Axactor ASA (ACR) Earnings Call Transcript & Summary

Hello, and welcome to the Axactor ASA Presentation of Q3 2022 Results Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to Johnny Tsolis to begin. Johnny, please go ahead.

Good morning, and welcome to Axactor's third 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 Q3 financials before we give an updated outlook and round off with a Q&A session. As always, you may ask questions live after the presentation or through the available chat function. Now let us move to Slide 3 and have a look at the third quarter highlights. Q3 was another solid quarter for Axactor, both in terms of collection, profitability and CapEx deployments. The EBITDA margin expansion continued and ended at 51%. Actual EBITDA reached EUR 30 million, which is satisfying in a seasonally weak quarter, up from EUR 13 million same quarter last year. However, please note that Q3 2021 was negatively affected by reopening effects after the pandemic and hence, low collection performance. Cash EBITDA was up 22% year-over-year, reaching EUR 54 million. Profit after tax ended at EUR 10 million for continuing operations, corresponding to 10% return on equity. This is a substantial improvement from the EUR 2 million loss in the same quarter last year. We closed to EUR 70 million in CapEx for the quarter. Axactor has already invested nearly EUR 200 million so far in 2022. Including committed forward flow volume for Q4, Axactor has secured investments for more than double the 2022 replacement CapEx. But even more important, we have done so at an attractive gross IRR of 20% compared to the 16% gross IRR on the historical backlog. We stick to the CapEx guiding of EUR 250 million to EUR 300 million, but it is more likely that we end up in the higher end of the interval than in the low end, given that Q4 is normally a quite busy investment quarter for the NPL industry. Please move to the next page for a quick reminder of the most important pillars in Axactor's strategy. Firstly, in Axactor, we are working hard to blend our NPL book. This means in a nutshell to solve all claims with low gross IRR acquired in the first 4 or 5 years of Axactor trade and we placed them with new claims of higher quality and substantially higher gross IRR. We accelerate the blending by investing significantly above the company's replacement CapEx level, which is estimated to EUR 108 million for 2022. As you will see in the coming slides, over the last couple of years, we have also done so successfully. Secondly, we always seek to improve our cost position [indiscernible]. The company has been most invested 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 excel 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 and 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. It is clear that as investment levels are increasing, the same will be the case for the company's ERC. Third quarter showed a continuation of the growth we have seen throughout 2022. And since Q4 2021, Axactor's ERC has grown by a healthy 11%. For Axactor, ERC growth through CapEx deployment is in itself not the most important KPI. But when the investments are done at attractive gross IRR levels, it is, of course, very welcome. Now let's move to the next slide, where we will give more details on the blending the 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 backbook by 1.1 percentage points over the last 6 quarters. Please bear in mind that a 1 percentage point increase in the total NPL book gross IRR equals approximately 2 percentage points improvement in return on equity. 2022 looks to become an attractive vintage with year-to-date gross IRRs north of 20%. Also, the future commitments looks promising at close to 21%, meaning a 4.1 percentage points higher gross IRR than average book by end of Q3. The speed of the blending will obviously be influenced by the annual CapEx level. Please move to the next page for more details on the market. In Q3, Axactor invested EUR 69 million in new NPL portfolios. This is a relatively high number for a third quarter, but it's partially explained by a couple of Q2 processes that was extended in time and closed in July. Hence, it was a bit of an overflow on CapEx from the previous quarter. Axactor has invested EUR 195 million in new portfolios year-to-date. Another EUR 37 million is committed in foreign flow agreements for the rest of the year, securing investments just north of EUR 230 million so far for 2022. We keep the NPL investment estimate to between EUR 250 million and EUR 300 million for the full year. But at the same time, the underlying that Axactor will probably reach the upper end of the tool. Given this investment level, we already now know that we will invest at least 2x replacement CapEx for 2022 and most likely even more. In addition to CapEx investment at a meaningful level with attractive gross IRRs, we are continuing to improve our cost position. Please move to the next slide for more details. The EBITDA margin expansion continued and ended at 51% for the quarter and 50% year-to-date. A major part of the explanation for this strong performance is obviously our industry-leading position in cost-to-collect. Axactor has managed to take another big step in the right direction this year and we now clearly see effects from all the improvement initiatives implemented over the last couple of years, in addition to more general scale effects in both operations and in SG&A. We believe there is still improvement potential as we continue to blend the book with higher gross IRR portfolios, which lead to further margin expansion over time. Additional scale effects and more data-driven operation will also be supportive to the mission of improved margins. Nina will go through more details on the most important financials shortly, but I just wanted to underline on the next page that we see a positive development of all key financial metrics year-to-date. From an overall company perspective, it is, of course, important to be able to blend the book. So in that sense, the NPL investment done at the right price level is crucial. Strong cash flow is important for obvious reasons, but especially since we are reinvesting the cash flow in new portfolios. And finally, it is very important to be in a position where we deliver a satisfying level of earnings after tax and hence return on equity to our shareholders. To conclude, we see both strong development since last year on important financial metrics and the level itself, we find satisfying, although we still see further improvement potential over time. With that said, I will leave the word to Nina, which will present more details on financials.

Thank you, Johnny. So starting with the development in gross revenues, we see an increase of 17% compared to Q3 last year and we are, as the previous sources, we are seeing growth in both NPL and 3PC segments. It is worth mentioning that Q3 last year was a weak quarter in terms of collections. NPL segment had a growth of 17% in the quarter, supported by satisfying investment levels during 2022. Q3 continued to show good collections with an overall collection performance of 99%. 3PC segment grew 20% in the third quarter, driven by the acquisition of C.R. Service in Italy. Let's now look a bit more into details of each of the business segments, starting with NPL on the next slide. Total income for NPL segment ended at EUR 46 million, up 63% compared to Q3 last year. The top line was, as already mentioned, supported by good collection. The portfolio amortization rate was lower in Q3 this year compared to Q3 last year. The reduced amortization rate is impacted by the revaluation in Q4 2021 and higher gross revenue for the quarter. The contribution margin was at a solid 78% for the quarter at the same level as previous quarter and up from 66% in Q3 last year. The market activity for NPL acquisitions continues to be high and we have already secured a healthy book value growth this year. As Johnny mentioned earlier, we see a steadily increasing gross IRR. This will contribute positively to the future profitability of 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, a growth of 20% was mainly driven by the acquisition of C.R. Service in Italy. Even without the acquisition, the segment still reported underlying growth. The market activity for our 3PC business has been good so far in 2022. We see another quarter this year with a positive market development, especially in Spain and Italy. The contribution margin ended at 35% for the quarter. The underlying margin is slightly better in Q3 this year compared to Q2 last year when adjusting for onetime effects. Let's move on to the next slide where I'll present more details on reported financials. Total income at the group level ended up EUR 59 million in Q3, up from EUR 39 million in Q3 last year, which represents a growth of 51%. The increase in total income was driven by growth in both 3PC and NPL sales segments. The amortization rate was as previously mentioned lower in Q3 this year compared to Q3 last year, mainly due to improved collection performance. Third quarter EBITDA came in at EUR 30 million, corresponding to a solid EBITDA margin of 51%. The margin is supported by good cost control in all countries. Cash EBITDA was EUR 54 million compared to EUR 44 million for the same quarter last year. This represents a robust growth of 22%. Moving on from reported cash EBITDA to interest rate sensitivity on the next slide. The group reported in Q3 net interest expenses from borrowings of EUR 14 million. The current macroeconomic views points to increasing interest rates going forward and based on the interest rates set for Q4 and the debt level as of 30th of September, we expect an increase in interest expenses of EUR 2.1 million compared to the third quarter. As you also can see from the chart, an increase of 1% in interest rates will, given the company's current debt structure and hedging levels, increase the quarterly interest expenses by EUR 1.8 million and reduced the annualized return on equity by 1.4%. Please move on 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 this quarter is in line with the previous quarters for this year. This underpins the consistently stable financial results in 2022. The return on equity ended at 10% for the quarter and year-to-date. The return on equity has shown a good improvement in 2022 compared to previous years. And Axactor aims for further improvements of key drivers: increasing economies of scale, changes in the business mix and gradual lending in higher gross IRR on NPL portfolios, all point towards high profitability. The effective tax rate is expected to stabilize around 27%. At the same time, the interest rate increases observed recently with negative pressure on the return on equity development going forward. Let's move on to the next slide for our comments on the group's balance sheet position. Axactor has a robust balance sheet with an equity ratio that continues at a satisfying level of 29%. The group has also in a good liquidity position with available cash and undrawn credit facilities of approximately EUR 100 million on the revolving credit facility. Axactor has continued to repurchase bond loans and acquire a total outstanding values of EUR 10 million in the third quarter. The bonds were on average purchased at the first par value. The total sales value of owned bonds acquired so far this year is close to EUR 47 million. The estimated investment capacity is EUR 320 million for the year and is supported by good cash collection over the past 3 quarters. This is equivalent to almost 3x replacement CapEx levels for 2022. I would also like to confirm that all of the covenants have a comfortable headroom. So in summary, we are pleased to see stable results for the third consecutive quarter, along with a healthy investment level and strong gross to collect performance, we are in a solid position for profitable growth moving forward. 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. Firstly, the interest rates in Europe are increasing and will impact Axactor's funding costs going forward. More precisely, we expect the interest expense on borrowings to increase by EUR 2.1 million from third to the fourth quarter, a further 1% increase in interest rates is estimated to increase quarterly interest expenses on borrowings by EUR 1.8 million. Secondly, we continue to see a mixed outlook on backbook collections. On the negative side, rising inflation and interest rates will reduce disposable income for consumers in Europe. All elements that reduces the debtor's disposable income will potentially have a negative impact on Axactor's backlog and put pressure on debtor's ability to repay and hence postpone the collections. However, on the positive note, low unemployment numbers, increasing salaries and government aid packages are improving the disposable income and can be expected to partly offset the challenges. The full net effects are probably yet to be experienced, but so far we have seen limited impact as a result of macroeconomic factors on collections in 2022. Thirdly, Axactor continues to see growth and margin expansion on NPL. We expect to deploy between EUR 250 million and EUR 300 million on NPL portfolios for 2022 at a satisfying gross margin. At the same time, we expect further margin expansion driven by attractive growth on our levels on new portfolios and improved economies of scale over time. We have one last reminder on the next page before we move on to the Q&A session. We mentioned briefly during the second quarter presentation that we plan to come back with more details on financial targets. This will be done early next year and we would like to invite all of the investors for our webcast on January 11. We hope you will take the time to call in for this event. That was what we had on agenda for the day. I suggest that we now move on to the Q&A session.

[Operator Instructions] We currently have no audio questions registered. So I'll now hand you back to the Axactor management team.

Yes. So we have a few questions that we have received over the chat. And the first one is regarding how the development in euro will affect Axactor, I will leave that -- and also is a question if the price book is 0.28. I will leave the question for Nina to answer.