Interim Report for half year

Provident Financial PLC 27 July 2000 Interim report for the half-year ended 30 June 2000 H I G H L I G H T S - Group turnover up 28% to £340.3 million - Group customers up 17% to 2.9 million - Like for like pre-tax profit up 6.0% to £65.1 million, after international start-up losses of £6.9 million and an extra £5 million of costs to strengthen the UK home credit field force - Earnings per share up 7.9% to 19.1 pence per share - Interim dividend up 10.1% to 10.9 pence per share - Bad debt ratio in UK home credit division improved from 8.4% to 8.2% of credit issued - International home credit division customer numbers up by 132,000 in first half to 281,000 - Insurance division profit before tax up 36% to £15.6 million 'We have made substantial progress in all our businesses in the first half of the year and we remain confident of a good result for the full year. We have also laid sound foundations for the future. The UK home credit division is now well prepared for profit growth, the international home credit division is rapidly progressing towards substantial profitability and the insurance division is thriving.' John van Kuffeler Chairman 27 July 2000 * * * * * * * * * * * Enquiries: Today Thereafter ----- ---------- Media ----- David Stevenson 0207 628 5646 01274 731111 Investor Relations ------------------ Elizabeth Bottomley 0207 628 5646 01274 731111 Chairman's statement -------------------- Overview -------- The board is pleased to announce further progress in the first half of the year. The number of group customers increased by 17%, group turnover was up by 28% and pre-tax profit on a like for like basis after adjusting for the additional interest costs on the debt used to fund the share buy-back programme, increased by 6.0% to £65.1 million. Earnings per share has increased by 7.9% from 17.7 pence to 19.1 pence per share. The directors have declared an interim dividend of 10.9 pence per ordinary share, an increase of 10.1% over the 9.9 pence interim dividend in 1999. It is particularly encouraging that this growth in profits has been achieved after the investment in start up losses of £6.9 million in building our international home credit division (1999 £4.2 million) and £5 million of additional costs in the UK to strengthen our home credit field force. The company has purchased in the market 9.4 million shares for cancellation, at a total cost of £49.1 million, emphasising the directors' confidence in the future. UK home credit -------------- In the first half, our UK home credit division has continued to make progress with profit before tax increasing by 2.4% to £60.3 million. Our focus for this year is to achieve steady growth, with the increase in credit issued being more in line with customer growth, whilst stabilising the bad debt ratio. This has resulted in customer numbers being up by 3.8% to 1,553,000 and the volume of credit issued up by 3.8% to £364 million. Agent numbers have continued to grow, up by 4.6% to 11,961 in the first half of the year. This focus, together with additional expenditure of £3 million on strengthening field management and £2 million on training and retaining new agents, is already enabling us to improve our bad debt ratio. As a percentage of credit issued, bad debt has fallen to an annualised rate of 8.2% at June 2000, from 8.4% at the end of 1999. In the second half of the year we expect improved profit growth from our UK home credit division. Collections performance, which is a good leading indicator of bad debt, has shown steady improvement since mid 1999. We expect the bad debt ratio to stabilise at or around 8.2% for the remainder of 2000. Our market research continues to show the opportunity for sustained growth. The feedback from our customers confirms that they like our service. It allows them to borrow small sums, knowing exactly how much they will be expected to pay back, with the guarantee that there will be no hidden charges. Our strategy remains to achieve growth by recruiting more agents who in turn recruit more customers. We expect higher rates of profit growth from 2001 onwards. International home credit ------------------------- Our international home credit division has again grown significantly during the first half, demonstrating further our ability to build and manage overseas operations successfully. As in the UK, our service is popular because we offer a fast, flexible and convenient way of borrowing. By the end of June 2000, customer numbers had increased to 281,000 - up by 132,000 since December 1999 and up by 219,000 over the past year. The average rate of increase in customer numbers has been 5,100 per week in the first half. At the end of June 2000 we had 164,000 customers in Poland (December 1999 72,000), 98,000 in the Czech Republic (December 1999 66,000) and 19,000 in South Africa (December 1999 11,000). We have invested heavily to build the infrastructure we require and in the first half of the year we have opened 30 overseas offices (21 new offices in Poland, 7 in the Czech Republic and 2 in South Africa). We are now able to serve the great majority of our target markets in Poland and the Czech Republic from a total of 53 offices. In South Africa, we have expanded successfully in the Pietersburg area. The international home credit division now has an infrastructure of 7,359 staff and agents, almost half that of the UK home credit division. The repayment record of our customers remains good, with underlying bad debt at around 6% of credit issued in Poland and the Czech Republic. For the remainder of 2000 we will build up our customer base in the Czech Republic and Poland and expand cautiously in South Africa. We continue to expect the international home credit division to trade near breakeven for the second half of this year - with the Czech Republic moving into profit during that period. We expect all countries and the division overall to report a profit for 2001. In 2001 we will launch our service in another European country and will enter at least one country each year thereafter. We remain confident that the division has excellent long term prospects and will earn substantial profits. Insurance --------- The insurance division has continued to prosper in its core market - providing non-comprehensive insurance for women drivers and for drivers of second family cars or older cars. Profit before tax has increased by 36% from £11.5 million to a record £15.6 million and the investment fund has grown by 10% to £316 million. The division has benefited from premium increases in the first half of this year of 7% - a little less than those of our competitors. This continued improvement in our price competitiveness has resulted in a substantial 28% increase in the number of policyholders to 705,000, with gross written premiums up by 75%. Increases in claims cost per policy have averaged 10% over the last year, well below premium increases for the same period, allowing an improvement in margins. We therefore expect excellent results for the division in 2000. The motor insurance market is cyclical and we are currently benefiting from conditions toward the top of the cycle. We believe increased price competition may be seen towards the end of this year. Summary ------- The first half of 2000 has seen performance very much in line with our expectations at the start of the year. In UK home credit, we have put in place the necessary steps to address the issue of bad debt and are positioning ourselves for a faster rate of growth. Internationally, we continue to see significant expansion, demonstrating beyond doubt the substantial international market that exists for our home credit service. Concentration on our specialist areas of insurance and the increase in premiums has resulted in strong profit growth. Overall, the board remains confident of a good result for the year. John van Kuffeler Chairman 27 July 2000 Consolidated profit and loss account ------------------------------------ for the half-year ended 30 June 2000 ------------------------------------ Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Turnover 340,325 266,244 582,561 ------------------------------------------ Operating profit and profit before taxation 65,116 63,605 155,021 Taxation (note 3) (17,581) (17,809) (43,406) ------------------------------------------ Profit after taxation 47,535 45,796 111,615 Dividends (note 4) (25,333) (25,642) (63,683) ------------------------------------------ Retained profit 22,202 20,154 47,932 ------------------------------------------ Earnings per share (note 5) - Basic 19.08p 17.70p 43.15p - Diluted 19.02p 17.49p 42.79p ------------------------------------------ Dividend per share (note 4) 10.9p 9.9p 24.8p ------------------------------------------ The results shown in the profit and loss account derive wholly from continuing activities. There is no material difference between the retained profit as shown above and the historical cost equivalent. Statement of total recognised gains and losses ---------------------------------------------- for the half-year ended 30 June 2000 ------------------------------------ Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Profit after taxation 47,535 45,796 111,615 Currency translation differences (148) (900) (1,099) ------------------------------------------ Total recognised gains and losses relating to the period 47,387 44,896 110,516 ------------------------------------------ Segmental analysis of turnover ------------------------------ for the half-year ended 30 June 2000 ------------------------------------ Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 UK home credit 212,374 196,123 422,633 International home credit 12,909 2,150 8,757 Insurance 115,042 67,971 151,171 ------------------------------------------- 340,325 266,244 582,561 ------------------------------------------- Segmental analysis of profit before taxation -------------------------------------------- for the half-year ended 30 June 2000 -------------------------------------- Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 UK home credit 60,332 58,904 143,911 International home credit (6,860) (4,201) (8,434) Insurance 15,645 11,510 25,374 Central costs (4,001) (2,608) (5,830) ------------------------------------------- 65,116 63,605 155,021 ------------------------------------------- Central costs include £2.2 million of interest costs relating to the share buy-backs (note 10). The international home credit loss before taxation can be analysed as follows: Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Poland (3,430) (1,395) (2,657) Czech Republic (1,369) (1,438) (2,679) South Africa (505) (371) (703) Divisional overheads (1,556) (997) (2,395) ------------------------------------------ (6,860) (4,201) (8,434) ------------------------------------------ Consolidated balance sheet -------------------------- as at 30 June 2000 ------------------ Unaudited Unaudited Audited --------- --------- ------- As at As at As at 31 30 June 2000 30 June 1999 December 1999 ------------ ------------ ------------- £'000 £'000 £'000 Fixed assets 37,143 36,583 36,074 ----------------------------------------- Current assets Amounts receivable from customers - due within one year 519,405 471,897 565,662 - due in more than one year 7,524 7,086 9,470 Debtors 146,118 117,294 130,342 Investments - realisable within one year 289,647 251,707 256,302 - realisable in more than one year 10,000 25,000 10,000 Cash at bank and in hand 38,490 27,922 42,423 ------------------------------------------- 1,011,184 900,906 1,014,199 ------------------------------------------- Current liabilities Bank and other borrowings (25,513) (41,340) (23,138) Creditors - amounts falling due within one year (138,844) (120,596) (167,315) Insurance accruals and deferred income (335,945) (287,763) (306,660) ------------------------------------------ (500,302) (449,699) (497,113) ------------------------------------------ Net current assets 510,882 451,207 517,086 ----------------------------------------- Total assets less current liabilities 548,025 487,790 553,160 ----------------------------------------- Non-current liabilities Bank and other borrowings (311,084) (208,936) (294,144) Creditors - amounts falling due after more than one year (4,923) (8,783) - Provision for liabilities and charges - deferred taxation - (3,043) - ----------------------------------------- (316,007) (220,762) (294,144) ----------------------------------------- Net assets 232,018 267,028 259,016 ----------------------------------------- Capital and reserves Called-up share capital 25,728 27,244 26,705 Share premium account 45,332 48,217 47,211 Revaluation reserve 1,641 1,641 1,641 Other reserves 3,967 2,451 2,990 Profit and loss account 155,350 187,475 180,469 ----------------------------------------- Equity shareholders' funds 232,018 267,028 259,016 ----------------------------------------- Consolidated cash flow statement -------------------------------- For the half-year ended 30 June 2000 ------------------------------------ Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Net cash inflow from operating activities 116,934 98,710 128,278 Taxation (17,160) 9,834 (19,524) Capital expenditure and financial investment 15,920 12,107 30,303 Equity dividends paid (36,545) (35,199) (60,924) Management of liquid resources (53,345) (23,072) (32,667) Financing (29,909) (67,180) (34,822) ----------------------------------------- (Decrease)/increase in cash in the period (4,105) (4,800) 10,644 ----------------------------------------- The cash flow statement above has been prepared in accordance with FRS1 (Revised 1996) 'Cash Flow Statements'. As required by that standard, the statement aggregates the cash flows arising from the insurance and home credit divisions. However, the cash and investments held by the insurance division are required by its regulators to be strictly segregated from the rest of the group and are not available to repay group borrowings. At 30 June 2000 the cash and investments held by the insurance division amounted to £316 million (30 June 1999 - £288 million). The financing section of the cash flow statement above includes a £49.1 million (30 June 1999 - nil) cash outflow relating to the share buy-backs. Reconciliation of net cash flow to movement in net debt Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 (Decrease)/increase in net cash for the period (4,105) (4,800) 10,644 Cash outflow from increase in liquid resources 53,345 23,072 32,667 ----------------------------------------- 49,240 18,272 43,311 Cash (inflow)/outflow from (increase)/decrease in debt (19,143) 67,652 (297) ----------------------------------------- Change in net debt resulting from cash flows 30,097 85,924 43,014 Net debt at start of period (53,557) (96,571) (96,571) ----------------------------------------- Net debt at end of period (23,460) (10,647) (53,557) ----------------------------------------- Analysis of changes in net debt 31 December Cash 30 June 1999 flows 2000 --------- ----- ------- £'000 £'000 £'000 Cash at bank and in hand 42,423 (3,933) 38,490 Overdrafts (6,434) (172) (6,606) --------------------------------------- 35,989 (4,105) 31,844 Investments realisable within one year 221,302 53,345 274,647 Bank and other borrowings - less than one year (16,704) (2,203) (18,907) - more than one year (294,144) (16,940) (311,084) -------------------------------------- Net debt (53,557) 30,097 (23,460) -------------------------------------- Cash, borrowings and overdraft balances shown above at 31 December 1999 and 30 June 2000 agree to the balance sheets at those dates. Investments realisable within one year exclude those current asset investments which are not considered to be liquid resources (being those investments with more than one year to maturity when acquired, but less than one year to maturity at the balance sheet date, other than investments which are traded on an active market). Reconciliation of operating profit to net cash inflow from operating activities Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Operating profit 65,116 63,605 155,021 Depreciation 2,858 2,856 5,044 Loss on sale of tangible fixed assets 154 25 128 Decrease/(increase) in amounts receivable from customers 48,203 52,231 (43,918) Increase in debtors (15,776) (9,991) (22,327) Increase in unearned insurance premiums 26,917 6,840 21,857 Increase/(decrease) in insurance claims provision 2,174 (10,945) (7,110) (Decrease)/increase in amounts due to retailers (12,294) (13,842) 506 Increase in accruals 1,299 2,370 5,297 (Decrease)/increase in other liabilities and deferred income (1,717) 5,561 13,780 ----------------------------------------- Net cash inflow from operating activities 116,934 98,710 128,278 ----------------------------------------- Net cash inflow from operating activities can be analysed as follows: Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 UK home credit and central 103,150 100,367 119,823 International home credit (18,246) (7,338) (19,480) Insurance 32,030 5,681 27,935 ----------------------------------------- 116,934 98,710 128,278 ----------------------------------------- Notes to the financial information ---------------------------------- 1. The financial information, which has been prepared on the basis of the accounting policies set out in the group's 1999 statutory accounts, does not constitute a set of statutory accounts and is unaudited. 2. The information relating to the full year ended 31 December 1999 is an extract from the latest published accounts on which the auditors gave an unqualified opinion and which have been delivered to the Registrar of Companies. 3. The taxation charge has been calculated by applying the directors' best estimate of the effective tax rate for the year, which is 27% (30 June 1999 - 28%), to the profit for the period. 4. Dividends paid and proposed Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Interim dividend declared 10.9p (1999 - 9.9p) 25,333 25,642 25,737 Final dividend paid 14.9p - - 37,946 ------------------------------------- 25,333 25,642 63,683 ------------------------------------- Dividend cover 1.75 1.79 1.75 ------------------------------------- 5. Earnings per share The basic and diluted earnings per share figures have been calculated using the profit for the period attributed to ordinary shareholders of £47,535,000 (30 June 1999 - £45,796,000) and the weighted average number of shares in issue during the period. The weighted average number of shares in issue during the period can be reconciled to the number used in the basic and diluted earnings per share calculations as follows: Unaudited Unaudited Audited --------- --------- -------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ ---------- Weighted average number of Number Number Number shares In issue during the period 252,066,217 262,789,741 262,281,979 Held by the QUEST (2,990,972) (4,000,518) (3,640,080) --------------------------------------- Used in basic earnings per share calculation 249,075,245 258,789,223 258,641,899 Issuable on conversion of outstanding options 852,768 2,999,186 2,190,714 -------------------------------------- Used in diluted earnings per share calculation 249,928,013 261,788,409 260,832,613 -------------------------------------- The movement on the number of shares in issue during the period is as follows: Number ------ At 1 January 2000 258,690,685 Shares purchased December 1999 and cancelled in period (1,009,553) Shares purchased and cancelled in period (9,425,503) ----------- At 30 June 2000 248,255,629 ----------- 6. Reconciliation of movement in equity shareholders' funds Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Profit attributable to equity shareholders 47,535 45,796 111,615 Dividends (25,333) (25,642) (63,683) ------------------------------------------ Retained profit 22,202 20,154 47,932 New share capital issued - 472 472 Share capital cancelled on share buy-back (1,879) - (1,006) Share buy-back (47,173) - (34,585) Currency translation differences (148) (900) (1,099) ----------------------------------------- Net(reduction in)/addition to equity shareholders' funds (26,998) 19,726 11,714 Equity shareholders' funds at beginning of period 259,016 247,302 247,302 ------------------------------------------ Equity shareholders' funds at end of period 232,018 267,028 259,016 ------------------------------------------ 7. Amounts receivable from customers a) Instalment credit receivables Unaudited Unaudited Audited --------- --------- ------- As at As at As at 31 30 June 2000 30 June 1999 December 1999 ------------ ------------ ------------- £'000 £'000 £'000 Gross instalment credit receivables 817,536 746,858 878,917 Less: provision for bad and doubtful debts (90,420) (88,984) (84,771) --------------------------------------------- Instalment credit receivables after provision for bad and doubtful debts 727,116 657,874 794,146 Less: deferred revenue thereon (200,187) (178,891) (219,014) --------------------------------------------- 526,929 478,983 575,132 --------------------------------------------- Analysed as: - due within one year 519,405 471,897 565,662 - due in more than one year 7,524 7,086 9,470 --------------------------------------------- 526,929 478,983 575,132 --------------------------------------------- At 30 June 2000 the net amounts receivable from UK home credit customers were £500.6m (30 June 1999 - £474.4m) and from international home credit customers were £26.3m (30 June 1999 - £4.6m). b) Bad and doubtful debts Unaudited Unaudited Audited --------- --------- ------- Half-year to Half-year to Full year 30 June 2000 30 June 1999 1999 ------------ ------------ --------- £'000 £'000 £'000 Gross provision at end of period 90,420 88,984 84,771 Less: deferred revenue thereon (26,280) (24,497) (23,948) --------------------------------------------- Net provision at end of period 64,140 64,487 60,823 Net provision at start of period (60,823) (53,229) (53,229) --------------------------------------------- Increase in provision (net of deferred revenue) 3,317 11,258 7,594 Amounts written off (net of deferred revenue) 36,307 27,528 64,558 --------------------------------------------- Net charge to profit and loss account for bad and doubtful debts 39,624 38,786 72,152 --------------------------------------------- Analysed as: - UK home credit 37,760 38,513 71,098 - International home credit 1,864 273 1,054 --------------------------------------------- 39,624 38,786 72,152 --------------------------------------------- c) The figures for receivables, provisions and bad and doubtful debts at 30 June 2000 should be compared with the equivalent information at 30 June 1999 in view of the long-established seasonal patterns in lending and collections. 8. Credit issued Half-year to Half-year to 30 June 2000 30 June 1999 Growth ------------ ------------ £'000 £'000 % UK home credit 363,963 350,634 3.8 International home credit 38,957 7,631 - ------- ------- 402,920 358,265 12.5 ------- ------- 9. Collections Half-year to Half-year to 30 June 2000 30 June 1999 Growth ------------ ------------ £'000 £'000 % UK home credit 596,325 563,272 5.9 International home credit 36,891 6,232 - ------- ------- 633,216 569,504 11.2 ------- ------- 10. Profit before tax on a like for like basis The company purchased 14.6 million shares subsequent to 30 June 1999, at a cost of £84.6 million, which were subsequently cancelled. This gave rise to additional interest costs in the first half of 2000 compared to the first half of 1999. If an equivalent purchase of shares had taken place during the first half of 1999, an additional interest cost of £2.2 million would have been incurred in the first half of 1999 resulting in a reduction in profit before taxation from £63.6 million to £61.4 million. Consequently, on a like for like basis, the profit in the first half of 2000 increased by 6.0%, from £61.4 million to £65.1 million. Independent review report to Provident Financial plc ---------------------------------------------------- Introduction ------------ We have been instructed by the company to review the financial information set out on pages 4 to 11 and we have read the other information contained in the interim report for any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities --------------------------- The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed --------------------- We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data, and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion ----------------- On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2000. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Leeds 27 July 2000 Shareholder information ----------------------- 1. The shares will be marked ex-dividend on 18 September 2000. 2. The interim dividend will be paid on 20 October 2000 to shareholders on the register at the close of business on 22 September 2000. 3. Dividend warrants/vouchers will be posted on 18 October 2000. 4. The interim report will be posted to shareholders on 4 August 2000. 5. The Provident Financial Company Nominee Scheme ('the scheme') enables shareholders who are eligible to use it, namely individuals, to take advantage of the CREST system for settling transactions in shares in the company by means of a low-cost dealing service. It includes a dividend reinvestment scheme. Shareholders who wish to take advantage of the scheme should contact the company's registrar, Capita IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TU (telephone: 0208 639 2000) to request an information pack.

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