Final Results - Year Ended 31 December 1999

Provident Financial PLC 24 February 2000 Preliminary announcement of the final results for the year ended 31 December 1999 H I G H L I G H T S - Investment in future growth paying off with group customer numbers up by 295,000 (12%) to 2.7 million and group turnover up by 15.1% - Like for like profit up by 8.5% to £155.0 million after international start-up losses of £8.4 million - Earnings per share up by 7.6% to 43.15p - Final dividend per share of 14.9p, making the dividend increase for the year 10.2% - Steady growth in UK home credit with like for like profits up 7.5% to £143.9 million. Bad debts expected to stabilise during 2000 at 8.5% of credit issued - Insurance division profits up 30% to £25.4 million - Significant progress in international home credit. Customers up from 18,000 to 149,000. Profits expected in 2001 - a year ahead of plan 'The board is confident of a good result in 2000 and has laid sound foundations for an exciting and rewarding future.' John van Kuffeler Chairman 24 February 2000 Enquiries: Today Thereafter Media ----- ---------- ----- David Stevenson 0171 628 5646 01274 731111 Investor Relations ------------------ Elizabeth Bottomley 0171 628 5646 01274 731111 Chairman's statement -------------------- I am pleased to announce a year of significant progress. In 1999, the group's profit before tax as adjusted for the effects of the capital reorganisation increased by 8.5% to £155.0 million (1998: £142.8 million) and earnings per share increased by 7.6% from 40.12p to 43.15p. These results are encouraging in the light of start-up losses of £8.4 million (1998: £4.7 million) incurred in establishing our new international businesses. The board of directors recommends a final dividend of 14.9p per share (1998: 13.6p), giving a dividend for the year of 24.8p per share (1998: 22.5p), up 10.2% over 1998. Operations ---------- This has been a year of considerable advance, with sound foundations laid for the future. Our UK home credit business has continued to make progress in a challenging market in which higher levels of personal indebtedness and bad debt have been evident. Our bad debt charge has risen to 8.4% of credit issued. This more demanding market has stretched our field management and we responded by strengthening our field force and growing credit issued per customer more cautiously. Agent and customer numbers grew by 6.7% and 4.6% respectively and credit issued was up by 5.2%. Profit before tax, on a like for like basis, increased by 7.5% to £143.9 million. Our international home credit division has performed exceptionally well with customer numbers growing from 18,000 to 149,000 over the year. We have proved our ability to build and manage overseas operations successfully and have exceeded the expectations of even a few months ago. Start-up losses for the year were £8.4 million compared to £4.7 million for 1998. The insurance division benefited from rising motor premiums in the market as a whole and has had an outstanding year, with substantially increased volumes and profits, together with excellent returns on capital. Profit before tax increased by 30% to £25.4 million. The group has been strongly cash generative and, in line with our policy to return excess capital to shareholders, we have repurchased 5.2m shares during the year, at an average price of 679p per share. A detailed review of operations is given in the Chief Executive's review. Strategy -------- The board has a clear strategy for the development of the group. We are well on the way to achieving our aim of being a leading international provider of financial services to lower income households. UK home credit remains the bedrock of our business and continues to provide attractive returns. We continue to recruit large numbers of customers from our traditional C1, C2, D and E socio-economic groups with 38% of our customer base coming from the C1 and C2 segments. We see potential for steady growth and our strategy remains to recruit more agents and customers to achieve this growth. A key element of our strategy is to develop our businesses internationally, building on the success of the introduction of home credit into Poland and the Czech Republic. Both countries offer substantial markets for home credit with returns on capital expected to be similar to those in the UK. In 2000, we will focus on building our presence in these markets and will then move into another European country in 2001 and at least one other country each year thereafter. The strategy for our motor insurance business remains to earn attractive margins rather than to maximise market share. We are a specialist player, focusing mainly on women drivers, to whom we provide non-comprehensive cover. We retain a strong competitive advantage which we strive to improve through our ability to design products for this market and process these low-value transactions cost effectively. It is also part of our strategy, in line with Government policy, to extend the range of financial services we offer to lower income households. We already efficiently serve over 2.7 million customers with our simple loan and motor insurance products. During 2000, we will intensify new product development and intend market testing a new budgeting and bill payment product to serve our existing and new customers. This will be distributed through a new, dedicated direct sales force. Board changes ------------- During 1999 we took steps to put succession plans in place. Peter Fryer, the Financial Services Director, will retire after the forthcoming AGM after a long and distinguished career of nearly 30 years with the group. On behalf of the shareholders I would like to thank Peter for his valuable contribution to the business. Robin Ashton was promoted from Finance Director to Deputy Chief Executive with board responsibility for UK home credit and will also shortly assume responsibility for the insurance division. His successor, John Harnett, was recruited as Finance Director in April 1999. I shall remain in an executive role whilst these management changes bed down and the international division moves into profit, before becoming non-executive chairman with effect from the AGM in 2002. Prospects --------- There has been good growth in all three divisions in 1999 and customer numbers have expanded significantly. This will continue in the current year. We see good potential for the UK home credit division, and so will pursue our growth strategy, with the rate of growth in agent and customer numbers expected to be similar to that seen in recent years. An improved trend in collection performance during the second half of 1999 gives us confidence that the bad debt charge as a percentage of credit issued will stabilise at around 8.5% as the year progresses. Overhead costs in 2000, particularly in the first half, will continue to grow ahead of revenue as the full-year effect of 1999's investment to strengthen the field force is felt. We expect profit growth in UK home credit in 2000 to be slower than in 1999 as a result of our more cautious approach to lending and of the absorption of the costs of our strengthened field force. Higher rates of growth are expected from 2001 onwards, as the benefits of our investment are felt. Our priority for 2000 for the international home credit business will be to increase substantially our customer base in the Czech Republic and Poland. In the Czech Republic, our investment in a nationwide infrastructure is close to completion and so we expect our operations there to move into profit later in the year. In Poland, we will invest further to extend our geographic reach and so we expect to come into profit in 2001. Based on our market research and our experience to date, we have set ourselves a target of over one million customers in these two countries within the next five years. The international home credit division is expected to report substantial growth in 2000 and lower start-up losses than in 1999, largely incurred in the first half of the year. We now expect the division as a whole to report a profit in 2001, a year ahead of plan. In the years thereafter, profits from the international division are expected to increase rapidly. This will enable us to deliver good returns for shareholders and to develop into other countries. We are firmly convinced that home credit is a service with considerable international application and provides an excellent investment opportunity which will significantly enhance the group. The motor insurance division should have another excellent year for profit growth driven by premium increases introduced in 1999 and further expected increases in 2000. As a result of continued investment in our international businesses and of the cost of strengthening our field force in the UK, we expect earnings growth to be stronger in the second half of 2000 than in the first half. The board is confident of a good result in 2000 and has laid sound foundations for an exciting and rewarding future. John van Kuffeler Chairman 24 February 2000 Chief Executive's review -------------------- UK home credit -------------- The UK home credit division is successful because it understands the relationships between people. We know what our customers want and we understand them because we have over 11,600 agents meeting, listening and talking to them every week. These agents, the majority of whom are women, live in the communities where they work and are out whatever the weather because their customers rely on them to be there. With an average service of seven years, they are often the people our customers trust more than anyone else to talk to about their financial situation. The regular visits to customers' homes by our agents allow continuous and more accurate credit assessments to be made. This gives us an enduring competitive advantage over remote lenders. Our success is also due to the high level of customer service we deliver. Our strategy has continued to be to increase the volume of credit issued, by recruiting additional agents, who in turn recruit more customers. Agent growth has been good and the number of agents has grown by 6.7% over the year. Customers grew by 4.6%. We were more cautious in our lending in 1999 and this led to growth in credit issued of 5.2%, in line with customer growth. A concern throughout last year was the rising level of bad debt. We believe this trend resulted from the interaction of two forces; a more complex marketplace for credit, and the pressures which that has put on our already lean home credit field force. There is increasing complexity in the UK consumer credit market, as a wider range of credit products has become available to lower income households. This has to some extent increased competition with our home-collected credit product but has also led to increased indebtedness amongst our customers, who are now borrowing from a greater variety of sources. A more demanding marketplace, both in terms of lending and collecting, has resulted. Over the last few years we have grown rapidly and as a result we have had a greater proportion of inexperienced agents and customers, of whom we have less knowledge and who absorb a greater amount of management time and attention. We have also been striving to drive down the cost of the UK home credit field force, as a proportion of revenue. In part, this has been achieved by increasing the number of agents and customers for which each front-line manager is responsible. We recognised last year that spans of control had been stretched and the increased work load and more demanding environment for lending had placed more strain on the organisation. We responded by recruiting and training almost 150 more managers and improving the support for both agents and managers. This essential investment in additional front-line managers has contributed to a rise of 13% in overhead costs in the second half of the year, compared to the second half of 1998. We have also implemented measures to ensure better supervision of lending. From early 1997 to mid 1999 we saw a decline in collection performance, followed some months later by a rise in the bad debt charge. During the second half of 1999 we have seen a stabilising of collection performance which gives us confidence that these measures will also stabilise the level of bad debts as a percentage of credit issued at around 8.5% during 2000. In addition, we are investing a further £3 million in the year 2000 to improve the training, development and retention of new agents. The right actions to improve the business have been taken and we remain confident that there is considerable potential for future growth. International home credit ------------------------- We have made great strides in our international operations, which have consistently outperformed our expectations. In the course of the year, we have proved our ability to develop and manage substantial overseas operations. In Poland, the Czech Republic and, on a smaller scale, South Africa, we have invested to recruit and train local staff, to open branch offices and install systems. With these in place, we have recruited and trained new agents, who have been the driving force in the recruitment of new customers. During 1999, the international home credit division's number of customers increased from 18,000 to 149,000. In Poland and the Czech Republic, we have built significant businesses with a combined total of 138,000 customers, served by 700 employees and 3,400 agents. We have now established an infrastructure to enable us to access all of the market in the Czech Republic and 30% of the market in Poland. We have also been very encouraged by the continued excellent repayment record of our customers, with bad debt at around 5% of credit issued. South Africa remained a pilot throughout the year. Customer numbers have grown to 11,000 and throughout the year the repayment record has improved. Encouraged by this, we have recently decided to expand cautiously, concentrating within the Pietersburg area of the country. We shall restrict our total receivables in South Africa to no more than 3% of the group's profits and we expect to break even in 2001. Start-up losses incurred in building these international businesses were £8.4 million over the year. Motor insurance --------------- In the motor insurance division we have not lost sight of the market we know best - non-comprehensive insurance for women drivers, drivers of second cars, older cars and those who do low mileage. Our expertise is our ability to transact low-value transactions cost effectively. We also benefit from the substantial income we obtain from our large investment fund. This strategy has continued to deliver good results. The division has benefited from increases in its premiums of 18% over the course of the year compared with increases in the market as a whole of 20% to 25%. This significant improvement in our price competitiveness has resulted in a substantial 17% increase in the number of policyholders, to 606,000 and, in these favourable conditions, profits have increased by 30% to £25.4 million. Howard Bell Chief Executive 24 February 2000 Consolidated profit and loss account ------------------------------------ 1999 1998 £'000 £'000 Turnover 582,561 506,014 ------- ------- Operating profit and profit before taxation 155,021 145,900 Taxation (43,406) (41,115) ------- ------- Profit after taxation 111,615 104,785 Dividends paid and proposed (note 3) (63,683) (151,776) ------- ------- Retained profit/(loss) 47,932 (46,991) ------- ------- Earnings per share (note 4) - Basic 43.15p 40.12p - Diluted 42.79p 39.65p ------- ------- Dividends per share (net of tax credit) to ordinary shareholders (note 3) (a) Interim - paid 9.90p 8.90p (b) Final - proposed 14.90p 13.60p ------- ------- Total ordinary dividend 24.80p 22.50p (c) Dividend paid in connection with share capital consolidation - 35.00p ------- ------- 24.80p 57.50p ------- ------- Dividend cover (excluding item (c) above), is: 1.75 1.80 ------- ------- The results shown in the consolidated profit and loss account derive wholly from continuing activities. There is no material difference between the retained profit shown above and the historical cost equivalent. Segmental reporting ------------------- Analyses by class of business of turnover and profit before taxation are set out below: Turnover Profit before taxation 1999 1998 1999 1998 £'000 £'000 £'000 £'000 UK home credit 422,633 390,642 143,911 136,910 International home credit 8,757 713 (8,434) (4,725) Insurance 151,171 114,659 25,374 19,619 ------- ------- ------- ------- 582,561 506,014 160,851 151,804 Central overheads - - (5,830) (5,904) ------- ------- ------- ------- Total 582,561 506,014 155,021 145,900 ------- ------- ------- ------- The international home credit loss before taxation can be analysed as follows: 1999 1998 £'000 £'000 Poland (2,657) (1,464) Czech Republic (2,679) (1,142) South Africa (703) (697) Central divisional overheads (2,395) (1,422) ----- ----- Total (8,434) (4,725) ----- ----- Analyses by class of business are based on the group's divisional structure. Turnover between segments is not material. Consolidated balance sheet -------------------------- As at As at 31 December 1999 31 December 1998 £'000 £'000 Fixed assets 36,074 36,571 ------- ------- Current assets Amounts receivable from customers (note 5) - due within one year 565,662 522,318 - due in more than one year 9,470 8,896 Debtors 130,342 107,303 Investments - realisable within one year 256,302 223,635 - realisable in more than one year 10,000 45,000 Cash at bank and in hand 42,423 31,583 --------- ------- 1,014,199 938,735 --------- ------- Current liabilities Bank and other borrowings (23,138) (25,352) Creditors - amounts falling due within one year (167,315) (116,332) Insurance accruals and deferred income (306,660) (291,840) ------- ------- (497,113) (433,524) ------- ------- Net current assets 517,086 505,211 ------- ------- Total assets less current liabilities 553,160 541,782 Non-current liabilities Bank and other borrowings (294,144) (291,437) Provision for deferred taxation - (3,043) ------- ------- Net assets 259,016 247,302 ------- ------- Capital and reserves Called-up share capital 26,705 27,229 Share premium account 47,211 47,760 Revaluation reserve 1,641 1,641 Other reserves 2,990 2,451 Profit and loss account 180,469 168,221 ------- ------- Equity shareholders' funds (note 6) 259,016 247,302 ------- ------- Gearing ratio (note 7) 1.22 1.28 ------- ------- Consolidated cash flow statement ------------------------------- 1999 1998 £'000 £'000 Net cash inflow from operating activities 128,278 87,930 Taxation (19,524) (50,558) Capital expenditure and financial investment 30,303 79,633 Equity dividends paid (60,924) (147,981) Management of liquid resources (32,667) (72,539) Financing (34,822) 108,199 ------- ------- Increase in cash in the period 10,644 4,684 ------- ------- 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 31 December 1999 the cash and investments held by the insurance division amounted to £292 million (1998 £290 million). Reconciliation of net cash flow to movement in net debt ------------------------------------------------------- 1999 1998 £'000 £'000 Increase in net cash for the period 10,644 4,684 Cash outflow from increase in liquid resources 32,667 72,539 ------ ------- 43,311 77,223 Cash inflow from increase in debt (297) (107,731) ------- ------- Change in net debt resulting from cash flows 43,014 (30,508) Net debt at 1 January 1999 (96,571) (66,063) ------- ------- Net debt at 31 December 1999 (53,557) (96,571) ------- ------- Analysis of changes in net debt ------------------------------- 1 Jan Cash Other 31 Dec 1999 flows non-cash 1999 changes £'000 £'000 £'000 £'000 Cash at bank and in hand 31,583 10,840 - 42,423 Overdrafts (6,238) (196) - (6,434) ------- ------ ------ ------ 25,345 10,644 - 35,989 Investments realisable within one year 188,635 32,667 - 221,302 Bank and other borrowings: - less than one year (19,114) 9,128 (6,718) (16,704) - more than one year (291,437) (9,425) 6,718 (294,144) ------- ------ ------ ------- Net debt (96,571) 43,014 - (53,557) ------- ------ ------ ------- Cash, borrowings and overdraft balances shown above at 31 December 1999 and 1998 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 ---------- 1999 1998 £'000 £'000 Operating profit 155,021 145,900 Depreciation 5,044 4,627 Loss on sale of tangible fixed assets 128 266 Increase in amounts receivable from customers (43,918) (52,612) Increase in debtors (22,327) (15,816) Increase in unearned insurance premiums 21,857 11,482 Decrease in insurance claims provision (7,110) (10,491) Increase in amounts due to retailers 506 1,136 Increase in accruals 5,297 13 Increase in other liabilities and deferred income 13,780 3,425 ------- ------- Net cash inflow from operating activities 128,278 87,930 ------- ------- Net cash inflow from operating activities can be analysed as follows: 1999 1998 £'000 £'000 UK home credit and central 119,823 81,618 International home credit (19,480) (5,635) Insurance 27,935 11,947 ------- ------ 128,278 87,930 ------- ------ Notes ----- 1. This preliminary announcement, which has been prepared on a basis consistent with the previous year, does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The announcement has been agreed with the company's auditors for release. 2. The information for the year ended 31 December 1998 is an extract from the statutory accounts to that date which have been delivered to the Registrar of Companies. Those accounts included an audit report which was unqualified and which did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 1999 upon which the auditors have still to report, will be delivered to the Registrar following the company's annual general meeting. 3. Dividends paid and proposed 1999 1998 £'000 £'000 (a) Interim dividend paid 9.9p (1998 8.9p) 25,737 23,034 (b) Final dividend proposed 14.9p (1998 13.6p) 37,946 35,187 ------ ------- 63,683 58,221 (c) Dividend paid in connection with share capital consolidation - nil (1998 35.0p) - 93,555 ------ ------- 63,683 151,776 ------ ------- 4. Earnings per share The basic and diluted earnings per share figures have been calculated using the profit for the year attributed to ordinary shareholders of £111,615,000 (1998 £104,785,000) and the weighted average number of shares in issue during the year. The weighted average number of shares in issue during the year can be reconciled to the number used in the basic and diluted earnings per share calculations as follows: 1999 1998 Weighted average No of shares No of shares In issue during the year 262,281,979 265,281,556 Held by the QUEST (3,640,080) (4,102,618) ----------- ----------- Used in basic earnings per share calculation 258,641,899 261,178,938 Issuable on conversion of options 2,190,714 3,068,769 ----------- ----------- Used in diluted earnings per share calculation 260,832,613 264,247,707 ----------- ----------- The movement on the number of shares in issue during the year is as follows: Number ------ At 1 January 1999 262,736,801 Shares issued pursuant to the exercise of options 144,817 Shares purchased and subsequently cancelled (4,190,933) ----------- At 31 December 1999 258,690,685 ----------- A further 1,009,553 shares were purchased in December 1999 but not cancelled until January 2000. After taking this into account, the adjusted number of shares in issue at 31 December 1999 was 257,681,132. 5. Amounts receivable from customers 1999 1998 £'000 £'000 (a) Instalment credit receivables Gross instalment credit receivables 878,917 807,541 Less: provision for bad and doubtful debts (84,771) (74,103) ------- ------- Instalment credit receivables after provision for bad and doubtful debts 794,146 733,438 Less: deferred revenue thereon (219,014) (202,224) ------- ------- 575,132 531,214 ------- ------- Analysed as: -due within one year 565,662 522,318 -due in more than one year 9,470 8,896 ------- ------- 575,132 531,214 ------- ------- At 31 December 1999 the net amounts receivable from UK home credit customers were £562,052,000(1998 £529,831,000) and from international home credit customers were £13,080,000 (1998 £1,383,000). (b) Bad and doubtful debts Gross provision at 31 December 1999 84,771 74,103 Less: deferred revenue thereon (23,948) (20,874) ------- ------- Net provision at 31 December 1999 60,823 53,229 Net provision at 1 January 1999 (53,229) (48,381) ------- ------- Increase in provision (net of deferred revenue) 7,594 4,848 Amounts written off (net of deferred revenue) 64,558 50,518 ------- ------- Net charge to profit and loss account for bad and doubtful debts 72,152 55,366 ------- ------- Analysed as: - UK home credit 71,098 55,301 - International home credit 1,054 65 ------- ------- 72,152 55,366 ------- ------- 6. Reconciliation of movement in equity shareholders' funds 1999 1998 £'000 £'000 Profit attributable to members of the group 111,615 104,785 Dividends (63,683) (151,776) ------- ------- 47,932 (46,991) Share buy-back (34,585) - Other movements in capital and reserves (1,633) 3,536 ------- ------- Net addition to/(reduction in) equity shareholders' funds 11,714 (43,455) Equity shareholders' funds at 1 January 1999 247,302 290,757 ------- ------- Equity shareholders' funds at 31 December 1999 259,016 247,302 ------- ------- 7. The gearing ratio is calculated as gross bank and other borrowings divided by consolidated equity shareholders' funds. 8. Credit issued 1999 1998 Growth £'000 £'000 % UK home credit 846,900 804,900 5.2 International home credit 29,400 2,800 - ------- ------- 876,300 807,700 8.5 ------- ------- 9. Collections 1999 1998 Growth £'000 £'000 % UK home credit 1,161,600 1,085,600 7.0 International home credit 24,900 2,100 - --------- --------- 1,186,500 1,087,700 9.1 --------- --------- 10. Profit before tax on a like for like basis In May 1998 the company paid a dividend of £93.6 million in connection with the share capital consolidation. This gave rise to additional interest costs in 1999 compared to 1998. If this transaction had taken place on 1 January 1998, an additional interest cost of £3.1 million would have been incurred in 1998 resulting in a reduction in profit before taxation from £145.9 million to £142.8 million. Consequently, on a like for like basis, the profit in 1999 increased by 8.5%, from £142.8 million to £155.0 million. For UK home credit, the additional interest cost of £3.1 million would have reduced profit before taxation in 1998 from £136.9 million to £133.8 million. On a like for like basis, therefore, UK home credit profit in 1999 increased by 7.5%, from £133.8 million to £143.9 million. 11. Year 2000 Changes to ensure the efficient and effective transition of the group's major business systems through the millennium date change were successfully completed. The group did not experience any significant year 2000 problems and does not anticipate any substantive residual risks. The total cost to the group, which principally comprised internal development costs, was £2.2 million. Shareholder information ----------------------- 1. The shares will be marked ex-final dividend on 3 April 2000. 2. Dividend warrants/vouchers in respect of the final dividend will be posted on 3 May 2000. 3. The final dividend will be paid on 5 May 2000 to shareholders on the register at the close of business on 7 April 2000. 4. The 1999 annual report and accounts together with the notice of annual general meeting will be posted to shareholders on 24 March 2000. 5. The Provident Financial Company Nominee Scheme ('the scheme') enables shareholders who are eligible to use it (i.e. 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, IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent, BR3 4TU (telephone 020 8639 2000) to request an information pack. 6. The annual general meeting will be held at 12 noon on 27 April 2000, at the Cedar Court Hotel, Mayo Avenue, off Rooley Lane, Bradford, BD5 8HZ.

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