Catella AB (publ) (CATB) Earnings Call Transcript & Summary

I'm -- maybe I should start having -- saying some words about the new appointment of Christoffer as being the new CEO. He's not responsible for the last quarter results. I think I'm much more responsible for that one than he is. But regardless, I'm extremely happy that he has accepted the appointment. And I have got to know him in the last 3, 4, 5 months. And I think he is very well equipped and has a very good background both as being CFO, but also being very active and with an international background in real estate, which is exactly what we need and what we would like to have moving forward. We have also had the opportunity to discuss the future strategies of Catella, which I think to be aligned on that one is a key issue. And I think that has been part of the problem historically that we have not really had a clear strategy of how we believe we could create value for our shareholders over time. And I think that's really what we have spent time on. And also, we started to get to know the organization and the pros and cons in the various operations, and they are very diversified or they disperse, whatever the word is, but they are different at least. And they also have different business models, which we have to not necessarily align with each other, but we have to adapt to it, and we have to maneuver it in a certain way. And I think we are very aligned on the future strategy. And it has been a great advantage for both of us, I think, to have this kind of discussion at the same time as we are making some kind of, I wouldn't call it drastic or dramatic changes, but we are doing organizational changes at least. I think the future will be more over the -- the question is how could we capitalize on the European platform that we have within Catella, very few [ captives ] have such a platform. So the question is, how could we drive more profits and drive more value out of that? And I think one word is that we need to be more proactive and looking for the projects. And by projects, I don't mean new developments. I mean I refer more to anything, which is any kind of new initiative is a project. So don't misunderstand me. And also how to connect with the various people in the organization to create more direct values out of their own creativity, et cetera. Okay. With that said, I welcome Christoffer. Thank you very much. I think the first stage, which I promised to talk a little bit about, is you are quite familiar to that one. I don't think there are any dramatic changes. The result is not extremely good. It could have been worse. I mean don't forget that in -- within the course of finance outside the Nordic, the market has dropped by more than 50% or at least 50%. So even if France and Germany are doing very poor or -- it's at least partly due to the market condition. And IPM, we would come back to you. But the assets under management has, so to say, I would say, it's stable. It hasn't decreased in IPM, and it has increased in the other operations. I think I rest my case now [ for a while]. Yes.

All right. Thank you, Johan, and thank you for the kind words. And I'm very excited to -- at some point, the spring takeover has seen [ the old ] Catella . I think like, as Johan said, we are in a fantastic position to continue to develop our European platform. If we turn to Page 3, talk about the results for the fourth quarter, which as Johan said, was somewhat of a disappointment, but not without promise underneath, and we'll talk about that a little bit. If you look at Q4, it was modest on the bottom line, especially when we compare to Q3, which was spectacular. Our business, I don't think, should be measured on quarterly results, but long-term trajectory and increased assets and profitability. So just bear that in mind as you evaluate the business. But we can always do better, and we'll do our best. The AUM ended the year at about SEK 130 billion. All these numbers are in Swedish krona, which represented a drop of SEK 5.9 billion during the quarter. Systematic funds, which is -- we'll refer to it as IPM, since the sale of our Mutual Funds business, we really only have IPM in that segment, had another challenging quarter. They lost SEK 5 billion of assets while our Property Investment Management group or segment, they actually grew by SEK 4 billion if we do not account for translation differences. We suffered a little bit from the weakening euro, but the underlying growth was pretty strong due to capital inflow, primarily in our U.K. asset management platform and our German property funds. We delivered net revenues, so what was the total income after assignment expenses and commissions, of SEK 476 million, which, unfortunately, is SEK 169 million or 26% lower than Q4 last year. That is adjusted for the sale of our mutual fund operations. Of course, IPM's continued capital outflow, this SEK 5 billion down to now SEK 14.2 billion at the end of the year, and lack of performance fees in that business contributed SEK 97 million to that income drop. So that naturally has a significant impact on the group's results, and it's something that we work very closely with that team on turning that around. Corporate Finance net revenues were down SEK 41 million or 15% versus last year in the same period last year. Good news there, though, is that Sweden delivered an excellent quarter. They're up close to SEK 30 million or 70% on the back of just generally strong performance across the board and also several large transactions. We're very proud that Catella was ranked #1 in Sweden on the sell-side advisory side. And hopefully, we can learn from what these guys are doing and translate that across Europe. Continental Europe though had a more challenging quarter. As Johan said, it's been a rough few months with lockdowns. And even though we had some pipeline, some deals fell through and some deals were delayed. And we're standing here in the -- towards the end of February, not knowing when that's going to change, but we're working as hard as ever and keeping that pipeline warm. Property Investment Management. Revenues -- net revenues were in line with last year, although we had less variable revenues this quarter compared to last year. That's a little bit -- one of the things you have to look at on a longer-term perspective. But our fixed fees keep growing with our asset base, which is really what we primarily look at when we look at our Property Investment Management segment. Our operating costs were SEK 68 million or 13% lower than last year, again, adjusted for mutual funds, which is mainly driven by lower variable salaries, not performance-related in systematic funds and Corporate Finance. But we also had some savings, especially related to the fact that we don't travel, we don't go to fairs. And we try to use technology as effectively as we can to stay effective. We had some headwinds on the cost side, partly from a couple of smaller goodwill write-offs of older investments and some increased consulting costs although there we believe we get a good return there from restructuring and transaction advice. All in all, our operating income was SEK 23 million in the quarter, which was -- which is slightly disappointing, but we're confident that our underlying performance, primarily in Property Investment Management, remains strong, and we are, of course, addressing the areas where we've had some recent weakness. If you look at the bottom of the, well, short P&L there, we wrote down the value of our loan portfolio by SEK 16 million to reflect changes in the cash flow profile, and we feel very comfortable where we are now. And we have some further negative impacts from the weakening euro. A lot of our assets and loan receivables are euro denominated. On a positive note, at the bottom, we were able to restructure our German ownership to lower our effective tax rate. So in total, Catella reports a loss of SEK 32 million from remaining operations in the quarter. However, Catella Bank, which is being wind down, actually contributed positively this quarter with SEK 25 million. So our total net loss amount is SEK 7 million. And I think the bank is now in a position where we feel comfortable with the provision and the reserve level for every remaining cost to wind that down, and we'll take it from there. If we turn together to Page 4, cover the balance sheet as of December 31. I want to point out that this is from our remaining operations, which then excludes Catella Bank. We have rough guideline is another SEK 400 million of assets and equity and a little bit less in cash if you want to look at the group's total consolidated position. But as you know, we report it as a disposal group held for sale. And without it, our group total assets were about SEK 3.7 billion and with the bank about SEK 4.1 million consequently. I don't want to point out too much on this slide, but you can see that the continued focus on principal investments can be seen the SEK 720 million of assets in property development projects, which has increased even more from last quarter, primarily from additional investments in our Danish residential development called Kaktus and our logistics project in Norrköping here in Sweden. Our liquidity remains strong with close to SEK 1.5 billion of cash and cash equivalents and our [ liquidity ] is above 40%. We spoke about this for those of you who joined us in the third quarter. While we're happy with our liquidity position, it should be noted that not all of the SEK 1.5 billion is immediately available for investments as a large portion is held in our daughter companies. If you see on the graph for cash, the dark shaded part of the bar is what's effectively immediately available in our holding companies. And out of the SEK 1.5 billion, about SEK 0.5 billion is immediately available at the parent company level at year-end, where about the same amount is sitting in our daughter companies. There will be some dividends, of course, coming our way. And the rest is sitting either in smaller restricted assets for regulatory purposes or in minorities. Once the banking license is returned, and we hope to achieve this wind down at the first half of this year, we expect to increase incrementally above what's listed here, our cash balance by approximately SEK 350 million over time. Some is available -- will be available immediately, and some will come when we can dispose of certain assets. We go to Page 5. We turn to our segments, and we start with Corporate Finance for the quarter. As we've mentioned, both Johan and I, Corporate Finance net revenues were down. They were down SEK 41 million or 15% versus last year, which, in the context of a 47% year-over-year drop in the overall market, excluding the U.K. where we really don't -- we're not really present, you could consider that respectable. We're, of course, not satisfied. We always want to beat the market, and we did so in Sweden. And France and Germany are a large market for us, very large markets, and we did underperform our expectations, and that's something we're working very heavily on. The Sweden -- the quarter in Sweden, which was up SEK 30 million, as I said, in net revenues, was also supported by 3 very large transactions with Norama, [ Hauger Gilston ] and [ Stanheuss ] , which I think, and Johan and I, I think we both agree that we want to do more of those types of transactions and continue to move up the value chain in the advisory business. For Continental Europe, it was a challenging quarter. We can't hide from that. We had further lockdowns and deal delays impacting our performance. France was down SEK 45 million net revenues, which is 29% year-over-year. Again, in the context of the market, not too bad, but not at all what we want to deliver. On a good note there, our residential advisory segment continued to deliver very strong results in France, which is what we're trying to build upon and get our core platform back on track. Germany and to some part Denmark was a real challenge. Germany has struggled for most of 2020, and we have an increased focus to support the team to turn this around for 2021. But Germany is a tough advisory market, and we're going to have a big task on our hands to make this -- turn this around this year, but it's one of our main focus areas. I would like to move to Page 6 to talk about Property Investment Management. Sometimes, I'll refer to this as PIM maybe, just because that's how we talk about it. So our Property Investment segment grew its AUM, as I mentioned, by SEK 4 billion in the quarter, if we adjust for currency translation effects, and really thanks to strong capital inflow in our U.K. asset management platform and our German property funds. Of course, looking at the euro translation, we look like we're flat and this is our key growth engine. And of course, we don't want that to look flat, and we expect that to grow. We still think that our capital inflow was solid. Not quite what we're hoping for, but it's good. APAM, our U.K. platform, added about SEK 2 billion from new shopping center mandates, and that business is trying to broaden its product offering, and it's trying to broaden the value chain, which we're very positive, and we're trying to support them any way we can. Our German funds grew by about SEK 2.5 billion across several funds, none really to point out. But I want to highlight that growth is still net of some material dispositions that we had in one of our residential funds. We added another SEK 0.5 billion in our hospitality business by great mandate for the Holiday Inn and Clichy in Paris. And that's one of the segments where there might be some more opportunities given the current situation. PIM, or Property Investment Management, delivered another solid operating profit of SEK 29 million, not quite where we want it to be, but maybe solid given the state of the quarter in general terms. This was driven, which we should keep pointing out, by continued strength in fixed fees. We also had some acquisitions where we do get fees, especially in our specialists and residential funds. And we got some variable fees or revenues from sales within the European residential fund. So this is where we'll see most of our growth coming and where we put a lot of focus on our management time at the moment. As you guys probably have seen during January, we sold our entire stake in our asset management business in France. This has, since the fourth quarter, reduced our AUM by about SEK 15 billion, just shy of that, and generated a profit of SEK 122 million, which will come in Q1. Obviously, we're not in the business of reducing our asset base, and we are actively looking for the next opportunity to relaunch our asset management business in France to get a new -- great new partnership going. On Page 7, we cover Equity, Hedge and Fixed Income Funds, which effectively now is IPMs, Systematic Macro. This is a tough situation. We can't hide from it, and we're deeply involved with it at group level. There's been real headwinds, both on an industry level. Our performance has not necessarily been worse than our peers, even the largest peers in this segment worldwide, but this past year 2020 has been anything but predictable. And our products here are based on predicting outcomes from macro events and has been extremely successful in the past few years. But it has not worked well for us this year, and we've had continued capital outflows, and we're down to about SEK 14 billion of assets now and has been a relative weak fund performance. So I mentioned earlier, we're down SEK 97 million year-over-year in income. Anyone involved in this industry knows that it's pretty hard to turn around this type of trend, but it's clearly not impossible or beyond us. The Board and the leadership team at IPM are working aggressively to develop new factors better suited to today's environment. Short term test results by no mean certainty, but they are promising, and we're hopeful that fundraising should be successful in the coming year, but this is a longer turnaround. We have taken some tough but necessary measures to adjust the cost base to this new situation, and we remain very, very engaged at the Board level to drive the necessary changes. And we'll keep updating investor community. On Page 8, we talk about our principal investments. We talked about these at length before. And this is an area where we have increased focus. And we've continued to invest, as I mentioned earlier, in our ongoing project. I think more importantly, maybe is that we're seeing an increased pipeline of potential projects, none that have generated any concrete transactions in the last couple of months, but we have a solid pipeline that we that we're working with towards 2021. And I think we look at it with some optimism. If we move to Page 9 and hand it over to Johan, if you want, or I'll continue. I'm on a roll. Okay. It's really -- it's just strategically and that's why I didn't want to cover the principal investments in too much detail because, really, that is a way for us to invest some capital, but it really isn't about being a developer or a real estate management company, it's about unlocking more potential for the broader group, and that's what we want to talk about on Page 9 and 10, which we've highlighted before, 9, 10, 11, we highlighted before in the third quarter. And Johan and I will talk about it a little bit together. We switch to Page 9.

Okay. Yes, I think in order to unlock the potential, I think we generally need cash, and I know the cash is pretty good. I mean if we would include the bank, the cash, I mean, we would have close to SEK 2 billion, but that is not really 100% true because as Christoffer said, part of that money is locked into some daughter companies. But regardless, we have potential to grow and to initiate new projects and to create joint efforts in the group, and that's what we see, and that's what we push, and there will be a lot of new investments coming along where we will sometimes invest like with 5% of the capital and sometimes maybe initially 95%. And I think the fundamental reason why we are going in this direction is that we believe we could earn much more of the -- we could have a better business model to have better margins, especially [ weaker ] initiative or initiate new investments and find the co-investors along with us why we are driving the projects. So that's what we are trying to do. And we see -- I think all our projects on Page #8, and we are now #8 and 9. But all the projects on #8 are going according to our expectations or better. We are very confident about them. And I think we have a pretty good or very good pipeline. It's more a matter of what we are capable of managing and how we could build the internal competence to manage the various projects. And then it is a matter of us investing and also making additional fees within the group by using the different daughter companies in the total value-added or in the value chain. I don't know if you would like to continue, but that's what it's all about. And if we go to Page #10, I think maybe we should -- this one, most of you have probably seen it before, but I think that we -- wide to the left, it shows that we are primarily in the core segment and with residential and a little bit of offices, while I think that we are going a little bit more into the, I don't know, you should call it opportunistic or value added, but we should move into new segments of the market where we believe that over time the fees could be substantially higher. And that is the -- that's how we would like to drive the business model in the future. I think we are behind time. I don't think I could add very much more than that.

I think we've covered most of the things on the last page, and we want to make sure that we -- with my rambling, everyone has time to ask questions. It's been a challenging quarter, but I think the underlying trends are still good. And what we're doing is focusing on growing on our strength and addressing the 2 or 3 areas where we're having some challenges. So shall we open it up for questions from the audience?

[Operator Instructions] We have a question from the line of Patrik Brattelius from ABG.

Yes. A couple of questions from my part. If I start with the IPM and systematic funds, we have seen negative operating profit now for 3 quarters in a row. So what is the run rate with the fixed revenue versus fixed cost on this AUM base? Do you need to increase the AUM base a lot in order to turn a profit? Or can you just reduce cost and still being able to achieve a positive operating profit result in this segment?

Thank you, Patrik. It's a very valid question, and it's a complicated one. When you're in the asset management business, there's no simple way to save cost to get you out of trouble. You have to do both, and that's the challenge. At our -- as you know, we don't give forecast, but you can do the math on the current asset base, multiplied by our fixed fee ratio. Compare that to our current cost base, and you can see that 2021 is going to be a bit challenging. We have worked everything we can to reduce costs without disrupting the operations. We need to have a first-class product to sell. And that takes some time and investment. But we're trying to cut wherever we can, and focus, I think, is the keyword, focus our operations on the right product and the right factors and selling those. But you can do the math. You know that we can't just save our way out of this one. We're going to have to turn this around.

Okay. Fair enough. And then I turn over to the Property Investment Management segment. You were able to achieve an operating margin of 21% if you look at the full year 2020. So that is a very strong quarter, but your -- this was also helped by the Grand Central transaction, for example. If you were to remove extraordinary revenues, what would the margin be on more of a run rate for this segment on a normalized level? Can you help us with that, please?

Yes. I don't think there's one answer to that. Obviously, performance-related fees are part of our normal business. They are, however, very choppy. They come in the quarter, and then nothing happens for another 5 quarters or we get some smaller ones as we did in this fourth quarter. We look at our underlying fixed fees to fixed costs and try to make sure that we have that covered, and then work with as much as upside as possible. The variable fees are not unpredictable, but it's the performance fees that you're talking about when you really close out a big transaction. Do we consider that run rate or not? It is part of our business. So I think what we have to do and what we can do and we can get back to you, if you want, with maybe looking at the last 8 to 12 quarters and fixed and variable split out. I mean that, I think, is the easiest way. I think if you're looking at a full year of 21%, that's higher than what our run rate would be without an extraordinary transaction, however you define that. Although this quarter, you can see that 2020 at 12% in the fourth quarter and 2019 at 10%. In 2019, we had a bit more of variable fees coming in, but we have since grown our fixed fee generation. So is that a standard order? Not too far from it, but we believe that we, on an annual basis, should have a bit more upside from variable fees. I know that's not a super simple and straightforward answer, but that's how we look at it, slightly a bit of over the longer term.

Okay. Yes. And what you mentioned there with the fixed fees versus fixed cost, yes, it would be lovely if you could provide that historically as well so we get more transparency into and get the right expectations going forward. Looking into the principal investments, how -- which -- is any of these projects in the property development projects ready for an exit mode, so to speak, in the coming 12 months? Or are they still being evaluated and worked on?

Well, there -- I think the first answer is they're all being worked on, and they're all being evaluated. As you know, we're -- we don't have quarterly targets that we have to meet or set. We operate on the premise of delivering maximum returns at the right time. But I think there's some likelihood that at least maybe one of these could be realized in 2021. And some of the ones as Seesradt and Düssel-Terrassen are bigger in scope and have several generations of them. So we'll see what -- if there's going to be something on the shorter term, but that's harder to predict, but that's a bit of a longer term project. I think Kaktus and Norrköping are more in the, let's say, 12 to 24-month time frame.

Okay. Yes. Very helpful, very helpful. And then if I turn over to this transaction you did in France with property asset management, you write there in the CEO word, in the CEO comments in the beginning of the report that you are looking to come back to that market. How does that market look like? What can we expect in terms if you were to do an M&A transaction in that market? Are you looking for the same kind of asset under management base? Or would you want to have an either even stronger asset under management base in that market? And how does the price level look like? Is it -- should we expect a similar price level as the transaction where you sold the property asset management here in the first quarter?

I don't know if I should answer that, but I guess our intention is more to have a start-up with someone who have done it before, like we did in the past. And we are, I should say, that we have serious discussions, that we have approached by different individuals who would like to start-up together with Catella AB. It's also a strategic decision a little bit how we deal with CREAG, which is the German operation working in the commercial space, more in the residential, and to what extent should we just have an asset management operation, to what extent could we set up new [ fact ] and should that be done in separate units France, or should that be done from the CREAG [ business ]. Now we -- there are some [ strategic decision ] that will refer to the situation in France and Germany and the Continental Europe.

It's a big market for us, Patrik. But I think we are in -- values today in the market are no cheaper than how we sold. And we have to be very careful if we're looking at M&A, which is trickier. We have been, arguably at least, even more successful when we grow our own partnerships, although it takes a little bit more time. But it's an important market for us.

Great. Is there any other market geographically that you see untapped potential here?

Okay. Yes. Fundamentally, I think we are -- if we are capable of growing in Germany, France and England for a great business, I think that that's where 8% of our market is. I think we are happy. And if we could grow by 10%, 15%, 20% in area as those markets, I think that is big enough market for us. I mean of course, there are some other big markets but I think it's a bit premature to [indiscernible]. We are growing in Spain. We have a decent profitable operation. It was loss-making for many years, but today it's making money. And I think we have some initiatives in Scandinavia as well. But the big markets for us are primarily in Germany, France and England.

Okay. And my follow...

We should try to double in those markets instead of maybe spreading around in a lot of new -- but we have to be a little bit more -- I mean we have to be -- I shouldn't call it the DCM market, but we should be more in the capital market [ as they describe today ], just depending on how you define the capital market.

Just a final question here from my part then. You mentioned some extraordinary items in the P&L. Can you specify them? You mentioned the write-down for the loan portfolio and an SEK 8 million goodwill impairment. I just want to make sure that I got all of them. If you can specify them, please?

Yes, and I think that...