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Edited Transcript of DDM.ST earnings conference call or presentation 20-Feb-20 9:00am GMT

Q4 2019 DDM Holding AG Earnings Call

BAAR Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of DDM Holding AG earnings conference call or presentation Thursday, February 20, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fredrik Olsson

DDM Holding AG - CFO

* Henrik Wennerholm

DDM Holding AG - CEO

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Conference Call Participants

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* Erik Borthen;Arctic Securities;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the DDM Holding Q4 Report 2019. (Operator Instructions) Just to remind you, this conference call is being recorded.

Today, I am pleased to present the CEO, Henrik Wennerholm; and the CFO, Fredrik Olsson. Please go ahead, sir, with your meeting.

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Henrik Wennerholm, DDM Holding AG - CEO [2]

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Thank you, operator. Good morning, everybody. This is Henrik Wennerholm, CEO of DDM, talking. Thank you all for joining the call in this Q4 and full year presentation for 2019.

2019 has been an eventful year with a large transformation within DDM as we continue to gradually move from an outsourced investor into nonperforming consumer portfolios into a secured investor into corporate workout portfolios. We made significant investments during the year in excess of EUR 100 million across our core markets. Already started during '18, we launched a servicing platform, which we have built during 2019 as well.

Please turn to Slide 3 for the key highlights for 2019. We have achieved strong adjusted net collections for the full year '19, standing at EUR 65 million compared to roughly EUR 66 million, which was a rough -- a record year in '18. It's principally in line. The majority of the collections principally were received from our secured corporate portfolios in our key investing markets in the Balkans and in Greece. As a result of the net collections, our adjusted cash EBITDA totaled roughly EUR 53 million for the full year. It's [an inch] lower than 2018, which is due to the start-up costs associated with the launch of the servicing platform. And it's also due to the consolidation of the Hungarian operations and increased activities within business development.

In light of the EUR 100 million investment, which is a net investment figure, we have grown the ERC, which is our Expected Remaining Collection, by 37% to roughly EUR 328 million. Most importantly, the composition of the portfolio has changed dramatically, where roughly 75% now is expected to be collected during the next 3 years.

Please turn to Slide 4. During the year, we -- as mentioned, we made a record year when we scored EUR 100 million worth of net investments. If you -- the largest investment was done in Croatia during the spring where we closed a 50-50 joint venture with our colleagues in the market, the Norwegian-based B2Holding. It was a distressed asset portfolio from HETA asset management with secured corporate receivables with a GCV, gross collection value/face value, amounting to roughly EUR 800 million.

Following this acquisition, we secured a third-party financing to partially fund the joint venture acquisition. DDM's share of the gross proceeds was roughly EUR 35 million. So if you add that to the top -- on the existing EUR 100 million net investment, you come up that the team has underwritten roughly EUR 135 million worth of investment during the year. The financing of the joint venture is at a lower cost of borrowing than the existing financing arrangements DDM has. The extensive due diligence by the financing provider also confirms the quality of the portfolio.

Further, during the year, we bought out our co-investor for roughly EUR 20 million in our Greek portfolio. We see a large value in the Greek portfolio. Further, during September, we closed a significant acquisition, also in Croatia, of a distressed asset portfolio, primarily with corporate secured assets with a gross collection value/face value of roughly EUR 200 million.

If we look at what we did on the financing side, we -- in March, we secured a new revolving credit facility from a large international bank of EUR 27 million, priced at 350 basis points. We then -- to refinance the old existing EUR 85 million bond by issuing a new EUR 100 million bond during April. It's a 3-year term. Further, we -- in July, we strengthened the equity of the bond group where we replaced the EUR 12 million bond with an EUR 18 million bond. The EUR 27 million RCF, as per the end of December '19, was undrawn, and we had roughly EUR 12 million at hand, giving us an investment capacity, liquidity at the end of the year of roughly EUR 40 million.

Further, as I mentioned, during the end of '18, beginning of '19, we launched our servicing platform with the intention to increase focus on the portfolio management and the business development services. Primarily, as we have grown from an outsourced unsecured consumer investor into a focused niche investment into corporate workouts where we have a need for a more committed servicer, the intention is that the business shall gradually provide third-party workout services and adjacent professional services to DDM. As a consequence, we have decided to sell the platform to AxFina which has resulted in a slight gain. And the reason for this, to separate, is that we'd further like to professionalize, enabling the servicing platform to take on third-party servicing outside of the DDM area as well. Bernard Engel was hired during the end of the year to head up this venture.

Further, since the year-end, DDM Debt AB has initiated a written procedure to request certain amendments of the EUR 150 million bond's terms and condition. Reason for that is that we have a very concentrated shareholding, where the 10 largest shareholders roughly control in excess of 98% of the share capital. The number of shareholders on the back of the bid which was launched during the year is less than 100.

Please turn to Slide 5, which highlights our adjusted net collections. For the fourth year -- quarter, we came in roughly at EUR 16 million. The seasonality, there will be -- we will continue to have variety in our collections as the composition of the portfolio is growing into more and more secured assets. Clearly, both the investments and the cash collections will be more chunkier, which also can be seen where Croatia came in at 33% of the collection during the year, closely followed by Greece. If you look at the carrying value, Croatia has a large portion of our total book. So this is going to continue to vary as we go forward. Roughly 70% of the adjusted net collections relates to secured corporate portfolios.

Please turn the page to Slide 6, which displays our DDM ERC, Estimated Remaining Collection, i.e., cash flow. As can be seen on the left-hand side, we -- at the end of '18, we were at EUR 240 million. And at the end of '19, following the EUR 100 million investments, net investments, we currently stand at roughly EUR 328 million.

On the bottom hand right -- on the bottom, on the right-hand side, you can see that 75% of this cash flow is expected to come in within the next 3 years. That clearly deviates us from several of our competitors in our region. If you look at the top-right hand, you will see that roughly 39% used to be unsecured while it's gone down to 30% unsecured at the end of '19, and 70% of the gross collection or EUR 328 million comes from secured portfolios.

I will hand over to CFO, Fredrik, who will take us through the financials.

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Fredrik Olsson, DDM Holding AG - CFO [3]

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Thank you, Henrik. Please turn to Slide 8. I'll start with some of the financial KPIs for the fourth quarter of 2019.

The adjusted net collections for the quarter, including collections from the JV in Croatia amounted to EUR 15.7 million, a decrease of about 31% compared to Q4 2018. 2018 was, let's say, significant collections coming out of Greece, and that's one of the reasons for this deviation. However, net collections totaled 65.4% for the full year 2019, in line with the record collections for the full year of '18.

Principal still continued to be, let's say, significant portions of the collections from the corporate secured portfolios in the Balkans and Greece, our biggest markets. It also includes a EUR 2.5 million gain on the sale of the previously acquired consumer portfolio in Croatia during the fourth quarter and a EUR 1.9 million gain when we sold and exited Russia earlier in the year. A total of EUR 3.8 million collections have been received during the year from the joint venture with B2 in Croatia.

Adjusted cash EBITDA amounted to EUR 11.9 million in Q4 '19 and EUR 52.7 million for the full year, 9% lower than the full year of '18 as a result of the higher operating expenses due to accelerated growth. The net result for Q4 was a profit of EUR 1.5 million, including a gain of EUR 1.1 million relating to the sale of the servicing platform to AxFina, as previously mentioned by Henrik.

The adjusted net result for the full year '19 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 second quarter. Higher amortization on corporate secured portfolios and higher operating expenses due to the accelerated growth weighed on the results during the period.

Please turn to the next slide. This slide shows the movement in adjusted net collections by country for the full year '19 compared to previous year. As previously stated, net collections totaled EUR 65.4 million for the full year '19, in line with the prior year of EUR 65.7 million. This was driven by significant settlements relating to corporate secured portfolios in the Balkans; EUR 3.8 million from the JV in Croatia; EUR 2.5 million, as previously mentioned, relating to consumer -- the sold consumer portfolio; EUR 1.9 million relating to Russia. These increases were partially offset by the decreases of EUR 3.2 million of collections in the Czech Republic, following the runoff of the consumer portfolio previously acquired in -- last part acquired in '17; a decrease of EUR 2.2 million of collections in Slovenia; and EUR 1.8 million in Greece due to strong collections received in Q4 '18.

Please turn to next slide. Adjusted net collections, as previously stated, let's say, totaled EUR 65.4 million for the full year versus the EUR 65.7 million, once again driven by the collections from secured corporate portfolios in the Balkans and Greece. Adjusted cash EBITDA, EUR 52.7 million for the full year or 9% lower than '18. Total assets were EUR 204 million at the end of December '19, of which approximately EUR 12 million is held in cash, and we have the remaining undrawn RCF available of EUR 27 million at the end of the year, hence total EUR 39 million available to draw.

Equity amounted to EUR 31.7 million at the end of December with an equity ratio of 15.5%. However, please note that the equity ratio in the bond group is 21.1% as at 31st of December '19. Our operating margin was approximately 55% due to the higher collections, partially offset by higher amortization on corporate secured portfolios and the higher operating expenses. Our LTV ratio, which is the ratio of net debt to ERC, has increased to 46%, following approximately EUR 100 million of net acquisitions during 2019.

Please turn to Slide 11, which shows the P&L quarter-on-quarter and year-on-year. And there are a few things to highlight in addition to, let's say, the collections that we discussed previously. The operating expenses increased EUR 1.5 million in Q4 and EUR 4 million for the full year in '19 compared to the corresponding periods. This is due to, as Henrik also did -- already brought up, these business development services, brokerage fees, and we have start-up costs incurred relating to the build-up of the servicing platform before selling it off. Consultancy fees, we also have, as previously mentioned, for the business development as we continue to expand and look at new opportunities in the region. We also have -- as we bought out our co-investor at the end of '18 with the smaller portfolio in Hungary, we are now also consolidating that entity and thereby including the OpEx from that operations, which also affected the total OpEx reported.

Please turn to the next slide. This slide shows our balance sheet structure at the end of the year, with total assets of about EUR 204 million, an increase of approximately 5% compared to 1 year ago. The main movements compared to the end of '18 are increase of EUR 57 million in invested assets to EUR 173 million, following the net acquisitions of approximately EUR 100 million for the full year of '19. This is partly offset by corresponding decrease in cash of approximately EUR 12 million. In addition then to the EUR 12 million, once again, as already mentioned, we have the RCF available. It's fully, let's say, to be utilized at EUR 27 million, and we, therefore, believe we're well positioned, ahead of the refinancing in 2020 of the EUR 50 million bond outstanding.

Please turn to the next slide, which shows the portfolio carrying value and the level of impairment and revaluation as a percentage of opening book value quarter-by-quarter. Total portfolio value has increased significantly over the last 2 financial years, in particularly following -- let's say, following approximately EUR 100 million of investments during '19 and stands at EUR 176 million at the end of '19. The value of impairments net of positive revaluation totaled negative EUR 1.2 million for the full year '19. This is lower than the total negative EUR 2.6 million for the full year of '18. This is principally due to the EUR 5.8 million of one-off write-downs in portfolios in the Balkans, partially offset by EUR 4.6 million of revaluation gain, following strong collection performance in Hungary and the buyout of the co-investor in Greece. 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 back to Henrik.

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Henrik Wennerholm, DDM Holding AG - CEO [4]

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Okay. Thank you. So let's turn to Slide 15 to summarize the quarter and the year. So key takeaways for '19 are basically that we have acquired portfolios, net of EUR 100 million, gross of EUR 135 million, across our core markets, principally within secured corporate portfolios. As a consequence, we have an ERC which currently stands at EUR 328 million, which is roughly 37% increase.

We have successfully refinanced our debt structure, but we are issuing a new EUR 100 million bond with a 3-year period. We have secured a EUR 27 million RCF, which is undrawn. And we are well positioned ahead of this refinancing coming up here in 2020, and we have EUR 39 million cash at hand if we drew on the RCF.

During the -- actually, during the end of '18 -- in December '18, the majority shareholder launched a takeover bid and as a consequence, the majority shareholder currently owns 89% of DDM Holding AG. The DDM Debt AB, as mentioned, has also, after the period, launched a written procedure to amend the terms and condition of the latest issued EUR 100 million bond.

Further, during the year, we launched the servicing platform to focus on portfolio management and business development services, enabling both captive and third-party services. We recognized a EUR 1.1 million gain on that sale to the company AxFina. And as mentioned, the reason for that is basically to further professionalize and enabling the service to take on third-party servicing as well.

This basically concludes our presentation, and we're happy to take on some questions should there be any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We already have a question from Erik from Arctic Securities.

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Erik Borthen;Arctic Securities;Analyst, [2]

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With regards to the refinancing of the 2020 bond, could you go into any more detail? Are you looking to raise a new bond or you want to take it out with the RCF or you're looking at other sources of financing? And a second question, could you comment anything on the amendment requests for removing the delisting put? Should we expect to see the shares being delisted in 2020?

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Henrik Wennerholm, DDM Holding AG - CEO [3]

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Well, to the first question, no decisions have been made on the refinancing. Clearly, if you look at our investment history, it's volatile, right? So I can't give you a guidance on any investment levels going forward throughout 2020. We made a record year of striking north of EUR 100 million net investments. Gross, it's much more. And we're going to continue to do co-investments throughout 2020 and onwards. Currently, yes, we have cash at hand, which basically could help us to fully refinance the EUR 50 million bond, but we are here to grow. And we have a sizable team. We have a very strong operating platform servicing us. So we're here to grow. So you can expect us to come back to the bond market here going forward.

With regards to your question regarding the amendment of the terms and conditions, it's merely facing the fact that 89% of the equity of DDM Holding AG, which is listed on -- in Stockholm, is held by the 10 largest shareholders. They basically control 98%. And roughly, there is less than 100 shareholders. So there's several shareholders who basically hold -- own a share or less than that. So no decisions have been made, but we are merely facing the actual situation, right? So that's sort of where we are. So whether it's a delisting event coming up, I can't -- no decisions have been made, so to say.

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Operator [4]

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(Operator Instructions) Well, it seems that we have no further questions for the moment. So sir, I give you back the floor.

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Henrik Wennerholm, DDM Holding AG - CEO [5]

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Certainly. I'd like to thank you all, and look forward to the upcoming spring here and new investments and to meet you investors again. Thank you very much for the time.