Hoist Finance AB (publ) (HOFI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Hoist Finance Q1 Report 2020. Today, I'm pleased to present CEO, Klaus-Anders Nysteen. [Operator Instructions] Please begin with your meeting.

Thank you, operator. And welcome, everyone, to this Q1 release for Hoist Finance. And present today from our side is, as usual, our CFO, Christer Johansson; and our Head of Investor Relations, Andreas Lindblom. They're in Stockholm. I'm still in a lockdown situation at the moment. First of all, let me start by saying that I hope you're all well and things are solely but surely getting better for you wherever you are. I guess most of us have been working now for the last 6 to 8 weeks, and I've learned many ways, new ways of working. Secondly, let me just use this opportunity to thank all my colleagues in Hoist Finance. You have ensured business continuity and have kept the customer dialogues going over the last couple of months in a very challenging circumstances. I am very proud of the work the team has done to support our customers in the best possible way during the pandemic. As far as Q1 is concerned, I have basically 3 clear opening messages. In the most dramatic financial crisis that we're seeing, the underlying business is resilient and robust given the circumstances. The exception is Spain where we have continued to struggle. Number two is that the impact of COVID-19 is visible towards the end of the quarter. We will experience collection delays in Q2, but we believe that things will trend back towards a more normalized situation in the second half of the year. And message #3, in this opening statement, is that our strategy of digital transformation, cost reductions and protecting our capital is working. And I believe that we are well positioned for the market opportunities ahead. With that as a background, moving to Slide #3, we will take you through the following agenda today. The key highlights, of course, the financial update, funding, capital and liquidity. We will do a summary in Q&A. But before moving to Slide #4, let me also say that we have tried to expand disclosure in this presentation to make sure that the key messages get across and to provide some additional insights for you, and we hope this is helpful. So moving on to Slide #4. A key highlight of this quarter follows from what I said in my opening statement. It is, first of all, great to see how quickly we have executed on our business continuity plans. We are obviously very pleased with the AT1, we did in February. An important milestone for us is to deliver on our ESG strategy and to have updated our brand. The challenges in Spain have continued, accentuated by the COVID-19 situation and they're written down the book value in Spain. However, as I said before, it's better to have one problem than many. And we know that our new team in Spain is turning every stone and get back on track. As far as the financial performance is concerned, Christer will explain things in detail, of course. But from my point of view, the key things to remember are, first of all, that the adjusted EBITDA shows strong cash flow generation. Adjusted EBITDA is up 25% from the previous quarter. Profit before tax adjusted for items affecting comparability is SEK 92 million compared to SEK 226 million in the first quarter of 2019. This legacy deviation is largely explained by Spain and some forward-looking recruitment write-downs. CET1 ratio is 9.5% and investments, SEK 545 million. As you can see from the next slide, Slide #5, the adjusted EBITDA is significantly up, 25% compared to previous quarter. And this is actually the highest adjusted EBITDA that Hoist Finance has ever seen. Moving on to Slide #6. I'm very satisfied with our business continuity. This slide shows the ramp up of the capacity for remote working by country. And as you can see, we are more or less in the 100% capacity in all markets. Now, of course, as the constraints are being lifted, we are preparing for welcoming our colleagues back to the office in a safe way. Moving on to Slide #7. I think it's fair to say that working from home to such a large degree, over such a long time period is a new experience. We have been prioritizing accessibility, quality assurance and security to protect both customers and agents. Generally speaking, what we have learned has surprised us positively and our collaboration tools have been instrumental. Having said that, I think it's clear that not everyone can work effectively from home for a number of reasons. And hence there is a drag on productivity in some markets. Looking at customer behavior and in response to the pandemic. We have observed a slight reduction of around 10% in repayment plan and a somewhat larger drop-off of around 20% in one-off settlements. This shows that the repayment plans are holding up fairly good. We're also pleased to see that the percentage of customers being digitally self-served is increasing. And the run rate is now at 17%. First year of the week (sic) [ week of the year ], we did a survey in Italy, that showed that close to 90% of our customers indicate that they will pay according to plan. And the remaining 10%, almost half, responded that they simply couldn't pay because the banks were closed. They just couldn't get to the bank. And I believe that this survey shows that our customers are willing to pay, but perhaps not always able to do so. When you go to the next slide, by the end of the quarter, we launched a new ESG strategy, focused on the 4 pillars as you can see in this slide. Our mission is to help people keep their commitments. Consequently for us, making sure that the financial market is accessible for all, it's particularly meaningful. In tough times, like now, it is important for us to show that we are on our customers' side. Can we go to the next slide, please? Having financial difficulties is a heavy burden to carry. Falling into debt can basically happen to everyone. And this is something we are being reminded of, basically as we speak. And having a social approach to our work is part of our DNA and is embedded in everything we do. We are proud to have launched 3 initiatives in the quarter to show our commitment to deliver on our ESG strategy. We just now launched, and we are collaborating with Appjobs, the world's largest digital platform, for finding jobs online. We believe that this can be a valuable help for our customers to find new sources of income in times of crisis. Appjobs is a free digital platform that is active in all our markets, has over 1,200 companies registered and gets more than 5,000 new online job listings per week. The initial launch for us is in the France and in the U.K. and will be followed by Poland. The 2 other initiatives are TEAM U and ONSbank. And these are examples of initiatives where we support local communities and organizations who are working for financial institution in society. We are building on our core competence and are happy providers of know-how and skills to these great organizations. Moving to the next page. I think we all appreciate the seriousness and uncertainty caused by the pandemic. This crisis is different from what we have seen before, and I find it hard to give clear guidance. However, it comes to no surprise that we see increased financial stress despite fiscal stimulus. The graph shows that the banks have been reducing the nonperforming exposures since the outbreak of the financial crisis. And we are now basically down to the pre-crisis level of nonperforming loans. However, we do observe that banks are now significantly increasing the loan provisioning. The nonperforming exposures will increase, and we have indicated here a scenario where NPL stocks return to the levels we saw during the financial crisis. And now I hand over to Christer, and he will take us through the financials. So over to you, Christer.

Thank you. And good morning. So starting on Page 12, as Klaus-Anders described, Q1 was a challenge. Looking back at the last couple of quarters, we have delivered profits of around SEK 200 million before tax with the growing book and improving efficiency, one would and should expect us to come in north of that. As I said, we report a SEK 61 million loss before tax, mainly driven by 4 items. The first 2 items we disclosed already on March 27, and this relates to us taking an impairment on our Spanish loan portfolio of around SEK 106 million. And we have also unrealized mark-to-market losses in our treasury portfolio amounting to SEK 47 million. Thirdly, we have seen COVID-19-related court closures in several markets. This did not impact Q1 collections. And for example, collections in the new large French portfolio has been above expectations. Nevertheless, it is prudent to recognize that this will cause delays in future collections, primarily on secured NPL portfolios. And this, in turn, triggered a SEK 20 million impairment in the value of our loan book. Finally, actual collections in the quarter did not quite reach our targeted level. We saw reduced momentum towards the end of the quarter in several markets, and this was most pronounced in Spain and Greece. A collection shortfall in those 2 markets alone amounted to SEK 68 million in Q1, roughly even the split with the shortfall in Spain adding to the impairment in Spain then. Overall, collection level for the unsecured book came in at 98%. Turning to Page 13. We have, as we always do, included a year-on-year comparison with items affecting comparability excluded. You will see double-digit growth on top line, but we also have interest expense coming up quite a bit. This is a result of structural changes in 2019, which I will get back to on a later page. As covered on the previous slide, we saw weaker collection performance with the end of the quarter trending down towards an overall level of 90%. This impacts the impairment losses and gain line. On the expense side, 2 key comments to start with. Collection cost is growing, but it's only growing half as much as the book, 8% versus 17% on the book. Secondly, expense levels in Q1 are impacted by IT-related costs. And already before COVID-19, we had embarked to transform selected parts of our IT infrastructure. And we do this together with our outsourcing partner, LTI. Now as crisis-related restrictions took hold, some of those work streams went into overdrive. It came with a cost that made a very significant difference to our ability to keep operations going. Turning to Page 14. We have included the corresponding comparison of financials as reported. I think we've already covered the key items. And although this table stops before tax, I would just like to mention that net profit at negative SEK 44 million is impacted by deferred tax assets relating to our Spanish business. Turning to Page 15 and focusing on cost savings. This has been a top priority for us ever since 2018. And based on the potential we had estimated at that time, we have committed ourselves to take out SEK 300 million in cost run rate by 2021. As per end of March this year, our list of completed actions add up to SEK 136 million, with site consolidation, IT outsourcing and reduced spend on professional services being key areas of progress. Now that said, the big ticket items here are really digitalization of collection and moving roles to shared service center and nearshoring locations. We've made good progress on both of those fronts. And as we see what's working, we update our view on what the end stage should look like. Taking a 2022 perspective, knowing what we know now, our current assessment is that digital collections should go from its current 17% to 30% and that the share of tasks carried out in shared service center and nearshoring locations should go from its current 9% to 25%. Furthermore, we've also identified additional savings and delivered a few very tangible examples. This includes using modern collaboration tool to reduce travel costs further. It also includes being more flexible in working-from-home options, allowing us to reduce cost for office space and for backup sites, which, frankly, I don't think we need. All in all, given this updated assessment, we still target to deliver SEK 300 million by 2021, but we also commit ourselves to deliver another SEK 100 million in run rate cost savings by end of 2022. Moving on to Page 16, that's staying on the cost theme. We are growing the book quite a bit, 17%, over the last 12 months. And for this reason, it makes sense to look at cost in terms of key ratios as a complement to looking at costs in absolute numbers. And make no mistake, cost-to-income is our preferred metric. It's the one we have our 65% target on. This target, we remain committed to delivering. Cost/income in this quarter is 87% after adjusting for IAC, which clearly is far from satisfying. Now with impairment and funding costs moving around a bit, we believe it's helpful in this quarter to also look at the trend in cost in relation to collection. And as you can see on the slide, there is real progress in cost efficiency. Moving on to Page 18. When it comes to funding costs, I mentioned on one of the previous slides that it has come up quite a bit since Q1 last year. And this relates to longer deposit durations and securitization positions as we have communicated throughout 2019. Comparing to Q4 '19 instead, the position is largely unchanged. In deposit versus the majority of our funding, we have not seen any difference in customer behavior. The mix of deposits and the interest rate levels they're stable. On capital market debt, the situation is also unchanged. And remember that the AT1 instrument is reported as part of equity. One can, however, note that the weaker Swedish krona inflates coupons paid in euro. Interest expense to book sits at 2.6%. That would have been at 2.4%, if not for the oversized liquidity position. Finally, one can note that the closest bond maturity is in Q4 2021. Continuing to capital and liquidity on Page 19. The CET1 ratio remains in our target range, and the target range has come down by 30 basis points during the quarters since regulators have reduced requirements through the so-called countercyclical buffers. Looking at the full set of capital ratios, one can see Tier 1 and total capital ratios being strengthened, and this is as a result of the Q1 issuance of EUR 40 million in a Tier 1 capital. Finally, on the right-hand side, liquidity remains very strong. Now in the crisis, that's not a bad thing. However, it comes with the costs. And since we are not expecting large acquisitions in the near term, we will, as the macro setting stabilizes, manage this down because there's simply no need for SEK 9.4 billion given the steady and predictable cash flow generation of this business. On Page 20, I wanted to bring that to life a little bit, focusing on cash flow from operating activities, as it's called in our audited cash flow statement. For a true view of the underlying level, one should adjust for cash flow from hedging, which is classified as operational. Those cash flows will even out, but they can be quite significant in the single periods. Having done that adjustment, the underlying cash flow adds up to SEK 4.1 billion over the last 12 months. And that's something that you can compare to the replacement investment grade, which is at SEK 3.4 billion. Now all of this is, of course, history, and the future is perhaps of greater interests, at least in the current setting. For this reason, we have, on Page 21, included our current projection for future collections, ERC. This is, of course, post the Q1 impairments, which we've described. We also commented specifically on secured collections. And as you can tell, that is actually a smaller part of the overall ERC figure, even more so in the longer run, where our unsecured banking books provide long, steady cash flows, originating from millions of customers. As shown, also without any new acquisitions, we expect quarterly collections in the rest of 2020 to be close to the levels seen in Q4 '19 and Q1 2020. It's perhaps needless to say that the outlook today is a bit more uncertain than usually, but we've actually seen crisis happen before. Turning to Page 22. We have included a bit of our collection history from the dot-com bubble and the financial crisis. And our observation seems to align well with what others in the industry have noted, namely, that collections at the peak of the crisis may suffer. We've seen shortfalls of up to 10% on the overall book, but that most of this will be recovered later on. So in other words, it's a delay rather than a reduction in lifetime collections. Now we're, of course, humble about the current challenges to society, and we keep multiple scenarios in mind. But based on our experience, collection will be resilient. That observation ends the financial part, and I hand back to Klaus-Anders for summary and Q&A.

Thanks, Christer. When we are looking ahead, and then we are on Page 24, I guess, it is always an absolute [indiscernible], right? We are absolutely not happy with the reported financial performance in this quarter, and we can do better. The Spanish situation is the biggest disappointment. Given the magnitude of the crisis, I'm, however, happy to see we have kept the shop open and our collection remains reasonably resilient, as Christer just described. And relative to competition, I am pleased with our access to funding, and our cost of funding is the lowest in the industry. And in a capital-intensive business like ours, which is clearly a strong competitive advantage, we have increased the scope for operational improvements. And the team is working really hard to make sure that we are ready to capture our lion's share on a growing market opportunity. Moving on then to Slide #25. It follows from what we have presented here today, that our priorities, at the moment, are to prepare what happens when the lockdown now comes to an end. We are determined, as ever, to reduce our costs, and we have increased the scope. The digital transformation is happening, and we are leading the way. Going digital means better collection strategy, lower costs internally, and, of course, offers a much better service for our customers. And I guess, this concludes our presentation, and we open up for Q&A. So over to the operator.

[Operator Instructions] Our first question comes from Borja Ramirez from Citi.

I have 2 quick questions, if I may. Firstly, I saw your press release, that there is some difference between the collections in the secured and unsecured NPLs. I would like to ask if you could please provide more details? And then secondly, I also found interesting the outlook that you provided on the NPLs. I would like to ask if you could provide more details, like expectations for the various markets?

All right. Thanks, Borja, to tag on the call. So the difference between secured and unsecured, this is, of course, basically related to litigation. And of course, when courts are closed in some markets, it is really hard to carry out litigation. So it's not like it's closed in all markets. So we have a predominant part of secured collections is in France and Italy. There is a delay in secured collections at this point in time. But we are not wasting our time. We are preparing for when the courts are opening again. As far as differences between different markets, I guess, it's fair to say that Spain has been our most problematic market at this point in time. This is not new to you, and it's not new to us, of course. The corona crisis kind of accentuated the problems in Spain. But I also see that some of our competitors are feeling the same issues in the Spanish markets. In Italy, which I think a lot of people worry about, I think collections have been pretty strong actually given the circumstances. At least on our side, it has. We are very strong in the segment called Cambiali. Cambiali has been upholding in a good manner. I think the slide that I referred to should give you some comfort in terms of what we can expect for the second quarter. So I think we do hope to see overall that the second quarter can land in terms of collection performance around 90%. So that's something we work out into the report, and that's really what we expect to see for the quarter. I'm not sure if you want to add something there, Christer, on secured or unsecured, for instance, or anything else?

I think what I can just add is collections in this quarter, actual collections in Q1 was actually pretty strong on the secured side, and that's partly a result of a good start to the large portfolio we bought in France. And the court delays that Klaus-Anders has mentioned, those are something that will come into force more for Q2 and Q3 rather than Q1.

Our next question comes from Ramil Koria from SEB.

I'm going to start off by apologizing. I haven't, as you can probably imagine, heard anything on this call. But just 2 questions, if I may. Could you please remind me of the dynamics of the SPV in terms of what happens between you and the co-investor if yields fall? Let's start off with that, perhaps.

Yes, I guess you're talking about the securitization structure loans. So Christer, do you want to take that one?

Yes. So as Klaus-Anders mentioned, our Italian collections have actually held up well. And at the levels we're currently observing, there's sort of no dynamics going on in between the co-investor and us. This is a scenario, which is well in line with what we have anticipated going into the structure.

So at this point in time, no concerns, no issues, good collaboration between ourselves and the co-investors.

Let's assume it deteriorates, then what happens? I mean, in terms of subordination as the structure of sort of the yields within that? I mean, was it 15% the yield and -- on the co-investment to tranches? Those are presumably prioritized. Will you, in a scenario where things really go bad, be -- could you theoretically be zeroed out from the SPV? Perhaps that's an easy way to face it.

I don't see that happening in the scenarios that we're talking about now. No. Of course, there's...

Exactly. So the tranche is clear, right? It's 85%, which is senior and 15%, which is less than the [units and junior]. Of the 15%, we have a slice that cuts across vertically, right? In the units and the senior. So I guess, from a risk point of view, that will just follow the tranches in a custom better way. And of course, the economic upside, above the 15% yield that we are paying the investor, comes to Hoist. So right now, everything is fine, everything is intact with no concerns and no issues with the securitization structure.

And I can just add that the anticipated collections on the portfolios in the securitization structure covers the repayment of the senior and the unit tranche with quite a lot of margin. So basically, the -- any realized collection shortfall will be a delay in repayment rather than a reduction since there's such a big buffer in that structure.

And I'm sure you've touched upon it in the call, but the liquidity situation, I mean, is there a rationale behind increasing liquidity despite already being quite -- having quite a lot of liquidity as is? And then, what are you looking to do to potentially mitigate sort of further inflows?

That's a very good question. And just as you say, the liquidity level of 9.4% is really more than what we need. Clearly, going into this quarter, we had anticipated larger acquisitions than what we have seen and this has also impacted the liquidity then in a sense. Over time, this is something that we will manage down. And the easiest way to manage this down is to be less attractive on the offered rates on deposits. And then we have a lot of experience on how that sort of impact net flows, and that it will allow us to manage this liquidity down.

There appear to be no further questions. I'll turn the conference back to you, speakers.

All right. Well, thanks, everybody, for participating on the call. I appreciate that some of you listened to one of our competitors. Of course, our hearts are broken for that priority, but that's how it is. So I'd just encourage you to reach out to us directly if you have further questions or just want to talk about our quarter. Andreas, Investor Relations, is -- he's available. So with that, I wish you all a great day and goodbye.

Thank you. This does conclude today's conference call. Thank you all for attending, you may now disconnect your lines.