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 going through the financial numbers will be Andre Adolfsen as usual, CFO of B2Holding. Let's go straight to the quarterly update as well as the summary for the year. We see -- in the last quarter, we have been having a very good performance on the unsecured portfolios as we were having throughout the year of 2022. We also see that the secured recovery of NOK 553 million, including REOs of NOK 173 million was very good for the quarter. We have the strongest cash EBITDA in the history of B2Holding, and it's been very, very good, and it's been good throughout also 2022, which I will come back to in some of the next slides. We have been going through deleveraging. Now we are starting increasing our purchases and ERC are now again growing in B2Holding. The Board is going to propose for the general assembly, a cash dividend of NOK 0.20 and a share buyback of NOK 0.42 of a total NOK 0.62 for the General Assembly in May. Throughout 2022, we had a reconstruction of our secured business as well as we have been doing efficiency programs in our remaining markets. This has resulted in lower cost, and we see that now we are at the very end of at least restructuring of the secured markets, and we are now steadily stabilizing at the lower cost level than we did have previously. We have established Veraltis Asset Management in the secured market, master and special servicer. And we also see that throughout 2022, we have a Group alignment. We have been able to have a cross-border function in several of our sectors, meaning that we have better human resources utilization and also better expertise in many of the fields. This has improved our cost base, but also approved our efficiency in the year that passed. Last, I want to remind you, we are an industry leader in ESG. Sustainalytics came and named us #1 in the industry for the second year in a row. ESG is important for B2Holding and we improved our scoring in 2022 as well. Key figures for B2Holding. We see that our cash collection was NOK 1.4 billion for the year, while also cash EBITDA NOK 1.140 billion for -- in the quarter. That was a fantastic quarter for B2Holding. REO sales, NOK 173 million for the quarter, which was above anticipation and also what will be shown later, we still have a good margin on our REO sales of, I think, 30% for the quarter. Investments includes 2 portfolios that was purchased in the end of Q4, in December. Due to accounting policies, we need to book it in the first quarter, but it's included in this number, NOK 435 million. So the total purchase for the year is NOK 1.2 billion, indicating what we were saying that we were going to increase our purchases and therefore, also, what we will see is that our ERC has increased during the quarter. And the ERC or the development of ERC has turned. This graph, I think, has been shown previously, but I think this graph summarizes quite a bit of what B2Holding has been going through. We have been going through a reorganization of secure market as well as doing the efficiency and effectiveness in our other markets. We have a lower level of cost established in B2Holding. And at the same time, we have deleveraged quite a bit, NOK 4 billion we have deleveraged throughout this period. Now we see the cash EBITDA, despite lower purchases throughout the period, the cash EBITDA has been stable. We have been getting more out of our portfolios, and we'll be using that to delever our company. What's important now is that to see the last 3 quarters, the tide has turned. We are starting investing more, our ERC and book value of our investment is increasing, but we are increasing our investment at the lower cost level than we did previously. So the tightest turn, we are now in a growing state again, and we can do that due to the fact that we have the best balance sheet and a financial position that we are solid so we can actually start growing again at a good rate without raising our leverage ratio and a debt level to a large extent. Now there's been a lot of talks, of course, in the past quarters about the macroeconomic development. It should be said that our industry as a whole has shown in the past to be very resilient through downturns. So through the cycles, this industry has been very good. Now inflationary pressure is expected. This is from Oxford Economics. They expect that the inflationary pressure will level off shown in the upper hand graph, will level off in the years to come. Coming down in 2023, but also going into 2024 and 2025, it will level off. At the same time, we see that GDP growth in the year that's coming or this year is going to be low. It's anticipated to be low, and it will vary somewhat between the different countries that we are in. But generally, it's going to be quite low. But the projections also going forward is improving. Now even though we go into a slower GDP growth, the labor markets still are anticipated by Oxford Economics to be resilient. So they are going to be not that high increase in unemployment that previously one would expect. And this is good for our industry. Now -- and also, as I said, we are -- they anticipate somewhat better macroeconomic development going forward. So what does this mean for B2Holding? We should remember, our portfolios, when we buy, we buy for 10-year plus. So short-term economic and macroeconomic volatility do not disturb our collection to a very large degree. That's what's been shown in the past when going through different cycles. We do not see any big hits on our collections. And we do not expect that this time either, even though one should be a little bit cautious due to the fact that we have seen inflation rate and also interest rates increasing quite a bit, but we do not expect that to have a big effect on us. The short-term uncertainty, of course, and also interest rates and increases and so on will be reflected in the pricing of the portfolios. And we also will see then somewhat of the participants would delay maybe selling some of the portfolios due to the fact that their anticipation doesn't meet their expectation in the beginning. So they will take some time before some of the portfolios come out. What we -- when talking to the different banks, we see that throughout Europe and a market that we have are exposed in, we see that the banks are reporting also that are reporting in other places, the underlying credit quality expect to deteriorate and also create new NPL volumes. What does that mean? It means that what we see is the Stage 2 loans are increasing. Stage 2 loans are loans that are just before the coming NPLs. And those Stage 2 loans has been increasing throughout Europe. And there is anticipated as the year past or the year go on, you will see that more NPLs are being created from those loans. That's what the banks are expecting. So going into portfolio purchases and investments. We have throughout this period and also in 2022, having a capital discipline. We have been having a very good return on our portfolio purchased in '22, also in '21 and the portfolio purchased in '20. So the capital discipline and so on has been very good. We see that investment that we did in 2022, and we also announced that we were going to increase investments. So now the investment is up at NOK 2.6 billion. And as shown previously, we also see then the book has started growing, and the tightest turn the ERC is growing quite substantially, that Andre will also show. As I said, the higher cost of funding will be reflected in the portfolio pricing. But also some of the participants, some of the vendors will possibly delay some of the sales of some portfolios until they have adjusted themselves to the market conditions that is prevailing now. However, when that is said, we see that also the portfolio pipeline that we have in the market is quite good. We are happy about the pipeline in our major markets that we can see. Now in 2022, we invested NOK 2.6 billion, going out of the year, we have also seen that the forward flow commitment that we have coming into 2023 is NOK 400 million, a higher level than we had last year. In addition, in the beginning of this year, we have closed another couple of deals that gives this level even being even higher as the year has already started. So we do anticipate our investments to be higher than 2022 levels. But of course, risk return consideration and capital discipline definitely is a key momentum for B2Holding. But we do believe that our investments will increase, and therefore, also our ERC and our book value will increase in the year to come. And that -- on that note, I'll let Andre take over and go through the financial performance.

Thank you, Erik. So I think before we go into the details, I want to reiterate what we said in the previous quarter. You will see in this quarter, a very strong quarter in terms of cash metrics, but with a more limited impact on the IFRS reported numbers, meaning net profit, and I'll come back to that. 2 key topics that we follow closely is obviously inflationary pressure on our cost base as well as the funding cost. And hopefully, during the presentation, you will see that during the year, we have been able to improve our margins due to cost savings already incurred during our restructuring process as well as a good hedging strategy applied over many years, which puts us in a position where the blended margin of the company is not significantly impacted by increases in interest rates. So summing up the quarter, we have a fantastic cash flow quarter with the strongest cash collections we have seen to-date in the company. We have refinanced our bonds. We have increased purchases during the quarter. We've taken the total investments up to NOK 2.6 billion, but maintained a leverage ratio still at below 2.4%. We've also amended the dividend policy, as Erik has pointed out, which allows us to increase distribution to our shareholders based on a good underlying cash performance in the company. Looking at the cash collections for the quarter and for the full year, we continue to see underlying strong collections within unsecured, with full year performance of 103.4%. Secured cash collection, very strong at the end of the year, REOs coming in at NOK 173 million in the quarter as well as cash collection from JVs, very strong at NOK 188 million for the quarter, which takes us to a growth on cash collections in the quarter of 28% and more than 6% for the full year. This drives also growth in our cash EBITDA. We guided in a trading update around NOK 1.1 billion. We are at NOK 1.14 billion in the quarter, which is 32% up compared to last year, 6% up for the full year. Cash revenue is up 5% for the full year, implying an improved margin -- underlying margin for the business for the full year. And I'll come back to costs in one of my later slides. On the net profits, I mentioned that we do have a couple of impacts in this quarter compared to last year, which is important to understand. We have a negative impact on the mark-to-market value of our hedging instruments and we also have negative FX impact in the quarter. Both of these are non-cash. This was NOK 20 million in the quarter negative, but positive SEK30 million last year. So we have a NOK 50 million swing on net profit in the quarter comparing to last year. The like-for-like, we are at the same level as last year, but the impact of cash from JVs is 0 on the P&L. So the underlying net profit of the company is significantly stronger in this quarter compared to last year. We signed investments in the quarter, as Erik mentioned, of SEK1.2 billion. We've reported NOK 769 million. And due to technicalities, we cannot book the additional 435 million in the fourth quarter as this was an investment in notes where we acquired a note from one of our existing co-investors. This is -- these are portfolios that we know extremely well. We service them today, and they will have immediate ERC and collection impact from January. Despite the increase in investments, we've seen leverage come down to 2.26x in the quarter. Adjusted for the additional investments, as I just mentioned, we are at 2.37x. I mentioned the amendment of the dividend policy. We have proposed a -- the Board has proposed a distribution of NOK 239 million or NOK 0.62 per share. This is split in dividend of NOK 0.2 per share and NOK 0.42 per share in a share buyback program. Moving to the next slide. Some more details on the collection performance in the quarter and for the year. As mentioned, we see continued strong outperformance on our unsecured portfolios. 101.4% in the fourth quarter, 103.4% for the full year. Just want to mention that the third quarter of this year was slightly stronger than expected as tax refunds in some of our markets came in the fourth quarter -- sorry, in the third quarter instead of the fourth quarter, meaning you have to see the 2 quarters combined. We've seen a positive development into January and have a seasonally very strong performance of 103% in January. Cash from secured, as mentioned, very strong at the end of the year. We've seen REOs sales of NOK 173 million with a very solid margin of 33% in the quarter and a full year sales number of NOK 581 million, which is significantly above the expected level we guided at NOK 500 million, with a total margin for the year of 48% above the booked value of these assets. Now this impacts our cash earnings. Cash earnings positive at NOK 99 million, despite an investment level of NOK 769 million and paid interest and tax, we have a positive cash earning in the quarter. Leverage, as mentioned, comes down despite the increased investment level and demonstrates the strong cash quarter that we had in the fourth quarter. Again, adjusted for the signed purchases at the end of the year, the leverage is 2.37x at the end of 2022. On the left-hand side, you see the positive trends. We mentioned on cash collection with a very strong end to the year, showing growth in constant currency of 25% compared to last year. Now this obviously drives cost with higher activity and higher collections. For the full year, our cost level is up 5%, while cash collections is up 6%. So we have been able to increase our margin throughout the year despite inflationary pressure. The personnel expenses are flat compared to last year, which is a clear demonstration of the impact of the restructuring process that we have done in our secured markets. Some more details on the investments in the quarter. Adjusting again for these signed investments we made at the end of the year, the NOK 1.2 billion in the quarter and the NOK 2.6 billion for the full year now drives growth from Q3 to Q4 in ERC of 11% for the Group. During the quarter, we made investments in all our jurisdictions. And I want to highlight that we made not a co-investment, but a co-underwritten investment in Western Europe together with PIMCO in the quarter. We have conducted a extensive refinancing of our bonds over the last 6 months. We issued a bond in September last year, EUR 150 million, and we tapped an additional EUR 150 million in February this year. That takes the 2026 maturity up to EUR 300 million. We repaid our '22 maturity in October last year, and we have now called and will repay the '23 maturity in March of this year. The numbers on this slide is adjusted for these events and is also adjusted for the additional investments of NOK 435 million, which we made early January. So going out of February, we have a liquidity reserve of around EUR 320 million as well as expected strong operational cash flows coming from also growth in ERC going forward, which puts us in a good position to continue our investment growth without a notable increase in leverage. On a final note, I want to give you a brief introduction to a new reporting structure that we will implement during 2023. We will go from reporting on regions and unsecured, secured to reporting split on investments and servicing. This is much more aligned with how we drive our business and is also very much aligned with the recent restructuring, where we split assets and servicing in our secured markets. So we will, of course, come back to analysts and investors with more information and guide you in how we want to structure this. And of course, we will provide pro forma figures for comparison going forward. So with that, I'll leave the word back to you, Erik.

Yes. Thank you, Adolfsen. We are at the summary. Now as we said that it's been solid cash performance, collection has been going very well, not only last quarter, but also for the whole year. We have been getting more out of our portfolios than we anticipated at beginning of last year. Cash EBITDA for the last quarter was very good and cash EBITDA for the whole year is also very good. So we've been able to do that also by reorganization and also keeping our costs down and reducing our cost levels. What is good also to see that finally now the ERC is starting growing again. But we grow the ERC, we grow our investment at the lower cost level. That is important also to notice. The proposed dividend, some adjustment to the dividend policy, but it give -- leaves us with enabling to have NOK 0.62 per share dividend in cash and share buyback program, which we believe is accretive to our investors. We will maintain capital discipline going forward, but there is also -- we have good opportunities to participate in the market. The balance sheet is strong and our cash flow is strong. So we will also, through the latest issues of the bond, we have enough capital. We have a very good capital base to participate in a good market that we also believe is going to be in 2023. So that was the latest remark that we have, and we are open now for questions.

Thank you, Erik and Andre. We will then open for questions. Vegard is the first, so we'll leave the word to you.

On the financing side, you mentioned last quarter the amount of interest rate hedging you had. Is it possible to give us an updated figure for what you had in place in Q4 and also what you have now going into 2023?

Sure. We had 54% at the end of the quarter, and we will have that level at least until Q3. And I also want to highlight that the blended margin that we paid in the quarter on our outstanding debt was 5%, including the floating interest rate was 6.9% in the quarter. And into the first quarter, you will see our interest rate caps, which is capped at 1% in euro will have a higher impact going into the first quarter than in the fourth quarter. Positive impact that is, of course.

Okay. And on the operational cost side, could you give some more details to what you see and how you -- or what we should think about the cost level of your operations in 2023?

Sure. I mean if you look at the fourth quarter, there was an increase in cost, which is why I focused on the full year. The fourth quarter is -- we had an increase, which is mainly driven by activity. And that is why also we focus on the fixed cost base, which is more or less flat year-over-year. But the activity-driven cost was up in the fourth quarter. A lot of these costs will not continue into 2023. Clearly, there is inflationary pressure for us as everyone else, both on salaries as well as vendors and being auditors or whatever. But we are -- we have an impact of the restructuring process, which you clearly see for the full year, which is not fully reflected yet. We still have positive impacts coming from the restructuring process, which will mitigate some of the inflationary pressure going into next year. But clearly, there is, of course, pressure on salary expenses in our company as with others.

Is it possible to be more concrete on that? So what kind of inflationary pressure do you see on average for your workforce? And on the FTE side, how many FTEs do you expect to be by the end of next year?

We cannot give you that information, but I can clearly tell you that we have initiatives in place to limit the impact on cost as much as possible.

Hakon Astrup from DNB Markets. One question on the collections side. You are describing an environment with higher Stage 2 loans from the banks and also higher NPLs. How do you think that environment will impact your back book of NPLs? Will that also have a negative impact there?

So our focus is mostly on new investments. That is where we see the potential challenge going forward. The main challenge, obviously, we monitor the back book as much as we can. We have not seen an impact yet on our collections. As I pointed out, we also see a good start to 2023, actually stronger than we expected on the unsecured side. What we do see is a deteriorating quality of loans going forward, as Erik pointed out in discussion with banks, which puts us in a position where we obviously try to reflect this in our new investments.

Okay. So as of now, you're not seeing the unsecured performance, say, hedging below 100%?

If you look back at history, there has been little impact on collections going through the cycles. Now I don't think we should be as forefront to believe that inflationary pressure or maybe interest rates are not going to have an impact on us at all. But so far, it has not been impacting our performance. We have also shown throughout the year that our collection has been well above 100%. And we believe that our margin on that is still going to be looking good for going forward. So our anticipation is that we will see strong collections going forward. But you're never certain. You can't be, but history shows that we are performing well throughout cycles. So we have strong beliefs that we will continue to show good performance.

Just a follow-up on Hakon's question on the Stage 2 you mentioned. Given that we are at close to full employment in most of your markets, I'm assuming, do you see these portfolios coming mostly on the SME secured side? Or do you think you'll see retail consumer loans also going to market?

In the discussions with the banks, they have seen that Stage 2 loans, what they've seen -- have not seen yet too much impact on retail secured markets. They've seen quite a bit of impact on the SME market. That has been -- the impact there has been stronger than sort of anticipated. However, they believe also that the savings and so on that the people has done has been able to -- be able then for paying on the loans, especially related to mortgage loans. They do believe, however, that there will be a larger impact as the year progresses within that. So that's what they're telling us that they believe that, that is going to be somewhat higher impact as the year progresses. And that's what we're saying. But those loans that are in Stage 2 might fall into the bucket of NPL as the year progresses.

Okay. Can I have 2 more?

Absolutely.