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

Good morning, everyone, and welcome to this call. I'm Lars Wollung, CEO of Hoist Finance. With me, I have our CFO, Christian Wallentin.

Good morning, everyone.

And our Communications and IR Director, Ingrid Osthols. We wanted to explain a little bit more what we have done and why we have done that and then open up for questions. We thought it is more useful for you if we have a very short introduction and then we open up for questions so that we talk about things that you are interested in. So let me start by summarizing then the situation. So we have entered an agreement with Lowell to sell our subsidiary in the U.K., containing the debt collection platform for unsecured credits. With that, in that package, is also then our complete unsecured credit portfolio in the U.K. And the reason is that our returns in the U.K. has been low for many years. We've concluded that to be successful long term, in a highly regulated market with substantial fixed and semi-fixed costs, that requires scale. And currently, our platform does not have that scale. In addition, we have not been able to acquire enough portfolios with sufficient net IRRs to make the whole equation work. And that's the underlying reason for why our net returns have been low in the U.K. for many years. We think the fit with Lowell is good. Lowell is one of the 2 largest companies in the NPL sector in the U.K. With this acquisition, they will become the clear market leader. They expand in financial services in the U.K., which is what Hoist Finance U.K. is all about. So the strategic fit is good. So we think this is a good place for that platform and our local people in the U.K. The deal represents 19% of our total credit portfolio. So it's a fundamental transaction, so to speak. It means that we will be able to refresh a substantial part of our total group portfolio, replacing low-yielding assets with hopefully higher yielding assets. The closing is expected to quarter 3. So it's business as usual for a number of months still. But the plan is to close when we got all necessary approvals, sometime in the beginning of quarter 3. I think I stop there with the introduction and then we just open up for questions.

Operator, do you open up for questions?

Yes, sorry. I was on mute. Thank you. [Operator Instructions] The first question we've received is from Jacob Hesslevik, SEB.

Can you hear me?

Yes, we can.

Perfect. So you have a secured portfolio left in the U.K. of SEK 340 million. So my question is, is this also for sale? And will you exit all together going forward the U.K. market? Or what's your future in this country?

Yes. That's an interesting question. The way we look at the U.K. is the following. It's one of the larger NPL markets in Europe. It's an advanced market. The consumers -- a good part of the consumers are -- prefer to work in a digital way and to be communicated with through digital channels, which is attractive. So all in all, we see that the U.K. market is attractive. We will be open to acquire portfolios in the U.K. going forward, but it will be portfolios where we have clear competitive advantages or bilateral relationships. We will not participate in the large bank auctions since we believe that we're not able to motivate that from an IRR perspective. If we buy new portfolios in the U.K., we will not build up a new platform ourselves. Instead, we will use partners to do credit management services on our behalf. And we think Lowell is well positioned to be such a partner, but there are also other great DCAs that we could use or partner up with for the practical collection work on the ground. So we have an investment appetite for U.K. We don't have an appetite to run a collection organization. That's the summary.

Okay. Very clear. So you are clearing out the nonperforming units or where you deem to be too small. So we could also expect more transactions like this across other European countries? Or how should I view today's statement as?

Well, of the -- if you take our total group portfolio and divide it into the countries, U.K. is a large part of our group portfolio, and it has been underperforming for a long time. That is not true for the other countries. So it means U.K. is a bit of a special case for us. So we don't foresee now that we will withdraw from any other country. However, we have -- we will do everything we can to meet our financial objectives. One financial objective is a return on equity exceeding 15%. And we will do everything we can to reach that goal. And that means if we have an asset class or an asset class in a certain country or an individual portfolio that doesn't contribute to the goal, then we will take action. The first action is to adjust the collection strategy and increase efficiency. If we can't do that, then it's to outsource collection services to the best-in-class provider for that exact type of credit in that specific country or even part of a country to improve cash flow. The third option is to divest; it's to sell portfolios or parts of portfolios that does not work well for us. So I foresee that we will look upon ourselves as an active asset manager, where we worked with our balance sheets in the same way as we see our partner banks selling portfolios to us that they are doing. So we will not keep credit cases that doesn't contribute to our financial goal. Then we'd rather try -- at least try to see if someone else are better than us for that portfolio and therefore, willing to pay a higher price compared to the net present value we have if we keep it. So we will be more active than before to think in those terms. And I guess in the past, we've been more thinking that we buy a portfolio, and then we hold on to it to the end. And that's not how we look at things going forward.

Okay. So you said the transaction is expected to close in the third quarter of this year. But how quickly do you believe you can reduce and maybe optimize the cost base following the sale of today's portfolio?

I think there's an immediate benefit at closing because we will redeploy this freed-up capital and the gains we're making on this sale as soon as we can in attractive higher-yielding portfolios. And that will, of course, be -- if we would do it in our existing platforms, then we would invest with a smaller total cost base. So we would have 1 less platform cost. So that is, of course, immediate benefit to us. And then, in terms of looking at overall group costs, et cetera, that's the continuing work that we're doing. And we will, of course, now take into account that we are 1 country smaller, so to speak, and adjust as relevant from that point of view as well. And we do see that the 1 less platform, while we can still invest into what Lars laid out in the most attractive situations, meaning the bilateral ones, is a really big advantage for us.

Okay. That's clear. So how confident are you in being able to replace this portfolio and utilize the cash that we get in from today? I mean, the Greek acquisition that you announced during December is a step underway, but where do you see growth going forward? Is it to continue in Southern Europe? Or are you looking at all markets or where do you see supply being?

Yes. We primarily will deploy the capital in the markets we exist. So we will deploy the capital to get a good risk diversification coupled with an attractive return on equity. And so over time, since we are in -- our total investment capacity is so small fraction of the total market, we believe we will be able to deploy the capital or the investment capacity we have. But we will not be stressed to deploy the capital immediately because then we may do deals that haven't -- that in the end, doesn't meet the return requirements. So we will only invest when it's attractive. And if we have to wait, we wait. But to deploy the freed-up investment capacity can possibly not be a problem if you take the longer view. And then I mean a longer view is more than a year. So that's how we think about it. So the plan is not to be a smaller company. So this is temporarily where we free up substantial part of the balance sheet. But the idea is to grow and another goal we have is to grow with 15% per year in average, and that means double the size in 5 years. So that's the target.

Okay. And I just have one last question before I will let others do some asking as well. Is Moody's on point with everything here? Or will your rating be changed due to this divestiture?

Sorry, we didn't catch the first part of the question.

So your rating agency, Moody's, do they know -- have you been in discussion with them regarding your rating and divesting 19% of the portfolio value? I guess they won't have any opinion on it or have you [indiscernible]?

I think we've been in touch with many -- or all our key partners either before, if it's been relevant, or we contacted them today to explain just as we're having this call. And we absolutely see this as a highly positive credit event.

The next question is from Borja Ramirez, Citi.

I have 2 quick questions, if I may. And the first question is if -- so I understand this is linked to the subpar profitability from the portfolio. I would like to check in what are the regions where you see that there may be -- also maybe subpar returns? And then my second question would be on the capital that will be generated from the transaction, which I -- if I understand is 280 basis points. This will be on top of the benefit from the change in risk weights that is still pending regulatory approvals. So given the improved capital position in coming quarters, would you consider maybe also returning some of that capital to shareholders? Or is it these are the -- to use that capital to grow?

So the first question was which regions do we see -- you broke up?

Sorry. Yes, my first question is in which regions or areas you see that maybe the profitability is maybe below the target profitability or the average profitability of the group?

Do you mean for us or as in -- as we see challenging markets currently?

Yes. Yes.

Okay. Well, we -- in the market we are in now, except the U.K., we see that it's possible to -- for us to have a return on equity of 15%. So by selective -- being very selective in which portfolios we buy and which ones we walk away from, we think we will be able to produce and meet that financial objective in all the other countries we're in. Then if you go down 1 level, it's different attractiveness between different asset classes in a certain country. So in 1 country, we could have appetite for more secured assets; in other countries, an appetite for an overweight in unsecured assets. So it varies country by country. But if we -- back to the country level, we think that all other countries are attractive for us to stay in and be active. And then on the -- you're right, that is 280 points are coming on top of the likely change in risk weights from 150% back to 100%, if we talk in unsecured assets. So the freed-up book value in this transaction of a bit more than SEK 4 billion, that means risk-weighted assets of SEK 6 billion. So if the risk weights goes back from 150% to 100%, it means this corresponds to an investment capacity of SEK 6 billion. But then we also improve the earnings. So the earnings level is instantly improved by the transaction. And that means that the investment capacity increases further above those SEK 6 billion. And on your question, will we then distribute that back to the shareholders or will we invest, the view we have there is that if we can deploy the capital to the financial objectives we have, the shareholders are best off by having us do that. And therefore, that is priority number 1, to deploy the whole investment capacity into credit portfolios. If we can't meet the financial objectives or if it takes too long time to deploy the capital, yes, then, I guess, theoretically, we would consider to start to distribute the money. We will not sit on an unnecessarily high cash level. So if we can't deploy to attractive returns, we, of course, give the money back to the shareholders. But as the market is expected to evolve the next 5 years, we think the chances that we will be able to find attractive portfolios that meets our objectives, that probability is high. So the likely scenario is that we don't distribute the money but rather deploy them. But that means, deploy means only if we can have a return on equity exceeding 15%. If we can't have that, we would distribute the money back to the shareholders.

The next question is from Ermin Keric, Carnegie.

The first question was on the central cost. Could you talk anything more about how much you expect that you could improve efficiency there and kind of reduce that cost bucket with the transaction?

The central cost, yes?

Yes, please.

Yes. I think we're redeploying certain resources, and we will stop doing certain things because of this transaction. And we won't guide on the -- any actual number at this point. We are doing, as you're aware, a larger transformation where non-ops costs will, in absolute terms, go down. So that will be updated with these new developments, of course. And over the year, we will guide more in detail on this.

Okay. Got it. Then you're selling the U.K. unsecured book at 108% of your book value. Do you see that you have more to take or kind of other portfolios that are undervalued? If we look in the more recent quarters, you had more of net impairments or net negative revaluations.

So if we see more undervalued portfolios, that's the question?

Exactly.

I think we, of course, hold our portfolios to the value that we see are the right one. That's the starting point. And that said, I think we've been through a difficult period over the last few years, as you're all aware. And this divestment is part of that transformation work where we see that we can find a better home for, in this case, a platform and the -- all the unsecured portfolios in the U.K. And we will continue, as Lars said, where we see that others might create more value, then we will consider that. However, we see that overall, we are working the portfolios as we see fit and we are now in a really strong position in terms of risks in the portfolio if you compare with 2 years ago, for example, where we had all of these revaluations that we've been facing the last 2 years coming up. So we see that we are in a very good position in terms of risk in the portfolio currently. And we believe that it's a really healthy portfolio.

Perfect. And then a little bit coming back to the question before here on capital distribution. So when you say that you think you can redeploy all capital, is that including both this transaction and a potential risk weight reduction? And just if you could elaborate a little bit more on how you're balancing off the opportunity to just buy back your own share? Because it sounds like you believe you can do more than 15% ROI on the remaining book. So wouldn't that be a low-risk investment where you get more than 15% ROI if you buy your own shares?

Yes, that's a good question. And yes, it -- I guess we -- as management, we shouldn't comment too much on the share price, but it's -- since you asked the question, it's difficult to avoid the -- to talk about the perspective that it may be a very good deal to buy the share. So especially if you see what's the market value compared to book value for the whole firm. And now we sold one of the most underperforming parts for 108%. So the question is what does that say about the true market value. So yes, I guess -- so we take the longer term. We have a 5-year plan. And this is going to be a great company 5 years from now on. We think we need the -- all capital we can generate to build a great company. But yes, if it takes time -- and as I said before, we will not in any way, feel stressed to deploy the capital and buy mediocre portfolios, then we wait. If it takes a long time, I mean, several years to deploy the investment capacity, I guess it would be reasonable to think about buying back the share as an alternative. We haven't come to that stage in detail actually. We worked hard to complete this transaction and we're happy that our capital situation has changed fundamentally and that we get the chance to refresh more than 1/3 of the total book. And then we'll see how much good NPL volumes that comes out on the market and then balance that with available cash.

And one final question. Just you mentioned that you are aiming to grow about 15% per annum. If you just look at the market as it is currently, do you think the market is there to do those kind of volumes? Or is it more based on an expectation of activity picking up from here?

Yes, that assumes that, first of all, it's 15% in average per year. And that goal assumes that the NPL market will be more active with larger volumes coming out and when compared to what we've seen 2020 and '21. And we're not saying that that's going to come already this year or even next year, but in a 5-year period, we think it's reasonable to believe that the NPL market will pick up substantially. And you can see the tendencies today. You have investment firms that have bought very large portfolios and own them for a number of years. And you see several of them are thinking about selling. So there seems to be a secondary market developing as well in the coming years. So in average, 15% during a 5-year period, we think is a reasonable goal. And that's not a new goal, by the way. It's an existing goal we have, and we think it's a reasonable goal.

Got it. That's all from me. And congratulations on transaction.

Thank you.

Thank you very much.

The next question is a follow-up question from Jacob Hesslevik, SEB.

I just have one last question. So you're selling your unsecured portfolio, but you're keeping the secured one. So what do you consider your core areas to be in going forward? Should I expect you to buy more secured portfolios? Or where do you believe you can easiest find a 15% ROE?

If you take the group perspective, we have investment appetite for both asset classes. The mix we have now is a minor share that contains secured portfolios, and most of it are unsecured portfolios. We'd like that mix to change a bit so that the secured part becomes a bit larger as a share of the total portfolio. But the important thing is the returns, the IRRs level, and most of all, return on equity. And so wherever we can find that, we will obviously go for that. But you should not see -- the divestment of unsecured in the U.K. and that we keep secured, you should not see that as a signal that we want to focus the group on secured assets. We still have an appetite as before for the unsecured segment.

Thank you. There are no further questions at this time. I hand back to you.

Okay. Well, if there are no more questions, I guess we can wrap up. And thank you for your interest and your time, and then we close the meeting for now.

Thank you, everyone.

Bye-bye.

Bye-bye.

Thank you for your attendance. This call has been concluded. You may disconnect.