B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Welcome to the Q4 presentation for B2Holding. Together with me today, Rasmus Hansson will be joining me in presenting. 2019 was a demanding year for B2Holding. The challenges we experienced in the year resulted in the new strategic direction for B2Holding. And followed by that we had organizational and operational changes in the group. In this presentation, which will be my first, as a permanent CEO, I will run through the numbers, but we will also have focus on the main issues in the new strategy for B2, going forward. Going forward, B2 will have focus on scalable platforms in key markets. Through joint venture solutions we will increase asset under management and also see to that our scalability of the platforms through economies of scale will be the focus. This will increase the income streams for the group, take down the risk for the company, and also increase our profitability going forward. Operational effectiveness and efficiency is the main issue and also the main focus for the group going into next year. And now I will give you the main developments for Q4 in this year. First of all, we are in line with all covenants for the bank's -- bank covenants for Q4. Leverage ratio of 2.8 is one of the lowest in the space that we are comparing us with. Gross collections was very good for the quarter that we had. And we also see that we have net profit of NOK 90 million but included in the profit of NOK 90 million, we have a one off cost of nearly NOK 40 million, NOK 39 million; whereas NOK 28 million of those NOK 39 million was non-cash costs. We will get back this later. Servicing fee and other income continued to increase, and this is a focus for the group, going forward. We also see that we had a little bit lower portfolio purchases in the Q4 than we usually have. Okay. It seems like there was some technical errors, so I need to use the microphone. Anyway the portfolio purchase was lower than previous years. I will get back to that but what is important is the portfolio level is about the same level as amortization, which means that our income stream is going to be at the same level, going forward, given the portfolio purchase that we did in the fourth quarter. But the effect on the balance sheet was quite good and also we'll get back to that. Mostly of the portfolio purchases were done in Northern Europe and that was forward flow agreements that we will see increase further -- going further in B2 [Audio Gap] continues to trend downwards but you will see some variation from quarter-to-quarters but it is do still continue to trend downwards. And cost efficiency, as I said previously, is one of the key elements for B2 in -- going forward, in the year [ 2020 ]. The RCF covenants, we are in line with those, we have an equity ratio over 25%, we have a leverage ratio of 2.86. So we have a good balance sheet and we also have a very good solid debt service capacity in the group. Partnership with Waterfall in Sweden was concluded in the fourth quarter. But we also extended that partnership to portfolio that we acquired in Cyprus in Q1. Furthermore, we had a collaboration agreement with Banca Sella, they are about the 20th largest bank in Italy that we will -- concluded also in Q1. Now Rasmus Hansson will take you for the business update.

Thank you, Erik. We have over the last couple of quarters shared this table showing collection within secured in the area where we've had the most challenges. But before we start with this, I would like to point out the amount of ERC related to secured is going down quarter-by-quarter; we are now at 28%, comparable to last year, where it was 33%. So we have a reduction of 5 percentage points. And we still collect, so that's important to point out. From Q3 to Q4, in this region alone, we collected more than NOK 200 million. So 70% -- excuse me -- 75% of the total amount invested in this region has been collected already. So it's not all bad when it comes to secured either. And I would also like to point out that the organizational changes that Erik mentioned that we have been implementing within the secured recoveries are starting to show effects. George Christoforou and his team has done a great job already, we have more specialized competence. We have reviewed the strategy within secured, reviewed all the largest cases and this is now starting to show positive effects. However, with new strategies you also see that it takes a bit of time. So as Erik mentioned, there will be some volatility, going forward. Then over to unsecured, which is the core of our business; more than 70% of our ERC is within unsecured. This is stable, good, predictable cash flows. And we also see that this part of our business is showing positive -- we see good, positive signs in the market. Last year, we saw a softening in prices, meaning of prices on portfolios decreased; and we now see a stable and good market for unsecured portfolios. We also have a good pipeline visibility. And we will now also this quarter share a slide on forward flows. So I will come back to that. But what we see is a good supply of portfolios within unsecured, and we expect this to continue also because of the backstop that was introduced in April last year. What I think is important to point out, we had a performance during 2019 of 106.5%, which is good. We had an even better performance in Q3, but as we explained there was spike in Finland in Q3 due to tax return among -- the payback of tax money coming in Q3 last year as compared to Q4 in the previous years. So this we actually accounted on the Q3 presentation. What we also focus on within the unsecured is, of course, to utilize economies of scale and be even more cost efficient than we are today. A part of that is focusing on technology acceleration. And what is that? That is, we see an untapped potential for further digitalization in several of our platforms. Some are at the very high level already, as for example Finland, but we dare see a good potential going forward. And with the divisional change we have done, where we have clear divisions between secured and unsecured, we see -- we are implementing several initiatives to improve efficiency based on use of technology. This could be Artificial Intelligence, like machine reading, which we for example have implemented in Poland and which is showing good results. So more of that to come. Then we have a new slide. Of course, there is a lot of focus on forward flow, why? Because this is stable, good, low-risk income for us, and it also creates strong vendor relationships. We say it's mutual relationships because we also share data with the vendors that they can use in their risk models. So this is a very efficient way of purchasing and collecting on portfolios. We know the claims that we buy, and we have the collection strategies in place. And there will be also then, we can start to collect very early, when we buy portfolios based on forward flow. And what we see in our mature markets, core markets. There is a increasing share of forward flow portfolios, which we see as a positive sign. And we also expect in connection with the backstop, meaning that the banks will have to write off unsecured, especially within unsecured, non-performing loans at a faster rate. We also see a potential for even further forward flow agreements, also with banks. Predominantly, within the forward flow, it's consumer lending companies, but we think this will change, going forward. Also, we have then during 2020, we have committed approximately NOK 1 billion in purchases based on forward flow. But what we see with this vendor relationships is that when they are first established and had this -- and we have had the relationship going on for a while. We see that they are usually extended and -- unless there are a large gap in the expected price and other terms. What we also see is that, with the forward flows, there is a mutual relationships. We also often get this question. Can you adjust these agreements? Yes, we can. According to market conditions and we have done so. There are clauses in these agreements that gives you room for adjustments. But this also goes -- this goes both ways, just to emphasize that. Then we have the JVs and partnerships for portfolio acquisitions. This is an important part of our business going forward. We have already established several JV partnerships as you know. We have the first one, which was with EOS in Romania. Then we did 2 transactions in Greece; 1 with EBRD and Waterfall, and 1 with Waterfall alone. And now we have extended the partnership with Waterfall to also include Sweden and Cyprus, which was announced in Q1 this year. We also have the partnership with DDM in Croatia. And now most recently, we announced this cooperation agreement, collaboration agreement with Banca Sella in Italy. And what does this mean? This means that Banca Sella will actually buy non-performing loans together with us, where we will service the claims, where we have special competence. This is mainly within SME secured claims. You could also then ask, why is Banca Sella buying NPLs and what will then happen in terms of the backstop? But bear in mind, they are then buying NPLs, not at the full face value, but at the discounted value, same prices. So it doesn't have that effect on the balance sheet of the bank. And this is a very solid bank in -- according to Italian terms. So what does that mean? With JVs going forward, of course, we will then have more servicing revenues, going forward, which will then, of course, give us another leg in our business. So this year, we will further develop these JV partnerships and we will also look at ways to optimize these co-investment structures as the volumes within JVs will increase. A little bit about the market development. We have seen some regulatory changes. We have already mentioned the backstop. And there was also a new debt collection law that was introduced earlier this year in Norway. We have had some questions around that, so I can just say that this has a very small effect for B2Holding. We have a relatively small debt collection business in Norway. And our main business in Norway is B2B claims, which is less affected than B2C. So all in all, this is not very dramatic for B2Holding. There has also been a change in Poland, where you have to pay a higher fee for unsuccessful legal action. This has given us some extra costs. But going forward, this will be priced in new portfolio purchases. So over time, we will -- this effect will not be very -- will not have a large effect for us. When it comes to portfolio purchases, we saw a improving market in 2019. And we see and expect a steady market going forward as well. We don't see necessarily further reductions. But we see a good pipeline visibility and a stable market, which is good for us. And there is also some differences from market to market of course, when it comes to competitiveness. Then it comes to transactions last year. And it's probably maybe a bit confusing. This is a statement. Total value of transactions expected to decrease from 2018 to 2019. The reason is the numbers for the markets. The aggregated numbers for the NPL markets are not ready yet. Usually, they are shown around mid-year, the following year. But what we expect is that there will be in terms of face value, approximately, 30% reduction in traded volumes in 2019 compared to 2018. This is of course, as a result of the NPLs that were accumulated during the financial crisis. A lot of it has been sold, and these have been the large volumes sold the last 4 or 5 years. Having said that, going forward, we believe, especially within the unsecured space that we will see a good and stable flow of portfolios. So we are very positive to the market, going forward. JVs and partnerships. What we see is a trend that there is a closer cooperation between banks and debt collectors. Now with the backstop, it will be costly for the banks to hold on, especially to unsecured NPLs. So we believe that will lead to more outsourcing also from the banks. And we have seen some large initiatives. For example, with Intrum engaging in deals with large banks in Italy, Spain and Greece. What we also see is there is a lot of capital out there within distressed funds, private equity players that want to invest in this industry. So we see we have a very good interest to co-invest with B2Holding. So we are -- we have a positive view when it comes to JV partnerships and the possibilities that we'll create going forward. We have also observed some NPL fund initiatives in the markets. Arrow recently announced that they raised the fund of approximately EUR 800 million, which is also a way to invest based on other's balance sheets. Then finally in the business update, just a short market overview, where we are and what is the development in our different markets. What is important to point out is that we are turning the business towards our more mature core markets, which you can see here. The ERC is increasing in Northern Europe, in Poland, in Western Europe and it's decreasing in Central Europe and South East Europe. In other words, we are investing more in Northern Europe, Poland or Western Europe, and a little bit less in Central and Southeast Europe. We have a strong position in these markets, which makes us an interesting partner for joint ventures, for co-investors. For example, a market like France, it's not a very crowded market, we have a lot of interest to converse with us there. But we also need to find the right partners, going forward. So this is what we are working on. And we also need to be ready as an organization or also locally to take on these joint ventures. So this is work in progress. So where do we have interests for these partnerships, other than what we already have in place? I mentioned France, Poland, there's also interest, at Italy, we have already started this year, with the collaboration agreement with Banca Sella. Back to you, Erik.

Thank you, Rasmus. Fourth quarter and full year summary, as we have seen, we had write-down earlier in 2019. So the year-end result, pre-tax was NOK 101 million is not the number that we expect to have also going forward. We are in good position. The company has a solid balance sheet. We also have good portfolios on our balance sheet. We are also seeing, going into January that the collection is in line with expectations. And we also expect that some of the costs that have been incurred in 2019 will not be coming in 2020. We are seeing also market that is improving and the steady improvement in the IRR of the portfolios, some markets more than others, but it's a steady good flow of portfolios. So we do expect our numbers, coming into 2020, is going to improve. And also going to be showing that some of the operational changes that we are making, going to make impact in going forward. We have, in 2019, we had cash revenue of NOK 5.7 billion, we have a very good cash flow stream for B2Holding. And just holding back a little bit on our purchases in fourth quarter had quite a bit of impact also on our balance sheet. Then we also see that the financial numbers, like leverage ratios and so on, improved dramatically just by holding back a little bit. So we are seeing that we have the front loaded cash curves and that is making impact. Portfolio purchase for the year was NOK 4 billion, and we believe that in 2020, we are going to be around the same numbers as last year for portfolio purchases. Looking at the income statement, there is, as I said, some in fourth quarter we had NOK 39 million in nonrecurring items. Both this is due to operational changes that has been impacting results and the costs that's been taken in fourth quarter, but also we've been having impairment on some IT solutions that we were writing down as well as some goodwill on one of the countries that we are located in. We see the tax also issue, we are going to have a lower tax going forward. We are going to see that with the tax rate, the effective tax rate is going to be below 20%, going forward. If you look at -- on our cost, this year, as I said, we are going to focus on operational and effectiveness within operation. Effectiveness meaning to get more out of our claims. And efficiency is actually doing the collection in a more economic way. Having the scale effect getting down the cost, utilizing then digitalization and artificial intelligence to further get our costs down. We see that we have potential in this way that Rasmus was explaining previously. We have, Finland is doing very well, when we see, also, we can implement similar technology that is known to the company that we have with some companies, we can export this to some of the other countries that we have and we will see that the cost also come down in that respect. So we believe the cost to collect will go further down in the years to come. When it comes to the balance sheet, we have an equity ratio of 25.2%, according to our bank covenants. We also see that if you look at tangible equity that is equity less the goodwill on our balance sheet, we're still over 20%. And this is very good compared to quite a few other competitors in the marketplace. And we also see that available investment capacity at the year-end was NOK 2.1 billion. And then we have the monthly cash flow. As we know, we invested quite a bit less in the fourth quarter than we usually do, but still we do have very good investment capacity, going forward. And we also have a very good cash flow, as was pointed out for fourth quarter. If you look at the capital structure of B2Holding, we see that we are now, as I previously said, we have -- we are in line with our covenants for the RCF. But for the -- furthermore, we also receive from the bank's new, amended RCF agreement, they dropped a clause, the repayment clause, which means that now the final majority of the RCF is 2022. Furthermore, we can use the RCF to pay back the first bond that is falling due at the end of this year. And we do have capacity under the RCF to do so. So there is -- and we also see that in the year to come, we have very good, solid cash flow from operations. So we can both utilize the RCF as well as invest NOK 4 billion in the year to come. So we have a fantastic balance sheet and we are solid, and it gives us good prospect of further growth in the company. As I said previously, we had a modest quarter for purchases, NOK 566 million. If you look at the amortization rate, it was around NOK 610 million, which we were just below the amortization rate. Why do I mention that? It's fairly clear. If -- we are just like a bank. If you lend out money and somebody repays, you have to lend out money again to sustain the earnings income going forward. And as long as we lend our -- buy portfolios and then we amortize, we have to also buy new portfolios to sustain the earnings, going forward. And if you look at the amortization for the group, as a whole, it's going to be around NOK 2.6 billion, NOK 2.7 billion for next year. And would therefore, if we invest more than that, then we will have a higher income stream, going forward. So we will have organic growth in B2 going forward in 2020. And also then additional, we will have the JV partnerships that is going to increase our purchases further and also increase our -- then incomes from servicing. So as a whole, this is going to make our platforms -- we will be utilizing our platforms more economic and take the economy of scale of the platforms and that's going to make an impact. But for the year -- for the fourth quarter, we see that we had NOK 566 million unsecured was 76%, 78% of that. So we are increasing further our unsecured part of the portfolios, we're still going to be in the secured space, but it's going to be lower than was historically. So if you look at our ERC is NOK 23.8 billion, at end of fourth quarter last year. The drop from the quarter before is -- mainly, some of that is due to actually currency rate drops from fourth quarter to -- from third quarter to the fourth quarter. We still see that our ERC is front loaded. We have 74% of our ERC falling due within the next 4 years. This is very high and we also then generate quite a bit of cash going forward that we can reinvest into our business. And as the portfolios are generating better IRRs we also see that this is going to make an impact going forward. Now if you go to the summary, what we try to do in B2 now is to develop company from being a pure debt purchaser to become a hybrid company with debt servicing capabilities. And we see that we are moving in this direction. We have several joint ventures that we've been going into in the past years and we do have several companies contacting us to actually buy portfolios together with us and having us service their portfolios. So this is going to be definitely a part of B2Holding and we're going to increase this as we go along. We see the organization and organizational structure has been changed in B2Holding to support the new strategy for B2Holding and this is coming into place, and we already see positive effects from this organizational changes that has been made into the company. Investment strategy is going to be still again focused on economies of scale and also operational efficiency. We have platforms that we can scale quite a bit. And we can -- and we have several now -- let's say that we have several platforms that we're already seeing that we will have efficiency, not only on the fixed costs but also on the variable cost by increasing the portfolios in --on those platforms. We have room for doing that without seeing that the costs are increasing. Now we also see that if we're going to focus our investment to larger degree, we'll also have to focus a little bit more on the footprint. So you will see that the footprint will be somewhat smaller going forward. And we will announce that to the market as it goes along. So far, we have pointed out some of the markets and we will get back to this at a later stage. But this will give us a growth potential on those markets as well also a competitive advantage on those markets. So having said that, and we are now ready for the Q&A session. And we have several people from B2Holding in the group here, so if you have any specific questions please raise them now, and we will answer as good as we can.

Jonas Lien [Audio Gap] is it on? Okay. Yes. I guess, a question now is how 2020 will be in terms of, you have signaled that you will exit some noncore markets. So the question is how will this look in terms of restructuring costs? You had some in 2019 so, I mean compared to 2019 how should we think about restructuring costs, going forward?

Yes, the question was related to some footprints that related -- that we announced and [indiscernible]. Some of the markets that we have been looking at exiting, there will be no particular cost related debt. But we also have a couple of markets that might -- might come, but it will be small numbers, it shouldn't be big numbers. But we also have a couple of other restructuring still heading but it's not going to be in the size that we had in 2019.

And one last one from me. One of your peers, private equity player in this industry, Anacap, they rolled down 9% of their investment book this month, I think. And of course there's a difference between them and you guys. They are majority of SME in Spain and Italy. So my question is really how large is the share of SMEs within your investment book?

It's fairly small number. If you look at our secured, which is SMEs comes under, it's rather small compared to the total book both on the secured. We have a granular secured and then we have some corporate secured and SMEs are a smaller number of our investment in our books.

Okay. questions from me as well, please. The first one is that the gross IRR fell 50, 60 BIPS from Q3 to Q4. Why is that, and what level could we expect, going forward?

Can you speak up please?

Gross IRR fell 50, 60 BIPs in -- from Q3 to Q4. Why is that and what level can we expect going forward?

Well, the gross IRR, what happened is that quite a bit of the portfolio that we purchased was also in Northern Europe. The gross IRR in Northern Europe is lower than some of the other markets. But at the same time you also have cost related to those IRRs. So the net IRRs are still very good. So the gross IRR gives one of the picture but the net IRR gives another picture but of course we have the costs for like in between that is lower in those areas.

So given that you buy more there, you should expect a stable gross IRR going forward or…

Yes, given that the -- what we probably will see is that we will also invest quite a bit of other areas that has a higher gross IRR. But as long as you keep investing in Northern Europe to the extent that we've been doing, you will see that gross IRR come down somewhat.

And then about the tax rate, what is driving the below 20% guiding?

Yes, the tax rate is driven by that -- we have losses carried forward in some of the markets and we're generating now income stream and gains against the losses carried forward. So the effective tax rate is estimate coming down. And that is due to the fact that we -- in our headquarters in Norway we have not been utilizing our losses carried forward because we have been having operational costs in the headquarters and we haven't had incomes to [ income ] over those losses. So that we will -- we'll see in a [ few steps ] we have generating income stream coming to over those and we can utilize those.

And then just the final one. When do you expect to reach your 15% return on equity target?

What we -- we see that we have been going through some changes in 2019, going into 2020. And 2020 is sort of a transition year for B2, going from a pure debt services to a pure debt purchaser to both. I think that in 2021 we are more in line with and also we'll see some of the -- our operational effectiveness coming in and efficiencies coming into play. So I have big hopes for 2021.

Could you give some more light on the discussions about [indiscernible] for this year and going forward?

We have a dividend policy that we were going to have dividend between 20% to 30%. Due to the fact that we had a write down this year of our -- 20%, 30% of our net income. Net income this year is at a level so we are -- which is lower than what was anticipated and also lower than anticipated going forward. So we took about 30% of our net income this year and that's what [indiscernible].

So if you are to use the [indiscernible] still you didn't [indiscernible] would that be the same [indiscernible].

What? Can you explain?

[indiscernible]

We have a common [ instruction ] in the bonds that we could give up to 50% of earnings to dividend. So that's the limitation with that respect. What we said, also from the Board of Directors and a recommendation from Board, has been that we give between 20% to 30% of dividend. And that's the recommendation to the General Assembly that is finally going to approve that.