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 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alberto Goretti, Head of Investor Relations of doValue. Please go ahead, sir.

Good morning, ladies and gentlemen. As the new Head of Investor Relations, I'm proud to welcome you to doValue's First Half 2021 Financial Results, presented by our CEO, Andrea Mangoni; and our Group CFO and General Manager of Corporate Functions, Manuela Franchi. Andrea will take you through the latest developments on doValue's business positioning and economic results before handing over to Manuela to dig further on our financials. Following the presentation, we will be glad to answer any of your questions. Now let me pass it over to Andrea.

Thank you, Alberto, and welcome on board. Good morning, everyone, and thank you for joining us today. Starting from Page 2 of the first half 2021 results presentation, I would like to comment on the positive developments we have achieved in the recent weeks as well as to remind some of the thinking behind our vision for doValue as a leading and reliable servicer for the financial industry. At the very start, 2021 was all about rebound and normalization of business conditions after an unprecedented crisis, which struck the society on a global scale. Nevertheless, we never stopped focusing on business development and organic growth, working in positioning doValue as the go-to servicer for banks and investors, even in a post-COVID world. As you know, we expected that despite a strong rebound of the GBV growth, the weaker sector and segments of the economy will be still struggling to cope with an uneven recovery and at the end of supporting measures from the government. This is why our forward flow contracts across 4 countries continue to underpin our assets under management, adding EUR 2 billion of GBV despite several moratoria still in place, reaching the target of the full year 6 months in advance. New mandate winning that stretched is very satisfactory with a EUR 5.2 billion of new business, especially in Italy where we command a solid 75% market share on the new GACS assigned to third-party servicer, a testament of our leadership and quality of service, growing our market share in the sector. Taking into account forward flows and new mandates, we are adding EUR 7 billion of GBV, which is more than enough to replenish collections and write off for the first half, stabilizing the asset under management without any extraordinary transaction. Also, we are participating in a consortium with Fortress and Bain, which has been selected as the preferred bidder for the Frontier portfolio, it means EUR 6 billion, with an exclusivity window, which will likely lead to a binding agreement very soon. Financial results and operating results were also satisfactory. Gross revenues stood at EUR 245 million and EBITDA ex NRI at EUR 73 million in the first half of 2021 with a strong growth year-over-year, respectively, of 44 -- sorry, 54% and 104%, driven by the consolidation of doValue Greece and a pickup of the collections activity, which was severely impacted in the last 15 days of March 2020 and the whole second Q last year. Also, on a pro forma basis, good growth is confirmed. We are particularly proud of the results of doValue Greece, which is showing better-than-expected collections and higher profitability than buy-side case. Net income is also growing along with EBITDA despite higher D&A and financial charges related to acquisition, highlighting the financial sustainability of our M&A strategy. On the back of these results and favorable market condition, we worked rapidly to improve our financial structure by issuing new EUR 300 million notes to refinance our existing banking facility to extend the average duration of our debt structure. We are very proud of the strong interested drawn from this deal, which added top-tier institutions to our investor base. Cash generation continued to be sustained in second Q, even after a partial reversal of net working capital, low seasonality in payment of EUR 2,001 million (sic) [ EUR 21 million ] dividend.

EUR 21 million.

EUR 21 million. Sorry. It was an hope. But it's just EUR 21 million. Okay. In fact, we further reduced our leverage ratio from 2.6x at the end of 2020 to 2.4x on the back of a stable net debt and a pickup in LTM EBITDA, a trend which will continue as we head toward the end of the year. On Page 3, we show a focus of the new AUM coming from forward flows and new servicing mandates in first half. As you may remember, we forecasted a conservative target of EUR 2 billion for 2021 to account for moratoria and other debtor relief measures still in place in our market, whose lift up and effects were not predictable yet. First half ended with forward flow of EUR 2 billion, already reaching the full year target, highlighting how signs of distress are still lingering in the economies as self-supporting measures have been rolled over. In fact, the shock caused by COVID will have long-lasting consequences for the industry. And we are seeing our major clients keeping on carry out their derisking process with important transaction where doValue can claim a leadership position. First half 2001 (sic) [ 2021 ] ended with a solid intake of EUR 5.2 billion of new mandates. Adding to the onboarding of the Icon portfolio for EUR 2.6 billion, we're on track to reach the target of new mandates of EUR 7 billion to EUR 9 billion for 2021. New GPV was especially good in the Italian GACS market where we have been awarded with over EUR 3 billion in Q2, a 75% market share on the new GACS mandate from year-to-date. We are particularly proud of this result as the Italian GACS market is considered one of the most competitive. While in the past, we felt pressure on margins owing new entrants, we are now reaping through it of a consistent strategy aiming at keeping the bar high when it comes to quality of services and performances. As the consolidation of the banking sector in our key market is gaining pace, we will see more disposal of portfolio and possibly favorable developments for doValue as our partners have solid institutions with acquisitive strategy in the consolidation game, which could add additional flows for doValue in the future. On Project Frontier, as you have know from the press, we are partnering with Fortress and Bain. Our consortium has been selected as preferred bidder with major chances to be awarded the contracts in the coming weeks. Project Frontier would represent a game changer as this is the only major [ HAPS ] transaction in Greece which will be awarded in the open market without any exclusive agreement or platform sales. On Page 4, we want to give you some updates on the ongoing normalization process of our collection operations. In the left part of the chart, you have monthly collection for 2019. So pre-COVID 2020 affected by COVID from March onwards and 2021 in Italy and Spain. Greece has been excluded being difficult to cost and comparable perimeter within that time frame. In Italy, collections in the first half are up 23% versus the same period of 2020, but still down 50% against the pre-COVID level of 2019. Social distancing measures are still affecting the normal functioning of courts and the moratoria on evictions and foreclosures is preventing us to collect properly certain secured portfolio. With this respect, one very positive development has been the sentence of the constitutional court, which has declared unlawful the freeze on evictions, paving the way to a healthier environment for collections on secured portfolio from July 22. Moreover, the vaccination campaign is allowing to increase the number of hearings due to more limited social distancing measures. As per Spain, REO sales are less affected by courts' activity and foreclosure. That's why collection has recovered and it exceeded year-to-date 2019 by 8%, while they are up 76% on the same period of 2020. In the right side of the slide, we resumed the status of the supporting measures in the jurisdiction where we operate. The legislation is still very favorable and supportive for debtors, although in a less widespread and more siloed way. Moving to key financial figures on Slide 5, you will notice how the post-COVID recovery is consolidating with a solid accelerating growth in both revenues, EBITDA and net income. Gross revenues were up 54% to EUR 254 million, was plus 47% in Q1. While year-over-year is benefiting from comparison with a semester which includes only one month of doValue Greece, even performing first half 2020 for the acquisition of doValue Greece, results are showing a positive trend with gross revenues up 40%, thanks to doValue Greece, which is performing ahead of business plan. The profitability in first half was good with EBITDA amounting to EUR 73 million and healthy 29% EBITDA margin over the semester. As collection will grow further, leading to seasonally stronger quarters, we think this is a solid base to reach pre-COVID profitability levels. Also, net income items grew significantly, swinging from a negative result of EUR 8 million to a profit of EUR 14 million despite higher financial changes and D&A originating from our acquisitions. This is thanks to our healthy approach to M&A with financial sustainable and accretive acquisition even with a very conservative approach when it comes to purchasing price allocations. If a sequential and year-over-year growth will stay the same in second part of the year supported by further relaxation of distancing measures and the pickup in economic activity, we will be well on track to reach consensus figures for 2021. Moving to Slide 6. I would like to point out how the positive cash generation feature of 2020, which is resulting from a shift to professional investors, customers and consolidation of doValue Greece, is continuing to underpin our balance sheet. In the first half, operating cash flow was at EUR 37 million and net cash flow in first half stood at EUR 23 million, bringing our leverage ratio on a pro forma basis to 2.4x with EUR 388 million net debt, even after payment of 2001 dividend -- sorry, '21 dividend. This is a further improvement versus 2.6x net leverage ratio as March 31. On the back of these results, we further strengthen our financial structure with the issuance of EUR 300 million notes, refinancing our banking facility. The issuance, which draw significant interest and was 2.7x oversubscribed, will allow us to be more flexible to deploy our M&A strategy and to remunerate our shareholder, still within the parameter of a very prudent financial policy, which distinguishes us from a more leveraged and risked player in the credit management sector. As per M&A, after the first investment in a Brazilian fintech named Quero Quitar, we are reviewing other interesting targets in the proptech and big data sector. After digesting our Greek and Spanish acquisitions with leverage heading south of 2.5x, we will monitor closer in-market consolidation opportunities in Italy and Spain. M&A is not a good course in itself. Our main filter will always be shareholders value creation, and we will not push external growth at any cost for the sake of deploying capital. I will now hand over to Manuela, who will take you through the first half of 2021 results in more detail. Manuela, the floor is yours.

Thank you, Andrea, and good morning, everyone. Starting from Page 8. We are pleased with these results, which show a consolidating recovery path and the promising start of a sustained growth in profitability. With our leadership position in the most attractive markets of credit management and the sound balance sheet with access to that capital market, doValue is ready to fully benefit from a post-COVID environment with the first half bringing already tangible results. In 2021, GBV reached EUR 159.5 billion, making us the clear #1 independent servicing in Southern Europe. GBV is substantially stable despite strong collection in the semester with new mandates and forward flow stabilizing assets under management, with balanced inflows across all countries and asset classes. Adding the awarded mandated to be onboarded yet, GBV would stand at a record of EUR 163.7 billion. Gross revenue are up 54% to EUR 254 million, sustained by continuous pickup of collection and a larger consolidation perimeter. The cost base is increasing due to the larger perimeter, including doValue Greece, but is slower on a relative basis, thanks to the ongoing cost reduction program. EBITDA ex NRI has reached EUR 73 million with plus 104% growth year-on-year and an EBITDA margin of 29%, up from '22 of the first half 2020 and in line with the EBITDA margin of first Q '21 despite seasonal weakness of first half. Bottom line is healthy with net income ex NRI at a positive EUR 8.5 million, driven by higher EBITDA and partially offset by higher D&A and financial charges. On D&A in bottom line, let me remind that we allocate much of our purchase price to the SLA contracts, which depreciate in a predictable and planned way. This is a nonmonetary item of EUR 38.3 million in first half 2021. Cash flow generation continues to be strong after payment of a EUR 21 million dividend despite an expected reversal of the positive net working capital dynamics, which is normal in the first half following advanced payments cashed-in in first Q '20. Deleveraging has been above expectations with the net debt to pro forma EBITDA on a reported basis limited at 2.4x from 2.6 at 2020. On Page 9, we describe the moving parts of our GBV. On the positive side, we have added EUR 2 billion of GBV coming from forward flow agreements, automatic transfer of NPL in earlier years coming to us each month from our 4 main banking partners. Having already reached the second -- the EUR 2 billion target for the full year despite the extension of the moratoria and measures to support the economy in Europe, we will definitely exceed target for this component. First half '21 ended with a solid intake of new contracts of EUR 8.6 billion, including the onboarding of the Icon portfolio for EUR 2.6 billion won in 2020. EUR 1.9 billion of contracts on boarded and won in the last semester and EUR 3.4 billion of secured contracts in the first semester of 2021 yet to be onboarded. This makes the target of new mandates won of EUR 7 billion to EUR 9 billion 2021 within reach. And please remember that these targets does not include Frontier. And we don't include in this target contracts already won in 2020 and on-boarded in '21. New GBV was evenly distributed across countries and asset classes with 1.1% of new NPL in Spain coming from Spanish banks, EUR 3.4 billion new mandates in Italy, mainly GACS, and EUR 200 million in the Hellenic region. Andrea has already mentioned Frontier, which would bring total GBV under management very close to EUR 170 billion mark. Collection were at EUR 2.7 billion, picking up pace in the third quarter, while write-offs were at just EUR 0.9 billion and sales by banking clients at EUR 1 billion. In conclusion, gross book value under management continues to develop positively, topping EUR 163.7 billion, when including 1 Monday to be converted. On Slide 10, we summarize the key certification of our AUMs. Year after year, we achieved greater diversification by market, asset class and client while maintaining the distinctive features of being one of the most secured corporate portfolio in the industry. We now cover all the most attractive markets in Europe while also being diversified. Italy is under 50% after the recent developments in inflows. In our client base, you find the top systemic banks and investors in the region. So this should translate not only in the ability by doValue to capture a significant portion of new mandates in the market and shown by the recent market developments, but also to establish a long partnership with shareholders such as Fortress and Bain. We believe that to have clients which are consolidators in the banking industry will have also benefit to our future inflows by eventually consolidating the inflows of the targets. With this respect, please note that the GBV size is not necessarily a good proxy for value at stake as different portfolio carry different profitability. We received a lot of inquiry on the Sareb contract, and we can now announce that the renegotiation process has officially started at the end of July and is expected to complete by the beginning of 2022. On Page 11, we look at the main components of revenues. On the left-hand side, outsourcing fees are stable. On the right-hand side, we highlight a key point of our business model. Base fee are up 1.4x in absolute terms compared to the first half of 2020, thanks to the inclusion of doValue Greece, and slightly down from 39% to 35% as a percentage of total gross revenue. Thanks to our exposure to markets, such as the Iberia region and the Hellenic region with a much higher average fees, the base fee component is now a significant part of our P&L, which has mute volatility, not only in the downturn period like COVID, but also seasonality different orders. A focus on costs on Page 12. We have built an operating platform based on skilled asset managers and a scalable IT platform, meaning that our cost base is mostly fixed with high degree of operating leverage. With collection volume growing dramatically versus 2020, we can deploy operating leverage with a slicker platform and reduce the impact of HR and SG&A costs. On relative terms, every cost item has reduced comparing to first half '20. HR costs are steady as a percentage of gross revenue compared to the first Q, as well our outsourcing partnership with IBM is continuing to yield its results implying lower IT costs. On Slide 13, the main results by geographic area, although Andrea already commented on the monthly collection, collection rates, which are on an LTM basis, continue to increase in 2021, following up on the recovery trend started in the second half of 2020. Stock collection rate for the whole group increased from 3.3% in first Q to 3.7% to H1. Please note that the data on the stock collection is impacted by the inclusion of the Alpha portfolio in silos of EUR 4 billion, which is not concluded as stock GBV due to the decision of Alpha to dispose it in 2022 and present structurally lower collection rates compared to other portfolio in the Hellenic region. One key element stemming from this slide is the accretive contribution of doValue Greece in group margin. In the region, we are already at 46% EBITDA margin, continuing to grow profitability in line with our acquisition business plan. Next, on Slide 14, the working capital and net financial position. Working capital has increased slightly by about EUR 8 million in the first half, lower than expected due to concentrated advanced payments at year-end '20. Net of this effect, our operations continue to show very low net working capital requirements due to a structural client shift to our investors and by international expansion in Greece where a portion of our fees are prepaid quarterly. Regarding net debt, I would highlight that leverage is developing even better than our expectation in this semester. Now that we have refinanced the banking facility with another bond issuance, we have all the flexibility and headroom to weather temporary drop in EBITDA or fund the M&A transaction without having to ask for waiver. On this, let me point to Slide 15, where we show an updated debt capital structure. We have no cash outlays and no financing needs until 2021 when our first [ EUR 2,016 million ] bond will expire and 2026 when another bullet payment for EUR 300 million in 2026 will come due for repayment of our 7 bond issuance. Even after accounting for recent cash outlays for the repayment of the Spanish tax claim and the dividend, our cash position stands at EUR 136 million complemented by undrawn RCF for approximately EUR 85 million. Let me remind you the reason for the refinancing of our banking facility. Rationale for senior signed the agreement for refinancing it in 2021 where first, as noted, that the removal of the financial maintenance covenants associated with the banking facility, which allows for more flexibility still within our financial policy for M&A and dividends and reduced liquidity risk in case of a sudden drop in the EBITDA. Second, market conditions were really good. We managed to significantly increase in the duration of our debt while only increasing the cost by 65 bps. Third, as a result of no principal payments until 2025, we will be able to pile cash to the project for M&A transaction, or if no opportunity will come, for dividends. Fourth, we managed to obtain a teller structure, which would become unsecured and unguaranteed automatically if the next year upon refinancing of the SSN 2025 allows for further flexibility. Moreover, we keep a strong relationship with our banks through our RCF lines. Finally comment on net debt on Page 16, just highlighting our healthy cash flow generation of EUR 23 million in the semester. Capital expenditures stood at EUR 7 million, in line with expectations and historical average in relative terms to our sales. We have already talked about net working capital. Net debt at the end of June is negatively impacted by the payment of the dividend for EUR 19 million cash out and positively by the divestment of certain securitization notes, both at 2020 and subsequently sold with a capital gain in February 2021. Thank you to everyone. We are now available for questions.

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

I have 2 questions. Firstly, there seems to have been an improvement in the collections during the month of June, which is very encouraging. Could you provide more details on this and also for the outlook into the second half of the year? And linked to this, if you could kindly provide any indications for revenues for the year, as the consensus expectations could possibly not be capturing all of your potential? My second question is you beat your forward flows target for 2021 already and have potential to beat the target for gross forward flows from new contracts for the year, also given the bank's planned NPL disposals that have been indicated in the recent Q2 results, do you expect new mandates for a second half of the year to be better than the EUR 5.2 billion achieved so far? And if this is the case, could you provide any updated gross flows value inflows target?

Going back to your question on improved collection in June, this is due to several factors. One, as highlighted in the chart where we show the performance of Spain. Spain is now out of restriction in terms of limitation of activities in the courts, and also the vaccination has probably started more efficiently than in Italy. Therefore, the number of hearings and the activity on the legal side has been very strong and trying to recover also the past, so 2020 performance. On the REO side, as mentioned before, this was not affected by those measures. So all in all, the results in Spain on REO and the collection side have been outperforming our expectation. Greece has continued on the over performance that was already there in the first Q, while Italy has been more aligned with budget given that the measures on the vaccination and on the first half mortgage have only been effective at the end of June. So we will be -- we will see a stronger improvement after June on the [ dynamics ] side. In terms of outlook for the year, while we confirm EBITDA consensus, we think probably the mix between the revenue and the cost could be a bit of higher revenue and slightly higher cost confirmed the net levels we have said. On the cost side, the only point we would stress the attention are well known in the sense that we have flagged in the past, but we still see analysts probably underestimating a bit the HR component, considering that in last year, we have benefited from EUR 3.4 million for furlough schemes in Italy, which reduced the HR cost by that amount and by a significant reduction in the variable HR costs at 6% for 2020 over total HR cost base compared to 16% in the year before. So obviously, these line items will go back to similar levels this year without the EUR 3.4 million addition. Moving now to your second question. We are confident that the EUR 7 billion to EUR 9 billion target will be reached. We don't feel like over -- going over, giving additional estimates on top of this, because taking into account that as you have appreciated now for some time, our business in terms of mandates, one, it takes time up to the revenue recognition. So it starts with the phase of pitching, winning the business, preparing a transaction, which takes, especially for GACS, 4 to 5 months, and then the onboarding phase, which can -- depending on the client, depending on the type of portfolio and the complexity of the file can take between 2 and 6 months. So taking that into account, the full -- the activity that was done in the first half has proven very successful. We have a pipeline sealed for the second half. And we have Frontier, which is not an easy execution in case we achieve a successful outcome. So all in all, these 2 items would bring the positive and extraordinary results of 2021. Let's stress on Frontier why it's a complex execution. You are moving a portfolio from a bank which has never been securitized before, has never done securitization before to a new servicer and also to new investors. But we are also doing here an IT change, so completely moving also the core banking platform to a new one, more efficient and in line with the Italian IT platform. So to have a common platform on the core banking side across the 3 major countries, Italy, Greece now and Spain next year, so to leverage and improve and reduce the IT cost for next year, reduce back office costs to manage it, and the positive consequence of the case. So all in all, from an operating standpoint, quite challenging but rewarding at the end of the journey.

The next question is from Nicholas Binda of Intermonte.

I have 3 questions. The first one is, looking at the earlier payment of a banking loan, I was wondering if this will generate some one-off on P&L in the second part of the year? The second one is on the net financial position. I noticed that the change in other asset liability generated EUR 20 million negative impact in the first part of the year. So I was wondering if you could provide us some colors on this and your expectation for the remaining part of the year. And finally, on the Frontier project. I was wondering if giving the -- sorry, the potential benefit that derive from the Project Frontier will start from 2022? Or there could be some impacts also in 2021, given the complexity of the business and the project?

I will take the last one. And no, Frontier, we'll have no impact this year in terms of EBITDA. We can have some onboarding costs in the last quarter of the year, but it would be not material. So impact of the project on the EBITDA will start on the first Q of 2022.

Going to your other 2 questions. By the earlier repayment of the banking facility, we don't have prepayment costs, so no cash effect, because our activity was pretty flexible so that it allowed early repayment with no transaction cost. The only noncash item, you will see is around EUR 5 million related to the amortized cost of the facility. As you have noticed in the past, we used to have an interest cost line, 2 components: one, the actual cash interest; and second was the initial cost to set up the facility which was sustained in one case in '19 and the other in '20, which is cashed out in the year, it was -- the cost was taken, but it's amortized over life. This obviously disappears with the dismantling of the facility and the cash -- and the noncash effect is the one I mentioned. The net financial position impact related to asset liability, it's just reference to the upfront fee in Greece. As you know, in Greece, we received, at the beginning of the quarter, the upfront payment for the base fee. In the specific case, it's actually paid at the end of the previous quarter. So it's paid at 31st of December, 2020. So the impact of this effect in 2021 is captured by these line items.

The next question is from Andrea Lisi of Equita.