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

Welcome to the second of our in-depth insights into the businesses that are contained in IPF Group. And today, I'm delighted to be here in Puebla, Mexico with David Parkinson, who is our Country Manager for Provident. And over the next 45 minutes or so, David is going to talk us through the business that he leads and the opportunities that it has. Now as we do that, when you look at your screen, you have the opportunity to ask us any questions you want. [Operator Instructions] So just type your question in there. And at the end, Alex will come forward and hit us with all of those questions, okay? So let's get started because we have a lot to get through. So David, why don't we start with how does a young lad from Durham end up leading a business of this scale in a place like Mexico?

Well, well, 37 years ago, Gerard, when I started as a DM in my hometown, I couldn't possibly imagine that I would end up in Mexico being part of this tremendous business. But I think I'm here because I always said yes to opportunities. So I've done all of the field roles in -- and our business did about 5 years now, Head Office and then had the opportunity to go to Czech Republic, then had the opportunity to go to Poland. And then, as we know, I had the opportunity to come here. So yes, an amazing journey for me. And really, I'm here because I've always said yes to opportunities.

Yes, a good strategy. Well, listen, we want to describe everything that we can about your business in Mexico. So why don't you start with an overview of the country in which we operate.

Okay. Well, I'm not sure how well the view is now Mexico, but I've put a chart on here with a map of Mexico, and you can see it's a huge country. So we operate in the top left in a place called Tijuana, and the bottom right, in a place called Mérida. And what's really interesting, it's around about the same distance from those 2 places as it is from Dublin to Istanbul, and I know 2 places that you're very familiar with. So it's a huge country that literally covers Europe. Now looking at the country itself, it's a Federal Presidential Republic with all of the usual checks and balances you would expect in a mature country. So an independent central bank, an independent judicial system and legislative system. The term of office for the President is 6 years, and we've got next elections in 2024. It's a big country, big population, but a lot of it is concentrated actually in the middle of Mexico and the border cities around the border with the United States. It's also a very big economy, the 15th largest in the world and the second biggest in Latin America behind Brazil. It's a very business-friendly place. I find that personally, and certainly, a lot of the commentators talk about Mexico as being an easy place to do business. Unemployment stable. It's got a good workforce, and there's a large informal element. What does that mean? It means that essentially, people are still economically active in work. However, they're not typically part of the social security system and don't pay taxes. Inflation at the moment is a little bit higher -- well, higher than the target rate, and it's a little bit higher than the headline rate that we see here for basics such as food and electricity and gas. And because of our geographical location, there's significant dependence on the U.S. economy for both imports and exports.

Yes. And I've seen that from myself as I've traveled around Puebla so often. These enormous car plants shipping literally tens of thousands of vehicles every month up across the border into the U.S. So what about the competitive landscape to it?

Okay. So we have 4 main competitor categories in the market. We've got banks, fintech, NBFIs and credit unions. So as viewers can see in the columns on the left-hand side of the screen, which show the biggest brand going down the columns, we also have the market segmented by what we call socioeconomic type, and this is in the pyramid in the middle of the slide. The permit is based on income levels with the highest income being A and B, and the more modest incomes being B -- being E, sorry, at the bottom of the pyramid. And this permit is produced by the National Statistical Office. The latest standard that we have is from 2019, and it's refreshed every 4 years. So as we can see, the traditional banks and fintechs dominate the top segments, and we have healthy competition in our chosen segments, which viewers can see with the blue line that goes around those 2 segments, and I'll come back to our segments in a moment. But overall, I described the market is something which is developing. Domestic credit penetration at GDP is 38%. There's a comparison in Brazil, it's in the mid-70s and over 100% in countries like the U.K. and the U.S. And despite the huge network of bank branches in Mexico, Mexico has a lowest combined bank and fintech penetration in whole of Latin America at 47%, and a handful of banks dominate penetration of these top 3 segments that we can see. Fintechs are supporting bank account penetration and also mostly target the higher socioeconomic groups. Now Provident target segment, C-, D+ and D, using the socioeconomic data together with our own data, we estimate that this market covers over 50 million -- round about 52 million consumers. And the majority of this segment deal in cash due to the lower-than-average bank penetration in these segments. Now key competitors in our segments include Compartamos that many of our viewers will be familiar with because we talked about them before. And they're mainly of the group lending, which is why 7 or more consumers clubbed together and take collective responsibility for the loan and repayments. And another key competitor is Azteca Bank, who offer all of the traditional bank products such as loans, credit cards, but also point-of-sale financing through electric stores, which are right next to Azteca Bank in our communities. And Coppel, who have a similar model to Azteca bank, but operate with a smaller scale. Now the majority of successful enterprises in our segment, including ourselves, win by being very, very close to the customer through our infrastructure and network being accessible by our local communities. So we all have lots of branches. And the other thing that we all have is, we all have our frontline staff, and in our case, our estrellas are very, very close to the customers in our communities. So that's how the best companies in this market win in that segment.

Sure, enormously important. And that's a very good transition now into talking about our business and how we operate in the market.

Yes. So we are a leading provider of installment loans on the market. We are amongst the top 5 players of all of that competition in our space. We've got a significant experience on the market. And actually, this year, we'll have a milestone because we'll celebrate 20 years on the marketplace. So we also have our infrastructure. We've got 57 branches, and we operate in 27 of the 32 states, and I'll talk about this shortly. And we've held and served already over 5 million Mexican customers. We've got good branch awareness. We don't operate everywhere, but where we do, we've got over 70% branch awareness, and we've got an exceptional Net Promoter Score of over 80%. And finally, we're a recognized award-winning business. So our CSR program, Together We Care, has been running now for 17 years and consistently wins awards. We're a top 500 company. Our innovation program recently was recognized Forbes. Our CIO was recognized by CIO Magazine. We're Certified Healthy Place to Work, and we've been recognized recently by the Wellness Council in one of their top tiers in their categories. So with great business, and we take all of our responsibility seriously.

And the great thing is that it is very important to do the right thing, but these days, it's equally important to be seen to do the right thing. And I think these accolades that you and your team are winning are fantastic in that respect.

Yes. Yes.

So moving on then in terms of how we serve the customers, what they want from us and how we deliver it. Let us move into that.

Okay. Well, we operate with 2 business lines that have separate networks. Firstly, home credit. So in -- Home Credit is individual, weekly-paid installment loans. We've got a very extensive footprint that we have across Mexico, and I'll show that shortly. We've got a significant amount of people and a large and importantly growing customer base. Our average loan term is 42 weeks, which is a lot shorter than what viewers might be aware of from our European experience. And equally, our long size is about GBP 300, which is simply a reflection of the income levels in our target segment.

So for comparison, in Europe, that term would probably be more like 70 to 75 weeks, and the average loan size would probably be about 3x.

Correct.

You're [ absolute ] here.

Correct. We also have Negocio. So for viewers benefits, we've got about 4 million very, very small enterprises across Mexico. These are usually sole traders, small family businesses, and these businesses often operate from the customer's home, either the ground floor of the apartment or somewhere within the home. We call these Negocios, and Negocio in Spanish just simply means business in English. And these are typically small grocery stores or general-purpose stores, maybe auto repair or fixed food outlets. We currently only operate this business line in Mexico City. There is a lot of potential there. We have around 8,000 customers, issue values and average long sizes as we can see are a lot higher than we have in home credit. And our loans are typically used as working capital in order for our customers to buy product and then sell it on to their customers. And in both home credit and Negocio, we offer as a value-added service optional life and health insurance.

And I can confirm, as you know, from being out and meeting lots of our Negocio customers, they are actually the very same as our home credit customers. They just happen to run a micro business from the front of their home or whatever it might be.

They are, absolutely.

Yes, but it is an enormous opportunity for us. Okay. And the team, David, does you're working with to deliver all this?

Yes. So let me introduce you to the team. So very briefly, this is a team that lead this business. I would say a hugely talented team that blends significant Provident experience and expertise in the individual's chosen specialism. And as viewers can see, most of my team have got multi-geography experience, a really experienced team. There are 3 non-Mexicans in the team. So myself, Bartek and Derek. Although I must say, Derek has been here in Mexico for more than half of his entire Provident career.

Okay. And then this is the team, I suppose, over a number of years that has built out the business. Now one of the questions I get asked when I meet investors is, why Mexico? And I explain about the opportunity. But they also like to understand, do we just arrive and build everything at once? Or how did we do it?

Okay. So I mentioned that we have a presence in 27 of the 32 states. Now we aren't in every city and town and each one of those states, and you'll see that a little bit in more detail later in the presentation. But we started here in Puebla back in 2003, and Puebla is the fourth largest city in the country, and it's got a really good location because of access links to East, West and also Mexico City. And from Puebla, we essentially moved out with a ripple effect to adjacent states and covered quite a lot of the territory over the next few years. An important point is, when we entered Guadalajara in 2008 because Guadalajara is the third largest city in the country by population. So going there, we already kind of refined our entry method, and we refined our skills in order to go to bigger cities. Then a couple of years after that, we moved into Monterrey, which is the second largest city in the country and essentially, did the same thing there, start to develop that state and adjacent states. And then in 2016, we came to Mexico City, the largest city in the country by some distance and start to develop that and the surrounding areas of Mexico City. And fast forward to 2022, and we've just recently entered Tijuana, which we can see in blue in Baja California on the top left of the map. And this was one of the largest remaining cities that we hadn't already started to build a presence in, and we'll use this as a hub to develop other geographies around that Baja California area. So my key message here is, whilst we've been on the market for 20 years, when you look at the big population of Guadalajara, Monterrey and Mexico City that we've only operated in for a few years, there's still quite a lot of opportunity to develop those particular cities and the territories around them.

And I think the pace of our growth has been very measured and very sensible. Now you mentioned at the start that when you overlay this map onto Europe, it stretches from I think Northern Ireland down to Istanbul. How do you control or govern or manage a business over such a huge geography?

Well, we've got a really good field structure, and I'll take viewers through a couple of important points here because running a business like ours needs a lot of experience and relatively tight spans of controls because of how much of the geography spread out. And when you're a growing business, you're constantly recruiting new people and there needs to be a very hands-on approach to coaching, learning and development. So that's why we have typically smaller spans of controls than we have in Europe. But starting at the base of the pyramid, we've got our 10,000 estrellas as we call them over here. So estrellas are our representatives. Estrellas mean stars, and there are stars. So they typically have around 75 customers. As smaller the numbers than we would see in Europe, but that's predominantly because a lot of our estrellas actually go and see their customers and manage their territory on foot. So they walk. We don't have access to public transport or their own transportation. 0ur first-line managers of which we have 900 have around 10 estrellas each. So again, smaller spans of control than we have in Europe. But bear in mind, a lot of our Development Managers and a lot of our estrellas are quite new. So we don't want to stretch spans of controls too much. The Area Manager and the DOM levels or the next level is up, and they are still pretty hands-on operational roles in the business, working with the Development Managers in the field. So we think they can take a little bit more. So they operate with round about 6 -- of [ they direct ] report each. And then when you go higher up to Regional Sales Leaders and my 2 Divisional Directors, Derek and Bartek, the spans of controls need to be a little bit lighter because they are geographically remote to their team. They have to do a lot of traveling. So this is how we manage our business, and it's really about having experience to make sure that we have the appropriate spans of controls for us in order to manage our operational rhythm.

Sure. And I think it's really important that people understand this because it is a massive geography, but this is a very well-defined structure and a very mature structure that works for us.

Correct.

Now in that whole pyramid, you probably have, I would say, 2 categories of people. You have those who are employed by us, and you have our representatives or estrellas. So let's look at each of those in turn.

Okay. Well, this is the business as a whole. So we've got 2,500 employees, more or less. About 45% are women. We've got 10,000 estrellas as we've already talked about, and 93% of women. And we've got about 50 senior managers in the business and about 1/3 of them are women as well. And that's important because we've got a good balance -- got a good gender balance in the business. I describe our workforce as really highly engaged and participative. So whenever we've got any service to complete or we ask our employees for opinion, we've typically got response rates in the 90s. So there's a real appetite to give feedback about what we should do. And the other thing that's really particular to Mexico is such a social connection that we've constantly got about 300 volunteers. They turn up every time we do any CSR activity, and it's fantastic to see them there. And the picture you can see is of our top 500 people. We had this event in Acapulco on the west of Mexico in October, and it's a recognition of our best of the best of the best performers. And we do this each year, and we get a lot of insight. And we ask a lot of questions about, for example, how they manage purpose, what do they think about our products, what do they need from a development standpoint. So it's absolutely fantastic. Now clearly such a big workforce needs a lot of development and a lot of investment. And I've put a number of things across the bottom which are highlights of last year from a developmental standpoint, but I'll just pick out two. And the first one is, over 6,300 of our estrellas completed the Academy Foundation level. So this is online learning supplemented with videos and workshops. And it's really important because the content of this is not only knowledge and skills that they would need to perform that role, it's also really important life skills, such as how to manage a family budget, and that went down really, really well and very, very high participation. And the other thing I would mention is on the far right-hand side, which we now have 30% of our development managers that used to be estrellas. And at the beginning of the year, that was only 11%. So we really promoted this career development from the front line into first manager position. And as I'm sure viewers can imagine, we get a lot of benefits when we've got a new employee started that already knows our business, that already knows the territories which we operate, already knows our customers and our rules. So that's a fantastic development that we'll continue with that.

Sure. And I think that's just a perfect segue then to talk about the net -- well, the biggest population of our, which are our estrellas, 10,000 that you keep referring to.

Yes. So we call them stars, and I think stars for a reason. They're absolutely fantastic. Now most of our stars -- most of our estrellas are women and typically heads a family and a breadwinner in their household. Average length of service is around 4 years, and they really value the opportunity to be able to build an income stream with Provident, improve their financial situation whilst continuing to do all of the things that they have to do as a key person in their family. Now the 2 ladies that we can see here are our actually real estrellas. And I've worked in several home credit countries over the course of my career, and in my opinion, our best representatives here in Mexico are no different to the best representatives that are met in other parts of the country. They are hard-working, kind and determined people who have the ability to connect within the communities and really manage a personal relationship with customers. Now the lady at the top of the picture is a lady called Betty. Now you've met Betty.

Yes, I've met Betty.

And I met Betty on my first visit. It was my first branch visit back in 2019 to Guadalajara. So I could talk a long time about the attributes and why our estrellas join us, but I just thought it's better to show a video of Betty, and she can describe it for ourself.

Great. Okay. Well, let's have a look at the video then. [Presentation]

Okay. Well, I mean that was just a fantastic example of an estrellas. And the good thing about that video, I think, David, is that, that lady is not an exception. She is more of the rule in terms of the quality of people that you have working here. So that's a great example of an estrella. What about our customers?

Yes. Well, clearly, our customers are the most important people in our business. We're all here to serve our customers. And as with our estrellas, the majority of our customers are women. So it's very much a female-to-female business at the front end. Most have children and most were a key contributor to the family finances. Just over 1/3 of our customers live in what we call rural communities and most are typically underserved by traditional banks and most have very limited credit history and need to borrow and budget very carefully on that tight financial situation. Now the lady in the picture here is Jennifer. Now Jennifer is also a real customer from Oaxaca. So again, rather than me talk about why a customer would choose Provident and what a customer would use their loan for, let's hear from Jennifer.

Okay. Fantastic. [Presentation]

Okay. Well, who couldn't help but be inspired by that video. And the first time I saw that video, I think, a few days ago, I asked you -- I said, well, is this stage managed? And what did you tell me?

Well, actually, it's part of our purpose program. We set out to collect customer stories and estrella's stories from all over the country. So we've actually got these real stories from all parts of Mexico because we wanted to share them with our local branch staff so that they could relate to something and somebody who within their geography. So it's everywhere.

Okay. Fantastic. Okay. Well, look, so we've talked about our business, the products, the services. We've talked about the structure in the field. We talked about our colleagues, and we talked about our estrellas. But clearly, all of this drives to one thing, which is performance. So let's talk a little bit about the performance of the business.

Okay. So I haven't now met everybody. Let me share some recent results. Now these results are up to the end of September last year. And as you can see from the chart, we're delivering solid growth year-over-year in relation to customer lending. So the top chart over 20% year-over-year as at the end of September. We're also very satisfied. If you look at the bottom chart with our receivable growth trends. So you can see here several quarters and it's just consistent growth over growth. So we're now again year-over-year just above that 20%. And I'd point out, I think it's very important. Certainly, it was very important to us here that we remain profitable through the pandemic period and due to our operational rhythm, which we crafted through that pandemic period, and our performance management systems and our data-driven decision process, we're now delivering sustainable customer growth that will obviously lead into good levels of profit growth.

Yes. And I'm sure you won't mind me admitting that when the pandemic hit, the single business I was most worried about was your business.

Yes. Yes.

And partly because it's an enormous country. The health care system isn't geared up for a pandemic, and we were very, very worried. But as you said, for all the reasons you've just described, the business remained profitable throughout and it's now firmly back in growth mode. Now this growth obviously is translating into returns for the business. So let's have a look at that.

Yes . So we've got 4 slides here, 4 chart which I'll explain, but we're very satisfied that we are delivering on our target returns of just above 20% whilst investing at the same time in growth. And I think that's an important message for the viewers. So we are delivering returns while still growing. On these charts, we see data as of the end of June for Mexico in comparison to IPF Group. And it shows, in my opinion, that we've got a balance of income and expense in the business. Firstly, on the income side. So our revenue yield is 86.5%. And we look at pricing relative to what's happening on the market in our chosen segments and our price reflects risk. So there are no price caps here in Mexico. Therefore, it's a kind of natural pricing set by consumers and lenders in this natural competitive environment. Our impairment rate is higher at 27.9%. However, it's in the ranges that we set taking into consideration our risk profile and the fact that we are a growing business. Unlike in European home credit, we don't benefit from a mature debt sales opportunity over here in Mexico. So we just have this headline impairment. Our cost-income ratio is 53.8%, and it's reducing. We're very proud of this actually. So it will continue in this direction. We rightsized, as everybody did and IPF through the pandemic, and we haven't allowed that headcount to creep. So all our new headcount is either directly related to strategic developments or it's related to our operational growth through expansion and extension.

Sure. Well, really, I think a solid set of numbers. Now in many respects, I suppose this is looking in the rear-view mirror. This is what you have delivered. But one of the things I constantly tell people who are interested in the business and investors in particular, is about the potential of your business and how you're looking at that. So let's go now from a rear-view mirror to looking forward and seeing what you're up to.

Okay. Well, we keep our development agenda pretty sharp and tight and focused. So there are 4 things here that we're really concentrating on right now, and I'll talk about each in a little bit more detail. But at a high level, it's improving our customer experience, it's driving synergies with Creditea. Creditea, part of IPF Digital, that operate over here. And essentially, this is about including more applicants accepted by IPF by working together. Territory optimization to increase our penetration within our existing footprint, and finally, extending and expanding the footprint that we have into new geographies. So they are the 4 things that we're really focused on.

Okay. And we should say, for anybody watching here who might not be as familiar with the business, what we're talking about today is home credit.

Correct. Provident.

We do -- Provident. And we do have the Creditea business, which is based out of Mexico, but that will be the subject of another in-depth insight piece. Okay. So let's walk through each of these 4 pillars that you have here.

Well, the first one is improving our customer experience. So as you can see from the top row, our customer experience back in 2021 included lots of handoffs. I don't intend to go through the detail here, but visually, you can see a lot of handoffs and it took a long time. So typically what we call Time to yes, so this is the time it takes for us to make a credit decision about an application was taking longer than 24 hours. And our Time to cash, which is the time it take for us to get the product to the customer, was taken 4 days. So we weren't very happy about this. And actually, these 2 elements, as defined by customers, were pain points in the customer journey. So we felt we should take notice of this. So we use technology and automation in order to reduce the number of handoffs and therefore, reduce time, providing a better and more modern feeling customer experience. Now the whole process is laid out in a tactical solution that we can see in the second row for 2022, but I'll just pick out a couple of main points in that process. And at the core of this slicker process is our digital origination process. So digital origination is essentially where our estrella can access a web application via her mobile phone in the customer's house and start to complete that application. We capture a picture of the customer's ID. We capture a selfie of the customer. We compare the two, and we compare that ID to the government database in order to validate it. We also take a geo location where the web application has been accessed from, and we compare that to the given address, again, to validate that the address is in the approximation of the geo location.

And that geo location comes from our estrella's handheld technology.

It's their handheld technology.

And it says, this is where that individual has done that.

It puts a geo location on where the mobile phone is at that point in time.

Okay.