Amigo Resources PLC (AMGO) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Amigo Holdings plc FY 2023 Interim Results Presentation. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to Danny Malone, CEO, to begin. Danny, please go ahead when you're ready.

Good morning, and thank you for joining us for Amigo Holdings half results for the 6 months to 30th of September 2022. I am Danny Malone, Amigo's Chief Executive Officer. And with me today, I'm pleased to welcome Kerry Penfold, our Chief Financial Officer. Kerry stepped up to the role of CFO in September when I became CEO. These recent management changes reflects the business' transition from turnaround to focusing on rebuild and future growth. Before we go through the presentation of our half year results, I'd like to thank our colleagues for their incredible hard work to get us to this position and for their continued commitment. I'd also like to thank Gary, who retired as CEO in September, for the significant contribution he made to achieving the Scheme of Arrangement that was sanctioned by the High Court in May, thus creating our RewardRate products, which address such an important need in our society. So in a moment, I'll give a summary of the business and financial headlines for the year. Kerry will then take you through the numbers. Before I give a little more detail on our return to lending, the proposed capital raise and on our corporate governance, I'm really pleased that the FCA has recognized the significant progress we've made in this area. Following the presentation, we will open the call to questions. Let's move to Slide 5 and look first at the business headlines. We have made good progress in the financial year-to-date. In May, our Scheme of Arrangement was sanctioned by the High Court. The Scheme claims portal is now closed, having reached the claims for day on the 26th of November, which was Saturday just passed. The Scheme supervisors will issue a report in due course on the Scheme website. But early indications are that the volume of claims are approximately 25% higher than our previous expectations in the Scheme documentation. In October, we received approval from the FCA to return to lending under a pilot. During this period, we will test our RewardRate products, the new tech platform and our customer journey and we'll be able to give more detail on each element of our next set of results, if not before. This has fulfilled 1 of the conditions of the Scheme. The remaining condition is to complete a capital raise with a 19:1 dilution for existing shareholders by 26th of May 2023. More on this later. The Board recognizes the importance of concluding the outstanding enforcement investigations ahead of the capital raise. So steady progress. We have hit some important milestones and all is on track. Turning to the financial headlines on Slide 6. The back book continues to run off with the net loan book reducing by 64% to GBP 80.6 million and revenue down 72% to GBP 15.8 million. The reported loss of GBP 12.7 million reflects both the lower revenue and the upward revision of assumptions for both claims volumes and upsell grade within this game. These have been adjusted now that we have more visibility on the final number of claims within the Scheme and a sample of the claims received has been processed. Unrestricted cash remained strong at GBP 128.4 million as at the 30th of September 2022. Current unrestricted cash is over GBP 130 million. Net cash -- sorry, net assets were GBP 35.2 million as of 30th of September. As we've said before, all net cash and net assets by our small working capital amount of around GBP 8 million are committed under the Scheme. I will now hand you over to Kerry, who will conclude the numbers in more detail.

Thank you, Danny. Good morning. I'm very pleased to present my first set of results to you as Amigo's Chief Financial Officer. If we look first at the P&L on Slide 8, we can see a reported loss of GBP 12.7 million incurred in the period. The key contributor to the loss reported today is the complaints charge of GBP 11.3 million. This relates to the change from Q1 and the assumption to Scheme claims volumes and the potential uphold rate. I will go into this in more detail shortly. Elsewhere in the income statement, as Danny has said, revenue declined by 72% to GBP 15.8 million. This is primarily due to the continued amortization of the book -- in addition, since Scheme sanction, we have not recognized the proportion of interest, which we estimate will be repayable to claimants. Finance costs have reduced to just GBP 1.5 million, that is down 85% year-on-year due to the redemption of a significant portion of our senior secured notes and the paydown of our securitization facility. We have seen an impairment credit in the period. Given the maturity of loans within the gross loan book, the book is now largely provided for under the lifetime loss assumptions. The increase seen in operating expenses in the first 6 months is largely due to the investment we have made and the development of our new product range. Turning to Slide 9, which shows the breakdown of our balance sheet. The group had net assets at the end of September '22 of GBP 35.2 million. As Danny has said, substantially all of the shareholders' equity will be absorbed by the ongoing costs associated with collecting out the back book and operating the Scheme. The reduction in campaigns provision year-on-year reflects the sanctioning of the Scheme in the period, which has capped Amigo's cash liability for redress creditors. You can see from the slide that funding has reduced over the period to just GBP 50 million of remaining bonds with Amigo having undertaken a significant bond repurchase in January this year. As a consequence of this, under the GBP 60 million contribution to the Scheme, unrestricted cash is lower than a year ago at GBP 128.4 million. You can see this GBP 60 million Scheme contribution driving the increase in our restricted cash figure, which now stands in total at GBP 70.3 million. A further Scheme contribution of GBP 37 million is due in February '23. Despite the worsening macroeconomic backdrop, our overall cash position remains strong and collection is resilient at this point, which will be demonstrated later in this presentation. Let's turn now to Slide 10 and look at the complaints provision in more detail. Year-on-year, the provision is almost halved due to the sanctioning of the Scheme and reduction of cash liability this implies. The slide here shows the increase on the year-end provision of GBP 179.8 million to GBP 191.4 million at the half year. GBP 16.3 million has been added to the provision. This largely reflects management's revised assumptions for both claims volumes and estimated uphold rate. In relation to volumes, as Danny has mentioned, the Scheme closed to new claimants on the 26th of November. Final claimant numbers are still being verified, but indications are that they are about 25% higher than prior assumptions, and we have accordingly increased the redress provision in this period. The estimated upward rate has been moved from 65% to 70%. We have gathered early results from our third-party claims processor when initial claims assessed. Whilst this is a small subset, we have taken the decision to lift the uphold rate to reflect these early findings. We know this is an estimate only, and a range of outcomes is ultimately possible. As expected, GBP 4.7 million of the provision was utilized for payment of anticipated advisory and legal fees associated with the Scheme. Moving to Slide 11. We which shows the P&L impairment charge produced to effectively now. As the book amortizes, it is increasingly provided for under the lifetime loss assumptions. Post charge-off recoveries have remained resilient and a robust source of collections. Slide 12 shows the impairment provision from a balance sheet perspective. On the left-hand side of the slide are the staging components and on the right, the loan book aging. The provision has continued to reduce with the reduction of the book down from GBP 65.1 million last year to GBP 30.1 million at the end of September. This reflects a provision coverage of 27.2%, a 4.7% increase year-on-year. All key impairment assumptions have been assessed in the period with no material impact to the P&L. Amigo's estimates of probability of default continues to track in line with actual performance and we believe are both accurate and importantly robust in the face of the worsening macroeconomic environment. Looking at collections on Slide 13. You can see that they have, as you would expect, declined broadly in line with the reduction in the loan book. Despite the squeeze on household spending, collections have remained resilient with our teams focused on supporting customers with sustainable payment plans. Note here that collections have shown growth of estimated returns to Scheme claimants. Slide 14 shows our positive cash flow position. A positive net cash flow in the period of GBP 57.6 million resulted in a closing cash position of GBP 198.7 million at the end of September '22. This number includes restricted cash. The final Slide 15 shows our net cash position and funding structure. The group is financed from a combination of cash generated from operations and senior secured notes of GBP 50 million. GBP 184 million of the senior secured notes were redeemed in January '22, leaving the remainder, which remained due in January '24. We have now fully closed the securitization structure, which is no longer considered appropriate for the needs of the business. 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 Danny.

Thank you, Kerry. As you know, in October, we received confirmation from the FCA that we had met threshold conditions and could restart lending for a pilot period to test our products, tech and processes under our RewardRate brand. This in itself is a great achievement. And I'd again like to thank all of our teams for all their hard work to get us into this position. During the pilot, the number of loans that we issue will be limited and outcomes testing will be undertaken by a third party. Our RewardRate products have been designed in conjunction with an antipoverty charity and incorporate inventive features designed to promote financial inclusion and mobility, a real need in society not lessened by the current cost-of-living challenges. Our guarantor and non-guarantor loans reward regular on-time payments with APR reductions and an annual payment holiday providing extra flexibility when customers need it. Our focus is on achieving good customer outcomes, and we now overhaul the underwriting process to ensure the loans we issue are right for our customers. The high inflationary outlook has been factored into all affordability assessments. And during the test period, all loans will be manually underwritten. Once we are comfortable with the journey and outcomes testing has returned the right results, we expect this to become more automated. We also have an entire new tech platform with capabilities that facilitate a high level of automation, scalability, speed and resilience. The cost of developing the system is being fully expensed and the forms part of the value shareholders will receive in return to the GBP 15 million Scheme contribution, which we are seeking in the capital raise, which I will come to on the next slide. While it is too early to report on the progress of the pilot phase, returning to lending represents a significant milestone for our business and come to the time of significant demand for our mid-cost responsible credit options. We will provide an update on the pilot of our Q1 results, if not before. Let's now turn to the capital raise on Slide 18. Amigo is looking to raise capital to both satisfy the final Scheme condition and to provide growth capital for the future business. The Scheme condition is that a capital raise with 19:1 dilution for existing shareholders must be completed by the 26th of May 2023. We expect this to include a preemptive offer and to be underwritten by institutional investors. As we said at the time of the AGM in September, we expect to raise GBP 40 million in equity alongside debt issue. A minimum of GBP 15 million of the capital raised will be paid to the Scheme fund for Scheme creditors. This is a complex transaction, and we expect to be able to give more detail on our -- to our shareholders at our next set of results. Part of the complexity is that we are seeking for as many of our current investors to participate as possible, and we're continuing to speak to institutional investors to facilitate this structure. As I said earlier, it's also important to the FCA investigation into Amigo's past lending and complaints handling is concluded ahead of the capital raise. We continue to have regular dialogue with the FCA's enforcement team to reach a resolution at a time scale that supports this. As an investment opportunity, Amigo is effectively an established startup. We have an established lending platform with the people in place. And with the Scheme sanctioned by the court and well progressed, we have limited legacy risk. Our new RewardRate products are innovative with a clear social purpose to meet a significant demand in the market for mid-cost credit. RewardRate products target a substantial subset of the circa 12 million adults underserved by mainstream credit providers. Our products have been designed with the upcoming consumer duty regulations in mind. We are, therefore, very well set up for the future regulatory environment. Our newly built technology platform has market-leading capabilities, and as I said before, is built to scalability and resilience. And finally, our people, as well as a highly experienced management team, we have teams of experts in their fields throughout the business. More detailed information will, of course, be provided once we publish the details of the capital raise. Moving to Slide 19, I'd like to spend a moment to update you on what we are doing from a corporate governance point of view. This is fundamentally important to our business. And it was very pleasing, as I said, that the FCA recognized the significant change and the progress we have made. As we return to lending, we do so with an enhanced outcomes-driven governance and cultural framework. Our purpose is a social one. Our new RewardRate products are designed to encourage good payments habits and provide flexibility, ultimately leaving our customers in a stronger position. Earlier this year, we established our Responsible Business Council, or RBC. This is an employee-led group with a direct line into the Board. In just a short time, it has already delivered some valuable initiatives to support our local community, including fundraising events for local credit banks. The RBC has also worked with HR to help our employees combat cost-of-living challenges they are facing. And with HR, we'll be undertaking a full diversity, equity and inclusion review. This is another critical area for us as a business to ensure we promote equal opportunities and attract a diverse and talented pool of people to work with us. Finally, climate action is one of the priority UN Sustainable Development Goals we selected earlier this year. Even as a small online financial services business, there are initiatives we can take to contribute to this goal, and we are already taking steps to integrate climate impact into our business planning. Once we have identified the risks and opportunities climate impact presents to us and to possess our carbon footprint, we will assess a credible net-zero target for Amigo. It is very early days for us on this journey, but we are on track to deliver the road map set out in our last annual report. Let me finish now with the summary and outlook on Slide 20. In summary, we're making steady progress. The first Scheme condition has been met with the FCA approval of our return to lending under the pilot. We now need to complete the capital raise by 26th of May 2023. This process is underway, and we look forward to being able to share more detail with you in due course. The sanctioning of the Scheme means redress customers are a step closer to receiving compensation, and Amigo is nearer to having clarity on its long-term future. Our legacy risk is now minimal, and our new products designed under -- signed during an economic crisis, position us well for the future. Amigo is well placed to support customers through the cost-of-living crisis with the new RewardRate products specifically aligned to key areas of focus for the FCA, including financial mobility and the upcoming consumer duty regulations. Our successful capital raise will mean we can move forward with the business model that is well positioned for the future regulatory environment and for growth. Thank you for listening. I will now pass you back to Maxine to open the call for questions. Thank you.

[Operator Instructions] Our first question comes from Aengus McMahon from Sarria - Credit Opportunities.

I do have 2 questions. The first is I just want to be absolutely certain that the impact of the higher claims doesn't affect -- it will affect the payouts that each individual get, but it doesn't affect Amigo. Is that correct?

It doesn't have a direct effect on the new investment coming in. There is a fixed pot of money that goes into the claims pot. However, the claims, the redress for the claims will be a combination of both cash and balance adjustments. And the balance adjustments may be higher than we had originally estimated. We don't know yet. But we do not expect that at this stage to have any impact on the attractiveness of the proposition to new investors.

Okay. But there could be a small impact on cash if the redress claims, yes.

There could be, but it's far to value to say.

Okay. Okay. My second question was just in previous calls, you've talked about bank debt. But I noticed Kerry said that you've now closed the securitization. Does that mean you're not going to take any additional bank debt out?

We don't have the need for any additional bank debt at this stage. Clearly, debt is a feature of the future capital raise proposition. But at this time, we have no need for it.

Okay. Okay. But you could revive the securitization very easily, I guess, structurally.

We believe that if we were to undertake securitization in future, a clean structure would be preferred in the market and therefore, we've taken the decision to close the structure completely.

Our next question comes from [ Ned Daivik ] from [indiscernible].

Can you confirm that the outstanding bonds will be repaid with the proceeds of the new debt and equity that you're raising right now?

The plans for the bonds are constantly under review. At the moment, we intend to repay them at maturity. But that will be kept constantly under review, pending the success of the capital raise and the debt raise in conjunction with that.

[Operator Instructions] We currently have no questions registered, so I'll hand back to the team.

Thank you. Thank you, Maxine. We do have some questions on the webcast. So I'll just run through those. Firstly, a question on the provision and the complaints volume figure. "I understand you said it was 25% higher, but can you say 25% higher than what? And give a comment on the calculation for penny -- pence and the pound."

I think as Danny mentioned earlier in the presentation, that is 25% higher than within the initial Scheme documentation. We've chosen not to give any further indication on the figure today to make sure they're fully verified before we do so. It's an important figure. But yes, there is a natural outcome from an expectation of additional volume and higher uphold rate, but there will be an implication on the pence and the pound. This is all estimated at this stage.

Thank you. Question on the interest rate being burned on the cash balance of GBP 198 million.

So we hold our cash balance in a range of deposit instruments, although we do look to obviously get good returns on that GBP 198 million. And treasury is not a profit center. Our focus needs to be on appropriate availability of cash, appropriate security of that cash for the benefit of creditors. So clearly, there's a benefit to us as interest rates rise. But that is not the focus when we hold that cash.

Thank you. Question now on the -- from what we said coherent, 2 questions. Firstly, for new lending. Can you indicate what level of IFRS 9 provisioning will be recorded at the point when the loan is extended, the percent of the value of the loan? And two, can you provide any updates to the FCA enforcement investigation?

So I'll just answer the first part of that question. We're still developing our IFRS 9 provisioning model for the new RewardRate product. While we have limited data on the new product performance, I assume that we will lean quite heavily on the historic Amigo data that we have, albeit that to refine cohorts of that data. And broadly, we'll follow a similar provisioning model certainly in the early period and clearly look to refine that as we get more data coming through on the new product book.

Great. Thank you. Another question is on the pilot phase.

On the enforcement -- second part of the question on the enforcement. We are actively working with the FCA to try and bring the enforcement investigation to a conclusion. The FCA cannot commit to any firm date on that, but they are aware of our timelines and the need for resolution before people will commit under a capital raise. But we're -- all I can say is we are working with them, and we hope it will be sooner rather than later.

A couple of questions on the pilot phase. "Can you -- when can you expect the FCA to update on the pilot phase outcome? And in line to that also, can you disclose what the loans limit is during the pilot phase?"

We haven't gone public with -- the loans limits sort of probably slightly misleading. This is testing our processes. We've got a brand-new system. The FCA asked us to make sure that our process has worked as intended and that the policies that we documented and agreed with them have been followed during that period. So it's not about testing the market per se. It's about testing our processes and policies. And that, as we previously said, is for a minimum of 2 months, following which the FCA will use a third party to review and report to them what they have found and they will then consider lifting the pilot.

Thank you. A question here on the rights issue, capital raise. "And if further details of the rights issue will not be shared until the next results, is 3 months enough time to engage with shareholders to complete the vote and complete the rights issue process?"

We believe that it is. We are working with our advisers and our brokers on detailed plans and sharing those plans with the FCA as well. So we believe there will be sufficient time. The difficulty we have, it is a very complex process. Working with potential third parties to underwrite takes some time for them to get to a position where they can make that commitment.

I think that covers all of the questions now that we've received in. If there are any questions following the call, please, as ever do get in touch with us at our investors at Amigo line. Thank you. Maxine, do you have any further questions on the call?

We have no further questions.

Okay. Thank you, everyone.

I'll hand you back to Maxine to conclude the call. Thank you.

Thank you, ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.