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 Quarter 2024 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Daniele Della Seta, Head of Investor Relations of doValue.

Good morning, and welcome to doValue Q1 2024 Results Conference Call. I'm Daniele Della Seta, Head of IR [indiscernible] along with Manuela Franchi, our Group CEO; and Davide Soffietti, our Group CFO. Today, we have the a moment this quarter is our first since unbearing our industrial plan for 2024, 2026. Additionally, we are in the final stages of a significant affiliation excluding but which we were announced on March 21. As we go through the market development since the year began, along with our financial performance this quarter, I want to emphasize the importance of today's focus on our results. While we acknowledge we have interest to run the potential execution of [indiscernible], we aim to concentrate today's discussion on our quarterly results. Rest assured we will sort hold further discussions with analysts hopefully by the time we are ready to announce the signing of the acquisition. At the conclusion of our presentation, we will be pleased to address any questions you may ask. Let me now hand over to Manuela to get started.

Thank you, Daniele. It puts a great pleasure and all for me to present our first quarterly results following the cap and the appointment of our new Board of Directors. I was originally interested by the Board to take the role of CEO on this. And now with the recent board appointment, I am committed to servicing in this capacity for the next 3 years. I see [indiscernible] fully excited to enter these challenges. I would like to express my strategy to our shareholders and the board for their trust and I must also extend thank you to the doValue employees for their dedication and so forth. I'm fully cognizant of the challenges and objectives are underlining our business plan, rest assured that, that is committed to doing by utmost to achieve our targets. The Board of Directors, the Board of [indiscernible] had undergone a significant change in its composition. While we thank you, the previous Board members who having assist the company in its first phase of both, we welcome the new Board with many international participants for the contribution that they get to the value in its new trajectory of diversification and laid in the new business plan. Let's now get started with the presentation. We dipped down into the Q1 2024 business highlights on Page 3. This quarter has demonstrated that our ongoing efforts to deliver on our strategic plan are on track, showing promise to soft across key areas. We are already working on a strategic pillars with some of results already visible and tangible such as revenue diversification, new ventures, operating model and IT improvements. Starting with our financial performance, our gross revenue has remained robust, aligning closely with last year's figures, showing only a modest decrease of 3.3%. Notably, we have seen positive developments in Italy, where revenues increased by 7.5% in our ancillaries, which started by 53%. This stable performance is underpinned by long-term agreements with CDs and banks, ensuring a steady revenue stream even in subdued market for new NPL transactions. Few businesses can boot [indiscernible] and revenue, especially in our new business volumes have decreased by 2/3. Our EBITDA, excluding nonrecurring items, has maintained stability compared to last year and excluding positive one-off impact of release of XPO variable compensation of EUR 6 million. This stability in the middle of economic fluctuations and which inflation reflects the strength and resilience of our operational management. After under management remain steady at EUR 116.9 billion compared to EUR 116.4 billion at the end of 2023. We also made significant strides in managing our operational costs through [indiscernible] efficiency measure and discipline in cost management, we reduced cost by 5% or 84 [indiscernible] despite saving a 15% wage inflation in Italy after the renewal of the National Banking contract. In terms of leverage, we kept it at manageable levels of approximately 2.9x EBITDA, when including both the cash we exceeded at the beginning of April for the arbitration against Apollo. This is a slide in [indiscernible] 2.7x in Q4, which primarily reflects payments for Altamira earn out related to [indiscernible], the seasonality dynamics in our financial structure and some temporary working capital mismatch, stemming from disposal transaction in Greece. Taking into account cash already generated in [indiscernible] this transaction of EUR 411 million level stand at 2.8x. Lastly, I know we are expected to close the transaction by end of [indiscernible]. I want to assure you that the Gardant deal remains active and is moving to our closure pending the finalization of reduction and financing documentation. We are already working with the Gardant to make a faster transition to combine. We look forward to this acquisition and the strategic announcement to our business plan, and we expect to update you by the end of May with that targeted presentation. Starting our extension now to our guidance for 2024 and our progress today in Q1, let's take a detailed look at where we stand on Page 5. Starting with gross revenue. We have achieved EUR 97 million in the first quarter, can be got on track toward our annual forecast of between EUR 480 million and EUR 490 million. This performance is well aligned with our expectations and seasonal trends. In terms of the gross book value, our collection rate stands at approximately 4.5% against an annual guidance of around 5%. This indicates a civil performance, although it has not yet fully reflected the anticipated higher performance from our new operational model. We expect to see the full effect of these operational improvements in the second half of the year. Regarding our EBITDA, excluding nonrecurring items, we posted EUR 25 million with a margin of around 26%. On an annualized basis, this comes short of our yearly guidance of EUR 160 million to EUR 170 million with an asset margin of 39%. However, the distance in the first Q was already foreseen and expected as weight inflection impact in Italy from renewal of the new contract scaling. However, is our new operating model gain structure, we expect a pickup in profitability in the second half of the year, which will bring profitability back on track as prices indicated in the Capital Markets Day. Lastly, we reported financial leverage at 2.9x EBITDA, in line with guidance, which anticipates a range between 2.7x to 2.8x for the year and before Gardant transaction. In April, we were already at 2.8x, even after payments of EUR 22 million over nonrelated to sizes. We have decided to reach the target for net leverage in the coming quarters towards the end of the year. As we continue to navigate to 2024, this meter will guide our strategies and novation focus, ensuring we meet or exceed our target. Moving now to Page 6. As we progress with our 2024/'26 business plan, I'm pleased to highlight our substantial advancements across the 5 pillars that support our strategic direction. Pillar 1 announced client-oriented approach, we have strengthened our client-centric strategy by senior management for product development and business development effective from the first quarter. This move ensures our organizational strategy and structure aligned with our book to better sell and understand our clients' evolving needs. The new business development structure is almost attractive level announced by the creation of DoAdvisory, which has been able to offer financial services to banks and investors starting from pen. Pillar 2, growth and diversification beyond servicing. Our business is diversifying effectively with the share of non-NPL business now representing 5% of our portfolio. We are also excited about the upcoming launch of our mortgage broking business, installed set for July 2025, and the establishment of our DoAdvisory unit in Greece mentionable further broadening our geographical and service reach. Pillar 3, reengineered operating model. In Greece, we have begun deploying a digital platform the time for automated contact and self-converts, modernizing our interactive customers. Additionally, our Discover Initiative in Spain targets, both banking and nonbanking customers allows enhanced operational efficiency take of the board. Pillar 4, leadership in technology and innovation, we are leveraging the to our Stage 2 management system powered by the exclusive support of [indiscernible]. This integration marks a significant step forward in utilizing cutting edge technology to streamline operations. Furthermore, our team for contact center solutions have been fully integrated, setting new standards in customer interaction and service deliveries. Pillar 5, included and sustainable culture. Finally, our commitment to fostering and included a sustainable work environment is evident from the satisfactory results of new [indiscernible] conducted by best of plate to work. This reflects an ongoing effort to create a workplace where divested is embraced and sustainability is prioritized. Moving to Page 7. I want to show the KPI that we will constantly monitor to see how we compare to our growth set in the business plan. It's clear we are on a promising trajectory to meet our long-term objectives. Market share in Southern Europe. Our target is to achieve a market share of 15% to 20%. As of first Q, even in a very subdued market for NPL, we have been able to keep our market share on new mandates, thanks to our franchise and draft of our customers, setting a solid foundation as we continue to expand our footprint across the regions. We expect to over perform this target in 2024 in Greece. Share of gross revenue from non-NPL. We have to diversify revenue stream with a target of 35% to 40% from non-NPL by 2026. Currently, we are at 54%, nearly touching our initial milestone. This indicates a successful shift in our business model towards more varied revenue sources. As the new initiative will start the start-up phase that KPI will move definitely 40%. Employee satisfaction, while our goal is to be leader in employee satisfaction, this ongoing product is vital as we start to make 2 value and top [indiscernible] to work. And by sizing the important motivated and satisfied workforce, especially in the context of a changing revenue mix and new capabilities to be introduced. Automation, we aim for more than 30% automation in our processes to announce efficiency scalability. Currently, we are at 20%, demonstrating significant progress in integrating the automation technology into our operations down there, more work to be done. Moving now to Page 8. Let's explore now our outlet friendly production, focusing on the trend illustrated in the graph of midlife. On the left-hand side, we see the NPA ratio reducing over the years from 2019 to '23, there has been a significant decrease in NPA stock. This reduction is primarily attributed to effective editing and initially high level events, which required aggressive management. While some may view the lower NPA ratios we be concerned, feeling the potential shrinkage of the market, it's important to recognize that this reduction reflects the normalization of the market from previously elevated levels. It's a positive indicator of the effectiveness of our servicing industry and market recovery. Now turning to the right graph, which shows the cost of risk a proxy for future NP production, the situation appears different. The cost of risk hasn't decreased as sharply as NPA stock, suggesting that we're still ongoing risk and potential for [indiscernible]. Notably in some regions like Spain, the costal increased, indicating a faster generation of new NP than anticipated. This contract with the broad ability is seen in other parts of the European Union. Italy and Greece had shown different trends, with Italy performing below average, largely due to government intervention and specific market dynamics, which are temporary. In contrast, Greece the group sees a significant risk cost compared to the average. This varies highlights the divest market condition across Southern Europe, suggesting that while the immediate with [indiscernible] stabilized underline [indiscernible] and sustaining a need for our services. Speaking about evolving market dynamics and the need for continued vigilance in the NPE sector, let's now dwell into our current and future GBV intake and market pipeline. As of March 2024, we have successfully boarded EUR 1.8 billion of GBV across balance regions, reflecting our robust index strategy and operational excellence. Not halt contributions come from both new and existing clients with significant inflows of EUR 300 million from Italy, primarily through the [indiscernible] in test portfolio and EUR 50 million from Spain. In the Atlantic region, we have seen a remarkable inflow from the [indiscernible] in Gemini transactions, contributing EUR 150 million. This is a statement to our strategic positioning and effecting the same region showing high MD-ratio reduction. On top of this, we also have EUR 1 billion new bandit increase to be on board than and recently announced. Now withstanding limited transaction in the market, we were able to involve EUR 1.1 billion in new GBV and additional mandate [indiscernible] EUR 1 billion, consistent with our annual target of EUR 60 billion of new mandates. The pipeline had also likely with over EUR 58 billion in the next paving months. Including the government projects, which are developing in Italy and a robust dividend intake in the Atlantic region, which will materialize in transaction, which will be appointed and filed by the second quarter. Moving to Page 10. We are excited to dwell in the partnership with Cardo AI, which marked a significant leap forward in our credit management capabilities, particularly within the Stage 2 loan segment. This partnership is crucial as is aligned with doValue strategic objectives to diversify beyond the [indiscernible] technology to drive efficiency and innovation. We observe the [indiscernible] 2 loan volumes are on the rise, with GBV reaching EUR 211 billion, a significant portion, roughly 75% or EUR1.75 billion comprises loans under EUR 5 million, demonstrating adviser market segments drive with opportunities. The estimated revenue from managing these loans range between EUR 300 million and EUR 400 million, highlighting the potential profitability in the sector. Our partnership with Cardo AI focuses on earning advanced AI technology to manage this stage 2 credit more effectively. Cardo AI staffing edge data management, predictive analytics and AI monitoring solutions. This collaboration not only announced our services offering, but also position the value and fastened financial technology and innovation. Stage 2 loans feature a [indiscernible] profile and highly sensitive to macroeconomic factors. Managing these loans necessitated high coverage ratios compared to Stage 1 moves and require sophisticated monitoring to minimize the [indiscernible]. The use of AI and machine learnings in early warnings and risk assessment helped in significantly reducing the probability of default, which in terms of the direct impact on the bank's balance sheet and the profitability. Our move into Stage 2 loans signified a strategic shift to diversify our revenue stream away from traditional NPL services. This segment offers stable and scalable opportunity as it evolves performing or underperforming loans that do not qualify then yes, yet requiring [indiscernible] management to prevent future defaults. Before moving to financials, let me give you some updates on ongoing processes and disputes on Page 11. Arbitration with Altamira holding. First one concerning the arbitration, there has been a crucial update, we have received a payment of EUR 22.7 million following a favorable quarter decision in April. This action has been challenged by Samir Asset Management aiming to undone the agitation and the payment, but the process is ongoing. We anticipate the court of Madrid to issue final verdict in May. We are [indiscernible] about the outcome, expecting the port to reject the actions, which will add a positive intact on our net income with an extraordinary gain, adding EUR0.28 per share, offsetting the extraordinary loss registered in 2020. This outcome has already positively impacted our net financial position in EBIT by the corresponding amount. doValue Portugal. In particular, we are currently negotiating an FDA with an identified buyer with the aim to conclude the negotiation by June. This development is expected to have a neutral impact on net debt, while positively influencing our profitability and enhancing cash generation in the future. This move aligns with our strategic focus on expanding our market presence and operational efficiency in Portugal. [indiscernible] by Altamira. On another front, we have reached a collective dismissal agreement to [indiscernible] by Altamira. This agreement completed enable and resulted in all employees exceeding by end of the month. While this will have a temporary negative impact on 2024 cash flows, which was already included in the estimate is expected up some impact of our further strategy to optimize our operational framework and focus on core profitable areas. Now let me hand over to Davide to cover the financials in more detail.

Thank you, Manuela, and good morning to all of you. So let's dip down with the financials this quarter. Moving to Page 13, we have here a summary of the financials for the quarter. As already mentioned by Manuela, the quarter was in line with our expectations and partially affected by the normal seasonality of our business in the first part of the year. Gross book value has remained stable since the beginning of the year, while it declined by 2.7% year-on-year. Our collection performance year-on-year has proved recent with collection of around EUR 1 billion and reprove collection rate. As usual, given the growing importance of the secondary transaction in Greece, our collection profile is [indiscernible] and more concentrated towards the end of the year. Gross revenues remained in line with the first Q 2023 with a small decline of 3.3% with a good performance of Italy and ancillary revenues compensated lower fees from disposal increase. In general, the new business in the remain low due to a favorable market dynamics with a higher cost compressing margin. This is why we have been extremely proactive in managing our cost base with both downside side and efficiency issues. Thanks to that, EBITDA has remained stable if compared on a like-for-like basis. This means excluding for 2023, the positive effect of the release of provision for deformable compensation. This is happening despite the significant wage inflation in Italy for the renewal of the national banking contract. The decline in EBITDA drove the net income decline, which for Q1 2024 is better than the budget, but is slightly negative versus a positive result of EUR 1.3 billion in the previous quarter. Moving to Page 14. Here, we present the conformance of our GDP movement in the first quarter. [indiscernible] amounted to EUR 700 million and 22% drop that [indiscernible] last quarter, but still in line with our guidance for the current year of EUR 2 billion. On top of debt in the quarter reported EUR 1.1 billion of new mandates. [indiscernible] collections stood at about EUR 1 billion. As you can appreciate, this [indiscernible] EUR 300 million, which is a low level compared to the normal disposal activity. This was caused by a delay in the action increase, which will pick up in the following quarters. Finally, you may notice that the rest of is almost equal to 0. This is due to a positive contribution from Italy, whereby position arcade first of all term taking account increased the bond interest. Moving now to Page 15. Here is the most detailed breakdown of our gross revenues very [indiscernible]. Loans were overall stable at [indiscernible] versus EUR 100 million. I remind you that we are not considering the revenue for for both Q2 and first Q 24 as we [indiscernible] the fine business unit. In Italy, gross revenues were higher than 7.5% year-on-year, mainly due to ancillary revenues and better collection for both UCP and NPL. In Atlantic region, gross revenues declined by 6.3% year-on-year, dragged down by lower restructuring activity on the Eurobank portfolio and delayed sales on up portfolios. These negative effects were only partially compensated by continued growth of the real estate business. We are very proud about the prospect of this new business in Greece, which was a mere [indiscernible] and now is growing in a very promising market becoming a relevant [indiscernible] for the region. This is also part of our [indiscernible]. Moving to Page 16. We continue to proactively and effectively manage our cost base, both in terms of [indiscernible] costs as well as [indiscernible] and SG&A. Operating expenses, including NRIs, have remained broadly stable year-over-year at EUR 61 million light increase of 1.7% from $60 million in first Q 2020, the stability costs come despite the significant one-off effect with reduced tear cost in the fiscal 2023, teaming from provision release for the former CEO by compensation of about EUR 6 million and despite we [indiscernible] in Italy. Overall, we have maintained a strong cost discipline across the group, particularly in Spain where we achieved a -7.5% reduction in operating costs, resenting profitably despite decline in revenues. In terms of [indiscernible] cost, there was an 8.2% increase, mainly driven by the one-off positive effect from the reprovision performance year variable compensation and significant wage inflation in Italy, that is +15% for the renewal of the contract, or compensated by [indiscernible] cost control vision across other countries. However, [indiscernible] component in June 2023 show a decrease of -4.7%. This was also the result of 84 SPT and 39 external asset managers acted as of at 2024, resulting in a landing savings of EUR6.8 million. For a seasonal sales and SG&A, the reduction in cost is primarily related to the ongoing adjustment stage [indiscernible]. In summary, we are confident that our [indiscernible] program will enable us to achieve our target for EBITDA margin in the coming quarters. Moving now to Page 17. EBITDA externalized for the group achieved a decline of 20% year-over-year to EUR 25 million in the first Q of 2024, which remained stable when excluding the positive effect from the release of provisions following the year's resignation in Q1 '23. The slight improvement in the figures remote our ability to manage costs effectively despite deal decrease in revenues. [indiscernible] components were around 350 showing limited impact on EBITDA figures. The EBITDA margin on the last region was notably impacted by lower NPL collection wait, which exited by 6.6%. Despite this, we have managed to partially offset these effects with savings in operating costs. We expect the EBITDA margin in Greece to lightly report to around 50% with an increased focus on disposal in the coming quarters. In Italy, despite the ongoing wage inflation and other economic challenges, we saw a resilient performance thanks to substantial savings on HR costs and incited revenues from higher NPL solutions, leading to [indiscernible] margin growth. [indiscernible], the third quarter traditionally showed weaker performance in terms of EBITDA, which remains in negative factory. However, thanks to the cost discipline [indiscernible] and the lease adjustment, we are starting to see improvements that are expected to compensate for the lower revenues moving forward. Moving to Page 18. Here, you have a summary of our regional performance on kinetics. We are particularly despite of our collection performance in an acquisition at close to EUR 400 million. All in all, the group collection rate increased to 4.4% versus 4.1% in the last year. Our group level continues to be strongly supported by performance in the Atlantic region. Moving to Page 19. Net income was affected in the first quarter by the decline in EBITDA. Again, the comparison in the first Q2 is affected by the one-off retail competition of without that component, the net income would have actually improved. As we forget with the current year and summary stronger quarters, we count from bringing the bottom line back to bid. Moving to Page 20. We observed a decrease in cash flow from operations, which stood at EUR 3.9 million in the first quarter of 2024, lower than this year, EUR 21.1 million. This decline is largely due to the change in net working capital, which was linked primarily to a delay in proceedings of [indiscernible] disposals. When normalized for sessions enabled networking at absorption was actually be. Free cash flow was also negatively impacted by the payment of the year now completion of share buyback and the acquisition of import. On the amount base of 22.3% Altamira Holding was acted by the Board of Madrid and remote [indiscernible] in the first part of the [indiscernible]. Moving to Page 21. We discuss our net debt and leverage position, which reflects our commitment to a conservative financial strategy. Our leverage at lines influenced by the payment of [indiscernible] to EUR 22.3 million, and interest amounted to EUR 11.6 million. Despite these costs, our [indiscernible] as remaining well within our target range, standing at 2.8x as of 2024 compared to 2.7x in December 2023. Significant cash inflows were noted in [indiscernible] with management, which brought in EUR 22.7 million, along with the collection of our [indiscernible]. This includes us to offset some of the larger outflows tied to advanced payment refinancing activities. As obviously, the company has cash of around EUR 100 million and undrawn of EUR 67.5 million, giving a liquidity buffer of EUR167 million, enough to handle short-term [indiscernible] and investment. Looking ahead, the financing of our current maturities will be addressed in the context of the upcoming M&A transaction ensures our financial maneuver aligned with our strategic growth and apposition plan. This approach keeps us on a solid footing for pursuing our strategic objectives and managing financial challenge effectively. Thank you for attention. We are now ready for the Q&A session.

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Simonetta Chiriotti with Mediobanca.

Just a couple of questions from my side. The first is a clarification. Is it correct that you said that standing on the Gardant acquisition should be communicated by the end of May? So did I understand correctly? And the second question is on Spain. There is an improvement in the quarter. And do you expect this geography to reach breakeven during the current year.

Thanks for the question, Simonetta. Yes, we confirm that we are progressing well. It's taking a bit longer to finalize all the items, but we have already anticipated the work also with the management team, and we are fully aligned to deliver by the end of this month when we will have an additional call on this topic. The terms will be similar to what we have indicated in the structure. So no new different news on that front. Regarding Spain, yes, we aim to have a better profitability than last year on the full year. And this is driven booked by the additional cost activities we have done over the last 4 months, basically reducing the workforce by another more than 80 people and also exceeding [indiscernible], which was providing the negative contribution. Both activities have been already done and completed by April. On the positive side, we have seen an increase of volumes, not only from our traditional clients, which is Santander but also more importantly, from the new clients on the banking side, which are first Sabadell and Caixa where volumes have doubled. Also, we got advantage of the weakness of our competitors in the Spanish market and the type of loans that come from these contracts are smaller tickets. And here, the acquisition of [indiscernible] been affected because this is the specialization and internalizing these activities, so not setting the network, but doing them in size allows us to retain the margins from this business.

The next question is from Davide Giuliano with Equita.

I have just 3. The first one is on Greece. Can you give us more color on the decline in UTP revenues due to the restructuring activities on Eurobank portfolios? And do you expect the decline to continue during the year? The second one is on Italy on GACS. A recent report by the Bank of Italy reported that approximately 10 securitization are significantly underperforming recovery plans. I was wondering to what extent the securitization weighed on your total GACS, GB in Italy. Do you see any risk in this regard? And third one on cash generation and RCF. Can you please remind us the gross RCF amount as of first quarter 2024, so the sum of drawn and the undrawn part?

On this, we have this reduction on medium CPs because as of today, there is the portfolio of Europe slightly decreased as the maturity mainly for Europe and is while reduction as soon as the inflow are coming, we expect it could recover will depend also on the strategy of Eurobank sales started portfolio because when they say for quarterly [indiscernible], we merge as NPL don't have any more attune transforming NT revenues. So we expect that as soon as the inflows from Europe and will come during the area we will again have more UTP revenues.