International Personal Finance plc (IPF) Earnings Call Transcript & Summary

Welcome to the International Personal Finance 2022 Q1 Trading Update Briefing hosted by Chief Executive Officer, Mr. Gerard Ryan; and Chief Financial Officer, Mr. Gary Thompson. Today's conference is being recorded. I will now hand over the call to Mr. Gerard Ryan to begin today's conference.

Thank you, Sharon, and good morning, everybody, and welcome to our Q1 trading update call. Gary Thompson, who joined the IPF Group as CFO at the beginning of the month, is with me here in Leeds. Morning, Gary. Welcome to the team. And joining from Warsaw, we also have our Group Treasurer, Kris Adamski, on the call. Hi, Kris. Hopefully, you've had a chance to read our Q1 trading update, which was published earlier today. I'll cover the details behind the good trading performance delivered this quarter as well as providing you with some color on what we're seeing in our markets, particularly in terms of the macroeconomic environment and the war in Ukraine. And as usual, we will have plenty of time at the end for Q&A. You'll see from our statements that we made a good start to the year. And the efforts of our teams in serving new loans to both existing and new customers resulted in credit issued growth of 10%, and customer numbers increased by 3% to 1.7 million. Leading this growth story is Mexico home credit as we successfully execute our strategy to significantly grow this business. A strong operational performance and good consumer appetite for credit in Mexico resulted in a 31% increase in credit issued and a 9% growth in customers to 656,000 year-on-year. IPF Digital also delivered very positive growth momentum in the quarter, with strong contributions from both our new and established markets to generate a 29% increase in credit issued. And we're now serving 257,000 customers, and that's up 4% year-on-year. The macroeconomic environment in Europe created a more challenging trading landscape for our European home credit business in the first quarter of the year, and this resulted in a 2% contraction in both credit issued and customer numbers. As we noted at the time of our full year results, we saw softer demand for credit in January and February, driven by consumer nervousness over rising cost of living. Our customers whose disposable income is relatively low compared to other consumer groups are disproportionately affected by increases in essentials such as fuel, energy and food. And adding to these worries, the outbreak of war in Ukraine really unsettled people in our European markets, which has further impacted demand and sentiment in Central Europe, in particular. However, I'm pleased to report that we have since seen an improvement in demand in March and through into April as well. Now before I cover receivables and collections, it's probably a good point in today's briefing call to update you on the level of support that our colleagues across the group have given to those displaced from Ukraine since the start of the war. Members of the team have been involved in donating food, clothing, equipment and money with many actually providing accommodation in their own homes and sourcing employment for refugees. Our Polish team, working closely with an NGO community partner, secured and renovated a large 11-bedroom property on the outskirts of Warsaw, which has become a safe home for Ukrainian moms and their children. Our IPF Digital businesses in Lithuania, Latvia and Estonia have also donated over EUR 150,000 to the cause. Returning now to our results. The strong growth delivered in Q1 boosted our closing receivables, which increased 14% and in turn, drove a 10% uplift in revenue year-on-year. And all 3 divisions contributed to this result. Our collections effectiveness is a core strength of the business driven by solid operational discipline. And combined with the responsible lending decisions we take on serving our customers, the quality of our loan portfolio continues to be excellent. The strong collections performance in Q1 delivered annualized impairment as a percentage of revenue of 11.5%. This metric continues to benefit from the COVID-19 provisions released in 2021 and is broadly in line with our expectations. Throughout the period, we have continued to maintain a very strong balance sheet to support our growth aspirations and fund our new progressive dividend policy. At the quarter end, we had debt facilities of just over GBP 560 million and capacity for growth on undrawn facilities and nonoperational cash of GBP 102 million. Before we move to the outlook and Q&A, let me cover off regulation in Poland. The European Council recently provided its response in respect of the proposed total cost of credit cap amendments, and it consisted largely of technical suggestions. The proposals are expected to be debated in the Polish Parliament, but there's no formal time line at this point. As we have stated in the trading update, there are many different views on the proposals. And during the parliamentary process, they could be changed, dropped or adopted. And obviously, we will update the market when there is something more concrete to report on. Looking ahead, we will continue to execute our growth strategy of delivering an excellent service to our existing loyal customers and increasing product choices and channels to attract the next generation. We're making very good progress on our hybrid home credit digital offering. We launched our mobile wallet in Estonia last month, and we will be expanding in the Norte region of Mexico later in the year. We've always believed that we have a crucial role to play in society, responsibly providing finance for those people who are underbanked and underserved. Our purpose is to enable financial inclusion, and we will continue to be there for our customers even in more difficult times, providing them with affordable credit in a way that suits their lifestyle and financial circumstances. We clearly remain cautious because of the uncertain macroeconomic environment as well as the impacts of the pandemic and the war in Ukraine. Notwithstanding these factors, we do expect to deliver good credit issued growth in 2022 by increasing customer choice while maintaining a clear focus on portfolio quality and costs. So to wrap up before we go to questions. We delivered a good trading performance in Q1, and this would not have been possible without the dedication and innovative work of a lot of my colleagues. And to all of you, I'd like to say thank you. We're closely monitoring the external landscape and its impact on consumer behaviors and in particular, demand for credit, and we will respond quickly if we see any material changes. And finally, as I've just mentioned, we are very focused on our growth strategy, expanding our product and channel choices to attract new customers, and we continue to expect good growth for the year as a whole. Well, that completes the briefing for Q1. So Sharon, I'll hand it back to you now to see if we have any questions, please.

[Operator Instructions] We will now take our first question from Gary Greenwood from Shore Capital.

I've got 2 questions, if I can, and slightly related, really. So the first one was just regarding the regulatory situation in Poland. I mean if this was to sort of push ahead, can you just talk through the sort of mitigating factors that you could put in place to try and sort of reduce the impact there? And then I guess, I suppose linked to that, if you could just remind us of the sort of various new product launches that you've got planned over the remainder of the year, that would be great.

Sure. Yes, so this Poland regulation piece, obviously, for those of you who know the business well, it's been around for years, bouncing back and forth. It's now with the Polish Parliament, but at the moment, it isn't being debated, and there is no formal time line. If it were to come in as proposed with a reduction in the total cost of credit cap, then as we've talked about before, we would seek to adapt our product structure so that it would be compliant but would still afford us a reasonable return in Poland. The best way to do that from our point of view would be to launch a credit card. And we've got a big team working on this. Clearly, it's a complicated piece of work, but we're happy with progress. So we'll be launching a credit card to our customers. But you shouldn't worry that what we would do is just simply send out 0.5 million credit cards to our customers. We would adapt, I suppose, the functionality of the card to be more suitable for our customer group. And what that really means is that we'd be cautious, to start with, to watch how they manage the use of a credit card because our customers prefer to use installment loans and in particular, to use cash. So we had to take our time about it, but we'd be reasonably optimistic that over a period of time, we would get our customers used to the functionality. And as that was the case, then we would start to open up some of the facets of a credit card that you and I would be used to or that we would enable at the start of this process. And then in terms of other products, we're clearly -- what we're trying to do is capture what I would call the next generation of customers. And the next generation of customers, by definition, would like to do things more digitally. So we're opening up new channels through the mobile wallet in our digital business is a fantastic opportunity for us. We're opening up partnerships with retailers so that we are there at the point of sale when the customer wants to make a decision and needs cash to execute the transaction. And we're doing this across the business, both -- as always with us, we test and learn in every business. We don't just test in one country and then decide we'll roll it out everywhere. So what you'll see is that we'll be spending more time investing in new channels, new products and new, what I would call, value-added services because it's probably not something we talk about a great deal, but we are able to provide really good value-added services to our customers because of our purchasing power. And in particular here, I'm talking about insurance. We don't carry the insurance risk on our balance sheet, but we -- because of the number of customers that we have, we're able to negotiate with insurance providers to adapt their product for [ IO ] type of customer and to do it at pricing points that are not available to our customers. And they really appreciate that. So lots of work going on in those fronts.

We will now take the next question from James Hamilton from Numis.

I have 2 interrelated, if that's okay. The first is you mentioned sort of recovery in demand in Poland. Can you sort of quantify that? Is that just a little bit better, sort of [ teensy ] better? Or is it sort of more meaningful uplift? And relating to that, obviously, credit quality in Europe at the moment is exceptional. Could you comment on the incoming applications you're receiving, what the credit profiles are looking like?

Yes. Okay. So on the recovery, so when we did our annual results, which is how many -- the 20th of February, 19th February, I think, we did mention at the time that we saw softer demand than we'd expected in Europe in particular. And then you had the Ukrainian war that came literally a day after we announced our results. So as we've said in the statement, that unsettled people, particularly in Poland, which is our largest market there. So what we saw is softer demand. But also, I have to say that it impacted our own operations in so far as we have thousands of agents who go out and visit their customers. And they themselves were preoccupied with the impacts of Ukraine. But now -- and it sounds terrible, but now that people are getting more used to the fact that there is this war that's ongoing, we are seeing a return to what I would call normalized demand. So for us, that's demand in line with our own targets, our own budgets. We're not there exactly yet. But we saw a good step-up at the end of March, and that followed through into April. So what I'd say is that we're comfortable with where demand is now and we would expect it to continue to improve over the coming weeks. We don't see anything that should upset that unless there were some major things that happened in Ukraine, which obviously is outside of our control. In terms of credit quality, you're right. We are at an exceptionally low point in terms of the impairment flowing through the P&L. But as we try to point out, it's a few things. One is that we're obviously cautious in terms of credit settings, but we are almost back to pre-COVID credit settings across the business. There are some sectors that we're more careful about that were particularly impacted during the pandemic. But broadly speaking, I would say we're nearly back at pre-COVID settings. So what we're doing now is we're starting to step up credit issued across all businesses, but what we're seeing is really good collections quality coming from operational effectiveness. So I would say our agents are outperforming where we'd expected them to be. But equally, I would say that the customers are repaying better than we had anticipated anyway. I don't think you -- because your question sort of might have implied that are we dealing with different customers. Not really. We're doing broadly with the same underbanked, underserved group. We're probably taking up more better-quality customers at the top end, but nothing, I would say, significant. So it's really a case that I think the customers are behaving very well and better than we anticipate, and our agents are proving very, very effective when they're out on the street. So the combination of the 2 is what's driving that low impairment. Now I think people should expect that as we go through the impairment in the P&L, we'll get to more normal levels. You shouldn't expect to see a negative impairment figure as we have in European home credit in the first quarter. So we would say that as we grew the business further and the way IFRS 9 works, you should expect to see those impairment levels come back to, I would say, the high teens across the group. I think that's what we should expect.

We will take the next question from Stuart Duncan from Peel Hunt.

You've answered most of my questions already, actually. The one I've got left is really around Mexico. And you've spoken in the past about the expansion plans there. So just give an update on how that's going, if that's possible.

Yes, of course. Well, as I mentioned just a few minutes ago, it will be later in the year when we expand into the Norte region. So I would talk that down as H2 for us in terms of when that would happen. But truthfully, you won't really see any discernible impact in the numbers this year because when we start out and we open up a new region, so for instance, in Mexico, we will open up a branch, we will recruit our agents, we'll recruit our management team, and we will start quite cautiously. So by the time we get to the end of the year, we won't be talking about numbers that move the dial at all. It will take probably 18 months or so, I would say, before you would see numbers that we would talk about as being meaningful. But that's okay by us. That's the way we run the business, cautious to start with, make sure we get the quality right. But what we are doing is we're expanding across Mexico by taking on new agents. So we've increased the agents number in Mexico over the last year, and that is now delivering additional volumes to the business. We've consolidated some branches, but we're also opening up more points around Mexico City and the [ innovation ] there because the density of population, which works very well for us. So I think in terms of expansion, there won't be too much to say in terms of Norte, but we will confirm that we have started it. But you will see the positive impacts of more agents on the street each month as we go by.

We will now take the next question from Andrew O'Flaherty from Credit Suisse.

Congratulations on the results. Three for me, if I may, and apologies if you may have had these kind of questions before I get up to speed on the story. But I guess the first, just on Poland, we saw the Polish Prime Minister mention possible moratoria in the context of, I think, mortgage lending in the last few days. I wonder if how you think about that kind of political overlay, if you like, and how would something like moratoria affect you were they to be applied to your consumer. Second question is just on Mexico. Obviously, the growth there has been very good. I'm interested, who are your key competitors here? Is it other home credit providers? Is it online? And what are the types of ways in which you're competing? Is it service quality? Is it more price? Just be good to get a bit of a sense of what differentiates you in that region? And then finally, just it would be great to get your kind of latest thoughts on the capital structure. Is it something you're comfortable with here? Obviously, you've got the 2 smaller maturities in the next few years and the quite high coupon on the, I think, 2025 note. So is it just kind of wait and see with debt markets remaining kind of a bit more difficult at the moment? Just keen for your latest thoughts on that.

Sure. Thanks, Andrew. Well, let's see your questions in turn. So Poland, let me first of all mention about moratoria generally, and then I'll hand over to Kris, who is sitting in Warsaw. So we've only got one remaining hangover from the COVID regulation, and that's in Hungary. And that's due to expire at the end of June, and we fully expect that to do so. So in terms of current impact on the business of COVID-type regulations is now quite small really. Kris, do you want to comment on the -- what Morawiecki said a few days ago?

Yes, sure. Thanks, Andrew, for your question. I think that in terms of the recent interviews that PM Morawiecki held in Poland, clearly, what the government is trying to achieve is they're trying to provide some relief to consumers that have mortgages in Poland in particular. So effectively, what they're trying to achieve is reduce the interest payable on the mortgages. You may be aware that the interest rates have increased quite significantly over the last 5 months really in Poland. And secondly, they try and help them defer some of those payments as they've been obviously benefiting from a standard type moratorias provided by banks in Poland, but they want to extend it a little bit. Both of those actions are basically looking to provide that support to mortgage customers. Our customers, firstly, very few of them have mortgages. That's the first thing. And the second thing is regulation is addressed to the -- to address the challenges in the banking sector really. So for now, we don't really expect or anticipate any impact on our customers from that end. Clearly, that may provide some relief. In terms of the moratoria itself, the discussions that are held at the moment, and there is a quite a debate between the government and the banking association about this in Poland, is about potentially deferring the interest component once a quarter for a couple of years to those mortgage customers. So as said, it is something that will potentially impact the bank industry rather than us.

Thanks, Kris. And then your second question was on Mexico. So in terms of competitors, I would say we come up against a group called Compartamos -- well now [ Gentera ], but their model is a group lending model. So [indiscernible] bank-type idea where you lend to 12 or 15 mostly women who effectively guarantee each other's loans. They're the same customer segment as us, but they tend to do group lending. We also see Banco Azteca, but they're a much bigger organization. They have retail, media and financial services. But there are probably 1 or 2 runs up from us in terms of the quality of customers they're after. So we see there's plenty of competition there, but there isn't any bug of any scale that does what we do, which is direct-to-consumer individual installment loans that are tailored for our consumer segment. And when I say that, I mean both in terms of being able to go to their homes, meet them, assess their credit quality and the amount of money we'd be willing to lend them, but also to do it in a way that suits their repayment cycle. Because I'm not sure if you know, but in Mexico, most people would be paid on what's called a quincena, which is every fortnight. And so our weekly loans then really suit these types of customers. The other thing is that in terms of our products, we are opening up partnerships there. It's embryonic. It's just getting started, but we also have a fantastic digital business, which is approaching 60,000 customers now, and that business is doing really very, very nicely. So we're trying to expand our horizons in terms of our reach of customers. We're still in the underbanked, underserved market, but now at least we can do it in 2 very different ways, the standard home credit model but also now the new digital model that we have there. And that's going really very, very well for us. The one thing to say about Mexico is that there is huge opportunity in Mexico in terms of scale. So the underbanked, underserved community is enormous and disproportionately large compared to most other countries that you would look at. And for us, that's a great, great opportunity. And that's why we spent so much time investing and talking about it, I guess. And then moving on to your third question, which was about capital structure. Gary, do you want to talk about that?

Yes. Sure. Good morning, everybody. In terms of capital structure, obviously, as we say in the statement, we've got a robust position. And clearly, as we flagged, there is really good opportunity for growth for the year as a whole. And I think we're in good shape to continue that growth as well as pay the progressive dividend that was flagged at the year-end. So I think we're in great shape as we enter the remainder of the year from that perspective. In terms of funding, as you say, there's obviously been a lot of volatility in pricing. Our yields, I think, moved from about 6.5 to above 10% on the bonds. Clearly, that's linked to the Ukraine conflict. And probably not the right time to be doing anything now, but we expect that yields should stabilize as the year progresses. And clearly, we'll be considering what we can do later in the year. But as we stand, we've got plenty of headroom to continue with our growth and our plans for the remainder of the year and into next year.

And it's clear that a business like ours with our track history of delivering to the bottom line with such a strong and well-capitalized balance sheet, truthfully, we deserve a better price on the bonds. But it's a question of finding the right time to do that.

We will take the next question from Neville Harris Radnor Capital Partners.

I have got a few questions actually. I had a couple on Mexico, but Stuart covered them mostly. You've given us more detail on the background there. I guess just one quickie. You're not worried about consumer confidence in Mexico. I know you didn't mention it in the statement, but I mean, how does it feel over there economically?

No. Neville, so consumer confidence in Mexico was only dented by COVID. So we don't see any spillover from the war in Ukraine. And Mexico as of last week, went fully green. They have a traffic light system across the country in terms of COVID restrictions, and that went fully green. So we would expect consumer confidence to be positive for the remainder of the year, unless there's something extraneous happens. So we feel good about that.

That's good. That's very good news. It's trading incredibly well, that market.

Yes. Yes, it's fantastic for us, yes.

[Operator Instructions] We will now take the next question from [ Freddie Bruce ] from private investor.

Just a quick one on Mexico. I see the impairment rate rose 4 percentage points in Q1. Can you just give a little bit of color on that, please?

Yes. It's very straightforward. The business, when it grows like it did there, which is over 30%, under IFRS 9 rules, you basically suck in a lot of impairment upfront. That's all it is. So it's perfectly normal and expected, in line with what we were looking for.

[Operator Instructions]

Okay. Sharon, I think that's fine. Thank you very much, everybody, for joining the call and for all of those questions. As always, we're available for bilateral phone calls or channels, whatever you want to do, if you need more detail on the business. We're always available for that. So thank you very much for joining the call and the questions. Sharon, thank you for hosting so well.

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