Zip Co Limited

Thank you for standing by and welcome to the Zipco Limited FY24 results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you'd like to ask a question via the phones, you need to press the star key followed by the number one on your telephone keypad. I'd now like to hand the comments over to Director of Investor Relations and Sustainability, Rachel Cooper. Please go ahead.

Good morning and thank you for joining Zip's FY24 earnings call. To open, 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 an archive will be available on the ZIPS website. I'm joined today by ZIPS Managing Director and Group CEO Cynthia Scott and Group CFO Gordon Bell. We will start this call with some prepared remarks and then open up to questions. With that, I'll now hand over to our Group CEO, Cynthia Scott. Thanks, Rachel. Good morning and welcome to ZIP's FY24 results presentation. This morning I'll cover the FY24 highlights and regional business performance. Then Gordon will take us through the financial performance and I'll conclude with remarks regarding our FY25 strategy and outlook. Turning to slide four. We began FY24 with a clear and simplified strategy to deliver profitable growth product innovation and to drive operational excellence across the business. Zip executes strongly against each of its strategic priorities. We delivered profitable growth in both core markets and achieved record group profitability. We simplified our balance sheet and reset our capital structure, providing greater operational flexibility to drive future growth. Importantly, we've materially strengthened Zip's foundation and have the right settings, products and strategy in place to deliver on our significant future growth opportunities. Our key financial highlights for the group are set out on slide five. Revenue rose 28.2% to $868 million, while revenue margins continued to expand, increasing 96 basis points to 8.7% of TTV. Our cash net transaction margins expanded 96 basis points to 3.8%, and net bad debts fell to 1.7% of TTV down 18 basis points over the year. Across the group, we delivered $10.1 billion in transaction volumes, up 14% on the prior year, driven by deeper customer engagement across the business. And merchant growth continues, increasing 9.6%, with over 79,000 merchants on our platform, reflecting the strong demand we see from merchants to have Zip available for their customers. Turning now to slide six. Our focus on execution saw ZIP deliver four quarters of profitable growth, resulting in record profitability for FY24. ZIP achieved normalised group cash EBIT TDA of $69 million, a $117 million turnaround on FY23. This includes the impact of cash STI payments of approximately $10 million, which means that underlying cash EBIT TDA was $79 million, or a $127 million turnaround versus the prior financial year. In the Americas, cash EBITDA was a record $77.2 million, up $101.3 million, or 420%, from a loss of $24.1 million in FY23. Our ANZ business recorded a cash EBITDA result of $33 million, a $19.1 million improvement on FY23, despite a more challenging operating environment. Zip crossed a key inflection point in FY24. where economies of scale opened up significant operating leverage for the business. Over the year, as a group, Zip achieved 28% revenue growth, which translated to more than 240% growth in cash EBIT PDA. We will look to continue this focus on operating leverage in FY25, while making measured investments to support future growth. Moving now to slide seven, and our execution against our strategic priorities. As highlighted, we delivered growth and sustainable profitability and focused on product innovation, launching a new product in Australia, Zip Plus, and piloting a new Payonate product in the US. With a focus on operational excellence, we strengthened and simplified our balance sheet, removing all convertible note liabilities and repaying all corporate debt via an oversubscribed institutional equity placement and share purchase plan in July 2024. These actions have put Zip in a very strong position with no corporate debt and sufficient equity and free cash flow generation to support our growth opportunities. Turning now to slide eight, covering ZIP's focus on sustainability. Our business model is built on being a responsible lender and doing what's right by our customers, merchants and other stakeholders. We recognise the importance of financial wellbeing and inclusion and continue to focus on offering accessible, fair and flexible products that cater to diverse financial needs and circumstances. This year, we piloted a financial literacy hub for our most engaged US app users. The response from customers has been very positive, and we'll look to expand the hub to a broader range of customers in the coming year. For our Zipsters, engagement levels remain high at 80%, with minimal gaps between genders in our engagement scores. We remain committed to driving gender balance, including through our gender balance targets, and are pleased to report that 43% of our workforce are women and that we have 50% female representation on our board. During FY24, we continued our commitment to calculating and offsetting our greenhouse gas emissions across all three scopes and increased our ESG transparency, participating in the carbon disclosure project and corporate sustainability assessment. Turning now to slide 10. Before I cover the operating results for each of our core markets, I'd like to provide some insight into how the ZIP leadership can drive performance. both at a regional and group level. As you'll see on the slide, at a regional level, we measure growth and performance through total transaction volume and the number and engagement levels of active customers. As highlighted earlier, managing our cost base and delivering scalable operating leverage is a key component to delivering strong results through the cycle for ZIP. For regional profitability, we assess revenue margin, cash net transaction margin, and regional cash EBITDA generation. And at a group level, our primary profitability measure is operating margin. And we monitor our return on allocated capital to ensure we're operating in an efficient manner. Moving to slide 11 and the operating performance of the US. Our American business had an outstanding year. We delivered record TTV growth of 39.5% and revenue growth of 45.6%. driven by continued optimisation across product and underwriting and deepening customer engagement. Although active customer numbers were slightly subdued during the year, we've seen strong growth from existing customers in both revenue per customer and transactions per customer, particularly in higher margin channels such as the app. The American business delivered a 420% turnaround in cash EBIT PDA versus FY23 with a result of $77.2 million. demonstrating the capital efficiency of the US business and its ability to produce sustainable profits at scale. Higher margin channels, including the physical card, saw strong in-store engagement, with card volumes up nearly 150% versus the prior year and in-store volume now driving 20% of all US PTV. And we expanded into new verticals, including automotive, and commenced vertical-specific marketing efforts. including sponsorships with NASCAR and Speedway Motorsports, and signing brand ambassador, WNBA star and Olympic gold medalist, Kelsey Plum. Slide 12 covers credit performance, US credit performance, in more detail, and demonstrates how Zip has delivered significant growth while maintaining loss rates below our target range. The US business exited FY24 with significant momentum, and in July, we welcomed Joe Heck as US CEO, with Larry Diamond assuming the role of US Chairman and remaining as an Executive Director on the ZIP Board. I'd like to recognise and thank Larry for the significant contribution he's made to strengthening the foundation and leading what has been an outstanding milestone year for the US business. On to the ANZ operating results now on slide 13. The ANZ business continues to deliver very strong results. In addition to record cash EBIT PDA results, Zip ANZ saw strong revenue growth of 13.5% and revenue margins widened nearly 290 basis points to 11.7%. As we've discussed throughout the year, in FY24, the ANZ business settings focused on driving yield and ANZ TTV and customer growth were tempered by deliberate adjustments made to credit risk settings in response to the external environment. However, pleasingly, We've seen early success in our Q4 initiative to pivot the ANZ business to focus on profitable growth, with an increase in customer engagement in June versus March. We've also seen strong customer engagement and positive improvements to margins with the launch of our low-rate virtual credit card product, Zip Plus, which complements our existing Zip Money and Zip Pay products. And new merchant growth remains strong, with an uplift across targeted verticals, including travel, ticketing, telecommunications and healthcare. Turning to slide 14 for more detail on the performance of the Australian loan book. Increased yield, strong portfolio management and ongoing initiatives to tighten funding costs delivered strong excess spread from the Australian loan portfolio. We're pleased with this result, particularly when compared to the Australian consumer credit market more broadly. And on net bad debts, shown in the graph on the right-hand side, We reached a seasonal peak in June of 2024, which has begun to normalise in July, down 40 basis points month on month. Careers are also trending favourably, which supports future loss performance. I'll now hand over to Gordon to cover the group financial performance.

Thank you, Cynthia. Starting with slide 16, as highlighted earlier, Zip achieved an outstanding positive cash DBTDA result of 69 million for the full year 2024. Cash growth profit was 372.9 million, up 52.8% from the full year 23. This was driven by the strong performance in revenue as a result of TTV growth in the Americas and further yield expansion in the Australian portfolio. During the year, we continued to exercise a disciplined approach to managing costs across the group as demonstrated by our cash operating expense outcome. Now that Zip has reset the baseline for operating costs, we will manage costs going forward in conjunction with growth opportunities and the unit economics we have developed. For the full year, Zip delivered a statutory net profit before tax of $25.1 million. And I'm pleased to be able to say today, this is the first year in Zip's corporate history we have delivered a statutory profit before tax. The appendix shows the breakdown of the non-cash items and the reconciliation from cash EBCDA to statutory profit. The main movements relate to depreciation, amortization, and the one-off adjustments in FY24 from convertible note transactions and the extinguishment of the corporate debt facility. Moving to slide 17. As Cynthia outlined, during FY24, we focused on improving all aspects of our business, which would translate into great outcomes and leverage in our unit economics. Throughout the year, we were able to absorb the increased cost to fund receivables and manage both bad debts and other costs of sales to generate a 52.8% increase in cash gross profit. The bad debts written off as a percentage of TTV was a particularly strong result against the general worsening of credit conditions in the Australian and the US economies, which have seen an increase in delinquencies in a number of other asset classes. The performance for all aspects of unit economics contributed the 96 basis point increase in our cash net transaction margin to 3.8%. Moving to slide 18, this provides the year-on-year walk for the cash NTM. The 96 basis points improvement in revenue margin was the key contributor to NTM expansion driven by the benefits of ZIP's two-sided revenue model and higher margin products. This increase more than offset the 30 basis point increase in interest expense, reflecting the impact of rising interest rates mainly on Australian cost of funds. Net bad debts improved to 1.7% of TTV, reflecting ongoing discipline with credit settings and active portfolio management in both core markets. The resulting 96 basis point increase in cash transaction margin is a very strong result in the current environment where margins have been challenged across other sectors. Moving to slide 19 on cash operating expenses. Overall, cash OPEX was up 2.6% on FY23 levels. However, when adjusting for the $9.8 million of STI to be paid in cash, and enabling a like-for-like year-on-year comparison, the FY24 cash OPEX would have been 297.1 million, which is marginally down on the FY23 number of 299.3 million. This outcome is especially pleasing when considering the inflation backdrop in both Australia and the US over the past 12 months. Strong cost disciplines shown across the group in FY24 has delivered the operating leverage we'll continue to use as the business scales. Salaries and employment-related costs declined 3.8%, reflecting actions taken in late FY23 and continuing into the full year FY24, which streamlined our operations and our cost base. Marketing costs declined 7.6% year-on-year due to disciplined merchant promotions, particularly in the US. The movement in IT costs reflects proactive actions taken to review and rationalise supplier costs. Finally, other operating costs increased due to a larger corporate debt facility compared to the prior year. Moving to slide 20, the next few slides starting with this cover the group's balance sheet and capital position. Slide 20 provides a breakdown of our cash position along with the year-on-year movement in available cash. In the chart on the left-hand side, you'll see the breakdown of ZIP's $353 million total cash position. After we allow for cash held at balance date that was unavailable, and we include cash that may be withdrawn from our funding vehicles, ZIP has $80.4 million in what we define as available cash at 30 June 2024. On the right-hand side, you'll see the material movement and improvements in our available cash position was driven by both operating and non-operating cash flows. Pleasingly, operating cash flows, which comprise cash EBTDA, CapEx, working capital and funding requirements, contributed a positive 18.4 million of cash inflows. This was driven by the group's strong operating results, offset by floats and working capital required to fund the TTV growth in the US. Non-operating cash flows of $4.7 million include inflows from the release of restricted cash in funding facilities and the exit of non-core businesses completed in the full year 24. This is offset by the partial repayment of the corporate debt facility of $20 million, which occurred in the fourth quarter, and the repayment of $10.8 million in principal and interest for the CVI convertible notes in the first half 24. Collectively and altogether, these actions delivered a $23.1 million improvement in our available cash balance since June 2023, further strengthening our balance sheet. Following the year end in late August, ZIP finalized the share purchase plan portion of the announced equity rates. This contributed an additional $50 million of cash available to the group. Slide 21, outliers the financing facilities in place for Zip's receivables and our headroom for future growth. Over the course of FY24, Zip refinanced $1.97 billion of receivables across Australia and the US. With the improvement in corporate performance and our receivables credit performance, we have been able to refinance a majority of our financing facilities, especially in the second half, with extended tenor and at materially improved credit margins. In the US, we refinanced our $225 million facility in December with a three-year term to December 2026. This facility also had the option to upsize to US $300 million with the financier. In Australia and New Zealand during the year, we completed a number of refinancing arrangements. The highlights included two $300 million rated issuances with the senior tranches both being AAA rated. We refinanced our primary warehouse, VFN1, in March, and in April established a new 300 million facility, VFN3, with new investors. We also repaid early one of ZIP's smaller receivables warehouses, VFN2, on commercial grounds. Pleasingly, our progress this year on financing is evidence of the strong support we're seeing from both existing and new investors. Australian refinancing activities for the first half 25 are well-progressed, with two initiatives in their closing stages to refinance the September ABS bond maturity of 700 million. You'll see the table on the right. Firstly, we are on track to settle a new $300 million warehouse facility, labelled VFN4, we're at the documentation stage and the agreed pricing with new and existing investors involved in this transaction. Secondly, last week, we launched and priced a $350 million rated ABS public issuance, labeled series 2024-2, which had a weighted average margin of 2.13%, which is tighter than our April bond deal. Of note, the demand and interest from existing and new investors and this bond will settle in September. Across the Australia and US marketplaces, we have sufficient funding headroom support receivables growth, currently sitting at $269 million of headroom in Australia and $37 million US headroom in the US, with an additional $75 million US available through our facility upsizing option. Our refinancing activities through the year have positioned us well to support our strategic growth initiatives as we move into FY25. Moving to slide 22. On the capital structure during FY24, ZIP executed a number of transactions to simplify the capital structure and set our group up for the future. These transactions have resulted in the extinguishment or conversion of all of the $340 million of convertible notes which were present at the start of the year. The conversion into equity for the public convertible notes and the completion of the shareholder sale facility earlier this year enabled an increase in ordinary shares available, which have largely been taken up by institutional investors and strengthened the share register. As of 30 June 2024, Zip had $130 million of corporate debt outstanding, which was repaid in July following our successful institutional equity placing. I'm pleased to announce that today Zip has no corporate debt. Overall, our strengthened financial position and our available capital has Zip well positioned for future growth. I'll now hand back to Cynthia to cover the group's strategy and outlook.