Earnings Call: Q1 2020

May 6, 2020

Ladies and gentlemen, welcome to the Host Finance Q1 Report 2020. Today, I'm pleased to present CEO, Klas Anders Nietzsche. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Please begin with your meeting. Thank you, operator, and welcome everyone to this Q1 release for Horst Finance. And present today from our side is, as usual, our CFO, Kristi Van Zond and our head of investor relations, Andrea Pindholm. They're in Stockholm. I'm in Oslo. I'm I'm still in a lockdown situation at the moment. But first of all, let me start by saying that I hope you're all you all are all well and that things are solely but surely getting better for you wherever you are. I guess most of us have been working remotely now for the last six to eight weeks, and I've learned many ways new ways of working. Secondly, let me just use this opportunity to thank all my colleagues in OIST Finance who have ensured business continuity and have kept the customer dialogues going over the last couple of months in very challenging circumstances. I am very proud of the work the team has done to support our customers in the best possible way during the pandemic. As far as q one is concerned, I have basically three clear opening messages. In the most dramatic financial crisis that we're seeing, the underlying business is resilient and robust given the circumstances. The exception is then where we have continued to struggle. Number two is that the impact of COVID nineteen is visible towards the end of the quarter. We will experience collection delays in q two, but we believe that things will trend back towards a more normalized situation in the second half of the year. And message number three from in in his opening statement is that our strategy of digital transformation, cost reductions, and protecting our capital is working. And I believe that we are well positioned for the market opportunities ahead. With that as a background, moving to slide number three, we will take you through the following agenda today. The key highlights, of course, the financial update, funding capital and liquidity. We will do a summary and q and a. But before moving to slide number four, let me also say that we have tried to expand disclosure in this presentation to make sure that the key messages get across and to provide some additional insights for you. And we hope this is helpful. So moving then to slide number four, the key highlights of this quarter follows from what I said in my opening statement. It is, first of all, great to see how quickly we have executed on our business continuity plans. We're obviously very pleased with the 81 we did in February. An important milestone for us is to deliver on our ESG strategy and to have updated our brand. The challenges in Spain have continued accentuated by the COVID nineteen situation, and they've written down the book value in Spain. However, as I've said before, it is better to have one problem than many. And we know that our new team in Spain is turning every stone and get back on track. As far as the finance performance is concerned, Christy will explain things in detail, of course. But from my point of view, the key thing to remember are, first of all, that the adjusted EBITDA shows strong cash flow generation. Adjusted EBITDA is up 25% from the previous quarter. Profit before tax adjusted for items affecting comparability is million compared to million in the first quarter of twenty nineteen. This negative deviation is largely explained by Spain and some forward looking and prudent write downs. CET1 ratio is 9.5% and investment, 45,000,000 debt. As you can see from the next slide, slide number five, the adjusted EBITDA is significantly up 25% compared to previous quarter. And this is actually the highest adjusted EBITDA that Horace Trineland has ever seen. Moving on to slide number six. I am very satisfied with our business continuity. This slide shows the ramp up of the capacity for remote working by country. And as you can see, we're more or less in a 100% capacity in all markets. Now, of course, as the constraints are being lifted, we are preparing for welcoming our colleagues back to the office in a serious way. Moving on to slide number seven. I think it's fair to say that working from home to such a large degree over such a long time period is a new experience. We have been prioritizing accessibility, quality assurance, and security to protect both customers and agents. Generally speaking, what we have learned has surprised us positively, and our collaboration tools have been instrumental. Having said that, I think it's clear that not everyone can work effectively from home for a number of reasons. And hence, there is a a drag on productivity in some markets. Looking at customer behavior and in response to the pandemic, we have observed a slight reduction of around 10% in repayment plan and a somewhat larger drop off of around 20% in one off settlements. This shows that the repayment plans are holding up fairly good. We're also pleased to see that the percentage of customers being digitally self served is increasing, and the run rate is now at 17%. Just the other week, we did a survey in Italy that showed that close to 90% of our customers indicate that they will pay according to plan. Of the remaining 10%, almost half, responded that they simply couldn't pay because the banks were closed. They just couldn't get to the bank. And I believe that this survey shows that our customers are willing to pay, but perhaps not always able to do so. If you go to the next slide, by the end of the quarter, we launched a new ESP strategy focused on the four pillars that you can see on this slide. Our mission is to help people keep their commitments. Consequently, for us, making sure that the financial market is accessible for all is particularly meaningful. In just times like now, it is important for us to show that we are on our customers' side. Can you go to next slide, please? Having financial difficulties is a heavy burden to carry. Falling into debt can basically happen to everyone, and this is something we are being reminded of basically as we speak. And having a social approach to our work is part of our DNA and is embedded in everything we do. We are proud to have launched three initiatives in the quarter to show our commitment to deliver on our ESG strategy. We just now launched that we are collaborating with AppJobs, the world's largest digital platform for finding finding jobs online. We believe that this can be a valuable help for our customers to find new sources of income in times of crisis. UpJobs is a free digital platform that is active in all our markets, has over 1,200 companies registered, and gets more than 5,000 new online job listings per week. The initial launch for us is in France and in The UK and will be followed by Poland. The two other initiatives are Team You and Homesbank, and these are examples of initiatives where we support local communities and organizations who are working for financial inclusion in society. We are building on our core competence and are happy providers of know how and skills to these great organizations. Moving to the next page, I think we all appreciate the seriousness and uncertainty caused by the pandemic. This crisis is different from what we have seen before, and I find it hard to give clear guidance. However, it comes to no surprise that we see increased financial stress despite fiscal stimulus. The graph shows that the banks have been reducing the nonperforming exposures since the outbreak of the financial crisis, and we are now basically down to the precrisis level on nonperforming loans. However, we do observe that banks are now significantly increasing their loan provisioning. The loan performing exposures will increase, and we have indicated here a scenario where NPL stocks return to the levels we saw during the financial cycle. And now I hand over to Christaer, and he will take us through the financials. So to you, Christaer. Thank you, and good morning. So starting on Page 12. As Klaus Anders described, Q1 was a challenge. Looking back at the last couple of quarters, we have delivered profits of around SEK 200,000,000 before tax. With the growing book and improving efficiency, one would and should expect us to come in north of that. As I said, we report a SEK 61,000,000 loss before tax, mainly driven by four items. The first two items we disclosed already on March 27, and this relates to us taking an impairment on our Spanish loan portfolio of around million. And we have also unrealized mark to market losses in our treasury portfolio amounting to SEK47 million. Thirdly, we have seen COVID-nineteen related court closures in several markets. This did not impact Q1 collections. And for example, collections in the new large French portfolio has been above expectations. Nevertheless, it is prudent to recognize that this will cause delays in future collections, primarily on secured NPL portfolios. And this, in turn, triggered a SEK 20,000,000 impairment in the value of our loan book. Finally, actual collections in the quarter did not quite reach our targeted level. We saw a reduced momentum towards the end of the quarter in several markets, and this was most pronounced in Spain and Greece. The collection shortfall in those two markets alone amounted to SEK68 million in Q1, roughly evenly split with the shortfall in Spain adding to the impairment in Spain then. Overall, collection level for the unsecured book came in at 98%. Turning to Page 13, we have, as we always do, included the year on year comparison with items affecting comparability excluded. You will see double digit growth on top line, but we also have interest expense coming up quite a bit. This is the result of structural changes in 2019, which I will get back to on a later page. As covered on the previous slide, we saw weaker collection performance with the end of the quarter trending down towards an overall level of ninety percent, and this impacts the impairment losses and gain line. On the expense side, two key comments. To start with, Collection cost is growing, but it's only growing half as much as the book, 8% versus 17% on the book. Secondly, expense levels in Q1 are impacted by IT related costs. And already before COVID nineteen, we had embarked to transform selected parts of our IT infrastructure, and we do this together with our outsourcing partner, LTI. Now as crisis related restrictions took hold, some of those work streams went into overdrive, came with a cost that made a very significant difference to our ability to keep operations going. Turning to Page 14. We have included the corresponding comparison of financials as reported. I think we've already covered the key items. And although this table stops before tax, I would just like to mention that net profit at negative SEK 44,000,000 is impacted by deferred tax assets relating to our Spanish business. Turning to Page 15 and focusing on cost savings. This has been a top priority for us ever since 2018. And based on the potential we had estimated at that time, we have committed ourselves to take out 300,000,000 in cost run rate by 2021. As per March year, our list of completed actions add up to 136,000,000 SEK, with site consolidation, IT outsourcing, and reduced spend on professional services being key areas of progress. Now that said, the big ticket items here are really digitalization of collection and moving roles to shared service center and near shoring locations. We've made good progress on both of those fronts. And as we see what's working, we update our view on what the end state should look like. Taking a 2022 perspective, knowing what we know now, our current assessment is that digital collections should go from its current 17% to 30% and that the share of tasks carried out in shared service center near shore locations should go from its current 9% to 25%. Furthermore, we've also identified additional savings To give a few very tangible examples, this includes using modern collaboration tool to reduce travel costs further. It also includes being more flexible in working from home options, allowing us to reduce cost for office space and for backup sites, which, frankly, I don't think we need. All in all, given this updated assessment, we still target to deliver SEK300 million by 2021, but we also commit ourselves to deliver another SEK100 million in run rate cost savings by end of twenty twenty two. Moving on to Page 16, but staying on the cost theme, We are growing the book quite a bit, 17% over the last twelve months. And for this reason, it makes sense to look at cost in terms of key ratios as a complement to looking at cost in absolute numbers. And make no mistake, cost to income is our preferred metric. It's the one we have our 65% target on. That's a target we remain committed to delivering. Cost income in this quarter is 87% after adjusting for IAC, which clearly is far from satisfying. Now with impairment and funding cost moving around a bit, we believe it's helpful in this quarter to also look at the trend in cost in relation to collection. And as you can see on the slide, there is real progress in cost efficiency. Moving on to page 18, when it comes to funding cost, I mentioned on one of the previous slides that it has come up quite a bit since Q1 last year, and this relates to longer deposit durations and securitization positions as we have communicated throughout 2019. Comparing to Q4 twenty nineteen instead, the position is largely unchanged Any deposit, which has the majority of our funding, we have not seen any difference in customer behavior. The mix of deposits and the interest rate levels, they're stable. On capital market debt, the situation is also unchanged. And remember that the AT1 instrument is reported as part of equity. One can, however, note that the weaker Swedish krona inflates coupons paid in euro. Interest expense to book sits at 2.6, but would have been at 2.4 if not for the oversized liquidity position. Finally, one can note that the closest bond maturity is in Q4 twenty twenty one. Continuing to capital and liquidity on Page 19, the CET1 ratio remains in our target range, and the target range has come down by 30 basis points during the quarters since regulators have reduced requirements through the so called countercyclical buffers. Looking at the full set of capital ratios, one can see Tier one and total capital ratios being strengthened, and this is as a result of the Q1 issuance of €40,000,000 in AT1 Capital. Finally, on the right hand side, liquidity remains very strong. Now in a crisis, that's not a bad thing. However, it comes with a cost. And since we are not expecting large acquisitions in the near term, we will, as the macro setting stabilizes, manage this down because there's simply no need for SEK 9,400,000,000.0 given the steady and predictable cash flow generation of this business. On Page 20, I wanted to bring that to life a little bit, focusing on cash flow from operating activities as it's called in our audited cash flow statement. For a true view of the underlying level, one should adjust for cash flow from hedging, which is classified as operational. Those cash flows will even out, but they can be quite significant in the single periods. Having done that adjustment, the underlying cash flow adds up to 4,100,000,000.0 SEK over the last twelve months, and that's something that you can compare to the replacement investment grade, which is at 3,400,000,000.0 SEK. Now all of this is, of course, history, and the future is perhaps of greater interest, at least in the current setting. For this reason, we have, on Page 21, included our current projection for future collections, ERC. This is, of course, post the q one impairments, which we've described, and we also commented specifically on secured collections. And as you can tell, that is actually a smaller part of the overall ERC figure, even more so in the longer run, where our unsecured banking books provide long, steady cash flows originating from millions of customers. As shown, also without any new acquisitions, we expect quarterly collections in the rest of 2020 to be close to the levels seen in Q4 twenty nineteen and Q1 twenty twenty. It's perhaps needless to say that the outlook today is a bit more uncertain than usually, but we've actually seen crisis happen before. Turning to Page 22, we have included a bit of our collection history from the dot com bubble and the financial crisis. And our observation seems to align well with what others in the industry have noted, namely that collections at the peak of the crisis may suffer. We've seen shortfalls of up to 10% on the overall book, but that most of this will be recovered later on. So in other words, it's a delay rather than a reduction in lifetime collections. Now we're, of course, humble about the current challenges to society, and we keep multiple scenarios in mind. But based on our experience, collection will be resilient. That observation ends the financial part, and I hand back to Prasadis for summary and q and a. Thanks, Kristor. When we are looking ahead, and then we are on page 24, I guess, it is always an absolute and a relative gap. Right? We are absolutely not happy with the reported financial performance in this quarter, and we can do better. The Spanish situation is the biggest disappointment. Given the magnitude of the crisis, I am, however, happy to see that we have kept the shop open and that collection remains reasonably resilient as Christopher just described. And relative to competition, I am pleased with our access to funding, and our cost of funding is the lowest in the industry. And in a capital intensive business like ours, this is clearly a strong competitive advantage. We have increased the scope for operational improvements, and the team is working really hard to make sure that we are ready to capture our lion's share of a growing market opportunity. Moving on then to slide number 25, it follows from what we have presented here today that our priorities at the moment are to prepare for what happens when the lockdown now comes to an end. We are determined as ever to reduce our costs, and we have increased the scope. The digital transformation is happening, and we are leading the way. Going digital means better collection strategy, lower costs internally, and, of course, offers a much better service for our customers. And I guess this concludes our presentation and we open up for Q and A. So over to the operator. Thank you. Thank you. Our first question comes from Borja Ramirez from Citi. Please go ahead. Your line is now open. Hello. Good morning. Thank you for your time. I have two quick questions, if I may. Firstly, I I saw in your press release that there is some difference between the collections in the secured and the unsecured NPLs. I would like to to to ask if if you if you could please provide more details. And then secondly, I also found very interesting the outlook that you provided on the on the NPLs. I would like to ask if you could provide more details, like expectations for various markets. Thank you. Alright. Thanks, Lorca, to have you on the call. So the difference between secured and unsecured is is, of course, basically related to litigation. And and, of course, when when courts are are closed in some market, it is really hard to carry out litigation. And so so it's not like it's closed to the whole market. So so but we have a predominant part of of our secured collections. It's in France and and and Italy. There is a delay in secured collections at this point in time. But we we are, you know, not wasting our time. We are preparing for when the courts are opening again. As far as differences between different markets, You know, I I guess it's it's hard to say that Spain has been our most problematic market at this point in time. This is not new to you, and it's not new to us, of course. The corona crisis kinda accentuated to the problems in Spain, but I also see that some of our competitors are are feeling the same issues in in the Spanish markets. In Italy, which I think a lot of people worry about, I think collections have been, you know, pretty strong actually, you know, in the circumstances, at least on our side it has. We we are, you know, very strong in in the same group called Campiali. Cambiali has been upholding in in a good manner. The things that the server that I I I referred to should give you some comfort in terms of what we can expect for the second quarter. So I think we we we do we do hope to see overall that the second quarter can land on in terms of collection performance around 90. So that's something we've worked out into the report, and and that's really what we expect to see for for the quarter. I'm not sure if you want to add something there, Krista, on on secured or unsecured, for instance, or anything else. I think what I can just add is collections in this quarter. So actual collections in q one was actually pretty strong on the secured side, and that's partly a result of a good start to the large portfolio we bought in France. And the the court delays that Gonzalez mentioned, those are something that will come into force more for Q2 and Q3 rather than Q1. Okay. Thank you very much. Thank you. Our next question comes from Ramil Kuria from SEB. Please go ahead. Your line is now open. Thank you. Thank you for taking my questions. I'm going to start off by apologizing. I haven't, as you can probably imagine, heard anything on this call. But just two questions, if I may. Could you please remind me of the dynamics of the SPV in terms of what happens between you and the co investor if yields fall? Let's start off with that, perhaps. Yeah. I guess you're talking about the securitization structure then. So, Kristin, you wanna take that one? Yeah. So as Gonzalez mentioned, our Italian collections have actually held up well and at the levels we're currently observing. There's there's sort of no odd dynamics going on in between the co investor and us. This is this is a scenario which is well in line with what we had anticipated going into this structure. So at this point in time, no concerns, no issues, good collaboration between ourselves and the core investor. Let's assume it it deteriorates then. What what happens, I mean, in terms of subordination as in your as the structure of sort of the yields within that I mean, was it 15% yield on the co investment to tranches? Those are presumably prioritized. Will you, in a scenario where things really go bad, be could you theoretically be zeroed out from the SPE? Perhaps that's an easy way to face it. I don't see that happening in the in the scenarios that we're talking about now. No. Of course, there is there is a Exactly. So so, you know, the the charge is is clear. Right? It's 85%, which is senior, and the 15%, which is mezzanine and junior. Over the 15%, we have a slice that that cuts across vertically, right, in in the mess and the senior. So so I guess from a risk point of view, that that will just follow the trenches in the in the customer, by way. And, of course, the economic upside above the 15% GM that we are paying the investor comes to comes to host. So right now, everything is fine. Everything is intact with the no concerns and and no issues with the securitization structure. Perfect. I can just and I can just add that the the anticipated collections on the portfolios in the securitization structure covers the repayment of the senior and the junior tranche with quite a lot of margin. So, basically, the any realized collection shortfall will be a delay in in repayment rather than a reduction since there's such a big buffer in that structure. That's that's very clear. And I'm sure you've touched upon it in in the call, but the liquidity situation, I mean, is there a rationale behind increasing liquidity despite already being quite sort of having quite a lot of liquidity as is? And then what are you looking to do to potentially mitigate sort of further inflows? That's a very good question. And just as you say, the liquidity level of 9.4% is really more than what we what we need. Clearly, going into this quarter, we had anticipated larger acquisitions than what we have seen, and this has also impacted the liquidity then in a sense. Over time, this is something that we will manage down, and the easiest way to manage this down is to be less attractive on the offered rates on deposits. And we have a lot of experience on how that sort of impact net flows, that will allow us to manage this liquidity down. Perfect. Thank you very much. Thank you. Thank you. There appear to be no further questions. I'll return the conference back to you, speakers. All right. Well, thanks everybody for participating on the call. I appreciate that some of you listened to one of our competitors. So of course, our hearts are broken for that priority, but that's how it is. So I just encourage you to to reach out to us directly if if you if you have further questions or just want to chat about a quarter and the the resolution is available. So with that, I wish you all a great day and goodbye. Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your line.