COFACE SA (COFA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Coface 9 Months 2024 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Xavier Durand, CEO. Please go ahead.

Thank you, and good evening to all here in Paris. It's 6:00 p.m. Thank you for joining. We're happy to report our Q3 earnings today. You will have read from the headlines that this was another strong quarter of execution for Coface. We're reporting EUR 207.7 million net profit in the first 9 months, which means EUR 65.5 million in the third quarter. I think if you read through this report, you'll see the continuation of some of the trends we discussed in the past quarters, but also, I would say, some better news on the growth side as we're seeing the inflation cycle playing through. You've seen insurance revenue decrease by about 4% at constant FX without any contribution from client activity. The total revenue for Q3 has actually stabilized at just slightly below 0. We're coming from -- the same number in Q2 would have been minus 4.6%. Revenues from other activities are actually up 6%. What you see, which is pretty consistent with the prior quarters is client retention still at a high level at 92.7%. It's down from the record of 23%, but pricing is also minus 1.4%, in line with the historic trends. I think good news on the Business Information side, where you're seeing double-digit growth at 17.2% in the first 9 months. Same thing we'll talk about debt collections and manufacturing is down 3.6%. That's mainly on the back of slow industrial activity in Germany. Continued very strong performance from Coface on the loss side in an economic environment, which is hardening, I would say. You see the 9-month net loss ratio at 35.5%, which is almost 5 points better than last year. The net combined ratio at 64.4% remains very strong. The gross loss ratio is better by 6 points. And you'll see that in the next pages, where we're continuing to open the new year at a pretty high level, and we have continued to benefit from strong reserve releases on the past vintages. The net cost ratio has actually gone up by 3.2 points to 28.9%, and we'll explain how that's being impacted by lower revenues and the continuation of our deliberate investment strategy. Actually, we continue to invest in growth and technology, and that's really the constant since we published our new plan, Power the Core. So overall, I would say strong -- another strong quarter. The annualized ROATE at almost 15%, I think, is the highest we've had in the last 9 years. So if we go into Page 5, we wanted to give you a little bit more color on the services business that we are building, as you know, as part of our Power the Core plan. It's been intensifying for the last 4 years, and we believe we're developing a unique set of services to serve clients in what is now a hardening cycle. On the left here, we describe some of the value propositions that we've been building on the Business Information side. We're building supply chain risk management capabilities, customer risk evaluations, including portfolio monitoring, credit decisions, risk model improvement, portfolio due diligence. We're investing significantly and constantly in our data patrimony. We have now almost 220 million companies referenced in our database, which cover 200 countries. We're digitally connected to more and more information providers at the stage, 56. We've got about 15,000 clients, 2/3 of which are noninsured. So that's considerably expanding the commercial reach of Coface, if you will. And some benchmark numbers here. We've got about 20,000 credit decisions, which we think are being taken by our clients on a daily basis, and that's growing strongly. So we've also been building more recently capabilities around debt collection. This is really based on the fact that we have one unique system now that's serving many, many countries around the world that we are known for collecting for ourselves. We have the brand. We have access to the market. We have teams. We have clients who need those services. And we do this at a time in the cycle when the need for collections is increasing as you know, insolvencies are rising around the world. So on the top right hand, I mean, give you some numbers here. We're almost -- we're 566 people at the end of the Q3 dedicated to Business Information. So for Coface, being a 5,000-employee kind of company, this is quite significant. We are building that up. There's 220 people that are dedicated to sales. There's another 50 we've hired actually in 2024. So we're continuing to invest and expand. We're tripling in 2 years the FTEs that are dedicated to sales on the debt consolidation side. And you can see that we're making progress on the revenue side where we have about EUR 58 million worth of revenue out of these 2 businesses for the first 3 months of the -- 9 months of the year, sorry, with strong double-digit growth. And this is profitable. I mean we are doing all these investments at no cost to the P&L, but the gross margin in Business Information that we work with is something north of 60%, so this is really building for the future. And we thought it would be helpful to give you a little bit of a read on what we're trying to do here, expanding both the capabilities, the commercial reach and validity of Coface, at the same time building really interesting data capabilities, which will help support the insurance business. On the next page, you're very familiar by now with all the next pages. Page 7, you see total revenue down 2.1%, with services up 6%. We have trade credit insurance, as I said earlier, at minus 4%. We're not yet seeing a rebound in client activity. It's not negative anymore, I guess, but we still have weak economy and lower inflation playing through. The other revenues, as I said, is up 6%, of which Business Information up 17.2%. Third-party debt collection almost 19%. That's a much smaller business, though. And then factoring down mainly driven by Germany industrials. A nice pickup in insurance fees, which are up 8.3%, all things equal for the quarter. On the next page, we describe the growth by region as we usually do. And what you see on this page is really more or less the state of the global economy, Western Europe down 3.1%, improved, I would say, from Q2. Northern Europe, which is, for us, a big part of this is Germany being probably the tougher part of the world right now with low growth and slow industrial activity. Central Europe at minus 3%. The exception being Med and Africa still growing at about 5%. North America at minus 6%, starting to feel a little bit better. Asia Pacific at minus 8% and Latin America improving from the past at 2.3% growth. So really not a whole lot of [ good ] news as we see some of the same trends actually playing out in the different regions compounded by the state of the economies. On the next Page 9, some better news, as I said, on the growth side. You see new business up 8% from last year and 17% from '22. So picking up some speed here. There's more demand, I guess, in this market, which is a little bit more stressed. Retention is improving even though it's not as strong as it was in '23. Price is negative, but less negative, as I said, than the 2 prior years. And volume effect is not negative anymore. It's just kind of flattish. So we are not benefiting anymore from inflation. The world economy is kind of flat. I wouldn't call this a rebound yet, but it's certainly better than having negative activity. On the loss side on Page 10, you see the loss ratio before reinsurance, including claims handling at 33.7%, so very much in line with the prior quarters. I think clearly, we are -- you look at the market and you see that insolvencies are well above 2019 in most countries. So clearly, the cycle has hardened. We see the number of claims continuing to increase. We see bigger insolvencies than before. So clearly, this is a market which is getting a bit tougher. The economy is kind of slow. The monetary policies are tightening and companies' treasuries -- and you'd probably see it in the earnings reports that have been released over the last few weeks, companies' treasuries are being put under more pressure. There's no change in our reserving policy. You see we opened the year at 78.4%. We still benefit from 45% of reserve reversal. So past claims experience remains strong, and I think we continue to execute in a tougher market. You see on the next page, the total years '21, '22, '23 and in the first 9 months of '24 by region. There's really not a whole lot of news, quite frankly, on this chart, very stable and improvement in Latin America, which had been the subject of our attention last year, probably the smallest and most volatile region of Coface. But pretty much everywhere else, the story is pretty much in line with historic trends. On Page 12, we describe the same numbers, but this time by quarter and the 4 largest more stable regions of the world at the bottom are kind of pretty much, again, in line, so not a whole lot to talk about. Same above with more volatility, as I said, in Latin America, but that's under control and in Asia doing actually very well. On Page 13, there is a cost story. So if you recall, at Q2, we had shown more than 6% growth in the cost base. Q3 on Q3 last year is up 3.3%. So there again, better, I would say, comparables to last year. We see the gross cost ratio before reinsurance at 33.7%. You see that on the top right. And if you go to the bottom right, you see that the gross cost ratio between '21 and '24 after reaching a record in '23 at 30.5% is now up from last year. Now the increase in the cost ratio pretty much like the last quarter is driven by 3 things. One is we have premium -- negative premium. So that's impacting about 1/3 of the mix. We continue to invest deliberately in BI and other services and in our development. So that's also 1.7 points. And then there's cost inflation that we have embarked from the last couple of years of inflation, particularly on wages or outside services, which is partially offset by the product mix and the increase in sales and services. So better news, I would say, but still a situation where the costs are growing higher than the revenues. We think it still makes a lot of sense for us to continue to invest and to build for the future. So that's what we're doing on the back of a strong performance. Now I'm going to turn it over to Phalla to take us through the next few pages as we usually do.

Thanks Xavier. Good evening, everyone. So let's go to Page 14 on the reinsurance side. Honestly, it is very, very similar to what we saw last quarter in terms of cession rates. So with the premium cession rate at almost 28% and the claim cession rate at 22%. And here, again, I think we -- for this quarter, almost EUR 30 million pretax is going back to the reinsurers with a total of EUR 95 million year-to-date. Net combined ratio at 64.4%. This is an improvement compared to last year, the same period with an increase in net cost ratio, as Xavier explained, and a decrease on the net loss ratio. If we move to Page 16, so financial portfolio, the mark-to-market of our investment portfolio is now reaching EUR 3.2 billion (sic) [ EUR 3.23 billion ]. The asset allocation has slightly changed. We have increased a little bit the allocation in bonds with a higher duration and a higher yield, while I think investment in real estate staying exactly the same at 5%, equity as well at 3%. If we look at the recurring income, reaching almost EUR 71 million, this is what -- 50% more than what we had last year. And I think that at this stage, we are benefiting fully from the interest rate increase since 2 years. The new money is now invested at 4.3%, which is slightly below what we had in Q2, but still at a very comfortable rate. In terms of realized gain, EUR 8.4 million, what needs to be highlighted here is, of course, the investment in real estate. I think up to Q2, we booked some negative mark-to-market. What we saw in Q3 that we haven't booked much. I think it's a very, very small amount of negative mark-to-market. So on this front, we think that it's stabilized in terms of the value of our investment in real estate. We -- the IFE expenses at minus EUR 25 million. And of course, we booked additional almost EUR 2.8 million of hyperinflation, especially in Turkey and Argentina. This leads us to a 9-month net income of EUR 208 million almost, with an operating income up 15%, moving from EUR 273 million to EUR 315 million. On tax rate, 27%, very stable with what we had in Q2. What we are highlighting here is that we expect limited impact from the French budget of the fiscal bill, even it is not final yet, but at this stage, we will not be impacted. And this lead us to a net income increase by almost 10% compared to last year with a comfortable, I think, Q3 net results. Book value at EUR 14.1. I think we're now trading above the book value, which is a good news. If we move to the next page, Page 18. So return on average tangible equity. If we look at the IFRS equity moving from EUR 2.05 billion to EUR 2.1 billion. Of course, we paid our dividend. We accounted for our 9 months net income. And then we have a positive mark-to-market on our -- especially on our bond portfolio due to the interest rate decrease. This leads us to a return on average tangible equity increase from 13.4% to 14.8% with a strong contribution of the financial results. Xavier?

So just to wrap it, I mean, it's pretty short because I guess the story is pretty straightforward this quarter. Another set of strong results, I would qualify it that way, I guess, as the credit cycle continues to harden. 64.4% combined ratio is well below our through-the-cycle targets. We continue to invest deliberately. I tried to show that on the second page of the pitch. The Q3 revenue is now almost stable versus last year as the biggest part of the disinflation headwind is behind us, and we continue to see some really nice growth on services. You saw that we now fully benefit from the uptick in our -- in the rates in our investment income. We've been talking about this for a couple of years now. I guess at 14.8%, our ROATE is the best we've had so far. So really strong, I would say, first 9 months of the year. And I think what's encouraging is the services strategy continues to deliver double-digit growth in what we consider to be a structurally profitable business. I mean, clearly, we're doing this at no cost to the P&L and obviously, no profit to the P&L. But it's really an investment for the long term. We're seeing double-digit growth again for BI and for debt collection, and we continue to expand our patrimony and our assets being technology or people or knowledge or expertise in the space. So that's pretty much the story for today. A shorter call, I guess, than usual. We're very happy to take questions you might have, and I'm going to turn it back to the operator to open up the lines.

[Operator Instructions] We will now take the first question from the line of Michael Huttner from Berenberg.

Congratulations on -- I think the outstanding results, it's amazing. I had lots of little questions. But the main one -- the 2 main ones. The first one is the insolvencies are higher now than 2019, but your loss ratio has never been better or it may have been better, but it's certainly better than back then. Can you -- I mean, I can understand where the numbers are today, but there is a disconnect between the market as a whole and Coface. Can you maybe remind us or remind me what's driving this? And then my second question is on the Business Information. The gross margin of 60% is fantastic. I just wondered, can you explain -- and you say it's no cost to the P&L. So my guess, and this is a very rough guess is there's roughly EUR 50 million gross margin, give or take, for the year. And we have roughly 560 employees. So if I do the math, I get to an average salary, one covering the other, of EUR 85,000 or something. Is my math correct? Or are these employees also doing work or allocating costs to other parts of the business? I just want to understand if there's at all any overlap between these 2 activities?

All right. So I think I'm going to take those 2 questions, if you guys don't mind here. On the first one, look, we've been describing our stance, our strategy, our execution for years now. I'm almost 9 years complete in this business. So we always said we're going to take a very value creation-oriented approach to underwriting. We are going to underwrite with courage and discipline, and we are continuously improving our tools and processes, right? So it is true that -- we continue to deliver strong risk performance. The market is hardening. It is what I call normalizing. I've been describing this for 3.5 years now. But it's normalizing in a slow and continuous way, which allows us to manage, I would say, the risk in the manner that you've seen. So that's pretty much all I can say is, it is good to see the performance of the business in that environment. Another environment could also lead to a different outcome. But I think that's what we've been able to achieve. On the BI side, I mean, the math is not completely what can I say, disconnected from reality. You have to factor in the fact that we have technology costs as well and services that we buy from the outside. But essentially, we do employ about close to 600 people. They are mostly employed, not completely, but there's a mix between mature markets and some developing markets. So I don't want to get into a nitty-gritty discussion on the P&L, which we're not willing to disclose here. But basically, with that gross margin, we're paying people and we're paying some technology and some fees to outside services, and that's basically the way it works, right?

We will now take the next question from the line of Amalie Zdravkovic from Deutsche Bank.

This is Amalie from Deutsche Bank. I was just wondering, I have 2. First, sort of do you have any color on costs going forward? And I'm thinking here in particular on the sort of cost inflation side and the premium growth component? And then second, I mean, what, if anything, are you expecting as a result of the U.S. election on your business model? Are you sort of thinking about anything related to the tariffs? Or yes, I was just curious to get your thoughts on that.

Yes. So thanks for the question, Amalie. I mean, I guess we've been very consistent in this call about not giving forward-looking statements. So unfortunately, that will apply again as frustrating as it might be. I mean I think what we're trying to describe on this call is how the cycle plays. And I'll just qualitatively here describe we had a surge in inflation, which the way we bill our clients is we bill them a percentage of our turnover and -- of their turnover, sorry. And so when the inflation strikes, the first thing we tend to see is actually an increase in our revenues. And then like every business, we have to pay people and buy services from the outside, then we get hit by inflation in turn, and that drives our costs up. And they tend to be sticky because those increases cannot be reduced further. So at this stage in the cycle, what we've seen is clients' turnover has actually started to decrease because commodity prices and things like this have started to come down. So we're not seeing the top line benefits that we used to see, say, a year ago or 1.5 years ago. At the same time, we still have the cost embarked from the inflation years that are still hitting us, but the comparables are changing. As time passes and inflation comes down, the same elements are going to play through in the cycle. So I think that's really what you see at play in our numbers. In terms of the U.S. election, look, anybody's guess here in terms of what's going to happen, both in terms of the election results on one hand. And second, in terms of what that means for economic policy. So I would not try to design a scenario, I think we have to look at a range of issues, at a range of scenarios, at a range of possibilities. So could there be more tariffs? Yes, there could be. Could there be more geopolitical stress? Yes, there could be. Could there be resolution of some conflicts? I guess there could be. But at this stage, we're less trying to plan for one or other thing than trying to stay very close to the action because in our business, we're able to affect the level of risk that we take on a, I would say, 4 to 9 months basis. And I think what's important for us is to stay very close to the action and help our clients one by one steer through whatever is going to happen. That's what we do. That's why we collect millions of data points, and we have -- we make about 13,000 credit decisions a day, just to give you the nature of our business. So tomorrow, we're going to make 13,000 credit decisions. And the day after tomorrow, we're going to do 13,000 again. Depending on what happens and what policies are being put in place, it's going to take a little bit of time, clearly, right, for the world to change. We will alter those credit decisions and positions we have on different companies as we see fit. And our ability to do it in a timely way, in a detailed way, in a granular way, sticking with the reality of whatever is going to happen is what's going to determine our performance. So I hope that helps. We're not trying to paint the world with a big brush because I think if you try to do that, you're probably going to get it wrong, and you wouldn't even be able to determine the timing anyways. So many, many things can happen out there. I hope that helps.

We will now take the next question from the line of Benoit Valleaux from ODDO BHF.

A few questions also on my side. Maybe the first one is regarding to client activity, which is still close to 0. You mentioned the fact that inflation headwinds is now over. What can we expect broadly for next year, I mean, based on what you see from your clients, based on view of your economists, I mean, any color, any comment on that would be very helpful. And second point also maybe in terms of pricing trends. Do you see any reason why price decrease, let's say, should be higher than usual next year or [ would be ] still stable at minus [ 1.5% ]? The second question is regarding reinsurance. So you've been very profitable this year. It may be a bit too early, but what do you expect in terms of pricing for the next renewals in terms of reinsurance? And my last question is related to Western Europe. If I look at your slide, I think it's Slide 12, your loss ratio is still excellent, but I mean, there is a slight deterioration in Western Europe in Q3. Just wanted to know if there's any specific things to be mentioned in terms of country, sector or [indiscernible] frequency. I mean, okay, just to understand if it's -- if there is something specific behind that.

Yes, thanks for the question. This is usually the time of the year when we start getting questions on reinsurance. The only thing I would tell you is it's a bit early because the negotiations take place at the end of the year. You're probably well aware of the stuff that the reinsurance market is going through right now with storms and floods and rain and all sorts of stuff. So part of that plays into this. The credit cycle plays into this, all sorts of stuff. So that's an end of the year discussion that we haven't had. In terms of your 2 first questions, and then I'll pass it over to Phalla for the last one on Europe loss ratio. But where are we going in terms of client activity or pricing? I think we've described this. I mean, again, we're not going to make forward-looking statements here, but we come from a high inflation world with obviously high client activity to a lower inflation world with actually negative client activity for some time to kind of 0 in the last quarter. I think what you're seeing here is some of the world economics playing through. It will depend on price of commodities. We tend to be a little bit more skewed towards commodities than the general GDP mix. It will depend on industrial activity because we tend to be a little bit more focused on industrial than on services. It will depend on Europe because we tend to be 50% Europe-centric. So there's a lot of moving parts, I would say, in the mix. We see the world economy kind of slowing. But as you know, this is the delicate phase of a monetary tightening where it's now coming to reality. The economy is starting to slow. The central banks are starting to ease in that game and the governments are running a bit out of money. So you've got all these factors playing against each other, and we'll see where that lands. So far, it seems like they've managed to engineer some kind of a soft landing, but -- and we already talked about the geopolitical uncertainty, the social unrest or uncertainty in different countries. I think there's a lot of moving parts. So that's -- but these are the things that will drive, I think, the level of client activity. When it comes to pricing, I think the market is hardening a bit, and you see that actually in the last 3 years' history of pricing, we went from very negative to -- last year to this year a little bit better. We're pretty much on the, let's say, long-term mark here that we've observed for the last 10 years, minus 1.5% is kind of what this industry has been doing year after year. So nothing exceptional. It's also a factor of the level of competition, which remains very strong and the level of demand in the market, which is improving. So I mean, anybody's guess as to where this is going to go, but we're pretty much on the long-term historic trend here. Phalla, do you want to...

Yes, I'll take the first one. I think on the Western Europe, it's not -- we don't see the risk increasing. It's just the fact that in Q2, we have released some reserve related to this region for cases for which the risk has disappeared. So we released some reserve, and this is why you see this increase, which is much more related to the Q2 reserve release than the risk really increasing in Q3.

We will now take the next question from the line of Michael Huttner from Berenberg.

Just a little questions. The first one is -- the first one is not so little. Hannover Re about a month ago held an investor kind of afternoon and they highlighted the growth in their insurance-linked securities business, effectively where they're providing clients with reinsurance cover, but tapping outside capital, so not using their own capital. I thought many years ago, 10, whatever, 15, when they started this business that they were kind of cannibalizing their own business. In fact, they're not, they're kind of -- it's the core and the new business grow together. Is this how you see Business Information services? In other words, although the way I understand it, a client can have the choice of doing it yourself by buying the information or relying on Coface. In fact, the 2 are kind of complementary. Just to get a feel for it. And then the other question is just on numbers. I didn't catch -- there was a figure on Turkey and Argentina, and I really didn't catch it. Sorry, Phalla.

Yes. The second one will be Phalla's to answer. But while she thinks about the answer, let me -- I mean, there was a -- we've heard a lot of people say Business Information is actually competing or will compete against insurance. I don't think so. Of course, it serves the same purpose, but not everybody needs or wants insurance. Not everybody can deal with the information. You've got different market needs. The penetration of insurance in the world is still very limited. I mean we're talking about covering 5% to 7% of the global receivables. So there's plenty of space, which means that most everybody is actually not using insurance and doing something else. And most everybody is somehow buying information or using information to watch their book. So to me, these 2 things are complementary. And plus, we use the information for insurance. So getting better at information makes a ton of sense if you want to do insurance yourself. I hope that's the way -- that answers the question you were asking. And I'm going to turn it to Phalla for the Turkey and Argentina point.

Yes. Michael, this is not new news, right? It's the application of IAS 29 on hyperinflation. So we already used to book some negative impact since last year. What I'm mentioning in this quarter is that, of course, the inflation is coming down. So what we booked in Q3 is probably less -- probably less significant amount or negative amount than we used to book in the past quarters.

I understand that. It's just I didn't catch the numbers.

Okay. I'm sorry. I think the total amount for year-to-date is EUR 10 million, and we booked for Q3 only EUR 2.8 million.

[Operator Instructions] There are no further questions at this time. I would now like to turn the conference back to Xavier Durand for closing remarks.

Well, yes, thank you very much. Thanks for logging in. Thanks for taking time out of schedule. I mean you're giving us 20 minutes back, which we'll put to good use. So that increases our productivity. We will be again meeting on, I think it's February 20 for the full year results. So looking forward to that discussion, and I wish all of you a great fourth quarter. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.