Axactor ASA (ACR) Earnings Call Transcript & Summary

Good morning, and welcome to Axactor's second 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 Q2 financials before we give an updated outlook and round off with a Q&A session. As always, you may ask question 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 second quarter highlights. Q2 this year has been a strong quarter for the industry and several peers have delivered good results. Axactor is no exception and on many KPIs we are showing the best results since the inception of the company. Based on high NPL investment levels in the first half, we are raising the CapEx guidance by EUR 50 million. And we now expect to invest between EUR 250 million and EUR 300 million for the full year. EUR 223 million is already either invested or committed through one contract and forward flow agreement. The guided CapEx level represents NPL investments of between 2.3x and 2.8x replacement CapEx for the year. The comparable number last year was marginally above 1x, clearly indicating that the market for NPLs is back with full strength after the pandemic. Our cash EBITDA grew 5% year-over-year, and we delivered an annualized return on equity of 13% for the continuing operations. In Q2, the bond market experienced turbulence with cash outflow from investment bond. During the quarter, Axactor repurchased bonds for approximately EUR 37 million in nominal outstanding amount at a substantial discount. The transactions were financed by using available RCF credit line and resulted in a onetime positive effect in the financial result of EUR 1.4 million. Please move to the next page for a quick reminder of the most important pillars in the strategy that will lead Axactor to become the industry benchmark. Firstly, in Axactor, we are working extremely hard to blend our NPL book. This means, in a nutshell, to solve all claims with low gross IRR acquired in the first 4, 5 years of Axactor history with new claims of higher quality and substantially higher gross IRR acquired after 2020 and onwards. We accelerate the blending by investing significantly above the company's replacement CapEx level of EUR 108 million. As you will see in the coming slides, over the last 2 years, we have been doing so successfully. Secondly, we always seek to improve our cost position in all areas. The company was incepted to disrupt the industry on cost-to-collect, and we have obtained a superior cost position. Currently we are investing extensively in data-driven valuation and data-driven operations to fuel further. Thirdly, we are pursuing a niche strategy in terms of industry, segments, and markets. Our main focus is on bank and finance, primarily business to consumer unsecured. Organic growth in our 6 markets to build market position of scale is the main role. Please move 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. As already mentioned, with increasing NPL investment levels, Axactor is back on the growth track. 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. The last 2 years has, of course, been heavily influenced by the pandemic in several ways. But regardless of COVID-19, Axactor has a high need to consolidate operations and adjusting the NPL acquisition strategy. Last year, we did a full refinancing of the balance sheet in combination with a EUR 6 million cost reduction program. During the same period, we have done a significant size consolidation in several countries, closing down operational sites, back office functions and 1 sales office. And in total, 12 sites have been closed down. A new corporate strategy has been implemented, including a more conservative NPL acquisition strategy backed by significantly more data than what we have access to in the startup phase of the company. Q1 was the first time since the beginning of 2020 that we saw meaningful growth in our ERC curve and the trend continued in the second quarter. Let's move to the next slide, where we will give more details on the blending book strategy. Axactor's single most important profit improvement initiative 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 1 percentage points over the last 5 quarters. Please bear in mind that 1 percentage point change in the total NPL book growth IRR equals approximately 2 percentage point improvement in the return on equity. If you look at the last 2 years' vintages, the gross IRR is substantially above the average book and the 2022 vintage is currently 3.7 percentage points higher than average. On top of this, the committed investments for the remaining of 2022, 2023 and 2024 is down at 4.7 percentage points, higher than the NPL book. The speed of the blending will obviously be influenced by the annual CapEx levels. Please move to the next page for more details on the matter. In Q2, Axactor invested EUR 47 million in new NPL portfolios. Q2 -- is normally quite active in the second quarter, and this year was no exception. However some of the processes was extended in time and closed in July. Hence we will see an overflow on CapEx into the third quarter. Axactor have actual investment and forward flow commitment of EUR 184 million, plus another EUR 39 million in one transaction, securing some EUR 223 million so far for 2022. Based on this, we are increasing the NPL investment estimate to between EUR 250 million and EUR 300 million. The updated NPL estimate indicates a level of between 2.3x and 2.8x replacement CapEx in 2022, securing continuing growth on NPL. I mentioned in my introduction that this quarter was the best for Axactor on many parameters. If you please move to the next slide, I will focus a bit on one of them, the EBITDA percentage. Axactor delivered an EBITDA margin of 50% for the second quarter and 49% year-to-date. Obviously we now start to see the positive effect of the major turnaround the company has gone through the last 2 years. The key driver is the industry-leading position on cost to collect. Next step is to blend the book with higher gross IRR portfolios to secure further margin expansion over time. Additional scale effects will also be supportive to the ambition of improved margin. With that, I give the word to Nina for the financial update, starting on Slide 10.

Thank you, Johnny. So starting with the development in gross revenues, we see an increase of 5% compared to Q2 last year. And as importantly, we are seeing growth in both NPL and 3PC segments. Q2 is seasonally a strong quarter, and even though Q2 last year was especially solid, we still managed to exceed that performance this quarter. The NPL segment had a growth of 4% in the quarter, supported by satisfying investment levels during the first half of 2022. Q2 showed good collection in all countries with an overall collection performance of 99%. The 3PC segment grew 13% in the second quarter, driven by the acquisition of C.R. Service in Italy. Let's now look a bit more into details on each of the business segments, starting with NPL on the next slide. Total income for NPL segment ended at EUR 46 million, up 13% compared to Q2 last year. The top line was, as already mentioned, supported by good collection in all countries. The portfolio amortization rate was somewhat lower in Q2 this year compared to Q2 last year. The impairments booked in Q4 last year are reflected in the lower amortizations this quarter. The contribution margin was at a solid 77%. The market activities and sale acquisitions continues to be 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 the future profitability for the NPL segment. Please turn to the next slide for comments on the 3PC development. The 3PC revenues reached EUR 15 million for the quarter. The growth of 13% was mainly driven by the acquisition of C.R. Service in Italy. Even without the acquisition, the segment still reported marginal growth. The market activity for 3PC business has been good so far in 2022, and we see a positive market development, especially in Spain and Italy. C.R. Service continues to deliver performance above business case, and we expect that the Italian 3PC business to deliver double-digit organic growth in 2022 compared to 2021. The contribution margin ended at 41% for the quarter, and we see that measures implemented on the cost side are having a positive effect. Let us move on to the next slide where I will present more details on the reported financials. Axactor reported total income of EUR 60 million in Q2, up from EUR 54 million in Q2 last year, which represents a growth of 13%. The increase in total income was driven by growth in both the 3PC and in the NPL segment. Amortization rate was lower in Q2 compared to Q2 last year, mainly as a result of impairments booked in Q4 last year. The reported EBITDA came in at EUR 30 million, corresponding to a solid EBITDA margin of 50%. The margin is supported by good cost control in all countries. Cash EBITDA was EUR 58 million compared to EUR 55 million for the same quarter last year. This represents a healthy growth of 5%. Moving on to reported cash EBITDA to interest rate sensitivity on the next slide. The group reported for second quarter net interest expenses on borrowings of EUR 14.3 million. It is a mixed picture when it comes to positive and negative effects through the quarter, and this slide shows the restated level as per end of Q2 of EUR 13.5 million. Increased interest rate levels will have a negative effect, but we expect this to be offset by the bond repurchases, which will improve the funding cost. The current macroeconomic views points to increasing interest rates going forward. And as you can see from the chart, an increase of 1% in interest rates will, given the company's current debt structure and hedging level, increase the quarterly interest expenses by EUR 1.9 million. And this leads us to the next slide and the development in the return on equity. We are pleased to see that annualized return on equity for continuing operations is maintaining a good level in Q2 at 13% and 10% for the first half of 2022. The positive return on equity is mostly driven by an improvement in the operating profit. Net financials includes a positive onetime effect of EUR 1.4 million related to the repurchase of part of the 2 outstanding bonds. This was also announced in the press release last week. As a result of the work to simplify the legal and capital structure, interest limitations are less of a problem. With improvement in profit, certain group companies have also been able to utilize previous year's tax losses not recognized in the balance sheet. The effective tax rate was thus lower to 15% in the quarter with an effective tax rate of 25% year-to-date. 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 for some more details regarding the balance sheet. The equity ratio continued at a satisfying 29%. And Axactor also has a good liquidity position with available cash and substantial undrawn credit facilities. Investment capacity has increased further to approximately EUR 350 million, supported by good cash collection over the recent couple of quarters, which is equivalent to 3x the replacement CapEx level for 2022. It is important to note that the challenge is not access to funding, but rather access to high-quality portfolios at the correct price level. I would also like to confirm that all of the covenants have a comfortable headroom. So in summary, we continue in the right direction of profitability, and we are in a solid position for future growth. I'll now hand it back to Johnny for an 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 interest rates in Europe are increasing, and it will impact our structured cost of funding. A 1 percentage increase in interest rates will increase quarterly interest cost by EUR 1.9 million and reduce the annualized return on equity by 1.5 percentage points. Secondly, we see a mixed outlook on backbook collections. On the negative side, rising inflation and interest rates will reduce disposable income for consumers all over Europe. All elements that reduces the debtor's disposable income will potentially have a negative impact on Axactor's backbook. However, on the positive side, low unemployment rate numbers, increasing salaries and government aid packages are improving the disposable income. The full net effects are probably yet to be experienced, but so far we have seen marginal impact as a result of macroeconomic factors on collections in 2022. Thirdly, Axactor expects to deploy between EUR 250 million and EUR 300 million in new NPL portfolios for 2022. Just to repeat the positive message, Axactor has already secured investments and committed investments of more than EUR 220 million at a satisfying gross IRR level. We expect margin expansion driven by attractive gross IRR levels and improved economies of scale over time. That was what we had on the agenda today. I suggest that we move on to the Q&A session.

[Operator Instructions] Our first question for today comes from Hakon Astrup from DNB Markets.

2 questions from me. First, on the potential future targets given the solid performance that you are delivering this quarter and the uptick that we have seen over the last, say, 2 recent quarters? Are you contemplating issuing or updating your public financial targets on profitability or dividends?

Yes. So we will come back to the market during the fall, Hakon, on that topic, and I think you could expect the timing is not fully set, but probably around November, we will come with medium and long-term financial targets to the markets, including more comments regarding dividend policy. But like we have said before, we will at the latest pay dividends in 2024 based on 2023 numbers.

And then a second question on the investment given what you have deployed so far, it was EUR 223 million, if I remember correctly, the lower end of your new guidance, it seems rather cautious. Do you agree with us? Or is it something that I'm missing?

No. It's -- we can agree to that. But at the same time, we are not willing to push IRR. So as we saw Q4 last year, Q4 is usually the most active quarter. But last year, the prices were pushed quite substantially, and we withdrew from a number of processes. I would say that Q3 has been extremely -- started extremely active. Maybe a lot of the Q4 deals have started earlier this year, but there will be a lot of activity in the next 4 or 5 months. But -- and it's a little bit also -- if you win 1 or 2 of the medium-size to big ones, yes, then definitely EUR 250 million is in the lower range. But we prefer to be a little bit cautious on the guiding.

Our next question comes from Joakim Svingen from Arctic Securities.

I have 2 questions as well, if I may. The first one is you're showing progress on gross IRR the last few quarters. Could you elaborate a bit on how you see this proceeding going forward? And what's your targeted gross IRR level? Maybe you can start with that.

Yes. So I think there's no change in the guiding on the target gross IRR. We have said that it will be in the range of 18% to 22%. And as you can see from the numbers now, we are just in the middle or slightly above the average of that target. We don't see any change to the -- or at least no significant change to the gross IRRs for the next few quarters.

And then I was just curious on, because you showed some income from repossessed assets in Q2, also in the continuing business. How do you see this moving going forward? Will that continue in the same path? Or should we see more or less going forward?

Well, that's -- first of all, I will have to say that repossessed assets, it's a very marginal part of the total collection and it's a little bit lumpy because it's basically real estate assets that we have repossessed and it's a little bit harder to estimate exactly when the sales will happen. So I don't have any clear guidance on that, Joakim, but we expect it to still be relatively, say, marginal compared to the NPL part of the -- the rest of the NPL business.

[Operator Instructions] Our next question comes from Ulrik Zurcher from Nordea Markets.