with DAVID MCALPIN / TCRS CEO
It was certainly a year of two halves for us. In the first half, we
were on track to achieve high, double-digit earnings growth
above 2019 levels. Our strategic initiatives were coming
together nicely. But COVID-19 brought about a dramatically
different operating environment, which impacted consumerfacing
businesses all over the world.
Many of our clients, including retailers, banks and specialist lenders, experienced severe disruptions to their businesses and had to immediately switch focus to protect their employees by implementing COVID-19 protocols, shifting from an on-site to work-from-home operating model, and supporting their customers through payment relief programmes. These actions all contributed to slowing the handover or sale of matters for collection.
We adopted a cautious approach to the acquisition of NPL Portfolios as principal, and curbed our risk appetite given the volatile market conditions. This, together with the slowdown in sale of matters for collection, contributed to the reduced acquisition of NPL Portfolios in both South Africa and Australia, well below the levels achieved in 2019. Also, uncertainty in market conditions led to pricing dissonance between buyers and sellers of NPL Portfolios.
While collections on NPL Portfolios performed better than initially expected, we see future collections recovering more slowly and over a longer period than we did at half-year. Estimated remaining collections are expected to be about 4% lower over the medium term. As such, we adjusted the carrying value of purchased book debts down by R588 million to ensure future yields remain aligned with those achieved in the past.
Our almost 20 years’ experience in acquiring NPL Portfolios at attractive risk-adjusted returns enables us to adjust our pricing methodology to the prevailing environment, to ensure NPL Portfolios are priced accurately to achieve targeted returns and collection multiples. Although we anticipate investing less in NPL Portfolios in 2021 than in 2019, as market dynamics become clearer, there may be an opportunity to accelerate investment beyond 2019 levels. Similarly, we expect to invest in excess of R1 billion in 2022 in acquiring NPL Portfolios.
In Australia, the appetite of banks to sell their NPL Portfolios has declined, as they implement the recommendations of the Royal Commission into the banking industry and manage the effects of COVID-19. We will continue to follow a cautious and selective approach in acquiring NPL Portfolios in Australia in line with our medium-term strategy to establish a more meaningful position in this larger market.
Clients in the Australian market have shown a preference for FFS and contingency collection mandates over the sale of their NPL Portfolios. Our diversified business model positions us to respond effectively to this shift. In 2020, Recoveries Corporation was able to gain new mandates from new and existing clients, which enabled it to grow organic revenue by double-digit percentages. It also managed its operating costs well given the shift in revenue mix to FFS mandates.
The South African contingency and FFS division performed in line with expectation given the difficult consumer environment. Muted retail sales and credit extension from March 2020 translated into lower volumes of matters handed over for collection by clients. We expect recoveries and contingency collection revenues to be lower going forward, as consumers struggle to repay their debt. However, we may well see higher volumes of outsourced collections mandates on larger NPL Portfolios in this environment.
The biggest change we made was to move to a
work-from-home operating model. Thanks to our
investments in technology, we were able to give our
teams the necessary access to our systems and full suite
of data, technology and analytics capabilities, without
compromising data security. Our dialer and workforce
management tool have proven to be fit for purpose in
this new operating reality.
Given the need for effective people management in a remote working environment, we enhanced our ability to measure productivity and efficiency substantially. Our agents responded very positively to working from home, reflected in higher efficiency and productivity metrics per agent, and much lower levels of absenteeism. A reason for this is the removal of time spent on commuting to and from work, as well as costs such as travel, which means our agents are saving money and winning back time. For example, in the South African business, early evening we can now have 800 to 900 (of 1 600) agents still online and working, whereas before, most of those agents would be making their way home. Our salary structure for agents also encourages outperformance due to the high incentive component.
The actions we took to recalibrate the business in terms of infrastructure and staff complement should allow us to realise around R90 million in cost savings into the 2021 financial year.
We will definitely continue with work-from-home because
of its benefits. There are still limitations to doing
everything remotely. For example, it can be difficult to
innovate or iterate ideas in virtual meetings, or to read
someone's body language, and these meetings do not
tend to have much energy. Also, training generally
needs to be done onsite. To ensure sufficient contact
and to connect them back into the culture of our
organisation, our employees rotate back into the office
every two to three weeks. We think it will settle
naturally in a combination of office- and home-based
work, depending on the outcomes required, but certainly
work-from-home will become a permanent feature of our
From an infrastructure perspective in South Africa, the work-from-home model is robust in the face of electricity and network outages given the geographic dispersion of our agents. However, some employees may not have good enough internet connectivity in their area, or struggle with motivation outside an office environment.
We have put the necessary measures in place to ensure the safety of these employees at our call centres, including a mandated two-metre social distancing restriction between each person in our call centres and offices. We also have a number of employees with comorbidities, which requires that we be particularly careful in managing infection risk.
As a high-performance culture organisation, our focus has been on playing to our individual employees’ strengths to accommodate them the best we can. The level of sophistication around how we can monitor productivity and the business insights from our systems is a competitive advantage. The level of oversight, and our ability to monitor and manage performance, has reached a new level compared to where we were before COVID-19. As part of our employee value proposition, we are providing uncapped 5G to our agents and their families where there is 5G network coverage, so when they work from home, their children can use that for school and learning.
It was a tough decision to make and was carefully
considered, but there were a number of factors that led to
us reducing our headcount. Firstly, while work-from-home
was implemented successfully, the reduction in revenue
due to COVID-19 required that we adjust our cost base
accordingly. Before the pandemic hit, we were in a
phase of building capacity for anticipated growth in the
collections market, and we had budgeted for expansion.
With lower collections in the second half of the financial
year and expected remaining collections below our
previous estimates, we had no option but to reassess our
organisational structure and amend the cost base.
Another important factor is that our investments in our data, technology and analytics capabilities have enabled us to run collections campaigns with fewer people. There are also the efficiency benefits that were an unexpected outcome of the work-from-home model, such as higher productivity per agent allowing Transaction Capital Recoveries to be more efficient with less people. It has really brought out the best in our top performers, who have driven our efficiency levels higher than ever before.
On balance of all these considerations, we had to implement a Section 189 process (which deals with large-scale retrenchments) that affected
544 employees by end September 2020. That also included 76 employees who were retrenched during the year as we wind down Transaction Capital Business Solutions.
Recoveries Corporation is based in Melbourne, which
had strict lockdowns imposed twice – once at the
beginning of the pandemic and again following the
emergence of a ‘second COVID-19 wave’. Agents were
successfully equipped to work from home, and for the
in-source programmes where agents would ordinarily be
deployed to the client’s site, clients provided the
necessary hardware to work from home where able or
permitted agents to use Recoveries Corporation's devices
from home. Even before COVID-19, our employees,
consumers from whom we collect, and our clients were
impacted by unprecedented sustained bushfires in the
We believe the operational agility demonstrated in the Australian business will support its resilience even if the pandemic’s path is prolonged–especially with the prospect of effective vaccines being rolled out and the expectation of a relatively faster recovery in the Australian economy. However, as in South Africa, our collections business is tightly linked to our clients’ ability to extend credit, so we are naturally linked to their credit cycles.
Collections in Australia were stable and resilient. This is partly due to significant support provided to Australian consumers through government subsidies, job keeper programmes and the relaxation of regulations on accessing retirement funding, which some consumers have applied to paying down debt. Also, our insourced FFS business benefitted from banking clients requiring additional collections capacity, or needing capacity planning and management, to deal with their debt relief programmes. Recoveries Corporation has benefitted here too.
The potential impact on credit-active consumers once support programmes come to an end remains a concern, as does the future performance of Australia’s economy. Our Australian team anticipates that this may impact the number of books coming to market, as banks may be reticent to sell books in this environment due to reputational risk, as well as pricing dissonance between sellers and buyers.
The Australian platform has built an even stronger reputation in the Australian market thanks to our investments in technology and increased efficiency. We have seen strong growth in the business since acquiring Recoveries Corporation in January 2017.
Lanyana Financial Group, in which we acquired a 25% shareholding last year, has been affected by the debt relief programmes and subsidies mentioned earlier, as there is less take-up of debt agreements. However, as relief measures come to an end, we expect take-up to resume. We continue to seek and assess opportunities in Australia, with consolidation in the industry representing a potential opportunity in this market.
Recoveries Corporation runs a different dialer and
workforce management tool to what we have in South
Africa, so our focus has been on optimising the benefits of
their systems and overlaying our business information
systems, which has assisted in the effective management
of the business. That is where the real efficiencies have
We took a platform that already had a diversified client base, strong revenues, good reputation and experienced management team, to which we applied our specialist data, technology and analytics capabilities. We now have a business earning in hard currency, performing at or ahead of our expectations, even with the implications of COVID-19. Also, the valuation and analytical IP and methodologies we have developed in South Africa over 20 years have clearly benefitted the Australian platform. We also believe we can leverage our experience in running platforms and valuations into the European market.
In short, while many South African corporates have been unsuccessful in the Australian market, our investment in Recoveries Corporation has yielded better than expected results and continues to perform well.
The intention is to create a more focused and substantial payment and transactional
services business diversified by payment activity, client and sector. It is our vision to
create a single, scalable payment services platform. This has resulted in Fihrst, acquired
in December 2019, being integrated with Transaction Capital Payment Solutions and
Accsys to create a payment and transactional services platform.
Growing TCTS will be a key focus going forward. We have a strategy for how to differentiate the business and we are working with the management team to grow revenue substantially. We are assessing synergies within the platform as well as opportunities for cross-selling and up-selling, and we are applying best-in-class technology from each to create a more resilient and efficient platform.
Our position was that if we could not achieve scale in
these businesses, we should either wind them down or sell
them. For TCBS, the challenging operating environment
for the SME sector existed well before COVID-19, and
has continued to deteriorate. Consequently, we decided
that we would achieve better risk-adjusted returns from
deploying capital elsewhere within TCRS, particularly in
acquiring NPL Portfolios. Most of the outstanding portfolio
in TCBS has been collected, with only R218 million of net
loans and advances remaining at the end of the financial
year. Similarly, with Principa, our inability to achieve
scale motivated the decision to sell it during the year.
We have made great progress in adopting and reporting
against our new ESE framework during the year.
Shareholders and funders are certainly becoming more
sensitive to ESE performance and we have been aligning
our internal reporting processes to the framework. While
the business has established ways of demonstrating the
value its services unlock for clients, the ESE framework
allows us to track our social impact areas. Importantly,
it also establishes metrics by which we can measure
and track the extent to which our business effectively
rehabilitates debtors and collects responsibly, to expedite
their re-entry into credit markets.
I am pleased that a lot of what one would expect out of a responsible corporate citizen is already very much in place within TCRS. The framework formalised and structured our ESE performance measurements, but showed up the approach to social responsibility and social relevance that is intrinsic to our values and the way we do things on a day-to-day basis.
As mentioned, we believe that the increase in arrears
on consumer debt presents a meaningful medium-term
strategic growth opportunity, especially in the
acquisition of NPL Portfolios, for which we are looking
at different special funding structures to increase our
Outside South Africa, we continue to assess opportunities for further geographic diversification, either through direct investments or through partnerships with European- and United Kingdom-based platforms. In Australia, we will continue to grow our contingency, FFS and in-source businesses, as well as the acquisition of NPL Portfolios.
Another focus will be on growing our services revenue. That will be achieved by growing transactional services through TCTS and other opportunities such as business process outsourcing and customer services, where we can leverage our current call centre, data, technology, and analytics expertise.
The ongoing impact of COVID-19 on the markets where we operate presents a lot of uncertainty, especially in terms of economic growth, employment, credit extension and consumer indebtedness. We are encouraged by signs of a rebound in the South African economy, but remain cautious as we expect pressure on consumers to persist. We will monitor developments closely, but the actions we have taken to restructure our operations, our diversification by geography, client and sector, and the defensive nature of our businesses, place us in a strong position to weather these uncertain times and take up the opportunities that are emerging for us in this ‘new normal’.