14th Dec 2005 11:54
Provident Financial PLC14 December 2005 Trading Update and Closure of Yes Car Credit In September 2005, Provident Financial announced that it would undertake astrategic review of the Yes Car Credit business. That review has been completedand has concluded that the business is no longer viable. Increased competitionfrom motor dealers for sub-prime finance customers, together with regulatorychanges that have reduced sales of insurance products, have resulted inoperating conditions that are very different from those that prevailed when weacquired the business. Yes Car Credit ceased to be profitable in 2004 and,despite every effort to return the business to profitability, has been sufferingtrading losses since. A pre-tax trading loss of about £24 million is expectedin 2005. Over the past three months, in conjunction with our financial advisers, we haveworked hard to find a buyer for the motor retailing activities of Yes CarCredit. Unfortunately, last Friday, 9 December 2005, negotiations withprospective purchasers ended unsuccessfully. As a consequence, the tradingactivities 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 bookof customer receivables, valued at approximately £240 million, will be collectedout as they fall due. Approximately 820 employees, from both branches and head office, will be maderedundant. 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 willbe written off. In addition, exceptional pre-tax cash closure costs of about£30 million together with asset write downs of about £20 million will beincurred, giving a total exceptional pre-tax loss of approximately £141 million. Chris Johnstone, Managing Director of the UK consumer credit division, will beleaving the group by mutual agreement when the closure of Yes Car Credit iscomplete. UK consumer credit division UK home credit The UK home credit business has performed broadly in line with expectations inthe 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 toselected, lower risk customers have generated growth in credit issued of 3% forthe year to date but, as expected, the rate of growth is slowing as the yearprogresses. We noted at the half year the early signs of a weaker collectionperformance following the reduction in consumers' disposable income caused byrising fuel and utility costs. This trend has, as expected, carried throughinto the second half of the year with the result that impairment costs haveincreased by 9% compared to the first 11 months of 2004. Operating costs remainunder tight control. We expect a reduction in profit from this business in linewith the market consensus for 2005 and we expect that the recent trends inimpairment costs together with increases in other costs, particularly marketingcosts, will mean that the annual reduction in profit in 2006 is likely to begreater than in 2005. We continue to co-operate actively with the Competition Commission's inquiryinto the UK home credit sector and have responded fully to the recentlypublished emerging thinking document. We were pleased to note that theCommission's own research confirmed high levels of satisfaction among customersand that agent relationships with customers were good and businesslike. Thenext step in the Commission's process is the publication of provisional findingsin January/February 2006. Central costs for 2005 are expected to be about £4million higher than in 2004, largely as a result of the significant expenditureinvolved in dealing with the Competition Commission inquiry. Vanquis Bank Vanquis Bank has continued to grow its cardholder numbers and customerreceivables during the second half, despite tightening its underwritingcriteria. Cardholder numbers stand at 153,000 at the end of November 2005 andnet amounts receivable from customers at £58 million. Start-up losses of £16million are expected for the full year. We continue to expect a much reducedstart-up loss in 2006 and a move into profit in 2007. International division The international division has been operating since 1997 as part of ProvidentFinancial's strategy of developing new sources of growth outside of the UK homecredit business. International continues to deliver good results with growth inprofits from central Europe partly offset by start-up losses in Mexico.Hungary, Czech Republic and Slovakia have continued to perform as expected. InPoland, we said at the half year that we had slowed the growth in credit issuedand increased the emphasis on collections in order to address adverse trends incollection performance and impairment. These actions have stabilised collectionperformance but have led to lower than expected growth in credit issued andcustomer receivables which is impacting profit growth in 2005 and which will doso to a greater extent in 2006. Overall, for the eleven months to November 2005, the international division hasincreased its customer numbers by 15%, as compared to November 2004, to almost1.7 million and its credit issued by 12%. We now expect profit from theinternational division for 2005 to be about 25% higher than in 2004, which is alittle below our previous expectations. Preparations for the new regulatory regime that comes into force in Poland inFebruary 2006 are progressing to plan. Mexico is growing rapidly and performing well. Customer numbers already exceed100,000 and our geographic expansion in the Puebla-Veracruz region isprogressing to plan. In addition, in order to take advantage of theopportunities in this large and attractive market, we have recently opened asecond centre in the Guadalajara-Leon region which has a population ofapproximately 20 million people. We continue to expect start-up losses of about£4 million for this year. The accelerated expansion in the Guadalajara-Leonregion will result in start-up losses in Mexico increasing to around £9 millionin 2006. We also intend to launch a pilot operation in Romania in 2006. This is a fastdeveloping market, adjacent to our central European markets, with a populationof 22 million people. It has researched well and has significant potential. Wewill incur about £3 million in start-up losses in Romania in 2006. Overall, in 2006 the international division will invest about £12 million instart-up losses in developing Mexico and Romania, building upon the considerablesuccess and substantial value already created by our international expansion.As a result of this investment in start- up losses, together with slower growthin Poland, we expect a small reduction in international's profit in 2006 beforegrowth is resumed in 2007. Motor insurance division We expect Provident Insurance to deliver excellent results for the year withprofits of approximately £40 million. Although market conditions remaincompetitive our underwriting results continue to benefit from the favourabledevelopment of claims costs. We expect market conditions in 2006 to be similarto 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 toits final salary pension schemes; approximately £31 million in December 2005 andthe balance in the first half of 2006. This will remove the IAS 19 deficit asvalued at 30 June 2005. New, more sustainable pension arrangements for futurepension accrual will be established that will provide greater certainty as tothe cost of pension provision and, in particular, are designed to reduce thevolatility of the company's pension costs to changes in wage inflation andlongevity. The increase in the group's interest payable after funding thedeficit will be broadly offset by a reduction in the IAS 19 pension charge tothe group's profit and loss account. Final dividend for 2005 The board recognises the importance of dividends to shareholders and its presentintention is to increase the final dividend for 2005 by 3%. Group performance Overall, we expect the ongoing group (excluding Yes Car Credit) to reportprofits approximately 5% below the market consensus estimates for 2005. Enquiries to Brunswick Group on 020 7404 5959 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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