B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, and welcome to Q4 presentation for B2Holding. I am Erik Johnsen, CEO of B2Holding. And with me today, I have André Adolfsen, the CFO of B2Holding. The extraordinary year of 2020 ended on a positive note for B2holding. And I'm looking forward to sharing our comments to our result and our view on the positive market outlook. Looking at the highlights for the quarter. We had a steady operation in our key markets. While most of our countries experienced a second pandemic wave in the quarter, the focus and response for our employees remained impressive. We were able to maintain close to normal operation while securing the health and safety of our employees. Collection and recoveries were above our expectation, resulting in a positive cash generation of the portfolio investments and interest coverage. We are pleased to see that the reorganization of the secured business and the recovery strategies is starting to yield results. The focus on cost control and cost savings continued through the quarter and were in line with our targets. Investment activity in fourth quarter was higher than Q3 as indicated that it would be at the Q3 presentation, but relatively low compared to previous years. All portfolios acquired were unsecured with the majority in Poland and Northern Europe. There is still a low activity in most markets compared to previous years, but the pipeline is building up in our markets, and our markets outlook remains what we see as very positive. During the quarter, we did a full repayment of Bond #1 and continued to buy back Bond #2 and extended the RCF with 1 year. At the end of the year, we are pleased to present a strengthened balance sheet with equity ratio close to 28%. Book equity per share equals NOK 11.5. Lower net interest-bearing debt results in a reduced leverage ratio. This gives us additional financial flexibility, and with higher liquidity reserves and future good cash flow, we can take part in the expected positive market going forward. Moving over to the key figures. Gross collection were NOK 1.3 billion for the quarter and up NOK 5.7 billion for the year. The cash EBITDA was NOK 905 million for the quarter, and NOK 3.65 billion for the year. Our leverage ratio was down to 3% and is trending downward with lower interest-bearing debt. Total revenues amounted to NOK 847 million for the quarter, and especially Poland and Northern Europe performed well during the quarter. Net profit of NOK 123 million, corresponding to earnings per share of NOK 0.3 for the quarter. And then we had NOK 309 million for the year and earnings per share of NOK 0.75 for the year. Portfolio purchases were higher in Q3, but kept relatively modest at NOK 437 million, but with a better IRR than previously. André will share more details about the financial results with you later. Now moving over to the business update. We had a quarter where operation performed well and the bailiff and courts were functioning in most countries. Our organization was prepared for the second pandemic wave and flexible work arrangements have limited the impact on our operation capacity. Of the countries where we operate, Italy and Spain has been most impacted by the second wave. In most of the market -- in our main markets, Poland and Northern Europe, we continued to see strong collections. The recent months, we have seen that the pandemic environment can change quickly, and we remain cautious going forward. However, we believe that the potential future impact is limited in the short term as the organization has proved its resilience with good routines in place, both in securing stable operation and safeguarding our employees. Today, I would like to highlight the development in our secured division throughout 2020. The previous years B2Holding has faced challenges in perceived riskier markets with high concentration in corporate and secured assets. The new management structure was in place at the end of 2019, and in 2020, the secured asset management team has introduced a new approach of managing secured asset and REOs. Through a deep dive assessment, the team has revised the strategy for about 60% of the remaining secured ERC, and new portfolio strategies has been implemented. During 2020, we have gained better insight into our secured assets, improved our recoveries with potential of adding additional value in the secured portfolios. This transformation has already proved successful in several cases, and we are confident that new resolution strategies will deliver additional value. Now looking specifically at REO asset under management, we saw an increased pace in the fourth quarter. REO asset under management has grown significantly over -- in 2020, mainly driven by the repossession of key assets, which is fundamental part of the loan recovery strategy in secured portfolios to shorten time to cash and extract additional value. If we look at this real-life REO case of 57 villas, we can see how we use understanding of the online value of the case to design a proper strategy. After taking control of the asset with recorded book value of EUR 1.7 million and the design and preparation of the completion, project began. In our current stage, we have started completion of the villas and presold 4 villas at 3x book value. Expected sale proceeds will exceed EUR 5.5 million, resulting in a significant additional value extracted from the REO strategy. This is one of the cases that we have on our table. Now core priorities going forward. While we are waiting for the market pickup, we continue to strengthen our internal operations and structures. On the operating side, we focused on economies of scales in key markets to improve margins for further investments -- or for future investments. We prioritized digital transformation and building B2 data and advanced analytics capabilities over time. In terms of investment, we are preparing for improved market conditions and expect lower investment required relative to what we amortize to maintain earnings going forward. We will maintain price discipline and continue to shift towards stable cash-generating portfolios in core markets. Finally, we are strengthening our risk functions with a degree -- with a higher degree of centralization in investments. This, combined with improved data quality and insight, will result in a more efficient capital allocation going forward. And with that, I will hand over to you, André -- to André to go through the financials. André, please.

Thank you, Erik. It is great to be on board. And I'm happy to see that Q4 was a very solid end for the company to a challenging year. Looking a bit into the details of the fourth quarter. The collection performance continued to prove resilient and stable for both business lines with unsecured collections at 101% of the latest forecast. In terms of the secured collections, we also ended up above our latest forecast despite some claims being moved out in time to Q1. If we include those claims into the Q4 collections, we would have been closer to the Q3 secured collections, including the repossessions. Important to note that the over-performance or the earlier collections unsecured in the quarter resulted in some curve revisions related to timing effects. The majority of these revaluations in the quarter unsecured is related again to the over-performance, which is more comparable to increased amortization. And to a smaller extent, we had effects of delayed collections, as previously mentioned. On the cost side, we maintained continued cost control, as Erik touched upon earlier, with only some sequential increase driven by higher activity across the group. This resulted in an EBIT growth of 22% in the quarter. And I want to note also that the EBIT was impacted by the exits we have previously communicated in Portugal of NOK 6 million in the quarter. Both the EBIT and EPS showed notable improvements compared to last year, and that's despite a significant decrease in the investment pace throughout the year. This was achievable due to a continued focus on the efficiency and extracting value of the back book, strict price discipline, and as mentioned, cost control. All of these effects made -- efforts made during the year resulted in a continued strong cash generation for the company. Despite increasing the investment levels sequentially in Q4, we managed to reduce the leverage, and at the same time, also reduce the interest expenses going forward through the buyback of bonds, which I will touch more upon later in the presentation. Moving to Page 11. We elaborate a bit more on the cash generation throughout 2020. On the left side, we demonstrate the development of cash EBITDA to cash earnings, adjusted for investments and any financial obligations. In the quarter, the cash surplus -- or cash earnings before any repayment of debt ended at NOK 204 million. I just want to highlight that, that number is not adjusted for any nonrecurring items or one-off costs. Looking at the top right, you can see that the cash earnings and the potential investment level over the last quarters has been quite stable with the opportunity to invest more into new portfolios, if needed. Given the market conditions we see today, we have remained moderate in our investment level and maintained price discipline and consequently utilized the cash earnings to reduce leverage, which you can see on the bottom right. Leverage was reduced from 3.23 in the third quarter to 3.04 in the fourth quarter. Comparing to last year and the old definition, excluding -- sorry, including repossessions, leverage was down from 2.9 to 2.7. Moving then to Page 12. We elaborate a bit more on the effects of the cost initiatives taken during 2020. Let me just first say that I've been with the company now for only 3 months, and I am very impressed with the efforts made out in the countries. They have been able to reduce costs, maintain resilient collections, while at the same time, moving to remote working from home. So a big thanks for all the efforts to the -- all the employees watching out there today. The total group delivered an FX-adjusted cost reductions compared to Q1 in the quarter of NOK 47 million, excluding impairments, depreciation and amortization. For the 3 quarters, Q2 to Q4, the same savings ended at approximately NOK 200 million. Comparing the Q4 to last year, also adjusting for FX and nonrecurring items, the savings was NOK 50 million and approximately 12% cost reduction year-over-year. The group will, of course, continue to focus on cost and efficiency going forward. And we will use a lot of what we have learned during 2020 in order to continue to hold the underlying cost level at a low level and also continue to improve the scalability of our platform. Moving then to Page 13 and an update on the portfolio investments. As mentioned by Erik earlier, we increased the investment level in Q4 compared to Q3. But we continued to stay price disciplined, and I want to highlight that. The increase in Q4 compared to Q3 was mainly driven by investments related to one-off portfolios at favorable terms compared to pre-COVID levels. And to a large degree, they were made in bilateral processes. Almost 90% of investments made in the quarter were done in Northern Europe and Poland and 1/3 of the investments were related to forward flows in Nordics. The ERC from unsecured in the Nordics and Poland consequently now make up a bigger proportion of the total ERC, which is in line with our communicated strategic direction. Going forward, we anticipate a significant amount of volume coming out to market end of 2021 second half and going into 2022. We will, of course, in the coming quarters, continue to stay price disciplined and be moderate in our investment approach, but we will also continue to shift focus towards more stable cash-generating portfolios in our core markets, and potentially seek partnerships unsecured through joint ventures. Moving then to Page 14, capital structure and funding. During the fourth quarter, we both refinanced the bond -- Bond 1 and also made buybacks on Bond #2. We extended the maturity on the RCF and we now have full flexibility to pay down Bond #2, following the EUR 100 million bridge facility communicated in Q3. The result is an improved maturity profile, increased flexibility, but also lower interest margin for the coming year. The costs related to the bond buybacks made in Q4 and was NOK 13 million. And the result is an interest margin of around 5.5% going forward. The net expected savings from the buybacks is a NOK 10 million. Net interest-bearing debt at the end of Q4 was NOK 11.1 billion, down from NOK 11.9 billion in Q3. The reduction can be explained by the NOK 204 million cash earnings explained earlier and the remaining effect is related to FX. At the end, I just want to highlight that the headroom to covenants now has increased in Q4 and that we expect this to continue in the coming quarters as we expect a moderate investment level in the next quarter or 2. On a final positive note on that, this morning, S&P decided to change the outlook for the company from negative to stable. So that proves that we have been able to deliver on our promise with stable resilient collections, good cost control and increasing the headroom to covenants over time. With that, Erik, I leave the word to you again. Yes.

Thank you, André. To summarize, we feel that the fourth quarter was stable with collections and recoveries above expectations. We have a well-functioning organization that has ensured stable operations during the second wave. Cash earnings enables further reduced leverage and secures additional investment capacity. We still see a positive market outlook with expected increased NPL volumes and also good prices going forward. At the end, I just want to comment also that we have mapped important ESG criteria for B2, and we'll work with the plan and KPIs to the market during 2021. And with that, we are then finished with the presentation, and we are ready for taking questions. So Rasmus, you will help us with this.

I will, thank you, Erik and André. I will moderate the Q&A. We have quite a few questions already, probably some more coming in, but we will start with quite a few who are asking for will we pay a dividend for 2020. So let's start with that.

The Board has not come out with any recommendation now, but given that we have still a pandemic existing and also in the markets, I suspect that the Board will most likely not give a dividend this year so -- and rather retain the cash flow, the cash in the company to secure a better balance sheet and also taking care -- or taking advantage of the future market conditions.

Thank you. Then we have a question from [ Frank Lehman ]. He's thanking for good results. And the question -- first question is, will you retract from certain countries?

We have already retracted from Portugal. We have also downscaled the operations in 3 countries and have outsourced some of the collection on the portfolios in these 3 countries. So -- but we will, once when we do something like that, we will revert to the market with that information. But as I said, we have done -- scaled the operation in 3 markets also in addition to Portugal.

Then a second question on forward flows, what's the contractual obligations we have in 2021?

You can see that from -- in the investment slide, and the overall level has come down from what we saw in 2020, which we are happy about. We've been able to renegotiate many of the existing for flows. And the committed level now going into a bit more uncertain times in 2021 is lower than we have in 2020. So we are happy about the current level we have.

Then we have a question from Rickard Hellman, Credit Research at Nordea. The question is, given the communication in Q3, he had expected a higher amount of repossessed assets. Is the low number in Q4 a sign of better collection than expected, a changed strategy on assets or just timing?

We still continue to do repossessed asset and we still believe that is going to be increasing somewhat going into 2021 as part of the strategy. But we've also seen that we have been having -- some collections has been going from what anticipated repossession to actually solving it with the cash. So our strategy pays off, but repossession will still be coming in -- quarters coming -- going forward.

Then an additional question from Rickard, I will give this to you, André. Can you give an assessment of your replacement CapEx needs to keep ERC stable, also including the more favorable pricing in the market?

Yes. So I guess what's the rule of thumb is to say that the amortization is the expected level of replenishment CapEx. What we expect going forward is the price level to change a bit and we've seen that through the one-off portfolios we've acquired so far, meaning that the replacement CapEx will, given the more favorable terms, be lower than the amortization level on average. That said, we expect to collect a lot of the claims on both secured NPLs and REOs going forward and the amortization rate there is higher. But we can reinvest that cash into more stable cash-generating portfolios, as mentioned in particular, in secured in our core markets.

Then we have a couple of questions from Johan Ström, Equity Research at Carnegie. What is your expectations for 2021 portfolio investments? More than NOK 2 billion?

I think it's too early to say something specific about 2021. As mentioned, we expect more volumes to come to market, but probably more closer to the second half of the year. So we will still maintain a moderate, cautious approach in the short term. But when the market hopefully sets in terms of price levels post pandemic, we obviously expect to invest closer to amortization and maintain earnings going forward.

Then an additional question from Johan. Also, do you think net debt-to-EBITDA will go below 2.5x before year-end '21?

Yes. Guiding on that is too early. It all depends on the market development. As you can see from the cash earnings slide, we can -- with the cash earnings we have today and the lower cost level, we can reduce leverage further, but we can also invest more. So we have to balance that with the market outlook we see going forward.

Then we have a couple of questions from Joakim Svingen, Equity Research at Arctic. The first one is on CapEx, I guess we have already answered that, but let's see if we want to elaborate a bit more. What do you expect to invest in the first half of 2021 in addition to forward flow contracts?

I guess that answer is more or less the same as the previous one. We don't guide specifically on the CapEx level. That said, we hope, over time, to be -- to increase investment level compared to what we saw in 2020. So you have to look at the year in total, and I fully understand you would like short term guidance, but we have to balance the investment level with maintaining a strong balance sheet and that we will continue to do.

Then we have a couple of questions from Robin Rane at Kepler. The first one is dividend, that has already been addressed. The second question is, have you had any help in the quarter from catch-up effects from previously delayed collections that maybe not will be sustained into the coming quarters?

I think that's -- that question is -- the answer is more or less no, but that's difficult to answer because the secured collections are very binary compared to unsecured and you can see that from the results in Q4. We had good collections, but still we had some delayed collections and we had some earlier collections. And the effect of that, as I touched upon, is a revaluation, which I again want to note that is an increased amortization of earlier collections. But this will always fluctuate. And it's difficult to determine the exact month or quarter where the larger corporate claims will be resolved.

I can just add then, we've seen that a couple of the court systems, bailiff's offices have been opened up in a couple of countries giving a positive effect. On the other side, we are also seeing that some of the court system, the bailiff's office closed down in other markets. So this is where -- it's differences between the different markets that we operate in. But on a whole, I would say that we see that collection has been somewhat hurt by the pandemic. But overall, we have performed very well on our collections in the quarter.