Earnings Call: Q2 2024

Jul 26, 2024

Good afternoon. This is the Chorus Call operator. Welcome to Generalfinance conference call presenting 2024 half-year results. Let me remind you that all participants are in listen-only mode. After the presentation, a Q&A session will be held. The presentation is available on the www.generalfinance.it website. To be assisted by an operator during the conference call, press star and zero on your phone. Let me now turn the conference over to Mr. Massimo Gianolli, CEO of Generalfinance. Mr. Gianolli, you have the floor. Thank you very much. For those of you who are following the presentation, we're starting from page five. You have an update on the increased voting rights. Investment Club, first progress in Banca delle Marche, as you see on the slide. 24 months have elapsed, and therefore, we updated the voting rights slide. In the following page, on page six, you see there's a snapshot of the Workinvoice deal, which was announced in the previous weeks, and it's the acquisition of Workinvoice. The aim is to build within Generalfinance a small division based or focused on digital lending, with the main aim to really make our distressed corporate department even more specialized. As you can see, they have been in operation for more than 10 years, and they've been growing. Their operations will be broadened, not just for invoice discount, but also for factoring and small businesses, SMEs. We have the first meetings, and of course, we have some formal steps to go through, but we are confident that by year-end, the deal will be closed with a positive outcome. The initial valuation is EUR 6.4 million, sorry. We have already looked at the results we could achieve. We have two corresponding earn-outs. On page seven, you see how our turnover has been trending. In this first half, it went up 20%, and the market instead grew about 2%. Despite the fact that the turnover volumes are growing, we are growing on a consistent basis. Also going forward for the next quarter, we expect to be growing sizably. Net income on page eight, again, it's been growing to about 19.19%, roughly just like the turnover. As I said, it's on page eight, and we closed the half year with EUR 8 million of net income. We move on to page 10, and cost of risk has been increasing versus 2023, and it went up, as you will notice, our NPA ratio went up from 0.61-1.75. Last year, if you remember, we expected higher volatility of these ratios that are a consequence of an inspection of Bank of Italy and the evolution we had last year when it comes to the ways classification policies are run by our clients. The result is still outperforming the market. We have half the gross NPA ratio versus market average, and we are confident that by year-end, by the end of the next half, we'll be going back to below 1%. Why is that? Because it's mainly due to the new classification policies. One item in particular was subject to litigation. For another item according to the policy, changing the seller status would lead to a different classification, but then it will be changing again. On page 11, you see the parachutes, the mitigants, so to say. We have net risk on financial assets of EUR 433 million, 56 of which are insurance coverage. Allianz Trade policies, it's a multiplier, practically, of net premia that we pay. It's EUR 56 million outstanding, not advanced. It's EUR 100 million, it's receivable sold but not advanced. Personal guarantees which equal the exposure for the single financing. The coverage ratio is 44.4%, and it's a different snapshot, and we hope this picture will help you better understand how it's broken down. We have a slight increase in DSO. You see it on the left-hand side of the slide. This parameter was constantly declining, and so we are quite happy that despite the fact that we only have 36% of our receivables that have 120 days, whilst the market has a 73% average exceeding 120 days. Delays, payment delays. On the right-hand side of the slide, you will see that 94% of our receivables and maturities are regularly paid upon when they expire, when they come to maturity, and 4% is cashed in within the next 30 days, and the remaining 2% following that. That's also very interesting. Taking into account payment delays we are witnessing that we are seeing in the market. On page 13, the following page, as I told you, we have a decline of DSOs in the lower part of the slide. It had flattened out in September last year, and then it's picking up again in June this year. We're back to above 70, which is a good result. Also taking into account that the next six months could lead to a slight growth. On page 14, you see a breakdown of the so-called picture where we show a picture of our sellers and assigned debtors. In the central part of the slide, you see that's the quality of turnover of assigned debtors. In the lower part, you see a snapshot of sellers that are mainly, as you can see, 47% are distressed company and 32% are performing, and 25% are newcos. It's normally vehicles that are established to actually support the specific business unit of a distressed company. Other parameters, with recourse and non-recourse or without recourse portion is well below the market average. You see we are 26% versus an 80% of market average. Pro Solvendo or recourse factoring is 74% turnover versus 20% market. Slide is number 15, and then we have 16, our digital platform, proprietary digital platform. In the previous months, we told you how we have had developments on this platform, and we've added all of the components that we had identified. Fabrick, PagTech, all these functions were added in the last few months, and now they are up and running. In the last 12 months rolling on the client side, the top part of the slide, our digital platform managed 628,000 transactions in a totally digital way. Before we move on to your questions, I hand it over to our CFO, Mr. Ugo Colombo, who will give you some figures to crunch, and then I'll get back to you to draw conclusions and give you some guidelines, and then we'll have questions. Good afternoon to all of you. On page 17, let me give you some details on the main items of our P&L. We start our income statement. We start from the top. It's very interesting to see the positive performance of our interest margin that, after having a lower trend in 2022, is back to growing in a more than proportional way to our turnover growth. It's 29%, very much in line with the growth rate of our net commissions. We will see them also in the following slides, leading net banking income, sorry, to a growth in excess of 28%. We've talked about provisions tied in with the policies, for Stage 3 and Stage 1. We try to be very conservative, especially on Stage 1. You will probably see an increase in the coverage rate, 30 basis points, about 40 basis, but from 30-40, the overall coverage. To be very cautious, and costs are up 16%, and they are in line. If you look at the CAGR between 2021 and 2023, it's the same. It was 15%. We'll give you more details about costs as well. Central part of the slide, we have loan-to-value, so disbursement. The disbursed amount that went down sizeably. LTV went down 6.6%. Sorry, four percentage points on the recourse factoring, LTV Pro Solvendo or with recourse. Again, central part. Cost income ratio as a trend is further declining by four percentage points. We are slightly lower than the 2023 full year data, so we are around the all-time low values for the last two, three years. Our shareholders equity, and then we have 27%. Our stock of total assets is in excess of EUR 530 million. The vast majority is advances versus the sold invoices, EUR 432 million, both recourse and non-recourse. The rest is liquidity that we have with banks in waiting to be invested. We have other liabilities and other items for EUR 16 million worth. EUR 410 million is the debt, with the net shareholders' equity EUR 67 million. Page 19, capital ratios are improving versus end year 2023. They are declining because of RWAs versus end of March 2024, but still very sound is our capital buffer versus minimum levels. CET1, we are in excess of 10 percentage point. Total capital ratio 16%, which is twice the minimum requirement. On the left, we've maximized our RWA density versus year-end, 85% down to 80% with a more favorable mix within our receivables portfolio, and also thanks to what we did on the tax receivables, which is improving in the market. It somehow positively improved our RWA mix. On page 19, we see our funding breakdown. Starting from the bottom of the slide, we reconfirm total available funding, about EUR 690 million. We have securitization plans as well. Some of them are being renewed in the second half of the year. Total funding EUR 690 million. The use of funding between debt and with no recourse factoring, EUR 470 million, the use of funding. We have a counterbalancing capacity. We have a backup of unused liquidity equal to EUR 300 million. On the top side, you see our funding mix. It's not different from the previous quarters. We have securitization revolving credit facilities that take up the lion's share of the EUR 411 million worth of our debt. Average spread on all funding lines around 135 basis points-140 basis points. Funding is all at variable rates. Page 20. If you see the bottom of the slide, you see Net Interest Margin, which is improving year-on-year, confirming the trend we recorded in the first quarter, which overall, throughout the first half, has seen a full realignment after the stabilization of the euro. Both interest payable and receivables are better realigned after 2023 with the stepping up of the short-term interest rate. Page 21. Here again, we have a positive sign coming from the pricing of services. That is to say, commissions on services. Year-on-year, here too, we see a slight improvement of net commissions on turnover, thanks to our pricing discipline, the way we price services, the way we maximize our mix between non-recourse and advance on future receivables versus last year led gross commissions to 130 basis points, and a slight decline in commission expense. It's stable, both for insurance costs and the bank facilities that led to a stable commission expense rates about 10 basis points. 120 basis points between the two components. One last comment before I turn the conference over to our CEO is cost income and costs. It's 16.5%-17%. We have the change, the delta between 2023 and 2024. We strengthened our team, and so we have more people. It went up 10% from 67-72 staff. Admin expenses were overall flat year-on-year. Whilst quarter-over-quarter, we had a first quarter that was not so affected by costs. We had some initiatives for communication, but overall, the results are in line. Cost-wise, they are also in line with our expectation. I'm going to stop here and turn the conference over to our CEO. Thank you very much, Ugo. Just to wrap up today's call, the market is right now and also going forward, we view the market in a positive way because the market for receivables, and where some corporates do not get funded by banks. It's difficult for them to turn to banks for loans, so they encounter difficulties, especially after the COVID lockdown. Now we see an interesting increase. We've witnessed an interesting increase in the number of companies that access funding, that need loans to support growth or somehow to restructure their debt. We have a large number of new companies that we have lended money to, and they are starting to perform well. This is positive both for 2024 and also going forward for the next few years. Many of these companies, especially in the building and construction business where there are tenders, and they are starting really to benefit from the National Plan for Recovery and Resilience. We've acquired quite a few contracts with a good outlook to increase the workload in the coming months. We think that the Workinvoice deal will benefit us, not just from the organization viewpoint, but also from the market viewpoint, because Generalfinance will be able to feed our platform better, and Workinvoice can increase our business, because I am confident that together, the two companies will have 15 extra people joining us coming from Workinvoice, and that will generate value from the point of view of human capital, but also from the perspective of generating new business. We are going to open a branch in Spain. We should be starting our operations in autumn. When we will present the new business plan, we will be in a position to already assess the impact of these two novelties I've just mentioned. In the light of the results achieved and the introductions and the info we gave, myself and the CFO, we can confirm the guidance we disclosed to the market with a net income at year-end in excess of EUR 20 million. I would leave room for questions now. If you want to ask questions, we're here to take them. This is the Chorus Call operator. We now start the Q&A session. If you want to ask a question, please press star and 1 on your phone. To be removed from the Q&A queue, press star and 2 on your phone. Please use your handsets to ask your questions. Press star and 1 now if you want to ask a question. The first question comes from the line of Luigi Tramontana with Banca Akros. Good afternoon to all of you. Thank you very much for the presentation you made. A couple of questions, the first one on operating costs that were slightly higher than my expectations. Is there anything, any non-recurring item during the quarter, maybe tied in with the acquisition of Workinvoice or your expansion to Spain? I've seen the tax rate is also slightly higher than expected. Does this have to do with the adjustment in LLPs that you performed during the quarter for the reasons you explained? Always on LLPs, as it's changing, the performance is changing, the trend is changing every quarter. Maybe could you elaborate on the level of LLPs you expect to have by year-end? As to costs, it's the CFO answering. On costs, they are spread across the first half. Some items, especially for communication, were almost zero in the first quarter, and instead have their full impact in Q2. It's ordinary communication, so to say, business as usual, advertisement and related costs. In the second quarter, there was a small component of non-recurring costs, especially legal and consultancy costs tied in with a Workinvoice deal that we are starting to account for, and book them as costs. Also legal costs that were tied in with the AGM we will have in September. When it comes to the yearly figures, if you compare June 2023 operating costs and June last year, among operating costs, we had some tax adjustments of EUR 700,000 were non-recurring as an item, and this half instead, they were equal to 0. This, as far as the yearly cost trend. Nothing new on the non-recurring item side. There were consultancy fees. We had our initiatives to expand on non-organic basis. Well, the EUR 7.5 million, they are in line with our expectation of EUR 15 million on a yearly basis. The cost trend is consistent with our forecast and budgets. As to the tax rate, which is slightly higher than 2023, for sure, we have to factor in the government provisions that canceled ACE, which was at a certain weight because we are highly capitalized also thanks to the IPO, that gave a very positive contribution in 2023, and it was canceled. It will probably be replaced, ACE, by another provision, where you have deductions on new hirings, but this will be accounted for in the second half of the year. On a conservative basis, we did not include the Patent Box benefit. It was not factored in, but it will be factored in the second half of the year. With a 34% tax rate, we'll see it full year. It's going to be slightly lower if you look at it full year 2024. It'll be around 33%, thanks to the Patent Box effect and the deductions. The new employees will be accounted for in the second half of the year, and here I finish, and then Massimo. On LLPs, the idea is to get to 2024 year-end on the current levels. In our forecast for full year, we have EUR 200,000 above the current levels, and it's confirmed practically. The review we did on the individual items, we've recently done on individual items with all the involved functions. In the second half of the year, we will somehow release the provisions on Stage 3. We will increase Stage 1 provisions because we have an increase in the receivables stock, and that should probably lead to this kind of results you've seen. Stage 3 decline and Stage 1 go up because of the cost of lending, 1.6%, 1.7%. Next question comes from the line of Simonetta Chiriotti with Mediobanca. Good afternoon. I wanted to ask you if you could give us some more color on how receivables are faring, are performing versus turnover and advances. Turnover went up a lot in the two quarters. I was looking at Q2 specifically. Advances went up a little less than the turnover, and loans a little less. Could you explain, give some color to these three orders of magnitude? The reduction in loan-to-value, will it carry on going forward? What is it caused by? Is it simply a reason of being more conservative, or could you elaborate on that? Can we expect that kind of level also going forward? Thank you. Let's say that there are three main effects that have a joint impact in this turnover to receivables trends. Of course, you have to consider the full quarter because that has an impact on advances for the quarter as well. On the one hand, if we look at until end of 2023, we have a balance of loans, of receivables that very high, because we mainly disbursed a lot in the last few days of 2023, in the second quarter this year. The turnover was more standard for the period. The distribution of invoice buying within the quarter is not consistent between the two quarters or within the same quarter. Sometimes it increases or decreases. Because, of course, you have to refer to the disbursement and turnover as a whole for the full quarter or for the full half year. As you said, Simonetta, loan-to-value is declining with the same turnover, so the exposure is slightly lower. We went down six percentage points in loan-to-value, and also the loan dynamic is much more limited. On the funding side, from 2023 onwards, we have sizably increased funding through deals where we sell non-recourse items that are purchased and then resold by other companies. Turnover-wise, you get your numbers reduced. The combined effect of all that take us to the exposure of EUR 430 million that we saw on the slide. One more thing on LTV. Sometimes we bought receivables that have not yet been disbursed, or were not disbursed at the end of the quarter, and are then picked up the following quarter when the contract comes into force and we start disbursing. We think that LTV will normalize over the next quarter already. Thank you. Let me remind you that if you want to ask a question, you may press star and 1 on your phone. For further questions, press star and 1 on your phone. The next question comes from the line of Simonetta Chiriotti with Mediobanca, and it's a follow-up. Well, I take advantage of this opportunity to ask another question. As to your expansion in Spain and Workinvoice acquisition. In your guidance, you probably did not factor in any of those two items. Could you elaborate on that? Could you confirm? I confirm, none of the two was factored in. Nothing. Whilst for Spain, you will give us more details once you disclose your business plan. For sure. Yes. Both. Well, we'll give you more transactions, and we will, of course, have the business plan to share with you, and everything is on top of what we've seen today, because today we would not be able to give you precise figures. That's why we did not factor that in. We could not give you sound figures. That's why we did not provide them. For further questions, press star and one on your phone. Gentlemen, there are no questions in the queue for the time being. No more questions in the queue. Very well. I would like to thank all of you for joining us. Thank you for your patience. Thanks for listening to us. Thanks for the question you asked, and we are here available to take any more questions you may have. See you next quarter. Thank you very much. Have a good day and have a nice summer. Happy holidays.