Axactor ASA (ACR) Earnings Call Transcript & Summary

Hello. And welcome to the Axactor Q2 2020 Results Conference Call. [Operator Instructions] This conference call is being recorded. Speakers, you may now begin.

Good morning. And welcome to Axactor's second quarter presentation for 2020. This presentation will be divided into 4 parts: firstly, we will go through the highlights of the quarter, including COVID-19 status for Axactor and the main impact the virus has had on book values and business in general; secondly, we will present a bit more details on financials; then we will conclude the presentation with our summary and outlook before we open up for Q&A. Let's move on to the next slide, please. So already anticipated in our first quarter report, April and May performance were significantly impacted by the coronavirus situation. However, we have seen a strong pickup in collections in June, which we will expect to continue. Out of our 6 Axactor countries, Spain and Italy have been the most affected. Spain, in particular, faced large challenges with closed notaries and shutdown of the legal system in April and May, which caused temporary challenges for Axactor. All main business areas were affected, but we have to hit yet the heart of it, as activities came to more or less a complete stop during Q2. The assets sold in Q2 are primarily Q1 sales that we were able to conclude as the notaries reopened in the second quarter. All markets are now more or less fully reopened and close to all our employees are back to work. Therefore, we do expect the second half to continue the positive trend we've seen in June. From 2021 and onwards, we expect limited effects on the original collection curves, which is supported by the current trend lines. Let us go to the next slide, please, where we look closer at our cost savings initiatives during COVID-19. Axactor did implement drastic cost measures during second quarter with temporary workforce reductions of approximately 400 employees, salary reductions for managers, price reductions on IT services and other nonmining-related cost reductions. We did also close down selected locations in Norway and Sweden. Currently, we estimate a EUR 25 million annual cost saving for 2020 compared to our budgeted costs. However, second half cost reductions will depend on activity level and might be adjusted up or down, depending on how clear the ramp-up in collection will be. Next slide, please. We will see anticipated COVID-19 effect on our NPL book values. As indicated in the interim report for first quarter 2020, we have assessed the implications of COVID-19 on our valuation models and have charged the financial statement the negative revaluation of EUR 27 million for our NPL portfolio. The revaluation is based on an extensive review of all NPL portfolios in all office and represents the short-term financial impact at the time of 2020. This revaluation represents approximately 2.4% of our net book value devaluation. From 2021 and onwards, we expect overall collection remain largely unchanged and this is supported by our current trend lines with a strong pickup in the second half of Q2. Next slide please, where we will present the COVID-19 effects on the REO book value. The corona situation will obviously have a significant negative effects on our REO book value where we have expected lower prices on assets and on sales volumes. We have done an impairment accrual of EUR 26 million on the REO asset. The impairment is based upon updated commercial analysis, taking a prudent view of the current trends in the market. The accrual represents approximately 23% of the REO book value we impaired. Impairment test with external valuation support will be conducted in the second half of 2020 to validate the income. But again, we underline that we believe that we have taken a prudent view with the EUR 26 million impairment at well. Let's move on to the next slide, please, where we give an update on covenants. Axactor has obtained a waiver to exceed the leverage ratio for covenants for Q2 and Q3 on our main bank facility. Axactor is in compliance on all loan agreements as of Q2 2020 with the waiver. Reopening of markets and improving collection significantly reduces risk of covenant breaches in the second half of 2020. Next slide, please, where we will give a bit more flavor on how the corona situation has affected our Axactor countries. Spain has been the most affected country with a significant impact from legal systems being closed in the first half of the second quarter. However, we do expect a gradual ramp-up from mid-May to continue into Q3. For Italy, we saw many of the same effects as for Spain, but given the relative size differences, the impact for Axactor has been smaller than from the Spanish operations. As the lockdown restrictions was reduced from June, we have seen increasing 3PC volumes from customers in Italy. Norway has experienced a very different situation, with strong NPL collections, but with slightly lower 3PC volumes. However, all in all, Norway has proven to be short-term resilient against COVID-19. In Germany, we had to close down all field services in April and May, but the total revenues has remained quite stable for Germany as such. For Finland and Sweden, we have only seen limited COVID-19 effects as the economies has remained open. However, we have seen some backlog issues with the bailiffs, and new sales has been a bit more challenging. But all in all, low impact from the virus situation. On the next slide, we will see that the capital activity is gradually returning to normal. So already mentioned, the Nordics have been less impacted than expected. We have seen a strong but gradual ramp-up in Spain and Italy. In general, we expect increasing 3PC sales in the second half as the sales processes normalize. Also, we expect a shift towards positive cash flow after investments during the second half due to lower CapEx investments and higher cash EBITDA. The total investment level in 2020 will exceed EUR 200 million and secured significant volumes going into 2021. Next slide, please, where we'll be moving into the financial part of the presentation. It is obvious that both the lockdown situation and the significant portfolio revaluations and impairment accrual did affect our Q2 financials negatively. We delivered a total revenue of EUR 29 million, but adjusted for NPL portfolio devaluation, it would have been EUR 56 million. EUR 56 million is the same level at Q1 this year, even with the longer COVID-19 period lockdown in Q2. However, as Q2 is a stronger quarter from a seasonality point of view, it has partly compensated the longer lockdown period in the quarter. The negative EBITDA of EUR 30 million was, of course, heavily impacted by the EUR 53 million devaluation and impairment accrual. EBITDA margin without these revaluations and impairments would have been just north of 40%. Cash EBITDA came in at EUR 44 million, only EUR 4 million lower than the EUR 48 million in Q1, despite a longer lockdown period, which is also mainly explained by the strong seasonality in the Nordics in Q2. Next slide, please, where we will see more details on capital deployment. If we look a bit more into which geographical markets Axactor is focusing its capital investments, we will see that it has been a clear shift toward the Nordics since 2018. This is explained by a couple of factors. The IRRs have been higher on Nordic portfolios due to less competitive situation on portfolio acquisitions. Secondly, Axactor's desire to diversify its business more equally between the north and the south of Europe and also between the countries. Our current forward flow commitments are for the moment related to Norwegian and Swedish agreements. Axactor will continue to invest in the markets where we will achieve the highest IRRs, but we expect the IRRs in all countries to increase over the coming quarters. Moving on to the next slide, please, to see more details on CapEx versus cash EBITDA. One of our main challenges during the last 2 quarters has been the fact that our committed CapEx have been above the cash level that we generate for new investments expressed here as cash EBITDA, less interest expense. As you can see, from being in a very imbalanced position in Q1 2020 with investments of EUR 90 million, the situation has improved significantly in Q2 but still a bit high investment levels. As we move into Q3 and beyond, our forward flow commitments are reduced and the balance is further improved. This is further fueled by an expected increase in cash EBITDA after ramp up continues in the second half and until we are back to normalized levels. We believe our liquidity to be at a satisfying level, and we will consider to use excess liquidity to deleverage over the coming quarters. The next slide, please. We can clearly see that also our 3PC activity has been affected by the corona situation. The main reason for this being that some of our largest customers in Spain and Italy asked us not to perform collection services during the lockdown period. We also had to close down field services in Germany entirely in April and May and partly into June. However, we see this as a temporary situation and expect a significant pickup in the second half of 2020. Also, we do expect increased volumes coming to the 3PC market, both due to the general economic situation, but also that some of our banking clients would prefer to put portfolios on 3PC contracts rather than selling it at the current NPL price levels. Let's move on to the next slide to see a bit more details on how COVID-19 has affected our noncore REO business. Despite a full lockdown most of the quarter, we did manage to close approximately EUR 7 million in REO sales in the quarter. However, it should be noted that most of this revenue is from sales signed in the first quarter with completion and realization in the second quarter. We do expect a gradual pickup in REO sales during the second half of this year as viewings of assets, again, are taking place in Spain. Regarding the asset inventory, you can see more details under supporting information and REOs on Page 33 to 35 in this presentation. Next slide, please, where we will present more details on contribution margin from the different business segments. Due to the revaluation of the NPL portfolios and the impairment accrual for REOs, the total contribution margin came in at minus EUR 21 million for the second quarter. Both NPL and 3PC delivered small but positive contribution margins. REOs came in with a negative contribution of EUR 27 million, at approximately the same level after impairment accrual of EUR 26 million. Moving on to the next slide and more details on net finance, tax and net profits. Total net financial costs came in at EUR 14.4 million, whereof EUR 13.9 million was interest expense on external borrowings. The average blended interest costs are still approximately 5%. Due to this quarter's loss before tax, the tax expense were EUR 2.5 million positive. We still expect the average tax rate to trend towards 25% over time. Due to revaluations of impairment accruals, we delivered a net loss of EUR 44.4 million, whereof minus EUR 26.7 million were attributed to equity shareholders and EUR 17.7 million to minority shareholders in Axactor and other REO companies. Let us move on to the next slide with the outlook and summary. Starting with the outlook, we would like to underline some main trend. Firstly, we see lower prices on NPL portfolios not only in the Nordics but on -- in all markets as well. We expect this trend to become even more visible when the portfolio acquisition market again are getting more active in 2021 and 2022. Secondly, we do expect 3PC volumes to increase once normal banking operations resume. Also, some of our banking clients prefer to put portfolios on the 3PC markets rather than selling at current market prices. However, we need to pay close attention for any resurgence of COVID-19 and/or economic setback with significantly higher unemployment rates and lower consumer affordability. Moving on to the last slide where I will summarize the second quarter. The second quarter 2020 were significantly impacted by COVID-19 in all business areas. We do, however, see improving market with strong pickup in June, which we expect to continue into the second half. Revaluation and impairment of EUR 53 million to portfolios affected the second quarter financials negatively. Waiver for leverage ratio covenants, which, together with reopenings and improved collections, significantly reduces risk of breach in the second half of 2020. Cost reductions are estimated to EUR 25 million for 2020, where approximately half is already implemented. And finally, an investment level in excess of EUR 200 million for 2020 secures growth into 2021. Thank you so much for your attention. We will now open for questions.

[Operator Instructions] We have our first question from [ Joakim ].

I have 3 questions. The first one is related to REOs in Q3 and Q4. I guess if a lot of the sales in Q1 was postponed and completed in Q2, the big question is how much will be booked in Q3 with the holiday in August as well and Q4? Perhaps you could elaborate a bit on that, your thoughts? And then the second one is just related to -- we've seen an increase in the infections in Spain lately. Are you able to prepare and mitigate any negative consequences of a potential second shutdown in Spain? And your thoughts on that. And the last one is just if you perhaps could comment a bit around the write-down within NPLs where you state that you expect overall collections to remain largely unchanged from 2021 onwards? Because with higher unemployment rates, lower growth, et cetera, you would expect perhaps collections to be lower 2021 onwards as well?

Yes. Thank you, [ Joakim ]. I can do so. I'll start on the question one on the REOs Q3 and Q4. You are right that the viewings have started again, but it has been a slow Q2, of course. But what we see is that we are actually having quite okay development in the pickup. So if I should give some kind of indication, I would say that we expect Q3 sale to be maybe more or less at the same level as Q2, if we see the continued rate of viewing that we have right now. And then we expect a bit further pickup in Q4. But it will take time until we are back on levels as we had in Q1 or maybe Q4 last year. And also remember, the levels should go down in absolute numbers because we are moving into the tail of the portfolio and have fewer and fewer units for sale. So that was question one. When it comes to increase in infection rate in Spain, I think it's important to look a bit more into what is actually happening in Spain right now, and don't mix this with what you see in the Norwegian media where Norwegians might be quarantined when they come back from a holiday. That has really no effect on us. What really matters for us is if the legal system is closing down again in Spain. And right now, we have absolutely no indications that, that will happen. What we might think could happen is that the recommendation for employees to go back to the office might not -- sorry, not go back to the office, might be extended. So for instance, we have approximately half of our employees working from home still. And the plan was that, that should happen until September, but maybe that home working period will be extended. But as of now, no reason to believe that they will see a similar lockdown in Spain with the close down of notaries and legal systems. And your last question regarding the write-downs. What we see is that -- what we say in the report is that, yes, it will -- looks now like it's largely unchanged, and that is on the total for Axactor. And then it might be that certain countries will experience some kind of a dip. But then what we have seen, especially in the Nordics and Norway, in particular, is that the effects have actually been quite positive. And right now, it's very difficult for us. We don't see any documentation that we will have significant long-term effects. It's rather the opposite in the Nordics where consumers are actually taking down their leverage and repaying debt as consume -- the private consumption is limited. So we have to follow our impairment tests and boundaries, and we cannot predict too much what's going to happen one year ahead. So we do what we see now. I think we have taken a prudent view on it. Compared to a lot of our competitors, we are taking a significant write-down on the NPL books. So I think we have -- the way we look at it now, we are on -- we have done the right level of impairment.

[Operator Instructions] Our next question is from Håkon Astrup.

This is Håkon from DNB. Two questions from me, the first one on REOs. Can we talk a little bit more about your assumptions behind the write-down here? If you, for instance, compare the average prices sold in Q1 and Q4 versus the average prices in Q2, prices are down, very roughly, 30%, then you take 23% impairment? On -- then the second question on 3PC. Is it possible to shed some more light on how the 3PC revenues developed throughout the quarter? For instance, the level in April versus the level in June.

Yes. So regarding the assumptions behind the EUR 26 million accrual on REOs. I think what we have written in the report is actually what we have done. We have used the best possible knowledge. It's not an average price calculation of any quarters as such. It's based on what the analysis we have of future prices. We have seen reports on the Spanish markets saying everything from minus 11% to minus 40% on the housing market. And then -- but that obviously is -- I mean, 40% would not be relevant for us, because we do not have the asset that has been most of both for price reduction. But it's like you say, 23% reduction. This is what our own team believes to be the best estimate going forward. And then we will, like we also say, support this with external updated valuations during second half. So we think that EUR 26 million is representative and in percentage, representative for our asset base. But it's not, Håkon, an average of already sold assets and the -- at that price level. So it's the future. So it's connected with some kind of risk, but I think we have taken a prudent view, and we are quite confident that the level is, at least the way we look at it now, the correct one also for REOs. Secondly on 3PC, we see that the pickup has been quite substantial also in the 3PC area as in -- especially in April and May, there were a lot of large banking clients in Italy and Spain that asked us to suspend collections on their claims as the countries were in complete lockdown. So we expect a gradual ramp-up of the 3PC revenues as well. And we also see that the market is now being active again when it comes to new sales and new deals. Unfortunately, there are some lead time on the largest transactions, but we will see a pickup in 3PC, both in Q3 and further into Q4, that's for sure.