Our key aim in 2012 is to use the levers of accelerated growth and consistent credit quality to offset the adverse impacts of higher early settlement rebates (‘ESRs’) and weaker FX rates. The Group has performed well against this objective in the first half of 2012, reporting growth in customer numbers of 7% and credit issued of 12% alongside stable credit quality. This has resulted in underlying profit growth of £7.5M before the twin impact of higher ESRs (£5.6M) and weaker FX rates (£6.2M).
The Group results are shown in the table below:
|Change at CER %|
|Customer numbers (000s)
|Average net receivables
|Revenue (net of ESRs)
|Profit before taxation, exceptional item and fair value adjustments
|Exceptional item – restructuring
|Fair value adjustments
|Profit before taxation
This performance was delivered against a backdrop of low but relatively stable consumer confidence and modest economic growth in our European markets. The key drivers were growth in customer numbers, which have increased year-on-year by 7% to 2.5M, and credit issued which has increased at the faster rate of 12%. The growth in credit issued was reflected in higher average net receivables, which have increased by 10% to £568.9M.
Revenue increased at the slower rate of 8% largely due to the expected impact of higher ESRs in Czech-Slovakia and Poland, which are charged against revenue. The impact of higher ESR costs was broadly in line with our expectations for the first half and our guidance for the full year remains unchanged at £10M to £15M.
Our collections performance remained robust during the first half of the year and annualised impairment as a percentage of revenue remains at the lower end of our 25% to 30% target range (June 2012: 26.2%; December 2011: 25.8%; June 2011: 26.8%).
Finance costs increased by 5%, which is around half the growth in average net receivables and reflects the continued capital generation and de-gearing of the Group. Agents’ commission costs, which are largely based on collections in order to promote responsible lending, increased by 11% to £35.9M in line with growth in the business.
Operational efficiencies generated room for £5.0M of targeted investments, largely in promotional and incentive activity for our field management teams, to drive top-line growth while maintaining a flat annualised cost-income ratio of 40.9% since the 2011 year end.
Profit before tax, exceptional items and fair value adjustments was £31.4M, which is £4.3M lower than 2011. This reflects a £7.5M improvement in underlying profit offset by the impact of higher ESRs and weaker FX rates.
During the first half of the year we have incurred an exceptional charge of £4.8M in respect of a management restructuring exercise designed to strengthen our UK functional support teams and refresh the country teams (2011: £nil). As a result of the UK restructure, 57 positions will be removed (around 30% of the UK head office team), with around 30 new positions created, mainly in marketing and IT. The annual net reduction in costs arising from these changes is expected to be around £2.0M.
As previously announced, the Group entered derivative contracts to fix foreign currency rates used to translate approximately 70% of our forecast profit for the year. At 30 June 2012, the fair value movement on these derivative contracts that relate to the second half of the year was a £0.8M loss based on marking these contracts to market (2011: loss of £4.7M). This loss will unwind in the second half as the contracts mature. Further details are set out in note 14.
The following table shows the performance of each of our markets. We have shown the impact of additional ESR costs and weaker FX rates in order to provide a better understanding of underlying performance.
|UK – central costs
* Excluding exceptional item and fair value adjustments.
Profit before tax, exceptional items and fair value adjustments reduced by £4.3M to £31.4M reflecting a good improvement in underlying profit offset by the impact of higher ESRs and weaker FX rates.
The underlying profit improvement during the first half of the year was £7.5M, with the key drivers being Poland and Mexico. In Poland, a combination of good growth in credit issued and stable credit quality has resulted in strong growth in net revenue. Profit growth in Mexico has been driven by 29% growth in credit issued together with continued improvements in operational performance which have reduced impairment. Conditions have proved more difficult in Romania so far this year due to the combined impact that austerity measures and severe Winter weather had on on household income, although consumer confidence has improved towards the end of Q2.
The Consumer Credit Directive (‘CCD’) was implemented progressively in our European markets between March 2010 and December 2011. This has resulted in an increase in the cost of ESRs. These are charged against revenue and the additional impact in the first half was £5.6M. Poland and the Czech Republic were the last of our markets to implement the CCD and therefore the year-on-year impact on profit continues to be seen in these markets. The impact in Poland is relatively small in the first half and is expected to increase progressively during the second half of the year. In contrast, the impact in Czech-Slovakia is expected to reduce because the higher rebates are becoming fully embedded in the income statement.
As announced in January, our operating currencies have weakened significantly against Sterling and the effective average FX rates at which we hedged 70% of our forecast profit were 17% weaker than 2011. These weaker FX rates have adversely impacted profit in the first half of the year by £6.2M.
The taxation charge for the first six months of 2012 has been based on an expected effective tax rate for the full year of 28%.
Whilst the regulatory framework in which we operate is constantly evolving, there are currently no major regulatory challenges facing the business. The planned EU review of the CCD has commenced but we do not, at this stage, expect any substantive changes. We have successfully implemented the CCD in all European markets and in Hungary have transitioned to the lower 45% APR cap with no material impact on performance, providing further evidence of the flexibility of the business model.
Balance sheet and funding
At 30 June 2012 the Group had net assets of £333.9M (June 2011: £335.5M) and receivables of £564.4M, which represents an increase on the prior year of 10% at CER (June 2011: £597.2M). The Group balance sheet has, therefore, continued to strengthen in the first half of 2012 with equity as a percentage of receivables increasing to 59.2% (June 2011: 56.2%; December 2011: 58.5%).
Borrowings at the end of June were £246.3M which is £4.0M lower than June 2011 CER (June 2011: £287.4M). This is despite a 10% increase in the receivables book reflecting continued strong operational cash flows of £42.3M in the first half of the year (June 2011: £36.2M). Gearing, calculated as borrowings divided by equity, has therefore reduced to 0.7 times (June 2011: 0.9 times).
Borrowings are supported by a diversified portfolio of debt funding, comprising both bank and bond facilities over predominantly three and five year maturities, with total committed facilities at 30 June 2012 of £436.0M. This means that the Group has headroom on these facilities of £189.7M. In May 2012 the Group extended £130M of its bank facilities into 2015 which, together with existing debt facilities, provides sufficient funding through to that time. This was achieved with no increase in margin or any change in financial covenants.
Dividend and share buy-back
Given the uncertain economic outlook, we will maintain a conservative balance sheet for now, but ultimately, our aim is to lower our cost of debt funding, optimise the amount of equity capital on the balance sheet and enhance shareholder returns. In the meantime, with an increase in the equity to receivables ratio to 59% and having successfully completed the refinancing of our bank facilities, we are demonstrating our commitment to working the balance sheet harder by undertaking an on-market share buy-back programme of c£25M which will reset the capital ratio to nearer our current target ratio of 55%.
The Board is also pleased to declare an increase in the interim dividend of 7.5% to 3.23 pence per share (2011: 3.00 pence), reflecting the strong underlying trading performance and the cash generative nature of the business model. The dividend is payable on 5 October 2012 to shareholders on the register at close of business on 7 September 2012. The shares will be marked ex-dividend on 5 September 2012.
Following the appointment of Gerard Ryan as Chief Executive Officer, the Group has redefined its core strategic goals, which are designed to accelerate growth and increase shareholder value. This new strategy aims to develop the business through four strategic actions:
- Expand the Group’s footprint – grow in existing markets and enter new markets through greenfield development or bolt-on acquisition;
- Improve customer engagement – enhance customer acquisition and their experience to improve retention and profitability;
- Develop a more sales focused culture – develop a stronger sales mindset and invest in the recruitment and development of people with the skill set to meet our growth plans; and
- Improve our ability to execute strategy – improve efficiency and redefine the role of the UK head office and management resource required in-market to deliver the new strategy. Develop the IT strategy to support growth and meet the future needs of customers.