Haya Real Estate, S.A.U. (INTRUM) Earnings Call Transcript & Summary

Welcome to the Intrum audiocast. [Operator Instructions] Now I will hand the conference over to CEO, Andres Rubio; and CFO, Michael Ladurner. Please go ahead.

Thank you very much, operator, and good morning to everyone. This is Andres Rubio, the President and CEO of Intrum reporting, and doing this call from what is a beautiful day here in Stockholm. I would like to -- we would like to make some prepared remarks for 5 or 10 minutes and then open it up for questions. Today, we're delighted to announce the acquisition of 100% of Haya Real Estate in Spain, for a total consideration of EUR 140 million, and I'm on Page 2 now. The transaction is expected to close during the third quarter of this year and is subject to both competition authority as well as some other formal releases of the company shares and assets. But what's most important is that this transaction is completely in line with our stated objectives and checks all the right boxes from what is, I believe, a very selective criteria for doing inorganic -- pursuing inorganic growth. As you can see on this page, it is perfectly in line with our stated objectives of growing and transforming our business, and it is in line with our objectives of growing specifically our client service business. This extends our servicing franchise in Spain, and we become pro forma for this transaction, the servicing partner to all the leading banks. In addition to having contracts or bringing contracts with 3 major banks, including 2 of the top 4: BBVA and CaixaBank, this transaction also cements our relationship with Cerberus, who is one of the largest nonperforming asset investors globally and in Europe with whom we have a very meaningful amount of revenue. They're one of our largest clients. And this transaction, in fact, doubles our volume with them. And I think lays the groundwork for more collaboration and partnership with them going forward. The deal does have favorable deal economics. I'll get into it on the next page in more detail, but it does have a day 1 deleveraging, given the favorable purchase price. It is meaningfully earnings accretive over the coming year against consensus. And just as importantly, and more importantly, fundamentally, it improves our servicing income, which is a very high quality and valuable source of income and growth for us. I think it also really demonstrates how our business model is focused on core organic growth and development, but we will be very disciplined in the pursuit of inorganic opportunities. And by discipline, what I mean is, we will have some very strict financial criterias. We have to work within our valuation and our leverage constraints. But we also need to make sure that these transactions add strategically to our business and in particular, our capital-light focus on servicing and growing our PI business with third-party capital. So in this case, this transaction checked the box of having a strategic rationale and being very favorable from a financial perspective, which will over the near term -- immediately and over the near term, benefit both our shareholders and our bondholders. If we can go to the next page, please. More specifically, the EUR 140 million represents just a shade under 3x what we estimate to be the EBITDA on a 2023 basis, including our restructuring costs. It's very important to know that this multiple as well as this transaction will generate attractive returns to us, only contemplating the existing contracts with no assumed extensions plus our synergies, net of restructuring costs. So as a consequence, the impact to both our leverage and EPS is quite significant. The leverage ratio does drop by 0.06 pro forma on a trailing 12-month basis as of the end of Q1 2023 for this transaction. Relative to consensus, the increase is up to 20% on cash EPS. And again, it's attractive returns with a conservative underlying business plan, underpinning what I said earlier, which is a disciplined, selective approach to inorganic opportunities to complement our core challenge going forward, which is improving our operations, improving our servicing business, growing our servicing business and leveraging our human capital that's in that business and growing our investing business, leveraging not only our own capital but also third-party capital to grow that business. The transaction will be financed by cash on hand and our credit facilities. And again, we expect this to not only be accretive at EPS, but also to be very important and grow our cash flow to equity by almost SEK 400 million post financing, restructuring and other one-off costs. So it's a very meaningful and positive development. One last point I'll make, and then Michael can add any other points or we can go to questions. In terms of our capital deployment, this is a year, which many of our constituents, both on the equity and the debt side look at us for guidance as to how we're going to use our capital. We have the privilege of generating a tremendous amount of operating cash flow, but we need to be judicious and reflect the current environment in the use of that cash flow. In terms of our capital deployment trajectory for the year, we expect to deploy a total between SEK 7 billion and SEK 7.5 billion for the full year, and this includes both portfolios and M&A. So it is inclusive of this transaction. Based on the franchise-enhancing M&A of not only this deal, but also the Arrow U.K. deal, which we announced at the end of last year, and you're all very familiar with, this leaves us about probably between SEK 5 billion and SEK 5.5 billion for total portfolios for the remainder of the year. We believe this is the right decision to put this number forward in terms of our total capital deployment to make sure that we are balanced and we're reflecting our capital structure and our need to address our leverage as well as our need to still provide greater earnings to our equity shareholders. So in conclusion, I'm very happy to announce this deal. I think it's wonderful for our franchise. It's wonderful for our financial metrics, and it sets the base for a continued growth going forward in our servicing business. So I don't know, Michael, if you wanted to add anything? Or if not, we can go straight to Q&A.

I think we can go to Q&A.

Thank you, Michael.

[Operator Instructions] The next question comes from Ermin Keric from Carnegie.

So maybe the first one, just if you could talk a little bit about the catalyst behind this. And I mean given the terms you're setting out, it sounds like a very cheap multiple, the Cerberus is selling at. So is there anything extraordinary explained in this? Because otherwise, if this is a normal transaction multiple for these kind of assets, should we see strategic markets also being valued at 3x EBITDA? Or what are we missing here?

Thank you for the question. I'll address it and Michael can add whatever he'd like. But I don't think this is a normal multiple. What you're talking about is an entity that was much larger a few years ago that is focused on a single market and a handful of contracts that lost a contract in the form of the Sareb similar to what we did, we absorbed that quite nicely. This entity was more challenged and had to go through some debt restructurings. And what we ultimately did was we looked at the underlying contracts as the key assets. We saw that as very attractive to us because we have a larger business, a more diversified business, a still growing business. But this is evidence of how businesses that are focused more narrowly on selected markets or have a concentration of clients can be vulnerable, unfortunately. We did this not to take advantage of the situation, but to partner with both Cerberus and the key clients in giving Haya and these contracts for their life in our hands. And this is evidence of the fact that when the sector does consolidate, which it will over time, we can be both selective, but we're a preferred strategic partner to both banks. We -- in this context, we spoke with all the clients before finalizing the transaction, and there was a very positive reception. And I think that's just evidence of how we're going to be the preferred partner and we're going to be able to selectively pursue inorganic opportunities as the sector develops.

And then a follow-up would just be on the guidance you're giving. How much synergies are included? What's the time line for extracting them? And also on the restructuring side, so the same thing on the magnitude and the time line for those.

Yes, I mean, as you can imagine, we have a very large business in Spain. It's our second most profitable business country after Greece. So largely speaking, all centralized management and overhead is completely redundant. We estimate that to be between 20 million and 30 million roughly. We estimate a full elimination of that during 2023 into '24. So it's going to come in over the next couple of years, Ermin.

And the cost for doing restructuring?

It's -- we've assumed -- sorry, Michael, did you want to answer that?

No, I'll just address it very quickly. So when we talk about synergies, we ultimately talk about net synergies. So for 2023, it's borderline neutral, right? I mean there's only closing in Q3 and then some actions with some costs. And already from 2024, we have a positive net synergy contribution, which then ramps up very, very quickly into 2025 to reach the full run rate by the end of that.

And to be clear, Ermin, to answer your question, and I refer to restructuring costs, we're assuming a 1:1 cost for realized synergies, which I think actually is conservative.

That's very helpful. Then lastly, maybe just if you could say anything about the remaining contracts that is within this platform, how long are they? And is there a kind of protection from terminations, et cetera? Or is there anything we should consider?

Again, the contracts are with BBVA, CaixaBank and Cajamar. They extend from 2024 through to 2028 for the 3 different contracts. There are, as every contract, certain selective early termination provisions, we've contemplated those in the valuation and the risk assessment of this transaction. And I'll reiterate what I said earlier, which is we've spoken to BBVA, Caixa and Cajamar. We've got a very positive reception from all 3 of them. We do, do business with all 3, but this obviously meaningfully increases the amount of business. And from their perspective, as a client, they see this becoming part of Intrum, hopefully, as a positive. Where we're going to not only deliver on this current contract, but hopefully in the future on additional business, and we're going to continue to provide them great service, which Haya has done, but ultimately, we can continue.

The next question comes from Louise Miles from Morgan Stanley.

I just have one quickly on the financials. So I think you said that the leverage is going down by 0.06 and the cash EPS is going up 20%. I think that's for 2023, is that correct? And I guess my question -- sorry, my question. You go, you go.

So Louise, as we said in the presentation, the increase is up to 20% relative to the consensus for the year-end, right, for us to underline, and the decrease in leverage ratio, we've looked at that on a trailing basis. So if we pro forma Q1 2023 for the transaction, then we get a reduction of 0.06 turns.

Yes. And then how should we think about those 2 metrics evolving after 2023, all things being equal? So what's the 2024 and 2025 impact from this transaction?

I think, Louise, if you put in a nutshell, it's really -- we bring an industrial logic to this. We obviously extract synergies, as we've just talked about. So we do expect an ongoing positive contribution relative to our stand-alone position from a cash EPS perspective. And also given the sort of acquisition multiple and this is capital-light intrinsically because it's servicing-based, we expect an ongoing benefit to the leverage ratio from that perspective as well.

Okay. I guess that follows on nicely to my next question then. I want to just understand that the rationale for the transaction. Is it more than to purchase the platform to kind of access that and, therefore, to continue to do the real estate servicing through that platform?

Well, yes, I mean we have an existing platform in Spain that not only those loans but also does real estate. This adds to that. This now also gives us a contract with all of the top Spanish banks: Santander, Caixa, BBVA, Sabadell, and Cajamar, and adds to our already very meaningful relationship with Cerberus, both in Spain and, hopefully, to be expanded into other geographies. That's fundamentally the rationale. And all of that is on the servicing side. There's no PI element to it. There's no investing element to this. It's purely on the servicing side. So over time, as Michael said, this will add significantly to our cash flow, and we'll have those benefits that we highlighted over the near term financially, continue into the years to come.

And can you use the platform for other types of servicing, i.e., not just real estate, can you use it for consumers, for example? I guess I'm asking because I'm wondering, given the comment you made earlier, are there enough real estate assets to be serviced in Spain going forward? So can you use this platform for something else instead?

We can use it. We will integrate it into our operations, but there's -- as someone who knows the Spanish market quite well because I've operated in it for the last 15 years, there's plenty of real estate assets for several years to deal with still.

Okay. And what is your view for market consolidation in Spain for the services?

Well, this is an important step. This already gives us a significant market position. I wouldn't envision us doing anything else in Spain on the M&A front.

That's great. And then just one final question from me. On the Haya bonds, will these stay within the structure of operating debt? What actually happens to those bonds? I don't think it was mentioned in the presentation.

So we have nothing to do with the Haya bonds. We're buying the company free and clear. That's why it said in the presentation that it is contingent upon the release of any kind of a lien on the shares or any kind of a guarantee of the assets. We're buying the company on a debt-free basis. Ultimately, the bondholders and servers have to deal with how the proceeds are being divided up between them. And that negotiation, I believe, has largely been ongoing, but you have to ask them, not us.

The next question comes from Patrik Brattelius from ABG.

Just a short follow-up question there. You said the purchase was EUR 140 million and a multiple for on 2.9, which gives an expected EBITDA, I guess, of just below 50 million for 2023. Can you please share with us the trailing 12-month EBITDA for the company?

The trailing 12-month EBITDA is not apples-to-apples. It included the first quarter, which had the subcontract in it, but it is roughly an equivalent amount.

Okay. So it's no one-offs included there, you would say?

No. And we obviously focus on what we think we can do going forward with this. We've obviously closely looked at the first quarter and the first quarter is in line with the annualized budget. And so we felt comfortable closing on the transaction at this time as a result.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

No. I just want to thank everyone for listening in on our discussion and also thank you for the questions. This is one small step on a journey here. We, as we said a few weeks ago, are going to come back in the coming weeks with further announcements regarding other initiatives we already talked about as well as between now and the fall, continue to highlight and communicate information on our fundamental journey to improve the returns on our business, improve the returns on our human capital, on our service side, and grow that business and also grow our PI business predominantly with third-party capital, not our own balance sheet, and we will be in touch. So thank you very much, and have a good day.

Thank you. That concludes the conference call.