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

Ladies and gentlemen, welcome to the Hoist Finance Q1 Report 2021. [Operator Instructions] Today, I'm pleased to present CEO, Klaus-Anders Nysteen; and CFO, Christer Johansson. Please go ahead, Mr. Nysteen.

Thank you. And a very good morning, and a warm welcome to this quarterly earnings call. I'm here in Stockholm with my officers, with our CFO, Christer.

Good morning.

And our Head of Investor Relations, Andreas.

Morning.

So without further ado, let's then move into the presentation. And let me just start on Page #4. And almost needless to say, the financials in this quarter is impacted by the consequences of the ongoing pandemic. And as you have seen before and as you know, we have made impairments to the book, primarily in the U.K. and in Spain. I guess, an overarching comment will be that our cumulative impairment totaled now, from the beginning of the pandemic until now, 2.1%, which I guess, is just more or less in line with industry peers. You also, I guess, seen by now that our revenues are down due to lower book values compared to the same quarter a year ago which is, of course, explained by lower transacted volumes in the previous years, and I will revert to that point in a later slide. So as we are now working through the pandemic, we are focusing on the fundamentals and we have to stay steadfast in our priorities. So first of all, the collection performance remains solid in this quarter coming in at 103%. And there has been a steady improvement compared to the pre-COVID curves. Actually, in this quarter, compared to the pre-COVID curves, we are at 98% collection performance, which is strong. The digital collections is at an all-time high of 24%. More about that in a second. And I guess, even perhaps the most important operational news, is that we have successfully acquired into a new forward-looking securitization structure, which shows that we are leaving regulatory issues behind. And my last comment on this slide is that the market outlook is positive. And this quarter's investment is at SEK 750 million is more or less in line in what we have seen for the first quarter historically. Moving then on to Page #5. I did mention that the collection performance was 103% in the quarter. And the cash generation remains solid, too. I would again, say, it's more or less on par with previous quarters. There's a hike in Q4, and that was a standout. That's particularly driven by some secured collections and cash from remediation activities. So that kind of explains the Q4. And having that in mind, I still believe that the cash generation is solid and in line with previous quarters. The next page, Slide #6. A couple of comments on this page. First of all, this is a profit before tax adjusted for forward-looking impairments and items affecting comparability. So this quarter, coming in at SEK 120 million, which is actually slightly better than what we saw in Q1 last year, but it's down compared to Q4. Compared then with year-on-year, so 1 year ago, collection performance is significantly better in this quarter, but the volume is lower. So those 2 effects kind of net each out. Compared to the fourth quarter, there's a negative deviation of SEK 71 million, which is primarily explained by basically FX and certain items affecting net financials in the fourth quarter. And there's also an element of lower volumes totaling SEK 20 million. Moving on to the next page, Page #7. I'm not going to stay long on this page. The reason why we include this illustration is just that we see that some people are relating our comments on litigation processes to secure assets. And in reality, that's not really the case. So to the left, you see our collection strategies, our amicable strategy and legal strategy and, as you can see, litigation is 25% of the total. And I guess, 90% of legal strategy is basically unsecured. So that is just an illustration to try to explain that litigation is certainly important also for unsecured assets. And also have in mind that litigation processes are important also for amicable strategies for them to be successful. Our customers quite quickly understand whether or not there is a well-functioning litigation process in place or not. Moving to Page #8. I have 2 callouts. First of all, we are pleased with the significant increase in digital collections that we see in this quarter and its all-time high of 24% run rate towards the end of the quarter. Really happy to see. And of course, it's the biggest increase in any quarter that we have had. And secondly, and I think this is very encouraging, is that for the first time, our customers have established more payment plans through our self-service portal than what has been done through the contact center operations. So it really shows that the digital strategy is certainly working. Moving to Page #9, on contact center operations. Again, a key KPI for us, showing the nearshoring calls as a share of total in France and Germany. And I'm really pleased with the fact that number of calls taken from Romania now is doing really well, and measured as number of calls. More than 50% of all German and France customers now talk to our professional colleagues in Bucharest. Slide #10 is kind of a snapshot of our secured business line. I'm happy to say that also, in this quarter, it is a solid performance in secured. Collection performance coming in at 104%. If you follow the line in the graph, we now see that the NPL business share of total collections is about 15%, closing in to 20%. And there's been a really good development and really good growth, and the book value since our inception into the secured NPL space. On Slide #11, there are a few key messages to make. So I'll talk to the different sections from left to right. First of all, the supply in 2020 was quite low. And as I mentioned before, the traded volumes were actually half of the volumes that was traded in 2019, actually, down to 2013 levels. So that's kind of to the left. It's important to say that most companies in the industry were not able to acquire up to replacement levels. Only 2 of these 8 peers very above replacement value. In the middle there, it is important to get across to you that there is good momentum in the pipeline. There was certainly, last year, a lot of uncertainty around COVID-19 and supply. We now see that the 2020 volume is coming back to market. And the supply that we now see in our pipeline is not at all related to the current pandemic. Now moving all the way to the right, I also take -- I think it's also good to see that there is a number of opportunities across markets and certainly also across asset classes, and we have a strong pipeline, both in unsecured NPLs, secured NPLs and even performing loans. So with that, I'll leave it for Christer to take us through the financials. So over to you, Christer.

Good morning. And starting on Page 13. Needless to say, the Q1 impairment is a major setback. Our press release on March 31, we mentioned the preliminary number of SEK 350 million. That is also where the books closed, almost exactly. And this relates to the unsecured book. On the secured book, and the corresponding Q1 impact was small, SEK 15 million. And for the sake of good order, I should mention that on the secured side, the gross reported numbers are also impacted by timing differences as some assets were sold ahead of plan. That part is excluded here just as it is excluded when we say 103% collection performance. Now adjusting for impairment effects, the underlying profit before tax is SEK 120 million. And as Klaus-Anders mentioned, the reduction versus previous quarter is primarily due to 2020 investments being below replacement level. As you know, impairments are triggered by changes in projected future collections. So let's have a look at those changes on Page 14. Clearly, the last 12 months have been difficult to predict, and we've had to adjust our productions in several steps. Looking at cash collections of loan, Q1, they seemed on track, especially comparing to the active forecast. But remember, current cash collection is not necessarily the full picture. Future collections are dependent on current collection activity based, at least on legal activities, as Klaus-Anders described. And unfortunately, we see legal work streams lagging behind plan, especially for a set of portfolios in Spain and the U.K. Obviously, COVID and its continued impact on courts is rather unhelpful in this aspect. So towards the very end of Q1, we completed an extended assessment of the related portfolios. And we concluded to reduce the ERC by 1.4%. And this is illustrated by the magenta line in the graph. Now this second step included the total impact over the last 12 months, is around 2%, which is not very different from the peer group. Now let's turn to Page 15, and reported figures. This is, in a sense, old news because most items came in as disclosed in the press release a month ago. We see top line income declining on the back of a smaller book. And on the funding side, the quarter was kind of quite, with interest expense being flat and net financial transactions being close to zero. On the expense side, we have no items materially affecting comparability. Costs are down year-on-year, but not by enough. We have more work to do on the cost savings program. On that note, we have on Page 16, included our standard reporting. Notable progress in Q1 since Q4, includes the renegotiation of software licenses. And rather than go line by line, I'd like to illustrate our current position in a few selected projects on the next page, Page 17. Starting with nearshoring, we now see a majority of German and French calls being taken through our contact center in Romania, as Klaus-Anders mentioned. That's very good progress in this activity. And here, of course, the benefits are about making sure that we do not end up with a duplication of staff, with reasonably high turnover that can be managed as full productivity is established. The activities included in our IT outsourcing, they're almost done, and the 0% benefit may seem surprising, but it's not because this saving is phased in over a long contract with initial benefits coming into 2021. Admin is a much wider topic. And amongst many other things included, this is about making sure we are organized in the best possible way, call it, One Hoist. And here, the Q1 introduction of business lines, which cut across country borders, brings a new lens to things. So ultimately, this is about making sure we utilize our resources to the full extent across countries. On digital, our portal is up and running all over the place. And of course, there is additional functionality on our wish list. But unlocking benefits is not necessarily about that latest and greatest feature, it's about maximizing the use of the portal and about redesigning the legacy workflows. And from new portfolios, we have been able to redirect a very significant part of traffic, and this will accumulate over time and free up resources. Turning to funding on Page 19. There is not -- there's no big news in this quarter with limited growth and good cash flow. We have trimmed down the amount of funding a bit. We do this by adapting pricing of our deposit offers at a flexible way, but it does mean that we reduce volume in one of our cheaper sources of funding. You can actually see the average interest expense to book value inching up. On the other hand, as we return to growth, that growth will be funded with low-cost deposits unwinding the same effect. Turning to Page 20. When it comes to capital, obviously, the bigger movement in the quarter is due to the impairment, but I'd like to highlight a less obvious effect, which is very important for the long term. And this is about capital efficiency. I believe we have conceptually described how the front book will come in risk weights lower than the back book. This is not something which changes overnight. But as illustrated here, for Q1, that effect is real. And the lower risk weight on the front book is a combination of investments into secured assets and investments made into the Magnetar structure. So that's progressing well and will benefit Hoist over time. Finally, on Page 21, a snapshot of our capital and liquidity position as per end of March. The CET1 ratio is obviously impacted by the impairment, but not to the extent where it would impact our acquisition activity. The impairment, which also had a skew towards sterling, also created a bit of noise on the capital requirement. But that is temporary, and we have normalized this graph accordingly. This concludes the financial section of the presentation, and I hand back to Klaus-Anders for summary, comments and questions.

Well, thank you, Christer. I only have a brief wrap up today. Cash generation continues to be strong as we saw on the slides. Our cost savings program is certainly on track. Lot of costs are taken to launch the different initiatives. Now we are realizing the benefits. Really pleased with our securitization program, which is now forward-looking, and has really positive benefits as we now are leaving regulatory challenges behind. And last, but not least, we do have a promising strong pipeline. So that concludes our Q1 presentation, and I'm -- we are happy to answer your questions. So over to Q&A.

[Operator Instructions] Our first question comes from the line of Ermin Keric from Carnegie.

So if we start with the impairment that you booked now in Q1, unsecured side. Could you just give us a bit more flavor on kind of what happened between the CMD and -- the end of Q1, that make you take these impairments now? And also, what assumptions are underlying in terms of is there any more volumes at risk because, to my understanding, the U.K. part of impairment is -- because some volumes will become central part? So kind of up until which cutoff have you taken impairments now? And how should we think about that?

I mean, so maybe taking sort of a step back, you will remember that in Q2, 2020, we did take an initial impairment on the book, reflecting our expectations for the upcoming periods. I'm just looking back, it's clear that, at that point, we were a little bit too optimistic on how things would recover. And that specifically relates to how quickly we would be able to get back on track with the legal collection activities. So as we have extended our analysis towards the end of Q1, we have come to realize that the shortfall on these activities will translate or its very likely to translate into a shortfall in future collection, and that is what drives the difference or the change in the ERC here, triggering this impairment. So in a sense, it might feel counterintuitive that collections are on track, but there's still an impairment. But it is down to the collection activities that we see being behind plan. And that is specifically for the U.K. and Spain, and it's specifically for the legal activities. The second part of your question, the forward-looking piece. I'd say that at this point, we've taken into account everything that we can see and expect. But of course, there is no guarantee, especially in this very uncertain terrain for how things will develop going forward.

But you can't give us a date of kind of where is the cutoff for volumes that will become such a bar that you have now deemed that -- not like that you will be able to collect?

That will vary by portfolio-by-portfolio. And so there is not one specific date in that sense now.

Okay. Then a different question. In terms of the tax rate now in the quarter, is there anything there that's impacting it that actually makes it kind of -- the reverse being lower than you would expect based on the results you're actually having? Is that you're having offers in certain countries? Or is it anything else underlying?

That's a good question. So the impairment is primarily related to the U.K. and Spain, as I said. And obviously, we're then loss-making in those 2 countries. They are a bit different though because in the U.K., our underlying profitability is healthy. So we have no doubt that we will return to profitability quickly. And hence, we will be able to recover those tax losses. So there is a deferred tax asset being accounted for in the U.K. In Spain, given our history, where we've not been so successful, we're a little bit less certain. And we have not accounted for any deferred tax assets in Spain in Q1. So the combination of those 2 items then impacts the total tax position for the group. But I'd say taking a step back, there's nothing that would cause me to expect a very different tax rate for the overall group in the longer term. And so you might remember, we've been hovering around sort of Swedish corporate income tax rate, so 20% to 25%. And that is also where I would expect us to be going forward.

Got it. That's very helpful. Then a question on Slide #11, when you're showing us the pipeline. Could you just walk me through what those numbers actually stand for there in the middle? Is that portfolios do you see up for sale currently in -- was it for Q1? Or what are you actually trying to show us there?

Yes. So that is our own pipeline, of course, right? So it's our own internal numbers. So we're just opening up a little bit all of what we have internally. So this is at all times the pipeline that we have in our CRM system that we are evaluating, assessing deals that we know are coming. So I think this pretty much shows by every quarter, kind of the forward-looking perspective. So what we see now is, of course, a deal flow, which is quite healthy and strong and much better than what we saw in any given quarters during last year.

Great. Then one last question was just on the risk weights on the acquisitions that you show now for Q1 being at 120%. Is that just because you're not fully up and running with Magnetar? Or where would you expect that to be in, let's say, 6 months when you're doing your acquisitions?

Yes. So in Q1, part of our acquisition are secured. So they would come in with risk weight of 100%. Part of it is in the Magnetar structure, which is also around 100%. And then the last part is acquisition still being made in other markets. And so if you could say on the -- on our balance sheet and as before with 150% risk weight. So currently, you're seeing the blend. And for 2021, you should expect that blend to sort of continue. I'd say probably this is a reasonable assumption. Over time, it should improve then, but that's not going to be overnight as we're currently working to set those structures up.

Our next question comes from line of Borja Ramirez from Citi.

I have a couple of quick questions, if I may. Firstly, I would like to ask if you could please provide details on the tax rate for 2021? And my second question would be, if you could please provide indications on the portfolio acquisitions that you expect for 2021?

So I'll start with the tax rate, and then I'll hand over to Klaus-Anders on the second one. So of course, I'd say that maybe one shouldn't read too much into the tax rate for a certain quarter, especially not when the results are a little bit all over the place as in this quarter. But for the long term, you should expect our tax rate to be in line with historical rates. So that's around the 20%, 25% level. And there's been no sort of changes to the group or anything that would materially make that a different level.

Right. And on acquisition levels, we guided at our Capital Markets Day our acquisitions over the 3-year period, SEK 25 billion to SEK 30 billion, and we have not changed our view or perspective on those investment levels. So that is kind of the guiding we have. We previously have done SEK 6 billion to SEK 8 billion a year, and I wouldn't be surprised if that number that can -- will be realized this year.

[Operator Instructions] Our next question comes from the line of [ Phil Pella ] from Deca Investment.

This is [ Phil Pella ] from Deca Investment. Can you hear me?

Yes, we can.

Great. I have 2 questions. The first question is what is your approach towards shareholder returns or shareholder distributions? And will you pay a dividend? And my second question is, do you think you will be able to keep your investment-grade rating of your senior bonds because it's currently Baa3 with a negative outlook? And will you take actions to defend it?

All right. Well, thank you. On the dividend policy, we have a dividend policy of paying out 25% to 30% of net profit, and that remains in same place as was confirmed at our Capital Markets Day. So no news on that one, that is in place and will be, of course, subject to Board decisions, but that's what's in place and we will adhere to. Christer?

Yes. Now on the second question there with regards to the rating, I think it's important to remember that our financial targets, for example, on the CET1 ratio has been set at the level where we feel comfortable being able to defend the current rating, and those targets have not changed. So we're still sort of operating with that as our sort of guiding star. And the impairment in this sense doesn't change that. So I'd say that we're still -- yes, go ahead.

Can you comment whether you have already spoken to Moody's because of the impairment?

We speak with Moody's all the time. So there's a continuous exchange of information, and that's not different from previous quarters.

We have no more questions from the line. I will hand it back to our speakers.

All right. Well, thank you all for your time. And I wish you all a great day. Bye.

Bye.