Earnings Call: Q2 2017

Jul 28, 2017

Thank you, thank you everybody for calling in today to our financial report for the second quarter 2017. Can I please have slide number two, please? We continue to show a healthy portfolio growth, which is up 15% seen over the last 12 months. This quarter's investments amounts to nearly SEK 800 million, which corresponds to 55% higher investment levels compared to the same quarter last year. The market keeps developing in line with our expectations. We are engaged in an intensified number of discussions with our banking partners across Europe. Hence, our full year growth outlook remains unchanged. We continue our disciplined investment approach. Thus we can show our investors a strong return on equity of 20% excluding items affecting comparability. This is in line with the first quarter this year. Our EBIT margin is unchanged compared to the second quarter 2016 and came in slightly lower compared to the first quarter 2017. The reasons for the deviation compared to the first quarter this year are related to higher levels of legal activities in Italy and a number of strategic projects which have been running during the quarter. These are short-term investments which will support our growth and profitability in the longer term. Pontus will walk you through the details later on in his presentation. Nevertheless, excluding items affecting comparability in the quarter, we can show a healthy EPS growth of 33% year-on-year. The items affecting comparability were associated with a liability management exercise that we conducted during the quarter. That amounted to SEK 67 million pre-tax. The exercise was the buyback of the older Tier 2 note issued 2013 with a coupon of 12%. We were now able to issue a new EUR 80 million Tier 2 note at a coupon of 3.875%. This exercise was part of our ongoing and long-term work to broaden and diversify our funding base. As a result of this exercise and the work previously done, our rating agency, Moody's, uplifted our credit rating to investment grade. This decision does not only support our long-term growth capabilities through lower funding costs. It definitely also strengthens our brand name. Also, would like to comment on the recruitment process for my successor, which was announced and initiated during the second quarter. As you know, I've been in leading positions in this company for nearly eight years. Together with a brilliant team here at Hoist, we have not only showed an exceptionally strong financial development where we more than doubled our bottom line profits over the last three years. We have also managed to expand across Europe and are now present in 11 jurisdictions. It is my strong belief that this is the right time to find the next CEO who will take our value-driven, well-capitalized debt collection partner to the next level. My aim is to continue our strive towards our vision as deputy chairman and also as a long-term shareholder. I'm happy to take any questions on the recruitment process at the end of this presentation. Talking about shareholding, I also would like to inform you that some members of my management team have expressed their intention to divest part of the shareholdings. These shares were obtained as part of the pre-IPO incentive program set up some four and a half years ago in 2013. The program was put in place to incentivize the hard work leading up to our IPO in 2015. Previously, there's been a large focus when management has sold shares in Hoist Finance, and therefore, and in order to be transparent, we choose to disclose this information to the market. I just want to be clear, however, that I will not be selling any shares. With that, I hand over to Pontus, who will walk through our financials. Thank you, Jörgen. I'm turning to page number four. Our portfolio growth during last 12 months continues to drive a solid growth in revenues. Compared to first half of 2016, total revenues are up 9%. As previously communicated, we expect lower revenues from servicing and our run-off joint venture in Poland over time. This is also reflected in lower other revenues in the quarter. Our core business revenues from acquired loan portfolios continue to show a stable and positive trend over time. Worth mentioning is that the vast majority of our portfolio growth came in late in the quarter and is thus not supporting top line revenues in the second quarter. Turning to Return on Book and profit before tax development on page number five, please. Our underlying Return on Book remains stable and the deviation compared to Q1 is driven by several factors. Firstly, in Q1, we received a performance fee from Bank of Greece, adding 0.4 percentage points to the quarter's ROE. Secondly, our investments in Q2 have been back-end loaded, thus adding to our book value by generating low revenues in the second quarter. Finally, we have also increased our legal collection efforts in Italy to some extent, adding cost to this quarter, but supporting our top line revenues further down the year. Nonetheless, we continue to show a strong underlying profit. Excluding this quarter items affecting comparability amounting to SEK 67 million, our bottom line profits show a solid increase of 37% year-on-year. Worth mentioning is that we've undertaken several strategic projects during the quarter, adding to our central expenses and suppressing our bottom-line profits slightly. To give you some examples, with preparations for the new IFRS standards to be implemented and primarily the IFRS 9 standard. We have also simplified our corporate structure, where we have merged our German subsidiary into a branch of the Swedish parent. Then we have conducted several projects to evaluate and prepare ourselves for expansions into other asset classes. Thus, we have made a number of necessary investments in the quarter, investments that, however, will support both growth and profitability in the longer term. We also continue to apply a disciplined investment strategy and continue our work with operational excellence. This secures our return profile and profit development going forward. Turning to efficiency improvements on page number six, please. The long-term profitability outlook is also reflected in our efficiency, measured as expenses to gross cash collections. Here you can see that our efficiency continues to improve despite higher investments in strategic projects and higher legal collection activities in Italy during the quarter. We continue to invest in digitalization and IT infrastructure that will improve customer experience and enable us to further efficiency improvements down the line. Turning to slide number seven to give you an update on our regions. Let's start with Region West. We show a good portfolio growth of 27%, where U.K. followed by Spain are the main countries adding to the portfolio growth over the last 12 months. Increased collection activities last year are now feeding through in gross cash collections, which are up 22% year-on-year. The increase in collection activities last year are also yielding a lower cost to collect this year. This effect, coupled with our continued work to improve efficiency in the U.K. and France, yields a 12% cost decrease year-on-year. This despite Spain being added as a new jurisdiction throughout this period. As a result of both increased top-line gross cash collections and lower costs, we see a healthy EBIT increase of 25%, which is broadly in line with our portfolio growth over the last 12 months. Also you will notice that our EBIT margin and RoB continues to improve. Both in the U.K. and in Spain, the transaction markets continues to show a healthy pipeline of investment opportunities for the second half of 2017, whereas the French market keeps developing at a slower pace. Moving to Region Mid, slide number eight, please. We have had a strong portfolio growth with 24%, where Italy continues to be the main driver. The main reason for the decrease in EBIT margin and RoB in the second quarter are the increased legal collection activities undertaken in Italy during the quarter, which are activities that will support top-line revenue growth and margins further down the year. The other main reason is a slower performance in our Dutch business during the quarter, whereas same quarter last year, a larger portfolio in the Netherlands was performing very strong. Looking ahead into next quarter and further down the year, we expect returns to recover. Italy is still the main growth driver in the region, and we expect this to continue during second half of 2017, although we are engaged in a number of discussions with our partner banks in the Benelux region as well. Moving on to Region Central East, slide number nine, please. Our portfolio continues to be on a standstill level. Our outlook for the region remains intact as we have seen interesting investment opportunities in both Poland and Germany. In spite of a lower growth, we maintain our margins on good levels as we've accelerated our activities on our back book and continue our work with operational excellence initiatives that continue to pay off. The Return on Book is very strong in the quarter, which is partly an effect of higher than expected collections in Poland. To reiterate, we have discontinued a larger servicing contract in Poland to focus on our core activity. This is seen at the drop in fee and commission income with 70% year-on-year. This, however, only has had a marginal effect on our EBIT. Moving on to our funding structure on page number 10, please. During the quarter, we issued a new subordinated loan of EUR 80 million at a fixed coupon of 3.875%. We also bought back the existing T2 notes with a coupon of 12% and also bought back an older senior note. The transactions are part of our ongoing work to broaden and diversify our funding, and as an effect, Moody's decided to upgrade our rating to investment grade. Looking at our total funding cost in relation to our book value, the ratio has decreased substantially over the last couple of years from a level which is well ahead of where we're running today. Looking at our blended funding cost today, they run at approximately 2%, and this combined with our strong balance sheet makes us well-positioned to continue our growth journey. Before opening for Q&A, we will have a look at our capital ratios and liquidity position on slide number 11, please. Our CET1 ratio is well above those regulatory requirements as well as our own targeted range. The second quarter issue of T2 debt has also increased our total capital ratio to 19.7%. To conclude, our capital ratios together with our strong liquidity position makes us very well-positioned for further growth during the second half of the year and onwards. With this, we would like to open up for Q&A. Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. We have our first question from Ermin Keric of Nordea. Please go ahead. Your line is now open. Good morning, thank you for taking my questions. My first question relates to that you mentioned that you had some increased advisory costs in the quarter related to you exploring to perhaps enter some new asset classes. Could you tell us more about that? Yeah. To give some flavor on the increased expenses, you could probably assume roughly we've had accelerated in the range of SEK 8 million-SEK 10 million from various projects, not only that one. As you know, we have throughout last couple of years been expanding and diversifying our asset coverage, and we've been doing investment both in secure to some extent and also primarily in SME asset in some of the markets. Some of the work we've done has been to ensure that we can continue on that route and also expand that into more jurisdictions than we're currently doing, which looking back, it's been primarily in the Italian markets where we've done this, but we do see these opportunities across a number of jurisdictions in Europe today. Okay, thank you. That's helpful. Also, you showed your improving operational efficiency, and you had quite a strong trend there. How should we think about it more medium and long term? Which level do you think might be achievable? Our medium-term target in terms of operational efficiency, necessarily not expressed in the way as here has, of course, been around our EBIT margin target of 40%, which we have not yet reached, but I think you should still think of us being able to run towards such a level, which means that looking at total cost to cash collections, they should continue to trend down a few percentage point to us to get to that level. Of course, it's a sensitive metric, which I'm sure that you all have noticed now from the first quarter EBIT margin that we posted to this quarter where, of course, accelerating a little bit spending on these strategic projects, et cetera, has quite some impact on the numbers. It's on a quarterly basis, it can be volatile. We stay committed, of course, to that financial target. Okay, great. A final question, if I may. On the capital, you're still, I think, 0.7 percentage points above your target interval. How should we think about this going forward? Is this something you intend to simply grow into by investing more rapidly in the future, or how should we think about it? Exactly as you expected, this is Jörgen here, as you expected at the end there. We of course want to be prepared from a capital liquidity perspective before we grasp the opportunities rather than after that. To hand in a bid of a huge portfolio subject to financing is not a strong competitive standpoint. The only reason, and this is not unusual in our growth story if you look back five years as well. We prepare our balance sheet first in order to capture the possibility that comes out in the market. Of course, our aspiration is to grow into this with optimized capital and liquidity levels. I understand that you of course want to have some room to seize growth opportunities when you see them, isn't the interval also already taking this into account? There is a base scenario, if you may call it like that, which is the market consensus and which we have confirmed, and that we believe that is a realistic scenario. Everybody of you that looking into the banking sector, you also know that that come up huge transactions, and if you want to be a winner for the future, you should be able to capture those transactions. That is actually the recipe that we've been used historically as an important factor of our growth success. Remember that just as one example, at the end of 2011, for 19 years, we had acquired for EUR 40 million per year. We were prepared to acquire for more than a couple of hundred million at that time, which of course many of them hesitated. The year after 2012, we did acquire for more than EUR 200 million. You need to have a base case, you need to be prepared for larger complex transactions, portfolios coming up on the banks today in the pipeline are larger and more complex. We feel that it's necessary and smart to be prepared for such possible developments. I see. Thank you. That's all from me. Thank you very much. Thank you. Our next question comes from the line of Mats Lidell of Nordea. Please go ahead. Your line is now open. Good morning. Just one follow-up then to Ermin's questions. In terms of the net financial items, it was, I don't know if I should say it was strong, but it was better than expected. Even if I take out the SEK 67 million related to the refinancing and these SEK 5 million-SEK 6 million from the bond portfolio gains, are there any other one-time items in the net financial items that I can see as one-offs? It seems a little bit strong to me. There is no other items. It's the bond buyback which is split between interest line and the net financial item line. Then you got the mark-to-market effects that in this quarter were positive. Okay. Yeah. That's all from me. Thank you. Thank you. Our next question comes from the line of Rickard Hellman of Nordea Credit Research. Please go ahead. Your line is open. Thank you. Two questions. First is regarding the cash flow. I note that you lower your operational cash flow and that's much due to other non-cash items. Could you please give some color on that one? Secondly, I wanted to hear your investments. If it has been a lot of small portfolios that are acquired or if it has been some bigger. On the operational cash flow side, these are flows that relates to our hedging arrangements with the banks then where we will either pay out or receive on these, primarily on the currency hedges. Talking about the investments, I'd say that it's concentrated in larger portfolios, but partly what Jörgen was mentioning earlier on, I think the trend and the tendency that we've seen through the years is that the average ticket sizes on these transactions, they tend to come up. As you've noted, we've done quite a lot of our investments in the Italian and the U.K. market, which typically are larger size portfolios. Okay. Thank you. Thank you. Our next question comes from the line of Adedapo Oguntade of Morgan Stanley. Please go ahead. Your line is now open. Yes, good morning. Thanks for taking my question. Just wanted to get some comments on pretty much your strong portfolio acquisition in the quarter, particularly with respect to the business environment in the U.K., what you are seeing there, and what you expect for the rest of the year. Also if you could just give an indication of maybe the average gross money multiple on the acquisitions you've made thus far, and maybe also some color on the nature of the portfolios you've acquired. Thanks. If I start, then I hand over to Pontus. We actually see a continuous strong development across all our jurisdictions, and that means in practical terms that we have an even strong pipeline in all our jurisdictions. As you all know, it's black and white whether you get the deal or not deal. It's hard to predict which regions that will be the strongest performer in the second half of 2017. We are happy to confirm then that the demand of the pipeline is quite evenly distributed across all our regions for the remainder of the year. Pontus? Yeah. In terms of money multiples, I guess you could say that we've seen those coming down through the years. Not necessarily as a function of price per se, but more as a function of the paper that's being sold. We're moving in a direction of buying fresher claims, i.e. higher quality. Which of course also has an impact on the cost associated with collecting on these. As you've noted, we've had a strong growth in the U.K. market, which is by far the most mature market in Europe. As you also saw probably, our cost in absolute terms were down year-on-year, which gives a good kind of indication that we're able to take on quite a lot of volume without adding substantially to the cost side. I think you should see the money multiple in that context. Thanks. Just a follow-up on the U.K. In terms of the strong growth you are seeing there, is it as a result of overall markets good, or are you capturing additional market share? I'd say that we're probably capturing a little bit market share. We've been operating now for six years in the U.K. market, we've expanded in the market in various ways, both as a combination of M&A activity, also clearly the last two, three years organically, we've moved our position forward there. Right. Thank you. Thank you. Our next question comes from the line of Arun Bilmani of Macquarie. Please go ahead. Your line is now open. Morning, gentlemen. I had two. If you take it in parts, that would be helpful. I think one was on the Return on Book. We're seeing that sort of trend down a little bit to 10, and you sort of highlighted Italy and other costs in the period that would do that. My question was on outlook. What kind of paper are you seeing come out in the market, and what is the expectation for the Return on Book? How is that being affected by competition and other sort of metrics in the market? Our expectations on the Return on Book, as we've communicated previously as well, is that we believe that we're going to be able to run on these type of levels. It's been in the range of 10%-11% throughout the years now. Which is of course a combination by us improving efficiency, improving our collections on the back book coupled with being able to take on new assets kind of defending that type of levels. We stand firm with that kind of guidance. All right. If you just talk about Return on Book in terms of Italy, what is the metric you're getting there? Is it higher or lower than your average back book? If you look at Italy over, again, let's take a five-year kind of look back when we entered the Italian market. We have certainly seen if you look at unlevered investment or IRRs. They've been trending downwards in Italy. In that context, yes, we've been replacing the front book is coming at lower unlevered returns. That's one side of this equation. Of course, in the same five years, our funding costs have come down substantially, and they're currently running at 2% roughly. Of course, this is not only for us, this is for the industry in general. Kind of looking at levered returns in general and specifically also in the Italian market, they've been sustained at good levels. Is that higher than the 10%, I would assume? As we communicated, I think the setback that we saw in the Region Mid, which is not only Italy. As I mentioned also, we saw some weaker or slower performance in some of our Dutch portfolios and kind of coupled with where we were last year, we had very strong performance there. We expect to be able to recover, again, towards the 10% mark there, which is improving at a substantial point there. Brilliant. I think the other one I had was on management sale of stock. I just wondered whether you were able to quantify what that looked like today. Second one was on succession. Are you looking for an external or internal sort of candidate or both? How important is it that they have some experience in the debt collection markets? Thank you. First of all, I don't have any more comments than what I've said about the management sale. Some members of my management team have expressed their intention to sell. There's no more to comment on that. Secondly, the succession plan. That is quite easy. It's to find the best candidate. I'm in no hurry whatsoever. I'm in very good shape and so is the company. I have a long-term holding and engagement in this company. This is my life's dream. This is my vision. Any replacement will not be done until we find the right candidate. If that takes 6, 12 or 18 months or whatever it takes, I don't have any problem with that whatsoever. We're doing a traditional recruitment process, both internally and externally, in order to find the best candidate. Right. Does it matter if they have experience in the debt collection industry or not? Do you see that as important for succession? It's many factors that you take in when you're looking for a CEO candidate. Of course, that is one factor. I won't say that it's the most important factor. Attitude is always the most important factor. There are many factors that we take into consideration in this process. Thank you so much for taking my questions. Thank you. Our next question comes from the line of Viktor Lindeberg of Carnegie. Please go ahead. Your line is now open. Thanks. Morning. Looking at your capitalization, and I think this was touched upon in a previous question, but you have a very strong capitalization. Would you consider not only higher level of NPL investments but also corporate acquisitions? We know for a fact that one of your closest peers in the Nordics is about to divest parts of their business within the coming six months. Could or would this be of interest for you as a new market for Hoist? Thank you, Viktor. You know me since many years, Viktor, and you know that I always do have high aspirations for not only the next year, but the years after that, et cetera. Of course, I want to be prepared beforehand, and that's part of my comment before on the balance sheet. I want to be prepared when big opportunities come, and I do have a very positive outlook for the coming years. We do not only have a natural interest, we also feel that it's an obligation to look at all and every transaction that is out on the market, whether that is organic portfolio opportunities or if it is M&A opportunities. You also know that M&A opportunities is typically not Hoist Finance sweet spot activities, since many M&A opportunities comes with a huge goodwill and goodwill knocks off our capital base as a financial institution. You also know that I see that as a very good thing because that helps you to keep your common sense in place, because goodwill is what goodwill is. We also see that many M&A transactions comes at levels where we believe, to be honest, are insane levels. What we are, of course, looking into and do participate in all transactions that we see, we will also look into the Intrum Lindorff transaction, yes. All right, thanks. A follow-up on the French comment you had. I think, Pontus, you mentioned that it was a bit slow now. Going back a few quarters, you mentioned the market heating up a bit. What is happening in the French market? Can you provide some more details on that? Yeah. It's heating up to some extent, we've seen a slower pace in that market. To come back to our initiatives in terms of strategic projects and spending, of course, heating up in the sense that this is one of the markets where we're trying to diversify ourselves into a broader coverage of asset classes and so on. We've seen a bit less opportunities now in the first half of the year if you look at unsecured core consumer claims there. Okay. That's undertaking initiatives to expand and broaden our coverage and understanding into other asset classes. All right. One final question from my side. Looking at Italy and now you take some extra investment to boost and improve collections going forward, is this something done on top of your existing initial estimate that you made with the acquisitions of those assets? So it should, maybe we can say, lead to an outperformance, or is this a necessary action to take in order to defend the portfolio value? No, as I said, it's actions that we're undertaking to build stronger collections, expecting them to come stronger than the current forecast in the future. I think it's like we've accelerated some of that activity during the quarter, which is not really reflected in us taking a view on the collections in the coming quarter and the coming year at this stage then. That will be of course part of the exercises when we'll run through our revaluation exercises, et cetera. Okay. It's not to defend any kind of recoveries there. It's rather to build that. You can probably say that we've done legal collection activities in the Italian market throughout the year, but at a fairly slow pace then. Yeah. One thing that popped into mind now was when you comment on that is outperformance. You have vintages that they are a bit aged now. How do you see those develop versus your initial expectations? I know you have provided from time to another one aggregate that timeline with collections being bang in line with your elements. Some of your peers are experiencing quite good outperformance on their vintages. Why are you not experiencing that type of outperformance given that you also budget for 10 years of duration only on your portfolios relative to 15 years for some of the other guys? No, we are experiencing that as well. I think if you would look at the old kind of graphs we have been given in the past that say that it is probably expanding a little bit in favor. Rather than running at 100, it probably cumulative runs a bit stronger now. This is quite broad. I would say that most of our jurisdictions are running a bit ahead of expectations in terms of core cash collection performance. Okay, thanks. Thank you. May I remind everyone that if you wish to ask a question, please press 01 on your telephone keypad. There are no further questions at this time. Please go ahead, speakers. Thank you very much for that, and thank you for everybody that called in and for the questions. I look very much forward, not only to our Q3, but also to see you again when we report our Q3 in October. Thank you very much.