us to provide appropriate credit to America's underserved customers and respond quickly to changing market conditions throughout the credit cycle. Our focus on credit performance saw Zip maintain loss levels at or below 1.4% of cohort TTV as we scaled new product features to drive responsible repayment behaviour. These included features such as enabling self-service for payment date changes, flexible instalments and gamified repayments. We've continued to strengthen our proprietary credit decisioning capabilities with cash flow underwriting and new machine learning models for returning customers, which will provide ongoing support to the business as we scale further. Turning now to ANZ on slide 12. The ANZ business continues to deliver very strong results. Revenue was up 23% year on year, with revenue margins expanding 320 basis points to 11%, reinforcing the strengths and benefits of our two-sided business model. While TTV and customer growth were tempered by deliberate adjustments to our credit risk settings, we delivered a solid cash EBIT TDA result as revenue growth more than offset the significant increase in funding costs over the period. With 2.3 million active customers and over 10 years of operating data, we have a deep understanding of our customer needs. In November, we launched a new product in Australia, Zip Plus, to an existing group of Zip customers, providing access to greater spending power and financial flexibility. Zip Plus has been designed for an environment where we may see higher for longer interest rates, and is expected to drive TTV and margin growth over time. While it's early days, customer engagement has been strong, with 93% of customers liking or loving the new product, and recent transactions per MTU have been double that for Zip Pay customers. During the half, we also launched with a number of new merchants in targeted verticals, including Telcos with Amazims, and bolstering our presence in healthcare with HBS Dental. verticals where we continue to see ongoing consumer spending despite a softer retail environment. Our strong market position in the travel vertical is performing well, and our differentiated Zip Money product positions are strongly in this vertical. Moving to slide 13 for more detail on the performance of the Australian loan book. With our account-based product construct in Australia and well over $2 billion in receivables, returns and metrics on the loan book is the best way to think about the performance of the business and the significant future outside. The chart on the left-hand side shows the return on the loan book, or excess spread, similar to a net interest margin measure. Highlights from this train portfolio were the improvement in yield to 17.5%, up 338 basis points over the last 12 months, and the increase in excess spread. Excess spread was up 106 basis points to 6.2%, despite a $27 million increase in funding costs versus the first half of 23, demonstrating the resilience of its business model in a rising interest rate environment. The right-hand side provides further detail on our credit performance. The chart shows an improvement in the inflated arrears that we saw in the second half of 23 as a result of the softening in the broader consumer credit market. As we've consistently demonstrated, we have a proven ability to manage credit outcomes through different external cycles. Our product construct and capital recycling provides it with a unique advantage and the ability to respond quickly and adjust risk settings as needed. Actions such as tightened lending criteria and reduced exposure to higher risk customer cohorts have driven an improvement in credit quality and loss performance, which you can see particularly as we exited the first half of 24. And we expect net bad debts to continue to trend down during the second half. I'll hand over now to Gordon to cover ZIP's financial performance.