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

Thank you. Good morning, everyone. Thank you all for joining the conference call on doValue financial results for the first 9 months of 2020. Attending the call, as usual, you have the senior management team of doValue: Mr. Andrea Mangoni, Chief Executive Officer of the group; and Ms. Manuela Franchi, General Manager, Corporate Functions and CFO. We will begin with a few highlights to then dig deeper into the financials. Over to you, Andrea.

Thank you. Thank you, Fabio, and good morning, everyone. In today results, I would like to underline a few items which show the response of our business to the current environment and perhaps demonstrate that we are well positioned for what comes next. First, quarter 3 shows a material acceleration in collections, revenues and profitability. Activity levels across the board is progressing on the way to normalization. EBITDA was higher than the previous 2 quarters combined at EUR 41 million. Margin went up to 35% from 19% in the previous quarter. What is important here is that the acceleration is visible in every market, in organic terms, in Italy and Iberia and both organic and helped by M&A in the Hellenic region. Second, 2020 is shaping up to be one of our best years on record when it comes to new business. Today, we are already at the low range of our full year guidance for new business. And in the next few weeks, we are confident to be able to share more good news. As you remember, our target was set in November 2019. So it does not include any COVID impact. Finally, our business model responded well to the shock caused by pandemic with the team completely operational from remote and stronger actions on cost, which resulted in a rise in the cash position for -- from year-end 2019 and leverage under control despite significant acquisitions. As we said in the past, the sector is ripe for consolidation. And this scenario amplifies the differences among the best and worst performers, facilitating the process. In one way or the other, doValue will benefit from it. Turning to Page 2, an update on monthly collection trends in our 3 regions. Quarter 3 was slightly ahead of expectation, continuing on the uptrend started in June and confirms our full year expectation of around 25% negative impact from the pandemic. As a reminder, in our case, the most negative factor was the lockdown of legal courts and other public servicers, services we need to perform servicing activities. In terms of run rate, we are currently working in a range of between 80% and 90% of pre-COVID collections. On a regional basis, current operational conditions can be summarized as follows: in Italy, there is continued support from judicial collections, helped by gross distribution. COVID containment measures at the moment do not limit our operation. Banking moratoria and the relief measures to the most vulnerable debtors are only the marginal and temporary effect on our GBV. At the same time, productivity levels and frequency and volume of options are still reduced. This is a factor we are watching closely with the expectation to a slow but progressive return to normality. In the Iberia region, operating condition quickly went back to normal after lockdown, both in NPL where, today, the legal system can be described as fully operational, and in real estate. Banks implemented moratoria for about 12 months on average with no impact on our collections, but only on new NPE formation probably until the first quarter of 2021. As you can see however, our forward flow from Spain were already on -- in an uptrend and are growing year-on-year. An additional positive factor here is that the judicial system is working to catch up and accelerate auctions in bankruptcy proceedings. Key factors to watch in the short term will be the pricing and volume of real estate. Although we deal with distressed and other classes, so the impact will be much reduced. As for the Hellenic regions, our results are fairly insulated from external scenario given the high proportion of base fee. In any case, banking moratoria in place go hand-in-hand with support measures, helping debtors having difficulty with their payments. Frequency and volume of auctions and court activity continue to improve. And the real estate benefits from a good comparison base, as prices never fully recovered from the past crisis. Our results continue to be positive, slightly above our expectation, and we are happy with the progress we are making there with the integration of the Greek team. So overall, positive trends in Q3, confirming our view and market expectation for the full year despite some short-term uncertainty due to the current external scenario. On Page 3, an update on the market. The shock caused by COVID will have long-lasting consequences for the industry. And the rising pile of NPE will have to be managed in a professional, industrialized way, surely with the involvement of servicers. Investors are gearing up to deploy capital in this asset class, and Southern Europe is a particularly attractive space. We showed you already the proof of this trend year-to-date. As of September, with EUR 8.6 billion of new mandates, we already achieved the low end of our full year guidance. Greece was the most dynamic market with the EUR 2.6 billion Icon portfolio, followed by Italy with 2 important mandates: a GACS securitization with Iccrea and the first corporate multi-bank UTP mandate in the market. We are confident based on current negotiation ongoing there that by year-end, we will be in a position to share more positive news, again, coming from Italy and from the Hellenic region. So in a year disrupted by COVID, we reached our pre-COVID target for new business. We consider this a remarkable achievement and something that will support our earnings beginning with 2021. As you then see on Page 3, the pipeline for serving the single mandates, it's very solid. There are a few large mandates we are working on, especially in Greece, Cyprus and Italy, and several mid-sized ones in Spain, in line with the future of this market. Our industry is competitive, and the banking industry is looking for consolidation. So it's important to have the right size and the operation in place to serve the evolving needs of our clients and emerge among the few winners in the long run. We are confident that being #1 in Southern Europe with top service and ratings and having a diversified client base with top NPE and the real estate investors in the regions means doValue is ideally positioned to take advantage of the current market. With this, I hand it over to Manuela for a comment on the financials. Thank you.

Thank you , Andrea, and good morning, everyone. I would characterize the quarterly results as solid since they confirm the path of acceleration in collection and earnings and provide a sound base for market expectations for the full year. GBV reached EUR 163 billion, making us the clear #1 independent servicing in Southern Europe. Revenues are up 20% to EUR 281 million, sustained by progressive improvement in collections, a growing proportion of base fee and the larger consolidation perimeter we have. The cost base is reducing on a pro forma basis. And on a reported basis, we continue to reduce variable HR costs and toggle all other variable costs. EBITDA more than doubled as compared with the first half results and reached EUR 76 million. There was a sequential improvement in EBITDA margin, which resulted in 27% for the first 9 months. You might remember that 2019 results had a tailwind in terms of one-off indemnity, more concentrated than usual. Excluding this effect, EBITDA would be up on a reported basis year-on-year. Cash flow generation continues to be strong with EUR 61 million of free cash flow, EUR 170 million of cash position and the leverage limited at 2.4x net debt-to-pro forma EBITDA. Next, Page 6 for the moving parts of our GBV. On the positive side, we have EUR 3.1 billion of GBV coming from product forward flow agreements, automatic transfers each month from our 4 main banking clients, a precious and defensive feature of our model. As mentioned, this is 50% more than our yearly target of EUR 2 billion. EUR 5.5 billion of GBV from new mandates was added to the IUM and made up primarily of the Alpha Bank mandates won in 2019, new investor portfolio won in Spain and Portugal in '20 and a recent UTP win in Italy. The doValue Greece acquisition brought in more than EUR 26 billion of assets under management. And mandates currently in the onboarding phase, which add another EUR 4.2 billion, is composed of the Icon portfolio in Greece and the Bank Iccrea securitization in Italy. Collection were at EUR 2.8 billion, picking up pace in the third quarter, while write-offs were at EUR 3.4 billion. And sales by banking clients is EUR 1.3 billion, in line with the asset quality strategy. In conclusion, the gross book value under management continues to develop positively and sustain our cash flow generation. On Slide 7, we show the key stratification of our GBV. Year after year, we achieved greater diversification by market, asset class and clients, while maintaining the distinctive features of being one of the most secured corporate portfolio in the industry. Average size stayed very high and reached EUR 300,000 per loan for doValue Hellas in the solar portfolio. We now cover all of the most attractive markets in Europe while also being diversified. In our client base, you find the top systemic banks and investors in the region. So this would translate in the ability by doValue to capture a significant portion of the new mandates in the market. On Page 8, we look at the main components of revenue. On the left-hand side, outsourcing fees are up due to the new perimeter of consolidation and the use of real estate brokers in the REO services. On a pro forma basis for NPL, they are actually reducing since we are insourcing more. On the right-hand side, the key point of our business model. Base fee are up more than 2x in absolute terms and from 21% to 38% in relative terms. This is a trend which began in Q1 '20 and depends on our exposure to markets such as the Iberia region and the Hellenic region with much higher average fees. You can see more quantitative details on our fee structure in the page, with base fee going from 5 basis points to 15 basis points. Variable fees are down as a percentage of total revenue due to the temporary reduction in collections impacted by the lockdown. Going forward, this revenue component will progressively regain its weight. But in the meanwhile, we can rely on this fee and ancillary revenue as a source of stability. Moving now to Page 9, a focus on cost. We have built an operating platform based on skilled asset managers and the scalable IT platform, meaning that our cost base is mostly fixed. We want to be ready to deploy operating leverage since we expect market volumes to grow. But in the meantime, we look for sources of efficiency everywhere we can. On a stand-alone basis, that is excluding the effect of the greater consolidation perimeter, every key cost item which is going down, beginning with HR cost, down as a percentage of total costs and with its variable components reduced to only 4%. As to our outsourcing partnership with IBM, it's yielding its first results. And we have reduced our reliance on real estate and co-working space, something that at least impacts will be structural. On Slide 10, we included the main results by geographic area, although we already commented on the collection and operating environment by region. Collection rates are holding up despite the coronavirus disruptions with the structural differences, which always have been present, linked to the different efficiency levels of the judicial systems. EBITDA margin improved materially from the second to the third quarter of the year and to be precise, from 19% to 35%. We are seeing signs of normalization everywhere, and the latest news in terms of measures to limit the spread of coronavirus seem much less invasive than in the April-May period. One point that is apparent here is the potential for the doValue Greece acquisition to be accretive to group margins. In the region, we already are at 40% EBITDA margins and expect to grow from here, in line with our acquisition business plan and supported by the higher-than-average proportion of base fee. Next, the working capital and balance sheet on Page 11. Working capital has come down by about EUR 26 million year-to-date, notwithstanding the greater revenue. As we stressed in the past, this is a positive feature of our operations, which we believe to be structural, sustained by the client shift towards investors and by international expansion in Greece, where a portion of our base fees are prepaid. Regarding net debt, I would highlight that leverage is developing in line with our expectation, and that the current covenant set provides for ample room to manage even in an adverse coronavirus scenario into 2021. Our sources of funding are well diversified between the bank and the bond markets, while limited near-term cash replace our nonfinancing needs. In the appendix to this presentation, you may find further positive details on the subject. Finally, a comment on net debt on Page 13, just highlighting the strong free cash flow generation at EUR 61 million. Our business model is highly cash-generative, a leverage that comes down very quickly, as the Altamira acquisition already demonstrated. Capital expenditure stood at nearly EUR 14 million, higher than our historical average but in line with expectations, as we complete the integration of the group systems and work to continuously upgrade our IT. 2021 should already see total CapEx coming down to our historical average in relative terms to our sales. Finally, I would like to flag that the net financial investment line, 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.

Firstly, well done on your results. We showed encouraging trends. I have 2 quick questions. Firstly and related to the short-term pipeline of EUR 25 billion, for example, yesterday, we saw a midsized bank -- midsized Italian bank announcing new NPL disposals. I would like to ask if it's possible to provide details on the trends in the NPL transactions in the recent months after the gradual removal of the restriction measures. And my second question is, if I remember well, the AGM this year approved a share buyback program. In light of improving revenue trends and also the strong cash conversion rate and generation capacity, I would like to check if there's any possibility of a share buyback plan to be launched in the near term.

Okay. Thank you for your question. On the -- on our forecast in terms of business development in Italy for next year, we see a significant increase in the number and size of the transaction in 2021 when the restrictions, the current restriction will be removed. I think we -- the Italian banks were quite active this year despite the restriction in place selling down portfolio, both through cash transaction and securitization. So I think this trend will accelerate next year when all the restriction will be removed and the calendar provisioning and then the new one will work. On your second question, the AGM and the opportunity for the AGM to approve the share buyback, my answer is no. No, we don't want to submit to the AGM the opportunity to approve a share buyback: First of all, because we, I think it was the last AGM, gave to the BOD and the management of the company the power to buy back shares, so we don't need any formal approval from the next AGM; and second, because it's -- I think it's too soon, it's too soon to say. We can work in on it, but it's too soon to say.

The next question is from Julia Varesko with JPMorgan.

My first question is on cost. Your year-to-date performance, adjusted for acquisitions, is quite positive. And even if we take into account that part of that came from variable costs being down, and that's probably temporary, would you please comment on what you expect for this line on a comparable basis for next year? My second question is on FPS and doValue Greece. You say that it's continuing to perform ahead of your expectations. So I'm wondering, do you expect it to also perform ahead of your expectations next year? And would you be able to provide some guidance for 2021 development for doValue Greece? And finally, on M&A, you comment in the release that you see the likelihood of consolidation in the sector. Do you plan to participate in that? Or will you be just standing on the sidelines? What are your views on M&A?

In terms of the question you asked on the cost base and how we see it developing for next year, we continue to work on efficiencies. So despite the business being up, and therefore, the variable costs are naturally coming up in the next year, the sheer amount of cost will reduce percentage-wise, so that the EBITDA margin can grow to the levels we had expected in the business plan presented to you now almost a year ago. So the trajectory is defined, and the work on cost continues. On the second point, we gave some indication on doValue Greece performance for next year when we announced the transaction. We don't feel today like indicating additional performance vis-à-vis what we have already guided for. Obviously, the more we get into 2021, the more we could give promising messages as they materialize. Today, it's a difficult time to say that there is an overperformance, given that the second wave of COVID is upcoming. Obviously, I mean, the way it has been designed and the structure of the lockdown is much different from the previous one. But still, we need to assess carefully all the implications. On your third question regarding consolidation, we continue to monitor markets for opportunities like we have done over the last 3 years with a very clear guidance in terms of financial policy and limits and accretive transaction for our shareholders. So these are the 2 key points we need -- we will take always into account when we look to market opportunities.

The next question is from Luigi Tramontana with Banca Akros.

Yes. First, 2 questions on strategy. You flagged some criticism about the operations of AMCO in Italy, the way that the company operates being both an investor and a servicer of NPLs. What is your view regarding the creation of a network of bad banks that is being studied at European level? Do you think that this is going to impact your activity and which way? And still on strategy, regarding the consolidation of the servicing sector, you think that this will be positive for doValue? Why so? Do you think that this is going to reduce the pressure on commissions, margins, if any? Or is there anything else? Second question is rather on the evolution of the business, especially collections, given that we are seeing new lockdowns across Europe. I just wanted to be sure that for the time being, the activity of the judicial courts is not being suspended so that basically, legal activity will be clearly less buoyant than last year, than in Q4 last year, but better than in Q2, so similar to the last quarter, to see -- or what we can expect in terms of net profit for year-end?

Okay. On the bad bank, we are in favor of the current EBA proposal on the network of national bad banks. But it's important for the national bad bank being in line with the Spanish scheme, the SAREB scheme. So in Spain, the bad bank is a debt purchaser, and SAREB give all the assets under management to players such as Altamira, et cetera. I think it's the right way to do it. As you can see in the coming weeks, Greece will replicate the same scheme and I think a big -- the scheme approved at European level. I think this scheme will be different from the AMCO ones. And so the bad bank will not take the asset under management. So all in all, for doValue, it's a positive perspective because it can accelerate the disposal of the NP position from the banks. On the consolidation process, I want to repeat our view on this crucial point. I think the consolidation is underway. And probably, the process will accelerate: first, because of the consolidation, the main European banks are looking for; and second, because of the impact of the pandemia because, as I said before, the pandemia will amplify the difference among the best and the worst performer in our space. So at the end, we'll facilitate the consolidation process. And consolidation is important because, as you rightly point out, did point out, because of the impact on pricing there and competition, the main result of the consolidation process will be a significant reduction in the pricing pressure with a quite positive impact on the profitability of the servicer, even more in our case because, as you know, our platform is scalable, and the marginal cost are extremely, extremely low. So we are in favor of the consolidation process. But I think we can wait because doValue will benefit from the consolidation process one way or another. We can play an active role in this process or not. In any case, we will benefit from the reduction on the pricing side coming from the consolidation processes.

On the last point, Luigi, this is Fabio, we can confirm that, at the moment, the countermeasures in place for COVID with regards to the courts are not the same as the ones during the first wave. So currently, courts remain open. They switched partially to remote working. They remain open. This is, of course, the markets that we cover, especially the largest one, Italy, Spain and Greece. So judicial activity continues. Clearly, it's not the ideal situation, but the current countermeasures are temporary. They stretch until the end of November. And in any case, there is no shutdown. So the activity continues. The advantage that we have as well in this case versus the first wave is that other important activities that we need to finish -- conclude our collections, think, for example, real estate brokers, they can continue to operate. So that is again another reason to be mildly optimistic.

Many thanks for all the clarifications. Just one last question, if I may, regarding CapEx. I understood that the CapEx will be down next year. Can you give us a range of CapEx for 2021?

I think you should assume just around 5% of group revenue, as you have seen. And we had indicated for this year a certain amount, and we are doing less. So we are shifting EBITDA to next year as well. So it's along the lines of what we historically have had.

The next question is from Andrea Lisi with Equita.

Several questions from my side. The first one is on the impact you expect in case a moratoria will be further extended, let's say, till June 2021, and in case of a temporary suspension of the calendar provisioning. My second question is on -- I see on your numbers, the extraordinary items below the EBITDA, there are a further EUR 2 million with respect to the first half of 2020. I want to ask you, what are referred to in these extraordinary items? If -- and if we should expect other one-offs in the last part of the year? And I wanted just to understand a bit better the movement of net working capital in the quarter, starting in the third quarter, the change asset and liabilities was of minus EUR 36 million, if my calculations were correct. And I want to ask you, which are the reason why this impact?

Andrea, I'll answer your question. In terms of the impact of moratoria, as you have seen also in 2020 when the moratoria was applied in all countries, and the effect of the new flows have been limited, we have achieved more -- much more than our target for the year of EUR 2 billion in September. So we expect to overperform also next year in terms of new inflows from existing contracts. The guidance for next year was also EUR 2 billion, even in the scenario where the moratoria is going to go up to June 2021. We do not have a significant impact from the suspension of the calendar provisioning, given that the main effect is on the -- in the short term is on the unsecured multiyear portfolios, where our exposure is quite limited. Going back to your question on the...

Sorry. Just to give you a better assessment of the impact of the moratoria on our business, the main impact of the moratoria is stopped the switch of the current performing loan to subperforming, so from performing to UTP. But the UTP loans are excluded from the moratoria itself. So the impact of the crisis will accelerate the switch from UTP to NPL because the current UTP loans are not included into the moratoria. So in the short run, the impact of the moratoria will be a significant acceleration in the NPL generation and a slight reduction in the switch of the loan from performing to UTP.

Going back to the second question on the extraordinary items below the EBITDA, they mostly relate to the layoff costs. As you know, we had a plan in 2019 presented to you of some layoffs to happen in 2020. We have continued in that plan to create efficiencies. And obviously, that brings cost with it, both in Italy and in Spain. Regarding the working capital dynamic in the third quarter, the main event you see that is impacting the quarter result is the reversal of the anticipated payment done to -- in the context of the Eurobank transaction, which was, as we mentioned in the past, around EUR 30 million, which has an impact on the change in working capital dynamics.

The next question is from Laura Homsy with Neuberger Berman.

Yes. I was also going to get back to the cash flow development in Q3 and what kind of you expect for Q4 overall, whether that will be a positive contribution in Q4 with regards to overall capital but also working capital. And what kind of development do you expect there? And then if you could give any more color regarding the one-off that caused the EBITDA performance year-on-year to be negative. You mentioned something regarding a one-off that you benefited from in the 9 months -- or rather into Q3 than maybe in 2019. If you could give some more color, that would be great.

Yes. Definitely. On the development of the working capital to year-end, we see an improving trend. So we continue to improve from the basis that we are in, as we said, for 2 structural reasons: more securitization we manage, better the payment terms are; and the kicking in of the European contracts are the payment terms, which are more attractive on average than the average portfolio, balances terms. So all in all, an improvement which we reduced, which we like to reduce the net financial position. On the second point, we have indicated in the past that in the first quarter of 2019, Intesa has sold a large portfolio to Intrum in Italy of around EUR 10 billion. We were managing EUR 2 billion of this. So the transfer of the servicing agreement to -- for this EUR 2 billion, and we kept managing the remaining EUR 5 billion we have with Intesa, determine the payment of a one-off fee to us as part of the usual contracts, where every time there is the portfolio disposal by our clients, we are indemnified for the future flow, which we will be missing from losing that piece of the portfolio.

Understood. Very clear. And then one more question. Sorry, with regards to the syndicated loan facility that's amortizing, when is the next payment?