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Edited Transcript of DDM.ST earnings conference call or presentation 1-Aug-19 8:00am GMT

Q2 2019 DDM Holding AG Earnings Call

BAAR Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of DDM Holding AG earnings conference call or presentation Thursday, August 1, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fredrik Olsson

DDM Debt AB (publ) - CFO

* Henrik Wennerholm

DDM Debt AB (publ) - CEO

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Presentation

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Operator [1]

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Welcome to the DDM Holding Q2 Report 2019. (Operator Instructions). Just to remind you, this conference call is being recorded.

Today I'm pleased to present CEO, Henrik Wennerholm; and CFO, Fredrik Olsson. Please begin your meeting.

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Henrik Wennerholm, DDM Debt AB (publ) - CEO [2]

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Good morning, and thank you very much for joining our Q2 and half year report. We drag you out of the sun, but thank you very much for joining.

And I'd like to start on Page 3, which has been -- and just take you through the key highlights here of Q2 and up until to date here, where it has been a very eventful quarter and a significant step forward in our growth strategy as a specialized investor in nonperforming loans and also a buildup of our internal servicing capacity, the strategic shift that we started last year.

During the second quarter of '19, we achieved adjusted net collection of EUR 14.2 million, while the same period last year was EUR 15.5 million, which represents a slight decrease, which is due mainly because of the nature of a larger portion of secured portfolios, where the variability is higher.

However, if we look at the long-term trend and compare the last 12 months, compared to, for example, the last financial year 2018, we were at EUR 73 million net adjusted collection compared to EUR 66 million, which represents a healthy increase of 11%.

Naturally, the last 12 months' cash EBITDA has increased at the same pace, roughly at 9% from EUR 58 million for financial year '18 to EUR 63 million for the last 12 months.

During the quarter, which I mentioned was very eventful, we closed the joint venture transaction with B2Holding in Croatia. Further, on the back of this transaction, we secured another transaction in Croatia, which I will let you more -- explain a little bit more.

We also continue here post the quarter with buying out our coinvestor in Greece. The quarter has been including quite a lot of successful refinancing, which has also continued after the quarter. We had our AGM in June, according to plan, and the public cash offer went unaffected during the quarter.

If we turn the page to Slide 4, I'll take you through the key developments there on -- during the quarter. As I mentioned there, we finalized the acquisition in May of a large distressed asset portfolio with secured corporate receivables in Croatia, together with B2Holding. It's a joint venture partnership, where DDM controls 50%.

The sale of this transaction has helped the asset resolution, which is the nationalized Austrian bad bank. As mentioned, the first closing was end of April, and the second and final closing was end of May. During the quarter -- and we are still working with onboarding this very large portfolio, together with the B2Holding and testing the organization for this.

We have received preliminary share of net profits from the joint venture of roughly EUR 0.5 million. Further, we have in Croatia a final agreement to acquire another large distressed asset portfolio, where the gross collection value, i.e., the face value is roughly EUR 200 million. Please do not mix up this with purchase price or ERC. This is the notional value of the portfolio, which is EUR 200 million. This transaction is pending regulatory approvals. And we are -- we believe this one will close during Q3 '19.

As a result of the acquisitions conducted year-to-date and end of second quarter, the ERC has increased roughly 18% to EUR 284 million. And the proportion of secured portfolios has increased a lot. We are currently at 71% of ERC.

We have, during the quarter, secured a revolving credit facility of EUR 27 million, which is currently, as per end of -- as per 30th of June, undrawn. In addition to the undrawn amount of EUR 27 (sic) [EUR 27 million], we have cash at hand of EUR 17 million. Further, we issued a -- and replaced the existing senior secured EUR 85 million bond with a new EUR 100 million bond priced at 925.

As mentioned, our main shareholder, formerly Demeter Finance, increased its shareholding via the cash offer at SEK 40 per share and was unconditional and paid off the shareholders and currently controls 79.2%. For us, it's no change. We are still listed and will continue to be so and continue to work as a publicly listed company.

We have the AGM down at Zug in June where Torgny Hellström, the current Chairman was reelected as Chairman; and Fredrik Waker, who was an [independent] Board member was replaced by Joachim Cato. Fredrik Waker went on in his career and is doing other Board member work.

If we turn page to Slide 5, I'd like to take you through -- I mentioned the Q2 was very eventful so has the time after Q2 been. And since the quarter end, we have just recently disclosed, mid of July, that together with B2Holding in Croatia in the joint venture, we have secured third-party financing to partially fund the joint venture.

Our share of the financing received is roughly EUR 35 million. The term of this financing follows the amortization schedule of the cash flow. The interest rate is -- we're guiding that it is more efficient than the existing senior secured bond framework.

We're happy to announce that it's been a very, very solid due diligence exercise on this transaction, which basically confirms the portfolio quality. The proceeds from the financing will be used to fund future acquisitions.

Further, just a couple of days ago, we announced that in Greece, we have bought-out our coinvestor and paid-out roughly EUR 20 million. We have also continued with our refinancing activities, where DDM Finance AB, a daughter company to DDM Holding AG, has refinanced a EUR 12 million senior secured bond. And in addition, the terms and conditions have been changed, and we have increased the bond with EUR 6 million. This -- these proceeds, net of financing and transaction costs, are being used as equity in the secured bond group, DDM Debt AB.

Further, I'm happy to announce that we have strengthened our senior executive management team substantially by having Bernard Engel to join DDM. Bernard is coming from PwC in Austria, where he's been heading up the Financial Services and Deals Leader team. He has more than 15 years of experience in our sector, and he's been advising on a substantial amount of the transaction conducted in CEE area.

He's joining as per the 1st of October, and he will head up the servicing venture that we are focusing on. As I mentioned, with our strategic shift during last year, we are intensifying our efforts on building our captive servicing capability, which we have together, through a partnership, with 720 portfolio management. This -- Bernard will join 1st of October and will head up this function.

So please turn page to Slide 6, where we summarize the adjusted net collections by quarter. As you can see, we were at EUR 14 million for Q2 compared with EUR 15 million roughly for '18. As mentioned, the majority -- the reason for this is that the portion of secured assets, which is part of the strategic shift, has increased, gone from 61% to 71%. And clearly, as a natural consequence, the variability of the cash flow will continue to be volatile and continue to increase.

We have guided on this throughout the year. That's also why we have revoked our guidance because these cash flows can either happen in Q1 or Q2, or in this case, perhaps in Q3. However, if we compare last 12 months' collections, and if you look at the long-term trend, the trend is still very healthy, where I mentioned, we have roughly an 11% increase last 12 months compared to financial year 2018.

Let's turn the slide to -- from page to Slide 7, where you will see our ERC. And those who follow us know that the ERC is our estimated remaining collections, which basically refers to future projected cash collections from our acquired portfolios. We increased from by year-end EUR 240 million to EUR 284 million as per end of Q2, which represents an 18% increase.

On the lower right-hand side, you can see that roughly 74% of this is scheduled to arrive within the next 3 years. The reason for that increase, it was previously 71%, is actually that -- sorry, it was actually 66%. We're now at 74%. The reason for that is that on the top [part], you will see that the portion of secured asset has gone from 61% to 71%. So clearly, it's more focused and shorter weighted average lifetime of secured portfolios compared to unsecured portfolios.

So I will, by that, hand over to Fredrik, who will take us more through the details on the financial performance for the second quarter.

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Fredrik Olsson, DDM Debt AB (publ) - CFO [3]

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Thanks, Henrik. Please turn to Slide 9. And I would like to start here with some of the financial KPIs for the second quarter of 2019.

Adjusted net collections for the quarter, including collections from the JV in Croatia, amounted to EUR 14.2 million, a decrease of 8% compared to Q2 2018, primarily due to weaker performance in Greece and as a result of the volatility quarter-on-quarter in collections on the secured corporate portfolios. Net collections totaled EUR 33.1 million in H1 '19, an increase of 27% compared to 1 year ago.

Adjusted cash EBITDA amounted to EUR 11 million in Q2 '19 and 27.8% in the first half of '19, 24% above H1 2018 as a result of the higher net collections but partially offset by higher operating expenses.

The adjusted net results for Q2 and the first half of 2019 was a loss of EUR 1.5 million. If adjusting for the nonrecurring EUR 2.6 million of expenses relating to the bond refinancing during the quarter, we're up EUR 2 million related to the call premium and EUR 0.6 million for the noncash write-off of the remaining unamortized transaction costs.

Higher amortization on large, complex cases that were settled earlier than expecting related to corporate portfolios and higher operating expenses due to accelerated growth also weighed on the results.

Please turn to Slide 10. This slide shows the movement in adjusted net collections by country for the first half of 2019 compared to first half of 2018. Net collections increased by 26%, driven by significant settlements relating to corporate secured portfolios in the Balkans acquired in 2018 due to the sale of the Russian portfolios in Q1 '19 and the EUR 1.4 million of collections from the JV in Croatia. These increases were partially offset by the decrease of EUR 4.1 million in collections in Greece, due to significant collections that were received in the prior period and weaker performance in H1 '19.

Please turn to Slide 11. Let's have a look at some of our financial KPIs for the last 12 months. Cash -- adjusted cash EBITDA was EUR 63 million, mainly driven by the increase in net collections, as previously mentioned, from secured corporate and consumer portfolios acquired in '18. The adjusted net result was a profit of EUR 2.3 million compared to profit EUR 5.8 million for 2018, after adjusting for the EUR 2.6 million previously mentioned relating to the bond refinancing and EUR 1 million in Q3 '18.

Our total assets were EUR 197 million at the end of June this year, of which EUR 17 million was held in cash. Equity amounted to EUR 31.8 million at the end of Q2, with an equity ratio of 16.1%. Please note that the equity ratio in the bond group was 18.6% at the end of Q2, and as I say -- and will increase further following the issuance of the EUR 6 million bonds by DDM Finance AB announced yesterday.

Part of the net proceeds from this refinancing and increase of the bond will be used as a shareholder loan to the DDM Debt bond group, which thereby qualifies as equity under the existing senior secured bond framework.

Our operating margin was approximately 66% due to higher collection, partially offset by higher amortization on corporate secured portfolios. Our LTV ratio, which is the ratio of net debt to ERC, has increased to 49% following the recent acquisition in Croatia.

Please turn to Slide 12. This slide shows our balance sheet structure at the 30th of June 2019, with a total asset value of approximately EUR 197 million, broadly in line with the end of 2018. The main movements compared to the end of 2018 are an increase of the portfolio value to EUR 163 million, following investments of EUR 66 million into the joint venture, together with B2Holding in Croatia, and a corresponding decrease of the cash balance.

Please note that the RCF was undrawn at the end of Q2, but is expected to be utilized in Q3, following the buyout of the coinvestor in Greece and the new acquisition in Croatia that Henrik previously mentioned. In addition, the EUR 85 million bond that was successfully refinanced in April 2019 by issuing the new EUR 100 million bond with a 3-year period and thereby also slightly increasing the amount of long-term loans on the balance sheet.

Please turn to Slide 13, which shows the portfolio carrying value and the level of impairments and revaluation as a percentage of the opening book valued by quarter. The total portfolio investment value has increased significantly over the last 2 financial years, in particularly following the recent investments in the joint venture and stands now at EUR 163 million at the end of Q2.

Whilst the absolute value of impairment and revaluation have totaled EUR 0.6 million for the first half of '19 or EUR 3.4 million for the last 12 months, the relative percentage of the opening book has remained at the same level during the last 2 years.

And with that, I would like to hand over back to Henrik.

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Henrik Wennerholm, DDM Debt AB (publ) - CEO [4]

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Perfect. Thank you, Fredrik. So let's go to Slide 15 to summarize the key takeaways for the quarter.

As mentioned, we made this milestone acquisition, together with B2 in Croatia with a 50-50 joint venture. First closing, April; second and final closing in May. And after the quarter, we secured third-party financing of roughly EUR 35 million, also proving the quality of the acquired portfolios.

Further, we have signed an agreement to acquire significant distressed asset portfolio in Croatia with a gross collection value of roughly EUR 200 (sic) [EUR 200 million], which is currently pending regulatory approvals, which is expected to close during Q3.

As mentioned here throughout, we have spent a lot of time on successfully refinancing both DDM Finance and DDM Debt AB, the secured bond group, as well as extending the bond issuances.

Further, very happy to announce Bernard Engel, who will become the managing partner and responsible for the servicing activities we are pursuing and will be a tremendous increased focus on portfolio management, business development and adjacent services to DDM's captive servicing but also to third-party portfolios -- from third-party owners and business advisory services.

Finally DDM Group Finance formerly Demeter Finance, the previous -- the current large shareholder concluded show -- public to private transaction, which I referred to. They currently stand at 79.2%. As mentioned before, this is as usual for us.

And by that, I like to conclude the presentation, and we hand over to the operator again. Thank you.

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Operator [5]

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(Operator Instructions). Okay. There seems to be no questions coming through. So I hand back to our speakers for the closing comments.

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Henrik Wennerholm, DDM Debt AB (publ) - CEO [6]

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Okay. No, by then I think we'll conclude and let the audience go back to the sun and enjoy some well-deserved vacation. Thank you very much.