B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, and welcome to Q4 presentation for B2Holding. I'm Erik Johnsen, and with me today, I have André Adolfsen, CFO of B2Holding. The fourth quarter rounded off a good year for B2Holding. We have seen solid collection throughout the year and cost savings achieved during the pandemic are sustainable, and I'm very satisfied with the year-end result. Let's move to the highlights for Q4. Our unsecured collection were once again solid in the quarter and security recoveries also performed above our forecast. REOs sales were lower than expected, but this is due to the fact that we pushed some larger REOs sales into 2022 to maximize the value on those REOs sales. On the operational side, we see achieved lower cost levels are sustainable. And we observed positive result of different initiatives related to automization and process optimization. The digital transformation as well as advanced analytics is continuing to be a key focus of the group. Over the last 2 years, the Q4 of 2019 and Q4 of 2021, we see a cost efficiency of 13% between those 2 quarters. And that's not taking -- and that's also absorbing all of the increase in cost during that period. On the investment side, we continue to focus on disciplined and selective investment in Q4. As anticipated and also told on the Q3 presentation, we had higher investment levels in Q4, and we see strong pipeline going into 2022. As previously announced, B2Holding has engaged discussions with reputable institutional investment partners to establish a co-investment partnership predominantly in B2Holding's back book and secured assets. We have advanced well since the last quarter, and we have now completed the first milestone in this partnership. I'm pleased to announce that the key financial year -- in this first step is a company managed and advised by PIMCO. We will revert to this later in the presentation. Furthermore, on the capital side, I'm pleased to announce a proposed dividend of NOK 0.42 per share. Now let's move over to the key figures. Gross collection was nearly NOK 1.27 billion for the quarter, almost at the same level as third quarter. The cash EBITDA was NOK 862 million, adjusted for nonrecurring items. The somewhat lower cash EBITDA is affected by the mentioned REOs sales that was postponed by choice. Our leverage ratio is among the lowest in the industry and gives us flexibility on the financing side. Net profit of NOK 120 million corresponding an earnings per share of NOK 0.3 for the quarter, and book value per share is close to NOK 12.2 per share. The portfolio purchases of NOK 552 million is significant increase from previous quarters and confirms what we said, as I said, from what we said on the third quarter. André will share more details about the financial performance later in the presentation. Now look at the main achievements for 2021. Throughout 2021, the organization has been impacted by COVID as most of the countries have. B2 has taken appropriate steps and measures for working remote hybrid models or has been -- and all of this has been functioning very well for B2Holding. Our commitment to ESG is showing results and third-party confirmation and validation has been received. We see that continued improvements continued in 2021. And we see that the effectiveness in collection in unsecured and recoveries in secured has shown significant improvements. New portfolio strategies in secured recoveries and REOs leave us with confidence of possible upside potential in our secured curves. We have seen the sustained lower cost payable increasing effectiveness in collection. We've been having stable good cash earnings that enable B2 to reduce net interest-bearing debt with NOK 2 billion in the year. The strategy towards increasing investment capacity in our secured market reached its first milestone by signing of the senior finance agreement with PIMCO in February. We will revert to this later. B2Holding has a solid investment capacity. New investment processes in 2021 has improved our underwriting. We see good return on investment made in 2021. A bit on the market update. In summary, we see much improved market for NPLs going into 2022 than a year ago. There are several factors contributing to this. And the key takes away are: one, according to EBA, 75% of the banks in European economic area expect an increase in consumer credit of consumer consumption is expected to increase on the back of the pandemic. 65% expect the quality of consumer credit assets to decrease. Two significant increase in Stage 2 loans through the pandemic indicate formation of new NPLs going forward. And three, we expect the effect of the backstop initiated to -- backstop regulation to be more visible in 2022. All of this indicates that the NPLs are growing in the bank's balance sheet, and we expect a number of portfolios coming to market to increase. Now we have, as we said, concluded the senior financing structure with PIMCO. Over the 2 past years, we have emphasized the strategy to increase the investment capacity in secured market through joint ventures and drive scalability on our secured platforms. Furthermore, the intention is to increase the servicing remedy revenue going forward. Today, I'm pleased to announce that we have signed a NOK 200 million senior financing agreement with PIMCO. This is financing of the back book in secured markets. Nonrecourse to B2Holding. This is derisking the balance sheet and monetizing secured back book at book value today. The new structure will enable us to source new funding and drive scalability on our secured platforms. It will give us an increased investment capacity in secured and unsecured markets. PIMCO will be an attractive partner for future co-investment opportunities. This slide show the structure now and the structure under finalization. Secured portfolios and servicing platforms are carved out from existing structure. To the left in the picture, you have the old structure. In the new structure, you see the core unsecured countries and existing JVs in 1 structure. In countries with secured assets, we have segregated servicing from investment activity. All assets in back book in these countries will be in a part called core asset -- core secured asset. The entities will be 100% owned by B2Holding on a nonrecourse -- as a nonrecourse subsidiary. The entities -- this is where the financing for PIMCO comes, and that will have nonrecourse to B2Holding. André will go through more detail of this afterwards. The servicing entities will be in a box master servicing with local expertise. B2 has established a cross-border master servicing specializing in secured assets. That has proven itself over the past 2 years. The new structure facilitates co-investment mainly in secured NPLs, which is scalable. This will increase servicing volume and capital-light revenue. The new structure and funding of NOK 200 million will give increased investment capacity and flexibility, both within unsecured and secured segments. Now you take over?

Thank you, Erik. Moving to Slide 8, we'll elaborate a bit more on the financial impact and details of the financing structure. As pointed out by Erik, we are carving out the countries where we have predominantly secured assets into a separate vehicle, which is labeled core secured perimeter on the slide. The assets will still be owned 100% by B2Holding, but we'll have attached the senior financing from PIMCO, which is nonrecourse to B2. The senior financing will be approximately NOK 200 million, which is 50% of the NOK 4.8 billion book value adjusted for interim cash flows until closing. The financing carries a fixed interest rate of 5%, with a duration of 5 years with an option to extend 2 more years. Closing and drawdown is expected during the second quarter. The agreement also includes a RCF feature, which allows us to reinvest the cash flows, 65% of the cash -- up to 65% of the cash flows in the core secured perimeter. This amounts up to EUR 130 million of the proceeds to be reinvested over the next 2 years in these markets. In addition, as pointed out by Erik, we intend to also co-invest with PIMCO going forward to drive further scalability on our platforms. So summing up the new structure, we have a loan of NOK 200 million coming into B2 to reinvest in our core unsecured markets. We will reinvest cash flows in the core secured markets and we will do co-investments as well. So we now have an additional investment capacity and flexibility both for our unsecured and our secured markets going forward. Moving to the financial performance of the quarter. Before we go through the financials, I would just like to take the opportunity to thank some of my colleagues out there. It's been a very hectic closing of the quarter in the middle of signing a transaction. Thank you so much for all the support in delivering a report, which is very strong, both from a financial point of view and from an operational point of view. So the collection performance, again, the underlying operational performance is very strong. We have overperformed our expectations in both secured and unsecured. The gross collection is down 4% year-over-year, but if we adjust for FX, the gross collection is up 4% in the quarter and up 2% year-over-year for the full year. With unsecured collections at 2% above expectation and secured collections as much as 22% above expectations. During the quarter, we also sold REOs of NOK 24 million at a premium to the book value of 43% and 38% over the last 12 months. I'll comment more on the REOs later in the presentation. I would like to highlight that both revenues and EBIT in the quarter was impacted by higher amortization rate year-over-year, which is related to higher collections in secured. This will vary between quarters and normalize -- usually normalize during the course of the year, which you can see from the adjusted EBIT, which is in constant FX, down 6% in the quarter, but up 15% for the full year. The adjusted EBIT has been adjusted for a net effect of NOK 30 million related to the announced transaction, which impacts the P&L in the quarter also on the bottom line. In terms of cash EBITDA, cash EBITDA is also down 5%, but in constant currency, it is up 3% in the quarter and up as much as 9% compared to last year for the full year. Investments came in at NOK 552 million for the quarter, which is notably up from previous quarters. We want to stress that we have maintained our price discipline and the increase in volume is related to what we see as a more normalized market in the fourth quarter. In terms of cash earnings, we have seen a very strong period throughout 2021, and we have taken down leverage from 3.0 last year to 2.4 at the end of 2021. Following the strong cash generation, the Board has proposed a dividend of NOK 0.42 per share. Moving to the next slide, a bit more color on the collection performance in the quarter. Again, unsecured collections at 2% above expectations in the quarter and 2.3% over the last 12 months. Adjusted for FX, the total collections in unsecured were flat year-over-year. On the secured side, we delivered recoveries of NOK 342 million, of which NOK 126 million were repossessions, up the previous quarter as we announced back in the third quarter presentation. In terms of REOs, we sold NOK 424 million in the quarter. And as pointed out by Erik, this is slightly lower than expected, but we have probably the strongest quarter we have seen so far in terms of well advanced agreements on some milestone REOs. We've already seen a higher level of sales during the first quarter than in the fourth quarter, and we expect a very strong year for sales in 2022, which I will come back to later in the presentation. On this slide, we elaborate a bit more on the cash earnings for the quarter. As you can see on the left-hand side, we demonstrate the development from cash EBITDA to cash earnings, adjusted for investments, tax and interest expense in the quarter. The total cash earnings ended up at NOK 78 million, which is lower than previous quarters, mainly due to an increase in investments in the quarter. And we have used those -- that NOK 78 million to pay out dividend and do share buybacks of approximately NOK 92 million. And consequently, the leverage quarter-over-quarter is flat. We're very happy to see that we continue to generate enough cash to drive investments of up to NOK 600 million plus per quarter on the operational cash flows. Moving to Slide 13. Again, we are happy to see that the cost savings we have achieved over the last 2 years continued to be sustainable. In the fourth quarter compared to Q4 2019 before the pandemic, the cost reduction is 13% in constant FX. We expect to benefit this going forward in terms of profitability as we expect to ramp up investments going into 2022. On Slide 14, portfolio investments. Again, we increased our investments quarter-over-quarter, up to NOK 552 million in the fourth quarter. We continued to be selective and price disciplined. So the volume increase we're seeing is related to what we see as a more normalized market. The pipeline at the beginning of the year is significantly stronger than what we have seen over the last 2 years, and we expect a very active year in 2022. We continue to see the majority of investments in Poland and in the Northern Europe. But during the quarter, we have invested in all our regions, and we've also made some smaller investments within secured. So we should expect based on the investments to see ERC ticking up, in particular, on the unsecured side going into the first quarter. On Slide 15 and 16, I would like to elaborate a bit more on the revisions made in the fourth quarter, in particular, on secured. In connection with both the operational improvements that we have seen on secured and the new strategies applied and with the announced transaction, we have made a full re-underwriting of all our secured assets. The new curve applied will be cash-based, meaning you will sometimes see repossessions with timing earlier than the timing we have in the curves, which are cash based, and I'll come back to that on the next slide. The change in NPV in the quarter is only related to timing. As you can see on the top right, the ERC of -- for secured has increased by NOK 431 million, meaning we have increased the values, but we've also shifted the assets out in time, which has a timing impact. Looking at the table on the top left, you can also see that we delivered above the curve in the fourth quarter, NOK 62 million, which then has to be taken out of the curve. Consequently, the net timing effect of the changes in secured is minus NOK 104 million. And we've also made adjustments across the group in unsecured as well as JVs. The net effect for the group in the quarter is NOK 7 million. I would like to highlight and stress that we have applied a prudent approach to both values and timing unsecured to reflect the announced transaction with a senior finance year. On Slide 16, you can see on the top left, the changes in timing on secured. The dark blue -- the dark line shows the new curve, which has different timing, which is cash-based and with higher values. The accumulated values. On the bottom left, you can see the difference per year. and important for estimates going forward in '22, then obviously also the amortization will be lower. Based on these changes, we would like to support the collection estimates going forward with some guidance, which we have shown on the top right. And this is only including our existing back book and no new investments. On the secured back book, we expect cash of approximately NOK 900 million. but we also expect to do repossessions, which has to be added back to the collections. So total gross collection is expected with a prudent approach, again, is NOK 1.1 billion. And adding back also the unsecured back book, we have a total expected gross collections of about NOK 4.3 billion. As highlighted before, we have progressed very well on some milestone REOs, and we see a very strong pipeline for sales for 2022. And we expect sales of around NOK 300 million for the year. That takes the total cash collection expected to more than NOK 4.3 billion. Again, this does not include any new investments or the overperformance that we have seen and demonstrated over the last quarters. In addition, we expect in 2022 to ramp up investments and to invest more than the amortization. We expect to invest in the area of NOK 2.5 billion to NOK 3 billion and consequently grow the book during the year. And with that, Erik, I'll leave the word back to you.

Thank you very much. I think in the summary, for 2021 has been a milestone year for B2Holding. We have seen that the operations has improved in effectiveness and efficiency. And I need to thank all the employees of B2Holding. There has been going through a pandemic and at the same time, has been improving and working so hard to achieve these results. We see the improvements both in unsecured markets where I see the improvements on the secured market. And we see that the collection is coming better than anticipated. And we have a very positive and good momentum going into 2022. So 2021 close on a positive trend for B2Holding. It enables us also to give a dividend now of NOK 0.42 for 2021. The milestone agreement that we signed -- with the finance agreement with PIMCO will drive scalability on the secured platforms. And the work I need to thank also all the employees that has been involved in this project. For all the work that they put down and also be able to sign this agreement. And also thank PIMCO for the good cooperations that we've been having through these negotiations. Now as I said, the B2Holding finance and the balance sheet is very solid. And we see significant increase in investment going into Q4, but we also anticipate our investment going into 2022 to increase. Also, we are prepared for higher market activity. And as I said also during the presentation, our investment that we have done, we have changed the way that we do things and we are well prepared now to participate in the market higher market activity. And we also see that the portfolio is coming to market, we anticipate to come back to more normal standard as the year progressed. So on that, I conclude, and we take Q&A.

Thank you, both, given that our equity is trading around 0.8% of book value, why don't you prioritize share buyback versus dividend?

I think we both have to do both. We have a program for a buyback at this point in time. And it is correct that a buyback of shares is positive. And we have so far been buying back around 4.7 million shares in B2Holding. Also, our -- we have a dividend policy of 30% of the net result for the year. So with the past year, as we have been going through now, we think that we should also sustain the dividend policy and come back with the 30% share of dividend.

Very good. Then we have a question from Ulrik Zürcher at Nordea. Have PIMCO done a due diligence of the secured assets. And what will the NOK 200 million proceeds be used for?

Well, yes. Obviously, they have done a very thorough diligence of all the due diligence of all the secured assets. And based on the transaction, we have as mentioned, 50% of the book value will be the proceeds. We have confirmed the way we see it, the book value of our secured assets. And we have also implemented new curves, which we believe is on the prudent side given that we've gone forward with a senior finance year. The proceeds of NOK 200 million, as mentioned in the presentation, will go mainly to invest into our core unsecured markets.

Well, as for now, we don't have any more questions. This could also be due to the fact that we're having a separate analyst call a bit later today. So I guess the analysts are saving their questions until then. So unless let's see if there pops up some additional questions here, it doesn't look like it. So with that, we will conclude the Q4 presentation. If there are any additional questions, you can also send me an e-mail, Rasmus Hansson, my contact details is -- you will find my contact details in the presentation. Okay. Here was one from Robin Rane at Kepler. I think we'll have time for that. Any geographical limits to the PIMCO SPV? That's question one. And can financing costs be sustained at the Q4 level?

I think, first of all, to answer, we have concentrated on those countries with major secured assets. And -- but we I think there's the option is there. But so far, the concentration and the agreement with PIMCO has been concentrated on the countries in question. When it comes to the financial cost, I'll leave it to you.

We can maybe add that the co-investments going forward is not limited to the countries in the secured perimeter, but will be focused mainly on unsecured assets. I'm not sure I fully understood the question regarding financing costs. I guess what we can say is that we -- based on the cash flows that we see, we continue to believe that we can invest a significant amount throughout the year without increasing the leverage and consequently, not increasing the financing costs. On the financing side, we have, of course, obtained new financing, which will be closed during the second quarter at 5%, which is below the average margin we have today.

Thank you, both. Then I think we will conclude because then there are -- I cannot see any more questions. So again, if you have anything -- any additional questions, please send me an email. You will find my contact details in the presentation. Thank you all.

Thank you very much, everybody, for listening in.

Thank you.