Trading Update/YCC Closure
Provident Financial PLC
14 December 2005
Trading Update and Closure of Yes Car Credit
In September 2005, Provident Financial announced that it would undertake a
strategic review of the Yes Car Credit business. That review has been completed
and has concluded that the business is no longer viable. Increased competition
from motor dealers for sub-prime finance customers, together with regulatory
changes that have reduced sales of insurance products, have resulted in
operating conditions that are very different from those that prevailed when we
acquired the business. Yes Car Credit ceased to be profitable in 2004 and,
despite every effort to return the business to profitability, has been suffering
trading losses since. A pre-tax trading loss of about £24 million is expected
in 2005.
Over the past three months, in conjunction with our financial advisers, we have
worked hard to find a buyer for the motor retailing activities of Yes Car
Credit. Unfortunately, last Friday, 9 December 2005, negotiations with
prospective purchasers ended unsuccessfully. As a consequence, the trading
activities of Yes Car Credit will cease today and all branches will be closed.
The vehicle financing activities of Yes Car Credit will also cease and the book
of customer receivables, valued at approximately £240 million, will be collected
out as they fall due.
Approximately 820 employees, from both branches and head office, will be made
redundant. Yes Car Credit is offering employees an enhanced redundancy package,
beyond normal statutory entitlements.
In 2005, goodwill arising on the acquisition of the business of £91 million will
be written off. In addition, exceptional pre-tax cash closure costs of about
£30 million together with asset write downs of about £20 million will be
incurred, giving a total exceptional pre-tax loss of approximately £141 million.
Chris Johnstone, Managing Director of the UK consumer credit division, will be
leaving the group by mutual agreement when the closure of Yes Car Credit is
complete.
UK consumer credit division
UK home credit
The UK home credit business has performed broadly in line with expectations in
the eleven months to November 2005. Market conditions remain competitive.
Customer numbers continue to reduce and are 3% below the level at November 2004.
Increased issue of larger loans repaid over eighteen months or two years to
selected, lower risk customers have generated growth in credit issued of 3% for
the year to date but, as expected, the rate of growth is slowing as the year
progresses. We noted at the half year the early signs of a weaker collection
performance following the reduction in consumers' disposable income caused by
rising fuel and utility costs. This trend has, as expected, carried through
into the second half of the year with the result that impairment costs have
increased by 9% compared to the first 11 months of 2004. Operating costs remain
under tight control. We expect a reduction in profit from this business in line
with the market consensus for 2005 and we expect that the recent trends in
impairment costs together with increases in other costs, particularly marketing
costs, will mean that the annual reduction in profit in 2006 is likely to be
greater than in 2005.
We continue to co-operate actively with the Competition Commission's inquiry
into the UK home credit sector and have responded fully to the recently
published emerging thinking document. We were pleased to note that the
Commission's own research confirmed high levels of satisfaction among customers
and that agent relationships with customers were good and businesslike. The
next step in the Commission's process is the publication of provisional findings
in January/February 2006. Central costs for 2005 are expected to be about £4
million higher than in 2004, largely as a result of the significant expenditure
involved in dealing with the Competition Commission inquiry.
Vanquis Bank
Vanquis Bank has continued to grow its cardholder numbers and customer
receivables during the second half, despite tightening its underwriting
criteria. Cardholder numbers stand at 153,000 at the end of November 2005 and
net amounts receivable from customers at £58 million. Start-up losses of £16
million are expected for the full year. We continue to expect a much reduced
start-up loss in 2006 and a move into profit in 2007.
International division
The international division has been operating since 1997 as part of Provident
Financial's strategy of developing new sources of growth outside of the UK home
credit business. International continues to deliver good results with growth in
profits from central Europe partly offset by start-up losses in Mexico.
Hungary, Czech Republic and Slovakia have continued to perform as expected. In
Poland, we said at the half year that we had slowed the growth in credit issued
and increased the emphasis on collections in order to address adverse trends in
collection performance and impairment. These actions have stabilised collection
performance but have led to lower than expected growth in credit issued and
customer receivables which is impacting profit growth in 2005 and which will do
so to a greater extent in 2006.
Overall, for the eleven months to November 2005, the international division has
increased its customer numbers by 15%, as compared to November 2004, to almost
1.7 million and its credit issued by 12%. We now expect profit from the
international division for 2005 to be about 25% higher than in 2004, which is a
little below our previous expectations.
Preparations for the new regulatory regime that comes into force in Poland in
February 2006 are progressing to plan.
Mexico is growing rapidly and performing well. Customer numbers already exceed
100,000 and our geographic expansion in the Puebla-Veracruz region is
progressing to plan. In addition, in order to take advantage of the
opportunities in this large and attractive market, we have recently opened a
second centre in the Guadalajara-Leon region which has a population of
approximately 20 million people. We continue to expect start-up losses of about
£4 million for this year. The accelerated expansion in the Guadalajara-Leon
region will result in start-up losses in Mexico increasing to around £9 million
in 2006.
We also intend to launch a pilot operation in Romania in 2006. This is a fast
developing market, adjacent to our central European markets, with a population
of 22 million people. It has researched well and has significant potential. We
will incur about £3 million in start-up losses in Romania in 2006.
Overall, in 2006 the international division will invest about £12 million in
start-up losses in developing Mexico and Romania, building upon the considerable
success and substantial value already created by our international expansion.
As a result of this investment in start- up losses, together with slower growth
in Poland, we expect a small reduction in international's profit in 2006 before
growth is resumed in 2007.
Motor insurance division
We expect Provident Insurance to deliver excellent results for the year with
profits of approximately £40 million. Although market conditions remain
competitive our underwriting results continue to benefit from the favourable
development of claims costs. We expect market conditions in 2006 to be similar
to 2005 but continue to expect profits from the division to reduce.
Funding of the group's final salary pension scheme
The company intends to make two special contributions totalling £133 million to
its final salary pension schemes; approximately £31 million in December 2005 and
the balance in the first half of 2006. This will remove the IAS 19 deficit as
valued at 30 June 2005. New, more sustainable pension arrangements for future
pension accrual will be established that will provide greater certainty as to
the cost of pension provision and, in particular, are designed to reduce the
volatility of the company's pension costs to changes in wage inflation and
longevity. The increase in the group's interest payable after funding the
deficit will be broadly offset by a reduction in the IAS 19 pension charge to
the group's profit and loss account.
Final dividend for 2005
The board recognises the importance of dividends to shareholders and its present
intention is to increase the final dividend for 2005 by 3%.
Group performance
Overall, we expect the ongoing group (excluding Yes Car Credit) to report
profits approximately 5% below the market consensus estimates for 2005.
Enquiries to Brunswick Group on 020 7404 5959
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