Axactor ASA (ACR) Earnings Call Transcript & Summary

[Audio Gap ] the Axactor SE Presentation of Q1 2022 Results Call. My name is Ruby, and I will be your moderator for today's call. [Operator Instructions] I will now hand over to your host, Johnny Vasili, CEO, to begin. Please go ahead.

Good morning, and welcome to Axactor's first quarter presentation for 2022. This presentation will be divided into 4 parts. First, I will take you through the highlights of the quarter. Then our CFO, Nina Mortensen, will present Q1 financials before we give an updated outlook and round off with a Q&A session. As always, you may ask questions live after we are done presenting or through the available chat function. Now let us move to Slide 3 and have a look at the highlights for the quarter. After a rough second half of 2021 and, in particular, a slow Q3 in terms of NPL collections, it is comforting to see that our collection performance is back at 100% for active forecast. Last year's revaluation obviously helped, taking future collection curves down. But in general, the positive trend we saw in December has continued into 2022. At the end of last year, we saw indications that the market for NPL transactions were coming back with full strength, with higher volumes coming to the market. This continued into first quarter and have started substantially in Q1, reaching EUR 80 million in NPL investments. With this investment, in combination with already committed forward flows for the rest of the year, Axactor, at a minimum, will have 50% more than replacement CapEx in 2022. Our cash EBITDA grew 10% year-over-year, and we delivered an annualized return on equity of 8% for our continuing operations, meaning all operations less the real segment. Please move on to the next slide, where you will see that Axactor is back on the growth track after a period of consolidating operations and improving the balance sheet. We thought it would be a good idea to recapture our historical estimated remaining collections, or ERC development, to give the audience some insight to how we look at the past and the present regarding growth in the NPL segments. Obviously, the first 4, 5 years was characterized by several M&A transactions, as we were building our platform structure. At the same time, Axactor was investing aggressively in new portfolios in order to build scale. NPL investments were particularly large in 2017, '18 and '19, resulting in a strong growth in both NPL collections and ERC. The last 2 years has, of course, been heavily influenced by the pandemic in several ways. But regardless of COVID-19, Axactor have a high need to consolidate operations and adjusting the NPL acquisition strategy. During the last 6 quarters, our NPL investments has been limited, both due to capital limitations we have suffered from the beginning of 2020, but also the market in general, which offered much lower volumes for sale. To summarize some of the main milestones for the last 2 years, I would like to mention the following. The most important one was the full refinancing of the balance sheet last year. We also successfully implemented a EUR 6 million cost reduction program in 2021. During the period, we have done a significant site consolidation in several countries, closing down operational sites, back office functions and 1 sales office. In total, 12 sites have been closed down. As you are aware, we have done revaluations of the NPL book in both 2020 and 2021, particularly portfolios acquired in the growth period previously mentioned, but also due to the unlucrative investment in Spanish real estate. Our new corporate strategy has been implemented, including a more conservative NPL acquisition strategy backed by significantly more data than we have access to in the startup phase of the company. And finally, we have sold off more than 90% of the REO assets in terms of value, leaving a moderate book value of EUR 23 million by the end of Q1. From Q4 last year, the investment in NPLs was again higher than our replacement CapEx, and the same was the case for the previous quarter. Of course, it is not difficult to deploy NPL CapEx in a booming market. But as you will see later, Axactor has done so at satisfying gross IRR levels and substantially above the average IRR level that we have achieved in our first 5 years of operations. The positive effect can be identified as growth in our ERC figure, which will continue to grow because of increased NPL investments going forward. Let's move to the next slide, where I will give some additional comments why I think Axactor is in an excellent position to accelerate going forward. I already mentioned some of the main changes Axactor has gone through the last couple of years. I think it's fair to say that we have -- what we have been through as a company is actually closer to our transformation than anything else. We are, of course, the first one to admit that the financial result has been disappointing. However, please bear in mind that when a company invested assets with a 15-year collection curve, where the gross payback on portfolio is typically between 4 to 6 years, it takes a long time to see the effects on the improvements. It could take 2, maybe 3 years before we start to see the results of the transformation in the financial figures. With this in mind, I would like to underline a few very important indications of why we believe Axactor has such a solid foundation to accelerate going forward. Firstly, we are winning close to 80% of all 3PC benchmark we participate in. Unlike NPL, where you can buy a market share by simply bidding more than competitors, winning benchmarks on 3PC requires a highly skilled [ augmentation], excellent reporting systems and, not to forget, a 3PC relationship in the first line, which is not easy at all to get as long as you require a sensible margin on your services. Secondly, Axactor has managed to become industry-leading on cost to collect. The last 2 years' hard focus on cost, in combination with long legacy structure, are keywords in this regard. Further, Axactor is ranked by Sustainalytics as 1 of the top 5 companies worldwide on ESG. We consider this as a real proof of quality, and we know that investors does as well. Another important element is the debtor satisfaction. We are measuring our debtor satisfaction in all Axactor countries. And our average score is 4.6 out of 5. Needless to say, this is a very strong result and further confirms that Axactor is treating the debtors fairly and with respect. The same high level of satisfaction is seen when we ask our customers how satisfied they are. The score gives Axactor 8.5 on average out of 10. This is a result that I'm particularly proud of and really sets the benchmark for the industry. The last part of the equation, and what really puts us in a unique position for the future, is our highly skilled and motivated employees. In 2021, we were introducing Great Place to Work certification, and we managed to be certified in 5 out of 6 countries in the initial year, which must be considered to be a very strong result. In my view, the combination of these elements puts Axactor in an excellent position for the future. Please move to the next slide, where we will go a bit more into detail on collection performance. As I mentioned earlier, we are pleased to see that the collection performance versus active forecast is back on our long-term target of 100%. This was, of course, supported by the revaluation we did last year, but also a result of increased cash collection for the quarter. Last 12-month collection performance is now at 95%, but will gradually improve, as Q3 and Q4 last year is taken out of the rolling 12-month figure. Even though we might see smaller deviations from the target level in certain quarters, we do believe the long-term average performance will fluctuate around 100%. Please move to the next slide for additional comments on NPL investments. I have already elaborated a bit on the uptick in NPL investments, but I would like to repeat that there are many deals in the market, but the quality is varying a lot. Several banks and funds are taking the opportunity to sell out order backlogs, and the price level is quite aggressive. And the fact is that the collection company still needs to refill volumes after the pandemic. For that factor, Q1 is the third consecutive quarter in a row that our NPL investments has increased. We speak of the current guiding of EUR 200 million to EUR 250 million in investments for 2022. But again, I would like to underline that we will only invest as long as we see gross IRRs at a satisfying level. We will not invest just to fill out the machine. Let us move to Slide 8, where we'll give some data to back up our current CapEx value. Our estimated replacement CapEx is EUR 108 million. This represents the investment level where, everything else equal, our NPL book values will stay constant. To simplify, we acquire new volumes equal to what we collect. We have already signed NPL investments of close to EUR 160 million for 2022, which consists of the combination of the EUR 80 million invested in Q1 and the committed forward flow volumes for the rest of the year. At this point in time, in all our 2022 investments, we will see replacement CapEx by approximately 50%, and this will increase further over the coming quarters. We now need to close approximately EUR 90 million in additional CapEx at a satisfying price in order to reach the upper range of the guidance CapEx level. We believe this should be relative to achieve, especially knowing that Q2 and Q4 normally are the most active transaction quarters for the industry, but even more important than the CapEx level is the price level. Please move to the next slide for more details on that. Axactor's single most important profit improvement in this day is to buy portfolios at a satisfying gross IRR level. As you can see from the graph on the left-hand side, the average gross IRR on the total NPL book is steadily increasing quarter-by-quarter. We have managed to increase the gross IRR book by 0.8 percentage points year-over-year. This might seem moderate, but please remember that we only invested EUR 114 million last year compared to a backlog of EUR 1.1 billion. As you can understand, it takes time to blend the book with higher IRRs. Also a 1 percentage point change in the total NPL book gross IRR equals approximately 2 percentage points improvement of the return on equity. If you look at the last 2 year vintages, the gross IRR is substantially above the average book, and the 2022 vintage is currently 4.4 percentage points higher than the average. For the administration, this represents the most important indication that Axactor is on the right track to improve profitability. With that, I give the word to Nina for the financial update, starting on Slide 11.

Thank you, Johnny. So starting with the development in gross revenue, we see an increase of 3% compared to Q1 last year, and we are pleased to see growth in both the NPL and 3PC segments. The NPL segment had a growth of 1% in the quarter, despite low investment levels and decreasing book values during 2021. Q1 showed good collection in all countries with an overall performance of 100%. The 3PC segment grew 14% in the first quarter driven by the acquisition of CR Services in Italy. Let's now look a bit more in the detail from each of the business segments, starting with NPL on the next slide. Total income for the NPL segment ended at EUR 43 million, up 9% compared to Q1 last year. The top line was, as already mentioned, supported by good collection in all countries. The portfolio amortization rate was somewhat lower in Q1 this year compared to Q1 last year. Impairments booked in Q4 last year are reflected in the lower amortization this quarter. The contribution margin was at a solid 77%, the same level as in Q1 last year. The market activities and sell acquisitions is high, and we have already secured a healthy book value growth for the coming quarters. Together with a satisfying gross IRR, we expect this to contribute positively to future profitability for the NPL segment. Please turn to the next slide for comments on the 3PC development. The 3PC revenues reached EUR 13 million for the quarter. The growth of 14% was mainly driven by the acquisition of CR Services in Italy. Even without the acquisition, the segment still reported marginal growth. The market activity for the 3PC business has been high so far in 2022, and we signed several significant 3PC contracts during the first quarter. We see a positive market development, especially in Spain and Italy, with the easing of the moratorium. We also see a positive change in the bank's willingness to sign new contracts, and that the market is improving with increasing pipeline across several countries. The contribution margin ended at 34% for the quarter, and we see that measures implemented on the cost side last year are having a positive effect. Last year was impacted by restructuring costs of EUR 2.8 million. And adjusted for this, the margin would have been around 30% in Q1 last year. Let us move on to the next slide where I will present more details on the reported financials. We reported total income at the group level of EUR 56 million in Q1, up from EUR 51 million in Q1 last year, which represents a growth of 10%. The increase in total income was driven by growth in the 3PC segment and the collection performance in the NPL segment. As already mentioned, the overall collection performance in the quarter was back at 100%. Amortization rate was lower in Q1 compared to Q1 last year mainly due to lower book values as a result of impairments booked in Q4 of last year. The reported EBITDA came in at EUR 27 million, corresponding to an EBITDA margin of 48%. The margin is supported by good cost control in all countries. Cash EBITDA was EUR 48 million compared to EUR 44 million for the same quarter last year. This represents a solid growth of 10%. On the next slide, we will look closer at return on equity development. The return on equity level has been, as you can see on the chart, quite volatile on recent years and has been negative during the last 2 years with COVID-19. We are pleased to see an annualized return on equity for continuing operations of 8% in the first quarter, which is have set in the right direction to deliver profitable growth going forward. The positive return on equity is mostly driven by the improvement in operating profit, but net financial items are also showing a positive development. We have taken measures to reduce the net FX exposure to 2021, and the FX impact for the first quarter this year was close to 0 compared to negative EUR 3 million last year. The effective tax rate of 39% in the quarter and is impacted by interest rate limitations in some of the Nordic countries. Measures have been initiated to reduce the impact, and the expected tax rate will be reduced over the coming quarters. I would like to point out that the return on equity might vary from one quarter to the next due to seasonal fluctuations, but we do expect the trend to be positive year-over-year going forward as the underlying business improves. Let's move to the next slide. The group has a strong balance sheet following their financing of the company in 2021. The equity ratio is at a satisfying 29%, even after the negative revaluation in Q4 last year, and we also have a good liquidity position with available cash and substantial undrawn credit facilities. We have approximately EUR 300 million in investment capacity, which is almost 3x the investment CapEx level for 2022. It is important to note that the challenge is not access to funding, but access to high-quality portfolios at their correct price level. I would also like to confirm that all of the covenants have comfortable hedges. So in summary, we have taken our first step in the right direction on profitability, and we are in a solid position for future growth. I'll now hand it back to Johnny for some updated outlook.

Thank you so much, Nina. In our updated outlook, we have 3 items that we would like to share and underline. Firstly, the European consumer consumption are returning as restrictions related to the pandemic are lifted. And we expect a gradual increase in formation of new NPLs, which in turn will increase the volumes in both the 3PC and the NPL market. Secondly, we see an increasing geopolitical risk in Europe with the ongoing conflict in Ukraine. The war has a marginal effect on Axactor's operations so far. However, the increase in energy and food prices and increasing interest rates might affect Axactor negatively going forward. Actually, all elements that reduces the debtor's disposable income will potentially have a negative impact on the Axactor back book. And finally, Axactor expects to deploy between EUR 200 million and EUR 250 million in NPL portfolios in 2022. Just to repeat the positive message, Axactor has already secured investments and committed investments of close to EUR 160 million for 2022 at a satisfying 21% gross IRR level. That was what we have on the agenda today. But before we go to Q&A, I would just like you to have a look at the next page, as we have launched a few new initiatives in order to make us more available and transparent in terms of investor relations. First, I would like to inform you that on Monday, May 2, we will present at Investorweb in Tiril Støle from SpareBank1 Market as moderator. It will be a great opportunity to ask questions and to learn more about Axactor and the industry. I recommend everyone to listen in. We also encourage you to sign up for our new Investor Relations newsletter. You could do so at our web page, axactor.com. In addition, we have just recently shared investor information such as analyst consensus and target prices, in addition to credit rating reports. I especially recommend you to have a look at our educational videos that we launched this morning, which you can also find on our website. With that said, let us open up for questions.

[Operator Instructions] Our first question this morning is from Rickard Hellman of Nordea Credit.

I have 2 questions. To start with, the increased cost environment also seeing in the inflation, have you got some indications that, that will affect your collection ability during Q1 or going forward as well?

Thank you for the question. We have seen a few indications that some debtors are calling in, asking for reduced amounts in payment plan. That is the most concrete example I can give you actually, but not to a large extent so far. But of course, with the increasing inflation and potentially higher interest costs for consumers, it could not be ruled out that we will see more and, to a larger extent, going forward.

Okay. But so far, were you limited at least?

Yes. So far, limited, yes, correct.

Okay. The next question, regarding your guidance to investment levels and also the fact that you have been able to invest quite a lot of that guidance, how should we interpret that in? Will you cherrypick to get up to that level? Or could we expect you actually increased the investments above?

I think, currently, we stick to the EUR 200 million and EUR 250 million guidance. What's actually said in the presentation, there's a lot of deals in the market, but also the competition is quite fierce. So we would evaluate every opportunity. And as long as we could achieve the desired IRR, we are willing to invest also above the guided amount. We may have capacity to invest up to EUR 300 million without pushing covenant limits, so there is definitely room for more. But I think, to be realistic, given the prices, as we see in the market, we should be satisfied with reaching the EUR 200 million and EUR 250 million mark at satisfying IRRs.

Okay. Do you see any big differences between the different markets or regions behind the competition? I have noted some of your peers are also stating that the competition is very fierce.

I would say that it's fierce in all markets, all our 6 markets. So not -- there's normally everything from 3 up to 10 bidders on most of the portfolios. But what I can say is that there's a widespread in how many deals that is coming to the market. So for example, in Spain, we see a lot of deals coming to the market, and that may be the most active market for us for the next 2, 3 quarters. But when it comes to the competition, I would say that it's competition in all markets and quite fierce for the moment.

[Operator Instructions] Our next question is from Neil Simpson of ICG.

First one was just a quick one. So 3PC revenue, what was the contribution of CRS? Or maybe what was the organic growth is another way to ask that question?

When it comes to the 3PC on the revenue side, the growth is driven by 3PC -- sorry, the CR Service in Italy. So that's on mostly all of the growth. So if we adjust for that, we are marginal on the positive side.

Okay. So just to maybe dig into that a bit deeper. So on the -- excluding CRS, you mentioned that you were seeing some improvement in Italy as moratoriums come off. Can you just go into why you're not seeing any kind of organic growth?

Yes. First of all, we see that volumes are coming back on 3PC in Spain and Italy, primarily. But at the same time, we see that the default rates are historically low in most markets, and particularly in Norway, and it's also been in Germany. So volumes have been lower in those markets. And in addition, as you might know that a couple of years back, or maybe a little bit less, the fee regime in Norway was changed. So we are getting less revenue on the Norwegian 3PC business. So -- but this is more than compensated by the increase in dynamic.

Okay. Got it. And then as you think about the outlook, obviously, Q2 last year was very strong. So how do you think that will comp relative to the prior year just for the upcoming quarter?

We are not guiding specifically on the next quarter, but -- so I think we -- what we can say on the CapEx side, I think it will -- as you can understand, if we are to reach EUR 200 million and EUR 250 million, we still need to invest for the rest of the year. And I think that Q2 will be a quarter where we are in a position to invest more than what we have already committed under forward flows. We anticipate, based on what we see now, that the positive development on 3PC will continue. But as I also mentioned in the outlook, it is, of course, a bit uncertain how the debtors will behave if energy prices and inflation continues to stick up, to increase. But they -- as a basis, we believe that we will see -- Q2 has historically been a strong quarter, and we don't see any reason why it should not be also a good quarter this year.

Okay. Got it. Because in prior quarters, you've given us the ERC by -- for the next 4 quarters split out. I don't believe it's in the presentation this time. Could you give us some indication of what ERC will be for Q2?

Not in the presentation, but it should be in the -- it is in the report.

Okay. I must have missed it. And then last question. So you mentioned increase in leniency calls. What about discretionary payments? So payments outside of a normal scheduled plan, are you seeing any kind of changes in consumer behavior and how they may be make additional payments?

No, not really. Not that we could -- not really.

Our next question is from Elise Evans of Man GLG.

A couple of questions from my side. A lot of competitors have seen the number of NPL just coming to the market much below what they were expecting and the market was expecting overall. I'm assuming this is what is driving high competition for new portfolios. And I'd like to understand a bit better how do you see the situation developing from that side. And also my second question is around the risk of combination of the higher prices for portfolios and the deteriorating economic environment impacting collection rates. I'd like to get a bit your view on that and also what discount in collection rate do you model for this portfolio you are buying at the moment. Because obviously, you know that there's going to be an impact, which is difficult to evaluate, but I'd like to understand a bit better how do you approach that.

I'm not sure if I grasped the first part of the question entirely. But if you asked about the volumes that comes to the market, yes, we see significant volume coming to the market. I'm not sure if it's so surprising. I think we have been waiting for it. It's probably driven by the fact that the prices in -- at the end of Q1 was increasing quite substantially or basically throughout the whole year, as collection companies needed to refill and push prices on the few deals that was available last year, and that, again, has created that environment where banks and sellers have seen that prices has been attractive and are now pushing a lot of deals into the market. And let's see how prices will develop going forward. But it is true that the industry has refinanced, and there's a lot of capacity available, both because the companies have, during the pandemic, also had a high cash flow that could be reinvested, but also because we have seen competitors setting up co-investment vehicles with high capacity that needs to be refilled. And we've also even seen new companies coming to the market with deep pockets and willing to take a high risk on portfolio acquisitions. So I hope that answers the first part of the question. The second part of the question, I will say that for Axactor, we are not pushing the risk on portfolios. We are -- a couple of years back, we introduced kind of adjustments to our acquisition strategy, and we are primarily buying portfolios from very well-known sellers known to us. So either we have done 3PC on the claims or we have done transactions with the selling banks previously, and that is a big advantage because, then, we know what kind of risk profile the bank has and what kind of credit policy that lies beneath the credit giving. And this is what we are looking for. And if we are not reaching the required IRR -- gross IRR on our portfolios, we will simply not buy, and that was what you saw the result of last year. It was not because there was no deals coming to the market. It was just simply prices being too high, and we did not have the appetite to push the risk. And we will not have the appetite to push it this year either. But because of the increased volumes, there are possibilities for us to buy for the guided amount at, as you can see, satisfying gross IRR levels. When it comes to what kind of discounts we put into our valuation models, and that's a very detailed question, and it will vary from portfolio to portfolio, from country to country. So actually, I cannot answer you very specifically on that one.

Yes. Sorry, I was not necessarily looking for a very quantified answer, but just trying to understand how you approach that because the slight visibility around collection rate given the deteriorating economic environment, the high inflation and the reduction of disposable income. And then like you buying portfolios in a very competitive environment where like prices are actually higher than what was expecting, it's interesting to hear that volumes are high because I've heard from like other players in the area that actually reproduce was slightly lower than what was expected, but doesn't look like you share that view. So I think that was more my question.

Okay. Thank you.

We have no further telephone questions, so I will hand over to the speakers for any questions via the webcast.

Okay. Thank you very much. Well done. We have got 3 questions that we will answer from here. And the first question is actually consisting of 3 sub questions, so I will read it out. It's as you talked about NPL cash collections at 100% of active forecast in Q1 2022. And the question is, how often do you update your active forecast? The answer is that we update the active forecast monthly. But of course, we only do changes if it's necessary. So it's not like we are updating active forecast on all portfolios all -- every month. But if we see the need to do changes, it is done on a monthly basis. Second part of the question is, what is the definition for active forecast? Well, the -- what I can tell you is what's kind of the -- what's the basis for it, and it's the ERC curve. That is again kind of the basis for our book values. So those are the most important ingredients in the definition. And the last part of the question is, is that the latest business target? Or is it more of an accounting curve target? And the answer is actually it is our business target, but it's also, at the same time, the basis for the book values of the portfolios. Second question will be answered by Nina.

Yes, I can read it out loud. Could you please restate the amount of overall cost savings Axactor benefited from due to the cost reduction programs in 2021? And the cost program that we initiated also implemented during 2021 has an annual saving of EUR 6 million. So we expect that also to mostly come into also the 3PC business during this year. And then also the next question, could you provide the EBITDA for Q1 2022? Exclude any contribution from the acquisition of 3PC and equally, please. We don't give that detailed numbers. And also the CR Services are already been integrated with the Italian 3PC business, so we don't have those figures isolated either anymore.

The next question is last 12-month EBITDA after the consolidation of Spanish REO came in at EUR 190 million for 2021 versus EUR 224 million before the consolidation. Can you comment on the difference, please? To be honest, it's -- we need to come back to you on that. I don't have that detailed answer on that here as I'm sitting. So what I suggest is that we come back to you on your e-mail and answer you that during the day, if that is okay. That was all the questions that have come in to us. So yes, let's see here. Now we have another one, actually, a follow-up on forecast. You have a quarterly ERC forecast of EUR 68 million in Q4 and reported collection of EUR 64 million in Q1. Does this mean that after the forecast last month was lowered to EUR 64 million to reach 100%? No, that is not the case. I think it's important to remember that we have a total ERC of EUR 2.3 billion. There will always be changes like this in the quarter, and it's influenced by several things. For example, this quarter, it was influenced by a few secured assets that was delayed in realization in Spain, so it will -- so that asset has been moved. And I think if you look at the other companies in the industry, you will see that these -- this is not uncommon. And most company will experience a deviation between ERC and actual collection on a quarterly basis. There are also other elements that could influence. It could be currency. It could be other stuff. So it's -- naturally, you will have to expect a certain amount of deviation on a quarterly basis like this. Yes, that was -- then we don't have any more questions here on our screen. So thank you all for calling in, and we wish all of you a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.