B2 Impact ASA (B2I) Earnings Call Transcript & Summary

[Audio Gap] to Q2 presentation for B2Holding. I'm Erik Johnsen, and with me today, I have André Adolfsen, CFO of B2Holding. Second quarter was another good quarter for B2Holding, where the markets and operation show improvement. We go straight to the highlights for Q1. Unsecured collections were above forecast, and we continue to have solid recoveries, both in forms of cash and successful repossession in the secured markets. It should be also noted that REO sales increased substantially and the REO sold were done at the markup of 28% over book value. On the operational side, we see the cost levels remain stable. Going forward, we expect to see sustained lower cost levels. André will get back to this also later in the presentation. The digital transformation as well as advanced analytics is key for the group. With this in mind, we have hired a new Chief Data Analytics Officer reporting directly to me to accelerate the digital transformation. On the investment side, we continue to focus on disciplined and selective investment. Pipeline is picking up, and we have already so far in Q3 been buying more than we did in Q2. Even though the purchase had been on low side over the past last 12 months, we still see that the earnings before interest and tax are increasing. We have reduced our net interest-bearing debt substantially close to NOK 2.5 billion, and our cost of capital is coming down. We have a very good liquidity situation and a solid base to further support our further growth. Let's go over to the key figures for the quarter. Gross collections were nearly -- was NOK 1.4 billion. Despite lower purchases over the last 12 months, the gross collection is up 7% year-to-date. Cash EBITDA is close to NOK 1 billion, NOK 977 million. The cash -- our leverage ratio was 2.52 and trending downwards. Net profit of NOK 162 million corresponding to earnings per share of NOK 0.39 per share. Book value equity per share -- book equity per share is close to NOK 12. André will show more details about the financial results with you later. Moving over to the business update. We saw higher activity levels in Q2 compared to Q1. Some portfolios won in Q2 are booked in Q3 due to delayed closing. As I said previously, we have already closed more portfolios in Q3 than we did in Q2. Pipeline activity is picking up, especially in those countries lesser impacted by COVID. Countries largely impacted -- larger impacted by COVID and where we see the government schemes and loan moratorium are initiated, we see delayed NPL recognition and substantially lower pipeline at this point of time. However, increased loan loss provisioning in European banks and increased Stage 2 loans, a leading indicator for NPL, are both increasing. We still believe activity will pick up in the second half of '19 -- of 2021 and into 2022. It should also be noted, in addition, caps on interest rates we introduced in several of the markets have resulted in lower consumer lending and lower NPL volumes. We still believe these limits are expected to be lifted later in 2021. Then we go over what we see improved operation and scalability. Throughout the pandemic, B2 has been working to improving the operations. This has resulted in sustainable cost savings. We have been able to collect more at lower cost by optimizing collection strategies and processes. We have developed hybrid working models, allowing for reduction of office spaces, lower fixed operating costs. Digitalization and optimization of processes will continue. Some of these processes increased the communication with debtors while debtor experience dealing with B2. On the analytics side, we have used -- made use of analytical tools and increased use of machine learning in the operations. We have experienced positive effect on operations. We have [ on certain ] campaigns resulted in improvement on an amicable solution of about 10%. In B2, we believe that the key -- this is a key business project, enabled by technology and data analytics and will be a focus area for B2 going forward. Going over to core priorities going forward. On operations side, we focus to keep the low cost base. Furthermore, achieving scalability by utilizing, among other things, technology and data analytics, as previously mentioned, is key going forward. On the investment side, we have a strong balance sheet and a good liquidity to capture what we believe is going to be a favorable market going forward. We continue to focus on operation -- on investment that will give us economies of scale. On investment partnership, we see a positive development in servicing revenue, but also we see we have a large potential to do more. Therefore, we will focus on increasing investment partnership to be able to achieve this. And with that, I'll hand it over to you, André, and you take the financials.

Thanks, Erik. Thank you. So as Erik mentioned, we are obviously very happy with the development we've seen in the quarter, continuing the positive trend that we have seen over the last 12 months. Our balance sheet is very solid. Cash metrics remain very strong, and we're clearly seeing a pickup in activity and pipeline across our markets. So diving into some of the details of the quarter. Collection-wise, we ended up at approximately NOK 1.4 billion in the quarter, which is up 10% in the quarter and 7% year-to-date. In the quarter, the collections are up 19% in constant currency. In terms of business mix, we're continuing to see a positive trajectory in unsecured collections coming in at 102.5% of the latest forecast and at 102% of the forecast over the last 12 months. In terms of secured collections, secured collections or recoveries came in at NOK 333 million in the quarter, of which NOK 137 million were repossessions. This is compared to NOK 279 million last year. We also sold REOs of NOK 72 million in the quarter, and these were sold at a premium to book value of 28%. Cash EBITDA is up 10% year-to-date, and we've been able to maintain the cash margin in the quarter that we had in the first quarter and were up 4 percentage points year-over-year for the first 6 months. In the quarter, we have introduced adjusted EBITDA as a new KPI in order to better demonstrate the underlying development in the business. The KPI is adjusted for any items that may affect comparability year-over-year, which are viewed as nonrecurring. Adjusted EBITDA was up 31% in the quarter and 27% year-to-date, obviously driven by the strong collection performance but also the sustained lower cost base and the improved scalability we have seen in many of our markets. In terms of adjustments, those are related to a VAT refund of NOK 30 million in Poland as well as costs in connection with organizational changes. The net positive effect was NOK 20 million in the quarter. We have continued to stay selective and price disciplined in terms of investments, with investments in the quarter coming in at NOK 220 million. Now as mentioned by Erik earlier, we have seen a pickup in activity and a couple of the transactions in the quarter were delayed to early July. Including those transactions, we would have been closer to NOK 300 million for the quarter. Cash generation remains strong, and we have been able to reduce leverage to 2.52 in the quarter and consequently also taken down the cost of debt, translating into the EPS growth that we see year-over-year. So moving to the next slide, we elaborate a bit more on the collection performance. As mentioned, we're seeing a positive trend and trajectory on the unsecured collections, 102.5% in the quarter and 102% over the last 12 months. And we're happy to see that the positive trend has also continued into the third quarter. On the secured side, we continue to see stable collections. We've seen both a stable and positive trajectory on the cash collections. Total cash recoveries on secured, including the REOs, amounted to NOK 268 million in the quarter. The REOs, again, sold at -- of NOK 72 million in the quarter compared to a book value of NOK 56 million, translating into a margin of 28% in the quarter and 15% over the last 12 months, which is in line with the guidance that we've given of 15% to 20% over time in terms of margin. Looking into the second half of the year, we continue to see positive development in REOs, and we expect the average quarterly volume to be in line or above what we have seen in the second quarter. On the next slide, we -- if you look on the left-hand slide, we demonstrate the development of cash EBITDA to cash earnings, adjusted for the investments in the quarter and also any financial obligations. Cash earnings came in at NOK 516 million before repayment of debt. And on the top right, you can see the positive trajectory we've had in cash earnings and additional investment capacity. Given the market situation we have seen, we have utilized the cash earnings to take down leverage, and leverage in the quarter came down to 2.52 from 2.62 in the first quarter and 3.22 in the second quarter of last year. Moving to Slide 12. On the right here, we demonstrate the development we've seen in gross collections as well as operating expenses on a 12-month rolling basis. And we are very pleased to see that we've been able to take down costs and maintain costs at a low level despite a much higher collection activity over the last 12 months. The cost program we initiated in the beginning of 2020 is now embedded in the organization, and the accumulated savings that we have seen since the first quarter of 2020 now adds up to NOK 316 million. We expect these savings to be very much sustainable and to be able to continue going forward with a lower cost base despite increase in collections. Moving to Slide 13, additional details on the portfolio investments. We did invest NOK 220 million. As Erik already pointed out, we have seen higher activity and we've seen a volume already in Q3 surpassing the volume we saw in the second quarter. In terms of ERC distribution, we continue to see that unsecured make up a larger part of the ERC. However, if we include the book value of the REOs, the split is actually 25% secured and 75% unsecured. On the left-hand side in the graph, we -- you clearly see that ERC is declining year-over-year. But we're very happy that we've been able to maintain and actually grow collections despite a declining ERC. This has been made possible due to the improvements that we've seen across all the asset classes in terms of collection but also accretive new acquisitions over the last 12 months. We see the same picture when it comes to earnings. Earnings is significantly up year-over-year despite the declining ERC, and this is a trend that we continue and expect to see also in the second half of '21, where we expect to be able -- or have to invest a replenishment CapEx of approximately NOK 1 billion to be able to maintain earnings, not ERC. And given the market that we have seen so far in the second and third quarter, we clearly expect to invest more than that. Moving to the next slide. We're obviously very satisfied with development and the strengthening we've seen in our balance sheet. Net interest-bearing debt has come down by NOK 2.5 billion year-over-year, NOK 1.8 billion adjusted for FX. The interest expenses are also down by NOK 44 million year-over-year, obviously driven by the repayment of debt and the lower leverage but also the buyback of bonds that we have made over the last 12 months. At the end of the quarter, the liquidity reserve stands at just over NOK 400 million. And we currently have a very solid position in order to take advantage of the favorable market conditions we expect going forward. So with that, Erik, I'll leave the word back to you.

Okay. Thank you. Thank you, André. Then we go to the summary and the key takeaways. As we said, we continue to have strong collection performance in all asset classes, and that is including REOs. We still believe that REOs are going to perform strongly in the second half. We see improved collection efficiency, coupled with increased scalability in several of our markets. And we see solid cash flow, reduced leverage and lower cost of capital now going forward also. So promising pipeline for REO sales, increased volumes is expected, as André was saying. We have a higher visibility of the NPL pipeline with increased activity observed in several of our markets. All of these things put B2 well positioned to take advantage of the growing NPL markets and also continue a strong performance going forward. On that, I see our presentation is finished, and we go over now to Q&A. So please post the questions, and we will try to answer them as we go along. Rasmus?

Thank you both. Just to those posting questions, there's a slight delay before we receive them. So we would encourage you to post them as quickly as possible. We have a first question from -- I assume it's a shareholder, [ Lars Hatletveit ]. The question is, I hope you dropped dividends to invest in portfolios. Is this the strategy going forward for next year?

The Board of Directors has the option to give dividends at this point in time. And I -- there has not been so far decided whether we are going to drop the dividends going forward. That is -- it's going to be decided at a later stage. I do expect that we have a dividend policy of 30% of our earnings going to be given as dividend. And so far, that has not been altered. So on back of that, we need to alter that first. So we'll see.

So maybe adding to that, going into next year when we see, hopefully, the market stabilizes, we expect to, yes, invest in portfolios but be able to pay out dividends at the same time.

Yes.

Then we have a question from Håkon Astrup at DNB. B2 continues to add more REOs on the balance sheet than you are able to sell. Do you expect this trend to continue?

I guess we said last quarter, we expect a net decrease, but these are large assets, and we, all the time, have to find the right solution for each asset. This quarter, the best solution for us was to repossess more than we were able to sell. And we have clearly said that we expect a pickup in the pace of sale of REOs, and we will see that also in the second half of this year. We expect similar volumes as we've seen in the second quarter, on average, for the last 2 quarters.

Then we have 3 questions from Joakim Svingen at Arctic. First question, I guess this goes to you, André. Do you expect cost to collect to stay around 20% the coming quarters?

I guess that question is something -- Joakim, you know that it all depends on the secured collections. So over time, obviously, cost to collect will come down when we collect larger secured assets. But over time, it should stay around 20% on average is what we expect. Obviously, we do expect when volume pick up that we will be able to grow on a lower cost base. But short term, around 20% is a fair level to put into your model.

Then the second question, how long lead time is there on unsecured portfolios now from investment until you start receiving cash? Bit tricky to answer, I guess, but you can give it a shot.

I mean that obviously depends on the portfolio. If we already service it, it's instant. Some portfolios have onboarding of 3, 6 months. We have 2 weeks. So that's a very difficult question to answer, but the lead time on unsecured is not very long.

Finally from Joakim. Dividends, consensus expectations appear to be above your guidance. When will you review financial targets?

The financial targets, we will find it natural also later this year to review them and come back to the market where we see the development of the company as well as development of the market. And at that point in time, we'll also do an update to the market.