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

Okay. Good morning all, and welcome to ABG Sundal Collier's Q2 Results Presentation. [Operator Instructions] And luckily, for that purpose, amongst others, I'm also joined by our CFO, Geir Olsen. So Geir, when I say that's a good question, it means it's a difficult question and then it's time for you to step in. Let's kick off up with a few general reflections before we look more into the numbers. While stock markets have done pretty well after the U.S. regional banks and the Credit Suisse blow-ups as well as macro indicators having shown some signs of improvement, the confidence in terms of market participants wanting to take on more risk is yet to return. That has continued to dampen market activity, affecting the revenue line for the industry as a whole, including us. But it is in times like these, we really can stand out and make a difference for our clients. We are in the business of seizing and creating opportunities for our clients with the sole purpose of helping our clients to improve their businesses or returns. In fact, that is the only thing we do. And as such, we need to be better than competition, which many peers have other revenue streams from balancing lending for instance. Our clients know that when they partner up with us, they work with a party that tend to get things done. We have to, which is partly explaining our strong position in the market. While we really continue to further develop our new business initiatives as planned, i.e., private banking, alternative investments, we are taking further action to fight cost inflation observed across the line. We focus on increasing efficiency in our daily operations and implementing new technology. We are improving the already high quality of our staff by intensifying our efforts on having the right man or woman in the right place as well as rightsizing our operations were needed to protect profitability. We do this while we continue to hire top talent to make sure we always are in the position to give the best possible advice and execution to our clients. Thereby, we will continue to strengthen our competitiveness and our market position. So with that, let's look more at the numbers and what really happened number-wise in the quarter. We closed the gap somewhat during the second quarter on revenues year-on-year, but not all the way and ended up at NOK 379 million in the quarter, 7% down and NOK 805 million in the first half versus NOK 893 million, first half last year. The main reason for the decline in revenues is very much similar to the first quarter, i.e., less M&A revenues year-on-year, while most other product areas are more or less flat. Margins were negatively affected by, of course, the previously mentioned cost inflation and [ not least ] NOK depreciation as well as operating leverage, of course, from lower revenues, resulting in the operating margin going to 18% from 27% last year. And as a consequence EPS, earnings per share, ended up at NOK 0.19 in H1 versus NOK 0.29 in H1 last year. So looking at the next slide and talk about macro and the macro backdrop. I touched upon this previously. When looking at the headline performance of equity indices, volatility being low and trending lower during the quarter, well below 20 and seemingly interest rates flattening out, I think that Q2 could or even should have been more supportive for our business looking at historical patterns. But looking below the headlines, we can observe that while U.S. equity indices were up by some 8% during the quarter, it was mainly a function of a rally in the mega tech cap companies, with less broad participation and also slightly more muted performance in the Nordic indices. And while interest rates seems to be leveling out at obviously a much higher level than we've gotten used to as of late, inflation seems to be a bit stickier than expected, and thus, it could be an indication of rates, interest rates being higher a bit longer than expected, which probably is contributing to less conviction in the market about the future direction. What we need is a bit more time without negative surprises, and we expect a return of conviction and risk appetite to follow. Looking at the next slide, please, with the performance of our main markets and volume-wise, starting off with Nordic equity capital market primary volumes, activity is clearly muted this quarter again, down by 9% year-on-year in the quarter. Activity is especially weak within IPOs. And looking at the first half as a whole, only 3 conducted IPOs in our markets and not a single one in Sweden, and primary placements slightly less affected than IPOs, but still muted to say the least. What held up better than the 2 just mentioned products, primary placements and IPOs is rights issues. That is more of a lending bank product. For various reasons, I will refrain from discussing here now. Debt Capital Markets did okay in the quarter, in spite of the very slow start in Q2 off the spreads widening on the back of the turmoil in the financial sector in March and April, with volumes still ending up 11% down year-on-year, but underlying activity slightly improving. M&A market, on the other hand, as previously mentioned, has continued to be weak with a number of deals, down by 45% in the quarter year-on-year. Deals take significantly longer time to get done these days, but as the gap between sellers and buyers in terms of price expectations, et cetera, will shrink, and it will. We expect activity to pick up the coming 6 or 9 months, difficult to say exactly when. Over to next slide and look at our performance in these markets, starting off with corporate financing, where I'd say we have done our fair share, not least, ECM Norway with an increase in market share during the first half to an impressive 25% market share year-to-date. However, overall, our revenues were marginally down in the quarter from NOK 137 million to NOK 132 million, resulting in H1 revenues of NOK 314 million. We continue to have 100% participation in Nordic IPOs i.e., we have participated in the 3 deals that have been done year-to-date in our markets. This quarter, it was the IPO of DOF as you can see on the right-hand side of the slide, but we also executed on several private placements such as Andfjord, IDEX and not least Sagax, the latter contributing to ABG, having a clear market-leading position on private placements by a wide margin in Sweden year-to-date. In debt capital markets, we have seen deals in slightly more sectors than compared to the first quarter, which we think is good and to our benefit. And here, I would, of course, like to highlight the EUR 200 million bond done to partly finance Nordic Capital's acquisition of Foxway, where we acted as sole global coordinator and where we're also, flipping to the next slide, please, looking at M&A, were sole adviser in the M&A transaction to Nordic Capital in the just mentioned acquisition of Foxway. As you can see, volumes down for us in terms of revenues by 20% in the quarter and 33% in H1, keeping in mind transaction activity in the overall market being down by 45% in the quarter. Another transaction I'd like to mention while on this page is Sweden state pension fund, AP7 acquiring 33% of Stockholm CBD Urban Escape property valued north of NOK 20 billion. And it's a pure real estate transaction and something we don't do on a daily basis, but a function of the entire system, the entire platform, delivering service to our clients regardless of what type of product it might end up with. We think we could do better in M&A in specific areas, and we think we are well positioned to increase our share of this market going forward. Over to next slide, looking at brokerage and research operations, that has continued to deliver a solid performance, being up 6% year-on-year in the first half at NOK 313 million and flat versus a strong second quarter last year. Backed by our highly ranked research operation, our idea-driven sales operations combined with supreme trading flow matching abilities, clearly contributes to making ABG a preferred counterparty to our broad Nordic and international investor base. This is further enabling us to cement our position as a trusted speaking partner with market-leading placing power within the ECM and DCM primary segments. We also think that the trend that institutional investors are consolidating the number of broker counterparties is continuing, and that is something that is supportive for our relative position in the market, not least given that we have continued to invest in very strong research operations. So with that, I'd like to leave the word over to Geir, who will talk a bit more about costs and headcount. Please, Geir, go ahead.

Thank you, Jonas. Looking at our operating costs at the mainline, they look to be in line with the first 6 months of last year. That is a function, however, of cost inflation and a weakening NOK on the fixed cost base. We are obviously challenging the cost inflation every day, but we are not immune to what's going on in the society around us. We observe that suppliers increased costs regularly, and that's just the way it is these days. We do what we can to fight that and review contracts and try to reduce our cost base. However, in -- when we have a weakening NOK like you have seen for the first 6 months, we have seen that our costs have increased by NOK 24 million just because of weakening Norwegian krone. On the headcount side, headcount is up 4% year-over-year for the first 6 months. That includes also our new business areas. If looking at the underlying headcount of the existing or historical operations, we are down for the first 6 months of the year compared to the end of last year. So we do what we can to challenge the inflation, and we are [ seaming ] operation where we can. So with that, Jonas, I'll leave the word back to you.

Okay. Thank you. Thank you, Geir. So with that, let me summarize what we think are the key takeaways here today. We have a superior position within research and brokerage. That is strongly contributing obviously to revenues, but also and equally important, I think, to our capabilities when it comes to executing ECM and DCM transactions. And that is paving the way for further strengthening of our market position. We are not in the business of wishing for markets to be strong and helpful. We are in the business of seizing and creating opportunities regardless of market sentiment. And now it is our time to really prove why we are a trustworthy counterparty and make a difference. We are, as Geir mentioned, experiencing cost inflation on top of a weaker NOK, having obviously a negative impact on margins. Thus, we are intensifying our efforts on improving efficiency, not least by embracing new technology. We continue to have a strong inflow of mandates, better suited for current market conditions, and we are in very good shape to execute once market allows. And while we short term might experience setbacks in the market, name of the game, the low volatility and clear signs of a reopening of the U.S. IPO market activity may serve as a catalyst for European and also Nordic IPOs to increase again. So with that, I'll open up the floor for any questions.

We have received a couple of questions. The first being, when will the 2 new business areas, private banking and alternative investments, start to generate revenues?

That I can't give the exact date, so I will refrain from that, but I can give you a hunch, and that is during 2024. Obviously, since we're starting from scratch, it will be a gradual increase, but we expect revenues to start to kick in from 2024 and onwards.

I understand that it is difficult to predict the transaction market, corporate and M&A revenues. I remember that you have indicated a strong pipeline of transactions in several quarters, still transaction revenues continue to fall. How would you assess the situation for ABG as of today with respect to M&A, corp revenues for the second half compared to last year?