Amigo Resources PLC (AMGO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Amigo Full Year Results Call. My name is Adam, and I'll be the operator for the call today. [Operator Instructions] I would now like to hand over to your host for today's session, Roger Lovering, acting Chairman. Roger, if you'd like to go ahead, please.

Thank you. Good morning, and thank you for joining us for Amigo Holdings financial results for the year to March 2020. I'm Roger Lovering, Acting Chair of Amigo; and on the line also is our Chief Financial Officer, Nayan Kisnadwala; and Chief Regulatory and Public Affairs Officer, Nick Beal. In a moment, Nayan will take you through the numbers, and Nick will then give a brief update on the regulatory environment before I close the presentation, and we open the floor to questions. The financial year 2020 and the period since the year-end has been challenging, and that is reflected in today's results. During the year, we faced 3 main challenges: a substantial increase in complaints, notably post year-end; managing the impact of the COVID-19 pandemic on the business; and a very public dispute with our founder and largest shareholder. I will go into these 3 issues in more detail in a moment. But important to note that despite these challenges, Amigo has a strong cash position that is enabling us to support our customers. It is important to remember that Amigo serves the purpose in providing financial inclusion to those unable to access finance through mainstream lenders. This is likely to be ever more relevant going forward as the country recovers from the economic impact of COVID-19. Before we look at these challenges in more detail, I will touch on a few points on the financial headlines. The increased provisions for complaints and impairments, with COVID-19 having a material impact on the latter, led to a reported loss for the year of GBP 27.2 million. The net loan book is down 9% year-on-year, reflecting the higher impairment charge and our reduced risk appetite for new lending over the final quarter. First, as part of the strategic review, and then laterally from the onset of COVID-19 and our decision to pause lending to everyone except key workers. However, customer numbers and revenue increased in the year by 10.4% and 8.7%, respectively, demonstrating the continued demand for our guarantor loan product. The rise in income was driven by an increase in average gross loan book for the year. The substantial rise in complaints that we have seen, notably post year-end, is arguably the biggest challenge we face as a group. The change in the positive approach during the year to their judgments and past lending decisions led to a significant increase in the number of complaints they upheld against us. Previously, they had found the majority of complaints in our favor. Subsequent to this, and following the negative publicity that has surrounded Amigo, we have seen a substantial rise in complaints, particularly from claims management companies post the year-end. We have built up our -- built up capacity to handle this increase in complaints volumes. We are seeking [ experienced ] advice where necessary, and entering into constructive dialogue with the FCA and FOS. We have created a provision today that recognizes the challenge and helps us move forward. Nayan will give you more detail on this in a moment. As for many businesses, COVID presented an unprecedented challenge as we sought to protect our employees and follow government guidelines whilst continuing to support our customers. Our entirely digitalized model meant we were able to quickly move almost 400 employees to remote working with no disruption to customer service. As we reduced lending to only key workers at the end of March, many of our employees were redeployed into customer services and collections. We offered payment holidays to our customers, which, for the first 3 months, included a pause in interest as well as capital repayments in concert. This went beyond the FCA guideline. As we cap the amount of interest our customers pay, this means that despite the pause, they will not come back to higher monthly payments when they return to a normal payment plan, and they will never pay more than stated in the original agreement. This is an example of our simple, transparent product. In addition to this, we were pleased to be able to help a number of national and local charities during this time. It is too early to assess the full impact of COVID-19. In June, we began a phased reopening of our offices and we keep the timing of our return to lending under constant review. Time will tell how quickly the U.K. economy recovers, and this will determine our decision regarding when we recommence lending. It has been frustrating to have a dispute with our largest shareholder and founder, Richmond Group. This has been played out very publicly and has not been helpful to the company. I would like to thank our shareholders for their support at the general meeting we held in June. Around 90% of the minority shareholders who voted, voted against Richmond Group's proposals to remove all the [ then ] board members. In line with their declared commitment to sell 1% of their holdings should their resolutions not be passed, Richmond Group has been selling shares in the market and now holds less than 40%. Our former Chairman, Stephan Wilcke; and CEO, Hamish Paton, had already resigned at this point. Stephan left the business in June and Hamish will leave at the end of this month. I am delighted that our former CEO, Glen Crawford, will rejoin Amigo on the 1st of August. Also this morning, we announced the appointment of Jonathan Roe as our new Chairman. Jonathan will join the Board on the 1st of August as an [ independent ] and step up to the role of Chairman once he has received all the necessary regulatory approval. Jonathan brings a wealth of industry and regulatory knowledge. With the Chairman and CEO in place, we can now start to move forward, able to focus clearly on the challenges and opportunities we face. Before I hand over to Nayan, I'd like to touch briefly on a couple of other developments post year-end. Firstly, with the FCA. Over the years, we have seen evolution in the regulatory environment. We continue to engage productively with our regulator. And in May, we agreed on a voluntary requirement to resolve, by the end of June, the complaints backlog that have arisen. In July, an extension to the voluntary requirement was agreed, covering a high volume of complaints, with the new deadline to the end of October 2020. We also announced in June that the FCA had initiated an investigation into Amigo's creditworthiness assessment processes from November 2018 to date. We welcome the opportunity to better understand the evolution and approach taken by our regulators. Finally, in June, we announced the termination of the Formal Sales Process initiated in January following statements from the Richmond Group. The Formal Sales Process identified a number of potential acquirers who made digital offers that were materially above where Amigo shares were trading at the time, and the Board considered worthy of further investigation. The process was terminated when the potential acquirer, with whom we have been in discussions, withdrew from the process. I'll now hand you over to Nayan.

Thank you, Roger. Good morning. Let's turn straight to the key financials. Over the financial year to the 31 March 2020, revenue grew by 8.7%. However, the reduction in lending in the last quarter and an increase in impairment led to a decrease of 9.1% in the net loan book. Initiatives to optimize the group's capital structure, including the open market repurchase of high-yield senior secured notes, have allowed us to reduce underlying finance costs once nonrecurring senior secured note buyback and RCF fees are excluded. We have made no further repurchases of the senior secured notes over the second half. The year-to-date complaints cost recognized in the income statement has risen to GBP 126.8 million, with a balance sheet provision of GBP 117.5 million. The provision relates to both estimated costs of customer complaints received up to 31 March 2020, and the projected cost of potential future complaints. I will go into more detail on this in a moment. Excluding complaint costs, the ratio of operating expense revenue remains low at 20.2%. The increase on the prior year reflects investments made to improve collections and complaints handling. Net borrowings to adjusted tangible equity increased to 2.4x from 1.9x last year due to the reduction in equity following recognition of the complaints provision in the year. As Roger has highlighted, we are facing a number of challenges and there is considerable amount of uncertainty about the outcomes of these. These material uncertainties have been reflected in our audits and resulted in a qualified growing concern against devaluation. Now let's look at the complaint provision in more detail on Slide 13. Historically, complaints have not been a material issue. For the year ended 31 March 2019, complaint redress expense was negligible at less than GBP 0.1 million, with only a small number of complaints made and very few of these upheld or referred to the FOS. As the change in approach from the FOS resulted in an increased uphold rate, we recognized a provision for complaints received, but not yet assessed, in Q1. At that point in time, we have not seen any increase in the volume of complaints made. Volumes began to increase modestly in Q2, and then we added a provision for the portion of expected future complaints on existing loans, where we thought it was likely that redress would be offered to the customer. Incoming volumes have continued to rise since then with a significant increase post the fiscal year-end. More recently, claims management companies have emerged as the major source of complaints. To address this challenge, we have increased our balance sheet provision to GBP 117.5 million as of 31 March 2020. The level of the provision has been increased to reflect the level of complaints received. The total charge to the income statement in the year was GBP 126.8 million with GBP 9.3 million utilized in the period of our customers' redress, including both loan balance adjustments and cash payments. The provision represents our best estimate at the cost of remediating complaints. In accordance with IAS 37, it relates to both estimated costs of customer complaints received by fiscal year-end and the projected cost of potential future complaints where it is considered likely that customer redress will be appropriate based on the available data on the type and volume of complaints received to date. Where we previously announced an estimate of at least GBP 35 million, this related only to the volume of complaints within the original voluntary requirements agreed with the FCA. In addition to this, the total provision includes incremental volumes included in the extended VREQ and an estimate of future complaints. Year-to-date, less than 60% of redress has been settled with cash payments versus balance adjustments. The complaints provision is sensitive to movements in expected volumes, the uphold rate and the average amount of redress. These entities are shown in our accounts. It is not intended to cover the eventual cost of all future complaints as there is significant uncertainty around a number of variables, including the emergence period for complaints, the activities of claims management companies and the developing view of the FOS on individual affordability complaints, all of which will significantly affect complaint volumes, uphold rates and redress costs. Amigo, supported by external advisers, has not to date identified any recurring systemic issue across any past cohort of lending, and we continue to explore root causes in line with regulatory expectations. Now let's move to look at another challenge we have faced, primarily post year-end, on Slide 14. Following the outbreak of COVID-19, we paused lending to all but key workers owing to the economic uncertainty that pandemic was causing. We have refreshed lending policies in preparation for a return to lending, the timing of which is under constant review. We have moved quickly to offer financial relief to customers suffering financial hardship with up to 3 months payment deferral in place from late March, ahead of the 9th April 2020 FCA deadline. This has since been extended to 6 months. We currently have around 20% of our customers using these relief measures. Despite this, collections have remained robust at 87% of pre-COVID expectations in Q1 of the new fiscal year. Our employees were redeployed to collection and customer service roles, all working from home. Some IT costs were incurred to facilitate this. Revenue impact will be assessed in Q1 of the new fiscal year. Moving to the next slide. The chart on this page shows impairment as a percentage of revenue. COVID-19 has materially impacted our provision for impairment. The impact is reflected in the provision by way of new macroeconomic assumptions and obtaining overlay to reflect forbearance measures extended to customers during the outbreak. Towards the end of the final quarter of the year, Amigo saw an uplift in request for breathing space from customers. On 31 March 2020, our revised COVID-19 financial release policy was formally introduced. The granting of a payment holiday does not automatically indicate a significant increase in credit risk in this unprecedented COVID-19 scenario. Multiple variables have been considered on an individual customer basis to determine if a significant increase in credit risk event has occurred. The treatment of those customers within our IFRS 9 modeling has involved significant accounting judgments and has included detailed analysis of historic behavior of that customer, considering both previous payment plans and the number of times that the loan has fallen into earlier. Excluding the impact of COVID-19, the impairment to revenue ratio would be in low 30s, in line with our previous expectations. Earlier in the period and prior to the impact of COVID-19, resource constraints within our collections department were a key driver in the increase of our impairment provision. Amigo invested in both its workforce and improved processes to address this issue with average headcount increasing from slightly over 300 to over 400 year-on-year. We continue to direct more resource into our collections team with the benefit of recent recruitment and internal redeployment, reducing our reliance on third-party outsourcing. On the left-hand side of Slide 16, we have the impairment provisions with the staging components and on the right-hand side with the loan book aging buckets. Following the analysis provided -- performed for COVID-19 on an individual account basis, a stage 1 to stage 2 uplift overlay has been applied to our IFRS 9 model. We have an impairment provision balance of GBP 106.8 million at year-end, which is over 2x the balance of receivables which are 60-day past due or more being GBP 42 million, an increase from GBP 29.8 million in fiscal '19. Where we have refined the ECL model, the distribution of the provision between stages has changed. An increase in statement provision due to refined probability of default methodology is offset by decreases in stage 2 and stage 3, owing to the enhanced LGD estimates. These modeling tweaks broadly offset, resulting in an immaterial net impact on the overall provision. The primary driver of the increase in impairment provision between Q3 and Q4 is the introduction of new macroeconomic assumptions, which increased ECLs due to the anticipated increase in unemployment as a result of the COVID-19 pandemic. The loan aging reflects the same trend. Our proportion of receivables, which are current or less than 31 days past due, declined to 92.1% compared to 94.6% last year. Moving to Slide 17. We have said, encouragingly, collections have remained robust despite the impact of COVID-19, at 87% of pre-COVID-19 forecast projections in Q1 of the new fiscal year. High cash collections were driven in part by operational redeployment to the collections team, while originations were temporary -- are temporarily paused and also by an increase in early settlements. On the next slide, we focus on our loan originations. On the left-hand side, we have the origination split between homeowner and non-homeowner and private lending; and on the right-hand side, we have the acquisitions channel mix. We originated over GBP 339.3 million of new loans in the U.K. over the full year, a decrease of GBP 86.9 million compared to the prior year. Lending to new customers represent 72% of total originations in the 12-month period to end March versus 61% in the prior year, a decrease of GBP 20.3 million year-on-year in absolute terms. As expected, we have seen a moderate increase in the percent of repeat lending over second half as customers become eligible under the enhanced credit policy introduced in July 2019. As part of our ongoing strategic review, we reviewed our lending policy and risk appetite, which led to substantial reduction in both new and repeat lending. We were in the process of trialing our new policies and procedures when COVID-19 struck, and we paused all lending to customers except for key workers. The COVID-19 situation evolves daily, and we will continue to monitor the macroeconomic environment when considering when to lift our temporary pause on new lending. Excluding complaints, the ratio of operating expense to revenue you will see on the next slide is in line with previous expectations at 20.2%. The increase from the prior year reflects primarily investment in operations to improve customer experience and operational resilience as well as the increase in legal and professional fees. Slide 20 shows the continued cash generation of our business. High cash collections were driven in part by operational redeployments in the collections team, while originations are temporarily paused and also by an increase in early settlements. Gearing remains low despite the recognition of a complaint provision in the year, in line with pre-IPO levels. Net borrowings to adjusted tangible equity was 2.4x on 31st March 2020. Slide 21 shows our funding structure as of the year-end '19 and '20. We continue to optimize our funding and have further improved our cost of funds to 4% from 5.3% last fiscal year. The senior secured notes became callable from January 2020 at a call premium of 3.8%, while the senior secured notes coupon at around 500 basis points higher than the interest cost of the securitization facility, we have been opportunistic in buying back approximately GBP 85.9 million of the senior secured notes, no repurchases were made for the second half. The increase in securitization over the year, from GBP 200 million to GBP 300 million, has contributed to the lowering of our cost of capital. In May, we announced the temporary suspension of performance triggers related to the securitization facility, which includes a pause in further drawings from the facility while we understand better the impact of COVID-19, the pause in trigger ends at the end of July 2020. At the same time, we announced the cancellation of our RCF facility. The RCF has had minimal utilization over the last 12 months, and it is therefore considered no longer necessary. Cancellation of the RCF will save Amigo an annualized non-utilization fee of GBP 1 million -- of GBP 1.3 million. We had GBP 178 million undrawn funding facilities at 31 March 2020, which, combined with a strong cash flow, gives us adequate liquidity. Before I hand over to Nick to give an update on regulatory developments, I'd like to give a quick update on our operation in Ireland. We've seen continued growth in loan book and customer numbers, which at the end of March 2020, stood at EUR 8.2 million and 3,400, respectively. Over the years, we have grown our team to manage the demand from an average for the year of 18 employees compared to 11 last year. It's a great start from the February of last year and gives us confidence in our ability to roll out those valuable products into new markets. At the end of March 2020, just as the rest of the group, Ireland paused lending following onset of COVID-19 pandemic. In June 2020, we reopened our office in line with Irish government guidance. Our priority remains the health and well-being of our employees, and we have taken additional health and safety steps to safeguard our teams, including additional cleaning, separator checks, the use of PPE and social distancing measures. Amigo Ireland is ready to resume lending when it is appropriate to do so. With that, I'll hand over to Nick.

Thanks, Nayan. As we've discussed before, the Financial Conduct Authority, the FCA, has several sector-wide reviews ongoing into the nonstandard finance sector. These include a look at affordability, a review of repeat lending and guidance on the treatment of vulnerable customers. Much of this work has been delayed due to its focus on COVID. Specific to the guarantor sector, the FCA reviews are focused on affordability, guarantor understanding, guarantor payments and forbearance. In November 2019, we received feedback from the FCA on their review into guarantor understanding and payments. Since then, we've implemented a number of measures based on this feedback to provide more information to help our guarantors make informed decisions. This includes information about the likelihood of the guarantors having to make a payment, currently less than 10% of payments are made by guarantors, and information on the borrower's credit file at the point of lending. While much of this was covered informally because of the relationship between the borrower and the guarantor, this change formalizes the sharing of this information. In April 2020, we received initial feedback from the FCA's review into affordability. Many of the recommendations were already implemented or were in the process of being implemented before we paused lending in March 2020. Over the year, we've increased the level of verification we require during the income and expenditure checks in relation to both borrowers and guarantors. Where we have assessed the customers at higher risk, we investigate the relevant individuals expenditure further. We've also extended our use of open banking into our affordability assessments. The remaining recommendations by the FCA will be implemented before we return to meaningful levels of lending. As already announced, the FCA has begun an investigation into Amigo's creditworthiness assessment process and the governance and oversight of this process. The investigation will cover the period from the 1st of November 2018 to date. These reviews can be lengthy, but we're keen to see the resolution of this as quickly as possible, and we're working with the FCA to that effect. The FCA's review into, and guidance on vulnerability has been delayed due to COVID-19. Our teams are trained to recognize when a customer might be considered vulnerable and whether that might be a financial vulnerability, for example, due to recent changes in their circumstances or from mental health issues. We have a dedicated specialist support team to provide targeted support and to ensure each customer receives fair and appropriate treatment. Our priority has always been the fair treatment and well-being of our customers. Finally, the COVID-19 pandemic is undoubtedly putting pressure on the lending sector as a whole. Both the FCA and HM Treasury are monitoring the liquidity of all firms, and we've been producing regular reports in accordance with their requests. To help our customers suffering financial difficulty during this time, we've offered payment and interest holidays ahead of the FCA's guidance, and we remain in a good position to help our existing customers through this difficult period. In conclusion, particularly in the face of an evolving regulatory landscape, it's important that we continue to regularly and productively work with the FCA to both understand and comply with evolving regulatory requirements, and also to promote a better understanding of our products, and our goal of financial inclusion for all. With that, I'll hand back to Roger.

Thank you, Nick. In summary, Amigo is facing a number of challenges, which the Board and the wider team are working hard to address. These need to be tackled and resolved favorably. This will be the focus of the Board and the management team going forward. Despite the difficulties, it is important to remember that our business model serves a purpose of providing financial inclusion to those who are unable to access finance through mainstream vendors. And as I said earlier, this is likely to become ever more relevant as the country recovers from the economic impact of COVID. We have optimized our processes to enable us to resume lending quickly when it is appropriate to do so. Due to the uncertainty caused by COVID and the increased complaints provision, we are taking steps to conserve cash and maximize financial flexibility and are not proposing a final dividend for the year. Also, it is not appropriate today to provide guidance for the financial year ended March 2021. The most important asset we have is our people, and I'm extremely proud of our Amigo workforce who have adapted to the challenges we have faced and worked tirelessly throughout all of the changes to continue to put our customers at the heart of everything we do in order to provide them with the best possible outcomes. Before I hand back to Adam to take your questions, I think it's worth saying these are unprecedented times. We are operating within a global pandemic as well as an evolving regulatory environment. We are facing significant challenges, but we will work through these. Our focus now is on building a sustainable business and returning to providing our current and future customers with access to the finance they need. With that, I would like to say, once again, thank you for joining us this morning, and I'll now hand back to Adam to take your questions. Thank you.

[Operator Instructions] I would like to go ahead with our first question. It is from Alex Fyfe of Apollo.

Can you guys hear me okay?

We can, yes.

Yes.

Great. I got 3 questions. The first one is about complaints. So it looks like in the 6 months to December '19, it looks like you've paid out 78% of complaints you received internally. So I was wondering, in light of how you could contemplate relending again, if you need to pay out almost every complaint you received. Are you just kind of hoping the numbers of those complaints goes down? Or what's the plan?

Do you have 2 questions? Do you want to give them one at a...

The second one is -- I can keep going if you want. Second one is just around the FCA investigation. Just wondering if you can give us color on what drove that investigation and whether you need to wait until that's complete before you lend again? And the third question is just on the ABS. So it looks like the waiver for that runs out on 24th, which is Friday. I'm wondering kind of what the latest is if you plan on putting capital into that and whether if that is not mediated, if that goes into complete amort? Or if it goes into only gradual amort where you still receive some of the cash flow from that facility?

Thanks, Alex. And I think your first 2 questions really both tied up into relending and our opportunities to do so. So I think what we have been doing over the last year, as I mentioned in the presentation we've given, is that we have been enhancing our affordability assessments in line with a re-review of our risk appetite by our Board and Risk Committee. And we have been using additional checks -- I referred to open banking earlier, but using those additional checks to ensure that we have an even more enhanced level of affordability assessment, taking into account the regulatory changes that we have seen in an evolving environment from both the Financial Ombudsman Service and the FCA over that period. And therefore, there was certainly no requirement for the FCA investigation to have completed prior to us starting to relend. The regulation -- the investigation, as you will expect, from a regulator will be thorough and detailed and will take some time. On average, these take over 2 years to complete. But we are hopeful that as -- will be completed within a shorter period than that. So certainly, no need for us to wait for the outcome of the investigation. And also, whilst we keep the FCA informed of our plans, there's no requirement for them to sign off on that either. So that's the first 2 questions, I think.

Okay. But the -- how come -- how are you paying out almost every complaint you receive? Like, what are you assessing the complaints on? And I mean, I understand for new lending, you can put new checks in, et cetera, but the complaints coming in are from the back book. So like -- it sounds like anyone in your book can complain and get paid out. So how are you dealing with that? And how can you conceive to remain a viable company, if anyone who was given a loan ever can come in and complain and seemingly get paid out?

Yes. So complaints are being reviewed on a case-by-case basis. And on each of those cases, we're looking at the information we had available to us at the time at the point of lending. That, as Nayan stated very clearly, hasn't identified any systemic risks within the book. And both the Board and external advisers have been reviewing that over the period. And therefore, we feel comfortable to continue to lend on that basis. And I think it's important to say we are lending today, albeit we paused lending for all but key workers. We continue to offer the product, which is needed by a group of people. For example, a nurse who happens to need a second-hand car, that would be an ideal example of someone who's been using our products over the last few months. Nayan, did you want to cover the third question on the ABS?

Sure. Alex, let me...

Sorry. Just to finish up on the first question. So of all the complaints you're receiving right now that are valid, so if customers that actually had a loan with Amigo before, how many of those -- like what percentage are you actually paying out internally?

We have not disclosed that number for commercial reasons, Alex.

Okay. And on the ABS?

ABS. So it's premature for me to comment because of ongoing discussions. But on one hand, we could have an extension to the post period with or without revised turns. On other hand, as you said, we could put it on amortization over the next 4 years and/or somewhere in the middle. So we are -- we will announce it as soon as we have concluded our negotiations.

But under the current terms of the ABS, if it was to go into amortization, so if you were to not agree an amendment by Friday, does all the cash flow from that facility stay in that facility? Or are you still able to receive some of the cash flow in the facility?

It stays in the facility, and it amortizes over 4 years or so.

Okay. And so that -- and so the maturity -- or the deadline is Friday. So will you be letting us know before Friday or after Friday, shortly thereafter whether...

As soon as we can say, yes.

So you're currently negotiating to figure out what you're going to do with that?

Correct.

Okay. And actually -- and on the ABS, when someone complains and their loan is in the ABS, does that loan become ineligible in the ABS?

Yes. Yes, it does.

So it gets kicked out back to your high-yield group or it stays there in the ABS? And you have to replace it with new collateral?

Either.

Either.

We have another question. Our next question is from [ Callum Gatcombe ] of Goodbody.

Guys, just a quick follow up for me on complaints. Just trying to get a sense of how much room you have on the provision, if complaints continue to flow in at the pace you've seen recently? Can you give us an indication of the volume of complaints embedded in the provision that is not -- can be roughly assumed that GBP 35 million previously announced related to the 9,000 complaints or the voluntary requirements, if we don't extrapolate this forward based on the provision you gave in Q4?

Sorry, could you kindly repeat the question? We were struggling to hear you there. Apologies.

No problem. Yes. So just in terms of the provision, can you give us an indication on what the volume of complaints embedded in the provision is at year-end, like what your assumption is? And if not, can we still -- like the

We have -- yes. [ Callum ], again, we have not given out this detail for commercial reasons.

Okay, yes. And so is it fair for us to say -- you've previously announced GBP 35 million in relation to the [indiscernible] in relation to the moratorium and that was relating to 9,000 cases? And then we can extrapolate this all on -- based on the provision you take in Q4?