B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, and welcome to B2Holding Q1 presentation. Since the Q4 presentation, the world has been going through a turbulent period. COVID-19 has accelerated around the world and is impacting the societies and the world economy. B2Holding is also affected. To what extent lockdown and other measures will impact B2Holding is too early to say, and we need more data points going forward. The impact varies in the 23 countries we operate. B2Holding emphasized the 4 following main issues in this period: one, secure the health and safety of our employees; two, maintain normal operation to ensure good collection and recoveries; three, reduce cost going forward; and four, limit portfolio purchases to preserve capital. Now we go to the key figures for Q1 2020. Gross cash collection was at NOK 1.3 billion and was stable. Cash EBITDA was at NOK 966 million. The leverage ratio is impacted by large foreign exchange fluctuations and ended at 3.26. If the currency rate at the year-end was used, we would have the same leverage ratio as at the last quarter, namely 2.86. The currency fluctuations has impacted both the P&L and the balance sheet. The highlights for Q1 are as follows. We have -- we had modest portfolio purchases in Q1. The portfolio were mainly purchased in Northern Europe, and 97% of the purchases this quarter was unsecured portfolios, mainly existing forward flow agreements. As I previously said, we see stable gross cash collection close to the curves, despite the impact of the coronavirus at the latter part of March. Cost-cutting programs are put into place to mitigate some of the effect of expected delays in collections and recoveries. We are in line with the covenants and expect compliance going forward. In the latter part of March, 2,500 employees in 23 countries were moved from the office to remote office structure, impressive effort by the organizations. Collection was minorly impacted by the move. Now over to the business update. Rasmus Hansson will take you through that.

Thank you, Erik. As you mentioned, our main priority has been our employees, the health and safety of our employees. You also mentioned that we've had a successful transition to a remote office structure. This was done in a matter of days. And I think it's important to point out that we started this process well ahead of government recommendations. And I think it's important to point out that the flexibility shown by our employees in this process has been impressive. So this actually enabled us to continue operations close to normal through a very challenging period. And we have our organization to thank for this. Of course, there are large variations in terms of how we are impacted by the crisis. The Nordics has been much less impacted than our countries in Southern Europe. That also means that we have seen differences in how the court systems and the bailiff systems operate. And we are, of course, tracking this on a daily basis. So then to give you a bit more flavor on how we are impacted in the different countries, we have then shown the European map, where we have the different impacts. When we look at the Nordics and Northern Europe, in general, we have a lower impact. And Nordics plus Poland represents then more than half of our ERC. And if we look at the unsecured, which is approximately 75% of our total ERC, Northern Europe and Poland represents more than 2/3 of our unsecured ERC. And here, the impact is low. Further south, as mentioned, of course, the impact is larger. But if we see Spain and Italy, which are the 2 countries that are most affected, we have a total ERC -- 7% of our total ERC. As Erik mentioned, we still need more data points to observe consistent trends. And this will continue going forward. We still see some variations, both between countries but also within the countries. We will get a bit more back to that. In this period, it's very important to focus on ethical and responsible collections. And as such, we have introduced several measures and guidelines across all our countries to make sure that we treat our clients in a respectful way in this challenging period. That includes softer communication. We are more careful with sending cases to legal. And we are looking at payment plans in order to adapt them to the current environment. Despite the fact that we still are unable to observe trends, we still need to prepare for delays in collection and recoveries. So what have we done so far? We have shifted curves in the first quarter, mainly in secure to prepare for delays in collection. As a result, we have looked at our cost structures, and we have also initiated then a cost-cutting program, where we have savings, monthly savings of approximately NOK 20 million per month starting from April this year. We have seen collections already now for April. And what we have seen so far is that the impact has been limited so far. Unsecured collections are moderately behind forecasts. We are close to 90% of cash collection forecast for the group. And we see minor deviations in the Nordics and Poland. Of course, in southern part of Europe, the impact has been larger, but all in all, the impact has been moderate to low. When it comes to the secured recoveries, they have actually been above forecast. We have seen some large claims that have been collected in Central Europe. However, we need to have a conservative approach going forward. Longer term, we need to see more data, as mentioned, but the cost savings will also be based on the impact on a local level. There will be large variations on where we see impact, and the cost programs have to be adapted accordingly. Then over to our forward flow agreements. These are the commitments we have to buy portfolios going forward. Erik mentioned that we are preserving capital. Investments are kept at a minimum. However, we do have obligations to buy forward flow portfolios. But what we see is that in this challenging environment, the whole industry is in dialogue with vendors, and most vendors have shown willingness and flexibility beyond contractual arrangements. They see, as us, that it's mutually beneficial to maintain a long-term partnership. So we are all giving something in this challenging period. That means that we have reduced our forward flow commitments. And in several countries, we have actually replaced forward flow arrangements with 3-party collection contracts. This we've especially seen in the northern part of Europe. We have already mentioned that we are preserving liquidity. As of today, our liquidity reserve is EUR 266 million per end of the quarter. It's, of course, important for us to have a good dialogue with our RCF banks. And we have frequent dialogue with them, and they have given us positive feedback on our responsiveness to this crisis. As Erik mentioned, of course, the FX rates have heavily impacted the ratios, but we are still in line. Should we have based the FX on year-end, our equity ratio would have been approximately 0.5 percentage point higher. So we are still good within our RCF covenants. So with that, Erik, I would leave the word to you again.

Thank you. Then we will look at the financial performance. First quarter, we -- as we said, we had stable collection from our portfolios. The collection was good, and it was mainly good nearly in all countries. We had some lower collection in the latter part of March in some southern and southern eastern countries. If you look at the credit loss of -- net credit loss of NOK 62 million that we took a hit this quarter, most of that was related to COVID-19, where we had some lower collections in Italy and also in Spain, but also then we put forward quite a bit of collections -- expected collections on the secured claims that we have. And this was then hitting us with NOK 62 million. EBITDA also includes nonrecurring items of NOK 15 million related to organizational changes. So if you take this into consideration, the EBITDA would be NOK 296 million at this Q1. If you look at the income statement, the profit/loss also is impacted from lower JV results. The results there is around NOK 20 million lower than anticipated. And this is also due to the restructuring of the curves in the impacted areas. The FX is impacting the P&L statement. If you look at the cost side, you will see that we have around NOK 27 million impact from the foreign exchange on the cost side. And NOK 15 million, as I said, from nonrecurring items accounts for then the larger part of the cost increase. We anticipate cost reductions the next quarters around NOK 20 million, as Rasmus was saying. In -- and additional, we will then have lower legal fees as the legal systems has locked down in several of the countries that we are operating. However, we see that some of those legal institutions in different countries are coming back on track in several of the places. If you take into consideration the net credit loss, the JV impact and nonrecurring items, we are in line with the operating profit from last year of NOK 350 million. The net exchange loss of NOK 73 million unrealized loss is caused by fluctuation in the foreign exchange rates of kuna, RON and Czech. If FX rates was used yesterday, we would have a NOK 20 million to NOK 25 million positive impact. So this will vary from quarter-to-quarter, and we've seen that also in the past. If we focus on next page on the cost reductions, we see that different costs are more or less in line with last year, a little bit up from last year, but actually down 1.1 percentage point from last quarter. We do see cost to collect still having the trend downwards going forward, and we are also using quite a bit of time on developing our artificial intelligence processes within the group. Now if we go to the balance sheet, we see large effect on the balance sheet due to currency fluctuations. The increase in the balance sheet total assets is mainly related to currency fluctuations. The FX impact on purchased portfolios using the FX rate from last quarter, we will see that it would be NOK 1.8 million lower. So the FX has a large impact on our balance sheet and also, of course, that KPIs that includes there. We also see that the equity is at NOK 4.7 million, which is up around NOK 400 million related to also to the FX rates. If we go to the capital structure, we do have very good liquidity with a liquidity reserve in neighborhood of NOK 266 million. And maturity profile of the debt is displayed on the graph. We have good headroom for repaying outstanding bond at the year-end, which is today accounts for NOK 134 million as we had a buyback program earlier this quarter. We are in line with all covenants. And we have a good dialogue with the RCF banks. And we are looking for increasing the headroom even further due to COVID-19 to ensure that we will be within our covenants. Leverage ratio, as previously, is impacted. And it would be 2.86 if it were at the same currency rates as end of the year. Also, we see, as Rasmus was pointing out, the equity ratio is impacted by nearly 0.5 percentage point. So we had about 16%, 17% increase in euro against Norwegian kroner at -- during the quarter, which is impacting, which is incredible high fluctuations. If we then go to page for the modest portfolio purchases first quarter, we see that we have secured purchases only of 3%. 97% of our purchase was unsecured, as I said previously, mainly in Northern Europe and related to also to our forward flow agreements. The purchases going forward is going to be lower, and we will then see how things will develop. Hopefully, we'll get back to normal level again at Q4, but that remains to be seen. If we go to the next page, increase in ERC is attributed to FX effects. We had about FX affecting our ERC positively by NOK 3.1 billion. We still see that we are front-loaded, and we expect to be front-loaded. And we see this as an advantage coming into the crisis here that we have front-loaded curves and we'll have good liquidity going forward. If we come to the summary, I think it's fair to say that the organization proved agile and sustainable in extraordinary situation, both at the country level but also at the group level, where the new organization structure were put into place the latter part of last year. We see limited impact on the cash collections so far, including April, but the variation among the different countries are large. And also, the actions taken by the different countries has been varying quite a bit. We do focus on cost reductions and which as much as, by the way, is implemented. But we also see that this -- the cost reduction will vary because the effect on the countries will vary quite a bit. We lowered investments to preserve capital. And I think that will sustain until we see that we are seeing light in the tunnel and the crisis that is affecting us currently is on its way to go away. We are now looking forward to a period after COVID, which we see potential good opportunities, both in servicing but also for portfolio purchases. So on the back of that, we are now ready to take Q&As. So if you have any questions, please type them in, and Rasmus will then read the questions, and we'll try to answer them together. Rasmus?

Thank you. We have a first question here from Magnus Rasmussen at Swedbank. To what extent have you adjusted your ERC curves? When have you assumed lockdown measures to end? And how do you expect secured portfolios to perform in this environment?

We have adjusted some curves according to COVID, not all of them, of course, because it's too early to say and we do not see all data points at this point in time. We have moved out, and then that is the majority of the NOK 62 million. We have moved out a secure collection out in time to have headroom for the collections. As we saw, the secured collection varies quite a bit. And if you go to April numbers, we already see that we were quite a bit above the curve, unsecured because we've already moved it out in time and we were able to close the case earlier. So this will fluctuate a little bit. So maybe next month, we'll be a little bit lower. And then suddenly, we have a case, another case, coming our way. So the granular part is still functioning, but the larger cases will vary.

Yes. He also asked when we have assumed lockdown measures to end.

That's too early to say. We see that quite a few of the countries that has been affected by that, that put into measures are now lifting some of them. And things seem to move a little bit faster, but it all depends on if the COVID-19 still the number of cases is plummeting again. Then you will probably see that the lockdown cases will -- lockdown situation will continue. But we see, which is most important that some of the legal entities or the legal structures within the countries and the bailiff structures are showing tendency to open up again.

We have a follow-up question also from Magnus. You are quite close to your RCF covenants, and you intend to use that RCF to repay the bond maturing in 2020. Will you be allowed to repay that bond using RCF also if you do not comply with the covenants at the time of maturity?

Well, we believe that we will be in compliance with the covenant. The headroom that we are talking to the RCF banks with is also to ensure that we will be in line with our covenants even if the collection drops quite a bit. So we are -- we have a good headroom already. We believe that some of the currency fluctuations that we saw will also go positively the other way now going forward. And also, our collection, as we said, in April was good. So it looks pretty good for things going forward. But -- we are close, but we are working with and have a very good dialogue with the banks to look at how to deal with the covenant structure due to COVID-19.

Then a question from Robin Rane at Kepler Cheuvreux. You're right that you expect a larger impact on business from May, which is from the report. Is not the worst in terms of lockdown behind us and therefore collections should slowly recover? Or are you worried about the macro headwinds hitting the ERC going forward?

I think there's -- even if they lift the lockdown somewhat, there will be also some delays. Things has to come back to normal quite a bit. There is quite a big difference. In northern part of Europe, you see that quite a bit of the collections is done by bank transfers. And more in the southern and southern eastern part of Europe, you also see part of the collections is done by cash payments in banks and cash booths. That -- those possibilities has been limited for some time. So we've seen some slow collection on amicable side. When this opened up, we will also anticipate then the collections in those areas to increase. I think it's going to be some delays also due to the lockdown on the legal system. The number of cases, I'm sure, has been increasing there, so it will take time for the legal systems also to process them. Northern part of Europe, you have electronic legal system, so it's electronically made. Further south is more paper made, both to the legal system and the bailiff system. So that is more affected by such a lockdown, that northern part.

Then also, Robin has a few follow-up questions. Some of these questions are overlapping. So we will then maybe just answer them together with others. The follow-up question regarding the ERC curves, is the delay in collection curves you make on secured assets driving the credit loss in the quarter?

Yes. The majority of the credit loss was due to the delay in -- that we actually put some of the expected collections going forward. We put it out in time to ensure that we were on the conservative side. This is -- it's difficult -- some of these cases are solved amicable and might come in, like the case that we did in April that was rather large. So it's always difficult to say when some of this secured cases are coming in, but we do expect some delays in secured cases and therefore also made an adjustment in the Q1 numbers.

Then a few questions from Jonas Lien at ABG. Could you give us an indication of the collection level in April as Intrum did yesterday? I thought we did that, but we might elaborate a bit more on that, Erik.

Yes. We had -- we can say that the collection levels in April was above NOK 400 million, which is a good number. So we are pleased with that number. And we do anticipate that we might have some lower collection in the months going forward, but this remains to be seen.

And how was that -- how was the April collection compared to March?

On top of my head, I think we -- compared to March, we were a little bit lower than March collections. But we are still seeing a lower impact than actually anticipated at this point in time. We see that the Nordic part is still functioning well. We see Poland is fairly good. And then we have some of the other countries like Bulgaria and also Greece and so on that is more affected by the COVID-19 and therefore also have a lower collection.

Then a follow-up question from Jonas. The impairment level in Q1 seems quite moderate. To what extent do you anticipate that you will do a more forward-looking revaluation in the second quarter, e.g., to reflect a potentially much weaker macro outlook?

Well, it's still -- as I said, we need to have the data points. April was surprisingly good. And we do -- and therefore, we need more data points. But definitely, we will look at the curves more closely at the Q2 presentation. And -- but I do believe this is a delay. It's not lost collections. Normally, when you have a lower collection, you will recuperate that at a later point in time. So it's -- it will be some delay, but we also will see that impacting somewhat our results, but it shouldn't be -- it will be higher in Q2, but that remains to be seen.

Then a question from Thomas Svendsen at Nordea. Can you comment on the quarter-to-quarter increase in net interest bearing debt? Is it mostly currency related?

Yes, it's mostly currency related. Actually, net interest-bearing debt -- and also, you see the interest charges that we have over the P&L was affected by around NOK 9 million due to the currency because we have it in euro and as euro went up by 16%. Also, our debt is in euro, but our income streams also are coming from euro and other European currencies. So if you look at the -- compared to Norwegian kroner, we had increase in 16% in -- against the euros. We had 13.5% increase against kuna. We had around 12% increase in RON. So you see all the other currency has been strengthening against the Norwegian kroner, and that is then reflected on our balance sheet, both on the asset side as well as on the debt side. So we are not increasing our debt at this point in time.

Then a question from Joakim Svingen at Arctic. How is your business in Croatia and Bulgaria affected?

Bulgaria is one of the countries most affected by the corona crisis. They put into some new laws that will limit our ability to collect through the bailiff system. Also, Croatia has been affected, even though we see the collection are somewhat better than anticipated. They have also been having an earthquake in Croatia, and we have been going through and over all our assets in the area to ensure that none of the collaterals has been affected by the earthquake and to -- and we have insurance also covering that. So -- but Croatia, as such, is going to be impacted, but it's too early to say how much is going to be impacted going forward still. We still see a rather large impact on both the debt is unsecured, but also potentially for the secured. But then again, as I said previously, we see also that we have fairly good collection within secured items in Croatia still.

I think it's also fair to add that both Croatia and Bulgaria have been moderately affected by the virus in terms of number of people infected and the number of people that have died from this virus. But they have taken strict measures regardless. Then I think we have hopefully covered the questions from the analysts. But if not, please write us a note, and we will address any remaining questions you may have. We have a bit more time actually to answer questions. Then we have a question from [ Frank Lehmann ]. Would you contemplate any more buybacks of bonds?

We will look at this. We did it as previously a month ago or something. So we might contemplate, come back to the market probably in the autumn, if that. But it's not on the table yet, but I would assume that at one point in time, we would come back.

Well, unless we have any more questions coming in online, I think we can actually conclude. Of course, we can add that if there are follow-up questions, you can, of course, contact myself. My phone number and e-mail is on our website, and I will direct your questions to the appropriate person.

On back of that, thank you very much. And hopefully, we will soon be back to normal or going process towards that. So thank you very much for listening in, and see you next quarter. Thank you.