B2 Impact ASA (B2I) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to B2 Impact's Q2 Presentation. My name is Rasmus Hansson, Head of IR. I'm here with Erik Johnsen, our CEO; and André Adolfsen, our CFO. I just want to remind you that you can now ask questions live by using the second link in the invitation and also in today's press release. Again, if you want to ask questions live, use the second link. You can also ask questions in the chat by using the first link. And with that, I'll leave the word to you, Erik.

Thank you, Rasmus, and good morning to everybody listening in and welcome to Q2 presentation for B2 Impact. I'm Erik Johnsen, as Rasmus said, and with me also is André that will take you through the financial statements later. We had another good quarter in B2 second quarter this year. Our unsecured collections were once again solid in the quarter, with collection 11% above our forecasted curve and secured recoveries also performed above our forecasted curve. REO sales still performs good with 4% margin over book value. The RCF has been amended and extended after constructive dialogues with our RCF banks; DNB, Nordea and Swedbank. The amended RCF will reduce the cost of funding going forward. Over next months, further steps will be taken that will improve our cost of funding. The group has today a solid financial position with low leverage and good liquidity position. We have so far invested and committed NOK 1.3 billion. We currently see an improved pipeline with larger one-off transactions. In the quarter, we sold the loan receivable portfolio in Poland with a substantial profit. The restructuring of the loan activity was closed last year, and the portfolio was transacted this quarter. Going forward, we expect growth in investment rest of the year. The target to invest is expected to be around NOK 3 billion on an annual basis going forward. In the quarter, we paid NOK 0.7 in dividends per share, representing an 8% yield. And with the good quarter behind us, we anticipate delivering growth in dividends for 2024. So let's move over to key figures. Cash collections were close to NOK 1.4 billion in the second quarter. Unsecured collection is increasing year-on-year. This month, we had a very good quarter with 11% above the forecasted curve. The secured portfolios in the balance sheet is reduced over the past years, and it is anticipated that we will see somewhat lower collection going forward. The REO sales is still showing a margin of 40% over book value. The cash EBITDA was again very strong with NOK 1.3 billion for the quarter, which is about NOK 170 million above last year. Adjusted for non-recurring items, net profit was NOK 252 million, including then the sale of the loan receivables portfolios. The portfolio purchases of NOK 337 million was on a low end. Invested and committed amount is now NOK 1.3 billion. And we see, at currently, an improved pipeline with high one-off transaction and we anticipate more volumes as we said earlier in the second half. André will, of course, share more details about the financial performance with you later. Moving to the next page. The competitive cost level for new investments. And this is key for us. Over the past years, the cost-cutting initiatives has resulted in stable OpEx despite higher inflationary period. The initiatives continue and we expect the trend of stable OpEx to continue despite higher expected investment activity going forward. However, we can anticipate somewhat higher legal collection cost with higher investments. The improved terms in a renegotiated RCF and better market condition for the B2 bonds and other activities will further reduce our cost of debt going forward. That is shown in the curve to the right. B2 has now a scalable operation, where the group can increase investment while maintaining operational cost level. This, together with improved cost of debt and good investment capacity, it puts B2 in a unique position to scale up investments and increase further earnings. So, how does the macroeconomic outlook look and what is the indicators looking like? Now, following a period of high interest rates, we see the NPL volumes are trending up, both NPLs as well as stage 2 loans. NPLs growing across the board, including core markets and core unsecured segments, higher than average NPL ratios in Poland, Spain and Romania. We see improving macroeconomic environment with lower inflation, stable employment, the return to GDP growth underpin solid collections. Growing NPL supply and positive macroeconomic support appetite for higher investments going forward. And with that, I'll leave the word over to André, that will take you through the financial numbers.

Thank you, Erik, and good morning to everyone listening in. During the second quarter, we have observed similar trends as we have seen over a longer period. The underlying business performance is very solid, with strong and improved collection performance as we also guided back in the first quarter. We see operational cost improvements and a declining cost of debt. And as already touched upon in the quarter, we have concluded the sale of our loan receivable assets in Poland with a notable gain to book value. The impact on the P&L versus cash metrics is slightly different, and I will guide you through the accounting of the sales proceeds as well as the P&L gain. So on Page 8, let me take you through the financial highlights and summary for the quarter. During the first quarter presentation of this year, we guided that we expect higher collection performance in the second quarter. And we are pleased to see collection performance improving significantly compared to previous periods. Compared to last year, our total collections are lower, which is mainly due to limited new investments in secured NPLs, in line with our communicated strategy. Unsecured collections are slightly up on a comparable basis in the quarter. Again, the performance in unsecured came in at 111% of the latest forecast, which is a notable improvement and we do see a continued strong trend into the third quarter. Secured cash collections came in at NOK 253 million, of which NOK 80 million were REO sales. This is in line with the level we had in the first quarter this year, but again down compared to last year as expected with secured ERC trending down. In the first quarter of 2023, we decided to close down our loan receivable business in Poland, with an expected annual cost saving of NOK 40 million there. We have continued to see revenue from these loans, but slowly declining as we have not issued any new loans. During the second quarter, we finalized the sale of the related loans, leading to a gain compared to our book value of NOK 167 million. This gain is booked under Other revenue, as this is not NPL collection related. This will consequently have a smaller negative impact on Other revenue of around NOK 20 million in the coming quarters. The net sales proceeds was NOK 296 million, and has had a positive impact on cash metrics, both revenue and EBITDA for the quarter. The underlying OpEx has remained stable despite continued inflationary pressure. We see that personnel costs are trending down and is down 3% compared to the same quarter of last year. We have incurred higher legal collection costs, which are correlated with the improved unsecured collection performance. And we do expect these costs to decline or flatten out in the second half of 2024. Cash EBITDA for the second quarter was more than NOK 1.3 billion. This is significantly up from last year, with the growth driven mainly by the cash proceeds from the loan receivable assets. In the Q4 presentation in February this year, we presented a target to notably reduce our run rate interest costs this year. We have seen a positive impact in the first 6 months, driven by the bond refinancing in the first quarter. In August, we have renegotiated and extended the RCF at improved terms. We are consequently well on track to reach our targets, and I will come back to more details on this later in the presentation. Investments came in at NOK 337 million for the quarter, which mainly consists of forward flows. We also have commitments for the remainder of the year, taking the year-to-date investments and commitment for the remainder of the year to NOK 1.3 billion. Going out of the quarter, we have a very strong financial position with ample liquidity for investments and low leverage. With expected lower interest rates going forward, we expect to be active in the market for the remainder of the year. On Page 9, I will run through a bit more details on the collection performance. We have seen an overall very strong collection environment, with a notable improvement in unsecured performance coming in at 11% above our forecast. We have also observed strong performance so far in the third quarter. In terms of guiding, we should expect a similar trend in the third quarter, but most likely somewhere between Q1 and Q2 in terms of performance, given vacation periods in many of our markets in the third quarter. Secured cash collections remained stable with REO sold comfortably above book values. As touched upon earlier, we have made limited new investments in secured, and we've also made some larger collections over the last 12 months. Secured collections typically fluctuates between the quarters given the size of the claims as demonstrated by the high collections in Q4 last year on the bottom left of Page 9. Moving to Slide 10, and an update on the cash flow for the quarter. Cash earnings came in this quarter at NOK 666 million after adjusting for portfolio investments, financial expenses and tax. The positive earnings has resulted in a further reduction in debt and a reduction of leverage to 1.7x. The strong consistent earnings over time is driven by the positive trend in collection performance, a stable and slightly lower underlying OpEx and reduced interest costs. In addition, in this quarter, we had a significant positive impact from selling the loan receivable assets. Low leverage, coupled with strong cash generation provides a very solid foundation for longer-term profitable investment growth. Moving to Page #11, and an update on the OpEx. Over the last 12 months, we have seen cash revenue grow by 10%, while OpEx has increased by 3%, resulting in an improved operating margin. The underlying cost base has been reduced in the quarter, with personnel costs coming down 3% compared to last year and down more than NOK 30 million on an annual basis. We have seen an increase in activity-based costs related to unsecured collections. These are mainly legal cost collections in our core unsecured markets. We clearly see that this has supported the improved collection performance observed in the second and so far in the third quarter. We do, however, expect these costs to come down in the second half of the year. Now, we continue to take actions to reduce costs also going forward. We have booked non-recurring items this quarter of NOK 17 million related to these cost initiatives, which are mainly related to reduction in personnel in administrative functions. Moving to Page 12, portfolio investments. As mentioned, the investments in the quarter came in at NOK 337 million. As Erik said, this is lower than expected but has been transacted at very favorable terms. We have additional commitments for the remainder of the year, which takes the full year expected investments as of now to NOK 1.3 billion. All investments are related to unsecured assets. We continue to see the secured ERC trending down, following a longer period of strong collections and limited new investments. The unsecured ERC now make up 83% of the total ERC, and we saw unsecured ERC growing by 3% compared to last year. On Page 15 (sic) [ Page 13 ], I'll give an update on the capital structure as well as the cost of debt. Following the bond refinancing we did in Q1, we have seen a positive trend in interest costs. The credit spread for B2 Impact has improved further since the bond issue and is now among the lowest in the industry. During August, we have finalized an extension of our existing RCF at improved terms, both financially and in terms of flexibility. We are very pleased with the constructive dialogue we have with the banks, and their support is a testament to the strong financial position of the company. We also expect during the third quarter to terminate the SFA, which will simplify our cash management setup and offer interest cost savings. Our capital structure will consequently be streamlined with no short-term maturities. So moving to Page 14. We would like to give you an update on our plan to reduce cost of debt. As a reminder, we said going into 2024 that we will target a significantly reduced run rate interest costs during this year compared to the run rate at the end of 2023. We target a lower run rate of at least NOK 200 million by the end of this year. The target is fully based on company-specific actions and is not dependent on any potential lower floating interest rate. Now as of today, we have close to 60% of this target achieved. And this is driven by the completion of the RCF extension, bond refinancing in the first quarter, termination of SFA and simplifying cash management and securing a lower floating rate through interest rate swaps. We do see also further upside in increasing the hedging ratio as the current long fixed interest rates has increased -- has decreased. We expect to fully reach our target and to achieve the target either during the third and the fourth quarter, depending on timing and availability of the bond market. With that, I leave the word back to Erik to summarize the presentation.

Thank you very much, André. Let's look at the key takeaway. As we said, the strong collection performance in the past quarters continues into Q3. Very happy about the development in that part of the company. The stable underlying cost is expected to continue going forward, and we now have, what we say, a scalable platform, taking more investment, keeping the costs more or less constant. We see that we have a strong financial position with good liquidity position, enabling us to also then look for new investments. We have extended the RCF with improved terms, and we have to also remind ourselves that we last quarter had an improved rating by the rating agencies and Moody's, also underpinning the lower financial costs that the company has received. Now going forward also, the investment, we anticipate to grow in investments and also we see that we are -- it will enable us to come out with higher dividends most likely for 2024. So with that, we -- that is our conclusion and we open now for questions.

Thank you, Erik and André. We will then start...

[Operator Instructions]

Thank you. That was the AI voice. Back to the Q&A. We will then start with the live questions. But you can also ask questions -- written questions in the feed. But we will then kick off with the live questions.

This is Håkon Astrup from DNB Markets. Two questions from me. The first one on dividend policy. You have a very strong financial position, and you also said now targeting higher dividends in '24 compared to '23. So, my question is, is that something that you're aiming for also, say, going into '25 and '26 to have a, say, nominal increase in dividends year-over-year? Many financial companies try to accomplish this. Is this something that you also are aiming for?

I would say that we are aiming for that, the nominal amount to increase over the years to come. We are seeing dividend as a good source of payout to our shareholders. So, that is the aim for the company.

Perfect. That was very clear. And my second question on the investment activity going forward. So, you're indicating that activity is ramping up. Can you be a bit more precise on which regions that you see most activity and where you see the highest profitability at the moment?

I mean, we clearly focus our investments in our unsecured markets. So, we have more than 10 markets to invest in, and obviously, that's a good position for us to be in as the markets, obviously, fluctuates between the years, which market is more competitive and which market is more attractive in terms of returns. So, we will continue to focus the investments in these markets. And so far, we've seen very favorable returns and we have been a bit cautious given the increase in interest rates and margins that we have seen for us and across the industry. We have now turned this around and expect it to come down in the coming periods, and we should consequently be much more competitive and be able to win more volume going forward.

[ Gustav ]?

Just a follow-up here on the investment level. Can you elaborate a little bit on the low levels we have seen currently and the guidance on a significantly higher number, what is the step change here? Has supply been too low? Is it too competitive? Or are IRRs just not meeting your hurdle historically here in the past 12 months?

I think this goes back to my previous answer. We have been disciplined, and I think we can be slightly more forward leaning on price, and obtain still a very profitable return given that we're able now to drive our financial costs down quite a bit going forward. So it's a combination of being prudent, and we have not seen the volume coming to market that we have been expecting also. So it's been right for us to be prudent. We do see a smaller step change. We're not saying, by the way, we're going to invest necessarily NOK 3 billion for this year, but we expect still to be able to drive within our target range of NOK 2.5 billion to NOK 3 billion, that's still our target. But on an annual basis going forward, we say we should be able to invest up to NOK 3 billion or more. And we can do that now on a much improved cost of funding.

Can you support an investment level of NOK 3 billion and increasing dividends with organic cash flow? Or would this imply that you will be taking on more debt in volume?

Based on the leverage we have today and the available liquidity, and the obviously operational cash flow we have, we can definitely drive a level of NOK 3 billion per year without having to increase the gross debt, that's absolutely possible and to maintain a moderate leverage at the same time. That's the key for us is why we have delevered and ended up in a position we are. We want to be able to deliver growth over time, not necessarily significant growth, but stable, profitable growth and maintain a moderate leverage over time.

I have just 1 or 2 more here. So after the portfolio sale in Poland, how are you tracking against your targets of reducing the number of active markets? Should we expect similar transactions going forward?

As we said previously, we are still looking at some countries where the activity has been low for the past years. So, we are still contemplating coming back with possibly new reductions going forward. It's on a plate. We are concentrating our investments in around 12 countries at this point in time.

And the last one from me. You are now delivering over 110% collection performance and sequential improvement, and also stronger than the same quarter last year. At what point would you consider revising your active forecast and perhaps make a positive evaluation to your book considering the strong collection performance?

This is something we're considering every month and every quarter. So it's also an area where you should be prudent and not make too many changes based on short-term performance. So, we haven't seen 110% for many quarters. It's been more in the area of 103% to 105%. So, I think we have to observe the collection performance in the coming quarters and see a clear trend before we do any notable changes.

Then over to you, Jan Erik Gjerland, ABG.

Yes. Just one follow-up firstly on the investment level. Did I hear you right, André, that you said NOK 2.5 billion to NOK 3 billion this year and then NOK 3 billion ahead as your best guidance for your investments?

So the NOK 2.5 billion to NOK 3 billion was our target set at the beginning of the year. We obviously want to reach that this year as well. But if we reach that in December or in February next year, it's not a big difference for us. So, obviously, we want to be at the level up to NOK 3 billion per year. And we will definitely target to reach the level of NOK 2.5 billion to NOK 3 billion for this year. But if we see more interesting opportunities coming into beginning of '25, obviously, we will wait for those opportunities as well. But our clear target is to increase investments in the second half and we now see that that's much more comfortable for us with the lower cost of debt we will have.

Good. Then the second one is probably related to it, because you have now seen your ERC coming off a little bit. Would you think it will be higher than next year going into the future than what we have seen today? Or is it more also dependent on the FX since you're reporting in NOK, the banana republic currency?

So is the question on ERC or on currency?

On the ERC. But of course, you're reporting in Norwegian krone, so it will, of course, be depending on that level as well going forward. But in stable currency environment, will you have same, higher or lower ERC going forward, do you think in 12 months' time?

Here, it's very important to make a distinction between unsecured and secured. So over time, we will invest much more in unsecured, which will drive growth in unsecured ERC. But at the same time, we're collecting on our back book unsecured, which has a shorter lifetime, while unsecured has a much lower lifetime and more stable collections, which is the direction we want to go. In some quarters then, you may see that we don't collect as much unsecured and we'll have periods where collection is not coming up year-over-year like this quarter. But the most important thing to look at is if our unsecured ERC is growing. And it was up 3% this quarter without too many investments. And that is, to a large extent, also because we're investing at more favorable terms. But we should expect going forward, if you focus on unsecured, to see notable growth in ERC within unsecured.

Very clear. On the OpEx side, you touched upon the legal costs, which could be sort of becoming higher because it's depending on your collection, of course, while your running cost seems to coming down. Should we then expect the margin actually to expand from here? You have now a strong cash OpEx level. Is this something we should see that you're expanding the margin on the cash side? Or was it this quarter then impacted by the sale of Poland in that margin -- cash EBITDA margin?

Yes. So, this quarter was unusually high on cash margin, which should most likely trend back to around 70% area. In terms of the legal costs related to collection, it has been unusually high for the last couple of quarters. Also in the first quarter, we had some impact coming from the large secured collection we had in Croatia, which impacted quite a bit on legal collection side. But we have also invested more in unsecured legal collection actions, which we have seen a positive impact from in Q2, but also expect to see that in Q3. And short term, these costs will come down. And of course, if we drive more investments than we have today, that will obviously drive some incremental legal expenses going forward. But we should expect the overall legal collection compared to the total collections to come down in the coming periods.

Thank you. We then have a few questions in the chat as well. We will then start with one question from -- or a couple of questions from Vegard Toverud, Pareto. Question one, what will termination of the SFA in Q3 contribute with on funding for Q3 and Q4 '24?

So for the next quarter, it will not contribute much, but on an annual basis, we should expect the termination and some steps we're taking to improve cash management to be around 20% of the achieved target. We have set the NOK 200 million.

Second question. I think this can be answered again. Just to be clear from our side, will the proceeds from the Polish sale be reinvested in the business that will increase other income or in portfolios that will boost portfolio income?

It will be most likely invested to increase NPL revenue and not other revenue.

Thank you. Then we have 2 more questions, but they are asking for the same. So, we will then ask them together. Given ambitions of higher investments going forward, what is the company's comfortable leverage ratio?

Well, we have said that over time, we're going to still keep a low leverage going forward. We're at 1.7x now, which definitely is on the low end. Coming up to 2.5x would be a comfortable level to be at. But -- so that's -- short term, we will not achieve that because that would entail very high investments. But going forward, I think between 2x and 2.5x in the short run is where we will see -- where we will head, I think.

Thank you, Erik and André. That concludes the Q&A. If there are further questions after the presentation, feel free to contact us. My contact details is on the last page of the presentation. So with that, we conclude the second quarter presentation and look forward to seeing you again in Q3. Thank you.