B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, and welcome to the third quarter 2023 presentation for B2 Impact. I'm Erik Johnsen, the Group CEO. And presenting with me today, I have the Group CFO, André Adolfsen, that will go through the financials at a later stage. Rasmus Hansson will be the moderator for the Q&A session. So please submit any questions you might have on the online chat. Let's move to the quarterly highlights. We are very pleased with the launch of our new brand, B2 Impact, on September 29th. We have outgrown our name, and we believe B2 Impact better reflects who we are, the important role that we play in the financial community. We provide liquidity to financial institutions contributing to a healthier financial system. And we impact the financial situation of our customers by offering sustainable solution to handle their debt. Our new brand will support our strategic goals to increase recognition across our markets and strengthen our internal culture and our commercial activities. The B2 Impact brand will be rolled out in all our core markets over the next 12 months. During the quarter, we have established a new organizational structure, which means that we have reduced CEO reporting lines, enabling a stronger commercial focus and drive efficiency across our organization. The change will also have cost reduction impact. The positive trend that we have seen in unsecured and secured collections continued in the third quarter, and REO sales are also strong. André will share more details on this under the financial section. We continue to have focus on cost efficiency as we have been having over several quarters and underlying operational expenses are down from previous quarter. Our leverage ratio was at 2.15 at the end of the quarter, which is among the lowest in the industry. We have reduced our debt with about EUR 400 million over the past years. The deleveraging effort in combination with stable performance over last year's resulted in Moody's announcing a credit rating upgrade from Ba3 to Ba2 at the end of the quarter, which we are, of course, very pleased with. We have invested and committed NOK 2.7 billion year-to-date, which includes the NOK 435 million transaction that was closed in January this year was signed in December last year. We are thus on track to reach our investment target for the full year at the return level that we are satisfied with. Also, I think it's worth mentioning that the share repurchasing program is going well. As of today, we have repurchased 15.9 million shares or 4.11% of shares outstanding. It should also be mentioned that our equity value per share as of today is NOK 15.1. Now let's go to the next slide for key figures. Cash collections are up over years and ended at NOK 1.5 billion, and we report a record high cash EBITDA of NOK 1.16 billion for the third quarter, very good cash flow in the quarter that passed. The REO sales were at NOK 169 million with a continued high margin over 35%. Adjusted net profit was NOK 84 million, which also includes some noncash elements that André will come back to. Investment ended at NOK 357 million in the quarter -- in the third quarter. Q3 is typically a slower quarter for investment, as it was last year, and we remain satisfied with our investment levels and expect to reach our investment target for the full year. As of today, we have invested and committed NOK 2.7 billion for 2023. Going to the next slide. Since the beginning of 2020, our focus has been to reduce leverage while maintaining a sustainable activity in our operations. In this period, we have achieved 19% growth in cash EBITDA, that is the green line on the graph, despite reduction in our balance sheet. We have used the good cash flow to pay down our debt with about EUR 400 million, resulting in a leverage ratio that has been going down 29%. And in the same period, we see our investments is up 62%. And this is important. This means that we are well positioned for a healthy growth going forward in combination with prudent leverage. As mentioned, we are pleased with our deleveraging effort has been recognized by Moody's with a credit rating upgrade from Ba2 -- to Ba2 from Ba3. Going to the next slide. As I said, after some years with lower investment and deleveraging, we now see growth in investment, which again will increase our ERC going forward. The lower balance sheet in Q3 reflects that Bulgaria is now out of the balance sheet, but we also see that is reflected in our net interest-bearing debt now resulting at NOK 9.3 billion. That is a combination of Bulgaria, but also the very good cash flow that we had in the quarter that André will come back to. Our cash EBITDA is strong and has enabled us to repay debt, but at the same time, maintain a stable performance in adjusted net profit despite material increase in financial costs over the past years. Going to the next slide. During the third quarter, we continued to see a repricing of portfolios, meaning that prices are down and IRR are improving. We have previously said that we expect that market would need some time to adjust to the changing market dynamics with increased cost of capital and consequently, higher return requirements, and that has led to some portfolio sales being postponed as the sellers need more time to adjust to this new environment. We have seen this on several portfolios coming to market has been withdrawn, but it's been coming out some months later or half a year later. I would, however, like to emphasize that we see sufficient volume for B2 Impact to meet its investment targets and adjusted return requirement. Having said that, we will also be disciplined and selective in our investment approach going forward as we believe it will be an improving market going forward. We do also observe an increase in secondary transaction coming to market, that being industry playing -- players deciding to partly divest their back book or exit selected markets or financial investors selling residual assets or noncore assets in portfolios acquired. And we see that in several jurisdictions this is happening. We are still focused on optimizing our footprint with the aim of concentrating capital in fewer markets. As previously stated, this is an execution of the strategy to simplify our operational structure and focus on scale in core markets. The sale of our entity in Bulgaria was closed at the end of the third quarter, and we are also in the final stage of our sale of operation in Montenegro. Further access are being considered and we will update market as soon as we have more to share on this. Let's go to the next slide. And with that, I will leave the word over to André, who will share more details on the financial performance. André, please?

Thank you, Erik, and good morning, everyone. So before we go into the financial details, I would like to highlight 2 topics that should help you understand the underlying performance in the quarter when guiding you through the financial numbers. Firstly, the currency impact on the P&L in the quarter was around 14% compared to the same quarter last year using year-to-date average rates. Now as I did in the second quarter, I will comment on deviations compared to previous periods in constant currency throughout the presentation. Secondly, in the quarter, you will see a notable difference in positive development in cash metrics and slightly less positive reported metrics compared to last year. This is driven by several factors, including the effect of higher repossessions last year, which are accounted for as collections, but with no cash effect. We had an extraordinary high REO margin last year of 108% versus 35% this year, which is still a strong performance. And we made a noncash adjustment in this quarter, as Erik touched upon, related to the sale of Bulgaria of NOK 32 million, which is booked under net financials. The cash earnings for the quarter, as Erik has pointed out, was the strongest reported cash EBITDA in the history of B2, and the outcome of that is a decreased leverage ratio and a lower debt level. Now moving into the financial highlights and details of the quarter. The third quarter was yet another quarter where we saw solid collection performance across all our asset classes, and we saw growth compared to last year. The unsecured performance came in at 101.6% of the latest forecast and is up 2% compared to last year. Again, all deviations in constant FX. Secured collections came in at NOK 407 million, which includes REO sales of NOK 169 million and secured cash from JVs of NOK 50 million. The secured cash collected in the quarter was up 12.9% compared to last year. The total cash collected from our joint ventures was NOK 92 million in the quarter, notably up from NOK 32 million last year. The underlying operating expenses in the quarter was up 4% compared to last year while collection growth was 6% in the same period. Sequentially, compared to the second quarter of this year, the operating expenses was down 6%, and I will elaborate a bit more on this later in the presentation. The growth in cash collections, combined with cost efficiencies, has resulted in a very strong cash EBITDA of NOK 1.16 billion in the quarter and a subsequent reduction in leverage also driven by the sale of Bulgaria, which was closed during the third quarter. In relation to the closing of the transaction, we again booked a noncash item in net financials of NOK 32 million, which is related to accumulated profits from signing and the closing of the transaction. The gross debt in the quarter was reduced by NOK 1.36 billion compared to the previous quarter, of which NOK 450 million was related to FX. Leverage is consequently down to 2.15, confirming the positive credit metrics reflected in our recent rating upgrade from Moody's. After the end of the quarter, we have also entered into new interest rate swap agreements, which I will come back to later in the presentation. Portfolio investments came in at NOK 357 million for the quarter. The third quarter is seasonally a slower quarter for investments, but with high activity going into the fourth quarter, which we also saw this year. We have so far invested more in the fourth quarter than in the third quarter. And the spent and committed investment level for the full year currently stands at NOK 2.7 billion. The adjusted net profit in the quarter was lower than what we saw in the second quarter of this year. Now as mentioned back in the second quarter presentation, we had an extraordinary strong performance in our secured portfolios with both higher values and earlier-than-expected collections compared to the forecast. This will vary from quarter-to-quarter for secured assets due to the size of the underlying claims or assets, and we had a slightly more normalized development in the second quarter. I want to highlight that the adjusted net profit year-to-date is down NOK 92 million compared to the same period last year. But at the same time, interest expenses has increased by NOK 300 million. The impact of a higher interest rate environment has consequently been mitigated to a large extent through both -- through accretive investments, improved collection performance, and of course, cost reductions. Moving to the next page and some additional color on the collection performance on Page 10. We continue to see solid underlying collection performance across all our asset classes in the quarter. Unsecured collection performance at 101.6% in the quarter is slightly lower than what we saw in the previous quarter, but we also guided collective performance down from the high level we saw in the second quarter. Over the last 12 months, we see a very solid performance of 104%. Secured collections continue at a stable level despite a few new investments. Secured cash collections, including our joint ventures, was NOK 407 million in the quarter, as mentioned, 12.9% up compared to last year. The REO sales of NOK 169 million came in with a solid margin of 35%, but lower than what we saw last year, which was especially high at 108% of above book value. And the collection trend we saw in third quarter has continued into the fourth quarter so far. Moving then to Slide 11 and the cash earnings for the quarter. Cash earnings for the quarter came in at NOK 441 million after adjusting for portfolio investments, financial expenses, and tax. In addition, we reported proceeds from the sale of Bulgaria of NOK 460 million. The reported leverage was reduced from 2.52 in the second quarter to 2.15 in the third quarter. Now we are very pleased to see a continued strong operational cash flow, driving further leverage reductions and increasing our financial flexibility. Moving to Slide 12 and the operating expenses for the quarter. Both cash revenue and operating expenses were up 6% over the last 12 months, resulting in a maintained underlying operating margin in the period. During the third quarter, we have seen cash revenue increased by 5% and cash collections by 6%, while the corresponding operating expense increase of 4%. Sequentially, the operating expenses was reduced by 6%. And we see that the impact of cost initiatives across the group have now stabilized the cost curve following a period of inflationary pressure and increased activity. The group continues to initiate actions, changes that Erik mentioned earlier today. This will, of course, have an impact on our cost base over the next 12 months. Moving to Slide 13 and portfolio investments. Investments came in at NOK 356 million -- sorry, NOK 357 million. And as previously mentioned, we have already closed a higher investment volume in the fourth quarter, taking the spend and committed investment level to NOK 2.7 billion for the full year. The investments made so far this year have been at highly accretive terms in terms of expected net returns. And we continue to see positive signs of the repricing within the markets and volume we invest in. Moving then to Slide 14 and the capital funding structure. So we are very happy with the current leverage level we have achieved of 2.15. And as Erik has pointed out, at the same time, we have been able to increase our investment level and grow the cash EBITDA. The deleveraging potential of the business is further demonstrated in the SFA with PIMCO, which is almost repaid in under 2 years, despite also utilizing the facility to draw EUR 50 million for investments in the period. It is encouraging to see that the performance demonstrated is now reflected in an improved rating -- credit rating by Moody's. Additionally, we have currently no short-term refinancing needs and full flexibility under the RCF to repay the 2024 maturity. After the quarter, we have entered into a new 3-year interest rate swaps to limit the short-term impact of increased interest rates as we continue to replenish our book with accretive investments. The hedging ratio will remain above 50% going out of 2023. And the current impact of the hedges is an improvement compared to floating interest rate of 111 basis points. Availability of liquidity continues to be strong, north of EUR 400 million, giving ample room to invest going forward and take advantage of our financial position in the current market conditions. And with that, I leave the word back to you, Erik.

Thank you. To sum up the third quarter. A new brand and company name, B2 Impact, launched on September 29th. The new brand will be rolled out on a core unsecured market over the next 12 months. As André said, we had continued our good performance, collection performance in the third quarter. And going into the fourth quarter, we see the same trend, both on unsecured, but also on the secured performance. REO sales in third quarter was good, and we anticipate that we will be at the same level in fourth quarter. The new organizational structure was in place first of October, which will again strengthen the commercial focus and have the efficiency across the group increase and the cost coming down. We have a solid balance sheet and see sufficient volume to meet both investment targets and adjusted return requirements going forward. Capital discipline will still be key for us with continued focus on keeping leverage at a sustainable level. Finally, our lower leverage in combination with solid performance has been recognized through a credit rating upgrade from Moody's. So a very good situation that we actually can and will invest more going forward and have a growth in our business, but still keep leverage at a good level for B2 Impact. So with that, we open for questions. Please post your questions in writing in the chat, please.

Thank you, Erik and André. Let's kick off with the Q&A. You still have time to post questions. We will answer them as they come in. We will start here with first question. Can you provide some guidance on fourth quarter investments beyond the existing commitments?

We have a stated investment target. I think that's what we can give you. We have already said that we have invested more in the fourth quarter than in the third quarter, which was NOK 357 million. And we expect to continue to do selective investments also in the latter part of the fourth quarter. I think that's what we can share as of now.

Thank you, André. And a question from Vegard at Pareto. Although still strong, unsecured collection performance is dropping. Should we read something into this?

So if you look at the performance, it will vary from quarter-to-quarter. It all depends on timing of cash also from the bailiff systems and tax refunds. And we guided back in the second quarter that Q2 was on the higher side, and we should expect some slightly lower performance based on the strong performance in the second quarter. And we see exactly that in the second quarter, slightly below 102%, still a strong performance. And over the last 12 months, we see a very solid 104% compared to the forecast.

It should be noted also that generally, third quarter is a little bit slower collection period than the rest of the quarters.

Then a follow-up question from Vegard. What are IRRs on portfolios you are now -- that you now buy or are looking at?

Same answer to that question. As usual, we don't disclose that, at least as of now. But we see a notable improvement in returns compared to previous years, which is highly accretive to our back book.

And then a final question from Vegard. What should we expect as quarterly interest expenses with the new hedges in place, assuming same lower volumes?

You will see a positive impact compared to the underlying floating rate, which in our jurisdictions was 4.29% floating rate in the quarter. And we have an improvement based on the underlying -- based on the hedges of 112 basis points.

Then we have a question about the leverage ratio. What is your leverage ratio goal for the company in the long term?

We have said that we should be below 3. We are at 2.15. And most likely as it looks like now, we're going stay at that above that level at the end of Q4. We do anticipate that good investment opportunities will come, and we will, of course, then try to also participate in the market and take advantage of the good opportunity that is coming to B2. We have invested in 2023. The increase both in interest rates and costs of collector has been captured by the new IRRs, that has increased more than that. And we are expecting also that the leverage ratio will go up somewhat going forward, but still stay at the low level.

Thank you. Then we go to question from [ Hill ] Markets. Can you elaborate on the drivers behind the changes in ERC?

Sure. I assume the question is from the second to the third quarter. The deviations between the quarter is related to the sale of Bulgaria and FX. If you adjust out Bulgaria and FX, the reduction is around 2%, which is normal seasonality. Historically, we have seen a reduction between the second and the third quarter of around 3%, meaning the reduction in this quarter is lower than what we've seen historically.

Then we have a couple of questions from DNB, Håkon Astrup. I guess his first question has been covered, but as a follow-up question here. To what extent has the current interest rate environment being reflected in pricing on new portfolios? And do you see geographical differences?

The higher interest rate has been reflected in the purchase IRR that we receive on our new portfolio. So it's well covered within the IRR that we are doing on new portfolio. And that's somewhat also what you're seeing the market participants, the sellers, some of them are pulling the portfolios from the market due to the fact that they see the prices has been lowered. Others have been more quicker to readjust their price expectations, and therefore, they have been also selling at the new price levels. There are somewhat difference between the countries. Some markets, we still see higher competition. But generally, we would say that the number of participants participating in the auction has been going down over the past 12 months. We also see more discipline in the marketplace with respect to pricing. So all in all, generally, it's been going down in all of the market and the condition has improved in most of the market. But sometimes, you see slight deviations on portfolio to portfolio, and that is -- that will always vary somewhat, but good conditions in most of the markets.

Follow up question from Håkon. You have a strong financial position with a low leverage versus peers. Do you expect to increase leverage in 2024?

We already -- as I said also that the leverage of 2.15 is not a leverage level that we are going to commit to. But if you say plus/minus 2.5, going forward, I think it's within reach. But again, the investment, if we're going to increase leverage, meaning that we are going to participate and buy more portfolios in the marketplace, we will do so if we also see that the level of returns that we receive on those investments are within a range that we also believe is the right level.

Thank you, Erik. We then move to Artic, Gustav Larsson. His first question, what's the appetite for leverage in the medium term? I think, it's been addressed. And follow-up question here is, what is your plan for the secured carve-out once the PIMCO facility is repaid?

We have been looking at -- the PIMCO facility has just been repaid because the cash flow from our investment in the region has been extremely good. So the PIMCO facility as such has nothing to do with really the expectation in the region going forward. But as we said, we've lowered our investment in some of the countries in the region. And we will, of course, see what kind of opportunities there will be in this region going forward. So that's yet to be determined.

Thank you, Erik. Then we move to a couple of questions from ABG and Jan Erik. First, what's your expectations for 2024?

We will come back to that in the next quarter in terms of new targets.

Then also a question relating to next year, cost impact in the next 12 months, please elaborate? And will there be any restructuring cost elements?

We have been doing a reorganization of the company and taking down the cost levels. We will still be looking for restructuring in such a way, but not to the extent that we already have been doing. But of course, our goal is to have a leaner, more efficient organization going forward. So this is not a onetime, one-stop project. This is an ongoing project to see how we can drive the efficiency in the organization, utilizing the new tools that is coming to market as we speak. So this is an ongoing process. We are down to 1.7 -- 1,700 employees in the group now. We were at the most up to 2,600 employees. So it's been a process where we do look for efficiency in the group. Some of the actions that we've been taking this year is also going to have an impact on the cost levels going forward. So I think that is the best way to answer it, that we do believe that our cost mitigation going forward is going to keep control over the cost levels going forward as well.

Thank you. And then final question from ABG. What is your own expectations curbing the cost growth?

Can you repeat that question?

What is your own expectations regarding -- or how to curb the cost growth?

Curb the cost growth?

And the cost growth.

Okay. Well, going back to what I said earlier today, you can clearly see from the cost slide that the curve is flattening out, meaning the impact of cost initiatives is really starting to be visible in the numbers and will also be that in the coming quarters and into 2024. And as Erik mentioned, this is an ongoing process. There is no 1 solution, 1 answer to this. It's a combination of many factors across all our countries and a continued cost focus across the business. And it's not only a cost reduction exercise. It's also an efficiency exercise, which means we need to continue to invest to drive the scalability that we have in our platforms in core markets.

Thank you, André. And a couple of more questions. What is the replacement of ERC investments needed?

Well, if you see the last 12 months, we've invested NOK 2.7 billion, and it has definitely grown our ERC, but it's grown even more cash EBITDA. So one thing is what we need to replenish the ERC, but more importantly, how are we able to take advantage of that ERC and scale up on our cost base and drive more cash EBITDA from that ERC. So it's -- the answer is it depends a bit on asset class and on geography. But at the current level of investments we're targeting, we are expecting ERC growth but even higher growth in our earnings.

Thank you, André. And then final question here is, what is the cost reduction effect of the sale of Bulgaria?

There's no cost reduction in the quarter. But going forward, we have OpEx of close to NOK 100 million, which will go out of -- go up going forward or more than 4% of the current OpEx base.

Well, I think we have answer all the questions posted in the chat. Some of you have posted the same questions, so I hope they have all been addressed. Should you have additional questions, of course, we are more than happy to answer those after this presentation. You can send the questions to me, and will find my contact details on the last page of the presentation. So with that, we conclude the third quarter presentation of B2 Impact and look forward to seeing you again the next time. Thank you all.

Thank you.

Thank you.