Axactor ASA (ACR) Earnings Call Transcript & Summary

Welcome to the Axactor SE presentation of the Q4 2021 results. [Operator Instructions] Today, I'm pleased to present CEO, Johnny Tsolis. Please go ahead with your meeting.

Good morning, and welcome to Axactor's Fourth Quarter Presentation for 2021. As most of you noticed, on January 17, Axactor provided a market update that included key financial figures for Q4. So in many ways, this presentation might be regarded somewhat as a nonevent as there has been no material changes to the figures since that release. However, we still hope we will take the time for a recap, and we will add some more flavor on where we stand in terms of CapEx levels, et cetera, going into 2022. With that in mind, we will structure the presentation a bit differently than what we normally do and keep it short and sweet. As always, I will start by giving a recap of who is Axactor, then I will present 4 quarter highlights and outlook before we go to the Q&A session. Now let's move to Slide 3 for a short company introduction. Axactor was established in 2015 with headquarter in Oslo. Our main focus is on collection and acquisition of nonperforming loans from financial institutions. We are both buying nonperforming loans and do collection on behalf of banks and other financial customers. Axactor operates in 6 European countries, Spain, Germany, Italy, Norway, Sweden and Finland, and we are now close to 1,250 employees after the recent acquisition of CR Services in Italy. The company is listed at Oslo stock exchange and our main shareholder Geveran, owns approximately 46% of the shares. Please move to the next page for details on our strategic positioning. Axactor is pursuing a niche strategy to disrupt the industry on cost-to-collect. The main elements of this strategy are the following. We have carefully selected the 6 markets where we believe to have the best risk reward. These markets have well-developed and functioning legal systems for that selection, an efficient market for portfolio transactions and financial institutions that are actively using the 3PC market. Main focus is on fresh business to consumer unsecured debt within the bank and finance segment. The explanation is high volumes in combination with high average claim side. And the financial institutions are willing to pay for the additional value created by Axactor. Axactor also clearly prioritized the combination of NPL acquisitions and third party collection. In addition to be a product area with attractive margins. This strategy gives scale advantages without requiring significant capital. It offers access to relevant data. It has a clear diversification effect and strengthens customer relationships. The cost to collect level in 2021 was at par with 2020, but with continued innovation and growing economies of sale in 2022, we expect further improvement. However, legal costs might be highly dependent on inflow of volume and freshness of new bank. That was just a short recap of Axactor, and I will now move to Slide 6 for Q4 highlights. As mentioned in the introduction, the Q4 financials was already disclosed in January. The numbers were obviously highly impacted by the EUR 43 million negative revaluation. A majority of the revaluation related to legacy portfolios acquired during the startup phase of the company. On the more positive note, cash EBITDA were in line with last year adjusted for REOs and the EUR 2.2 million one-off settlement costs we booked in Q4. Also, the NPL investments increased for the second quarter in a row, up to EUR 54 million. This is substantially above our replacement CapEx and give some important indication that the market for portfolio transactions are normalizing. Let's move to the next slide for comments on 2021 full year financials. In 2021, gross revenues and cash EBITDA were up 6% and 7% correspondingly compared to 2020. At the same time, the book values was reduced by 7% year-over-year. During the year, we implemented a cost reduction program with an annual savings of EUR 6 million. The cost of funding was reduced through a successful bond placement in the European high-yield bond market and Axactor also obtained credit rating with S&P and Moody's. The NPL investment has turned into growth during the second half of 2021 and the transactions have been done at satisfying gross IRR levels. Let's move to the next slide for comments per business segment. Axactor acquired NPL portfolios at a gross IRR of 23% in 2020, 8 percentage points higher than the gross IRR on the total NPL back book at year-end 2020. We saw growth in NPL investments during the last 2 consecutive quarters and EUR 117 million is already secured in estimated commitments for 2022, done at a gross IRR of 22%. The negative trend on 3PC revenue year-over-year has turned into growth and the contribution margin has improved to 47%. The acquisition of CR Service comes with a recurring annual 3PC revenue of approximately EUR 6 million with effect from January 1. Regarding REOs, Axactor has sold off approximately 90% of the portfolio in terms of value. Gross revenue for the REO segment came in at EUR 40 million in 2021 and consolidated book values are down to only EUR 29 million at year-end. In 2022, the REO segment will be reported as discontinued operations in the financial phase. Please move to the next slide, where I will give some more flavor to certain balance sheet items and funding considerations. Axactor has a very strong balance sheet following the full refinancing of the company in 2021. Our equity ratio is at a satisfying level of approximately 30%, also after the revaluation. The liquidity situation is good as well. We have more than EUR 40 million in cash and substantial ongoing credit facility. As for the rest of the industry, the challenge is not access to funding, but access to high-quality portfolios at the correct price level. Axactor has at least EUR 300 million in investment capacity, which is approximately 3x our replacement CapEx for the year. Regarding covenants, we are obviously in all green and with comfortable headroom. You may see more details on covenants in the supporting material. Please move to the next slide for more comments on investment levels. NPL investments continued to increase also in Q4, ending up at EUR 54 million. Axactor participated in several portfolio acquisition processes during the quarter and activity was more or less at a normalized level. However, in some cases, the size of the portfolios have been reduced compared to pre-pandemic level. As for earlier in the year, we saw price levels in many transactions being too aggressive for [ NPL ]. And hence, although increasing investment level, EUR 54 million must be still considered moderate to the last quarter of the year. With that said, we see less seasonality in when transactions are coming to the market compared to historical patterns. We expect NPL investment to be in between EUR 200 million and EUR 250 million for 2022. A substantial part of this CapEx will be acquired through our forward flow contracts. Please move to the next slide for more details. During 2021, Axactor invested EUR 71 million through forward flow agreements. For 2022, we have already signed volumes for an estimated amount of EUR 117 million, and expect to sign further contracts throughout the year, increasing the investment on forward flow contracts even further for both this and next year. In combination with one-off transactions, the forward flow contract is expected to secure healthy growth for the NPL segment going forward. On the next slide, we will show more details on what price levels that we are currently acquiring. The single most important profit improvement initiative for Axactor is to increase the portfolio profitability. The gross IRR on our total NPL book is now gradually increasing, up 0.6 percentage points last 12 months. It might seem moderate, but please remember that everything else equal, of 1 percentage point increase in gross IRR on the total NPL book equals a 2% improvement in return on equity. The committed NPL investments for 2022 are down at a 5.6 percentage points higher gross IRR than the current NPL book. This blending the book strategy will continue to improve the average gross IRR for the next quarters and years. Before we go to outlook, please move to the next slide for some concluding remarks on our cost reduction program. Axactor is continuously working on implementation of cost reduction initiatives to increase profit and improve our competitive position. From Q4 2019 to Q4 2020, we've reduced our actual cost base by 4%. Last year, the cost improvement continued, and we were able to further reduce the actual cost base by another 5% from Q4 2020 to Q4 2021. We have finalized and delivered on the cost project that we introduced last year. Now we are working on continuous improvement and strengthening the cost culture rather than any large transformation of our cost programs. This concludes the walk-through of the highlights. Please turn to Slide 15 for an updated outlook. The large negative revaluation booked in the fourth quarter reduces downside risk for future collections, which is expected to fluctuate around 100% going forward. The cost reduction program has delivered above expectations, rendering a lower cost base going into 2022 than what we had at the start of 2021. Axactor has estimated NPL investment commitment for EUR 117 million for this year at a satisfying gross IRR level of 22%. Further, a subset expects to deploy between EUR 200 million and EUR 250 million in NPL portfolios for the coming 12 months, well above replacement CapEx level of EUR 108 million, which is important to continue to grow top line and enhance scale. The acquisition of CR Service in Italy comes with a recurring annual 3PC revenue of approximately EUR 6 million with effect from January 1 this year, which will be an important contributor for 3PC growth in 2022. With this, we conclude the presentation, and we will now open up for questions. Please remember that you can find more information in the supporting information and appendix attached.

[Operator Instructions] Our first question comes from the line of Joakim Svingen from Arctic.

I was -- just 3 questions. The first one is related to 3PC. What contribution margin from the CR Service, EUR 6 million, should we assume for 2022 and 2023? The second question is relating to the discontinued business. and how that will affect the P&L going forward? Is it so that you will report just net contribution, but lower operating profit from Q1 2022? And the second one is relating to new investments made. Have you made any changes to your assumptions around collection costs, given the issues with the legacy portfolios? Or is it just changed assumptions to basically the amounts collected?

Yes. Thank you, Joakim. So regarding the first question, we don't disclose contribution margin on a company basis for the acquisition, as such, that is a little bit too detailed to what we can disclose. But what I can say is that the 3PC margin in Italy would normally be lower than in some other markets. So it might be that it will be a little bit lower than the average for the group, but we don't go out with specific numbers on it. The second question regarding discontinued business. Yes, it will be reported below the tax line. So -- and when it comes to new investments and costs, we -- it's not the cost related to the legacy portfolio that has been an issue. The cost we have under full control. So -- and we do for -- in every portfolio transaction, we do a separate estimate for specifically that portfolio, what it will take in terms of [indiscernible] legal costs and so on. So the impairment or revaluation will not have any effect on how we look at costs in new transactions.

And the next question comes from the line of Hakon Astrup from DNB Markets.

Just 1 for me. When I look at the changes you have made in the collection curves now compared to the updated or the one you updated in Q3. It seems that most of the changes have been done in the front end of the curve with some limited changes towards the back end of the curve. Can you give us some more flavor on that, please? And why that is the result of the revaluation?

Yes. It's a correct observation. So it's basically the 2 first years, that most of the effect has been taken down. And the reason for it that we expect to meet the curves at some point after those, it's the individual portfolio by portfolio. But in general, you can say after 2 years, we will, at some point, meet the original curve, of course.

Okay. But just help me on thinking here because if I remember correctly, most of the revaluations were made on the legacy portfolio back in 2018. So I was perhaps thinking about because this is this old portfolio that will, say, impact the entire curve, but this is only seems to be in the front end of the curve. So anything else you can add here? Or is it just -- yes, everything -- anything you can say would be helpful.

I don't have anything to add, other then we have done evaluation, and we believe that the reduction in the curve, the 2 first years is what is necessary to get back on the original curve.

[Operator Instructions] We have 1 more question from Ryan O'Hagan from EIP.

I appreciate the update on this. Could you potentially give us a little bit of color on the CapEx spend through January and the first part of February and whether that's come from your forward flow agreements or separate market transactions? And separately, could you maybe give us an update on how the collection curve through the first 6 months of the year has tracked to the revisions you made at the last ride?

Ryan, I have your questions here. So I have all of them that you've sent in. So first of all, we will obviously not comment specifically on the first 6 months of the year as this is a call and not all information that we go to all investors. So -- but what I can say is that we expect to deliver Q1 and the coming quarters, according to the active forecast and fluctuates around 100% as we have stated earlier. And when it comes to the CapEx in the first 6 weeks of the year, we don't comment specifically on that. We have already commented, I think, in the material somewhat on forward flow for the next 12 months. And we are in several one-off transactions as well, and we expect to also close one-off transactions in Q1. But we don't have a split on that now, but I think you will find in the material, a good estimate of the forward flows at least. And did you have 1 more question of those sort -- oh, I also see it's a question here from you, I think on headroom on covenants, it looks low, what you're saying. Can you please elaborate? Well, first of all, I don't share your opinion that the headroom is low, but I assume that you are referring to the loan-to-value covenant, which is at 72%. But that is -- we regard it as really comfortable. And the reason is, of course, that -- in a normal quarter, our cash EBITDA, less interest expense is more than our forward flow commitments. So we are in a position that we could really control this more or less 100%. So for us, we feel that the headroom also on the loan-to-value covenant is more than sufficient.

And as there are no further audio questions, I'll hand it back to the speakers.

Yes. So then I will continue on the list here. I think we have 1 question here. How has the collection performance versus active forecast developed year-to-date. And like I said, obviously, we're not commenting on this call on the first 6 weeks of the year. I'm afraid you have to wait until Q1. But like I said, we expect it to be for the quarter at the 100%. And then we have the next question. Have you start to see European portfolios that has arisen from the new NPL provision rules of [ 100% ], and that is [indiscernible] ABG? It's, no. I think the short answer to that is no. We see transactions, but it's -- we cannot say that that is related to the new provision rules. It's -- some of them or most of them are basically annual transactions that we have seen for a long time. What I can say is that the seasonality and when transactions are coming to the market, it's less and less obvious than what it used to be a few years back. But it's -- I cannot say that it has come -- a flow of new portfolios due to the provision rules. Then, we have another question there. Why are you more optimistic on the more recent acquired portfolios than the legacy? Could you give some more color on the non-legacy portfolios that could give us more comfort? Yes. So here, we have -- I think we have mentioned this also during the market update that we have done a lot of different things to prevent reoccurrence of the past. So first of all, we have changed the acquisition strategy dramatically and buying more or less only from companies or banks that we know well, we know the credit policy. And in many cases, we have the 3PC claims before we buy the portfolio, which, of course, gives us much more information regarding the claims that we are working on. Second level, we will stick to strategy. If you look at the history, you will see that a large part of the underperformance. Yes, some of it is, of course, on NPL. But remember that the really, really big [ matter ] was the REOs, it was the real estate that was bought in Spain in 2017 and 2018 in combination with some of the secured portfolios. And here, it is just clear that the due diligence was not good enough, and this was outside the strategy. This was not something that Axactor should have done, and we didn't have the competence to do it. And we will not do those types off the strategy events again. We have also gained much more relevant data. Remember, we started off late 2015 and we acquired a few portfolios in '16. But then when we -- what we acquired in '17 and '18 was a lot of portfolios in Norway and Sweden and so on. We didn't have any portfolios in those markets. We didn't have any experience in buying portfolios at all. The companies that we acquired was pure 3PC companies with no competence in buying portfolios. And of course, there are also certain -- a lot of uncertainty in how the curves on NPLs would look like when we didn't have that data. Now we have been in business for 6 years and in most markets 4, 5 years. So we have a completely different set of data tools to build the curves in a much better way. Operationally, we are, of course, in a completely different stage than they we were just 2 years ago. where we have implemented machine learning. We have debtor portals. We have improved our scorecards. We have fully implemented data warehouse just to mention a few things. Also, the onboarding process has been completely revamped. So we see much less risk in taking on new portfolios and especially on forward flows that we have been much better at doing putbacks and so on claims that we are not obligated to buy under the forward flow agreements. And then the last point I would like to mention is that we have done huge changes to the contract that we use. So for example, for the forward flow contract now, all contracts have volume caps. They have [ Balamban ] pricing, putback mechanisms, which we really also follow up on, some of them has actually also have a pure straight-up cancellation opportunity, which was not a case in the past. So I hope that it could give you a little bit more comfort on that. We don't have any more questions from the audience here on our screen at least. So unless they have -- I don't know if there are any new on the audio.

We don't have any further questions.

Okay. Well, in that case, thank you so much for calling in, and we wish all of you a great day. Bye.