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 First Half 2020 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Investor Relations of doValue. Please go ahead, sir.

Thank you. Good morning, everyone, and thanks for joining the conference call on doValue First Half 2020 Results. Also attending this call from the management team of doValue, Mr. Andrea Mangoni, Chief Executive Officer of the group; and Ms. Manuela Franchi, General Manager, Finance and Operations, and CFO. As usual, we will begin with a few messages, before a detailed review of the financials. Over to you, Andrea.

Thank you, and good morning, everyone. In today's conference call, with results in line with our preliminary release of July 10, we would like to focus on 3 things: The resiliency of doValue in the current extraordinary circumstances with our business model reacting both in terms of fees and cost base; the positive dynamics of the market, evident in the new servicing mandates and forward flows ahead of expectation; and the closing of the acquisition of FPS, now doValue Greece, already performing well and producing the new organic mandates. The result of the second quarter of 2020 are in line in terms of EBITDA with the first quarter of the year despite the full effects of the lockdown, which limited the ability of servicing the companies to conduct business. Cash on balance sheet grew to more than EUR 190 million, free cash flow stood at EUR 65 million and leverage remained at 2x. This trend is consistent with our expectation of a progressive recovery into Q3 and Q4 and with market expectation for the full year. The servicing market has been very dynamic so far in 2020. We added 3 new mandates this year for a total of EUR 5 billion, plus nearly EUR 3 billion from forward flows. All 3 mandates were from clients already in our portfolio, which shows our ability to foster long-term partnerships. We expect that the current macro shock will increase the supply of NPEs and offer new opportunities to servicers. With the acquisition of FPS, now doValue Greece, the coverage of Southern Europe is complete and with a scalable platform to capture the new NPE wave. So in summary, it seems that operationally, the work is behind us and that the servicing industry can look with confidence at growth in the future. Turning to Page 2, more quantitative details on our performance into July and on the operating environment in general. As expected, the most difficult month were April and May, with a complete lockdown in every market. During these 2 months, we kept collecting based on the backlog of judicial procedure already in pipeline and received cash distribution from cash held in core. For these 2 difficult months, the performance was in line with expectation, whereas June and July performed better. It's too early to read into this trend. But certainly, they reinforce the conviction around the base case, which is a progressive return to normalized collection levels by the end of the year. To give you a sense of the run rate, June and July collections were only 20% below of last year. The judicial system is now open, but it's far from operating at full efficiency. Courthouses able to enforce social distancing and the new auction and court hearing dates are being set with a certain delay. Again, this was expected and is consistent with our base case. In the meantime, our business model is responding well with higher base fee and lower variable costs. Our clients see this moment as a postponement of collections since the collateral protects their business plan. On Page 3, an update on the market. We are particularly proud that we have achieved about 80% of our yearly for 2020 as early as the beginning of August and despite the impact of lockdown. We added EUR 1.6 billion in Italy, reaffirming our leadership on the access securitization. There are several other opportunities now in the market across asset class, and we are confident that we'll be able to share more good news by year-end. In Greece, we were allotted a EUR 2.6 billion mandate from Bain, first organic result of the acquisition of doValue Greece end up chasing other opportunities. Here, we are already significant above our target of EUR 1 billion to EUR 2 billion GBV per year. The Spanish market posted during lockdown, but before then, we added nearly EUR 1 billion with an investor mandate and are working to add on top of that. Finally, forward flows were up 4x year-on-year despite the impact of the banking moratoria and above the full year 2020 target of EUR 2 billion. So all in all, EUR 8 billion added to our GBV in 7 months as compared with our guidance of between EUR 9 million to EUR 11 million for the 12 months in 2020. Clients, banks and investors are looking at the NPE issue proactively, and tended to favor solid servicers with top ratings and a long-dated track record. Since the COVID crisis, we have seen no sales or securitization processes being canceled and competition levels have stayed rational, especially in our nature of complex secured credit in Southern Europe. On Page 4, a quick look at what the macro cycle could mean for us. Southern Europe is particularly hit by the current economic contraction already starting from a growth level below value range and the structural issues in terms of competitiveness and unemployment. Servicer will play a systemic role in this context with rising NPE levels and the need to manage them quickly, not to limit the chances of a swift economic recovery. Analyst estimates point to a significant wave of new NPEs from at least EUR 60 billion in Italy to at least EUR 10 billion in Greece and NPE ratios nearly doubling in all of Southern Europe. So after the past 2 years, where the outlook was for a stabilizing or declining level of NPE transactions, it seems that we are about to witness a new wave of growth and that doValue is well positioned to capture it. Finally, on Slide 5 and building on the concept of being ready to capture the opportunity, a redesigned organizational structure. We are very different company today as compared with when we IPO-ed in 2017 in a positive sense. Not only larger, but more diversified and more complex with a much bigger client base with very sophisticated names. Peer group level processes are empowered, in particular, on the business development front. So that 1 team led by Julian Navarro will interact with global NPE investors and look at opportunity across 5 markets. Operations, all corporate functions and the management of transformation projects are entrusted to the Chief Financial Officer, Manuela Franchi; while region managers in Italy, Iberia and Greece plus Cyprus will work with us to ensure in the execution of the business plan at local level. When designing the organizational structure, we build from the track record reached by our talent pool, which led doValue to where it is today, and that's already working on building a completely integrated group. This concludes my introduction, and I hand it over to Manuela.

Thank you, Andrea, and good morning, everyone. The main financial KPIs for the quarter show the resiliency of doValue and the initial benefits of the current consolidation perimeters. On Page 7, GBV reaches EUR 166 billion, underlying our leadership in Southern Europe as the clear #1 in independent servicing, also having been awarded some of the largest servicing mandates in the market of 2020. We looked at collection in details already, where revenue are up 47% to EUR 164.8 million, sustained by the larger consolidation perimeter and the growing proportion of base sale. The cost base is reducing on a pro forma basis; and on a reported basis, we continue to reduce variable HR costs and tackle all other variables costs. EBITDA reached EUR 35.1 million, with a better-than-expected performance in the second quarter, initially expected to be materially below quarter 1 of 2020. EBITDA was up 23% when excluding indemnity fees, particularly concentrated in the first half of the year due to the portfolio transfer by Intesa. Cash flow generation continues to be distinctive feature of doValue with EUR 65 million of free cash flow, a rising cash flow position -- cash position and the leverage limit to 2x of net debt-to-EBITDA. In short, H1 2020 is a solid base on the way to a full recovery of COVID towards the end of 2020. Next, Page 8 for the moving parts of our GBV. This is one of the strongest results since we IPO-ed with solid execution in all main drivers. EUR 2.8 billion of GBV coming from forward flow agreements, so with no commercial effort needed, a unique feature of doValue. EUR 5.2 billion of GBV from new mandates was added to the AUM made up of the Alpha Bank mandate won in 2019, and the new investor portfolio won in Spain in 2020. In terms of new wins in 2020, besides the mentioned portfolio in Spain, there are also the ICON portfolio in Greece and the Banca ICCREA (sic) [ ICCREA Banca ] securitization in Italy, another EUR 4.2 billion, net of amounts already managed. Collection were at EUR 1.7 billion, picking up pace in June and July, while write-off at EUR 2.2 billion and nearly 0 portfolio sales pipelines. So a growing AUM supporting our future cash flow generation with predetermined fees adding to the predictability of our earnings. Quickly on Slide 9, the key metrics of our AUM, now including the doValue Greece and -- which is now much SPF. Much greater diversification by market, asset class and client, while maintaining the distinctive features of being one of the most secured public portfolio in the industry with average high size topping up to EUR 300,000 per loan for doValue Hellas in the solar portfolio. We now cover all the most attractive markets in Europe, while also being diversified. In our client base, you'll find the top systemic banks and investor in each of these regions. On Page 10, we show greater details on our revenue composition. Two main trends here. Outsourcing fees are going down on a pro forma basis as we in-source more when the overall activity is down, showing flexibility. Secondly, and perhaps more importantly, base fee as a proportion of total revenue continued trending upwards, from 17% to 59% in the first half of 2020, up from 57% for the first quarter. With this revenue component plus ancillary revenue, which are more resilient to cycles, we cover a significant portion of fixed costs and can wait for the best time to collect. With this strategy component and the structurally growing base fee, in absolute sense, we highlight the fact that we are outsiders in the industry, having a base fee outside Italy, which are very attractive at 10 to 15 basis points compared to 5 in Italy, which further strengthened our revenue projection. Variable fees are down as a percent of total revenue due to the temporary reduction in collection impacted by lockdown. And going forward, these revenue component will progressively regain its weight. I'll focus now on cost on Page 11. Our cost base is mostly fixed, and we are not reducing that fixed cost base structurally since we believe in the opportunity presented by the market and want to be ready to deploy operating leverage. At the same time, we look for sources of efficiency everywhere we could, beginning with HR cost, down as a percentage of total costs and with its variable component reduced to a mere 3% of total. Additionally, we are taking advantage of governmental support schemes for payroll costs and reducing IT and real estate costs by working from remote. On Slide 12, the main results by geographic area. The lower collection in Italy clearly had an impact on its profitability, which, however, remains significant and can only trend upward from here. We are seeing signs of normalization in all our markets and the accretive nature of Greece and Cyprus is already evident. The new organizational structure in place will foster greater coordination and sharing of best practices, which we expect will support the top and the bottom line. Next, the working capital and balance sheet on Page 13. Quarter-after-quarter, we have been generating cash flow from operating capital as our client mix shift in favor of investors and that, in the case of doValue Greece, contractual arrangements to include fee prepayments. This is a positive feature of our operation, which is structural in nature and will continue, adding to the structurally high cash conversion measure of the value. Regarding our net debt, I would highlight that the final cash position already include the amortization of our banking facility and that the refinancing of the bridge facility used to acquire doValue Greece further limits any near-term cash outlays and refinancing needs. Tapping the debt capital markets following a positive trends in ALD indices allowed us to have a much more diversified and flexible source of funding and will create a track record with bond investors which we previously didn't offer. Interesting here, our available committed and undrawn credit facilities have gone up by EUR 5 million to a total of EUR 18 million. June leverage stands only at 2x, the absolute lowest in the sector, and we have ample covenant headroom to weather even the most dramatic future of COVID scenarios. Finally, a comment on the net debt on Page 14, just highlighting the strong cash flow generation at EUR 65 million and our potential for quick deleveraging following the doValue Greece acquisition and the temporary disruption caused by COVID-19. CapEx was slightly higher as of June, in line with expectation of integration and upgrades needed for our IT platform, but will normalize already from 2021. The net financial investment outline, of course, includes the cash outlay for doValue Greece. With this, I conclude my remarks, and we can open the floor to questions. Thank you, everyone.

[Operator Instructions] The first question is from Borja Ramirez with Citi.

I have 2 quick questions, if I may. Firstly, based on the banks' disclosed pipeline of NPL disposals, it seems that the biggest opportunity for doValue in the short term could be in Greece. Is this a fair statement? And the second question is, you are the main servicing player in Southern Europe. And I think it's very interesting what you mentioned in Slide 5 with the next NPE wave. Could you provide details on when you would expect the NPE stock to start rising? And also in which region or regions do you see the biggest revenue opportunity from the increase in NPE stock?

On the first question, yes, I think Greece will be important in terms of growth. But my advice is do not underestimate Italy, because we see an important upward move in the transaction this year and the next one. On the new NPE wave, I think, more or less, this wave will be important both in Greece and in Italy and Spain, and the increase will be in 2021.

The next question is from Andrea Lisi with Equita.

Several questions from my side. The first one is on SG&A in Italy. Looking on your financial statements, I see that they moved from around EUR 5 million in the first quarter to around EUR 13 million in the second quarter despite you said you have made cost containment measures. And so I want to ask you what -- why I have the increase? I see that also in the previous year, they have increased between the first and the second quarter, but expected maybe this year to have some more cost control on that side. And so if you can tell us to why this increase? The second point is...

Andrea?

Yes?

Apologies. Can you please repeat what cost line you're referring to because [indiscernible]

Yes, the SG&A.

The SG&A, okay.

Yes. The second one is on revenues in Greece. I see that revenues moved from EUR 9 million in the first quarter to around EUR 18 million in the second one, with obviously 1 month of consolidation of FPS. And so I want to ask you whether this EUR 9 million difference is entirely related to FPS? And which dynamic do you see from this point of view? So if -- because what -- EUR 9 million in just 1 month seems astonishing. And another question is if you can provide us the breakdown of the nonrecurring items before EBITDA? How are they allocated among different countries? And the last question is on SAREB, if you have any news on that.

Andrea, last point was on SAREB, correct?

Yes.

Yes. Andrea, I'll take your question. On the first point, the difference in the increase in the SG&A is only driven by the consolidation of Altamira. So on a like-for-like basis, there is a decrease of the SG&A. But here, you are comparing a first half where Altamira was not included with the one where it was.

I'm looking -- I was looking at Italy alone. So when -- in your financial statements, when you provide the breakdown, there was a -- I missed in my calculation, well, EUR 5 million in the first quarter and EUR 13 million in the second one. So just clarify because of this increase. Why this increase?

Because on the Italian side, we moved from EUR 5.8 million to EUR 5.4 million. So there is a reduction only in Italy.

Okay. So it's wrong. Okay.

Yes. Okay. On the revenue side, the increase is due to the consolidation of FPS for the 1 month that has been included in the perimeter. So that has created a significant increase. As we said, SPF is contributing much better than we had in our business plan expectation. It's only 1 month contribution and has been pretty sensitive change. In terms of allocation of NRI, they are all related to Italy in the sense that they all relate to the -- or they are not restructuring costs by any mean. These are only related to our acquisition as the vast majority last year and almost all this year. So they relate to the cost we faced for the acquisition of FPS, which we usually account at current company level, which is where we do the M&A and where we run the transactions. On the SAREB side, there are no updates in the sense that SAREB is pretty quiet at the moment. They are focusing on the new contracts with Haya, which established a new way of wording between SAREB and Haya. And also, the internalization of certain activities by SAREB, which is not a simple exercise given that SAREB before was a pure manager of the servicer and is now doing some new pieces of the processing side. So this has not -- has led not to focus particularly on the other services, which are continuing their activity as before.

And on SAREB, in strategic terms, we are quite positive because we hope SAREB will reduce the number of the servicer when the current contract will expire. And considering our relationship with SAREB and our track record, I think the reduction in the number of the servicer will be a big opportunity for value.

The next question is from Gurjit Kambo with JPMorgan.

Just a few questions. Firstly, just a little sort of discussion on the competitive environment. So you've done very well in, obviously, winning EUR 5 billion of new mandates. Just what's the pull of competitive environment around winning those mandates? Is it stable? Is it decreasing or increasing? Is that just on the competitive environment? And then on the sort of higher base fees that you're seeing, I think that's mainly outside of Italy, are you looking to potentially sort of renegotiate higher base fees in Italy or will you leave them unchanged? And then just a brief update on the IBM kind of outsourcing. Now where are we on that, sort of time frame, et cetera, on IBM?

I think in Southern Europe, the market will consolidate despite the new NPL wave. And after the consolidation, it probably will be possible renegotiate the contract and increase the base fee. Right now, considering the current level of the competition on the market, I think it's impossible. So we aim to protect our current fee structure. So the second question...

I will address the second question, which is relation IBM outsourcing agreement. From a strategic standpoint, we thought this is a good way to make our IT and operation infrastructure more efficient. We started from Italy the project, but we are analyzing if it makes sense to expand it also to the other regions to create more synergies on the infrastructure side and also, as I said, on the operations side. In Italy, the expectation has not been embedded in our estimates yet in terms of cost savings we will bring home. More importantly, this partnership is focused also on further improving the quality of our system to be top-notch in the market and achieve also all the levels of requirements that the banks, which are the most demanding clients in that sense, request in terms of securities and other features, given that they continue to upgrade themselves and they require the services to do so. Given that IBM is at the forefront of this discussion with banks, it's a very natural move for us to benefit from this upgrading that they also do for our customers. This allow us also to focus more on the core business, while having a trusted partner to focus on their core business, which is operations and IT.

The next question is from Andreas Markou with Berenberg.

The first one is, basically, is if you can please repeat the comment on the competitive environment earlier? It wasn't very clear, the sound. So if you can please repeat that. And then I have 3 questions. The first one is on the contribution of FPS. So you mentioned a little bit on the revenue line. Is it fair to assume that the contribution was about EUR 5 million for the month of June? So we should expect something like EUR 55 million to EUR 60 million of EBITDA from FPS for the year in total? Then the second question is about Bain Capital, so your kind of new, important shareholder. How do you see the relationship evolving in the future, and what do you think their intentions are with regards to you? For example, we've seen Bain recently buying a small platform in Italy. Is there any chance that they might merge that platform with you? I mean, what do you think they might do? And the last question is on collections in the real estate market. So you mentioned earlier about an expectation of the deterioration in the macroeconomic environment, which will lead to an increase in the volume of NPL. But as we all know, a deterioration in the macroeconomic environment leads to a deterioration in the real estate and effectively, collection rates. So how do you think of the impact on the real estate market going forward?

Andreas, on the competitive environment, I try to go through again the points Andrea made. We think the competitive environment has very much stabilized already in 2019 and further so this year, given that the COVID obviously put under pressure the P&L of smaller players, which were some of those trying to gather better -- lower fees in the contracts and win competitive bids this way. So we are seeing them less and less present. While banks and investors appreciate some players which are able to face the difficult times and guarantee in the sense that are able to demonstrate also in these times of good collection vís-à-vís expectation. Also, the base fee that we are -- in most of the -- these contracts allow us to wait, as we said, for the right moment to collect and not rush into collection, which is not what clients want, especially in a time where collection could be not at the right level given the lockdown we just had gone through and the real, let's say, markets condition. So we see this as a positive trajectory. The other point is that from a previous question was related to the ability to negotiate also the current base fee in the contract. We see this as part, eventually, of consolidation in the market, when and if it will happen. On a stand-alone basis without market consolidating, we don't see potential now for an increase in the current contract of the base fee. Potentially, this could happen in new contracts, but not in the current one. Regarding the contribution of FPS for the single month, we are not referencing a specific value here. It's a bit below what you said. But the main point is that they are contributing above expectation in a positive way to our results. I leave Andrea to comment on the Bain shareholding.

Yes. I think Bain is a strategic investors for doValue. The investment is a long-term investment, and Bain could be an important partner supporting our growth. We have an example with the EUR 2.6 billion contract in Greece, I said before. And I think we can have some positive new flow on this side in short. Having said that, we have no project of integrating the current platform of Bain in Italy because, first of all, it's just a leasing real estate platform, so it's not one of our competitor, and we do not have any discussion underway on this. Again, I think, Bain is a strategic partner for us, and I think we can support the growth of our AUM fortress. We did in the past and are doing right now, but no integration of this platform of Bain into doValue.

I take the last question on the collection and the real estate. We must say that after the opening of the -- from the lockdown, which happened in Spain in the last part of May, the month of June and July have been very, very strong, given that there has been sort of a push of all the transaction that did not happen in the previous 2 months. So the result for the first half are above the COVID case for the same period by around 15%, and they are just about in line with the half year projection, pre-COVID, that we had on this business in Spain. So overall, a good result for this business asset class.

That's useful. Maybe just on the real estate. I guess my comment was not so much about the past couple of months and maybe the next few months coming, but it's more about '21 and maybe early '22 when the new NPE generation starts to begin and then the deterioration in the macro takes place. What's your overall expectation of the real estate markets then?

Yes, we expect that the negative impact on the real estate side is -- could be fully counterbalanced. Actually, the effect could be even positive with the effect of the new NPE and real flow that we will see in the market. So we will have much more flow, probably lower collection on the previous portfolio, but net-net, the impact, already in 2021, could be net positive for the REO business.

The next question is from Luigi Tramontana with Banca Akros.

Just 2 details on my side. One is on your average cost of debt following the recent refinancing. And the second one is on the DTAs, if you plan to use any DTA by year end.

Yes. In terms of average cost, we have just below 4% -- between 3.5% and 4%. This is driven by the new bond where the cost is 5% and the previous financing, which was more around 2.5%. The key differentiating features between the 2 are the amortizing measures. If we had the previous financing on the same amortization schedule as the bond, i.e., an amortization bullet, we would have a similar cost. On the DTA side, yes, we cannot use a portion of the DTA still this year, but while the second part, all -- it can be used after 2022. On Page 20, you can the portion which can be used after 2022, which is the EUR 49.3 million, while the rest can be used before.

The next question is from Filippo Prini with Kepler.

Three brief question, if I may. The first one is on FPS and Greece. Is it -- could you share with us which is now, thanks to the new commission scheme, which is the weight of base fee on their total revenues. And if you can very briefly explain why FPS is performing better than status just for the -- through the shaping of the commission scheme or just for better business trend. The second one is on the D&A. Is it fair to say that the G&A in the second quarter this year versus first quarter this year is for the 1-month contribution of FPS? And the last one is on your net working capital. I've noticed a very positive contribution to cash generation on the first 6 months, almost EUR 37 million, most of which in the second quarter. So just to understand if it's something quite specific for the quarter or you expect this line to support your cash flow generation also in the next months?

The base fee as a percentage of the total revenue for FPS, if the average for the sector -- for the company is 59%, let's say, it's -- for FPS, it's above -- in the 40% to 50% range, let's say, more in the middle of that. So the FPS contribution of base fee is higher obviously than the overall group as we had anticipated at the time of the closing of the transaction. FPS is performing better for 2 reasons. One on the short term and the unsecured collection figures. This is where there are the ability to recover without much impact from moratoria. So the action has been fully pledged on this asset class. And second, on the cost side. Obviously, the estimates were conservative because the new perimeter was going to be created after the signing. So between signing and closing, a lot of the corporate business of Eurobank NPL management will moved to FPS. Given that it was difficult to assess the final composition of the cost, obviously, the sell-side estimated it in a conservative way. After the final structure has been deployed, the management has been able to work early on in the year already on the measures to make it more efficient, given that their experience was from a next bank unit to an independent servicer and therefore, the action brought some results already in the second Q. On the D&A side, probably it's easier to give an indication for the year, on a reported basis, would be around EUR 85 million. So given you have the first half, that is an indication for the second half. In terms of cash flow composition, we have mentioned a few items that are already impact the cost. But let's say, the anticipation of fees from Eurobank, which was an important point realized also when we closed the transaction, the fact that Eurobank is paying ahead of the period, the base fee rather than at the end of the period, makes a relevant contribution for around EUR 55 million, EUR 40 million. Then there is a mix of factors, but I would say that, that's the main element. That makes a change vís-à-vís the previous working capital dynamics.

Could you repeat the -- how high are the anticipated by Eurobank, sorry?

Yes. Precisely, it's EUR 36 million.

EUR 36 million.

Just to complete on the D&A side, we just projected a full year expectation on a reported basis. So let's say, for consensus purposes, EUR 85 million, which is composed of around EUR 70 million, as previously communicated for, let's say, the semester before the acquisition of doValue Greece. So with an additional EUR 15 million on a reported basis for the 7 months of 2020 of doValue Greece, so total of EUR 85 million.

Gentlemen, there are no more questions registered at this time. I give you the floor for the closing remarks.

Thank you, everyone, for connecting. Have a good rest of the day.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.