Axactor ASA (ACR) Earnings Call Transcript & Summary

Hello, and welcome to the Axactor SE presentation of Q3 2020 results. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I'm pleased to present Johnny Tsolis. Please begin your meeting.

Good morning, and welcome to Axactor's Third Quarter Presentation for 2020. This presentation will be divided into 4 parts: firstly, we will go through the highlights of the quarter; secondly, we will present more details on financials; then we will conclude the presentation with a summary and outlook before we open for Q&A. Please move to the next slide. Axactor continued a very positive trend toward normalization. We saw the early signs of this already in June, and it continued in Q3, where we report a total gross revenue of EUR 83 million. We experienced a solid pickup in gross revenues after a significant negative short-term impact we had due to the coronavirus, where legal systems were completely shutdown in Spain and Italy for a period of almost 2 months. I think it's fair to say that the situation has moved towards a more normalized situation faster than both we, the industry and the market in general, have anticipated. However, we are still not fully back to the collection levels we have before the pandemic. The REO segment experienced higher volumes and better prices than what we anticipated 3 months ago, and the REO sales was just north of EUR 10 million for the quarter. We do not expect the historical seasonality pattern with Q4 kicking compared to the holiday season in Q3 to apply this year. The main reason for this is that the vacation period has been handled in a different way, both in Axactor and for the debtors. We do see a challenging environment for new 3PC sales going forward due to COVID-19 restrictions, and this will limit the growth for new sales in Q4. Let's go to the next slide, please, where we look closer at gross revenue improvement per business segment. What I am particularly satisfying was the broad nature of the improvement that we saw in gross revenue as it applies to all business segments. The NPL gross revenue reached approximately EUR 62 million, up from EUR 54 million last quarter. The good performance is partly explained by the lack of the traditional seasonality, although we, of course, did see a weaker August compared to both July and September. This year, we did manage our vacation list differently with vacations more smoothen out over the period, as we believe it will be easier to get hold of debtors at home, which also turned out to be correct. The 3PC revenues was EUR 11.3 million, up from EUR 9.7 million in the previous quarter. We do see that the Spanish and Italian volumes are gradually returning. As previously mentioned, the REO segment experienced higher volumes at better prices than anticipated. We are satisfied with the development, especially since the actual new sales in Q2 was close to 0, as the sales closed in Q2 was mainly related to Q1 sales that could not be concluded due to the shutdown of Nordics. Let's go to the next slide, please, where we look closer on how the positive development on REOs will impact book values. As you all remember, Axactor announced a EUR 26 million impairment accrual on the REO book in Q2, as we did expect COVID-19 to have a negative impact on both volumes and the prices going forward. Although we do see a negative impact, and there is still uncertainty about the long-term effect on housing prices, the Q3 REO performance triggered a net release of EUR 5.1 million, which in turn increased the book values with the same amount. The estimation of the accrual in Q2 was done on an asset-by-asset basis, accumulating to the EUR 26 million. EUR 1.7 million out of the EUR 5.1 million is related to higher prices than estimated for assets sold in Q3, and the remaining EUR 3.4 million of the release related to improved estimates for future sales, as we see positive pipeline for Q4. We are still waiting for the yearly routine valuations by an external vendor to be concluded. This is expected to be finalized in Q4. Next slide, please, where you can see the development of the EBITDA margin quarter-by-quarter. Axactor reported an EBITDA margin of 49% in Q3. Adjusted for the EUR 5 million accrual reversal on REOs, we still saw a 41% EBITDA margin, which is the highest level ever reported by Axactor. This high EBITDA margin is the result of several elements. The combination of strong cost discipline and operational improvements in combination with the pickup in gross revenues are the main explanation. But it was also helped by somewhat lower amortization levels as we did write-down the NPL book by EUR 27 million in Q2. Axactor continues to show cost discipline. And even though part of the 2020 cost reductions will be reversed going forward, we are turning several of the cost reductions permanent, especially within IT and non-manning costs, this will be the case. Next slide, please, where we show how Axactor is limiting its liquidity risk through reduced forward flow commitments. Axactor's main challenge when the pandemic started was the major imbalance between forward flow commitments and cash flow available for new investments. Despite the private placement done in February that secured the company approximately EUR 50 million, the situation became challenging as performance started to dip in April and May. As you can see from the graph, Q1 alone had a negative balance of EUR 56 million. During Q2 and Q3, we have reduced our future commitments by agreeing on different acquisition profiles with some of our clients in combination with not renewing expiring contracts. Q2 did also represent a negative balance, but in Q3, the balance has turned positive. This improves our liquidity and enables Axactor to delever going forward. It also puts the company in a completely different and much stronger position in the event of a second COVID-19 wave. Let's move on to the next slide, please, where we have more details on the subject. Even though we are very satisfied with Q3 figures and the way Axactor develops in general, it is obvious that the corona situation is not over. However, we believe there are some major differences from the first wave. In general, I would say that Axactor is much better prepared both operationally and financially. The uncertainty we experienced back in March, April, May was more or less complete. We saw society going in full shutdown. Legal system in some countries completely closed down more or less overnight. We have to take drastic measures within Axactor in terms of cost and also arranging for approximately 900 FTEs to work from home, all to be executed within a very short time frame. In the case of a second wave, we believe that we will see more local shutdowns, and most likely legal systems will be open or at least partly open and not fully closed down. However, this is hard to predict, and the situation is changing by the day. From an internal point of view, Axactor is of course much better prepared. We are currently running close to 560 FTEs working from home. The lowest number we have had of employees working from home since the beginning of the pandemic is approximately 400. But we have proven that we can still deliver satisfying performance. In addition, from a financial and liquidity perspective, the situation is completely different as we have reduced the financial commitments and improved our cost position compared to the start of the pandemic. Go to the next slide, please. Luckily, it's not only about COVID-19 on how to mitigate the negative impacts from the pandemic. As we have done from the inception of the company, Axactor is spending a lot of time and effort to improve our underlying business and operational excellence. The aim is to secure the best cost position in the market. There are, in particular, 2 areas that I would like to highlight, its first being operational efficiency, where the whole organization is constantly focusing on how we can achieve operational improvements. Important examples in this respect are our new operational blueprint model for the NPL segment and the improved follow-up of KPI reporting. We are starting to see results of this as we lately have been winning the vast majority of the customer benchmarks we are participating in. Secondly, we are investing significantly in our centralized business intelligence platform, which improves our business control and allows for self-servicing solutions that give high-efficiency gains. We are also focusing a lot on building advanced analytic capabilities, both through competence and improving architecture, such as improved scorecards and prediction models, all which will help to avoid unnecessary costs. This concludes the Q3 highlights. Let's move on to Slide 11 to have a deeper look at the Q3 financials. Axactor delivered a total income of EUR 62 million for the third quarter, which is significantly up from the EUR 29 million in the previous one. But please bear in mind the negative EUR 27 million revaluation on the NPL book done in Q2. The EUR 62 million total income was only EUR 2 million down compared to Q3 last year. As previously mentioned, the EBITDA margin was 41%, adjusted for the REO accrual reversal, but this is still 10 percentage points up compared to Q3 last year. Cash EBITDA came in at EUR 56 million, up EUR 12 million compared to Q2 and only EUR 4 million lower than Q3 last year. Next slide, please, where we'll see more details on the NPL performance. The last 12 months rolling collection performance reached 97% in Q3, up from 93% in the previous quarter. The stand-alone collection performance in Q3 was 101%. The increase in collection performance was supported by the revaluations and the corresponding curve revisions implemented in Q2. The fact that we are approximately at 100% collection performance gives us the comfort that the level of revaluations done in Q2 was correct and, if anything, prudent. The long-term average performance is expected to fluctuate around 100%. Moving on to the next slide, where we look more closely at the 3PC development. 3PC volumes are picking up, although we are still not back to pre-COVID-19 levels. The total 3PC income reached EUR 11.3 million, which is EUR 1 million lower than for Q2 last year. We see a gradual return of the volumes that was suspended by clients in Spain and Italy earlier this year. Regarding the operational performance, I've already mentioned that Axactor is winning a large number of the performance benchmarks that we participate in across all Axactor countries. This is very important to Axactor, both as an argument for new sales, but also for existing clients. We still see a challenging environment for new sales due to COVID-19 restrictions, and this will limit the growth of new volumes in Q4. However, we still expect 3PC volumes to continue to ramp up towards normal levels. We also continue to prioritize 3PC volumes in combination with NPL forward flow agreements. Next slide, please, where we look more into the REO segment. Axactor has now sold close to 2/3 of all acquired REO assets, and we sold for 417 units in Q3 alone. The average unit price was somewhat lower than earlier, and this is partly due to the sales mix in this quarter with large number of smaller assets and garages sold in Q3 compared to the total REO book. Axactor owns approximately 40% of the total REO book value exposure. We have just north of 3,000 assets left, and you can see more details on Page 35 and 36 in the supporting information. Next slide, please, to see more details on net financials, tax and the net profit. Total net financial costs came in at EUR 15.4 million, where EUR 14 million were interest expense. The average blended interest cost is still approximately 5%, and we did have a EUR 1.4 million unrealized FX loss for the quarter. Profit before tax came in at EUR 12.3 million. And the tax expense was EUR 5.8 million. The high tax expense is a result of mainly 2 things. We are not allowed to recognize tax assets from loss-making entities, primarily the REO subsidiaries; and secondly, the interest limitation rules in Sweden increases the tax expense for the quarter. Net profit was EUR 6.5 million, whereas EUR 3.6 million was attributed to Axactor shareholders and EUR 2.9 million to minorities. A significant part of the net profit was related to the REO accrual reversal. Let's move on to next slide and have a short look at the most important balance sheet items. As always, our NPL portfolio represents approximately 90% or total balance sheet value of EUR 1.3 billion. We have a gross interest-bearing debt of EUR 925 million and a cash position of EUR 36 million. And the equity ratio at the end of the quarter was 27%. This concludes the financial part of the presentation. Please move on to Slide 18 for a summary and outlook. In Axactor, we are constantly evaluating our strategy and how to improve. As part of this work, it is natural to reflect the bit where we are in the company life cycle and where we are heading. Since the start less than 5 years ago, we have been focusing on aggressive growth to build scale. We are focused on market entries to get presence and to diversify, and we are focused on establishing efficient and effective IT and operations in order to have both on-portfolios and the third-party clients in the best possible way. We are now moving into a new phase where the focus will shift more towards profitability, operational excellence and to grow size in existing markets. The focus will be on return on equity and to create long-lasting competitive cost advantages. We are also aiming to start paying dividends within the next 5-year period. And Axactor will have an opportunistic view on the expected consolidation game in the NPL industry. Next slide, please, where we discuss how the COVID-19 situation is expected to impact our return on equity in the short and medium term. We expect several COVID-19 effects on our return on equity drivers, both positive and some negative. We expect the NPL prices to continue to decline. This trend started already back in 2018, but will be further fueled by the corona situation. And we see a large overhang of NPL portfolios to be sold as the market has been almost on hold in 2020. As portfolio prices are going down, some clients are preferring not to sell their portfolios, but rather have collection companies to handle their claims on third party contracts. It is also expected that an increase in default rates will drive the volume for certain segments, and by that, we think that the business mix will be positively affected by this situation. We expect no significant impact on the economies of scale. Axactor is still expected to grow in 2021, but at a lower rate than what we have done historically. We see a slight negative effect on the tax rate due to a loss in certain legal entities, such as subsidiaries in Reolux and in Italy, and we are not allowed to recognize tax assets in these entities. Finally, the expected improvement in funding costs has been delayed compared to what we believed when we started this year. Best estimate is that we have gotten a 1-year delay in this respect. Next slide, please, where we summarize the quarter and give some short-term outlook perspectives. The Q3 financials was above expectations for all business areas, and we are gradually returning to a normalized situation, both on activity and collection levels. NPL collection performance was about 100% in Q3, and this indicates our correct portfolio revaluation in Q2 on the NPL book. We did a net accrual reversal of EUR 5 million on the REO book due to higher volumes and better prices than expected. Axactor is more resilient than we were in Q2 towards a potential second COVID-19 wave. We have positive net cash flow after investments in the quarter, and this is expected to continue. And the organization is well prepared to continue working under COVID-19 restrictions. Q4 is expected to continue the good performance, but will not see the traditional seasonal increase due to a solid Q3 than usual summer effect we saw this year and the challenging environment for new 3PC sales that will limit growth somewhat in Q4. The high focus on competitive cost position will continue in Q4 and onwards. And Axactor will focus on deleveraging going forward, but we'll still deliver top line and cash EBITDA growth for 2021. With that, we open for Q&A.

[Operator Instructions] Our first question comes from the line of Johan Strom of Carnegie.

Two questions. First, on your planned investments. Any comments on what you expect for CapEx in 2021? That is my first question.

Well, we haven't -- we will come with more concrete guiding on that when we announce Q4. But I think it's fair to say that it will be in more or less in line, probably maybe a little bit south of the EUR 200 million that we invest this year. But it could be -- it will be plus/minus the EUR 200 million, it's between EUR 160 million and EUR 250 million somewhere, I guess.

Very clear. And then on -- it's actually two questions. Any comments on costs? I mean coming out -- coming in at a fairly low level now in Q3. So how should we think about the quarterly costs, let's say, in Q4, Q1 in the very near term? And then also on the funding side, what are your plans -- planned refinancing needs in the next 6 to 12 months? Anything that would you like to address on that?

Yes. So if we start with the cost, I think we will continue to have strict cost discipline, but it's clear that some of the cost elements that we have been holding back on will, as the business is returning to normal levels, it will increase again. But I think it's -- the cost will increase probably a little bit less than the expected increase in gross revenues for Q4, at least. So that is the trend. So I think we will hold back on the cost. But then also, bear in mind that for Q4 and onwards, as you are gradually returning to normal, the amortizations are also increasing somewhat. So I think in total, at the margin level that you have seen now is more or less what you will see for the next quarter as well. But -- yes. So I think that is all I can say on the cost side. And then you asked about the funding. I think what we have said also in the presentation is that we are prioritizing to deleverage. As you all know, we have a bond maturity coming up in June, but we have also promised our banks to try to come up with a solution to it within April 1, 2021. And we are hoping to be able to use the capital markets in a normal way. So in some shape or form, refinanced the bond within Q1. But if that turns out to be difficult or we cannot achieve the necessary margin on it, we will deleverage and try to -- and also to use the RCF in combinations with other funds. But the plan is to use the capital market. Alternatively, we will just deleverage holding back on investments for the next few quarters. So that should be sufficient to handle the bond maturity. Regarding the RCF, I think we have a really positive dialogue with the banks. Yes, it expires in December next year, but it's more because we have chosen to have a short maturity on it. Because we believe that we should be able to achieve more favorable terms as we are maturing as a company. And so I don't view that as an issue. It's more like a -- kind of a wanted maturity profile from our side currently. Did you have another question there as well, Johan? Or was I...

I think you answered it pretty quite clear here on this. And great to see the strong collections in Q3.

[Operator Instructions] Okay. There seem to be no further questions from the phones at this time.

Yes, then we have a few question that was -- been sent in. So the first one is from [ Jurgen ]. And the question is, how is the dividend outlook for 2021? And how will you work in order to reach this goal? And I think for 2021, there will not be any dividend payout. We have stated on Page 18 in the presentation that we will pay dividends, and the target is to initiate dividend payments over the next 5-year period. And with that said, we will -- we haven't decided which year to pay that we will start the dividend payments. But 2021, I think it's to be on the aggressive side. We will -- like I just explained, we will focus on deleveraging and to handle the bond maturity before we even consider the dividends. But it's a clear goal that we will initiate dividends within the next 5-year period. I mean probably -- I don't think I will speculate it this year. But it's obvious that it will be initiated, but we haven't decided which year. And how do we work to reach this goal? By, I think, we are reaching -- we are working with it by taking down the cost down and increasing the revenue. Simply said, we need to have best possible cash flow, and then we could choose what to do with our cash flow after we have paid-off our interest. So we could choose either to invest in portfolios or to repay to our shareholders. And over time, we will do both. Second question is actually two questions coming from [ Joakim Svingenh ]. And the first one, saying you had a very solid progress on OpEx in Q3. Could you give some guidance on what we can expect in Q4? And I think I just did that. But shortly to repeat, I think we will hold back on cost. It will be a high cost discipline, and it will increase less than the expected growth in gross revenue for Q4. That is that OpEx. And then also, as I mentioned, as we are returning to normalized levels, amortization will also increase somewhat. Second question, how many portfolio has been offered in Spain and Italy in Q3, approximately IRR on these? And how long can you withstand from the current CapEx in these markets in your view? So first of all, we have not engaged in any tenders in neither Spain or Italy in Q3. I would say that the NPL market, at least in our markets, as such, it's more or less put on hold. There has been some tenders in Italy and Norway, there has been in Germany. But to my knowledge, these large, call it, annual processes that has been initiated has actually been stopped due to probably too low prices according to -- compared to the sellers' expectations. And I would say that the deals that today is now going, it's more or less actual deals. And -- but there are possibilities to do acquisitions, but we have not been very active as we have been focusing on deleveraging. But it is very clear that if you were to buy portfolios in Spain and Italy these days, you will be able to buy that at a significantly higher IRRs than what we saw before the corona. But since we haven't done any real transactions, I will be careful to speculate in the exact level. And then how long can we withstand from deploying CapEx in this market? So I think, first of all, in our budget for 2021, we are deploying -- we are planning to deploy CapEx in both Spain and Italy. But what is positive to see is that we are refilling with 3PC volumes in more or less all Axactor markets. So we have been taking down costs in Italy. So we don't have a lot of excess capacity. In Spain, let's see going forward, we have probably excess capacity in the organization, but we are expecting substantial growth in 3PC. And also when we get back on the horse and start to buy portfolios, we must be careful not to have reduced the capacity too much as it's expensive, both to take down manning costs, but also to increase it again when you have to then rehire. So for now, I think we are in a good spot regarding the cost position, definitely potential to do more if we need to. But we -- I think it's a good -- it's sensible to take it a little bit relax and see the development of 3PC volumes and our capacity. So also when I answered you on early on regarding the CapEx investments, that is kind of the low case where we prioritize heavily deleveraging and some portfolio investments. So hope that answers your question, [ Joakim ]. And we don't have any more questions on our list. So I don't know if there's been any more request through the moderator.

None so far. [Operator Instructions] It seems there's no further questions on the phone. So I will hand back to you for the closing comments.

Very good. Well, thank you so much for your time. So by that, I wish all of you a nice day, and stay safe. Bye-bye.