International Personal Finance PLC

LSE:IPF

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the International Personal Finance Q1 trading update investor call. Your hosts today are Gerard Ryan, Chief Executive Officer; and Justin Lockwood, Chief Financial Officer. For your information, today's conference is being recorded. I will now hand over the conference to your host, Gerard Ryan, to begin the briefing.

[Gerard Jude Ryan, CEO & Executive Director]

Thank you, Laura, and good morning, everybody, and welcome to our Q1 trading update call. And this morning, as Laura just said, I'm joined by Justin Lockwood, our CFO. Now hopefully, you've had a chance to read the statement that we published this morning, and I plan to take you through this and add color wherever possible. And just to let you know, I'd expect this briefing to be about 20 to 25 minutes, so substantially longer than our normal briefings. Now like many other businesses, we are, of course, still evaluating the impact of CV-19 on our operations. And as I'm sure you'll understand, we need more clarity on the timing of easing of people restrictions in our various markets and further performance data in order to be able to provide meaningful guidance to the market. And so for that reason, we won't have our usual Q&A session at the end of the call. While our focus in recent weeks has been adapting our business model to deal with the impacts of COVID, I would like to take the opportunity to emphasize that we made a very good start to 2020, and trading in the first 10 weeks of the year was in line with our expectations. Through to mid-March, both credit issued and collections were delivered in line with our financial plan. And operationally, we delivered good performances in our European home credit and IPF Digital established businesses. We also saw further improvement in our Mexico collections performance where, as you know, we've been prioritizing credit quality over growth. As we moved through March, it became very apparent that the virus and resulting government state of emergency were impacting the business, and particularly across Europe. So we took immediate action, and our response to COVID-19 has been built around 3 guiding principles, the first of which is to protect our people. So ensuring the health and well-being of our colleagues, particularly agents visiting customers by providing PPE and guidance to keep them safe. Our colleagues are highly motivated, and we're seeing multiple fantastic examples of the volunteer work they are doing in their community. In addition, in the space of 6 weeks, we have transformed ourselves from a business that was based out of multiple head offices to one which now operates effectively with over 6,000 people working remotely. Our second guiding principle is the prioritization of our loyal customers. Our intention is to make sure our highest-quality customers have access to finance. Clearly, we have also invested a great deal of time and effort to arrange remote payment facilities, so all our customers have the opportunity to make repayments if their agent cannot visit. We know from agent feedback that our customers do generally want to continue repaying their obligations. And thirdly, in terms of our principles, we're protecting our cash flow. So we entered the crisis with a very strong balance sheet and funding position, GBP 217 million of cash and headroom on debt facilities and an equity-to-receivables ratio of 47.6% at the end of March. We're focusing on liquidity management actions to be in a position to recommence growth when the time is right, and I'll deal with that more later in the briefing. Now towards the end of the quarter and into April, collections performance in our European home credit businesses were increasingly affected as tighter restrictions were imposed on freedom of movement of individuals and debt moratoria were introduced. If there's one thing our business learned in the last financial crisis, it is that taking action early and decisively leads to better outcomes. So with the onset of CV-19, we swiftly and significantly tightened credit settings across the whole group in March to protect credit quality and cash flow, and as a result, group credit issued contracted 15% year-on-year for the quarter as a whole. These tighter credit settings are now in place, and our lending is focused on our loyal customers who have strong credit quality characteristics. As a result of these actions, we expect to limit credit issued to around 30% of our original budget for the month of April. Collections for quarter 1 as a whole were 95% of budget and 87% in March as the CV-19 restrictions were implemented across Europe and agent movements in the region were severely impacted for a number of weeks. We swiftly implemented a range of alternative collection strategies and resumed agent home service in most European markets. And we estimate that group collections effectiveness in April is around 76% of our original plan and will be at a similar level in May, with improvements anticipated after that. Now before I move on to business unit performance, I'd like to highlight that despite the challenges of CV-19, the group was net cash flow positive in April to date. We have also undertaken extensive liquidity stress testing analysis, which demonstrates that we can actively manage our cash flows and retain adequate headroom against our funding facilities. Moving on to the business unit performance for the quarter. I'll also break this down to give you some color on the range of measures taken by the regulators and governments in each market and our responses to these. Starting through with European home credit. As I mentioned earlier, European home credit businesses performed well for most of the first quarter. During March, we saw a rolling series of different responses to the pandemic, including significant restrictions on nonessential contact imposed in most markets, temporary price caps on new lending in Poland and Hungary, and temporary debt moratoria introduced in Czech, Hungary and Romania. The restriction on freedom of movement resulted in agents being temporarily unable to visit customers in 3 of our 4 European markets, and collections effectiveness in March was 82% of budget compared to 100% in the first 2 months of the quarter. But we immediately tightened credit settings, which for the quarter as a whole, resulted in a 13% reduction in credit issued year-on-year. Across all 4 European markets, agents and our call centers have been and continue to be in regular contact with their customers to help them make repayments. For our highest-quality customers, we are ensuring that they have access to financing as that remains appropriate for their current circumstances. We've built a tremendous goodwill with these customers over many, many years, and we fully intend to retain that goodwill in the months ahead. When we are able to, agents are visiting customers in their homes, but agents and our customer service teams are also in regular contact by telephone, text, email to explain our remote payment options and encourage repayment using those methods. We've given some customers greater access to the existing remote payment systems that were already in place, including money transfer and payment by link. We've also developed new facilities, including payment by SMS, online by cards through our Provident websites and at convenience stores, and we're building more capabilities, such as card payments through IVR in our customer service centers. These options have only been available for a matter of weeks, and usage data in the coming weeks will help us to understand their long-term effectiveness. As many of you will know, agents are our USP in home credit. So in order to support their incomes at a time when more payments are done remotely and to encourage them to maintain consistent contact with our customers, something which will be key for rebuilding performance in due course, we are paying the agents the same level of commission for remote as well as home collections. To deal with the temporary rate cuts in Poland and Hungary, we've developed new products that meet these new pricing requirements. These are already part of our active product portfolio and allow our agents to continue to meet the needs of their best customers who will qualify for new credit. Let me look now at the individual markets, and I'll spend a couple of minutes on each of these. In Poland, we suspended our agent home service in March as people movement restrictions were tightened, although customers can request that their agents continue to visit them so that they can make repayments. To date, about 30% of our Polish customers are seeing their agent weekly at home, and this level is increasing daily. Clearly, we have supplied our agents with the appropriate PPE to ensure that they are safe to carry out these duties, as is the case for all agents wherever we have agents in the market. Poland is a market where we have the most extensive alternative remote collection processes available. At the beginning of April, the Polish government introduced a reduced rate cap on noninterest cost of credit for new lending applicable until the 8th of March, 2021. The law has a built-in sunset clause, and after that date, the cap rate automatically reverts to historic levels. In fact, if a loan is issued today and it struggles at that pace, the reduced rate is applied up to the 8th of March, 2021, and the part of the loan repayable after that date has a higher cap rate. So in effect, the blended rate cap increases over time the closer to the 8th of March the credit is issued. And just as a reminder, the flat level of the cap was reduced from 25% of the loan value to 15%, and the additional variable cap from 30% to 6% per annum, and the aggregate of this cap should not exceed 45% of the loan value. Turning now to Hungary. Well, here, the government implemented a range of economic measures in mid-March, including a debt repayment moratorium available to all consumers until the end of 2020 or the end of the crisis, whichever is sooner. They also temporarily reduced the APR cap on new lending. Now the moratorium here is an opt-out regime, and we have had to suspend agent visits for a couple of weeks while the National Bank of Hungary agreed to the process by which consumers could exercise their right to opt out. Since early April, agents have resumed their home service visits, and I'm pleased to report that there has been a very positive take-up of customers choosing to continue to make repayments to their agents. It's also worth noting that the authority has left it up to the financial institutions to explain to customers that the moratorium simply delayed their repayments. And once customers realize this, many of them prefer to pay and reduce their debts.In Romania now, we suspended agent visits for 2 weeks in April in order to prepare them to be able to visit their customers safely and have since returned to provide a home service in order to collect repayments. As with our other European home credit countries, we've also introduced alternative payment methods for our customers. The Romanian government implemented a debt repayment moratorium until the end of 2020. But unlike the Hungarian one, this is an opt-in system for customers, and there are certain restrictions on eligibility. If we turn now to the Czech Republic, here, our agents have continued to visit customers throughout the CV-19 period. A temporary debt repayment moratorium has also been introduced. And once again now, this is in opt-in regime for which customers can apply. It offers them a choice of 2 periods to use the moratorium, so they can do that up until the end of July or to the end of October 2020. Lenders must also adhere to a 9% cap on interest charges for that period. Overall, the Czech Republic is our least-affected home credit market other than Mexico today. So that's Europe. So with that, now I'd like to move on to Mexico. As you know, our strategy in Mexico is to prioritize credit quality over growth in the short term in order to improve the overall portfolio quality, and I'm pleased to confirm that the early signs of recovery that we've previously seen continued through Q1. The operational actions we implemented to improve collections and credit quality delivered a year-on-year improvement in collections performance, while our focus on quality across the business resulted in a 15% reduction in credits issued. The Q1 impact of CV-19 in Mexico home credit was much less significant than in Europe, and it was only in the second half of March that we saw some changes in performance. It's also worth noting that there's been -- there's not been a blanket response by central government on people movement or other restrictions to limit the spread of COVID, and that role has actually been taken up on a state-by-state basis by governments based on how they view the seriousness of the issue. And in March, we saw some evidence of reduced collections effectiveness as a result of people restrictions imposed in some states. Notwithstanding this, our collections performance for March was 96% of our budget, and collections effectiveness is expected to reduce to around 81% in April. With the CV-19 experience in Mexico lagging that in Europe, we used the lessons learned here in Europe to take preemptive action to protect our people, customers and the business. And we placed even greater emphasis on collections and proactively tightened credit settings in March. And we're putting remote payment mechanisms in place as we speak. So that's the report on our home credit businesses.So let's turn to IPF Digital. Well, as I'm sure you know, the business model here is an end-to-end remote lending model. And while we speak to all our customers and remain in regular contact online or through our call centers, we never actually meet them face-to-face. For that reason, we have seen and would expect to see significantly less interruption arising from COVID freedom of movement restrictions. Our performance in Q1 was not materially impacted by the pandemic, nonetheless, as we moved into the second half of March, we chose to significantly tighten credit settings to protect credit quality and manage cash flow. Credit issued contracted year-on-year by 21%, driven primarily by these restricted credit settings and our focus on improving credit quality in our new markets. Total collections in March were at 93% of budget, and April collections effectiveness is expected to be around 82%.Interestingly, here now, the reduction in collections is mostly attributable to a fall in the number of customers overpaying their accounts. So just to explain, as most lending in IPFD is revolving in nature, customers have a minimum monthly payment they need to make, but as you'd expect, many customers regularly overpay that amount, and we've just seen a reduction in that in the past few weeks. As with our home credit businesses, the majority of our digital colleagues, including our customer support teams, are working remotely and effectively. In the short term, we've reduced the amount of credit issued, and as in our home credit operations, new lending is now targeted specifically to our highest-quality customers. We have also introduced payment holiday options in all our markets to support customers that have been impacted by CV-19 and are facing difficulties. The temporary rate cap that I mentioned a minute ago for Poland also applies to our happy Digital business. And in Finland, a temporary tightening of the interest rate cap from 20% to 10% is currently being debated. And that concludes the roundup of operational performance for the quarter, and I've tried to give you additional color on our response to the COVID pandemic in each market. I think it'd be helpful now if we look at how we are actively managing liquidity in order to protect cash flows at a time when temporary restrictions on people movement and the debt moratoria I mentioned are impacting our collections effectiveness. So we came into the COVID crisis with a very strong balance sheet, equity-to-receivables at almost 48%, and a combination of cash and headroom on our undrawn debt facilities of GBP 217 million at the 31st of March. It's also worth mentioning that we won our recent court case in Poland in respect of the tax years 2008 and 2009. And once that judgment is issued in writing, if the tax authority doesn't appeal within 30 days, then we will be due to receive a repayment of approximately GBP 34 million plus interest. While these are also happening in our markets, we moved swiftly to implement our short-term liquidity management strategy. And the key elements of this fall into 3 core work streams. First of all, as you would expect, we have significantly reduced costs. The first wave of this has been the immediate elimination of all discretionary expenditure. We've also deferred all 2020 salary increases across the whole group. And in addition, our leadership team requested that the 2020 annual bonus be canceled, and we also requested that the 2020 LTIP shares that have been recently awarded to us should be surrendered in full. The second stream specifically concerns our organization structure. Now as we anticipate less sales and collections for a number of months, we're actively applying for government employment support schemes in each market wherever relevant. We're also looking at the overall level of results required by the group and will activate new strategies at the appropriate time. And then the final stream relates to capital expenditure, and here, we've eliminated or deferred all noncritical investments. And we're only providing cash to complete those projects where it would be uneconomic not to do so. And as a result of all of these actions, we expect to generate around GBP 52 million of cost savings. As you will be aware, we also took the decision to cancel the 2019 final dividend to retain cash in the business, and this will contribute a further cost saving of over GBP 17 million. It's also worth noting that the group was cash flow positive in April, generating GBP 27 million of cash before the GBP 21 million payment of the annual coupon on our Eurobond facility. Now as I mentioned throughout the briefing, the most important lever in our liquidity management strategy is that we can and have significantly restricted our lending to customers across the business in response to the reduced level of agent contact with customers in the short term and the risk of recession at some stage in the future. Clearly, one of these areas where we have spent a lot of time is undertaking stress tests for the group as a whole. These stress tests cover all key inputs for the business, and we have performed a range of scenarios that assume a reduction in collection performance up to and including a 75% reduction in effectiveness in May, followed by progressive improvements in the subsequent months as we become more effective in loan collections when the restrictions on the movements of our agents are relaxed. The modeling that we carried out indicates that by delivering the expected cost savings we have already scheduled and agreed as well as reducing new credit issues, we can manage our liquidity to retain adequate operational headroom against our available debt facilities for the rest of this year and into Q1 2021, and that includes the repayment in full of our bond maturities in May and June of this year. We've run these scenarios for a period of a year, even though we know that they are temporary and that some of these rate caps and moratoria expire before then. We just thought it was more conservative to do it for a full year. We can manage the value of credit issued on a weekly basis, and we've already committed to the cost reductions in the business. And with the customers growing familiarity with our remote payment options and a return to more normal routine for our agents and by updating our models for actual data on a dynamic basis, we fully expect to manage our liquidity in a very effective manner. Work is currently underway to assess the likely impact on our P&L and balance sheet of the CV-19 effect on customer payment behavior and of the actions we have taken to conserve and manage liquidity. Now this is an extremely complex assessment because the accounting requirements are evolving as regulators and the audit companies interpret the implications from an IFRS 9 perspective. We expect to make significant progress in this area in the coming months, and this will allow us to assess the likely shape of the balance sheet as well as the impact on capital and future funding requirements. And here, I want to say that I am very mindful of the fact that we wish to refinance our Eurobond facility before next April, and clearly, that forms a central part of the work we're undertaking. Now as I mentioned at the start of this briefing, we're not in a position to provide guidance just now, but hopefully, this is perfectly understandable given that our new operating rhythm is literally, literally a few weeks old. And we expect the progressive lifting of freedom of movement restrictions to positively impact our business in the coming weeks. So let me try to bring together everything I've said over the past 20 minutes or so. Well firstly, let me reiterate that we performed well in the first 10 weeks of the year and in line with our budget. Our collections were good, IPFD was performing well, and we were seeing the continuing improvement of credit quality in our Mexico home credit business. Clearly, CV-19 has presented a number of significant challenges, but it's important that we view these in the context of the inherent strength of our business model and the overall financial strength of the group. We are the leading provider of home credits across the globe, and we have developed a profitable digital consumer business over the last few years. We have served and continue to serve millions of customers with credit facilities that they value and which they very often are not able to get from any other credit providers. We've got a great, long track record of effectively managing risk, and both our home credit and digital business models have proven to be resilient throughout very difficult trading cycles. Our balance sheet is robust. We've got a strong funding and liquidity position, and we benefit from borrowing long and lending short. As we move beyond this crisis period, we believe we will see some competitors exit this market. The recently tightened rate caps are all temporary, and demand for credit is unlikely to reduce, but we believe there'll be less competitors available. And we believe that, ultimately, we are very well placed to continue serving our customers to meet the credit needs after the impact of CV-19 subsides. So that is the update, and that provides you with all of the color that we have available today. Just to say that if 6 or 8 weeks ago you've said to me, here are all the challenges you're going to face, so restrictions on movement, lockdown, moratoria, tightened rate caps, and you tell to me, at the end of all of that, you will deliver this set of numbers, particularly as it relates to the collections effectiveness for the group, I'd have to say, I would feel very positive about that, and we do. It's been a huge challenge for the business. But I think through the initial stages, we've come through it very well. And we believe that the collections performance, the effectiveness in May should resemble that in April. And then we should be able to build on after that as well. So with that, I'm sorry that we can't move this down to Q&A, but I just want to say that Justin and I are available if you wish to discuss the business in more detail. And if you'd like to have a chat with us, please do contact us, and we will make ourselves available for that. So with that, from Justin and me and the team, thank you very much. I hope you're all safe and well, and look forward to catching up with you in the near future. Laura, thank you very much. That's the end of our update.

[Operator]

Thank you, Gerard. Ladies and gentlemen, we'll conclude today's presentation. Thank you very much for your attendance. Stay safe. You may now disconnect.