Results centre

Profit before taxation was increased by 9% to a record £100.5 million, driven by good growth in customers and credit issued, improved credit quality and continued cost control. This allowed the business to make good progress despite the expected increase in funding costs following the 2010 refinancing and higher early settlement rebates (‘ESRs’) arising from the implementation of the EU Consumer Credit Directive (‘CCD’), which together totalled £23.6 million.

Profit before taxation

The Group results are set out below:

At the start of 2011 our key objective was to accelerate growth against a backdrop of improving economic conditions in all our markets. Our plan was to drive growth by recruiting more agents, increasing investment in marketing and by the selective easing of credit controls.

We increased agent numbers by 13% and marketing expenditure by £2.1 million, and this helped to deliver a 9% increase in customer numbers and an 11% increase in average net receivables for the full year. As the global economic environment deteriorated in the second half of the year and consumer confidence in our European markets weakened, increased caution amongst European agents and customers led to a slowdown in growth for the Group, as shown in the table below:

Achieving the right balance between growth and credit quality can be challenging and we were pleased that alongside stronger growth we were able to reduce the Group impairment charge as a percentage of revenue by 1.8 percentage points to 25.8%.

As expected, following last year’s refinancing which delivered longer term, diversified debt funding, finance costs increased sharply, up by 28% to £42.9 million.

Other costs increased in line with growth in the business, with around two thirds of the increase reflecting the additional investment in new branches and field management to increase our geographical penetration as well as additional marketing spend.

Early settlement rebates

As previously disclosed, the CCD was adopted by the European Council in May 2008 and has subsequently been implemented in each of our European markets. Poland was the last country to do so, in December 2011. The primary impact of the legislation on our business has been to require that we grant more generous ESRs to customers who choose to settle their loans before the end of the contractual term. In 2011, net of a price adjustment, ESR costs were £13.3 million more than in 2010. In 2012, Poland enters these new arrangements and we estimate an additional year-on-year ESR cost in the range of £10 million to £15 million, although the final outcome is uncertain, depending on customer behaviour and also on the outcome of a long-standing case with the Polish Office of Competition and Consumer Protection on our pre-CCD early settlement practices.

Segmental split of results

The following table shows the performance of each of our markets. We have shown the impacts of the higher ESR and funding costs and other non-recurring items to provide a better understanding of underlying performance:

⁽¹⁾ Repayment of VAT from prior periods.
⁽²⁾ Write-down of IT assets.
⁽³⁾ Stated before an exceptional charge of £3.9 million.

Poland was the key driver of increased Group profit in 2011, reporting growth of 35% to £66.0 million. Its performance reflects good growth, stable credit quality and tight cost control, which resulted in strong underlying profit growth. This result also included a one-off credit to the income statement of £4.1 million, as a result of a refund of VAT overpaid in previous periods and a £3.6 million benefit from a price rise implemented to offset higher ESR costs, the introduction of which was unexpectedly delayed by the Polish government until December 2011.

The Czech-Slovakia business delivered a solid performance, although customer growth at 4% was less than we had targeted. Reported profit reduced by £3.9 million to £37.8 million due to significant increases in interest and ESR costs amounting to £8.6 million.

Hungary delivered both good growth and maintained excellent credit quality. However, after additional interest and ESR costs totalling £9.5 million, the business reported a profit of £8.3 million, which was £0.8 million lower than 2010.

In Mexico our key task in 2011 was to carry through the underlying improvements in operating and collections effectiveness we started in 2010. In the first half of the year a number of changes were made, in particular we embedded a new field management structure designed to reduce spans of control in the field and improve the supervision and support of our development managers and agents. Mexico’s first half profit reduced as a result of the additional costs from these changes. The benefits began to flow in the second half and we were able to combine accelerated growth with much improved credit quality with the result that second half profit was 29% above that for the same period of 2010. In addition, the changes made were instrumental in reducing impairment which, when stated as a percentage of revenue, improved by 6.3 percentage points to 30.2% for 2011 as a whole.

Our Romanian business, opened in 2006, continues to be on track with our original plan despite challenging local economic conditions. It reported an excellent result in 2011 with a £2.4 million increase in reported profit to £4.1 million, despite the impact of £4.3 million in higher ESR and interest costs. The main features of the result were continued strong customer growth together with improved credit quality.

Central costs increased by £4.3 million, including a one-off charge of £3.2 million to reduce the carrying value of our investment in handheld technology for agents and field staff. We successfully completed the trial of this technology in Hungary which proved the benefits of modernising the business in this way. Accordingly, we have decided to develop the technology in 2012 and to design revised working practices for subsequent roll-out across the business. Since the pilot commenced, more flexible and effective technology platforms have become available and we have therefore decided to write-down the carrying value of the technology deployed in the trial.

Taxation

The taxation charge for the year was £24.0 million (2010: £29.0 million). This represents a nine percentage point reduction in the effective tax rate to 24% and has arisen due to the impact that changes in the Hungarian corporate tax rate had on the Group’s deferred tax asset. In 2010, the Hungarian government legislated to reduce the rate of corporation tax in Hungary from 19% to 10% effective from 2013, resulting in a one-off tax charge in 2010 of £4.4 million. This legislation was repealed in 2011 and there is a corresponding one-off reduction in this year’s tax charge of £4.2 million due to an increase in the value of the Group’s deferred tax asset. The effective tax rate for 2010 and 2011, ignoring the effect of the Hungarian deferred tax asset revaluations, was approximately 28%, and is expected to remain broadly at this level in 2012.

Dividend

Subject to shareholder approval, a final dividend of 4.1 pence per share will be payable which will bring the full year dividend to 7.1 pence per share, an increase of 13.2% (2010: 6.27 pence per share). This is consistent with our progressive dividend policy. The dividend will be paid on 1 June 2012 to shareholders on the register at the close of business on 20 April 2012. The shares will be marked ex-dividend on 18 April 2012.

Balance sheet and funding

The Group balance sheet continued to strengthen in 2011 and the level of equity compared with receivables was increased to 58.5% (2010: 54.5%). At 31 December 2011, the Group had net assets of £327.7 million (2010: £309.0 million) and receivables of £560.4 million (2010: £566.9 million). The average period of receivables outstanding at the year end was 4.9 months (2010: 5.0 months) with 99.1% of year end receivables due within one year (2010: 98.6%).

During the year the Group generated operating cash flow of £144.3 million (2010: £133.9 million) before funding a £61.6 million increase in net receivables. This strong cash flow meant that borrowings only increased by £4.3 million to £276.5 million, which compares with total available facilities of £447.9 million and gives headroom on facilities of £171.4 million. Gearing, calculated as borrowings divided by shareholders’ equity, has reduced to 0.8 times (2010: 1.0 times).

The Board has reviewed the Group’s capital structure with a view to maintaining an appropriate balance between capital efficiency and ensuring that there is sufficient capital to continue to expand the business and to withstand a severe recession. This review concluded that given the current, highly uncertain global economic conditions and based on its current funding and covenant structure, a ratio of equity to receivables of approximately 55% is appropriate for the Group. Due to the uncertain outlook for the global economy and wholesale funding markets there is no present intention to change our dividend policy or otherwise return surplus capital to shareholders.

Foreign exchange

Changes in foreign exchange rates had no significant impact on the 2011 profit compared with the previous year due to the profit hedging put in place in January 2011. There was however significant volatility in foreign exchange rates during 2011, particularly in the second half of the year, when our operating currencies weakened significantly against Sterling. Our policy is to hedge the translation of reported profit only within the reporting year. In accordance with this policy, in January 2012 we hedged the rates that will be used to translate 70% of 2012 forecast profit at an effective average rate that is approximately 17% adverse to the rates experienced in 2011. For further details on the exchange rates used see note 13.

The majority of the Group’s net assets are denominated in our operating currencies and therefore their Sterling value fluctuates with changes in foreign exchange rates. In accordance with accounting standards, we have restated the opening foreign currency net assets at the year end exchange rate and this has resulted in a £40.2 million foreign exchange movement which has been charged to the foreign exchange reserve.

Regulation and legislation

The CCD has now been implemented in all of our European markets. As expected, ESR costs have increased as a result of more favourable early settlement rules for customers.

Following a review of practices in respect of customer early settlement rebates by the Office of Competition and Consumer Protection in Poland, the practices of the Group’s Polish business were challenged in 2009 and subsequently, in April 2011, our rebate practices were found to be unfair. We disagree with the verdict and our appeal is in progress and a date for an appeal hearing is awaited. In the meantime, the revised rebate methodology we introduced in December 2011 to conform to the Polish CCD legislation has addressed the concerns raised for loans issued after this date. If our appeal fails, more generous rebates will also be payable on loans outstanding at the date of the appeal decision, some of which may pre-date the implementation of the CCD.

As previously announced, on 9 November 2011 the Hungarian parliament approved legislation to lower the maximum APR cap for loans. Although originally scheduled to become effective for loans issued on or after 1 January 2012, an amendment was approved in late December 2011, postponing the effective date to 1 April 2012. We have completed amendments to our product pricing and structure to meet the requirements of the new, lower APR cap. Whilst we cannot be certain as to the impact this may have on the future performance of our business, based on similar changes we have made in the past in other countries we do not expect a material impact on the prospects of our Hungarian business.

Management changes

As we announced on 17 January 2012, Gerard Ryan was appointed to the Board as Chief Executive Officer (Designate) and he will become Chief Executive Officer at the beginning of April when, following a handover period, John Harnett leaves the Group to pursue personal interests. Gerard has over 20 years experience in the financial services sector, primarily with Citigroup and GE, and latterly spent four years as Chief Executive Officer for Citigroup’s consumer finance businesses in the Western Europe, Middle East and Africa regions.

The Board is most grateful to John Harnett for his work establishing IPF as an independent listed public company and for increasing the Group’s profits significantly through the turbulent years of the financial crisis.

Strategy

New country entry remains a key element of our long-term strategy. Our detailed research of potential new markets is ongoing but given the current uncertain economic climate we do not intend at this time to commit to launch a new market pilot.

The outlook for the global economy remains uncertain and we have prepared for this by maintaining tight control over costs. We also have the ability to tighten credit rules rapidly in the event that conditions deteriorate.

Notwithstanding the general economic uncertainty, the first two months of 2012 have been encouraging for IPF, with good sales growth and stable credit quality. Future growth prospects are good and we have a strong balance sheet. We are confident the business will continue to perform well.

Poland

Poland is our largest market and has performed very strongly, reporting an increase in profit of 35% to £66.0 million. The key drivers of this performance were a steady increase in customer numbers (up by 7% to 834,000), stronger growth in credit issued (up 10%) together with stable credit quality and good control of costs. This result also includes a one-off credit to the income statement of £4.1 million, as a result of refunds of VAT overpaid in previous periods and a benefit of £3.6 million from a price rise implemented in 2009 to offset the impact of higher ESR costs.

We continue to believe that there are significant opportunities for further growth in the Polish market and we increased our agent numbers by 13% in order to provide a platform to achieve this.

Credit issued was increased by 10% which was faster than customer growth and reflects higher sales to existing quality customers. This growth resulted in an increase in average net receivables of 9% at constant exchange rates. Revenue grew at a slightly faster rate due to the positive, year-on-year, impact of the 2009 price increase and a shift in mix of the receivables book away from lower yielding longer-term products.

Credit quality remained stable, with impairment as a percentage of revenue at 30.5%, which was marginally lower than 2010.

Finance costs were £2.3 million higher than 2010 due to a combination of the higher funding costs arising from the 2010 refinancing partly offset by a lower borrowing requirement reflecting strong cash generation. Agents’ commission costs, which are variable in nature, increased in line with growth in the business and represented 10% of revenue.

Other costs were tightly controlled and, excluding the £4.1 million VAT refund noted above, increased by 6% which is significantly lower than revenue growth.

Czech Republic and Slovakia

Our business in Czech-Slovakia delivered a solid performance in 2011 although the reported profit reduced by £3.9 million due to the £8.6 million combined impact of higher finance and ESR costs.

Agent numbers grew by 7% and customer numbers increased by 4%, which was a little slower than planned. We continue to believe there is the potential for stronger customer growth in this market and in 2012 we plan to intensify our efforts to realise this.

Credit issued increased by 10%, a stronger rate than customer growth, reflecting increased sales to existing quality customers and this resulted in average net receivables growth of 9%. Revenue grew at a slower rate due to higher ESR costs following the implementation of the CCD in Slovakia and the Czech Republic in July 2010 and January 2011 respectively.

Collections performance remained robust and impairment as a percentage of revenue, at 20.9%, was broadly in line with 2010. Finance costs increased by 7% due to the full year impact of higher funding costs partially offset by lower levels of borrowing. Agents’ commission costs increased in line with growth in the business. Other costs grew by 10% driven primarily by increased marketing and related expenditure to stimulate growth.

Hungary

Hungary performed well delivering good growth in customer numbers, strong growth in credit issued and excellent credit quality. Reported profit was £0.8 million lower than 2010 due to £9.5 million of higher ESR and interest costs.

A focus on improving customer service, more effective internal communications, improved marketing and agency growth of 4% allowed the business to make good progress in growing its customer base towards the previous level of over 300,000. Customer growth, together with improved credit quality which increased the number of customers eligible for larger loans, resulted in stronger credit issued growth of 11%. Average net receivables grew at an even faster rate of 15% due to the progressive acceleration in credit issued growth since mid-2010.

Revenue grew by less than one percent reflecting higher ESR costs, which are netted-off revenue. The impact in Hungary is relatively high compared to other markets due to the higher incidence of early settlement. This reflects the very high quality of our customer portfolio and we would expect the incidence to reduce as the business grows and credit quality normalises.

Credit quality remains excellent and impairment as a percentage of revenue is 12.1% (2010: 15.3%), which is well below our target range of 25% to 30%. We would have eased our credit settings further in the second half of the year but chose to maintain a more cautious positioning given the macro economic issues facing the country.

Financing costs were £2.6 million higher than 2010 due to the increased cost of debt funding and higher borrowings. Agents’ commission costs increased in line with the growth in the business. Other costs and the cost-income ratio were in line with 2010 reflecting very tight cost control.

The economic situation in Hungary is uncertain and is likely to remain so until there is a conclusion to the funding discussions between the Hungarian government, the EU and the IMF. Nonetheless, our Hungarian business has made good progress and we believe there are further opportunities to grow.

Mexico

During the second half of 2010 we reduced growth and suspended geographic expansion whilst we made improvements to our field operations so as to improve the consistency and regularity of agent collections and thereby credit quality. Our key task in 2011 in Mexico was to carry through these underlying improvements. In the first half of the year a number of changes were completed, in particular we embedded a new field management structure designed to reduce spans of control in the field and improve the supervision of our development managers and agents. This investment, together with the opening of seven new branches, increased our cost base and consequently, in the first half, profit reduced.

In the second half the expected benefits started to flow and we were able to combine accelerated growth with much improved credit quality. Consequently, whilst profit for the year reduced by £2.0 million to £1.5 million, second half profit was 29% above that for the same period of 2010. In addition, the changes made have been instrumental in substantially reducing impairment as a percentage of revenue for 2011 by 6.3 percentage points to 30.2% and it is now at our target level for this market.

As a result of improved operating performance, growth was accelerated from May 2011 and we increased the emphasis of our internal communications and incentive schemes towards expanding our business. This was successful and so for the year agent numbers increased by 17%, customer numbers grew by 12% to 671,000 and credit issued increased by 13%. Growth in average net receivables and revenue was less and lagged the growth in credit issued.

Finance costs increased by 40% to £7.7 million due to the higher cost of debt following the 2010 refinancing together with a larger borrowing requirement arising from the growth of the business. Agents’ commission costs increased broadly in line with growth in the business.

Other costs increased by 22% to £51.0 million reflecting the investment made in implementing our new field management structure, expanding the branch network and supporting growth in our existing branches.

During 2012, we will continue to focus our efforts on improving operational performance. We will also move on to the important next step of our development plan which is to build on improved credit quality by increasing loan size and thereby increasing revenue per customer. Some of this will come naturally, with customers paying more regularly and so getting the offer of increased loan sizes. We will also test the opportunity to further leverage improved credit quality by relaxing credit controls for good paying customers. This offers the possibility to further increase customer profitability. We will explore this possibility carefully by conducting structured credit tests in the first half of 2012.

The profit before taxation is analysed by region as follows:

We remain convinced of the long-term potential of the Mexican business to grow to at least three million customers generating a total pre-tax profit of £90 million per annum in the long term, which will provide helpful diversification of our business outside of the European Union.

Romania

Our business in Romania reported excellent results in 2011. Profit increased by £2.4 million to £4.1 million despite £4.3 million of higher ESR and finance costs.

The key ingredients of growth were a 23% increase in agent numbers which facilitated customer growth of 20% to almost 250,000 customers. Credit issued grew 17% and average net receivables increased by 23% to £51.1 million. Revenue grew at a slower rate of 7% due to the impact of increased ESR costs.

Improvements in operational effectiveness alongside the natural maturing of the business drove a substantial improvement in collections performance and credit quality, and as a result, impairment as a percentage of revenue was reduced substantially, by 8.6 percentage points, to 26.1%.

Finance costs increased by £0.7 million due to higher funding costs following the 2010 refinancing. Agents’ commission costs increased in line with the growth in the business. Other costs increased by 14% to support the expansion of the business.

Further geographic expansion is planned.