doValue S.p.A. (DOV) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the doValue Full Year 2019 Preliminary Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Investor Relator. Please go ahead, sir.

Good morning, everyone. And thanks for joining the conference call on doValue 2019 preliminary results. Attending this call and from the management team of doValue, Mr. Andrea Mangoni, CEO of the group; and Ms. Manuela Franchi, CFO. We will begin with an overview of the year and the main short-term opportunities we see in the market before commenting on the financials. Now over to you, Andrea.

Thank you, Fabio. For first comment, I would like to highlight that in 2019, we executed on several important strategic projects, which make the company today very different from what it was just a year or 2 ago. We believe that we are not only larger but better prepared to face what is ahead of us in the long term. The servicing market is evolving faster with clients asking for a broader set of services and very tight long-term relationships. Banks and investors have made the choice structurally to rely on professional specialized servicers. And we are instrumental to the sustainability of their business model. In this environment, we believe a few international independent servicers are set to emerge and continue to grow earnings. doValue has all the assets in place to lead this space. And we already do in Southern Europe. At the same time, operationally, we continue to execute, and the 2019 result, especially for what we consider market EBITDA and free cash flow generation, are a clear indication of that. Our business model is inherently cash-generative. And with a free cash flow of EUR 100 million, we took leverage down from 2x to 1.3x in our [indiscernible] models. This is quite unique in the industry. And it's not going to change since we grow while staying asset-light and cautious in terms of capital deployment. Growth in 2019 was supported by the addition of new clients in every market, both new banks and new international investors. I would like just a few names, like Cerberus, DK and Bain, and banks like UBI, Alpha Bank and Eurobank. As we will see, the current pipeline is supportive of our expectation of positive organic growth going forward. In terms of priorities, we stay focused on execution and integration and are able to share good news about the Altamira integration and the closing process of FPS acquisition. On Slide 2, a quick look at how we have changed since 2016, more than doubling the key financial indicators, expanding profitability and growing shareholder remuneration. We are also one of the most diversified servicers in the industry with a focus on Southern Europe and Italy at less than 50% of our GBV, even less in terms of revenues and no client above 50% of our AUM. We are the top player in data securitization in Italy and work with the largest banks, including the flow agreements in Italy, Spain, Greece and Cyprus. In terms of asset class, we are adding performing loans to NPLs, UTPs and REOs and shortly also in the arrears with FPS. NPE investors came out and chose doValue as their preferred partner for a wide range of investment strategies in the most promising markets. On Slide 3, we wanted to share one key message that the current active pipeline in Southern Europe is very dynamic and that we have started in the 2020 on a positive note. In Italy, we have reached 2 new agreements this past month for a large due diligence project and a master servicing mandate on a leasing portfolio. We are close to signing our first UTP mandate and are looking at an interesting pipeline. Some of our clients -- [indiscernible] clients will launch a new GACS. And there are a couple of significant portfolio sales expected by year-end. We are quite happy to have reached an agreement with Santander Spain for EUR 1.7 billion real estate project, entailing the significant investment by the bank to develop the asset and business plan running for 10 years. Besides this, there is quite a pipeline of primary and secondary transactions, where we are advising several high-profile international investors. Similar developments in Portugal, where, however, the average size of the portfolio is smaller. Greece and Cyprus have confirmed they are very active. A significant mandate in Cyprus will be awarded in the market in the next 3 to 6 months. And for Greece, we are happy to say that we have visibility on EUR 1 billion portfolio. We expect it to be onboarded after the summer, increasing visibility on 2020 targets. So all in all, the positive developments confirming our expectation. On Page 4, update on the Altamira integration, which is progressing well. As you know, given the quality of the management and the limited overlap of operation, no deep restructuring is needed. And Altamira closed the 2018 and 2019 accounts above our acquisition expectations and is continuing to perform well. Several project streams are active, covering areas from real estate, where Altamira will transfer its [ model ] to Italy employees to NPE management and operations. Our integration team is busy with the execution. And new organizational model has been launched. Lastly, I would mention that the employee satisfaction surveys at Altamira have improved since our acquisition and that turnover levels have not increased. Finally, on Page 5, our priorities for the current year. Execution continues to be key to capture the organic opportunity that our industry continues to present across markets and asset classes. What we see today confirms our conviction on the assumption of the business plan. And we count on sharing the good news as the year progresses. Cost focus continues to be a priority. And we will update you on a quarterly basis about the projects that we are running both in HR, IT and SG&A growth across the board. Cost control has been one of the main strengths in 2019 and supported our EBITDA and cash generation clearly, especially in Q4. Finally, on M&A, we will be busy with integration. And that will be the priority. The industry is consolidating faster, so it's our duty to monitor. But as always, we will do so with caution and with a focus on our current markets. With this, I thank you, and leave the floor to Manuela.

Thank you, Andrea, and good morning, everyone. On Slide 7, we have summarized the financials for this year. Besides the significant growth in all indicators, most important with EBITDA margin expanding to 59% and leverage already at 1.3x following the 2x at the end of last year, I would like to comment on the flexibility of our business model in terms of revenues and costs. Especially towards the end of the year, we acted on the mix of our revenue being more selective on certain projects which we consider secondary while at the same time, using cost flexibility to expand EBITDA and cash flows. Additionally, for certain portfolio sales by clients occurred in '19, upon settlement, we have the flexibility to reduce the cost base structurally, returning personnel rather than receiving one-off revenue components. And we decided for this mix. This is reflected in our 2019 results. We're exceeding the profitability and achieving the targets we had anticipated via cost levels, especially in Cyprus and Spain, and through the overall flexibility, building the incentive scheme of the group, which is an upside that when volumes will not exceed the targets, which are set above our budget. More on the financials, I will flag the 32% growth in net income to be reflected in the dividend with a 72% payout ratio and the positive trend in group fees, which are confirmed as resilient. On Page 8, we have summarized the evolution of the gross book value. Inflows into the GBV are particularly strong at more than EUR 15 billion, not including the Alpha Bank contracts, for which the onboarding is currently being completed. The quality of the new inflows is particularly good, given the addition of new clients, both banks and investors, confirming our status as #1 independent servicer in Southern Europe. We continue to be selective on new mandates, protecting the profitability going forward. Collections were very strong at EUR 5.6 billion, including the REO sales, with an overall growth of collection rates. Write-offs and sales by clients for which we were compensated for were in line with expectations. You might notice that the ratio of write-offs to collection is lower than in the past. This is purely due to the new geographic and service mix of doValue and the different collection rates across markets. Moving to Page 9. The summary statistic of our reported GBV at the end of '19, so not pro forma for the announced FPS transaction, which will improve these metrics. We continue to manage one of the most attractive books in the sector, composed of large-ticket secured corporate loans with some client market and asset class diversification. Diversification by clients and markets would be even more pronounced on a revenue basis as FPS will be consolidated. On Slide 10, we have introduced a focus on the composition of our revenue, both in terms of types of fees and investment of difference between gross and net revenue. Base fees are growing significantly from 17% in '18 to 22% this year and to about 25% of total in 2020 over the revenues. The trend has high visibility for us since it's built into our contracts. And it was expected, given the fact that we are diversifying into markets, which for different reasons [ of the fee ] structure, which relies heavily on base fees protecting servicer in case of short-term volatility. You might remember that our fee structure in Italy provides for an average 5 basis points on GBV, something that has remained stable over the years. Outside of Italy, this figure is at least double because of market maturity or because of negotiated contractual terms. The pipeline we see currently is in line with this trend. Next, on Slide 12, a focus on the fee structure of UTP, which many of you have asked for. UTP is becoming more relevant now as the growth of the market picks up and we approach the signing of our first large mandate. We report illustrative data, which involves large flat upfront fee for the setup of the portfolio above 1% of the purchase price in terms of management fee and very attractive success fee, so a much richer structure as compared to the NPL. As mentioned in the past, the lower number of case files managed by employees and the type of skill needed make UTP servicing also more expensive in terms of HR. But overall, the net balance of cost and revenue provides for a profitability above 40%, so in line or above our medium-term targets. This fee structure has been widely used in a more private equity-like UTP servicing in the past and is accepted by market participants. Turning now on cost on Page 12. Highlighting the growth in EBITDA margin to 59%, one of the highest in the industry, especially for asset-light services with no balance sheet risk. We have also included the nonrecurring items, so that you are clear on most of the extraordinary expenses, mainly related to the acquisition of Altamira and the group debanking process, and to a lesser extent, FPS. We continue to work on efficiency in all areas with a special focus on IT and HR, which supported the results in Q4 and in whole 2019. The trend in SG&A is purely due to the use of real estate progress by Altamira for the REO business, so expected and actually positive, given the development of the business overall. On Slide 13, doValue '19 results by market, highlighting both operational and financial KPIs. As mentioned in the past, collection rates are structurally higher outside of Italy due to lower collection timings and compressed collection curves in few areas. This is a very significant gap as compared with Italy, with Spain and Portugal collection rates, which are more than double of Italy and even more so in Greece and Cyprus. It's also a function of the different average vintages of the GBV. In terms of profitability, international markets are again accretive to Italy because of their contract nature, volume growth and degree of uncertainty servicers need to face, given the lack of long-term collection data. And they are specifically for Cyprus and Greece. We are comfortable in this environment since we are used to managing complexity and can use it as a competitive advantage against less structured servicers with lower servicer ratings. On Slide 14, a glance to the composition of net working capital and debt. On the top of the slide, I would flag out the net working capital is up purely due to the perimeter of the integration of Altamira. Excluding this effect, net working capital is actually lower in absolute terms. There is a positive structural trend that continues here, given the shift of client base investors, who have better payment terms for us compared to banks and due to the announced FPS acquisition, which will improve this even further, given that some payment of fees on a quarterly basis. Finally, on Page 15, perhaps the most positive feature of our business model confirmed yet again with these results. Cash flow in 2019 was very solid with EUR 100 million of free cash flow on the back of EBITDA growth, limited CapEx, neutral net working capital effect and only EUR 15 million of cash taxes paid. This allowed us to reduce leverage significantly below last year from 2x to the current 1.3x and also significantly below our target for the year of 1.5. So despite increasing the size of the company twofold and paying industry-leading dividends in '19, we confirm a very conservative financial profile, a unique case in listed servicing companies, something that will continue in 2020 and after following the integration of FPS. This concludes my remarks. And we are now happy to take your questions. Thank you.

[Operator Instructions] The first question comes from Luigi Tramontana with Banca Akros.

Yes. My questions refer, firstly, to the inflows you had from existing clients in 2019, almost EUR 5 billion, which is much higher than the guidance you gave for the coming years, approximately EUR 2 billion per year. So I would like to know if in 2019, you had some positive one-offs there and you confirm your guidance or if we can expect a higher contribution from the existing clients going on. The second question is on the collections in Italy, which actually were a little bit down compared to 2018, if you can comment on that and give us an indication for 2020, if you expect growth coming back in the Italian market in terms of collections or if you expect a further decline. And finally, a remark on taxes, you had only EUR 15 million cash taxes. And what do we have to expect in 2020, given the decays that you have on your balance sheet?

On the first point, the inflows were significant this year because you might know that in Spain, there was integration of Banco Popular into Santander. So as part of this plan, there was an extraordinary cleanup by Santander of the new NPL that they were going to manage. And therefore, they allocated to us a much higher portion than the expected at the beginning of the year in terms of amount of NPLs. As you know, Santander in Spain uses different services. We are the major one for the secured large tickets, medium and large tickets. They then have Actúa, which manage the small and Aliseda, which also manage real estate. Given our performance and the much higher inflows from Popular, we have been allocated an higher -- much higher proportion than usual.

On the collection in Italy, the collections were slightly down because of the impact on the collection in terms of a delay of the preparation of the multi-data securitization we did for UniCredit, the so-called PRISMA project. The project is a sizable project. We are talking about EUR 6 billion securitization. So the impact on our collection was important. But we are talking about just a delay in our collections. And I think we will fully recover in the second Q this year.

In terms of tax outflow, in Italy, as you know, we have had the benefit of the DTA, which are summarized on Page 21 of the presentation. Now we are left with around EUR 13 million, EUR 12.9 million of remaining DTA that can be used for 2020. The remaining will be used -- can be used only after from 2022. While in Spain, the taxes paid in 2019 as the [ story ] of this business are low because the amortization of the contracts is something that has been very high in Altamira, given that obviously they tried to limit as much as possible the tax paid, given that they were a parent company. But the amortization was down over time. Therefore, the net income increases more than proportionally vis-à-vis the EBITDA. Given that, they have very negligible amount of DTA, they will obviously start to pay the relevant tax rate in Spain. So definitely, the tax will step up from next year but still with some DTA to be used to reduce the margin of tax rate.

The next question is from Borja Ramirez with Citi.

A couple of questions. Firstly, I would like to ask if -- given the effect on the fees from the delay in the securitization, once this is fully normalized in 2020, could we expect a higher-than-expected collection rate? And my second question is I saw that you reiterated the 2.6% collection rate for 2020. I would like to ask if you could provide more color, also if the current negative rates in Europe could help in collections. And my last question, given the negative rates and also the improved capital outlook for banks, could we expect increased NPL disposals in 2020?

Borja, this is Fabio. Can you please repeat the last question?

Yes. So given the negative interest rates in Europe and also the improved capital position in the banking sector, could we expect increased NPL disposals in 2020?

Okay. On your first question, the collection rate for this year, we confirm more or less 2.6% collection rate for 2020.

Yes. Because we had already considered this effect when we announced the partner in November. So the effect of the shift, and therefore the higher collection, are included in the target of 2.6%.

On your last question, the low interest rate and the impact of the portfolio disposal, I think, yes, it could be. But on the same time, the situation of the banks in terms of derisking is slightly better in comparison to last year. So all in all, I think the impact of the low interest rates will be positive, but not materially.