B2 Impact ASA (B2I) Earnings Call Transcript

Okay. Good morning, everybody, and welcome to the second quarter presentation for B2Holding. I'm Erik Johnsen. And with me today, I have André Adolfsen presenting. Second quarter was an eventful quarter for B2. And going into the third quarter, we have closed a couple of strategic, let's say, deals. And we are happy of the market that we are currently under. Let's go to the highlights for the quarter. Both unsecured and secured markets performed very well in the quarter. Collection is the core of our business, and we performed 106% of the unsecured curves that we have. Also secured asset has a good momentum both recoveries on the secured portfolio, but also REOs has performed very well. We sold REOs for over NOK 100 million and momentum is there, and we also had a margin of 36% of the REOs sold. So very good real market. We are in the final stages of the restructuring program that we started a couple of years ago. We have today sold Bulgaria, I'll get back to that a little bit later. We have made an estimate, the final conclusion of the deal will be in October. And we have also concluded the deal with PIMCO, which segregated the asset from the servicing. And this is a milestone for B2Holding, so we see the end of the restructuring period. And we also see then the performance of and scalability -- and improved scalability in our platforms has come as a consequence of the things that we have done. We see an increased investment capacity. This last quarter, we did more portfolios evaluations. And we also see the number of portfolios coming to market has increased during the quarter. And going into the third quarter, we see a good momentum. The pipeline is good. The diversity of portfolios in different regions are increasing. And also, we see that the portfolio, the IRRs on the portfolio that we see now is good. And we also have been having a very good performance on our portfolio that we've been buying so far in 2022. As I said, we received then the PIMCO funding. It was concluded. It's been stretched out in time. But finally, now we have that concluded, and it's very good that we have finalized it, and we received the 160 million in cash euro on account the other day. The divestment of DCA Bulgaria is in accordance with the previously announcement. We were going to take down the footprint a little bit. At the same time, we want to use the money to reinvest on our other platforms where we have better scalability and also lower cost to collect. This is in line with previous communication, and we're really happy that we concluded this deal. Also, the RCF announced on the previous quarter was concluded in third quarter. So this is -- gives us a good funding together with the 2 previous announcement, the PIMCO deal as well as the Bulgarian deal. The Bulgarian deal will be most likely concluded in hopefully, in October. But it's up to the, let's say, the financial authorities in Bulgaria to accept the deal. Let's go to the key figures. We have a cash collection of NOK 1.2 billion, very good cash collections in the quarter that passed. Also, we said REO sales was good. So what the strategy that we started with, REOs and do repossession REOs and selling it afterwards has been very, very successful for B2Holding. And this continued to be successful. And going into the third quarter, we see good performance also. Net revenues, NOK 748 million. Cash EBITDA, good, very good, NOK 949 million. Adjusted net profit of NOK 173 million. The core operation is going very well. NOK 173 million is about a 12.5% return on equity in last one month using that. We have -- also, if you look at the market value, then we actually have 16%, 17% return on invested capital. So it's very good return. Also, we see the portfolio investment, as we said, going into second quarter, we anticipated the volume to go up. It did and a number of portfolios that we look at and we invested in was NOK 758 million, and the momentum is very good starting with third quarter. Now as I said, it's been an active market. The volumes are up. We valued more deals. And also, we see at the end of the second quarter, we have invested as well as committed capital of NOK 1.3 billion already for the year. And at this point in time, we have committed over NOK 1.5 billion so far for -- in the third quarter. We also see the portfolios are more divided between consumer finance as well as banking, portfolios to a larger extent. And we see that the extent the portfolios coming to market is widespread across the different regions. So good momentum going into third quarter. We anticipate still to invest around NOK 3 billion for the year. And also, we see the IRRs that we have on the portfolios are good. And also, as I said, the performance on the portfolio that we have already invested in, in 2022 are in line and very good with the portfolios that we invested in 2021 as well. So the performance on the portfolio are good. The momentum going into the quarter is good, and we are in a very healthy financial situation to participate in the marketplace the way we stand today. Now this has been a strategic journey, and the new B2Holding is sort of starting taking place. We have scaled down in some markets. We have divested in some markets, but this started really back in 2020. Beginning of 2020, we had a new organizational structure. We were saying that we had 2 business lines, unsecured and secured, 2 different capabilities that is needing for doing the collection recoveries. This has been worked on, and we see that the new segregation of those and also the new process and strategy with -- especially within the secured has been really paying off for B2Holding. Also, then in second quarter of 2021 into, let's say, the fourth quarter, we had a reputable investor looking at the secured portfolios. And in parallel, it must be said that we did very well good recovery we then continue with the senior financing with PIMCO alone and also then keeping the ownership of our portfolios ourselves, which we see today was the right strategy as our return on the portfolio has been very, very good during this period. Also, it must be said during this period, we had a lot of initiatives in the unsecured market as well. digitalizations as well as data analytics has been less incorporated into the business model of B2Holding, and we do see that these results are coming through now to a much larger extent than we did only a year ago. So we see the very good performance on that. Now last quarter, we talked about Veraltis. Veraltis is the master and special servicer in the region of SAE and CE region, Center Europe and South and Eastern Europe, including then Italy and France. This servicer is a special service and master service that has been established and will service our own portfolio as well as others portfolios. And this is now finalized with Bulgaria being sold, didn't really fit into the constellation there. Bulgaria mainly had unsecured portfolios and in the area here for Veraltis, there is mainly also secured portfolios. We closed now the PIMCO deal, very important for us also for the future. And we also then, as I said, closed the DCA deals or actually the SPA has been closed, and it's going to be concluded at the later stage. Now what does this mean for B2Holding? It means that we have, during this period, having improved scalability across our markets. If you look at the graphs up here to the left, we see that on the secured side, we have been having steady collection throughout this period. At the same time, the ERC has been going down. If you look at the number of people it's been going down for [ 1,047 ], and that exemplifies also the costs related to the operations down to 772. With sale of Bulgaria, we're down to 600. Also on the unsecured, we see the same happening. We have very good stable collection. Collection is ticking up now that we also start investing more. And we see also the ERC, by the way, the last quarter ticking up on the unsecured markets. But there, again, very good collection on the unsecured portfolios, and we do see the initiatives. And this is important. We do see the initiatives and data analytics and also digitalization now making results positive. Same again, with the FTEs development, we have a lower number of people in the operations. We are more efficient and we also see the scalability, that we have been building for the last couple of years, now really making its mark both in the secured as well as the unsecured market. So I'll leave the microphone and over to André, that will take us through the numbers.

Thank you, Erik. So before we go into the financial performance, I would like to walk you through some of the adjustments that we made in the quarter, which are related to the sale of Bulgaria as well as the continued restructuring process of secured, as Erik mentioned earlier. So the sale of Bulgaria, it was signed now in the third quarter, and we expect to close the transaction during October with the proceeds of EUR 48 million. This will result in some noncash effects in -- or has resulted in noncash effects in the second quarter, where we have written down mainly goodwill and other intangible assets. This impacts EBIT by NOK 135 million and impacts net profit by NOK 105 million. In this table, this is reflected in the adjusted EBIT as well as the net adjusted net profit. There's also an effect on net revenue, which is not adjusted out in this table, which is NOK 32 million. And consequently, the underlying net revenue in the period was NOK 780 million, which is 3% up compared to last year and 5% up in constant currency. We also had nonrecurring costs related to the restructuring process which was NOK 56 million in the quarter. This is higher than what we communicated back in the first quarter as the process have been a bit more lengthy than anticipated. We expect also some NRIs in the third quarter related to the restructuring process and to the sale of Bulgaria, but not to the same extent as the first and the second quarter. So moving into the underlying results for the quarter. We are, as Erik mentioned, very pleased with the underlying cash collections that we have seen. Cash collection for the group is up 1% year-over-year. And as you know, we have not invested to a large extent over the last 2 years. The cash collection is up 3% in constant currency. Now this reflects strong performance across all our asset classes. On the unsecured side, we delivered 6% above the latest forecast, which is an uptick in performance, but again reflects the trend that we have seen now over the last 2 years. Secured collections came in very significantly above the curve at 231%. This reflects some earlier collections than anticipated as well as higher values than we have in our curves today. REO sales is continuing a very positive trend coming in at NOK 103 million in the quarter with a solid margin to book value of 34%. And I'll come back to REOs a bit more in the next slide. Cash EBITDA, NOK 949 million, which is up 1% in constant currency. The adjusted EBIT, up 3% year-over-year, 5% in constant currency. So we are delivering growth despite that investment volume did not come up before the second quarter. And I'll come a bit back to this and some guidance on the next slide. So the underlying growth in earnings is again reflected by, obviously, the strong cash collections, but also stable underlying cost base. In terms of investments, investments came in at NOK 758 million, which is an uptick from previous quarters. We are currently at the level after -- in the middle of August, just above NOK 1.5 billion in invested and committed capital for the full year. Looking at the adjusted net profit, as mentioned earlier, it's adjusted for the impact of Bulgaria as well as the restructuring of secured business. Adjusted net profit came in at NOK 173 million, which is up 17% year-over-year. Now this obviously reflects again the underlying operational performance, but it's important to notice that we do have 83% interest hedging ratio currently, which impacts the net profit positively in the quarter. I also want to highlight that the underlying EPS and return on equity, adjusted for, again, the adjustments I mentioned earlier, came in at EPS of NOK 0.43 per share and a return on equity of 12.5% for the last 12 months. So on the next slide, I want to elaborate a bit more on the collection trend as well as provide you with some guidance for the remainder of the year. The unsecured performance, again, we saw an uptick in the second quarter. But we've seen a positive trend over the last 5 quarters. Now this is related to good performance on our back book, but also accretive new investments made over the last 6 months. So looking forward, at least for the next 6 months on unsecured, we expect a continued uptick in ERC. And we do expect to see a collection performance in line or above what we've seen on average for the last 3 quarters -- sorry, the last 5 quarters. Secured collections is continuing to develop very stable, and we're actually delivering higher cash collections for the secured business in the quarter compared to last year despite limited new investments. We expect a similar trend unsecured in the second half of the year as the first half of the year. When it comes to REOs sold, year-to-date, we are at NOK 239 million. For the first 6 months, that is north of 30% margin-to-book value. And this is 80% already of the communicated target at the beginning of the year. And we have seen a continued positive trend, slightly above our expectations, and we can consequently increase our sales target to NOK 400 million from NOK 300 million for the full year. I also want to highlight that for the second half of the year, we also expect a notable uptick in collections on our JVs compared to the first half. This is driven by some expected larger secured tickets coming in, in the third and the fourth quarter. All in all, we should expect to see an uptick in ERC as well as strong collection performance across the asset classes also for the last part of the year. So moving to Slide 10. We elaborate a bit more on the cash earnings, which is obviously a result of the strong performance that we've seen in the quarter. Cash earnings came in this quarter at NOK 226 million, which is before any repayment of debt and payment of dividends. During the quarter, we have both paid dividends and made share buybacks as well as increased investment volume, as mentioned. Consequently, the leverage has a slight uptick from the previous quarter from 2.3 to 2.4, but still very low from a historic point of view. Erik talked about this, but it's very important to highlight that we have seen very significant efficiency improvements across the group as well as improved scalability across many of our platforms. Now this is reflected, obviously, as mentioned earlier, on the collection performance. We do see growth in cash collection year-over-year, and we talked about this some quarters ago. ERC has come down for the group, but we did expect to see cash collections come up. For a couple of reasons: first of all, stronger collections on the unsecured side, better collection performance, getting more out of our existing base; and we expected to see sale of large secured claims or REOs, which we now expect also to continue into the second half of the year. On the cost side, we have a very stable development. We do have an increase of about 4% in OpEx in the quarter. This is related to activity-based variable cost. We have been able to contain inflation in our cost base and the underlying personnel costs in the group is actually down year-over-year despite the high salary inflation, we saw both last year and so far this year. Looking at what Erik presented earlier on the FTE side, the full impact of the lower amount of FTEs is still not fully reflected in the cost base, which will give us some room to maneuver when inflation in salaries continue to increase. I forgot to mention one thing. Obviously, when we do the sale of Bulgaria, this will impact our cost base. And it impacts the FTEs by NOK 172 million. This is 9% of the cost base. And Bulgaria will also -- the impact of OpEx will be approximately NOK 90 million per year or about 5.5% of OpEx, which will go out of the group. I want to highlight again what Erik mentioned regarding the redeployment of the proceeds. We expect in the current market environment to be able to redeploy the proceeds quite quickly with the supply of portfolios that we see today. And we expect to be able to do this at a much lower cost-to-collect. The cost-to-collect in Bulgaria is currently north of 30%, and we see that we're able today on unsecured, to redeploy capital with a marginal cost-to-collect in the single digits. We've seen a very positive development on the investment side in the quarter and so far this year. We have invested NOK 758 million in the second quarter. This has resulted in an increase in ERC in unsecured of 8%. I want to highlight that these -- the increase in volume, we have done that while maintaining price discipline, which is very important to us, and the increase in volume is coming from an increase of supply of portfolios in the market. In terms of investment mix, we have seen activity across all our markets. The main part of the investments, in the first half, has been in Poland and Northern Europe. But the activity level that we currently see and going into the second half of the year, we see a clear trend that there is more portfolios also coming out in the Southern and Eastern European markets. So pipeline going into the second half looks very promising and highlight again that we maintain the guidance that we have given of NOK 3 billion -- around NOK 3 billion investments for the full year. Now we are very happy to be able to announce several positive impacts on our funding base, both the sale of Bulgaria, the PIMCO loan and obviously, the communicated expansion of the RCF, which we communicated back in Q1 and now closed during June at very favorable terms for the group. The senior financing with PIMCO was also concluded just after the second quarter, and we now have NOK 166 million facility available to the group. The NOK 166 million facility is slightly lower than what you may remember from previous communication, and this is related to the sale of Bulgaria. So the sale of Bulgaria, it was signed in August. We expect it to be closed around October, which will give the group proceeds of EUR 48 million. And important to highlight that this will be used to repay the RCF. So following all these events, including the sale of Bulgaria, we will have approximately EUR 500 million available of liquidity, including very strong cash flow expected in the upcoming quarters. So moving into the second half of the year, we are very comfortable and we are in a very good position to take advantage of the market conditions, which is important. We do see an increase in supply of portfolios. We have the necessary liquidity to invest. And we also have with the current position, the necessary liquidity to invest and at the same time, take out the upcoming bond maturity, which is in November. And with that, I leave the word to you again, Erik.

Thank you. Let's just take this summary. Now we see the collection and recoveries continues into third quarter. It's good stable collections, both in all asset classes that we see, both on the secured, unsecured as well as REOs. As we said, we have improved our scalability, and that has impact on investment that we do further. And as we increase also the investment on the platforms, we see the scalability is there. The restructuring that we've been going through for a long period of time is coming to the end. And the cost related to those restructuring also will come to an end. And we believe this has very good impact on B2Holding going forward. We have closed the senior financing and extended the RCF. And we are, as far as we can see, in a very good position now to take advantage of the market going forward. We are at a -- we have gone through the restructuring period. We have been going through market conditions that has been unstable now. We see the number of portfolios come to the market with good investment returns as well as the organization is more ready than ever to take on new volumes without increasing cost to a large extent. So we feel that we are in a very good position now with the market also improving going forward. So that ends our presentations, and we are then ready to take questions.

Thank you, both. We will then finally ask those who have questions to use the microphone, so we can put the questions on the webcast. I think it was on Jan Erik first. I will run up with the microphone.

Jan Erik Gjerland from ABG. Three questions. The first one on the IRR. You say that you see good IRR levels these days. Could you just exemplify a little bit how your back book is looking? What kind of levels you are now investing in and what you're seeing in the marketplace? Secondly, on the restructuring side, you said you were finished. So Bulgaria is still sort of the one that you will leave and then you have continue with the rest. I can understood earlier that maybe you were sort of looking into more of your countries. . So just could you give us a little bit of examples on that. And finally, disposable income, you're right a little bit in the text that you look deeper into how this energy crisis towards that you build, could impact your collection. What kind of parameters are you looking at? And what is your biggest worries when it comes to collection and the disposable income?

Yes. André, maybe you can take the..

I can always answer the IRR question, and we don't guide on specific IRRs. So I think the only thing I can say is that the investments we have made during the pandemic has been at a low level. And consequently, the IRR in that period has been higher. We now see an increased volume, which consequently is larger portfolios with more competition. That takes the IRR back to probably levels we saw pre-pandemic or slightly better. It's difficult to guide on the total market. What's important for us is the volume we are able to deploy with the margins that we are able to generate on the portfolios that we see. So we are buying into assets where we know that we have certain capabilities. And currently, we are doing that at very favorable IRRs, and we are overperforming all those portfolios so far this year, on average, it's very accretive to the collection performance, as you can see from the 106%.

When it comes to the restructuring process, it's been taking a while. We see that by a sell off of Bulgaria we're coming to the end of the big restructuring. There will always be improvements going on in the organization, and that will continue, of course. When it comes to number of -- or the footprint, as you referred to, we have scaled down operations in 3, 4 countries. So we are more at a lower range there, and we also see the activity in those markets has been going down. And if you look at our investments over the past quarters, we have increased investments on platforms that has given us better scalability and better return. And that is something. So we have been striving for, and we do see that come through in the numbers as well. The last question was, yes, the disposable income. So far, we do not see the interest rates or let's say, the increase in fuel costs and so on, actually affecting us at all. It should be said inflation, as such increase is normally the lower side of the earnings higher, and that is coming to us as a positive effect. Also, when it comes to -- we bought portfolios in anticipation of collection generally goes up also when the earnings goes up. So in general, we have concluded that the inflation consequences is giving us more portfolios most likely going forward. But at the same time, will not impact our collection base to a large extent at all. And we haven't seen that so far.

Okay. Was that answers to your questions Jan Erik? Then, I think, it was Håkon.

Håkon Astrup from DNB Markets. Two questions from me. The first one on the collection performance on unsecured, 106% is, of course, very strong. Can you add some more color to any regional differences in a countries that is particularly strong or where it's more challenging. That was the first question. The second question, just clarification on the investments guiding of around NOK 3 billion. Is that the gross investment number that you are expecting? Or is it net after subtracting the ERC in Bulgaria?

Well, let's take the first one first. Collection performance, as I highlighted earlier, we do see strong performance on our back book. And the strong performance on our back book is an improvement actually across the markets. In terms of the new investments, they have been mainly in the Nordics and in Poland, as you've seen from the results. And those investments have overperformed our expectations. So you can say that, obviously, due to the ERC that we have. It is the Nordics in Poland that drive the collection improvements. But it's actually performance increase across the group. And Erik touched upon the inflation. And we don't know exactly, obviously, as everyone else was going to happen going forward, but we have looked into this and the increase in salaries that we have seen across low-income groups has impacted the collection performance that we have seen as the income in relation to the nominal value of the loans has increased. And this is something we looked at from the beginning of the year and expected this to have an impact. And it's quite clear so far in the results that there are external factors also that impacts the results positively. And in terms of the guidance, it is not net of Bulgaria. It is a target for the group. So we stick to the same target of NOK 3 billion for the group. And it's not changed in any way due to Bulgaria.

Just elaborate on how much ERC you're leasing in Bulgaria?

It is about 4% of the total, slightly above 4%. .

Vegard?

Vegard Toverud from Pareto. I have 2 questions. First on costs. You mentioned that you expect also some one-off costs in the coming quarters. Could you provide some details to the level of those one-offs? And also, if possible, some kind of baseline or underlying costs that we should expect next year?

Next year, I think it's a bit early to guide. Obviously, it depends on development in inflation, et cetera. But we do expect that the impact you've seen on FTEs to have a positive impact on the group cost going forward. So we do not see -- expect an increase in cost, driven by investment, rather the opposite, a stable cost base at increase in ERC going forward. Any of you -- I don't remember your first question.

You mentioned that you have substantial one-offs now in the quarter in connection with the financing and the master servicing. And you mentioned also that you could see some one-off items over the next quarter. So I just wondered if you could give some more details to the level of those or how much reserve should expect?

Hopefully, as low as possible, but this is a very complex restructuring of the group. And as you can see, the number of FTEs is coming down significantly in the area. And the cost related to this restructuring, we have to point out that this is not related to the financing stand-alone. It's related to the full restructuring of the organization. And this will impact the third quarter. It's difficult to guide on a specific number for you. It will be much lower than we have seen in the first 2 quarters. I think that's what we can say so far.

Okay. And the second question is more on the outlook for the Southeastern region. I'm not that familiar with the cooperation between the countries within the region, how that's structured and also your position in those countries. But as far as I remember at your Capital Markets Day, although a few years ago, Bulgaria, you had the #1 position in Bulgaria, whereas you had top 3 or top 10 position in the other countries. So with Bulgaria now out, where does this leave the other countries in the region?

Yes. If you look at Croatia, Slovenia and Serbia, we have a good position still. We have very large investments still in those countries. And I would say that we are #1 in those countries. There's a couple of others that has also been investing quite a bit there over the past years. EOS is one of them that has a good position there. If you look at Romania, we have a good position in Romania under unsecured. We see that on a secured base, it's a little substantial due to legislation that came into effect there. So we do not do, at this time, a large investment in the secured space, but on unsecured space, we would do. When it comes to Cyprus, we have a good position. The biggest position there, of course, is PIMCO that bought several billion our portfolio. So -- but we have a good position in, and we've done some very good investments in Cyprus. In Greece, we are -- we see our performance on our platform, but we are a smaller, not the largest players, of course, in Greece. However, we would say that in comparison, we had our portfolio, let's say the collection of those portfolio we had with several others. But our co-investors wanted us to do the whole collection due to the performance of our platform was better than the others. So we see our performance there good, even though we are not the largest players.

And the sale in Bulgaria doesn't impact your position or the profitability in Romania or Greece in any way and you're happy to stay in those countries?

No, it doesn't impact. The reorganization of Veraltis has given us a more steady platform to work for and more cost efficient and Bulgaria didn't really fit into that structure.

Important to highlight that it's not a market-by-market position we're taking. We're establishing a cross-border master servicer for secured. So we're aiming at taking a position in -- within secured servicing in the area. And obviously, we're positioning ourselves to take the leading position across these markets. So market-by-market, maybe not #1, but the master servicers, clearly, the target is to take a leading servicing position in -- within secured in these markets.

Joakim from Arctic. I have a couple of questions as well. If I start with dividends, you have a very wide range with NOK 3 billion in investments this year. And with the current outlook, could you give some soft guidance to where we should expect dividends? And the second one related to dividends is just relating to the write-down, if you are considering to keeping that side since it's noncash?

Dividends are in a bond agreements, we can give dividends up to 50% of net results. So that is the limitation on the dividend side. And the Board has said that we will do dividends and repurchase of shares up to 50%. There is no guidance on specific level of dividends or repurchase. That is more up to how we see the market conditions at that point in time when the general assembly is gathering every year.

And then just related to PIMCO since the financing was a bit delayed. When should we expect the first co-investment? And could you give some color on that?