Unifin Financiera SAB de CV

BMV:UNIFINA

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to UNIFIN's First Quarter 2018 Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

[Rafael Borja, executive]

Thank you, and good morning, everyone. I'm very pleased to welcome you to UNIFIN Financiera earnings call. This morning, UNIFIN's senior management team will discuss the company's first quarter 2018 consolidated results per the press release issued yesterday. If you have not yet received a copy of the earnings release, please contact the Investor Relations team at UNIFIN or i-advize in New York at [phone] to obtain a copy immediately.

Prior to introducing our management, I would like to remind you that forward-looking statements may be made during this conference call. This does not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations. Thus, we ask that you refer to disclaimer located in the earnings release prior to making any investment decision. We are very pleased to have with us all the way from UNIFIN, Mr. Sergio Camacho, Chief Financial Officer; and Mr. David Pernas, Head of Investor Relations and Finance. Thank you for your attention.

At this time, I would like to turn the call over to Mr. Sergio Camacho for his presentation. Sergio, please go ahead.

[Sergio Camacho Carmona, executive]

Thank you, Rafael. Good morning, everyone. Thank you for joining us today. I would like to start talking about the macroeconomic environment, which despite a more favorable outlook compared to what we had at the close of 2017, the first quarter of this year reported a slow start, but recovered through the end of the quarter. This was mainly due to the outcome of positive reports regarding a successful NAFTA negotiation that is expected to be confirmed in the coming weeks. Additionally, Moody's recently upgraded the international sovereign debt perspective to stable.

During the first quarter, Mexico Central Bank took monitory policy measures that raised the interest rate by 25 basis points. In the coming months, we are expecting some volatility and uncertainty in the local market as a consequence of the Mexican election process, which will culminate in July. However, favorable activity may be expected depending on the outcome of the election.

I would like to point out that despite the bleak scenario, UNIFIN continues to render excellent results as a consequence of our high prudent decision-making standards and the resilient Mexican SME market. Before we proceed to discuss the first quarter 2018 results, I would like to highlight 3 important transactions that took place during the quarter, which were previously explained in the fourth quarter 2017 earnings release. On January 25, the company issued $250 million in subordinated perpetual notes. These notes were oversubscribed more than 7x. These hybrid bonds helped to significantly enhance the capital structure of the company as the accounting treatment is a 100% equity. Also, in line with the company present risk-management approach, on February, UNIFIN issued its fourth offering of senior notes in the amount of $300 million. With both transactions, UNIFIN significantly enhanced its capital structure and increased its maturity liability curve up to 52 months. Also, we managed to fulfill in advance our funding requirements for 2018, allowing the company to continue its growth plans, counteracting any possible future volatility.

As part of UNIFIN's strategy, on March 9, the company successfully completed the full pay down on UNFINCB15 securitization for a total amount of MXN 2,000 million. To summarize, the company continues to be extremely focused on protecting its balance sheet and results from any market volatility as it continues to grow, always taking into consideration our pillars of prudence and sound financial health.

Now let's discuss our first quarter 2018 financial results. Income statements. Total revenue increased 62.4% in the first quarter of this year to MXN 4.4 billion compared to MXN 2.7 billion in the first quarter of last year. This encompasses a 43.2% operating lease income growth, a 101 -- 1,001.4 interest income increase compared to the same period of last year. The depreciation of assets under operating lease was MXN 1.8 billion at the close of the quarter, which is directly related to our leasing portfolio growth as well as the inclusive goal of extending the maturity of our liabilities.

Interest expense rose 60.8% during the first quarter 2018 to MXN 1.2 billion. The increase was partially due to the larger grades of our financial liabilities, which support the company's growth. At the end of March 31, 97.8% of our outstanding debt was denominated in fixed rates, reinforcing our prudent risk management. Our nominal financial margin growth, 49.1% year-over-year, which take us to a healthy 21.6 margin. This growth is in line with higher revenue and an increase of the company's expenses. Our net interest margin was 8.8% at the close of the period. Administrative and promotional expenses increased to MXN 266 million in the first quarter, representing a 6.1% of total revenues, a significant improvement when compared to 7.2% posted in the first quarter of last year. Safety years bring to us an operating income of MXN 623 million, which represented a 51% increase compared to the first quarter 2017.

UNIFIN reached a consolidated net income of MXN 471 million, which represented a 55.3% increase year-over-year. This was achieved due to higher margins and operating efficiencies, which resulted in improved profitability.

Moving to our operations. Leasing origination growth, 80.8% year-over-year, while the operating lease portfolio balance grew 60.8%, reaching MXN 37 billion in the first quarter. Factoring volume decreased 26.2% in the first quarter year-over-year, while the portfolio balance stood at MXN 2.2 billion. The decrease in the factoring portfolio is related to a more conservative approach towards new originations.

Lastly, auto loans experienced a 16.8% decrease in operating volume year-over-year. The auto loan and auto loan portfolio balance increased by 9.7% when compared to the first quarter, reaching MXN 5.9 billion in the first quarter of 2018.

In terms of the balance sheet, the total loan portfolio experienced a 44.8% year-over-year increase. Total loan portfolio consists of a net loan portfolio of MXN 5.4 billion for leasing accounts receivables and other loan registered under the accounts receivable for MXN 4.7 billion. In addition to our memorandum accounts of MXN 34.7 billion, which are comprised of future rentals of the company's operating lease portfolio. As a result, total loan portfolio was MXN 44.9 billion in the first quarter.

The company past due loan portfolio reached MXN 352 million, which considers MXN 126 million from factoring and auto loans, plus MXN 226 million from leasing accounts portfolio, which are registered within our other accounts receivable line. At the close of the first quarter, our NPL ratio was 0.78%, and the total allowance for loan losses coverage was 100%.

As of March 31, total assets increased 33%, mainly as a result of the growth in the net portfolio, net fixed assets and cash and cash equivalents. On the other hand, financial liability rose by 31.2% due to the growth of the year-to-year operations. As aforementioned, UNIFIN greatly enhanced its debt profile by extending the maturity of its debt to 62 months, but also by having 97.8% of its debt at fixed rate. As explained in our fourth quarter 2017 conference call, our subordinated perpetual notes transaction for accounting purposes were recorded entirely as equity. Therefore, the coupons for these loans will be treated as dividend payments, which will not be recognized in the income statement. This capital infusion stemming from the transactions allow the company to sustain healthy growth.

Regarding stakeholders' equity, these increased by 101.7% to MXN 11 billion in the first quarter from MXN 5.3 billion in the first quarter of last year. The capitalization ratio was significantly enhanced with the proceeds of the subordinated perpetual notes and profit generated in the period. This was strongly offset by the negative effect of the mark-to-market valuation of the hedging derivative financial instrument but remain at a solid capitalization ratio of 18.7%. Without that mark-to-market effect, the capitalization ratio would have been 20%.

Return on average assets at the close of the first quarter was 3.7%. While return on average equity improved to 26.5%, the decrease of the return on equity vis-a-vis the fourth quarter is due to the capital enhancements made by the company for MXN 4.5 billion. Despite this, our return on equity continues to be very attractive to our shareholders. UNIFIN financial leverage ratio was 2.4x at the close of the first quarter, whereas the company's total leverage ratio improved to 2.9x compared to 5x in the first quarter of last year.

I've mentioned in previous conference calls, we continue the process of catching up on our higher origination rate vis-a-vis the increased rates in our funding cost. Adding a slight improvement of our financial margin over the one registered in the fourth quarter of last year, it is important to highlight that UNIFIN improved, on average, 40% of client applications. Our portfolio continued to grow as a result of our excellent track record in delivering high-quality service to our clients, our strong backlog, the opportunities identified by our business intelligence team and the networking abilities of our more than 200 sales office representatives.

At the close of the first quarter, UNIFIN continued to have a healthy and diversified portfolio. The company has more than 7,000 clients, none of which represents over 1.5 of the total portfolio, and around 80% of our clients have approved credit lines for up to MXN 7.5 million. The client breakdown is spread across various economic zones and geographic sectors since it is vital for UNIFIN to continue having an ample diversification in terms of clients, economic sector and geographic zone.

Wrapping up, UNIFIN excellent results for the first quarter were driven by our prudent risk-management strategy, resilient Mexican SME sector, and our excellent track record in delivering high-quality service to our clients.

Once again, despite a somewhat -- somehow volatility domestic and global environment caused by political troubles and macroeconomic turmoil, UNIFIN managed to achieve outstanding results and fulfilled its business objectives. Our aim is to take advantage of the opportunities in the financial markets to ensure that we made the soundest strategic decisions possible for the long-term health and benefit of our company and its shareholders.

Notwithstanding the trials 2018 may pose, particularly with the Mexican election process, we will be closely monitoring. At UNIFIN, we remain optimistic about the company's future. We will keep working towards greater results supported by the knowledge of our market and our desire and strategy to maximize our platform through a constant evolution. Thank you, again, for your attention. At this point, we're ready for your questions.

Operator, please proceed to the Q&A session.

[Operator]

[Operator Instructions] And we can take our first question from Carlos Rivera with Citigroup.

[Carlos Rivera Zermeno, analyst]

My first question is regarding the impact on your book value from the perpetual bonds. So just wanted to know the way that you're going to be booking the interest expense. So I understand that's going against equity. Are you creating a provision monthly? Or are we -- or should we expect 6 months of -- to be hitting one at a time once you make the payment? And if you could confirm the amount, I estimate about MXN 150 million. And related to that, I don't see any dividend provisioned for 2017 earnings yet. So that would be another MXN 350 million probably impact to your book value in the next time that you report. Is that correct? And I'll ask my second question after.

[Sergio Camacho Carmona, executive]

Yes, on the provision for dividend, yes, you're correct because it cannot -- I mean, as of the first quarter, we haven't had our shareholders meeting, and therefore, it had been declared. And the shareholders meeting is going to be next Tuesday. And yes, there is a proposal to continue paying MXN 0.01 per share, and you're going to see that decrease in the second quarter results. On the payments for the perpetual notes, they are monthly deducted on the return earnings from previous years, both for -- yes, for previous periods. So there is a monthly provision on that.

[Carlos Rivera Zermeno, analyst]

Okay. Great. And my second question is regarding the levels that you would like to run UNIFIN at in terms of capitalization ratio. In the past, you mentioned something in the mid-teens. And looking at the new disclosures that you have, you have 2 ratios, one is the accounting, one is the adjusted excluding the mark-to-market. Shall we continue thinking about that level that, let's say, 15% based on the accounting or based on the adjusted that you provide? Or...

[Sergio Camacho Carmona, executive]

It's going to be -- no, it's going to be based on the accounting. And yes, the target is to be in the mid-teens. No, right now, we are far from that point, but that's the target.

[Carlos Rivera Zermeno, analyst]

Okay. And just one follow-up on that because that accounting considers 100% of the perpetual as equity, if I understand correctly. But for the rating agencies, not all of them will consider that completely. So if I only consider 50%, I estimate about 400 basis points difference, which means that, if my numbers are right, broadening about 15% accounting ratio would impact probably 11% for the purposes of the rating agencies. Is that -- does that math sound right? And is that a level that you are comfortable with?

[Luis González, executive]

It does, Carlos, however, take into consideration that both rating agency methodology does not require the company to comply with a 15% or a mid-teens capitalization metric. They have an adjusted equity consideration, no? And with these, what we're trying to say is that with the accounting methodologies that we've already disclosed with the -- of the 15%, which we're comfortable with, that should be well enough combined with the rating agency methodology calculation.

[Operator]

And we can go next to Gabriel Nobrega with UBS.

[Gabriel da Nóbrega, analyst]

I also have 2 questions. My first question, it's regarding NAFTA and the elections. How are you seeing impacts to your clients? Do you feel that some of your clients are actually postponing their own CapEx plan? And then what is your view on the appetite for your clients going forward? Moreover, do you think that you will be able to continue on growing your leasing portfolio at 61% year-over-year for the rest of the year? And I'll make a second question after that.

[Sergio Camacho Carmona, executive]

Sure. I mean, on NAFTA, and that's something that we took a decision late 2016 after Mr. Trump won the presidency. We decided to be more cautious on any customer that is -- was related directly to NAFTA. One thing that, over the last weeks, we have seen and we have heard a more positive news regarding a successful NAFTA negotiation. Actually, the consensus right now is that we may see something signed at least on May. So on that, of course, every time that we see or like our customers see news regarding the possibility of having a cancellation on NAFTA, it imposed some uncertainty and some deferral on their decision process making. However, and as we state on our -- on the call, the positive news improved the development of the business throughout the quarter, and we expect that to continue once NAFTA is signed. On the election, of course, there is going to be some volatility and some uncertainty. And as long as we get into a deeper debate and into -- deeper on the political campaigns, we may see some more uncertainty there because of the 2 opposite view on the -- the candidates have on the economy. However, we continue to be very positive despite the outcome on the elections since the SME sector, which is basically the core of the Mexican economy no matter who wins, it's going to remain strong, and it's going to remain there. Therefore, our outlook for the upcoming years is positive.

[Gabriel da Nóbrega, analyst]

All right. That's very clear. And as for my second question, I just want to get a feel of your outlook on the margins. And once you have this outlook mainly as 98% of your debt profile is now at a fixed rate, how easy is it for you to change these rates as the Central Bank might possibly begin cutting rates possibly at the end of this year or even in 2019?

[Sergio Camacho Carmona, executive]

Yes. We took a decision, right now about 24 months ago, of shielding the balance sheet because we saw a lot of clouds out there on the Brexit, on the U.S. election and also on the Mexican election and NAFTA. And that's why we took that decision. Going forward, if we start to see some indications that Mexico may start to reducing the interest rate as of today, we do not see them. All the incremental debt will be on a variable rate to catch up that positive effect. However, as we have stated in the previous calls, as long as we start catching up for higher origination rates on our income statement, on our revenue side, and having fixed the cost, our margins should improve. And if you see, for example, the margin that we posted on the fourth quarter of last year compared to the one that we post this quarter, we're having an increase of 20 bps. That is in line with our strategy and what we have commented to the market.

[Operator]

And we can go next to Alonso Garcia with Credit Suisse.

[Alonso Garcia, analyst]

First, could you please comment on your backlog? I mean, how has it evolved year to date considering all the macro-related uncertainties? And based on that, how -- what would be your base case for total portfolio growth? And what kind of conversion rate of your backlog is embedded in that estimate? And my second question is on OpEx. How should we think on OpEx growth for this year? I mean, I understand there is, of course, some kind of seasonality between the fourth quarter and the first quarter, but also if we look at the year-on-year growth rate, it's very different from fourth quarter, around 50% compared to this first quarter at around 37%. So how should we think on OpEx growth for the year?

[Sergio Camacho Carmona, executive]

We continue to have a very, very strong backlog number in -- around MXN 60 billion. But if I provide you with the conversion rate, it's going to be a full guidance to you. So I -- what I can tell is that we continue to see a strong demand for the services that UNIFIN provides, and we continue to see a solid outlook on our origination and on our generation on revenues. The second question was?

[Alonso Garcia, analyst]

Regarding OpEx growth for the year.

[Sergio Camacho Carmona, executive]

Yes. OpEx growth is going to be -- yes, it's going to be in line with our revenue growth. We are working to maintain OpEx as a percentage of revenues between 7% and 8%. Of course, the lower the better. But we believe that having that number, it's very, very healthy, it supports our margins, and it's in line with the growth perspectives, and on the expenses and investments that the company need to carry out to continue to be a state-of-the-art service and technology to our customers.

[David Sánchez, executive]

And I will also -- just to compliment a little bit what Sergio was saying, remember that the OpEx, as you well -- very well mentioned, has some seasonality, no? So early in the year when you compare to total revenues, no? It, generally speaking, is lower in the first half, and in the second half, it tends to pick up, no? So that's why the guidance on around 7% to 8%.

[Operator]

And we can go next to [indiscernible] with [indiscernible] Capital.

[Unknown Analyst]

So this is related, again, to the subordinated debt issue that -- it was partially answered at the beginning. But we're seeing that you're treating the interest expenses as a dividend. So we will not see all this effect into the income statement. So of course, earnings will be much higher. So we will like to understand more on a qualitative [indiscernible]. What is the reason of it? And especially because you mentioned that grade agencies do some adjustments on it, and for us, it seems very strange, but we would like to understand what is the reason of this.

[Sergio Camacho Carmona, executive]

Sure. The reason for not putting them in the income statement, it's an accounting group. The perpetual bond is treated as equity. All of the resources or the source that you need to take out of that or that you need to pay to, need to be deducted from the shareholders' equity or from the equity. At the end, if you see, on an annual basis, the effect is the same because while you put it in the income statement, you're going to have a lower net income, but that net income is going to be added up in the shareholders' equity that -- instead of not having that. It's only an accounting rule, and that's what we -- that's why we have been very clear on that.

[Operator]

And we can go next to Rafael Elias with Exotix.

[Operator Instructions] And we can take our next question from Nick Dimitrov with Morgan Stanley.

[Nikolai Dimitrov, analyst]

Just a quick question. Can you give us some color on your funding plans for 2018, considering the fact that you tapped capital markets already twice this year?

[Sergio Camacho Carmona, executive]

Nick. Yes, our plans are for, perhaps, doing something additional in the local market, but nothing -- we're not planning to do anything outside. On the other hand, since we have this capital injection, all of our credit facility or banking facilities have gone up. And also, they're having more financial institutions that had approached UNIFIN for putting on direct credit lines. So we are not planning to do anything for this year in the international markets. We will be planning to do something in the local markets.

[Nikolai Dimitrov, analyst]

Got it. And one more question. Your search for a strategic partner, is that off the table at this point? Or you're still kind of looking at opportunities?

[Sergio Camacho Carmona, executive]

On a formal basis, it's out of the table. However, there's always people approaching to -- us, and we're always trying to and pursuing to maximize the platform of UNIFIN. So as there are no formal talks as we speak, there are, of course, informal talks for people and for us to trying to maximize the platform.

[Operator]

And we can go next to Diego Ciconi with Scotiabank.

[Diego Ciconi, analyst]

I see on your release you mentioned a cost of funding for the first quarter of 9.89%. I'd like to understand if -- I assume it's not, but I would like to understand if that includes the cost of the perpetual bond that you pay out as dividends. I calculated that, that would be around 15% for the perpetual bond alone. And my second question is regarding origination. We see significant deceleration in the factoring segment. Is this a trend that we should continue to see throughout the year? And what is the composition of the loan that you expect to close the year with? I see that leasing is now around 82%. Is that supposed to be maintained throughout the year? Or should we expect it to change?

[Sergio Camacho Carmona, executive]

Well, first of all, no. On the funding cost, we are not including the payments on the perpetual loan because once again, it is not debt, it is treated as equity. And I -- and that's why we provide the treatment as a dividend. On the factoring, we have seen -- and that's part of the strength of the company to have a very well-experienced management team. We have seen that when things go a little volatile or with some uncertainty, the factoring business may be the one to be more hurt by that uncertainty, and it will become, perhaps, our riskier business across the product portfolio. So on that particularly business line, we enhance our credit scorecard, we enhance our manage -- risk-management approach. And that's why you see that reduction on that business. Going forward, we will continue working with the same high standards of credit analysis, and it's difficult to say if the bond is going to go up or not because it will depend on the type and the quality of the clients that we may approach or that the clients approach to us for that particular business.

[Diego Ciconi, analyst]

Understand. And just, if I may, just 1 last question. You mentioned that your target is to maintain the efficiency ratio at around 7%, 8% this year. Is that an assumption based on what level of growth for the portfolio?

[Sergio Camacho Carmona, executive]

With similar rate of growth from the one that we have posted in the previous years.

[Operator]

And we can go next to Jason Mollin with Scotiabank. [Operator Instructions]

[Jason Mollin, analyst]

Hello, can you hear me?

[Sergio Camacho Carmona, executive]

Yes, we can.

[Jason Mollin, analyst]

Okay, great. My question is more on the general marketplace on competition. If you're seeing increased number of players fighting for the same clients, if you're looking at similar types of SME clients with similar revenues, if you're -- if actually, and this being more conservative, you're actually -- your approval ratings are going down and you're changing your target market. If you can give us a sense of that, would be my first question.

[Sergio Camacho Carmona, executive]

Sure. I mean, I think that, well, we are -- we strongly believe that the potential for growth and the potential market continues to be very, very solid and very, very important within the Mexican SME sector. As we have previously explained, if we consider, or if we see our government's numbers regarding how many SMEs are in Mexico, they talk about -- a number about 4.9 million SMEs. We do an additional categorization on SMEs, and those are SMEs that have revenues from $20 million to $100 million per year. And that takes us to a universe of 750,000 SMEs in the country. We are only servicing 1% to 1.5% of those. So the market is there. And as long as we continue executing well, providing the best solutions to that potential market, we have the potential for growth. We are not changing anything. Perhaps what we -- what has happened is that as UNIFIN has grown over the last couple of years or so, there are larger SMEs, perhaps more on the medium size, that are approaching to us because of the relative size that we have right now. But once again, we continue targeting that sector, and that's our core, and we will continue working to satisfy a need that is within the SME sector.

[Jason Mollin, analyst]

That's helpful. And on -- in terms of the weighted average maturity for leasing, we've been seeing you talk about the increasing term. Is that a change in mix? Is it an effort to reduce the monthly payments for clients? If you can provide some color.

[Sergio Camacho Carmona, executive]

No. That has been a consequence of -- as long as some of our recurring customers know better how does the leasing work, and they have seen the benefits on real time on that, they are eager to take larger terms on their leasing up to the 48 months. And that's where you have seen the quarter-over-quarter that the mix or the maturity of our portfolio have grown. And -- that's the reason.

[Operator]

And we can go next to Rafael Elias with Exotix.

[Rafael Elias-Linero, analyst]

I just had a couple of questions. One of them is when you reported last year results, on the balance sheet, you had a total performing loan portfolio of MXN 9.1 billion, total loan portfolio of MXN 9.3 billion, and total net loan portfolio of MXN 9.1 billion. And on this quarter's results, those numbers change. Now you have performing loan portfolio of MXN 5.8 billion, and net loan portfolio of MXN 5.85 billion. Why has that changed? And the second question is, in the eventuality that López Obrador wins and we see a devaluation on the peso, are you hedged in terms of your debt? Or how are you planning to manage a potential devaluation that may result as an outcome of a negative election?

[Sergio Camacho Carmona, executive]

For better answering your first question, I will ask you if you can see on our report to the Mexican [indiscernible] as note to one, which provides a very clear explanation on your question. If you have an additional doubt on that, particularly that, we're more than happy to answer that after the call. And on López Obrador, if they're having devaluation of the peso, no, what is going to happen to UNIFIN are 2 things: first of all, we're going to have a positive impact on our mark-to-market that will be on the balance sheet. But on the business line, we may see some slowdown on the demand, depending on how big is the devaluation of the peso. Because the valuation within the Mexican market environment and way of thinking provides uncertainty and puts some of our customers and the people, the population, as a whole, a little bit nervous. However, if we see -- perhaps, 12 months ago or 18 months ago, when we saw an experience -- an exchange rate of MXN 20 per dollar, we did not really perceive any deterioration on the demand from our customers. So we are confident that whatever the outcome on the election, and this is, of course, thinking of that there is no doomsday or something like that, UNIFIN is going to be there. Also on the devaluation of the peso, once again, I would like to remind you that a 100% of our liabilities are fully hedged.

[Operator]

[Operator Instructions] And it appears we have no further questions at this time, I'll go ahead and turn it over back to Mr. Camacho for closing remarks.

[Sergio Camacho Carmona, executive]

Thank you. Thank you, again, all of you for being here with us. Thank you for your trust and your interest in UNIFIN on participating in this call. Please, as I said throughout the call, do not hesitate in contacting us if you have any additional questions. And we look forward to hearing from you. Have a good day and a good weekend. Thank you.

[Operator]

And this does conclude today's call. Thank you, everyone, for your participation. You may disconnect at any time, and have a great day.