ABG Sundal Collier Holding ASA (ABG) Earnings Call Transcript & Summary

Okay. Good morning all, and welcome to ABG Sundal Collier's Q4 results presentation. With me here today, I've got our CFO, Geir Olsen, who will make sure I behave. He will also elaborate a bit on financials and a bit on the cost base later on. Before we kick off, I would also like to mention that, of course, as usual, there will be a Q&A session. And after the presentation, if you want to raise questions, please use the Q&A function in Teams, and we will answer all questions in turn. So before we dig deeper into the numbers, let me start with a few general reflections about Q4 and the year that has just passed. During the quarter, markets recovered from the lows in end of Q3 on the back of signs of fading momentum in inflation, and thus hopes of interest hikes coming to an end. This supported some, although limited, capital markets activity during the quarter. Especially in equity markets, we saw some activity with ABG conducting a number of private placements and also actually 1 IPO, which was a very rare thing in the second half of 2022. That said, a high market share in very quiet markets doesn't make anyone happy. Therefore, I'm very glad to see that our business model is working as designed with leading positions in all relevant product areas across many sectors as well as in different geographical markets, making us less dependent on one single product or one single area. From that point of view, I'd like to highlight our strong performance, especially within our Norwegian M&A franchise as well as our brokerage and research platform. Also, we improved our market shares in the high-yield segment further during 2022 and improved our rankings such as #1 and 2 within the Prospera corporate finance ranking. All in all, a solid achievement in tricky markets. So let's look at the numbers in more details. During the quarter, we delivered revenues of just north of NOK 500 million, NOK 508 million, resulting in full year revenues of NOK 1.7 billion. Our operating margin ended up at 23% for the full year, which is a touch some of the plus 25% we think we should achieve over time, but still decent and within historical ranges. Clearly, our revenue and profitability-driven compensation model mitigates some of the effect on our operating margin from decrease in revenues. We'll talk a bit more on -- of our costs later on in the presentation. This ended up with an EPS on a fully diluted basis of NOK 0.17 in the quarter and NOK 0.50 on the full year. And in line with our dividend policy, the Board has also proposed a dividend of NOK 0.50 per share. I should also mention that we intend to work actively with keeping the share count stable over time from here. Okay. When it comes to market and the macro and market backdrop. Q4 was one very clear example of that history tends to repeat itself. The history I'm referring to is that when all 3 major asset classes, equities, bonds and commodities, at the same time in the same quarter decreases in value, such as was the case in Q3, we tend to see a bounce back in the following quarter. Of course, a trigger is needed apart from just historical patterns repeating itself. And this time around, it was, as I alluded to just previously here, signs of failing momentum in inflation, and thus, interest rates coming -- nearing a peak in a few months or so. We actually articulated just that back in early October, and we have since then witnessed a rebound between 10% to 20% for this basket of assets. That have automatically not resulted in capital markets being receptive for new issuance activity, but at least it's a start. Most important for capital markets to be open for business again is volatility fading, coming back to low levels and staying low for some time. And as you can see, in the middle of the chart, we witnessed that in end of 2023 -- 2022. Now we need to see stability for some time before markets are really open for business again. Okay. What -- how did this translate into for important market for us, this macro backdrop? Well, as described, the markets bouncing back in Q4 did not instantly lead to a strong recovery in volumes picking up again, which is evident looking at the ECM volumes being down by close to 80% in the quarter and just north of 70% for the full year. But look at the light blue shaded part of the bar in Q4, which is primary placements. Some signs of increased activity and actually the best quarter of 2022 in terms of volumes in primary placements. The reason is short lead times, making these kind of processes possible days rather than months such as the case for IPOs, which enables companies to utilize or take advantage of any window that might be open, which was the case especially in November of Q4 last year. Too early to tell if this is a clear sign of markets recovering, but at least it's an observation. Debt capital markets did slightly better throughout the first 9 months of the year but finished on a rather low -- on a low in Q4. However, this year has started better in debt capital markets, and we have already been involved in several DCM transactions in the first few weeks. M&A, as always, more stable. Transactions down by 26% in the quarter and 20% in the full year of 2022. So how did we do considering the market conditions in our specific niches? Well, decent, I'd say. And in terms of number of transactions, not too bad. Starting off with corporate finance, I think we did our refer share in terms of number of transactions, at least primary placements such as Catena; Exeger, an unlisted one; Komplett, to mention a few; and the only Scandinavian IPO above EUR 30 million in transaction size with the IPO of Cinis Fertilizer in Sweden. In DCM, we did a few transactions such as Kvalitena, First Camp and Proximar. But given the smaller size of the average transactions in the quarter, our revenues were down to NOK 124 million from NOK 427 million in Q4 last year. M&A, as alluded to, more stable. And when it comes to ABG and our performance specifically, it was not only stable. It was actually up both in the quarter and the full year. As you can see on the right-hand side of the slide, several transactions completed during the quarter such as KKR and Oslo Pensjonsforsikring acquisition of 30% of Telenor Fiber; Constructa to Veidekke; the sale of 50% of Revac to Rune Isachsen, to mention a few; and a number of private to public as well, as you can see in the chart on the right-hand side. On top of that, several real estate transactions were closed in the quarter with contribution from both Vika Project Finance in Oslo and ABG Fastena in Stockholm. When it comes to our brokerage and research operations, I'd say we have continued to deliver a very solid result, a very solid performance in a rather challenging environment, and not least, a very tough or difficult comps given the strong performance of 2021. Within brokerage and research operations, I would especially like to mention our fixed income sales operations. That has not only performed well in difficult markets but has actually increased revenues year-on-year, both in Q4 and full year. I'm also pleased to see that our clients appreciate our efforts in our brokerage and research operations, where ABG in the latest Prospera surveys for Norway and Sweden had top 3 positions in 27 sectors, including the #1 spot in important sectors and fields, such as bank and financial services in Sweden and shipping, seafood and macro in Norway. So with that, I'll hand over to Geir. Please, Geir?

Thank you, Jonas. Some comments on our operating cost base. Our total costs are down 30% compared to last year. That's mainly a function of our, I would say, dynamic cost model, being a function of profitability and revenues. Looking at headcount, which is a key driver for costs. They are up in line with our sort of long-term growth strategy. They're up 7% to an average of 332 for the year. We ended the year of about 340. So that's mainly, I would say, junior hires but also some selective senior additions adding to our teams. We have, I would say, a focus on maintaining a very slim support operation. We have a target of having more than 80% of our staff working in front operations, and we have maintained that also during 2022. So if you flip to the next page. We are constantly fighting underlying inflation, as everyone are these days. So on the noncompensation costs, and particularly we are pleased to see that we maintain a level of about NOK 1 million to NOK 1.1 million per head. That has been stable now for, as you can see, for the last 5 years, but it's been basically the same number for the last decade or so. So it's been quite robust. With respect to compensation and personnel costs, they are mainly a function of revenue and profitability. And over time, they have been in the mid-50s, which is a level where we see both other Nordic and international comparable companies operate. Still, we are, as I said, constantly fighting inflation, and we have a very tight and focused monitoring of our cost base. We focus on trying to improve our efficiency and also be able to respond if we have a material drop in market activity.

Okay. Thank you, Geir. So with that, let me summarize what I think are the key takeaways here. I think what we did in difficult markets last year simply could be described as a solid achievement. We have continued to further strengthen our market shares in several important product areas during 2022, such as net capital markets as well as in our long-standing, strong leading and leading position within Norwegian M&A. Our 2023 pipeline is more balanced in terms of product and geographical mix as well compared to 12 months ago. And as Geir alluded to, while we see early signs of market stabilizing, we are staying focused on keeping our long-term proven track record of sound profitability. And finally, we are looking forward to expanding our business through our new initiatives within private banking and alternative investments. These new business areas make a lot of sense for us for several reasons, but mainly 2. We see clear synergies, of course, with our existing operations as well as, over time, it enable us to generate new revenue streams, potentially with less cyclicality than our existing operations. So with that, I'll open up the floor for any questions.

Yes, we have received a couple. And the first being, what does the pipeline look like in terms of volumes compared to 2022?

In terms of volumes, pipeline, I would say is pretty much in line with the same time last year. But as we mentioned, we not only think, we can conclude that it's a better product and geographical mix in the pipe compared to 12 months ago.

On the same topic, last year, you also started with a strong pipeline but I assume it was not fully realized. How do you see the probability for realizing the current order book?

I think one important takeaway is, as we already mentioned, the product mix having improved makes us more confident we will actually be able to realize the pipe. But as always, markets need to be receptive, but we're not tilted the same way to one specific product. And of course, this time, 12 months ago, we had a lot of equity capital market transactions coming up in our pipe, and now we have a better product mix.