2019 Half Year Results 20 August 2019 John van Kuffeler Founder - - PowerPoint PPT Presentation

2019 Half Year Results

20 August 2019

John van Kuffeler

Founder and Group Chief Executive

2

H1 2019 – continued strong growth

3

▪ Investment in all three divisions is starting to drive increased returns –

Branch-based lending: new branches plus improved performance from existing branches

–

Guarantor loans: increased capacity and combined collections operation

–

Home credit: improved collections and more streamlined infrastructure driving increased ROA

▪ Exceptional items in H1 19 total £25.3m due to deal costs, goodwill impairment and restructuring ▪ Current trading: in line with market expectations ▪ No change to strategy – clear focus is on increasing ROA whilst delivering good customer outcomes ▪ Whilst the UK business environment is uncertain, we remain cautiously optimistic: –

record levels of employment; real growth in wages

–

demand remains strong for the Group’s products

–

well-invested infrastructure

–

high risk-adjusted margins

–

experienced management teams

–

access to long-term debt funding

▪ Half year dividend up 17% to 0.7p per share

Substantial upside for all three divisions following significant investment

4

Net loan book1 Revenue2 Operating profit3 Earnings per share4

• Loan book growth driven by branch-based and guarantor lending

that saw further investment in new branches and staff in H1 19

• Despite higher interest costs, normalised EPS still grew by 13%
• Payout ratio of 43% (2018: 41%)

1 Assuming George Banco had been owned since 1 January 2017 2 Excluding fair value adjustments 3 Normalised operating profit before exceptional items 4 Normalised EPS before exceptional items

Dividend per share

0.7p +17%

2018 0.6p

▪ Solid growth across all key performance metrics:

H1 2019 – financial highlights

£195m £267m £336m £0m £50m £100m £150m £200m £250m £300m £350m £400m H117 H118 H119 £52m £79m £88m £0m £20m £40m £60m £80m £100m H117 H118 H119 £8m £15m £20m £0m £5m £10m £15m £20m H117 H118 H119

+12% +26% +28%

1.35p 1.45p 1.64p 0.00p 0.25p 0.50p 0.75p 1.00p 1.25p 1.50p 1.75p 2.00p H117 H118 H119

+13%

Exceptional items

▪ Offer for Provident Financial plc – Fees and associated costs slightly above previous

guidance of c£12m

▪ Management restructuring at Loans at Home – Highlighted in FY18 results in March 2019 ▪ Impairment of goodwill at Loans at Home – See slide overleaf

Exceptional items H1 19 Offer-related fees and other transaction costs 12.7 Management restructuring costs at Loans at Home 0.1 Impairment to goodwill (non-cash) 12.5 25.3

5`

5x 6x 7x 8x 9x 10x 11x 12x 13x 14x

Forward PER (Current year)1

NSF Provident Financial Morses Amigo

• 41%
• 47%
• 16%
• 11%

Goodwill impairment at Loans at Home

▪ Strong growth since acquisition in 2015 – Net loan book – £35.5m vs £22.6m – Agents – 892 vs 557 – Customers – 91,600 vs 87,000 ▪ Business performing ahead of budget in H1 19 ▪ But…. ▪ Sector multiples have fallen significantly since

December 20181

▪ Whilst position may reverse in due course,

accounting standard requires that we impair the goodwill asset now

1 Since 1 January 2019, based on data from Bloomberg

22.6 28.0 26.9 33.4 24.7 40.6 37.8 41.0 35.5 5 10 15 20 25 30 35 40 45 Jul-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 £m

Net loan book

Under IAS 39 Under IFRS 9

6`

Latest Key Performance Indicators

7`

Six months to 30 Jun 2019 Branch- based lending Guarantor Loans Home credit Loan book growth 22.3%

✓

53.1%

✓

• 6.1%



Revenue yield1 46.2%

✓

31.3%

✓

165.5%

✓

Risk adjusted margin2 36.1%

✓

24.0%

✓

112.7%

✓

Impairments/revenue 21.8%

✓

23.3%



31.9%

✓

Impairments/average net loan book 10.1%

✓

7.2%

✓

52.8%

✓

Cost:income ratio3 45.3%

✓

44.3%

✓

56.3%

✓

Return on assets4 15.3%



10.1%



19.5%

✓

1 Revenue as a percentage of average loan book excluding fair value adjustments (twelve month average) 2 Revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average) 3 Administration expenses as a percentage of normalised revenue (twelve month average) 4 Normalised operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

Our clear focus is on driving ROA towards our medium-term target of 20%

Branch-based lending – progress since acquisition

8

▪ Full FCA permissions in 2016 ▪ Significant branch expansion:

• Doubled the size of the branch network
• 126% increase in the number of branch staff

▪ Investment in technology:

• 2019 Fintech Awards –

‘Most Innovative Direct Loan Lender – UK’

▪ Customer and loan book growth:

• 90%+ more customers
• 67%+ loan book growth

▪ Continued improvement in profitability,

whilst managing operational risk

▪ Culture remains a key driver of our

long-term success:

• Roll-out of ‘The Everyday Way’
• Revised incentive structure

136 104 106 104 108 118 129 141 145 168 233 309 328 30 26 26 26 26 27 31 34 36 41 53 65 73* 10 20 30 40 50 60 70 80 50 100 150 200 250 300 350 400 450 500 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1 2019

Number of employees and branch locations

Branch Employees Locations (RH scale) 31.8 42.6 48.3 54.9 59.1 66.0 75.8 88.4 103.7 122.4 149.4 186.2 203.8 12 17 20 23 25 25 29 34 36 40 47 61 67 10 20 30 40 50 60 70 £0 £50 £100 £150 £200 £250 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1 2019 ('000)

Receivables and customer numbers

Receivables (£m) Customer numbers (RH scale)

* As at July 2019

Guarantor loans – progress since acquisition

9

▪ Acquisition was transformational ▪ Full FCA permissions in 2017 ▪ Significant investment - people and infrastructure:

• 129 staff at 30 June 19 (+98% since Aug 17)
• Move to new office facility in Trowbridge
• Continued investment in IT

▪ Increased number and quality of leads:

• 2.3m leads processed in LTM vs 1.7m in 2017
• c.35% of leads pass to become applications

vs 27% in 2017

▪ Conversion has been maintained driving

strong growth in lending KPIs:

• Number of loans written +77%
• Value of loans issued +93%
• Number of customers +89%

The new premises in Trowbridge opened in Q4 2018 40.4 47.3 62.9 83.1 96.3 20 40 60 80 100 120 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 £m

Net loan book

Home credit – progress since acquisition

10

▪ Transformation is now complete:

• From paper-based to digitally managed
• peration
• Culture focused on delivery of good customer
• utcomes
• Full FCA permissions in 2017

▪ Significant investment in infrastructure:

• Self-employed agents
• Front and back-office technology
• New offices
• Senior management and field staff
• Regulation and compliance

▪ Increased number and quality of customers ▪ Normalised business mix and impairment

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Gross Lending Product Mix %

24 33 45 63 75 600 650 700 750 800 850 900 950 1,000 1,050 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19

Agent numbers

Nick T eunon

Co-Founder and Group Chief Financial Officer

11

Summary - H1 2019 normalised1 results

12

1 Adjusted to exclude fair value adjustments, amortisation of acquired Intangibles and exceptional items.

Six months ended 30 June 2019

Branch-based lending Guarantor loans Home Credit Central costs Total % change

£000 £000 £000 £000 £000 Revenue 43,756( 13,840( 30,691(

• 88,287(

12% Other revenue 221(

• (
• 221(
• 75%

Modification adjustment (246) (41)

• (
• (287)

n/a Impairments (9,335) (3,241) (8,828)

• (21,404)

7% Revenue less impairments 34,396( 10,558( 21,863( 66,817( 12% Admin expenses (20,558) (6,212) (17,560) (3,010) (47,340) 6% Normalised operating profit 13,838( 4,346( 4,303( (3,010) 19,477( 28% Finance cost (8,399) (3,453) (1,108) (218) (13,174) 38% Profit before tax 5,439( 893( 3,195( (3,228) 6,299( 12% Tax (1,033) (169) (607) 613( (1,196) 12% Profit after tax 4,406( 724 2,588( (2,615) 5,103 12% EPS 1.64p 13%

H1 2019 normalised1 divisional breakdown

13

1 Adjusted to exclude fair value adjustments, amortisation of acquired Intangibles and exceptional items.

13.8 203.8 43.8 4.3 96.3 13.8 4.3 35.5 30.7 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Operating profit Loan book Revenue Branch-based lending Guarantor loans Home credit

H1 2019 normalised1 divisional breakdown

14

1 Adjusted to exclude fair value adjustments and restating 2017 loan book under IFRS 9.

▪ Loan book up by 26% to £335.6m ▪ Driven by strong growth at our two largest

divisions

▪ Branch-based lending +22% ▪ Guarantor loans +53% ▪ Home credit returning to more normalised

rates of growth

129.9 166.6 203.8 40.3 62.9 96.3 24.7 37.8 35.5 £m £50m £100m £150m £200m £250m £300m £350m £400m H117 H118 H119

Loan book

Branch-based lending Guarantor loans Home credit

H1 2019 normalised1 divisional breakdown

15

1 Adjusted to exclude fair value adjustments. Note 2017 is as reported under IAS 39

▪ Revenue up by 12% to £88.3m ▪ Driven by good growth across our largest

divisions:

▪ Branch-based lending +22% ▪ Guarantor loans +40%

28.2 35.8 43.8 1.5 9.9 13.8 22.5 33.2 30.7 £m £10m £20m £30m £40m £50m £60m £70m £80m £90m £100m H117 H118 H119

Revenue

Branch-based lending Guarantor loans Home credit

H1 2019 normalised1 divisional breakdown

16

1 Before central costs, fair value adjustments, amortisation of acquired intangibles and exceptional items.

Note 2017 is under IAS 39 while 2018 and 2019 are under IFRS 9.

▪ Normalised operating profit1 +28% to £19.5m ▪ Returns from previous investments starting to

feed through into performance:

▪ Branch-based lending +15% ▪ Guarantor loans +12% ▪ Home credit +110% ▪ Cost:income ratio reducing in all three divisions

9.8 12.0 13.8 0.1 3.9 4.3 0.8 2.0 4.3 £m £5m £10m £15m £20m £25m H117 H118 H119

Operating profit

Branch-based lending Guarantor loans Home credit

Branch-based lending

17

1 Before fair value adjustments. 2 Normalised revenue as a percentage of average loan book excluding fair value adjustments (twelve month average) 3 Normalised revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average) 4 Administration expenses as a percentage of normalised revenue (twelve month average) 5 Normalised operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

Six months to 30 June 2019 2018 % Change normalised normalised £'000 £'000

Revenue 43,756( 35,802( +22% Other income 221( 890( (75)% Modification loss (246) 0( n/a Impairments (9,335) (6,998) +33% Admin expenses (20,558) (17,669) +16% Normalised operating profit 13,838( 12,025( +15% Finance cost (8,399) (5,637) +49% Profit before tax 5,439( 6,388( (15)% Taxation (1,033) (1,214) (15)% Profit after tax 4,406( 5,174( (15)% IFRS 9 Key Performance Indicators: Jun 2019 Dec 2018 Loan book growth1 22.3% 28.3% Revenue yield2 46.2% 46.8% Risk adjusted margin3 36.1% 36.7% Impairments/revenue 21.8% 21.5% Impairments/average net loan book 10.1% 10.1% Cost: income ratio4 45.3% 45.9% Return on asset5 15.3% 15.8%

Branch-based lending – progress in H1 19

18

▪ Investment in branch capacity:

• 8 new branches now open making 73 in total

▪ Increased lead volume:

• Applications to branch up 32%
• Record number and value of loans booked

▪ Productivity remains a key focus:

• Keep new borrower conversion within 6-10% range
• Increase units per employee

▪ Impairment remains tightly controlled:

• 21.8% of revenue (Dec 18: 21.5%)
• Within previous guidance of 20-22%

4,000 6,000 8,000 10,000 12,000 14,000 0% 2% 4% 6% 8% 10% 12% £'000

Value of loans issued to new borrowers and conversion

New cash

• Conv. Rate

Upper limit Lower limit 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 10,000 15,000 20,000 25,000 30,000 35,000 40,000 £'000 Applications to branch (RH scale) New cash issued

Branch-based lending KPIs – impairment/ ANR1

19

1 Company data. Note figures since 2017 are under IFRS 9 while earlier periods are under IAS 39

16.4% 16.2% 18.3% 9.7% 9.9% 7.9% 8.2% 7.8% 7.3% 8.9% 9.5% 10.1% 10.1% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1 2019

Guarantor loans

20

Six months to 30 June 2019 2018 % Change normalised normalised £'000 £'000 Revenue 13,840( 9,897( +40% Modification loss (41)

• (

n/a Impairments (3,241) (1,416) +129% Admin expenses (6,212) (4,593) +35% Operating profit 4,346( 3,888( +12% Finance cost (3,453) (2,583) +34% Profit before tax 893( 1,305( (32)% Taxation (169) (248) (32)% Profit after tax 724( 1,057( (32)% Rolling 12-month Key Performance Indicators: Jun 2019 Dec 2018 Loan book growth1 53.1% 61.0% Revenue yield2 31.3% 32.2% Risk adjusted margin3 24.0% 25.8% Impairments/revenue 23.3% 20.0% Impairments/average net loan book 7.2% 6.4% Cost: income ratio4 44.3% 45.9% Return on asset5 10.1% 11.3%

1 Before fair value adjustments. 2 Normalised revenue as a percentage of average loan book excluding fair value adjustments (twelve month average) 3 Normalised revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average) 4 Administration expenses as a percentage of normalised revenue (twelve month average) 5 Normalised operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

Guarantor loans – achievements in H1 19

21

▪ Continued strong growth in lending volumes ▪ Improving quality of leads over last twelve months

• 35% of leads now becoming qualifying applications (Dec 2018: 32%)
• This is driving a meaningful increase in conversion to 2.38% (Dec 2018: 2.29%)

▪ T

emporary uptick in impairment

• Combining TrustTwo and George Banco collections prompted an increase in impairment to 23.3% of

revenue (LTM to December 2018: 20.0%)

• We are focused on returning impairment to previous guided range of 20-22% for the full year

▪ We are maintaining a good balance of loans written by channel

53% 18% 8% 11% 2% 4% 4% Broker Top Ups Organic PCW ELL Online Decline ELL Branch Decline Lead Generator 54% 20% 6% 12% 2% 2% 4%

LTM to December 2018 LTM to June 2019

Home credit

22

Six months to 30 June 2019 2018 % Change £'000 £'000 Revenue 30,691( 33,196( (8)% Impairments (8,828) (11,653) (24)% Admin expenses (17,560) (19,497) (10)% Operating profit 4,303( 2,046( +110% Finance cost (1,108) (1,271) +13% Profit before tax 3,195( 775( +312% Taxation (607) (147) +313% Profit after tax 2,588( 628( +312% Rolling 12-month Key Performance Indicators: Jun 2019 Dec 2018 Loan book growth1

• 6.1%

2.0% Revenue yield2 165.5% 171.5% Risk adjusted margin3 112.7% 115.6% Impairments/revenue 31.9% 32.6% Impairments/average net loan book 52.8% 55.9% Cost: income ratio4 56.3% 57.1% Return on asset5 19.5% 17.7%

1 Before fair value adjustments. 2 Normalised revenue as a percentage of average loan book excluding fair value adjustments (twelve month average) 3 Normalised revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average) 4 Administration expenses as a percentage of normalised revenue (twelve month average) 5 Normalised operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

Home credit – achievements in H1 19

▪ Focus on profit after recent investment:

• Operating profit +110%
• Profit before tax +312%
• ROA of 19.5%

▪ Lower impairment:

• 31.9% of revenue (FY 2018: 32.6%)
• Below guidance of 33-37%

▪ Cost management:

• New structure in place since Jan 19

▪ Loan book mix improving:

• Continued focus on quality customers
• Reducing share of book over 12 months
• Short-term impact on loan volumes
• Yield benefits will follow

▪ Network management:

• Vacancy rate remains low

23

54.0% 55.0% 56.0% 57.0% 58.0% 59.0% 60.0% 61.0% 62.0% 63.0% 64.0%

Home credit cost:income ratio

Total cost:income ratio

Balance sheet and funding

24

▪ £285m term loan in place until 2023 at 725

basis points over LIBOR

▪ £45m RCF until 2022 at 350 basis points

• ver LIBOR

▪ In advanced discussions re additional

lower-cost funding options

▪ £75m boost to distributable reserves

from capital reduction in July 2019

30 Jun 2019 £m 31 Dec 2018 £m Loan book 336 311 Fair value 3 4 Adjusted loan book 339 315 Cash and other assets 34 25 Right of use assets 11

• (

Payables and deferred tax (29) (17) Lease liability (11)

• (

Debt (296) (266) Tangible net assets 47 57 Goodwill and intangibles 134 154 Net assets 182 211 Net debt1 286 259 Loan: value2 85% 83%

1 Excludes cash held at the parent company and unamortised fees associated with the debt financing 2 In accordance with the Group’s debt covenants, net loan book is calculated under IAS 39

Dividend per share

25

▪ Half year dividend of 0.7p (2018: 0.6p) ▪ Equates to a normalised payout ratio of 43%1 ▪ Record date of 20 September 2019 ▪ Half year dividend to be paid on 17 October 2019

1 Based on normalised EPS of 1.64p per share

0.50p 0.60p 0.70p 0% 10% 20% 30% 40% 50% 0.00p 0.20p 0.40p 0.60p 0.80p 1.00p H117 H118 H119

DPS and payout ratio

John van Kuffeler

Founder and Group Chief Executive

26

Branch-based lending – future plans

27

▪ Still see scope for 100+ branches ▪ But, to drive profit growth from our existing infrastructure and accelerate increase ROA:

• Increase capacity through productivity improvements rather than additional branches
• Recently opened branches will gravitate towards target run-rate of 20% ROA
• Operational efficiencies through technology and sharing of best practice
• Continued focus on impairment management

(400) (200) 200 400 600 800 1,000

• 25

25 75 125 175 12 month profitability £000's Branch Age (months)

Branch Profitability Vs Branch Age

(400) (200) 200 400 600 800 1,000

1,000 2,000 3,000 4,000 5,000 Last 12 Month Profit £000's Branch ANR £000's

Branch Profitability Vs Average Net Receivables

Guarantor loans - future plans

28

▪ Continue to gain market share whilst controlling impairment

• Centralised collections function in Trowbridge
• Payment portal for both brands

▪ Careful management of our key distribution channels

• Maintain focus on quality whilst continuing to drive volumes
• Continue to deepen relationships with key brokers
• Manage top-ups to remain at current levels (c.20% of volume)

▪ Drive productivity through operational efficiencies

• Completion of technical integration (front and back end)
• Increase number of loans per employee

▪ Maintain the highest standards of customer service

• Full transparency for both borrower and guarantor
• Low levels of complaints
• Continued investment in culture and training

▪ Continue to assist FCA in their review of the sector

0% 5% 10% 15% 20% 25% 30%

Top ups as % of total

Top Ups % Upper limit Lower limit 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

% payments made by guarantors

GLD GT Paid % Upper limit Lower limit

Home credit – future plans

▪ Targeting modest loan book growth in a mature

market

– Existing customers appearing more cautious – Good growth in new customers in H1 19 ▪ Continue to normalise shape of loan book – Term, yield, impairment ▪ Focus on maintaining a quality customer base: – Rigorous underwriting criteria using proven

scorecards

▪ Continued focus on collections, impairment

management and compliance:

– Real-time management information – Balanced incentives including good customer

• utcomes

▪ Selective recruitment of additional agents

29

30 35 40 45 50 55 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19

Average Product T erm (weeks)

Balance Issue

30

Outlook

▪ NSF is well-positioned to deliver for customers and shareholders ▪ 10-12 million UK adults remain underserved – this remains a large and important market ▪ We have leading positions in attractive segments of the non-standard sector ▪ No change to strategy – clear focus is on increasing ROA whilst delivering good customer outcomes ▪ Strong growth in H1 19 illustrates the Group’s potential future performance ▪ Funding costs are a major expense for the Group and we are in advanced discussions to source

additional, lower cost debt funding

▪ We have declared a 17% increase in the dividend to 0.7 pence per share that will be paid on 17

October 2019 to shareholders on the register on 20 September 2019

▪ Trading in the year-to-date means we are cautiously optimistic about the full year outlook

2019 Half Year Results

20 August 2019

Appendix - NSF is well-placed to succeed

▪ The market is 10-12 million UK adults that are underserved by mainstream lenders

32

At 30 June 2019

Market position #1 #2 #3 Acquisition Date: April 2016 April 2016/August 2017 August 2015 Net Loan Book (£m): £203.8m £96.3m £35.5m Annual loan book growth +22% +53%

• 6%

Number of staff 447 129 313 Number of customers 67,400 28,500 91,600 Loan Size (£m): £1k - £15k £1k - £15k £100 - £1k Duration: 1 – 5 years 1 – 5 years 24 – 63 weeks APR Range: 24% – 249% 37% - 80% 245% - 733% Average Customer Income1:

• c. £30,000
• c. £25,000
• c. £16,000

Business performance Product overview

Home credit Guarantor loans Branch-based lending

1 In the year to 31 December 2018