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

Welcome to Hoist Finance Q2 Report 2023. For the first part of the conference call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Harry Vranjes; and CFO, Christian Wallentin. Please go ahead.

Thank you. Good morning, everyone. So I'm Harry Vranjes, the CEO of Hoist Finance. I'm here today with our CFO, Christian Wallentin to take you through our Q2 results and describe what we are busy with at Hoist Finance. We have about 30 minutes of presentation in front of us, and then we open-up for questions. I will start by taking you through the highlights of the quarter, and then Christian will take over and go deeper. So in general, it is a very interesting time for the credit management industry at the moment. Activity across Europe is very high, both on the primary and the secondary market. We see deals in all asset classes coming to market. So we have unsecured, secured individuals SME virtually across all markets from both primary and secondary sellers. We also see an industry in a lot of change. So industry peers are reaching out to each other. New co-investment partnerships are formed. And with our funding cost advantage, we are very well-positioned for this development. We are happy with the second quarter. We see strong collections, a good investment level and I think good results on all our main KPIs. We see increases in deposit rates to our deposit customers. But they are offset partly by the returns on the liquidity portfolio and also by us investing at better returns. We see the repricing that we have been looking for, I would say, the industry has been talking about for a year. We see signs of that now coming through slowly. And internally, we are addressing our cost base, especially on the indirect costs during this quarter, and we will continue that program into Q3. And by the end of Q3, we will close it. So then looking at the highlights. Well, we landed at an adjusted EBIT of SEK 253 million after adjusting for the SEK 75 million rejuvenation costs and one-off costs for the redundancies. Our ROE target, return on equity reported at 10% and normalized of 19%. So normalized basically adjusting for the one-off cost of the rejuvenation and excess capital. On the investment side, we closed SEK 1.1 billion worth of portfolios in the quarter and a lot of deals that sort of continued into July. So we signed an additional SEK 1.3 billion after closing of the quarter. And the pipeline, as I mentioned, remains strong. We had a very good collection performance. There is of course an uncertain macro situation and so on. But we still do not see that in our collections and collection results. We had an impact on the Spanish court strike both for Q1 and partly in Q2, but that is included in these 108%. So we are very, very happy with the performance of the units. Our funding base continues to remain stable and increasingly competitive in this environment. And our capital and liquidity positions are robust, materially above our regulatory requirements. And our CET1 ratio runs at 14.75% at the end of the quarter. We have continued to execute on the rejuvenation program during the quarter, focusing on indirect and central costs. So we have reorganized our IT data and central operations functions and then found savings of about SEK 85 million there in this run and we will continue the program into Q3. And at the end of Q3, we will close the rejuvenation program and go into a continuous improvement mode. Internally, we have also reorganized our executive management team to now include the market heads to reflect our more decentralized approach, and we've also brought in compliance and risk into the executive team to reflect our status as a credit market institution regulated by the Swedish FSA. And during the quarter, and we talked about this in Q1 as well. So we divested our French unsecured legacy portfolio at premium to book value. And just to be clear, France remains a prioritized market for Hoist, and we are active in sourcing new deals there. So yes, and with that, actually, I'll hand over to you, Christian.

Thank you, Harry. Good morning, everyone, and thank you for joining during the summer. So I'll kick off with the overview of our portfolio acquisitions. It's been high market activity during the year and in the last quarter. And as you know, we are focusing on slightly larger deals than historically and often bilateral. So it can be slightly lumpy between the quarters, which you can see on this page. We have managed to in '21 and '22, invest almost SEK 10 billion. And now in '23, we invested SEK 3 billion up to the end of quarter 2. We can also say that we have signed another SEK 1.3 billion in up-to-date in Q3 which, in total, in 2022-'23, that adds up to over SEK 11 billion. And in '23, that would be SEK 4.3 billion. So we're now becoming a larger -- we have now have a larger book before the UK divestment, which is great. So we're really back on track in terms of size again. And if you look forward, then Q4 is our seasonally strongest investment quarter, and it looks like that will be the same this year. So we have a strong focus on repricing and high returns in all our bids. So that's pushing returns up to counteract the higher funding costs. And overall, the pipeline remains healthy with an overall strong outlook for the year. This is a strong quarter for Hoist. So it's characterized by high level of market activity, as I mentioned. It's also a solid collection performance. Costs are in line adjusted for the rejuvenation costs that we are taking this quarter and the execution of the final push of the regional shipment has been a real focus this quarter. So before I jump in, I will remind you how we adjusted the numbers to show the fair underlying performance of the remaining business. So Q2 '22, we have adjusted out the U.K. divestment, and that means that we have taken out the interest expense related to the U.K. divested book and also added in the retained U.K. group staff. You can see the details in the footnotes on this page and also in the reports. We have also taken out the gains from the interest rate swap hedging in Q2 '22 for comparative purposes as we were introducing hedge accounting in the middle of last year. And in Q2 '23, we are adjusting for 2 things, as Harry mentioned, so the rejuvenation costs and then the normalized equity. So we go for a normalized equity, which is in the middle of our target range for core Tier 1, and that's the underlying equity position that we used in the normalized return on equity. So overall, earnings before tax adjusted for rejuvenation, one-off costs of SEK 75 million was SEK 253 million in the second quarter, and this is a growth of more than 100%, 117% quarter-over-quarter, excluding the interest rate swap that I mentioned in the benefit in Q2 '22. So the key drivers were growth of the book. We grew 21% year-over-year, and the strong collection performance of 108%. And then also we divested our unsecured legacy French back-book in the quarter, and that's adding a one-off gain during the quarter. So then if you look at the bottom line, net profit for the quarter was SEK 161 million, which is 10% ROE on a reported basis versus reported of 19% last year. And if you look at the adjusted normalized numbers, it was SEK 92 million in Q2 '22 and an ROE of 19% -- in this quarter in '23. So that's driven by collection performance. It's also a low effective tax rate for the quarter. Year-to-date, we're around 20%, which is more or less in line with what we think is normal for us. And the net profit is also impacted positively by the divested French unsecured legacy portfolio. So we go back to the top and then net interest income is growing slightly quicker than the book. This is a mix of 3 variables, I would say. So it's pricing discipline, which remains strong overall. We are saying no to certain portfolios because we're pricing at the right level we think, with the right risk and return equation. It's also due to increased funding costs and then we have gone from a negatively yielding liquidity buffer to a positive yielding liquidity buffer. And all of this results in a growing net interest income of 22%. So as I mentioned, collection performance has been very strong at 108% for Q2, and this is 8% higher than our own management forecast. And this is despite the lower unsecured collections in Spain, which are mainly driven by the strike that Harry mentioned, which was ending in May. Overall, operating income, including both the net interest margin and then the collection performance has grown 38%, and this is driven by the increase of the book, our ability to withstand a higher interest rate costs and also strong collection performance. The costs grew with almost half the growth of the operating income, so 38% operating income versus 22% of the underlying total operational costs. So this is 2 dynamics, which I will come back to. But the direct cost growing with the book slightly more in the quarter and then the underlying indirect costs going down. So we have continued the rejuvenation as we said in the Q1 presentation in Q2. We have some savings driven primarily from almost 100 FTEs exiting during the quarter. And this leads to SEK 75 million of rejuvenation costs, and we see SEK 85 million benefit of this. And we're looking for more now in Q3. So before the rejuvenation ends by the end of Q3, we expect to find more benefits, which will then come with some cost to execute this as well. Also worthwhile mentioning in Q2, we issued a new AT1 instruments of SEK 700 million, which we think is a strong proof of strong confidence from our investors. It was a very difficult market to issue AT1. And subsequently, we have also called our previous AT1 bonds at the first call date in June and the one that is coming up in September as well. So if we look at the direct cost development, this is driven primarily by high activity in the quarter. So we have a 21% growth of the book, which is driving higher collection costs. And year-to-date, direct cost is growing in line with the book. In this quarter, it is slightly higher at 32%, and it's driven by one-off items. We have set-up a secured business in Spain during the quarter, which drove some costs. We also have the last, I would expect normalization of legal collection fees after COVID. So during COVID, the legal systems closed down to a large degree. So there was underspend of legal collection fees and that's now back to normal. However, in this quarter compared with the same quarter in '22, there's a slight increase back to that normal level. So the underlying costs are up 20% if you take those out the secured setup and the normalization of legal collection fees and that's driven by collection costs of SEK 27 million and then FX of SEK 26 million and then inflation in the salary, primarily in the underlying direct costs. So as you can see here, the currency impact in our numbers in this quarter is pretty high. And as the SEK has been weakening versus more our main currencies. And then what's clearly really encouraging is that these higher direct costs are driving an even higher operating income of 38%. So overall cost increase is 22% with operating income up 38%. So we're getting -- and that's of course the result of taking down indirect costs and then seeing some leverage from the more fixed cost base. We grow quicker income than we grow costs. If we look at the indirect cost base, we have continued rejuvenation throughout Q3, and we're looking to take out more or save more indirect costs, which will come at an expense. So this slide is showing the indirect cost base since the start of rejuvenation. We used the Q2 '21 as the first comparative quarter for the cost savings. And if you look at a constant currency basis, we're down 14% to-date. And in this indirect cost base, the 3 buckets of costs, you can say. One is central costs, which is primarily in Sweden. And then you have indirect costs in the loan management platforms in the markets, so that's the support functions in the markets. And then you have the asset management business, which is the investment team and the associated, for example, due diligence costs in those investment processes. And of that 14% save that you see on the page, central costs are driving the cost decrease and the platforms are down mainly because we have sold our U.K. platform, which was part of this cost optimization work. And then we have invested into the asset management side. So the investment team and related activities. And if we go to the next page, we wanted to show you a page which is the powerful statistics in our mind, what has been achieved in rejuvenation without the noise from inflation and currency movements. So these are direct FTEs on the left and indirect FTEs on the right. So the development since Q2 '21, the start of the rejuvenation. So overall, on the direct FTE side, we have much less people managing an equal sized book. So you see that the direct divested U.K. FTEs, those are in the dark box on the direct FTEs, so that's going down. And then we are basically flat with a less platforms managing an equal sized book. So we're getting scale on our direct FTEs as well. And this of course includes the book in the U.K. So we changed the operating model in the U.K. divested the legacy U.K. platform. However, we are investing in the U.K., as you know still, so it's an active and prioritized market for us still. So in the indirect FTEs, the trend is clear. We're overall down 39% since the start of rejuvenation. And we have invested into the asset management platform. You can see that we have gone from 24 to 37 FTEs in that area. And we have the -- 39% is compared with what we communicated in terms of executed rejuvenation efforts. So that's the post rejuvenation once it's executed what we have now done in Q2. So it's a gradual implementation clearly over Q3 as well. And the U.K. divestment and other sales, you can see in loan management platforms, so the top 2 boxes. And then in the Central FTEs, you can see that we are down 56% from 262 FTEs to 114 FTEs from the start of the rejuvenation. And I have to say that in the central layers where we've reorganized a lot, it's still an incredibly strong engagement and I think an improving and the better quality than what we started. So a lot of these central costs are a result of doing things differently and better, I would argue. So we have changed the -- in the last push, we've decentralized plenty of process into the markets. where we see the potential of having much more ownership and better drive and quality in those processes. Then the asset class mix. We have, as our investment strategy is aiming for increased our secured book value. So it's 20% a year ago, and that's now 28%. And we're seeing that in the quarter, we have more of a 50-50 split between new investments. So if that continues, this will continue to increase that portion of the book, which is what we want. We can also see an improved geographical and asset-class diversification, which is really beneficial for us. So we're not depending on one market. We're both investing and collecting in our markets across Europe. And also worth to say again, we have an active pipeline with a continued high share of secured portfolios and also larger bilateral portfolios that we like the risk and returning. So capital and liquidity position. We have a strong capital position, given last year's developments, and this enables us to be really picky about the investments we want to do. We have a real focus on the risk and return in the portfolios. We're looking at larger portfolios, and we can clearly grow quickly with this capital base. We are very disciplined. So we'll be quite lumpy in the quarters. But if you look over-time, since the beginning of '22, we are growing very much in using the capital base that we have at our disposal. Look at the liquidity, it's down over the last few quarters. It was unusually high post the U.K. divestment. And we have invested during these periods, clearly, that we tied-up cash in that. We also repaid our senior unsecured and issued a smaller replacement during the spring, and then we have repaid the AT1 as well. So that's the key drivers of the liquidity. So funding. We have a stable funding base, and it's becoming increasingly competitive despite the environment, which is highly volatile and onshore where we're heading. So we see that in the process we are participating in. We are always competitive even if we are pricing very attractively from our point of view. You can also say that this is impacting clearly the funding cost on the line. So you can see that the average funding cost is going up. We're now at 3.22%. However, the net interest margin is stable, and that's because what I mentioned, pricing discipline, yield on liquidity buffer and then the cost of the funding going up. So all of those together is resulting in a stable net interest margin. We've also increased the deposit part of our overall funding. So that's the result of replacing the senior unsecured with a slightly smaller senior unsecured as well. Now I'll leave back to Harry to summarize before we will start to take questions.

Yes. Thank you, Christian. So in summary, a strong second quarter adjusted for the rejuvenation costs on a comparative basis to last year with almost -- or we have more than double the results. Our return on equity, our key target, which is to be at 15%. For the quarter, we were at 19%. So we think we are doing really good progress towards that goal. And on the investment side, as we said, the pipeline is healthy, and there is a lot of activity out there. And it is evenly spread I would say, across Europe. There's not one market sticking out. There is high activity both on primary and secondary. The strong collection performance of 108%, we're extremely happy with during in this macro environment. And we will continue to work on our own management units to ensure that we are top at collections. And as Christian just walked through the funding base, remained stable and increasingly competitive as we see industry peers refinancing themselves at completely different rates. And we continue to have a robust capital and liquidity position well above both regulatory requirements and our own internal limits. So yes, with that, I think we're ready to open-up for questions.

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

A few questions on cost, maybe to start with. The SEK 16 million secured setup costs that you had in Q2, did I understand it correct that that's a one-off, but it's not included in the SEK 75 million of cost that you've highlighted as one-offs because those were all related to the rejuvenation program.

That's correct. We try to be very restrictive around classifying things as items affecting comparability. But however, we do want to highlight when we think this is not recurring costs like the secured.

And then on the FTEs, I think it was 75 and 20 consultants that you said that you've been able to reduce. They're still part of the Q2 base, right? So they're going out through the door in Q3. And maybe just -- I can do the follow-ups on that one directly as well, like, will you need to have any external suppliers for their services or will we kind of do all of that just locally on the existing resources you have?

People have exited during Q2 and then if not already then in early Q3. And the replacement of these services is being taken care of locally. So there's a marginal replacing of FTEs and that's included in our forecast. More people have left, but net, it is 75 plus 20. So the local replacements are in there.

Got it. And maybe strategically then on this kind of reorganization with doing more locally instead. Do you see that there's a risk of [indiscernible] of work in every local market instead of doing it centrally or how have you reasoned when you decided to take this approach instead?

There is a risk of sub-optimization obviously when we do similar processes in different markets. However, in terms of control and in terms of quality of the processes of the job done, as Christian mentioned earlier, we believe that the benefits outweigh the drawbacks there. If we look at the central execution of these processes, it typically costs a lot, and takes a long time. And when we onboard new portfolios at the rate that is happening at the moment, we are typically too slow.

And the real benefit that we see is driven by the people that actually execute are also fully accountable for this. So it's both a quality and speed and nimbleness in this. And as Harry was alluding to, we're introducing clearly checks and controls on a higher level to make sure that everybody is living the policies and the instructions that we have. So we steer much more through principles, meaning policies and the instructions how things we will do and then the people locally that are best suited to do the actual activities are also accountable for them. So they don't have any duplicates on central level, which was actually the case before. So the resources we had on central level were not optimally used because they were not sitting locally. And therefore, we see that this is absolutely the right way to go.

And then on the execution costs, you previously -- I think last quarter, you talked about SEK 100 million in execution costs for 2023. What do you expect that to be now because it sounds like we could have some additional costs coming through in Q3 as well? And have you changed the ambition for savings? Can you quantify anything? I think before it was SEK 85 million per annum?