International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2018-Q1

[Gerard Jude Ryan, Chief Executive Officer]

Thank you, Sylvia, good morning, everybody, and thank you for joining us this morning. I'm here with Justin Lockwood, our CFO. And we'll be happy to take you through our update for the quarter. First of all, let me apologize for the delay in starting. I know some of you have had difficulty getting in, so that's just the reason why we're a little bit late at than usual. Hopefully, you've had a chance to pick up the statement and have a read of it and if you did, you'll see that we had a good start to our year and we're trading in line with our own internal plans. So for the group, as a whole, we delivered credit issue growth of 3% year-on-year, and this was driven primarily by our growth engines, which are IPF Digital and Mexico home credit business. We continue to trade in what I would describe as an intensely competitive environment, particularly in Europe, and a challenging regulatory environment as well, but our credit issue growth in home credit in Europe contracted slightly, which was not a surprise for us. So we're okay, with that for the first quarter. I'm particularly pleased to report that credit quality and our collections performance continues to be very good and our annualized impairment as a percentage of revenue, you'll see, stand at 26.4%. Now that's an improvement of a full 1.4 percentage points over the same period at the end of 2017. Now you'll have picked up from the statement that all of these numbers are now under the new IFRS 9 standard and that will be the case, obviously, for all future releases. Now on the funding front, we've maintained a robust balance sheet and headroom on our facilities, currently stands at a touch under GBP 190 million. So if we move briefly onto the trading operations and starting with European home credit, as you know we agreed at the last update to the market that we would report the European home credit as a single entity. So in line with our expectations, as I mentioned just above, we saw a modest contraction of about 4% year-on-year in our top line there, but within that result we saw a much better than expected outcome in Romania, because when we compare that to Q1 2017, in Q1 '17 we were betting in the new rules there and so the comparatives are easier for us. The overall quality of the portfolio is good and together with really good collections, we saw a 1.7 percentage point improvement in the annualized impairment as a percentage of revenue, so that now stands at 19%. So clearly, significantly below our target range of 25% to 30%. Now before we move on to Mexico, and sticking with the Romania, I do want to comment on the regulatory piece there. Well, you'll recall that at the time of a full year results, we explained that there was a proposal to introduce an APR cap in Romania for both new and existing credit and that the captured stand at 18%. Now at the time, it was proposed that, that would be, I would say, rushed through and there was a possibility it would've been done in a matter of weeks. The fact is that there is, now, I would describe, a much more robust and erudite debate is going on as to what an appropriate cap might be, both for the market participants like ourselves and also for the consumers. But the proposal, as it stands is 18%. The fact that it has been delayed, in our view is a good thing, it has yet to come to committee stage before it would then travel on to the lower chamber. There are now lots and lots of key stakeholders who are involved in this debate and the debate is, I would characterize, at this point, reasonably mature. So the idea of rushing through '18 seems to have gone and there is a genuine debate about what should we do. But in any event, we do expect that there we will be a cap introduced in Q2, and so we just wanted to reiterate what we've said at the year-end results and, of course, we will update the market at our half year results once we've had a chance to digest whatever the cap is that does come into place and its potential impact on the business. So to sum up for Europe as a whole, we delivered a good operational performance. We're remaining focused on improving the sustainability of our businesses there and we're doing that by investing in technology to make the business more modern and more efficient, and at the same time, driving improvement in portfolio quality, which you can see coming through Q1 numbers. So if we turn now to Mexico, my whole executive team and I spent all of last week in Mexico, and I have been at there 3 or 4 times already this year. And I would say we came back really energized by what we saw in the business, really good momentum there. Team very strong and very positive about their prospects and what they are delivering. Now the facts in growth that you saw on quarter 1 was against a very tough set of comparatives for Q1 2017. So as we move through the -- we do expect to see an acceleration of growth coming out of Mexico. And that we will be driven by a number of areas. So as you know we are opening 5 new branches this year. They will all be complete by the end of Q2, so they would bring on some growth. And clearly we opened a similar, it was 6 branches last year and the year before, so those are beginning to have an impact in the business in terms of top line. And what was particularly pleasing, we saw when we were there last week, is that we're also driving much better productivity as of the existing branch network, and so that's contributing to the top line at this point. And then finally, of course, you have Negocio, which is our micro business lending unit where we're investing a reasonable amount of money, because we see a really big opportunity for that business in Mexico. So for the year as a whole, we are reiterating our expectations that we'll deliver credit issue growth in the range of 12% to 15%, which is exactly what we said at the year-end results. In terms of portfolio quality, where collections were good by our team there and impairment as a percentage of revenue on the annualized basis stands at 36.1%, and we expect this to trend towards our 35% target under IFRS 9, by the end of this year. And then moving on to IPF Digital. Well, once again our teams there delivered a very strong top line number and improved credit quality. So we're seeing good momentum in the digital businesses, we have credit issue growth of 24%. And as you know, we split those business into established and new. The established being the Central Baltics area, a new being Poland, Spain, Australia and Mexico. Now for the established markets, we continue to be very pleasantly surprised with the growth rate coming out of those and we delivered 21% growth in the first quarter there, driven by a particularly strong result in Finland, where the popularity of our credit line product, which is the revolving facility is proving very strong indeed. As for the -- and I should say that we should expect that growth rate on the established markets to moderate as we go through the year, I think, it would be amazing to see that continue, but we're very pleased with the first quarter there. In terms of the new market, credit tissue growth was at 29%, and we expect that to accelerate as, we go through the year, and the reason we expect that is, clearly we're investing more money, particularly in Poland and Spain, where we're building out the brand and getting our presence more widely known. So we expect good, strong delivery from those 2 markets as we go through the year. As for the credit quality, as I mentioned, it is improving and impairment to revenue, we saw at 41.1%, so that's improved from 45.6% at the year end. And clearly as the book matures, we would expect that to improve over time. So that's it for the Q1. So in terms of the quarter, we were happy with the quarter, a good start to the year, in line with our plan. And as we look ahead, clearly continuing to optimize our operations in Europe on the home credit side. Obviously, we have to have a really good focus on the regulatory developments that we're seeing in Romania. There is no new news on regulatory in Poland. I should just say that for clarity, there's nothing new to come out of there, and then we're particularly pleased with what we're seeing coming through in Mexico and Digital and reiterating our stance for Mexico there as well. So with that, if there any new developments on Romania that are not in line with what we said here, we -- clearly we would come back to the market, but our expectation is that we will update the market at the half year. So Sylvia, with that I hand it over to you to see if there any questions that either Justin and I can answer for people on the line.

[Operator]

[Operator Instructions] And our first person from the queue is Gary Greenwood from Shore Capital.

[Gary Greenwood, Research Analyst]

It's Gary, Shore. And just a couple of questions around sort of regulation, really. I hear what you're saying on the Romania, which sounds encouraging in terms of sort of more grown-up debate there. Obviously, as you said, there's not been sort of further progress from the Polish Ministry of Justice. Are you getting a sense the sort of regulatory pressures while still tough, and may be sort of starting to ease a little bit in Eastern Europe in the sense these debates are becoming more sensible now and there's more thought been put towards there. So that's the first question. And the second question, if you could just remind us where you are up to in terms of the dispute with the tax authorities in Poland and just remind us the timeframe for the appeal et cetera?

[Gerard Jude Ryan, Chief Executive Officer]

Yes, okay. How could you let go? So on the regulatory front, yes, it is pleasing to see that, as you used the word, a more matured debate, and I would say that's a good description in Romania. Clearly, as always, I carry out these by saying we're dealing with politicians in the main and at any point in time opinions can change. But I would say that we're being very successful with others in getting the message across that there should be a space for our type of business in all of these markets because we help our consumers to build a credit profile that helps them to go on subsequently and obtain finance whether it would be cheaper finance or moving into banks and stuff like that. So I think we play a really important role for introducing people like that into the consumer finance market. And the stakeholders that we talk to are more and more willing to engage in that discussion. As to whether that says that over Eastern Europe as a whole, there's less pressure, I think probably the less pressure is coming from the fact that practically all of our countries now have a cap of one form or another. Clearly the exceptions are Romania, Czech and Spain. Romania, we know what's happening there. Czech, there's a discussion that's going on there and has gone on for a long, long time. And Spain, we just think will come in due course. And so once all of these countries have caps, our expectation[Audio Gap] of tweaking than anything radical. Now clearly, if market participants step out of line, you would expect some regulatory action but by and large, I think, market participants play by the rules. So yes, I would like to think that as these last caps come into place, then we will have, I suppose, a new playing field as it were, and regulators would be willing to stand back and see how that works. On the tax front, Justin, do you want to comment?

[Justin Lockwood, Chief Financial Officer]

Yes, so Gary, you recall that we decided to move the tax dispute into something called mutual agreement proceedings, which is this, the negotiation process between the Ministry of Finance in Poland and HMRC in the U.K., because you've got 2 statutory entities in different countries that are impacted by this decision. We are providing information to both parties as part of that process. But as we, I think, indicated before that it can take up to 2 years for the 2 parties to come to a decision and if they haven't come to a decision after the 2-year period, then there's a further 6 months of arbitration. So we're continuing to provide information into that process, but there's no real material, well there's no update at all in terms of the process. So we expect it to be a long-running process.

[Operator]

And now we'll take our next person from the queue who is Owen Jones from Citigroup.

[Owen E Jones, Analyst]

A question on Mexico. Should we think about any further branches being opened in the second half of the year versus the 5 that you mentioned for the second quarter? And we've been in the situation before where we've seen you expanding in Mexico and it hasn't always gone to plan in terms of the actual rollout. It will be interesting to hear your thoughts about how you're approaching this rollout with expansion of the branch network, given what happened in Mexico before, perhaps how you're thinking about it differently or how you're approaching it differently this time around? And then a quick question on IPFD. In terms of the accelerated growth that we saw in the established markets during the third quarter, appreciate you've said that you expect that to moderate during the rest of the year. Does the increase uptick of the strong demand for the credit line product, does that do anything to your expectations with regards to the P&L for that business, given sort of the rates and utilization et cetera?

[Gerard Jude Ryan, Chief Executive Officer]

Okay, on -- Its Gerard here. Okay, so just to deal with them in order. In terms of the branches, we are going to open 5 this year, and those 5 will all be complete by the end of this quarter, quarter 2, and we won't be opening any further branches for the second half of the year. So the way -- you're quite right, we learned a lesson a couple of years ago in terms of management stretch, I suppose, and so the way we do it now and have done last year and this year again, is to open them in a condensed period with a very targeted effort by a specified group of people whose only focus is to open those branches. So all of them will be done in Q2, nothing in the second half of the year and for us then, and we've proven this last year, that makes it far more digestible and gives us the second half then to get those branches established, as it were, and working effectively by the end of the year. So our view would be that the plan that we have in place for those branches, and also, I think you could take into account the expansion of Negocio, our view is that we have a robust process in place, both in terms of capacity and timeline to deliver those without upsetting, what I would call the BAU side of the operations. And as I said, Justin and I and the rest of the exec team spent all of last week in Mexico, and clearly we went through all of those plans in detail and we feel comfortable that they will be delivered according to plan.

[Justin Lockwood, Chief Financial Officer]

And then just to add to that. I think the year that you're referring to, we were actually planning to open 10 branches in that year, and we decided to scale that back to the 6. And 6 is the number that we successfully opened in 2017 and that's we're trying to do again in '18, what we are doing in '18.

[Gerard Jude Ryan, Chief Executive Officer]

And then just move onto your third question, the IPFT one. Yes, credit line is responsible for the growth there and its really proving to be a very, very popular product, because it's easy for the customer to use, essentially they don't pay anything for the product until they start to use those and as soon as they repay us under whatever timeline they like where as long as they are making the minimum payment to do, then they just pay for the period of use and it's proving to be very attractive, very easy for customers to use. And that's generating a lot of this volume. The great thing about this, it's also, what I would call a very sticky product, because it doesn't have a finite end date as it were. It's not like an installment loan. So the customer pops in and out of it as they require the facility. Now your question is, will that then impact the financials in a different way to, let's say, installment loan and the answer would be no, it's essentially a drawdown by the customer. They pay for their outstanding balance at our standard interest rates and that just flows through the P&L as normal.

[Justin Lockwood, Chief Financial Officer]

And no change in our expectations for the result for IPFT for the year as a whole. We're just very pleased with the first quarter's performance.

[Owen E Jones, Analyst]

Okay, great. A quick follow-up, if that's okay, just on Mexico. How do you see the competitive environment after revolving the first quarter, given your, I guess, pretty good performance in the first quarter of 5%. How does that compare to what you've seen so far with your competitors?

[Gerard Jude Ryan, Chief Executive Officer]

It's a very interesting question, because when we were there last week, our competitors, our major competitors published their results and the vast majority of them actually had a really difficult quarter. What we saw is that a number of our competitors tried to expand last year. They've suffered some indigestion and their impairment seems to have gone up significantly. In some instances, we've seen significant reductions in customer numbers. We view that as being a clear out of some business they've written there, but they can no longer collect. There is one competitor that is doing very well, but they're doing extremely well because not only do they have a finance company, but they also have a very large retail outlet, or not outlet, but a number of stores. And so they attract customers at the point of sale. But for other, more traditional competitors like ours, they seem to have had quite a difficult quarter. So for us, it made us feel relatively speaking, even better about our team's performance in Mexico for the quarter.

[Operator]

[Operator Instructions] We will take our next person from the queue who is Mark Thomas from Hardman.

[Mark Thomas, Analyst]

Just a quick one, if I may. I'm just trying to reconcile with Romania that the credit issued growth was stronger-than-expected against, obviously, the regulatory side. So just wondering if you could comment on this point of growth that you're seeing there?

[Gerard Jude Ryan, Chief Executive Officer]

Mark, it's very standard. It's our normal product. The reason why the growth rate looks particularly positive is that Q1 '17 was a particularly difficult quarter, because in Q1 '17 we had to introduce new regulations that saw a dip in the volume of business we were able to rise. Those regulations clearly were embedded in throughout '17 and so with that now being in place, when you look at Q1 '18 versus Q1 '17, you see a very positive picture, but notwithstanding that, the team are doing very well.

[Justin Lockwood, Chief Financial Officer]

Just to add to that. You recall from our full year announcement that our business in Romania has become regulated by the National Bank in the first part of 2018, so in February. And that's required us to make some further changes to our credit settings. And our expectations were that, that would have a significant impact on volumes and actually the performance has been a little bit better than we originally have estimated. And that sits on top of Gerard's other comments.

[Mark Thomas, Analyst]

And just a follow-up, if I may. If the cap was introduced with the level which is proposed, and it's applied retrospectively, would the new lending in Q1 be profitable?

[Gerard Jude Ryan, Chief Executive Officer]

So the way it's proposed at the moment, Mark, there won't be retrospective in the way many of us would think of it, but it applies to existing loans. So as the proposal stands, you wouldn't be required to go back and recalculate and this is -- as we understand the proposal now, you wouldn't be required to go back and recalculate existing loans as if they have been issued under 18% cap. You'd be required to ensure that the payments going forward were under an 18% cap. So that is our...

[Mark Thomas, Analyst]

Is it possible that until such time the cap is introduced, but then it could reduce the duration when the cap is effective going forward, it might not be profitable?

[Gerard Jude Ryan, Chief Executive Officer]

Yes. So what we will have to do is see what is the rate of the cap comes in at, and then, because at the moment there are discussions about the cap potentially being variable by either loan size, by term, something like that. So we have to see exactly what the final outcome on the cap is, and then how that applies to our existing and go forward business. And if we could, then what amendments to the product structure would we make to comply with that cap. Now just for reference, when a cap was introduced in Poland in March 2016, clearly that brought down our rates there quite significantly, so we had to reconstruct our product there and we did that successfully. But it has to be said that in 18% APR cap in Romania would be extremely difficult.

[Operator]

[Operator Instructions] There are no further questions over the phone at this time. So I would like to hand the call back to our speakers for any additional or closing remarks.

[Gerard Jude Ryan, Chief Executive Officer]

Okay, thank you very much, Sylvia. Well, thank you, everybody, for joining. Just to reiterate, trading in line with plans, so we're happy with the first quarter's performance. Europe doing reasonably well, slight contraction as we expected, monitoring the progress of that piece of regulation in Romania and we'll be back to the market, we think at the half-year, with an update on that. Then the 2 growth engines of Mexico and Digital doing very well and overall portfolio quality heading in an even better direction, both very good at this point in time and good headroom on our facilities. So with that, I'll just say thank you very much for joining and talk to you again soon. Thank you. Thanks a lot, Sylvia.

[Operator]

Thank you. And ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.