Amigo Resources PLC (AMGO) Earnings Call Transcript & Summary

Good morning or good afternoon, and welcome to the Amigo Holdings plc Full Year Results Call. My name is Adam, and I will be your operator today. [Operator Instructions] I will now hand you over to Gary Jennison to begin. So Gary, please go ahead when you are ready.

Thank you very much, Adam. Good morning, everybody, and thank you for joining us for Amigo Holdings full year results for the financial year to the 31st of March 2022. So we're going to start on Page 4, which highlights the agenda. I'm Gary Jennison, the Amigo's Chief Executive Officer. And presenting with me today is our Chief Financial Officer, Danny Malone, who, I am very pleased to say, has now joined us on a permanent basis as of last month. As you know, we are an entirely new management team formed from late 2020 onwards to transform this business, and Danny is an excellent addition to our team. In a moment, I'll give a summary of our business and financial headlines for the year before Danny takes you through the numbers in more detail. I will then give an update on our progress to implement the scheme of arrangement which was sanctioned at the high court at the end of May, and I'll give some more detail on our new lending proposition RewardRate. And finally, explaining how Amigo is fundamentally a very different business with a strong social purpose. Following the presentation, we will open the call to questions. So moving on to Slide 5, please, to look at the business headlines. As I've just said, our preferred option in the new business scheme was sanctioned by the high court after the year-end on the 26th of May. This is now contingent on Amigo returning to lending with FCA consent by 26th of February 2023. That is 9 months after the scheme effective date of the 26th of May. We hope to be able to return to lending far sooner than that with newly branded products, which I will discuss further shortly. We must also complete a successful capital raise within 12 months of the scheme effective date, i.e., by 26th of May next year. Turning to Slide 6, which shows the financial headlines. The key point to highlight here and to explain on this slide is the profit, which we have reported for the financial year. It's very important to understand that whilst we have reported a profit after tax of just under GBP 170 million, this is mostly due to a credit of GBP 157 million from the release of the complaints provision, which has now been replaced with a scheme provision of just under GBP 180 million. Our reported profit should not be seen as an indication of company performance or indeed shareholder benefit. Prior to the scheme sanction, Amigo was insolvent, and the release of the provision is the only thing that has changed. It's important to understand that the shareholder equity shown today will be substantially absorbed by future costs of the scheme and by administering the legacy portfolio. We will be left with just a small amount of working capital of around GBP 8 million. Danny will explain this again in more detail in a moment. The future of Amigo is, therefore, totally dependent on our ability to raise new capital to fund the future business. We continue to collect out the loan book, and we have seen a near 60% reduction in the net loan book year-on-year to GBP 138 million. Collections have remained resilient, but as the book ages, alongside a deteriorating macroeconomic environment, we are seeing an increasing trend in the level of arrears, which has led to an increase in our impairment coverage. Our cash position remains strong with unrestricted cash at the year-end of GBP 133.6 million and current cash of more than GBP 100 million, after we have paid the initial GBP 60 million scheme contribution in early June 2022. We have GBP 50 million of outstanding bonds, having redeemed GBP 184.1 million in January. And of course, we fully repaid our securitization facility last September. I will now hand you over to Danny, who will go through the numbers in more detail. Danny?

Thanks, Gary. And good morning, everyone. Firstly, I'm very pleased to have now joined Amigo's CFO on a permanent basis. I introduced myself back in February at our Q3 results when I've only been in the post on an interim basis for just a couple of weeks. But for those on that call -- sorry, for those not on that call, I know the specialist lending space well, having co-launched everyday loans back in 2006, where I was CFO until 2013 and CEO until 2017. Although every day was primarily an unsecured lender, whilst I was CEO, we launched the Trust 2 Guarantor Loan business, which was actually built as a replica or an attempted replica of Amigo. Since I joined Amigo in February of this year, I have been impressed by both the people here and the business. There's a lot to do, but I'm confident that we have the right people, systems and relationships in place to build back a strong, profitable and sustainable business over time. So let's first take a look at the P&L. As Gary has highlighted, it is very important to look at the profit we are reporting today in context. With the scheme sanctioned as expected, we have released a large part of the complaints provision previously held on the balance sheet. And associated GBP 156.6 million has been credited to the P&L, and this has resulted in a significant reported profit. Underlying profit, however, was GBP 13.3 million. Substantially all of the resulting shareholder equity will be absorbed, however, by the future cost of the scheme and Amigo's operating costs as we collect out the existing loan book, leaving just a small working capital amount of circa GBP 8 million. Other points to highlight on the P&L are that, as you can see, revenue has declined by almost 50% as the lending has remained paused throughout the year on the net loan book amortizers. The decrease in the impairment charge is largely driven by the absence of originations, offset by an increase in delinquency. This is very normal in a declining book and we would expect the trend to continue as the book continues to run off. Operating costs have been well controlled and remain a focus for management going forward. Slide 9 shows the breakdown of our balance sheet. As a result of the sanctioning of the scheme, we have returned to a solvent balance sheet position with shareholder equity of GBP 47.9 million. It is very important to repeat that substantially all of this will be utilized over the coming 12 to 18 months as interest generated on the loan book will be more than offset by the operating costs of collecting the existing loan book as it runs off, the costs of administering the scheme, credit losses and the interest on our bonds. Any remaining funds that we generate from running off the loan book, excluding that small working capital amount of circa GBP 8 million will be added to the scheme fund. This is referred to as a cash turnover amount within the new business scheme. The estimate of this incremental cash turnover amount is highly uncertain and will evolve as the legacy loan book collects [ out ]. It is currently estimated to be around GBP 4 million. The gross loan book has continued to decline due to the ongoing pause in lending, down to GBP 185.4 million, with the net loan book now at GBP 138.1 million. Funding has reduced significantly with the securitization being fully paid down in September last year and GBP 184.1 million of the senior secured notes being redeemed in January, leaving us with a net cash position of GBP 83.9 million. The business continues to generate cash from collections and with no originations in the year, unrestricted cash was GBP 133.6 million. This is a decrease on last year as we used available cash to reduce debt. Let's turn now to Slide 10 and the complaints provision. A significant proportion of the complaints provision has been released. GBP 143 million of estimated cash redress has been released to leave the GBP 97 million committed under the scheme. GBP 47.3 million of the estimated value of loan balance adjustments has also been released, largely due to the passage of time with those balances having naturally reduced. For those customers, they have already launched a complaint and continue to pay down their loan, a proportion of those repayments are held in an escrow account and will further enhance -- redress you under the scheme where complaints are upheld. This is reflected in the customer restricted cash element you can see on the slide. On Slide 11, encouragingly, collections have remained relatively resilient despite the increasing trend in customer delinquency, which, as I said, is to be expected in a runoff situation as the book declines. Standard collections have been supported by early settlements customers being placed on payment plans and post charge-off recoveries. As Amigo has not sold any charge-off loans since February 2020, this part of the portfolio is growing and recoveries from it are growing proportionately. Moving to Slide 12, which shows the impairment charge as a percentage of revenue. This stands at 41.3% for the year. The increase from 35.5% last year is largely due to the significant reduction in revenue. The loan book decline and ongoing pause in lending results in a lower impairment charge with no upfront IFRS 9 provisioning. However, the economic outlook and the impact on future customer behavior remains highly uncertain. While unemployment trends are favorable, the cost of living process is expected to have an impact on our customer base as the loan book continues to run off. We will, therefore, continue to monitor and assess our assumptions. On Slide 13, we have the impairment provision with on the left-hand side, the staging components. And on the right-hand side, the loan book aging. The overall balance sheet provision decreased to GBP 47 million at the end of the year. The provision declined during the first quarter of the year, in line with the reducing loan book, but then rose in the second quarter due to a reforecast of Amigo's loss curves based on the delinquency observed at that time. Q3 and Q4 provision declined as expected, broadly in line with the loan book. We have seen a continued increase in the proportion of the gross loan book greater than 61 days past due to 13.1% compared to 11.8% a year ago. And the provision coverage has increased to 25.6% of the gross loan book. On Slide 14, this demonstrates the strong cash generation of the business. We continue to conserve cash by controlling operating expenses, and as a result of the ongoing pause in lending. The cash balance, including restricted cash at the year-end was GBP 141.2 million, despite GBP 64.4 million being repaid towards the securitization facility and GBP 184.1 million of the bonds being redeemed. The final slide in my section, Slide 15, looks at our net debt and funding structure. The group is financed from a combination of cash generated from operations and senior secured notes of GBP 50 million. The securitization facility of up to GBP 100 million was fully repaid at the end of September 2021, and we are in the process of closing that facility structure as we no longer consider it appropriate for the future needs of the business. The senior secured notes due in 2024 became callable in January 2020 at a premium of 3.8%, which fell to 0 in January 2022. We, therefore, redeemed GBP 184.1 million of the GBP 234.1 million senior secured notes outstanding in January 2022 to leave GBP 50 million, which remain due in January 2024. Resilient collections and diligent cash management have enabled us to build a strong cash position and pay down a significant proportion of our debt. With that, thank you, and I will now hand back to Gary.

Thank you very much, Danny, and thank you for explaining the numbers so clearly. Let's turn straight to Slide 17 and look at what we need to do next to implement the scheme of arrangement. As I said earlier, the scheme became effective on the 26th of May, 3 days after the sanction hearing. The sanctioning of the scheme represents a significant turning point for Amigo, and it's the culmination of a lot of hard work from many people here at the business. At this point, I'd like to thank all the team for their immense contribution. We're also extremely grateful to the FCA for the considerable amount of time they have afforded us as we work to present a new and much improved solution to our customers. And of course, we'd like to thank our customers for their patience as we have sought to remedy the mistakes of the past. However, there is still a lot to do to make the scheme fully effective as sanctioned by the judge. Customers have until 26th of November 2022 to submit their claims. And any claims received after that date will not be assessed. We have contracted with an outsourced third party who will then review and judge the claims over the following 6-month period to the 26th of May next year. A further period of 3 months has been allowed for independent adjudication of any disputed decisions. So customers with valid claims can expect to receive initial contributions in September of 2023 with a possible final payment, should there be any excess funds available from the existing loan book in November 2023. The existing loan book is expected to have materially runoff by July of next year. So a total of not less than GBP 112 million has been committed to the new business scheme. At least GBP 97 million will come from existing resources and, indeed, GBP 60 million of this has already been paid into the scheme fund in early June. The remaining GBP 37 million will be paid into the scheme fund by February 26 next year. An additional GBP 15 million needs to be raised from shareholders by 26th of May 2023. Moving on to Slide 18. You can see there that the preferred outcome of the new business scheme is contingent on 2 conditions being met. Both of these conditions, precedents are extremely important and must be met in the time scales agreed with the court or the new business scheme will revert to a managed wind-down of the Amigo loans business. The first condition is that Amigo must return to lending within 9 months of the scheme effective date, i.e., by February '23. We plan and indeed hope to do that far sooner. To enable us to do this, we must satisfy the FCA that we meet their threshold conditions and that all processes, policies, infrastructure that are all in place and have been tested. We have built an entirely new internal system to launch our new products with, and we must satisfy the FCA that testing on this new system has been completed successfully before we can issue our first loan. We have previously said that we will limit lending to a net GBP 35 million before we have raised new capital. This GBP 35 million will come from existing resources, including the GBP 50 million of outstanding bonds still in place and not due for repayment until January '24. We will conduct a pilot lend in consultation with the FCA before we can build monthly originations to any reasonable scale. We continue to have a productive and constructive dialogue with the FCA to satisfy them on these points, and we hope to be able to return to lending in the next couple of months. The second condition is that we raise at least GBP 15 million being the Scheme contribution, via a 19:1 equity raise. We also need to raise additional funds to support future lending. The need to do 1 rather than 2 equity raises has been well considered. A key reason is that without funds in addition to the GBP 15 million being raised, we're not able to provide evidence of sufficient working capital as required by the FCA in an FCA-approved equity raise prospectus. So that said, whilst the quantum of the fundraising has not yet been determined, and it will be largely driven by market conditions at the time, we are mindful of minimizing the equity raised by using higher gearing will make it far more feasible for existing shareholders to participate in any rights issue. We recognize that the 19:1 dilution will be significant for those who are unable or do not want to participate. However, everybody needs to face up to the realization that the alternative for shareholders would be no value if Amigo fails to complete the equity raise and the new business scheme would then revert to a managed wind-down of the business. So to be clear, these 2 important conditions precedent must be met in the time scales agreed with the court or the Amigo loans business will be wound down. Once we have presented our future business plan and provided details of the proposed equity raise, we will ask shareholders to approve the raise to general meeting. We also recognize that it will be important to have a resolution to the ongoing FCA investigations before we seek shareholder approval for the raise. Whilst we have other legal entities other than Amigo Loans Limited, they are not FCA authorized, and it will not be possible to launch a new lending business without FCA authorization. And to achieve authorization, possibly at all and certainly not within a time frame at which we could raise sufficient liquidity to enable authorization. In addition, launching a business in a jurisdiction that does not require FCA authorization is not under consideration. But I can assure shareholders that we have genuinely looked at all options for this business. And we think our plan is absolutely the right and indeed the only one. So let's move on to Slide 19 and look at more detail at our new lending proposition. We will not be returning to the market with the Amigo brand. Our new products will be launched under the RewardRate brand. The new proposition includes 2 innovative products with unique features designed to offer customers the cheapest way for them to borrow and to enhance their financial mobility. This is really important. We want to help our customers by putting them on a pathway to near prime credit with products best suit their needs. We will be offering both Guarantor Loans and non-guarantor personal loans. The personal loan will start at 49.9% APR and the guarantor loan, with its added security from the presence of a guarantor will start at 39.9%. Both will be launched with a rate dropper feature, which means that our customers will be able to lower the amount they repay simply by making payments on time. They will also be able to take a payment holiday each year with no penalties, providing extra flexibility when they need it. For example, at times such as Christmas or some holidays. We're extremely proud of our new lending proposition, which seeks to support financial mobility, helping customers with limited options to be able to borrow. So as we can see on Slide 20, there is a significant gap in the market. There is also a significant and growing demand in the market for specialist credit with around 12 million people unable to borrow from mainstream lenders. And let's be frank, that's a figure that's only going to grow as the cost of living crisis impacts families more over the coming months. Of these 12 million people, we estimate that around 5 million meet the new RewardRate customer profile. With evidence of income sufficiency and stability, we will be able to lend to customers where the other lenders decline them. With many providers having exited the market, and credit unions failing regularly. There is a growing need for fair, affordable and responsible products, which brings me on to Slide 21. Amigo is a fundamentally different business from the one of the past, and we now have a strong social purpose. To move forward responsibly, we need to have a clear understanding of where we went wrong in the past. We have done a thorough root cause analysis, which we have shared with the FCA. And all our people, our 210 employees today have all undergone mandatory training so that we learn from these findings and most importantly, the past mistakes are not repeated. The leadership team put in place from 2020 onwards has completely refreshed the culture here. As we launch the new products, we will have tighter eligibility criteria and enhanced affordability checks that include open banking technology. And there will be ongoing independent review of key controls to provide further assurance to our stakeholders. The new Amigo will get things right. Coupled with this, we have taken some important steps towards setting our ESG strategy, that is environmental, social and governance. In May of this year, we established our employee-led Responsible Business Council. This includes 8 elected employees from all levels in the business, including agent level. This is part of our ongoing mission to improve inclusivity and to create a forum that encourages diversity of thought. The council will act as a sounding board, a challenger, an innovator and adviser to the Board and management as we define, plan and execute our ESG strategy. We have also selected 4 priority United Nations sustainable business development goals following a materiality assessment and review by the Responsible Business Council, which align to our strategy, our values and our purpose. Over the coming year, we'll be setting targets and metrics against each goal, and we will report on these in next year's annual report. Let me now finish with a summary and the outlook set out on Slide 22. Amigo is a very different business from the one of the past, the sanctioning of our preferred scheme of arrangement signals a turning point for the business. We now need to secure FCA agreement to return to lending as well as a satisfactory resolution to the ongoing FCA investigations and complete a successful equity raise. So we have a lot to do, but we have taken some significant steps to get us here, and we will continue to do everything we can to move forward in the right way and return to providing a much needed service to those with few options to borrow. The business has reported a small underlying profit and remains highly cash generative, with current cash at more than GBP 100 million. While substantially all the net assets of the existing loan book are committed to the scheme, the business model is solid. With a refreshed culture and a new and an exciting lending proposition that meets a strong demand in the underserved market, we will continue to focus on turning this business around for the ultimate benefit of all our stakeholders. So thank you for listening to Danny and to me. And with that, I will now open the call to questions. We will first take questions from the phone line, and then we'll move on to addressing questions from the webcast. Thank you very much.

[Operator Instructions]

Okay. Well, we've had I think a number of questions coming in on the webcast. So we're just going to read those questions out. Then Danny and I will answer them as they come to us.

[ To start this ], there is a number which I will try and summarize. We'll start the one from [ Mark Jones ]. The recession fears at hit market, Bank of England has been quoted the same in the economic outlook looks that has deteriorated [indiscernible]. Are you confident that shareholders will vote to support the rights issue given the current environment? If so, why?

Well, it is a difficult situation for shareholders, and we have a number of us in Amigo as shareholders, too. But what I realize and I hope what everybody realizes is that if the capital raise is not supported. As I said in my presentation, that business will revert to the fallback solution, which is effectively a managed wind-down of Amigo loans, and that will then result in eventual liquidation of the business. So if the capital raise isn't supported, the business has no future. Now I accept that a 19:1 dilution is pretty tough to stomach, but it is the better alternative to the business being wound down. And at least if we can support a capital raise now, the business has a chance to get going again and start again. I'm using the phrase that we're an established startup. We have an established business, but with all inspect [indiscernible] and purposes [ our ] start-up because the back book is for the benefit of redress creditors. But we can get this business back to life. We've got a compelling proposition. We've got a huge market opportunity, and we just need to get going, and it will take longer. There's no quick wins here, but we are confident that the business has a future if we can raise the equity.

I've got a number of questions from [indiscernible]. He has asked when will we see action being taken on the previous board?

Well, it's not the position of the current Amigo board to do that. We have no mandate or right to do that. Any action, if there is any, has to be taken by the regulators, and I'm not aware of anything, not part of my remit, so I have no idea, but it's not anything we can do.

Another question from Mark Jones. If no indication of when lending will commence, via [ media ], social media and the board rate messaging suggesting otherwise, and can you share what remains on the investigation with the FCA for lending and when we [ all know? ]

Yes. Well, it's -- it takes a long time. I mean the regulator genuinely, as I said before, the regulator has been incredibly helpful to us because they decided not to object to the scheme of arrangement. And because of that, we were able to get the scheme sanctioned. So we're very grateful that the regulator has given us a second chance, but we have to accept and so does everybody else that the regulator needs to make sure Amigo is not going to repeat the problems of the past. And we have done some things wrong, and we have got to put those right, and they need to be absolutely committed to understand that we will get it right next time. So it's a very, very difficult process for the FCA, and we understand their position, but they are cooperating fully. We've got further meetings with them today. We're talking to them regularly. And I'm very hopeful that we'll start earlier. I mean the scheme [ says ] by 26th of May of next year, but we're very hopeful we can do it much, much earlier than that and hesitate to put a date on it because it's outside our hands, but we're hopeful we can get going much more quickly than that.

Question here on [indiscernible], but I will ask anyway. Thanks for providing the current cash balance. Can you please also provide the current net loan book balance.

I can't disclose the current net loan book balance, but the loan book balance at the end of March at the year-end was GBP 138.1 million.

Okay. And has Danny been approved by the FCA?

Danny's application is going through the senior managers and the certification regime application. It does take the regulator several months to formally approve it, but they have told us that they are very happy for him to do the job in the current intervening period. So the regulator has -- typically take several months to actually formally sign anybody off.

Question from David Chamberlain. What commitment can the Board give to shareholders regarding more regular shareholder communication? And will remember the Board be directed on board for shareholder engagement?

Well, there's 5 of us on the board, there's Danny and myself as executives and there's 3 nonexecutives, including Chairman. We all feel responsible for this. I'm happy to take a supplementary on this, if you're not happy with my answer here. But genuinely, I feel we do a lot of communication. We -- I do a quarterly video results. We do quarterly formal presentations like this. We send regular RNSs out as we can. I get the sense that a lot of shareholders seem to think that there has to be good news all the time. Well, we can't sugar coat things when -- that's not appropriate. We have to report factually and accurately. And sometimes, some of the messages we have to share including some of them today are not necessarily upbeat because this is still a very challenging situation, and we have to get these 2 conditions precedent complied with. And if either 1 falls over, then the business falls over, and goes into wind down. So we're doing everything we can, we shareholder and we communicate as much as we can. There's no point sending out an RNS if you've got nothing sensible to say. We announced RewardRate last week ahead of the results because that was when it was all agreed and signed off. The regulator was happy for us to do that. And we've given a fuller update today. But everybody is very focused on making sure all stakeholders, including shareholders, are happy with what we're doing.

Another question from [ Darryl ]. If the plan is to wind down Amigo Loan and launching RewardRate, does this mean the 19:1 dilution will not happen, as it was only the terms under the new business scheme and not the wind down scheme?

The plan isn't to wind down Amigo Loans Limited. Amigo Loans Limited is the legal entity behind RewardRate. We said earlier, we're not going to market with the Amigo brand, which is different. So Amigo Loans Limited will continue, and it's important that, that continues because that is the FCA-approved legal entity. We don't have any other legal entities approved to do loans other than Amigo Loans Limited. The reason why we're not going to market with the Amigo name is because we want to start again with a brand-new business, and that's what RewardRate is all about. I don't know, Danny, if you've got anything to add to what I said there?

Probably the only additional thing to add is that new requests for authorization at the moment are taking up to a year to get approved. And that's from a starting point where you are ready to go, and you would need to show that you fulfill the threshold conditions, including the financial conditions, which demonstrates that you've got the resources to fulfill it. So it's not really feasible to change courses.

Just a couple more. So we've got a question from Ben Bathurst from RBC. Please, can you share some details on how you plan to distribute the new products? And how much do you intend to spend on marketing to launch the new brand initially?

The distribution, I mean the amount that we're looking to lend until the capital raise, as we have said, is capped at a net GBP 35 million, which isn't a huge amount of money in context of where Amigo has been historically. So it will be a relatively restricted launch so that we can manage both people's expectations and the flow of business. So it will go out through a couple of introducers initially. And we will expand from there once we are through that initial testing phase, and that will happen a few months after launch. And the second question was in terms of marketing spend, I wouldn't expect to see significant direct marketing spend during that GBP 35 million [ phase ].

Great. Last question. Apologies if you struggle to hear me. So 1 question from [indiscernible], the price to be paid for new shares during the rights issue is critical to existing shareholders. Therefore, based on the worst-case scenario, can you estimate the cost per share?

I'm afraid we can't. The -- whilst we have draft plans in place for what we think will be the right thing to do as anyone who's been in the market this year will appreciate. There are significant headwinds there currently. The market could be very different by the time we actually come to it. So we have to explore the art of the possible before finalizing those plans. And we can't really communicate until they are final. So -- and we will come out to shareholders with them as soon as we are able to, but that will be not for a while yet.

I have 1 more question, actually. What percentage of the market do you think you can capture with RewardRate? And how does it compare to the average number of customers that Amigo had previously?

Yes. Well, Amigo, when it was at its peak, had about 220,000 live accounts. So it hasn't served millions of people over the time. And in fact, over our 15-year history, we've only ever done about 450,000 -- at about 450,000 customers in total. So let's be clear, we're not trying to serve millions and millions of people although there is a demand probably from, we think about 5 million people who would meet our criteria. So -- but as Danny has just said that, this business has to get back to life in a very slow and controlled manner. Previously, in years gone by, we were lending GBP 40 million a month. We are now, until we do a rights issue, only able to lend GBP 35 million net. So that puts it in scale. And if the rights issue happens sometime next year, a few months to go before we can get the capital raise in. So we're not going to be lending much money on a monthly basis and, in fact, nor would the FCA allow us to, in early days. They want to make sure we've got the systems and controls and the processes under full control. So they won't allow us to lift the lid too quickly and nor would we, as prudent managers want to do that.

Great. That is all the questions that we have on the webcast.

Great. Thank you. And as there are no supplementaries to our answers at all, anything challenging anything we've said?

Nothing. [ Adam ], have you got any more questions on the telephone line?

Nothing queued up on the phone lines.

Okay. Well, look, thank you very much for listening. Thank you all, everyone, for your questions. This is -- still a long journey to go, but we're well on the path. And we would look forward to speaking to you at the next quarterly update, if not before. And with that, I'll hand back to Adam to conclude the call. Thank you very much.

Thank you.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.