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

Welcome to the International Personal Finance First Quarter Trading Update hosted by Gerard Ryan, Chief Executive Officer; and Gary Thompson, Chief Financial Officer. Please note, this call is being recorded. However, you will have the opportunity to ask questions. [Operator Instructions] I will now hand you over to Gerard Ryan to begin today's conference. Please go ahead, sir.

Thank you, Priscilla. Good morning, everybody, and welcome to our Q1 trading update call. Today, as usual, I'm joined by Gary Thompson, our CFO. And together, we will update you on performance in the first quarter of this year. I'm going to give you some additional color on what we're seeing in each of our divisions. And as usual, there'll be plenty of time for Q&A at the end. So hopefully, you have a chance to read the statement we issued this morning. And in that, you will have seen that we got off to a very positive start to the year. All 3 divisions: European home credit, Mexico home credit and IPF Digital, performed very well, and we are trading ahead of our internal plans. My colleagues across the group are delivering on our strategy. And in meeting the continuing demand for credit from our customer segment, we delivered strong growth in customer lending of 15% year-on-year. European home credit and IPF Digital increased their year-on-year lending by 19% and 17%, respectively. But it's worth noting that those results are again saw relatively weak Q1 last year, and now that Europe was impacted by outbreaks of COVID and the beginning of the war in Ukraine. In Mexico, we increased customer lending year-on-year by 7%. And truthfully, we're actually very happy with that given that the comparison of the Q1 2022 was 31%, Mexico rebounded when the economy opened up post COVID. The strong growth in customer lending resulted in a 15% rise in customer at GBP 883 million. And I'm particularly pleased that we increased our revenue yield by 1.9 percentage points in the quarter to 53.4%. So now we present our target range of 53% to 56%. [indiscernible] is very disciplined in our lending decisions to customers and never more so than in difficult economic times, where we seek to protect our customers from over indebtedness while maintaining our portfolio of quality. Despite the increased cost of living for our customers, we haven't seen any presentable impact on their repayments behavior. And together with our tight credit standards, credit quality [indiscernible] and the annualized impairment rate was 10.5% at the end of the quarter. Of course, if we were to see deterioration in performance, we're moving [indiscernible] any potential impairment impacts. Our freeze actions in this area demonstrates that we can make required changes very quickly and [indiscernible] when the macroeconomic improves, we can turn it back on again. Our strong cost control focus continues to boost our efficiency. And in the quarter, our actions delivered a 2.1 percentage point improvement in our cost income ratio to 68.8%. [indiscernible] it is our investments in technology to drive productivity gains that is now paying up. And what also is happening with the very structural changes in the group must also deliver further benefits. And to complete the growth picture, we continue to maintain a robust position and a well-capitalized balance sheet to support our growth ambitions and deliver on our progressive dividend policy. We had GBP 92 million of headroom on undrawn facilities and non-operational cash balances, and we expect our current spending capacity and strong cash generation to meet our funding requirements into 2024. Well, that concludes [indiscernible]. Now let me take you through a high-level overview of each of our divisions. European home credit delivered a very good operational performance. We still see good customer demand. And as I mentioned earlier, growth in customer lending was very strong at 19% against Q1 last year. Closing customer receivables have reached just over GBP 0.5 billion at GBP 503 million, and that's up 15% year-on-year. And customer repayments remained strong over the period. A key focus in this division has been [indiscernible] of our credit card offerings in Poland, following the introduction of a tighter rate cap in December of last year. This is progressing very well with 20,000 cards now issued and being used by our customers, as well as [indiscernible] of our credit lending cash [indiscernible] online and in store. Since we introduced credit cards in Q4 last year, we've taken a safe approach to the world. And today, I'm taking concern that all our customer representatives and employees have been trained and have reached [indiscernible] across Poland in the first week of April. We will continue to take a test and learn approach to ensure we fully understand our customers' experience with the cards, and this will also support the introduction of new functionality as they become more familiar with the product. Although it's still very early days, we're very pleased with how our progress [indiscernible]. Turning now to our Mexico home credit business. It's also another very good operational performance. In [indiscernible] in Mexico, we did [indiscernible] last week. And it's been [indiscernible]. And the green energy momentum in the business, and Mexico is now for front of other [indiscernible] into the customer journey to increase the customer experience and deliver efficiencies. And also [indiscernible] that there continues to be a very strong demand for credit from our customer segments in Mexico. So we delivered 7% year-on-year increase in customer lending against price credit standards and a very strong quarter in Q1 2022. Continuing with our customers, increasing 6% to 695,000 and closing net receivables grew by 12% to GBP 169 million. So all in all, a very strong quarter. Moving now to IPF Digital. We continue to deliver a very positive growth momentum in all of our markets as we execute in our strategy to rebuild receivables to gain scale and deliver our target returns. Customer technology is strong, and we delivered a significant uplift in lending growth to 17% year-on-year against a weaker comparator for the reasons I mentioned earlier in the call. Mexico and Australia continues to add performance in terms of group dividend and closing that receivables end of the quarter up 17% at GBP 211 million. While customer numbers are now, excluding Finland and Spain, where our current sector are progressing very well, customer numbers grew by 4% to 234,000. Our shift on the [indiscernible] our digital business will be a focus on a number of our webinars to investors and analysts [indiscernible] made when from [indiscernible] some talent in Estonia. Presentation will cover details of the customer research, key market trends, our current technology and how IPF Digital successfully executed on its strategy to align future growth and returns. [indiscernible] I hope you get the opportunity to join us for that session. It does seem like the webcast we did recently on [indiscernible] with investors. So before we move on to Q&A, let me summarize our first quarter performance and what this means for the [indiscernible]. Demand for credit continues, and we are continuing to secure our customers were [indiscernible] credit and insurance in line with our preference to build a better world through financial inclusion. All 3 divisions performed very well in Q1 and delivered good levels of customer revenue growth, which is a [indiscernible] expectations. The year underpins our confidence in our strategy, and we expect the [indiscernible] into Q2 on the second half. The natural need to be somewhat ahead of our original plan for the year of our Board. And that is now the brief update on the [indiscernible] on Q1 this year. I'd like to tell a very positive story. [indiscernible] back to you if we have any questions that we can answer for you. So [indiscernible], over to you.

All right. [Operator Instructions] We will take our first question from Stuart Duncan from Peel Hunt.

I've got 2 questions, if that's okay. First one is on customer repayment behavior, and it's obviously encouraging. You've not seen any discernible impact there yet. I just wondered if you could give a little bit more detail or sort of thought around how customers are actually managing the inflationary pressures that we're all seeing, what are they doing differently or how we're managing that pressure just now. And the second question is on the cost to income ratio. And you sort of touched -- Gerard, you touched on the potential for some structural changes. I'm not sure if there's anything else you want to say around that just now. But if there is, that would be great. And whether that could potentially have any impact on the 52% to 54% target ratio for costs going forward?

Good morning. It's Gerard. So let me take your questions on the [indiscernible]. On the cost, yes, we mentioned structural changes, but change is too early. What we're saying is we're looking at how we as a group are organized to win [indiscernible] whether or not there's a more optimal structure for the [indiscernible]. It is very early days on that. But we're looking at every facet of the business to see whether or not we can squeeze low cost out of the business. These days, I'd say, Gary and I are very pleased with the progress we've made in the quarter. We do have a target rate. We're heading in the right direction. But I thought I'd try to want to move the target range so early. I think if we continue on this momentum, we'll be feeling pretty good about it. But we will come back in due course about the structural change. If it comes to anything, just to [indiscernible] yes. As for the customer, I have to admit [indiscernible]. It is a surprise to us that we've seen no discernible impact on customer repayments. It is a surprise because as you look at our customer segment, they do spend a disproportionate amount of their available income on [indiscernible] transport, all of the tools boosting. And all those things are really engaged case with very high double-digit inflation. And we've seen inflation in some of our countries like that basket of north of 13% and in some case, even north of 15%. So our fundamental believable is that is not somehow impacting customers behavior and it just having translated in terms of reducing their repayment to us, which I think is a testament to the strength of the relationship between the customer residents and our customers. But also the fact that we are very understanding. Our customers in there, I say, performed very, very well. Now I haven't gone to you that it's going to continue that way because it will not be fun to see. But right now, there's probably 6 or 9 months into these higher utilization period, and things are still going well.

We will move on to our next participant, [ King Bargoa ] from Numis.

Just one question for me, if I may. I would like to hear your thoughts on the competitive landscape across geographies. What sort of -- if there's any impact on that from changing macro trends and the banking turmoil, for instance, but also regulation. So if you could touch a little bit about what -- how you see that competitive landscape evolving?

Sure. Well, on the competitive landscape, what we see in people's [indiscernible] has reduced somewhat. So that's not pretty unexpected, I think. So compare the stability [indiscernible], I mean, we're not going head to head with the banks. You understand that. So including with some of the smaller plans, and many of them income are trading retiring cost of finance, and I define some of them was refinancing. We've got a very strong balance sheet, and we finance well into 2024. So we're comfortable in that respect. What we are seeing is with some of those struggling, we think that the old fundamental [indiscernible] sector is struggling in particular. You've had a number of approaches from [indiscernible] asking if we'll be willing to finance some of [indiscernible] on a wide label basis. We do that by [indiscernible] to hear the conversation. And so I'd say there's plenty of competition in our space. And certainly, some people are showing signs of finding that more difficult than it might have been in the past. On regulation, [indiscernible] requires at the moment. We have the new regulation in Poland. We rolled out our credit card there. We have the portability rule by coming in on the 18th of May in Poland, and that's [indiscernible] for days and [indiscernible] in Poland. So we're preparing for that. So on the credit card, on the regulation on the credit card, we issued 20,000 cards, probably more than 24, 25 [indiscernible] by this stage. And we're actually very comfortable with that because this is really -- it's a very significant change for us, for our customer residents and for our customers. And so we are incredibly concerned to be selling in the right way. So not blessing, putting the right there at the phase that's appropriate for us to make sure that we can demonstrate that we're selling effectively and in consolation, but also in a way even while the customers got a chance to understand the product. So you will see those numbers ramp up as we go forward. So that [indiscernible] regulation in Poland [indiscernible] on director to come through. We don't think they're going to really be surprised by that. Eventually, we might see a bit of regulation in Romania, but it's all that we try for probably 2.5 years, and we're ready for that. So regulation in the [indiscernible], I would say we need to require at this point.

[Operator Instructions] We will move on to our next participant, Dave Storms from Stonegate Capital Markets.

As you're expanding into new regions in Mexico, what has been kind of the historic pace of market penetration there? And how does that pace inform the expansion strategy?

Do you mind just repeating that question, please?

Yes, absolutely. With the new regions in Mexico, what's kind of been the pace of market penetration there, specifically in like Tijuana? And then how is that pacing inform expansion into the new region of Tampico and beyond?

Okay. So what we do when we open new branches in Mexico is that before we get to opening the physical branch, we do a lot of research, as you would expect, in terms of our charter customer segment. These are our competitors there. And if they are either being successful, whether we think we'll be able to recruit the right staff. So we did open up in Tijuana last year. And Gary was with me. Gary went to Tijuana and saw the business there. And so what we do is we go in. We open up a branch. We obviously have management ready to go in there. We start recruiting what you would expect would be our agents level. So we call them [indiscernible]. We refuse [indiscernible]. But we do it on a very paced basis because the thing about opening a new region, if you have to be shareholder, that the people you bring in, so the first cohort of employees and agents you bring in, you absolutely can have to drill, and I mean drill, you have to drill the process as to how we do business. And we sell correctly how we go out and we collect value from the customer and all that. And so the initial stages of opening up a new branch are actually quite slow. Because once you establish the current process, you can then let that process grow. But if you get up to the wrong foot on that initial stage, you can be in trouble. So when you look at, let's say, Tijuana now, we probably have 1,500 -- 1,300 customers or something like that. And people might look at and go, "Gosh, that's quite slow," But that's very deliberate. Once we are comfortable there and we've established all those big line processes, we have the right people in place, then we start to grow much more rapidly. And it would be the same in Tampico. So when I went to Tampico, we literally would have a few hundred customers. But what I was really interested in doing was meeting our initial cohort of employees and [indiscernible] and just testing and saying that we're comfortable we're getting the right caliber people into the business. Now the other thing we do is we always look at, like I said, the target customer segment, how many customers we think we can eventually have. And then we set ourselves a plan for achieving that target. But it's a multiyear target. So it's very paced. Okay.

Yes. Dave, I'll probably add into that. I mean what's important, too, as an executive, Gerard, is the measured pace of that growth. And what that actually brings is the relatively shallow J-curve. So whenever we go into a new territory, the losses in those territories are relatively low. You're talking small single digits, very small single digits. And that's really important in terms of whilst Mexico is a growth business, they can grow really nicely, it is still in our target returns. So we ensure that those, the J-curve is relatively shallow. It takes about 3 years for the region to be profitable. But the losses that we're taking there because of that very paced approach, because it's measured relatively low, which is obviously important in delivering our target returns.

[Operator Instructions] Dear speakers, there are no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks. Thank you.

Thank you, Priscilla. So on behalf of Gary and myself, I can say we're very pleased with the first quarter. Good top line growth [indiscernible] some. Nice to see the improvement in the yield on the portfolio because we've been working hard on that. Very good work on taking costs out of the business. And so as you would expect, that should lead to an improved P&L. Feeling good about customer demand. Feeling very good about the rollout of the credit card in Poland. But as I said, it's very early days. And we want to make sure that we're learning everything we should be learning about how the customers use the card and what they want from it. But all in all, feeling good about the first quarter and carrying good momentum into quarter 2 and hopefully, the second half. As always, thank you very much for joining. If you have further questions, you can always contact either directly or through way in Investor Relations, and we're happy to have bilateral calls if anybody would like to do that. So thank you very much, everybody. Have a good day.

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