Results centre

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:

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	2,455	2,288	167	7.3	7.3
Credit issued	409.3	406.4	2.9	0.7	12.2
Average net receivables	568.9	574.3	(5.4)	(0.9)	10.3
Revenue (net of ESRs)	316.0	326.7	(10.7)	(3.3)	7.7
Impairment	(98.3)	(98.5)	0.2	0.2	(10.7)
Net revenue	217.7	228.2	(10.5)	(4.6)	6.4
Finance costs	(20.4)	(21.8)	1.4	6.4	(4.6)
Agents’ commission	(35.9)	(36.2)	0.3	0.8	(10.8)
Other costs	(130.0)	(134.5)	4.5	3.3	(5.5)
Profit before taxation, exceptional item and fair value adjustments	31.4	35.7	(4.3)	(12.0)
Exceptional item – restructuring	(4.8)	-	(4.8)	-
Fair value adjustments	(0.8)	(4.7)	3.9	83.0
Profit before taxation	25.8	31.0	(5.2)	(16.8)

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.

Segmental results

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.

	2012 Reported profit £M	Underlying profit movement £M	Additional ESR costs £M	Weaker FX rates £M	2011 Reported profit £M
Poland	24.5	4.6	(0.7)	(4.2)	24.8
Czech-Slovakia	12.4	1.3	(4.9)	(1.3)	17.3
Hungary	1.9	0.8	-	(0.6)	1.7
Mexico	0.5	2.5	-	0.1	(2.1)
Romania	(1.6)	(1.9)	-	(0.2)	0.5
UK – central costs	(6.3)	0.2	-	-	(6.5)
Profit before taxation*	31.4	7.5	(5.6)	(6.2)	35.7

* 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.

Taxation

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%.

Regulation

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.

Strategy

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:

1. Expand the Group’s footprint – grow in existing markets and enter new markets through greenfield development or bolt-on acquisition;
2. Improve customer engagement – enhance customer acquisition and their experience to improve retention and profitability;
3. 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
4. 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.

Our central planning assumption is that market confidence will remain subdued in the near-term, especially in Europe. Nonetheless, we are confident that the business is on track to perform well for the year as whole. We believe that there are good opportunities for further growth, and we have the strategy in place and a strong balance sheet to capitalise on them.

Poland

Poland, our largest market, reported a strong operational performance in the first half of 2012 with an improvement in underlying profit of £4.6M, offset by the impact of weaker FX rates (£4.2M) and higher ESRs (£0.7M). Profit before taxation was £24.5M, £0.3M lower than 2011. The key drivers of this strong underlying performance were steady growth in customers, stronger growth in credit issued and stable credit quality.

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	847	806	41	5.1	5.1
Credit issued	152.4	157.8	(5.4)	(3.4)	9.3
Average net receivables	227.4	240.7	(13.3)	(5.5)	7.0
Revenue	132.2	138.2	(6.0)	(4.3)	8.3
Impairment	(45.3)	(47.9)	2.6	5.4	(6.8)
Net revenue	86.9	90.3	(3.4)	(3.8)	9.0
Finance costs	(5.2)	(8.1)	2.9	35.8	26.8
Agents’ commission	(13.5)	(13.2)	(0.3)	(2.3)	(15.4)
Other costs	(43.7)	(44.2)	0.5	1.1	(8.4)
Profit before taxation	24.5	24.8	(0.3)	(1.2)

We increased our customer numbers by 5% year-on-year in the first half to 847,000. Credit issued grew by 9%, a faster rate than customer growth. This was largely due to increased sales opportunities to existing quality customers arising from targeted easing of credit rules. As a result, average net receivables increased by 7% year-on-year and revenue grew at a similar rate. The impact of ESRs was not significant, although we expect this to increase progressively throughout the second half of the year.

On an annualised basis, impairment as a percentage of revenue has improved since December 2011 by 0.3 percentage points to 30.2% and sits just outside our target range.

Finance costs reduced by £2.9M as the business continues to de-gear due to strong cash generation. Agents’ commission costs continue to represent around 10% of revenue.

We believe that there are significant opportunities for further growth in the Polish market and to capitalise on this we have increased our investment in growth related expenditure by £2.4M, which was the key driver behind the 8% increase in other costs. As a consequence, the annualised cost-income ratio increased by 0.5 percentage points since December 2011 to 30.5%, although this remains the lowest in the Group and is our benchmark for other markets.

Czech Republic and Slovakia

Our business in Czech-Slovakia grew steadily in the first half of 2012 and this generated £1.3M in underlying profit growth. However, reported profit is £4.9M lower than 2011 due to higher ESRs (£4.9M) and weaker FX rates (£1.3M).

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	402	387	15	3.9	3.9
Credit issued	94.8	97.0	(2.2)	(2.3)	5.5
Average net receivables	146.1	146.3	(0.2)	(0.1)	7.7
Revenue	66.8	73.9	(7.1)	(9.6)	(2.5)
Impairment	(19.3)	(18.1)	(1.2)	(6.6)	(14.2)
Net revenue	47.5	55.8	(8.3)	(14.9)	(7.9)
Finance costs	(3.1)	(3.3)	0.2	6.1	3.1
Agents’ commission	(7.1)	(8.0)	0.9	11.3	2.7
Other costs	(24.9)	(27.2)	2.3	8.5	0.8
Profit before taxation	12.4	17.3	(4.9)	(28.3)

In the first half of the year customer numbers increased year-on-year by 4% to 402,000 and credit issued grew at the slightly faster rate of 6%. The growth in credit issued was slower than planned. Our focus in the second half of the year will be to accelerate credit issued growth and in order to achieve this we have increased our agency force with around 300 (7%) new recruits since December 2011 and refreshed the management team.

Average net receivables increased by 8% whereas revenue contracted by 3%, reflecting the progressive impact of higher ESRs (which are charged against revenue) on the reported yield following the implementation of the CCD in the Czech Republic in January 2011.

Credit quality remains good and impairment has edged up towards the bottom end of our target range of 25% to 30%, with annualised impairment as a percentage of revenue at 22.8% (December 2011: 20.9%).

Finance costs are broadly in line with 2011. Other costs have decreased by 1% reflecting tight cost control. The annualised cost-income ratio has increased by 0.3 percentage points since December 2011 to 38.6% due to the reduction in revenue arising from higher ESRs.

Hungary

Hungary performed well in the first half of the year with strong growth and continued excellent credit quality. This combination led to an increase in profit of £0.2M despite the £0.6M adverse impact of weaker FX rates and therefore the underlying performance is £0.8M ahead of 2011.

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	259	248	11	4.4	4.4
Credit issued	50.3	50.8	(0.5)	(1.0)	14.8
Average net receivables	72.0	72.2	(0.2)	(0.3)	15.6
Revenue	36.4	38.0	(1.6)	(4.2)	11.0
Impairment	(7.7)	(6.9)	(0.8)	(11.6)	(28.3)
Net revenue	28.7	31.1	(2.4)	(7.7)	7.1
Finance costs	(4.4)	(4.4)	-	-	(15.8)
Agents’ commission	(6.1)	(6.7)	0.6	9.0	(5.2)
Other costs	(16.3)	(18.3)	2.0	10.9	(1.2)
Profit before taxation	1.9	1.7	0.2	11.8

One of our key objectives is to progressively rebuild the business to its previous level of over 300,000 customers. We continue to make progress towards this objective, with customer numbers increasing by 4% to 259,000 compared with June 2011. This increase, combined with a careful easing of credit controls, has supported growth in credit issued at a faster rate of 15%. As a result, average net receivables have increased by 16%, which generated revenue growth of 11%.

Credit quality and collections remain good. As expected, the progressive easing of credit controls resulted in annualised impairment as a percentage of revenue increasing by 1.4 percentage points since December 2011 to 13.5%, which continues to be well below our target range of 25% to 30%.

Finance costs have increased in line with growth in the business and agents’ commission continues to account for around 17% of revenue. Other costs have been tightly controlled and grew by 1% despite the much stronger business growth. As a result, we reduced the annualised cost-income ratio by 1.7 percentage points to 45.5% since December 2011.

Romania

Conditions in Romania have proved to be difficult so far this year with austerity measures and the impact of severe Winter weather in Q1 squeezing household income. These factors resulted in lower than expected growth and higher than anticipated impairment which, together with a higher cost base arising from year-on-year investment for growth, has resulted in a loss of £1.6M compared to a profit of £0.5M in 2011. The reduction in profit is attributable to Q1, with Q2 profit in line with the same period last year.

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	265	226	39	17.3	17.3
Credit issued	40.9	40.8	0.1	0.2	11.4
Average net receivables	51.3	48.6	2.7	5.6	16.9
Revenue	27.8	26.1	1.7	6.5	18.3
Impairment	(10.8)	(8.3)	(2.5)	(30.1)	(42.1)
Net revenue	17.0	17.8	(0.8)	(4.5)	6.9
Finance costs	(3.1)	(3.0)	(0.1)	(3.3)	(14.8)
Agents’ commission	(2.6)	(2.7)	0.1	3.7	(8.3)
Other costs	(12.9)	(11.6)	(1.3)	(11.2)	(22.9)
(Loss) / profit before taxation	(1.6)	0.5	(2.1)	(420.0)

Customer numbers increased by 17% year-on-year to 265,000 and credit issued grew by 11%. Average net receivables increased by 17%, which is a faster rate than credit issued and reflects higher growth rates in the second half of 2011. Revenue increased by 18%, which is in line with the growth in average net receivables.

Annualised impairment as a percentage of revenue has increased by 3.7 percentage points since December 2011 to 29.8%. The impairment charge reduced in Q2 however the weather-related increase in the Q1 charge failed to unwind.

Finance costs and agents’ commission have increased in line with growth in the business. Other costs have increased at a faster rate than revenue due to the investment in growth infrastructure in the second half of 2011 together with slower than expected sales growth. This resulted in the annualised cost-income ratio increasing by 0.9 percentage points to 46.9% since the year end.

Mexico

Our key objectives for the Mexican business in 2012 are to build on the improved operational performance delivered in the second half of 2011 and to increase revenue per customer through issuing larger loans to credit worthy customers: this is a key building block in our aim to deliver £30 of profit per customer in two to three years. The business performed strongly against these objectives in the first half of 2012 and delivered strong growth in credit issued together with lower impairment through improved operational management. This resulted in a £2.6M increase in profit, with a loss in 2011 of £2.1M being replaced by a profit of £0.5M in 2012.

The changes made to the field management structure in the first half of 2011 have continued to deliver benefits with further improvements in the collections performance and reduced impairment. This improved operational performance also facilitated greater growth in credit issued, because customers that pay more regularly receive larger loan offers. In addition, in a limited number of high performing branches, we are testing the opportunity to further leverage improved credit quality by relaxing credit controls for customers with a good payment history. The initial results of this test are promising and we intend to extend the testing from 8 to 18 branches out of a total of 53 in the second half of the year.

	2012 £M	2011 £M	Change £M	Change %	Change at CER %
Customer numbers (000s)	682	621	61	9.8	9.8
Credit issued	70.9	60.0	10.9	18.2	28.7
Average net receivables	72.1	66.5	5.6	8.4	17.8
Revenue	52.8	50.5	2.3	4.6	13.5
Impairment	(15.2)	(17.3)	2.1	12.1	4.4
Net revenue	37.6	33.2	4.4	13.3	22.9
Finance costs	(4.3)	(3.7)	(0.6)	(16.2)	(26.5)
Agents’ commission	(6.6)	(5.6)	(1.0)	(17.9)	(26.9)
Other costs	(26.2)	(26.0)	(0.2)	(0.8)	(9.2)
Profit / (loss) before taxation	0.5	(2.1)	2.6	123.8

Customer numbers increased by 10% year-on-year to 682,000 at the end of June, and credit issued grew at the much faster rate of 29%, reflecting the impact of our strategy to increase loan sizes and revenue per customer. This resulted in growth in average net receivables of 18% and revenue growth of 14%, with the reduction in revenue yield arising from a shift in the mix of receivables towards lower-yielding, longer-term products.

Collections performance has continued to improve during the period due to the impact of the revised field management structure and this resulted in annualised impairment as a percentage of revenue improving by 2.6 percentage points to 27.6% since December 2011.

Finance costs increased due to higher funding requirements arising from growth in the business and agents’ commission costs increased in line with business activity. The annualised cost-income ratio has reduced by 0.9 percentage points to 48.7% since December 2011 as the business has leveraged the investment in the field management structure that was implemented in 2011. The profit / (loss) before taxation is analysed by region as follows:

	2012 £M	2011 £M	Change £M	Change %
Puebla region	3.2	1.8	1.4	77.8
Guadalajara region	3.0	1.9	1.1	57.9
Monterrey region	(0.5)	(1.0)	0.5	50.0
Central costs	(5.2)	(4.8)	(0.4)	(8.3)
Profit / (loss) before taxation	0.5	(2.1)	2.6	123.8