Earnings Call: Q1 2021

Apr 29, 2021

Thank you, and a very good morning and a warm welcome to this quarterly earnings call. I'm here in Stockholm in our offices with our CFO, Kristin. Good morning. And our Head of Investor Relations on the outs. Good morning. So without further ado, let's then move into the presentation. And let me then start on Page number 4. And almost needless to say, the financials in this quarter is impacted by the consequences of the ongoing pandemic. And as you have seen before and as you know, we have made impairments to the book, primarily in the UK and in Spain. I guess an overarching comment would be that our accumulative Impairment totals now from the beginning of the pandemic until now 2.1%, which I guess this is more or less in line with industry peers. We have also, I guess, seen by now that Our revenues are down due to lower book values compared to the same quarter a year ago, which is, of course, explained by the over transacting volumes in the previous years, and I will revert to that point in a later slide. So as we are now working through the pandemic, we are focusing on the fundamentals and And we have to stay steadfast in our priorities. So first of all, the collection performance remains solid in this quarter coming in at 103%. And there has been a steady improvement compared to The pre COVID curves, actually in this quarter compared to the pre COVID curves, we are at 98% collection performance, which is strong. The digital collections is at an all time high of 24%, more about that in a second. And I guess even perhaps the most important operational news is that we have successfully acquired into the new forward looking securitization structure, which shows that we are leaving regulatory issues behind. And my last comment on this slide is that the market outlook is positive. And this quarter's investments at SEK 760,000,000 is more or less in line and what we have seen for the Q1 historically. Moving then on to Page number 5, I did mention that the collection performance was 103% in the quarter. And the cash generation remains solid too. I would again say it's more or less on par with previous quarters. There is a hike in Q4 and that quarter stands out. That's particularly driven by some secured collections and cash from remediation activities. So that kind of explains the Q4. And having that in mind, I still believe that the cash generation is solid and in line with previous quarters. Next page, Slide 6, a couple of comments on this page. First of all, this is profit before tax adjusted for forward looking impairments and items affecting comparability. So this quarter coming in at SEK120 million, which is actually slightly better than what we saw in Q1 last year, but it's down compared to Q4. Compared with year on year, so 1 year ago, collection performance is significantly better in this quarter, but the volume is lower. So those two effects kind of net each other out. Compared To the Q4, there is a negative deviation of SEK 71,000,000, which is primarily explained by basically FX and certain items affecting net financials in the 4th quarter. It is also an element of lower volumes totaling SEK20 1,000,000. Moving on to the next page, Page 7. I'm not going to stay long on this page. The reason why we include this illustration is just that we see that some people are relating Our comments on litigation processes to secure assets and in reality that's probably the case. So to the left, you see our collection strategies, the Amicable strategy and the Eagle strategy. And as you can see, litigation It's 25% of the total and I guess 90% of legal strategy is basically unsecured. So that is just an illustration to try to explain that litigation is certainly important also for unsecured assets. And also have in mind that litigation processes are important also for amicable strategies for them to be successful. Our customers quite quickly understand whether or not there is a well functioning litigation process in place or not. Moving to Page number 8, I have 2 call outs. First of all, we are pleased with a significant increase in digital collections that we see in this quarter and it's an all time high of 24% run rate towards the end of the quarter. Really happy to see this, of course, The biggest increase in any quarter we have had. And secondly, I think this is very encouraging is that this is the first time Our customers have established more payment plans through our self-service portal than what has been done through the contact center operations. So it really shows that the digital strategy is certainly working. Moving to Page number 9 on contact center operations. Again, a key KPI for us showing the niche showing calls as a share of total in France and Germany. And I'm really pleased with the fact that number of calls taken from Romania now is doing really well and measure as number of calls. More than 50% of all German and French customers now talk to our professional colleagues in Bucharest. Slide number 10 is kind of a snapshot of our secured business line. I'm happy to say that also in this quarter, it is a solid performance in Secured. Collection performance coming in at 104%. If you follow the line in the graph, you now see that the NPL business Share of total collections is above 15%, they're closing in to 20%. And there's been a really good development and really good growth and the book value since our inception into the secured NPL space. On Slide number 11, there are a few key messages to make. So I'll talk to the different sections from left to right. First of all, the supply in 2020 It was quite low. And as I mentioned before, the traded volumes were actually half of the volumes that was traded in 2019, actually down to 2013 levels. So that's kind of to the left. Important to say that most companies in the industry were not able to Acquire up to replacement levels, only 2 of these 8 peers were above replacement value. In the middle there, it is important to get across to you that there is good momentum in the pipeline. There was certainly last year a lot of uncertainty around COVID-nineteen and supply. We now see that the 2020 volume is coming back to market. And the supply that we now see Our pipeline is not at all related to the current pandemic. And moving all the way to the right, I also take I think it's also good to see that there is a number of Opportunities across markets and certainly also across asset classes and we have a strong pipeline, both in unsecured NPLs, secured NPLs and even performing loans. So with that, I leave it for Christer to take us through the financials. So to you, Peter. Good morning. And starting on Page 13, needless to say, The Q1 impairment is an interest setback. Our press release on March 31 mentioned a preliminary number of SEK 350,000,000. That is also where the books closed almost exactly. And this relates to the unsecured book On the secured book and the corresponding Q1 impact was small, SEK 15,000,000. And for the sake of good order, I should mention And that on the secured side, the gross reported numbers are also impacted by timing differences as some assets were sold ahead of plan. That part is excluded here just as it is excluded when we say 103% collection performance. Now adjusting for impairment effects, the underlying profit before tax is SEK 120,000,000. And as Carlos mentioned, the reduction versus previous quarter is primarily due to 2020 investments being below replacement level. As you know, impairments are triggered by changes in projected Future collections, so let's have a look at those changes on Page 14. Clearly, the last 12 months have been difficult to predict, and we've had to adjust our predictions in several steps. Looking at cash collections and loan, Q1 may seem on track, especially comparing to the active forecast. Remember, current cash collection is not necessarily the full picture. Future collections are dependent on current collection activity, not least on legal activities, as Korsandes described. And unfortunately, we see legal work streams Lagging behind plan, especially for a set of portfolios in Spain and the UK. Obviously, COVID and its continued impact on quartz is rather unhelpful in this aspect. So Towards the very end of Q1, we complete an extended assessment of the related portfolios and we concluded to reduce the ERC by 1.4%, and this is illustrated by the Magenta line in the graph. Now with this second step included, the total impact over the last 12 months is around 2%, which is not very different from the peer group. Now let's turn to Page 15 and the reported figures. This is in a sense old news because most items came in as disclosed in the press release a month ago. I see top line income declining on the back of a smaller book. And on the funding side, the quarter was Kind of quiet, but interest expense being flat and net financial transactions being close to 0. On the expense side, we have no items materially affecting comparability. Costs are down year on year, but not by enough. We have more work to do on the cost savings program. And on that note, we have on Page 16 included our standard reporting. Notable progress in Q1 since Q4 includes the renegotiation of software licenses. But rather than go line by line, I'd like to illustrate our current position in a few Selected projects on the next page, Page 17. Starting with near shoring, we now see a majority of German fresh costs being taken to our contact center in Romania, as Kras Andres mentioned. That's very good progress in this activity. And here, of course, the benefits are about making sure that we do not end up with a duplication of staff, But with reasonably high turnover that can be managed as full productivity is established. The activities included in our IT outsourcing, they're almost done. And the 0% benefit may seem surprising, but it's not because this saving is phased in over a long contract with initial benefits coming into 2021. Admin is a much wider topic. And amongst many other things included, this is about making sure we are organized In the best possible way, call it VanHoist. And here the Q1 introduction of business lines, which cut across country borders, Brings a new lens to things. So ultimately, this is about making sure we utilize our resources to the full extent across countries. On digital, our portal is up and running all over the place. And Of course, there is additional functionality on our wish list, but unlocking benefits is not necessarily about that latest and greatest feature. It's about maximizing the use of the portal and about redesigning legacy workflows. And for new portfolios, we have been able to redirect a very significant part of traffic, and this will accumulate over time and free up resources. Turning to funding on Page 19. There is no big news in this quarter. With limited growth and good cash flow, we have trimmed down the amount of funding a bit. We do this by adapting pricing of our deposit offers. That's a flexible way, but it does mean that we reduce volume in one of our cheaper sources So funding, you can actually see the average interest expense to book value inching up. On the other hand, as we return to growth, that growth will be funded with low cost deposits unwinding the same effect. Turning to Page 20. When it comes to capital, obviously, the bigger movement in the quarter is due to the impairment, But I'd like to highlight a less obvious effect, which is very important for the long term. And this is about Capital efficiency, I believe we have conceptually described how the front book will come in at risk weights lower than the back book. This is not something which changes overnight, but as illustrated here for Q1, that effect is real. And the lower risk weight on the front book is a combination of investments into secured assets and investments made into the Magna tower structure. So that's progressing well and will benefit Horst over time. Finally, on Page 21, a snapshot of our capital and liquidity position as per end of March. The CET1 ratio is obviously impacted by the impairment, but not to the extent where it would impact our acquisition activity. The impairment, which also had a skew towards sterling also created a bit of noise on the capital requirement, That is temporary, and we have normalized this graph accordingly. This concludes the financial section of the presentation. And I hand back to Anders for summary comments and questions. Well, thank you, Christer. I only have A brief wrap up today. Cash generation continues to be strong. As we saw on the slides, our cost savings program It's certainly on track. A lot of the costs are taken to launch the different initiatives. Now we are realizing the benefits. Really pleased with our securitization program, which is now forward looking and has really positive benefits as we now are leaving regulatory challenges behind. And last but not least, we do have a promising and strong pipeline. So that concludes our Q1 presentation, and I am we are happy to answer your questions. Over to Q and A. Thank Our first question comes from the line of Ami Karet from Carnegie. Please go ahead. Your line is open. Thank you and thanks for taking the questions. So if we start with the impairment that you brought now in Q1 on the undecurred side, could you just give us a bit more flavor on kind of What happened between the CMT and the end of Q1 that made you take this impairment now? And also What assumptions are underlying in terms of is there any more volumes of risk? Because to my understanding, the U. K. Parts and impairment is because some volumes We'll become Petrobras. So kind of up until which cut off have you taken impairments now and how should we think about that? Yes. Good morning, Harbin. So maybe taking sort of a step back, you will remember that in Q2 2020, we did take an initial impairment on the book, reflecting our expectations for the upcoming periods. I guess looking back, clear that at that point, we were a little bit too optimistic on how things would recover. And that specifically relates to How quickly we would able to get back on track with the legal collection activities. So as we have extended our analysis towards the end of Q1, We have come to realize that the shortfall on these activities will translate or is very likely to translate into Shortfall in future collection and that is what drives the difference on the change in the ERC here triggering this impairment. So in a sense it might feel counterintuitive that collections are on track, but there's still an impairment. It is down to the collection activities that we see being behind plan and that is specifically for the UK and Spain, and it's specifically for the legal activities. The second part of your question, the forward looking piece, I'd say that at this point we've taken into account everything that we can see and expect. But of course there is no guarantee especially in this Very uncertain terrain for how things will develop going forward. But you can't give us a date of Kind of where is the cutoff for volumes that will become such a bar that you have now deemed that not likely that you will be able to collect? That will vary by portfolio by portfolio. And so there is not one specific date Okay. Thank you. Then a different question. In terms of the tax rate now in the quarter, Is there anything there that's impacting us? It's actually makes the kind of The reverse being lower than you would expect based on the results you're actually having. Is that you're having profits in certain countries or is it anything else underlying? That's a good question. So the impairment is primarily related to the U. K. And Spain, as I said. And obviously, we're then loss making in those two countries. They are a bit different though, because in the UK, our underlying profitability is healthy. So we have no doubt that we will return to profitability quickly and hence we will be able to recover Those tax losses, so there is a deferred tax asset being accounted for in the UK. In Spain, given our History, where we've not been so successful, we're a little bit less certain and we have not accounted for any deferred tax assets in Spain in Q1. So the combination of those two items then impacts the total tax position for the group. But I'd say taking a step back, There is nothing that would cause me to expect a very different tax rate for the overall group in the longer term. And as you might remember, we've been hovering around sort of Swedish corporate income tax rates, so 20% to 25% That is also where I would expect us to be going forward. Got it. That's very helpful. Then a question on Slide number 11, when you're showing us the pipeline. Could you just walk me through what those numbers actually stand for there in the middle? Is that portfolio you see up for sale currently But was that still in Q1 or what are you actually trying to show us there? Yes. So That is our own pipeline of course, right. So it's our own internal numbers. So we're just opening up a little bit of what we have internally. So this is at all times the pipeline that we have in our CRM system that we are evaluating, assessing and we are now coming. So I think this pretty much shows by every quarter kind of a forward looking perspective. So what we see now is, of course, a deal flow, which is quite healthy and strong and much better than what we saw in any given quarters during last year. Great. Then one last question was just on the We've raised some acquisitions that you show now for Q1 being at 120%. Is that just because you're not fully up and running with Magna Cart or Where would you expect that to be in, let's say, 6 months when you're doing your acquisitions? Yes. So in Q1, part of our acquisition are secured. So they would come in with risk weight 100,000,000. Part of it is in the Niator structure, Which is also around SEK 100,000,000. And then the last part is acquisitions still being made in other markets. And so if you could say on the on our balance sheet and as before with 150 percent per square foot. So currently you're seeing the blend And for 2021, you should expect that blend to sort of continue. I said probably this is a reasonable assumption. Over time, it should improve then, but that's not going to be overnight as we're currently working to set those structures up. Perfect. That's all for me. Thank you very much. Thank you. Our next question comes from the line of Baira Rabs with Citi. Please go ahead. Your line is open. Hello. Good morning. Thank you very much for your time and for taking my questions. I have a couple of quick questions, if I may. Firstly, thank you. I would like to ask if you could please provide details on the tax rate for 2021. And my second question would be if you could please provide indications on the portfolio acquisitions that you expect for 2021. Thank you. Thank you. So I'll start with the tax rate, and then I'll hand over to Kras Anderson on the second one. So of course, I'd say that maybe one shouldn't read too much into the tax rate for a certain quarter, especially not when the results are A little bit all over the place as of this quarter. But for the long term, you should expect our tax rate to be in line with historical Rates, so that's around the 2025 level. And there's been no sort of changes to the group or anything that would materially Make that a different level. Right. And on acquisition levels, We guided at our Capital Markets Day our acquisitions over the 3 year period, euros 25,000,000,000 to €30,000,000,000 fact, we have not changed our view or perspective on those investment levels. So that is kind of the guiding we have. We previously have done SEK 6,000,000,000 to SEK 8,000,000,000 a year and I wouldn't wouldn't be surprised if that's a number that can will be realized this year. Understood. Very clear. Thank you very much. Thank you. Thank you. Our next question comes from the line of Phil Pella from DeCA Investment. Please go ahead. Your line is open. Hello. This is Phil Pella from DeCA Investment. Can you hear me? Yes, we can. Good morning. Good morning. Great. Thanks for the call. I have two questions. The first question is what is your approach towards shareholder returns or shareholder distributions and will you pay a dividend? And my second question is, do you think you will be able to keep your investment grade rating of your senior bonds Because it's currently Baa3 with a negative outlook. And will you take actions to defend it? Right. Well, thank you. On the dividend policy, we have a dividend policy of We're paying out 25% to 30% of net profit, and that remains in place as was confirmed at our Capital Markets Day. So No news on that one that, that still is in place and will be, of course, subject to Board decisions, but that's what's in place and we will add her to. Christer? Yes. On the second question there with regards to the rating, I think it's important to remember that our financial targets, For example, on the CET1 ratio has been set at the level where we feel comfortable with being able to defend the current rating And those targets have not changed. So we're still sort of operating with that as our guiding star. And the impairment in this sense Doesn't change that. So I would say that we're still yes, go ahead. Can you comment whether you have already spoken to Moody's because of the impairment? We speak with Moody's all the time. So there's a continuous exchange of information and that's not different from previous quarters. Okay. Thanks. Thank you. We have no more questions from the line. I will hand it back to our speakers. All right. Well, thank you all for your time, and I wish you all a great day.