B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, and welcome to the Q3 presentation for B2Holding. It's been a good quarter for B2Holding, and we are satisfied with the development since Q2. I would like to thank our employees for the impressive effort shown during the quarter. We had a positive quarter with operations close to normal. When I say normal, we still had strict measures in place, with our employees working in shifts in the office and from home. The focus and response from our employees has been impressive. And the organization is well prepared for the second wave, which is now developing across Europe. I'm also pleased to see that we reached our cost-saving targets of NOK 320 million per month in the quarter. Collection and recoveries exceeded our expectation, especially the secured recoveries were good in the quarter, and we've managed to solve some larger cases. Investments in Q2 were kept low, as previously indicated it would be in this Q2 presentation. The third quarter is usually quiet. And in this quarter, the activity has been lower than normal. All portfolios acquired were forward flows with the majority in Northern Europe. We have a very good relationship with our banks, and I'm pleased to announce that we have signed an 18-month bridge facility agreement with EUR 100 million with DNB and Nordea. We also extended our RCF with 1 year until May 2023. This gives us added financial flexibility going forward. Finally, we announced a reverse Dutch auction this morning, where we can repurchase our second bond of up to EUR 50 million. Now over to the key figures for the quarter. Gross collections were more than NOK 1.6 billion. You may already have noticed that we are using new definition where the word cash has been removed. The reason is that these figures include repossessed assets, and the cash definition has caused some confusion previously. This also means that we have excluded the repossessed asset from cash EBITDA of NOK 932 million. Historically, the difference between the new and old cash EBITDA definition has been small. According to our previous definition, cash EBITDA amounts to almost NOK 1.3 billion for the quarter. Our leverage ratio is 3.23, which is about 30 basis point higher than previous definition. Total revenue amounted to NOK 845 million, and especially Poland, France and Northern Europe performed well during the quarter. Net profit of NOK 128 million corresponding to an earnings per share of NOK 0.31. Net profit includes noncash write-down of portfolios of NOK 14 million. Portfolio purchases, as mentioned, were kept low at NOK 264 million. Moving to the business update, we had a quarter where operation has performed well. And the bailiffs and courts were open in most of the countries. In our main markets, Poland and Northern Europe, we have seen strong collections during the quarter. Even though we are satisfied with the quarter, we need to be cautious going forward as the second wave is building up. What is the difference from March is that organization is well prepared, both in terms of working remotely, but also in terms of safeguarding our employees. Looking forward, we see upside potential, but also some risk that may affect our recoveries and collection. Some of the government support schemes for unemployment are expected to end, while others may be prolonged in this -- in the wake of the second wave. We also know that the employment levels and disposable income is expected to decrease over the next year, and the backlog of cases in court may cause delays. Still, we see upside potential in the NPL market and expect that volumes will increase in the back of the pandemic. And that, combined with more disciplined buyers, will lower prices. All portfolio purchased in the quarter were forward-flow agreements. And the volumes were slightly reduced compared to committed volumes as of Q2. Portfolio purchases are expected to increase somewhat in Q4 with committed volumes, primarily in Northern Europe and Poland. While we are waiting for the market to pick up, we focus further -- focus on further strengthening our internal operations and structures. On the operational side, we are moving forward with Program Foresight, which is aimed at transforming our business processes using leading AI technology. We are continuing to align and standardize IT systems across the group, while also continuing the cost-saving program. We have further developed our internal control and risk management functions over time, and we are continuing to focus on training and awareness. Finally, we experienced that ESG is a matter of increasing interest for investors, business partners and internally in our group. We currently have group-wide ESG project ongoing and expect to extend our KPIs for ESG reporting next year. Financial performance. We've reported the profit after tax of NOK 128 million in the quarter, which we are satisfied with. This include noncash write-down of NOK 40 million and an unrealized exchange loss of NOK 8 million. We see increased revenue from third-party collection. We had moderate impairment in Q3, but we do observe some uncertainty going forward in the wake of the second wave, although we are much better prepared this time around. We also see our major markets have shown resilience to the COVID impact on our collections. We are happy to see that we reached our cost-saving targets in Q3 as well, with cost savings of NOK 71 million compared to Q1 adjusted for FX. Cost related to legal collection, which is external cost of services provided, is coming back to normal level, now that courts and bailiffs are opening up again. This was expected and is good news as the countries are returning to normality. We have a balance sheet of NOK 18.1 billion. We have an equity ratio that is up to 26.6%. The FX impact on purchased loan portfolios on the balance sheet is approximately NOK 170 million, increased book value, as a result of the weakened Norwegian kroner mainly against the euro and kuna. Capital structure. On the capital structures, we are pleased to announce that we have received the bridge gap facility with -- from DNB and Nordea of EUR 100 million, giving us additional financial flexibility going forward, as previously mentioned. The RCF is also extended with 1 year until May 2023, giving us a healthy maturity profile. With the profitable quarter behind us and with low portfolio purchases, we have increased our headrooms to our original covenants. We expect to be compliant with original covenants going forward. As we said previously, we had a modest portfolio purchased in third quarter. Q3 is normally a quarter with low activity, and we acquired a portfolio of NOK 264 million. The portfolios acquired were unsecured portfolio -- forward-flow portfolios with around 80% acquired in Poland and Northern Europe. Finland and Sweden are the main countries for portfolio purchases in Northern Europe. The ERC development. The ERC is more or less at the same level, a little bit lower over the past quarters due to the low purchase that we have been having in the past 3 quarters. As you can see, 50% of our ERC are in Poland and Northern Europe. These are markets that have shown resilience during the pandemic. To sum up, we have seen a quarter with solid collection and recoveries and a well-functioning organization, which is well prepared for the second wave currently building up across Europe. The momentum into fourth quarter has been good with collection slightly above the curves. We have also seen good recoveries in secured assets this quarter -- this month in October. We have added flexibility to our capital structure with good support from our banks, and we still see upside potential going forward in the NPL market with increased volumes coming to market and lower prices expected. That was the presentation. And now we move over to Q&A section. So Rasmus, can you please join me?

I'm not sure if we are COVID compliant now. Okay. So far, we have a few questions from Rickard Hellman at Nordea. And this is about repossessed assets. So the question is, are the repossessed assets also included in your assessment of collections versus forecasts? That means are they counted as collected?

When you go -- an asset goes or a claim is going from a claim to REO, repossessed asset, it is usually also accounted as collection. When it comes to what we've seen in third quarter, we had repossessed asset of around NOK 400 million, but also we saw a collection in the quarter of NOK 264 million in cash collection. Now the collection was quite a bit above also the estimated, which means that we actually are able to get the asset over as a repossessed asset in the quarter, which was very positive for the group.

Then a follow-up question. How are they valued in the balance sheet? Or what is the book value of these assets?

The book value of these assets are very valued at low prices. They are valued at liquidation value, which means that normally, the market value is substantially higher than what we have in books.

And of course, then an additional follow-up question is, what is the prospect of actually selling these assets in the near term? And he also makes a comment, isn't it just a way of kicking the can down the road?

No. It's actually the repossessed asset when you go from a claim, you remove the legal aspects of the claim, and you then have the REOs on the balance sheet, which means that you are in position to sell it in the marketplace. Some of these repossessions are also done with -- agreement with the debtor that they have a possibility for time after repossessing to buy back the asset. So there is an agreement with some of these assets that's been repossessed, but it makes the time to value faster by putting them on the books than having them as a claim and removes then the uncertainty regarding the legal aspect of the claim.

Very good. I think, yes, we have a bit of time for the Q&A. So we will probably give Richard a few more questions. He's quite active today. Have you any assessment of how much the lower legal collection has affected the collection costs?

Well, in -- the collection cost, in the second quarter, we have NOK 22 million lower legal costs than we had in the first quarter. In the third quarter, we had NOK 5 million lower legal costs than we had in the first quarter. So the third quarter, we're more or less back on a normal kind of status when it comes to the legal cost. And going forward, we do expect that the legal cost will come back to normal level or at least we hope that because that would also then see that the legal collection will increase going forward.

And then 1 final question from Rickard before we move on to the next. What is your customers or vendors saying about you being less active in the market? Is it a problem or are they fine with that?

They are fine with that. Everybody realized that this is, let's say, an unusual situation that we are going through with the pandemic. And it's a little bit uncertain to see the clear pictures on the cash flows, and they realized that as well. And so we've been having good discussions with our -- and we also see that our competitors have moved in the same direction as us. So it's -- the market conditions are well known to everybody.

Good. And then over to Håkon Astrup at DNB. This also relates to the repossessed assets. His question is you have NOK 907 million in repossessed assets as of end of Q3, when do you expect to sell these assets and see cash flow? You've partly answered that, but…

Yes. No. As I said, we have some agreements with some of them. Most of them, we can -- we sell as we go along. But there also we do expect to see some buildup of REOs over the next couple of quarters. And then going forward, we also expect the REOs to be sold and the volume go down on the balance sheet. But it should be mentioned that putting the REOs on the balance sheet is a strategic and that we actually are -- that we have announced previously that we would be doing. And it's part of realizing higher value on our assets on the balance sheet. So this is according to our, let's say, strategy.

And his follow-up question is also about the valuation of the repossessed assets. I think you have answered that. Then the third question, looking at your ERC profile, the expected collection in year 3 is reduced by almost NOK 700 million to NOK 3.3 billion. What are the key drivers behind this reduction?

I don't have the idea completely in my mind, but some of the claims that we have will -- we have looking at secured claims and sometimes we move them a little bit forward and a little bit back depending on the legal process. We had a big collection this quarter as it was becoming a repossessed asset, and this was intended to be collected further out and is now a REO on the book. So we've removed the legal process, and therefore, it's then removed out from the curve further out. So that's very good.

Hopefully, that's the explanation.

Yes.

But we can get back to Håkon on that question. Then we move on to Joakim Svingen at Arctic. His first question, given your strong liquidity position, why do you see the need for a bridge loan of EUR 100 million?

EUR 100 million, it will be used to repay the bond #2. And instead of then using all our liquidity going forward getting from collections and so on, we are going to keep up the debt level more or less at the same level, and the bridge loan will actually facilitate that and also will give us more time to come back to either the bond market or looking at other financial possibilities going forward as the bond market has moved quite a bit up at this point in time at least.

Could we expect continued strong secured collections in Q4?

As I said, at least what we've seen in October was that the cash collection on secured collection in October was good. And we do see possibility still to do good collection on the claims that we have on our books. I think it will vary a little bit. It's bumpy when it comes to secured collections and whether it's going to be in December or January, will always be difficult to be certain upon. But so far, it looks pretty good.

And then over to Johan Ström at Carnegie. What do you expect to invest in 2021? Will it be higher than 2020? Alternatively, do you expect the ERC to increase in 2021?