B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning and welcome to the Q2 presentation for B2Holding. Obviously, COVID-19 has been a dominant factor in the second quarter. As previously stated, our focus in the quarter has been the health and safety of our employees, and at the same time, being able to maintain a high activity level. We have achieved both. The response to COVID-19 throughout the organization has been nothing but impressive. I'm humbled by the effort shown by our employees, and I'm very grateful for the flexibility we have seen for them in a challenging period. Key figures to Q2 2020. Gross cash collections, including JVs, was close to NOK 1.3 billion in the quarter. Of this, 30 -- 25% was secured, which was higher than anticipated. Also included in -- and gross cash collection includes NOK 76 million from JVs and is approximately 5% of the collections. We observed large variation in how operation across Europe were affected by COVID-19. The differences in closure of the bailiff and court systems vary to a large degree between the countries. We observed little impact in the Northern Europe, but several countries in the Central and Southern Europe, plus Italy and Spain were more affected. Good cash EBITDA of NOK 916 million and net profit of NOK 34 million. The net profit was affected by noncash write-downs of NOK 155 million. This is mainly time effect, but also some were more volume effect. The result was positively affected by the cost-cutting program initiated at the end of Q1. Portfolio purchases were at NOK 473 million in the quarter and was low as indicated it would be at Q1 presentation. Highlights for Q2. Investment in Q2 was kept low to preserve investment capacity and to monitor the market development during COVID-19. Portfolios related to forward flow agreements was mainly acquired in Northern Europe. During the second quarter, we have made various stress test scenarios and collection has exceeded our expectations. At the same time, we have introduced cost saving programs, and I'm pleased to see that we met our cost saving targets. During the quarter, we repurchased additional EUR 63.4 million in our first bond maturity in December 2020. We are in line with all original covenants, and we also expect to be in line with all our original covenants going forward. Following the general meeting on May 27th, Harald Thorstein was elected the new Chairman. As a consequence, Jon Harald Norbrekken stepped down as Chairman, and I would like to thank Jon Harald for all his effort as Chairman since he established B2Holding in 2011. Now to business update. The operations in most of Europe are returning to normal activity with bailiff and court systems reopened in all countries, where there has been a lockdown. COVID-19 has impacted the countries differently. Northern part of Europe, together with Poland, representing well over 50% of our ERC have been little impacted. Italy and Croatia still has high impact, while the remaining countries have medium impact, as shown on the map. The positive development in collection and recoveries, experienced in June, has continued in July and into August so far, where the collection has been higher than expected. The lower collection in countries experienced lockdown -- that experienced lockdown in bailiff and court systems returning towards normality but are not still there. So there is some left to go. If -- however, it's too early to tell how the macroeconomic development is going to affect -- from the COVID-19 is going to impact the collection going forward. So some caution is necessary. Concerning our forward flow agreements, forward flow agreements were either put on hold or renegotiated in Q2. Portfolio purchases are expected to be low in Q3. When we have better visibility of the future effect of COVID-19, we expect to increase our portfolio purchases as well. B2Holding has good liquidity at the end of Q2. We have a liquidity reserve of NOK 3 billion or EUR 275 million. This includes, however, also then the treasury bonds of NOK 1.2 billion or EUR 112 million. We have improved our equity ratio and all other covenant ratios in the quarter, and we are in line with all our covenants at the end of the quarter. Looking forward, we are preparing for life after COVID. On the operational side, we have several processes ongoing. On the IT analytical side, we have, since 2019, been working with Crayon on a 3-year transformation program with ambition to deliver tangible financial results and build visible competitive advantage. Crayon is a global leader in artificial intelligence and machine learning. Effectiveness and efficiency is still in focus in the group. Cost of reduction programs initiated at end of Q1 are in line with plans, and I will revert to this at a later stage in the presentation. JV and third-party servicing will continue be a strategic area. We see an increasing interest in co-investments, and several large investments -- investors are positioning themselves for an expected improved NPL market post COVID. With increasing volumes through JVs, we also expect a better scalability on our platforms and a good potential for increasing servicing revenue. Over to the financial performance. As previously stated, our result was affected by the net credit loss of NOK 155 million. This is a noncash loss. And was -- and this relates to both delayed collections as well as some volume reductions. As of today, we anticipate improvements in the profit in Q3. But we still -- we could still be influenced by the second wave of COVID-19, so we need to be cautious. On impairments going forward, we have already adjusted our curves, but there is still uncertainty, mainly related to timing with secured. As we said with Q1, we started a program with cost-saving targets and operating expenses reduced -- are reduced in accordance with cost-saving targets in Q2. Cost saving -- savings, second quarter, FX-adjusted was NOK 85 million, whereas NOK 40 million comes from personnel, NOK 22 million other costs and NOK 22 million from external cost of services provided, which is mainly related to legal cost. And this is due to often lower legal activity as some of the closure in the bailiff and the court systems. But we are very happy that we are in line with the cost-saving targets that was announced at the end of Q1. Balance sheet at the end of Q1 was NOK 18.1 billion. There's 2 items on the asset side. One is portfolio -- purchased loan portfolio, which is at NOK 14.2 billion, and then we have investment in joint ventures, which accounts for NOK 902 million or -- and also it's 5.9% of total portfolio assets, which is reflected also in our ERC. Tangible equity is very good in B2. It's 21.1% and tangible equity is equity then taken -- reduced with the goodwill and intangible assets. The capital structure for B2Holding. We have a bond falling due at end of 2020, as shown in the picture. But as we can see, we -- on the red part is what we have already repurchased. So we have NOK 70 million left to -- that is falling due at end of the year. We have currently ERC, remaining ERC unutilized at NOK 155 million. And together with a good cash flow that we experienced these days, we are in very good position for meeting our financial needs going forward. The capital structure, the covenant structure that is shown on the pictures here are better than anticipated. And as we said also in July, we see a further improvement and further headroom under original covenants. And also, we expect to be in line with the original covenants going forward. Due to the uncertainty that -- what was previously, we also asked for a waiver from the banks for further headroom under our covenants, and the banks that we have a very good relations with also agreed to that. So we have a very good headroom under our covenants. However, we still believe that we will be meeting our original covenants going forward. Portfolio purchases was moderately at NOK 473 million. The portfolio purchased in Cyprus, as announced in January, was accounted for in May. We expect to close the deal with Waterfall during Q3 and reduce that share to 20%, but in this quarter, it was accounted for 100% and accounted for under the SEE region. The remaining part that we purchased was for the flows in Northern Europe. As we can see also, we purchased 96% of the portfolios were unsecured portfolios. The ERC development has been fairly stable throughout the year. And the variation you see in the graph are mainly due to currency fluctuations. If you read the Q1 '20 figures at June rates, you would have an ERC of NOK 25.8 billion. And if you read the Q4 figures at June rates, you would have an ERC of NOK 26 billion, so fairly stable in the first 2 quarters of the year. We also see that we have still 74% of our ERC falling due within the first 4 years, which we believe is a great advantage in the market conditions that we have today. Going over to the summary. We have high activity levels despite a majority of the organization are still working from -- 50% of the organization is still working from home. Collection and recoveries exceed expectations in the stress test scenarios following the outbreak of COVID-19, and cost reductions are in accordance with plan. To further increase efficiency, we are focusing on IT development, as mentioned earlier. Good support from our banks with waiver giving us additional headroom in covenants until end of Q1 2021, we do not expect to use those -- that waiver, however, because we also see the headroom to original covenants are increasing going into Q3. We still observe low market activity but expect positive market development post COVID-19, with increasing NPL volumes, as previously stated. That was the end of the presentation. And Rasmus Hansson will moderate the Q&A session. Rasmus, please?

Thank you, Erik. So far, a few questions. So unless there are more, we will have a very short Q&A. But the first question is from [ Tore Glenn Hansen ]. He asks if -- he asked the following: when will you pay dividend next time?

Due to COVID-19, the dividend that was announced earlier this year was then reversed later, also due to -- so this year, we will not pay dividend. However, into 2021, if the conditions are such that we can return back to our normal dividend policy, we will do so. And we have said that we are going to pay between 20% to 30% of our net income in dividends.

And then we have a question from [ Nikolay Lemanczyk ]. The question is banks have set significant provisions. However, NPL ratios haven't increased much. What are your expectations when it comes to NPL supply for the rest of 2020 and '21?

We expect the NPL levels to increase going forward, both the UTP unlikely to pay as well as the NPL levels. So we believe that the volumes coming to markets is going to increase at the later stage in 2020. And going into 2021, we believe the volumes will be there. And I think also, we will see increased volumes throughout the whole Europe, not only in selected market, but actually throughout the whole Europe.

Good. Then a question from Joakim Svingen at Arctic. Do you expect fairly flat OpEx in Q3 compared to Q2? That was the first question. So you can start with that, Erik.

The cost structure in B2 has been fairly stable over the past months. So the answer is yes. We do believe that there is not going to be any particular cost deviations from -- in the next quarter.

And then the follow-up question. Will you complete a more thorough portfolio review at year-end?

We've already done -- every month, we go through our secured portfolios. And we also -- because that's a more lumpy sum, so we have to do it monthly. On a quarterly basis, we go through our unsecured portfolios. And we had a thorough review of our unsecured portfolios this quarter, and we also have a thorough review going forward. This is a normal procedure for B2Holding at every quarter looking at our portfolio curves. So no particular review at year-end. It's a normal quarterly review that we do.

Then we have some questions from Robin Rane at Kepler. With your NOK 155 million credit loss, do you make allowance for both lower recovery values and for delayed collections? What is the ratio of impact between the 2? And could you elaborate a bit on how you think about the drivers for lower recovery values going forward?

This is very different. The big difference is between the different markets. There has also been some legal changes in some markets that you have to account for in your curves. So with legal changes, normally there is also some lower legal -- some lower volumes coming out of this. It also could be -- but as I said previously, the majority of the NOK 155 million is lower or a delayed expected recovery or a collection. And there is just some few portfolios that we've also seen that was necessary to also to go into and do a volume adjusted recovery.

Then a follow-up question from Robin. Could you just clarify, please? You say that collection in Q2 was moderately impacted on the unsecured and in line with forecast on the secured and yet, net credit loss is related to delays in collections during Q2. Do you see significant seasonal variability in Q3 this year?

Our -- the NOK 155 million was a consequence of we had a lower collection on unsecured. But also we had a delay in collection in secured. And delaying collection in secured means that we are going to collect at lower -- at the later stage, and therefore, we'll have an impact, a timing impact that is costing us money. That is part of the NOK 155 million. We also extended that into Q3 and Q4 because we saw that, most likely, some of the countries that is being affected by COVID-19 will not be finished with the COVID-19 going into the second half of 2020. So we have to take account for that as well. When it comes to 2021, we still believe that there is a couple of countries that we have been also adjusting curves going into 2021, but that is at a lower level, so we still believe that we will return to normal level in the mid of 2021.

Then we have a question from Magnus Rasmussen at Swedbank. Have you seen any increase in IRRs on new purchases, so far, due to COVID-19?

This is normal. When you go into an uncertainty, the risk level increases. And with the risk level and uncertainty how to calculate the portfolios, you also see that the portfolio values go down to account for the higher risk level. And we have to do that. So if collection then performs as previously stated, of course, then you would have a higher IRR. We also will have a higher risk level and therefore also have somewhat higher IRR accounted for when doing portfolio purchases, and we have seen that be the case.

Good. Then we have 3 questions from Jonas Lien at ABG. We will start with the first. Could you elaborate on the tax rate in Q2, which was quite high?

Yes, the tax rate is high. We have some countries that own portfolios directly, which are performing very well. And those countries will also have a tax rate. And we have tax benefits, others, that will be accounted as against the portfolio. So in those countries that are performing well, still is going to have a fairly high tax rate. And that is why the actually tax level is a little bit higher in the second quarter. We do, however, as previously stated, expect the tax rates to go down year-on-year.

And then second question, which I think you have covered, but we can say it again. How does collection look like so far in Q3?

As I said in the presentation, July was better than anticipated. And we also see the collection and recoveries going forward in August being also at a higher level than anticipated. So -- and this continues a little bit from what we saw in June. However, I think it's worth mentioning that some of the programs that the government has put into place are ending throughout the autumn. And we do not really see yet how that's going to affect our collections going forward. So some caution there is necessary to take into account.

And then the third question from Jonas. Are you confident that the impairments made so far during 2020 will be enough to ensure sufficient performance?

When we do the analysis of our impairments, we always do the analysis with the basis of going forward. We believe the curves that we have now is the correct curves. As I said, there is -- it is difficult still with the COVID-19 and second wave coming if that is going to impact, if you're going to see some closure, if you're going to see something happening in the different countries. It's too early still to say how that's going to impact our recoveries. But as of today, we believe that the numbers that we have put forward is in line with our expectations.

Good. And we have one final question, so far. And I think this question deserves a short answer, Erik. This is [ Arne Reinemo ]. May -- please give an update on the status of the Croatian hotel process with reference to the 2 second quarter presentation last year. Is the hotel sold? Any new impairments, I guess, that relates to the hotel?

We don't go into specific cases. We still have a process, as previously stated, with the claim in question. And the process is going as anticipated. We -- so I don't see any necessary to comment on one single case. We have ERC of NOK 25 billion, and this is a very small part of that ERC.

Very good. I think we are then concluded with the questions. Should there be follow-up questions, you can then send questions or call me. My contact details are on our web page. So with that, I'll leave the word to you to just round off the presentation.

Well -- thank you very much, everybody. Hopefully, next time, we can meet in person and not only on the web. So thank you very much and hope to see you all soon. Thank you.