Coface SA

PAR:COFA

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the conference call for the presentation of Coface results for the period ending March 31. [Operator Instructions] As a reminder, this conference call is being recorded. Your host for today's conference will be Mr. Xavier Durand, CEO; and Carine Pichon, CFO. I would like to turn the call over to Mr. Xavier Durand. Sir, please go ahead.

[Xavier Pascal Durand, CEO & GM]

Thank you, and good evening, everyone. Thank you for joining us on this call. We are reporting tonight our figures for the first quarter 2019. I'll just move directly to Page 4 for the main highlights. In short, I would qualify this first quarter as a strong quarter. We reported total net income of EUR 36.4 million. Clearly, we see now the full effects of our Fit to Win actions. And as I said in the past, I'm convinced this plan is the right plan. And each quarter that goes by confirms this view. If I look at the underlying trends, I think, we show progress in nearly all the metrics. Our turnover reached EUR 365 million, up 6.7% at constant FX and perimeter. You'll see later that most regions are contributing positively to growth. The good news is also that new production is improving in mature markets, revenues are also supported by fast client activity growth. On the loss front, our Q1 net loss ratio is up 2.8% from the record we had in the first quarter of '18, which was -- so we're at 42.6%. The net combined ratio comes in at 74.5%. The gross loss ratio is almost stable versus last year. It's driven by both favorable recoveries and disciplined underwriting. I think we've been very consistent with that over the past. What's more, our net cost ratio is down 0.7% at 31.9%, which reflects a positive operating leverage in the quarter. We knew, we had a tough comparison versus the first quarter of '18, which was strong. We beat that number in terms of net income by 3.4% ex FX and reported net income as I said of EUR 36.4 million. Our return on average tangible equity comes in at 9%, just put that in perspective with our long-term targets, which included the capital actions. And finally, we continued to execute on Fit to Win. We've closed, as we announced a bit earlier, the acquisition of PKZ, which is the leading credit insurance in Slovenia. This is the first acquisition for Coface in 10 years. The board has made a decision and -- we've announced a 2018 dividend per share of EUR 0.79, which will be paid on the 22nd of May. And finally, we're still targeting to apply for a partial internal model end of summer '19. Discussions with the regulator are continuing. So with that, I'll just as usual, dive into more details and will point you to Page 6 on the growth front. As I've said, before, our total revenue is up 6.7%, everything comparable versus last year. What's interesting is now the trade credit insurance premiums are growing organically at 8% at constant FX. There's a couple of one-offs that helped the comparison from last year, which were actually negative one-off last year, but overall, we see growth driven by client activity, better new business and retention as well as easing price pressure and I'll show these trends on the next page. Service revenues are up 2.8%. Despite a still slightly negative factoring impact, the fees are up 0.9%. They're outpaced by the premium growth, which brings the fee to premium ratio down a little bit from last year. If I look at Page 7 and geographic contribution, we see that growth is actually happening in most regions. Western Europe is just slightly negative and that's driven by single risk actually, you see trade credit insurance underlying is growing. Northern Europe is growing again at 1.7%, and with actually trade credit insurance growing at 2.3%. We're a bit slower than we were in prior quarters in Central Europe as we're being careful with risk in some parts of some of the region, but the region continues to enjoy a steady growth. Same story in Med & Africa with a steady significant growth driven both by credit insurance and bonding. Starting to pick up a little bit in North America at 7% percent. I guess better client retention is the key there. You see some pretty strong numbers in the other 2 regions. We have to correct these for in terms of Asia. The one-offs that we had last year. So all things compared, our growth for the quarter is about 10.4% in Asia. And in Latin America, we always have to adjust the numbers for some pretty complex FX impact. So net-net, the growth comes in at about 25%, and it's been driven mainly by large international contracts, which had a significant impact on the region. If I go to Page 8 and we look at the usual charts, you see that new production is still low in comparison to other years. But better than last year by about 8%. So confirming some of the improvements that we have started to see at the end of last year. The retention is at a record level as it has been in prior years but getting better. Price effect is still negative, but as you can see again, it's less of a price erosion than we've seen in past years, reflects the fact that we're able to get relatively better pricing, particularly in the riskier parts of the world. And then volume effect, I think, we all anticipated the economy would slow, and we're seeing some of that here albeit, it happened a bit less and probably, a bit later than we thought. So the first quarter still had a pretty nice pick up from this client activity. If we go to Page 9, taking a look at the losses, I think, we can say that the loss story here is pretty strong. You can see on the top left, the quarterly sequence. And I just point you to the numbers in white, which are corrected for the effect of the facultative insurance, which we chose to selectively pass on to the market. So the number comes in at 42.2% compares to 46.3% quarter in Q4 and 43.6% in Q3. You can see on the bottom right that we opened the year at 71.1% so a little bit better than the prior quarter -- the quarters in the prior years. And we still see some pretty nice recoveries from the past at 33.8% for the quarter, a little bit less than last year, but still pretty good. And if you go to Page 10, I think, you see a pretty nice story for each one of the regions. The more stable ones at the bottom, Central Europe is actually better at 44.5%, Western Europe, I would say, pretty stable from last year at 32.7% when you correct for the facultative insurance; Northern Europe is improving at 40.7%; Med & Africa pretty stable at 47%; and then on the more volatile markets on the top, North America again, pretty flat from last year at 44%; Asia Pacific at a little bit below 30%; and Latin America all things considered, at 51% is a pretty good score for that region. So I would say pretty good numbers on the risk side. If I go to Page 11 on the cost side, you can see total costs are quasi flat from last 2 quarters. The internal cost are flat from last year's Q4. You know that in Q4 we had a little bit more cost because we had to book the profit share for the French employees for the year. This time in Q1, it's because we have basically purchased our distribution network in a good chunk of the U.S. So we passed on some cost from the external acquisition into the internal cost. And you see that as a result, external acquisition costs are flat because despite the fact that we're growing initiatives and actually growing. As a result of better growth and really contain the costs, you see our cost ratio coming down. I just want to point out on this page that the strategy we've led in the last couple of years, which is we continue to seek savings on the operating front, and we thoughtfully and in a disciplined manner reinvest these savings in the business in a series of things like risk, process and service, technology and select growth opportunities. We are continuing that practice. So there's no change in the way we drive the business. So you see us continuing to both drive costs and make select investments, and I think it's paying off and you can see now the cost ratio is coming down versus last year. And that's driven by the operating leverage between the growth and the premiums and the fact that the cost overall are very well contained. So that's the story of the Page 11 and I'm going to turn it to Carine for the rest of the pages.

[Carine Pichon, Chief Financial & Risk Officer]

Thank you, Xavier. Good evening, everyone. So reinsurance result is impacted for this quarter by low loss ratio. Premium cession rate first, as you may see, is at 29% so it's quite stabilized by comparing with the same quarter in 2018. We have a lower claims cession rate which is due to recoveries on highly reinsured facultative, but all in, reinsurance results have been at around EUR 27 million. So a little higher than last year mainly because of the low loss ratio I described before that we'll come back to reinsurance market.Page 13, you have a view on our net combined ratio, which is at 74.5%, so well below through the cycle average. Net cost ratio has been improved to 31.9% to be compared with the 32.7% in Q1 '18.Investments already said are fully financed by additional cost savings. And loss ratio is at 42.6%, which is below through the cycle average and which is below the last 3 quarters. Page 14, some comments on our financial portfolio. We have been able and that's clearly a target in the way we are managing the financial portfolio to stabilize yield. Accounting yield and average investment portfolio, you may see in the middle of the page is at 0.5% and if we exclude gains on sales, we are at 0.4%, so quite exactly the same yields in Q1 '18. Having said that, if you have a look on net investment income, you see that it was EUR 8.3 million in Q1 '18 and for Q1 '19, it is EUR 5.1 million. The main reason of this difference is coming from a negative contribution from nonconsolidated entities. We have decided to restructure our Peruvian operations and to disinvest in the subsidiary we have in Peru, and we'll continue to operate that through Chile and why doing that decision to close. We have decided to take the negative loss from the cuts and that's the reason why you have the decrease in net investment income. Page 15 is the full picture on the net income at EUR 36.4 million, and you'll see that our operating income is very robust at EUR 56.9 million in more complex environment. And we also have been able to decrease our tax rate. It is at 29%. It was 35% in 2018 and even if you remember quite higher in the previous years. All in, net income is up by 2.3% compared with a very good Q1 2018. From a return on average tangible equity point of view which is the Page 16. In terms of bottom that we went from 7.7% of return in '18 to 9% for this quarter. So the main increase is coming from a technical income, so a very good result on a combined ratio. A decrease by 1.5 point coming from financial results, mainly the decision to disinvest in Peruvian subsidiary. And some improvement coming from the tax rate decreased by 0.5 points. So all in, we have 9% in average for this quarter. So that's the overview of the results. And now I pass to Xavier for the key take away and outlook.

[Xavier Pascal Durand, CEO & GM]

Okay, so just to close of this presentation, I would say, in terms of the environment here, we see our global growth slowing, I think that's not a scoop. But in a way, trade was more resilient in the first quarter than we probably could have cleared billable, as I said, the environment is slowing. In this environment, I think, we deliver a clear strong quarter. We show improvements in every metric. 74% combined ratio, 9% return on average tangible equity, cost down -- cost ratio down from last year. As I said, we're seeing the impacts of the actions that we have taken materialize. They're paying off. And this is the highest net quarterly profit since we've began this plan. Growth is picking up driven by client activity, better retention, growing new business. Loss ratio is under control, I guess, in this environment, which I would say is hard to read. The cost ratio is down 0.8%. We've closed the acquisition of PKZ first time in 10 years. And then we're confirming our targets to apply for an internal model by the summer of '19 as we're continuing the discussions with the regulators. So I think it makes for a fairly simple story on Q1. And with that, I'd like to turn it over for questions.

[Operator]

[Operator Instructions] We have one question from Michael Huttner.

[Michael Igor Huttner, Senior Analyst]

Congratulations, these are great results. And really I've got 2 questions. One is are you going to continue on the same trend? I can put it in your words, which would be, I think, is this simple story likely to maintain or to continue? And the second is on the internal filing, which obviously was key to my hopes of more capital management. Can you maybe give us a little bit more color on the timing really, or you know the progress or whatever? These are my 2 questions.

[Xavier Pascal Durand, CEO & GM]

Yes. As you know Michael, we don't provide guidance for the year. But what I can tell you is that principles and the actions and the way we run the business hasn't changed. And I want to stress that point because every quarter, we see the impact of these actions. I think they're proving in my view to be the right thing to do. Nobody knows what the environment holds for us. As I said, it's particularly not an easy time to read the economy. There's things that are still panning out there, Brexit, whatever, trade wars and things like that. But I would say that we're not going to change the way we run the business, and I think, you'll see some of the actions that we're taking being quite constant. In terms of the -- I would also add that traditionally Q1, I would just refer you to the seasonality in our numbers, right, which I think over the years, so we tend to see a Q1 that's a bit higher than the other quarters. So I would just also point that out. In terms of the colors on the internal model, there's really not much I can add to it because as you know, these are discussions that are ongoing with the regulatory body, which is fully sovereign in their decisions. All I can tell you is that we're progressing as we thought we would, and we plan to submit this application during the summer. As you know, there's been a period of time. They have to study this and come back with the decision, it's 6 months. And then from there, I think, we will know what the outcome is and I cannot comment further on that.

[Operator]

[Operator Instructions] We have another question from Thomas Fossard.

[Thomas Fossard, Co]

I've got a couple of questions. The first one would be related to your top line growth, pretty impressive, I would say, at 6.7%. I know you're not providing guidance, but looking at The Street very consistent expectations for 2019. The market is currently expecting 2.8%. So clearly, there is a significant discrepancy between what you're reporting in Q1 and what the market is currently shooting for on a full year basis. So I know there is a bad effect as well, but I mean, could you tell us a bit more what you believe is the underlying growth rate of your business because if I'm right, I don't think that growth what really -- what we -- what was expected, I mean, for Coface? I see that you were more looking at controlling your risk and making sure that your business is in order? So just to better understand, if there is a new chapter now opening up for growth and which number we should put in, especially since -- I think that looking on Page 8, the volume effect is coming from your clients, is positive and that's great. But I mean, is not, I would say, accelerating. So still had some difficulties to understand, how we should read this 7% top line growth in Q1? The second question would be related to the buyout of your U.S. distribution network. I think that you did -- you had some actions already on that in Q4, if I'm right? You had -- it seems to me that you had another one in Q1 this year. So could you tell us a bit more? Or provide us a strategic update on what you're doing there? And how much there is still to come, and what could be the overall cost of buying out your U.S. network? And also on the strategical side, the Peruvian activity shut down, I'm not sure why this is showing up in the investment income and not, I would say, in the other lines or whether this is a part of your investment portfolio. And I will leave it there and come back into the queue for a question on the loss environment if this is not coming up.

[Xavier Pascal Durand, CEO & GM]

Okay. Thank you. I'll just -- to address firstly, the Peruvian thing. It shows up in that line because it's a nonconsolidated entity. So it's just technical works reporting. You're right to point out it's not an operating financial asset management question. It's an operating loss that's been accumulated and then recorded but because it's a nonconsolidated entity that's why it's in that line. This really -- all that is to it. In terms of the top line growth, I think, what I would say is, you've seen a number of metrics improve quarter by quarter, actually it's on this page. Number one, I would say is retention. I mean when I joined the Coface, I thought we could do better on retention and I think, we've proven this. And it continued to happen. And I think that's a very important driver. And we've seen it happen at the end of the year. A lot of our contracts actually renew at the end of the year and this is what happened again this year. You see that new business is a bit better than the last year, but it's still not anything spectacular. Price is better, so we've been working that angle as well. I think the trick here is being able to work price, at the same time as you work risk. And then you -- in terms of client activity, we had an exceptional year last year. We anticipate and we anticipated that the market will slow down, and I think, we're seeing this, albeit, maybe not at the pace we thought. Although I mean, we're all watching now a number of things in the market, what's going to happen in Germany, what's going to happen with trade wars, very hard to read, very hard to forecast. I mean, commodities is another factor. Actually, they're holding up for different reasons that are quite unpredictable, sanctions on Iran and this and that. So very hard to read, I would say but you are seeing some of these adjustments happen and you've seen that happen for a while. It's just the -- it's in the details, right, that these things are happening. The buyout of our U.S. distribution network, what happened is, we purchased a good chunk of our distribution probably 2/3 of it at the end of last year, actually the beginning of this year. We purchased it. We purchased that in 2 different batches basically, right. I can't remember which quarter was the first batch. It was...

[Carine Pichon, Chief Financial & Risk Officer]

Yes, I think it was for Q1 '18 and for Q4 '18 -- I think the main part was Q4.

[Xavier Pascal Durand, CEO & GM]

And in Q4 we did -- so the main part was in Q4. So now what I'm talking about is we own 2/3 of our distribution, and we now are able to take control, and obviously, start operating differently, but that will take time. So the project then just stop at the fact that we were purchasing the distribution, it's also what do we now with it? We have a new -- we've appointed a new leader in the North American business, just 1.5 months ago, and he's now in charge of this particular transformation, in particular, which I think is pretty important for us in the future. So that's really what's going. And in the U.S., we still have about 1/3 of our business, which is as in the past, originate through agents. And I think we'll have to continue to be looking at that as an opportunity for the future. But big focus is mainly on making what we already have now happen in terms of integration and change in processes and things like this. I hope that covers your questions.

[Thomas Fossard, Co]

Yes. Just to come back on the top line, what would be the kind of underlying growth? I mean, and netted off all the noise positive or negative or base effect would 4%, 5% be something reasonable in the current environment?

[Xavier Pascal Durand, CEO & GM]

I mean, I have to be a little dry on this one. We don't provide guidance, I don't want to commit to guidance on growth for obvious reasons. So I think, being agile, as I call it, is the key here in this business. So we'll be thoughtful, hard to read the environments, slow -- slower growth happening. Again, to which extent, hard to say.

[Operator]

We have another question from Michael Huttner.

[Michael Igor Huttner, Senior Analyst]

I have lots of little questions, if I may. Tax, I know you don't give guidance but maybe on tax, you could give -- say what you might expect? Peru, are there any more, I would call them one-offs potentially in -- coming like that? The deal in, I think, it's Croatia.

[Carine Pichon, Chief Financial & Risk Officer]

Slovenia.

[Michael Igor Huttner, Senior Analyst]

Slovenia, I beg your pardon. In Slovenia, is -- if you could give a few metrics on what it could do to I don't know, sales, profit, whatever? Solvency, I know you don't provide a quarterly kind of update, the last number I had was the 169. I think for full year and I just wondered given current trends and profitability is -- and I think solvency kind of embeds the improvement in combined ratios when it happens. Is that -- are we seeing -- are we likely to see kind of a little bit of a step uplift? And then the final one is just curious, you've improved processes and risk control and you kind of keep investing in this which is fantastic. I just wondered if you could give an example -- a live example of, and thanks to these processes we avoided that big loss, it's a hope.

[Xavier Pascal Durand, CEO & GM]

Okay. Well, let me start with the last one because I think the proof here, or the fact that I'm more assertive, I guess, on the risk improvements that we've made is think of what happened last year. And what we have to manage. In last year, you saw quite some brutal events in Turkey. You saw a crisis in Argentina, you saw basically, Italy slow down pretty steeply, I guess even from the first part of the year. So it wasn't like, you had Brexit going on throughout the year. We had a slow down in Germany at the end of the year. There's been a couple significant bankruptcies around Rome of the retailers. So you had it all. I think Coface did pretty well last year. And I think, that's what I'm referring to. In terms of Slovenia, it's about EUR 15 million in premium, so it's about 1% of our business. What it does is it gives us scale locally. This game is all about having scale and having skills and each of the things come together. So it's going to allow us to run this part of the world more efficiently. And to me, it's a perfect example of the strategy that we're trying to emulate in different parts of the world. I'll let Carine talk about tax, Peru and solvency.

[Carine Pichon, Chief Financial & Risk Officer]

So maybe on tax, always difficult. You know we are located in a lot of countries that's why I'm not in favor of giving a guidance on it. What you may see around 29% is that we are starting to benefit and to use some tax losses from the past, in particular, in emerging markets. And we are able also to monitor correctly emerging markets so let's say it's -- 29% is a very good tax rate but I don't like to give guidance. But it's clear that's better than last year. Peruvian, your question was what could be a clear additional potential we see on it. On Peru what we have taken in Q1 '19 is the accumulated losses from the past, which was not consolidated because the company was not consolidated so we take it. Now we have to see if we may have some additional costs on the sites that we need to liquidate the company but I think we have taken most of the losses so clearly on this quarter. Maybe one last comment on solvency. As you tell, we don't disclose any solvency ratio on Q1. What just maybe I can remind you is that clearly, the solvency ratio can be improved as well as the loss ratio also improved, but you also need to finance the growth. So it's a mix between the growth finance from one part and improvement in loss ratio is the other part.

[Operator]

[Operator Instructions] We have another question from Hadley Cohen.

[Hadley Cohen, Research Analyst]

A couple of very quick questions, please. Firstly, on the restructuring charges, can you remind me of your guidance and how you're thinking about those going forward? Because every quarter I seem to put in a number for what I think your guidance is, and every quarter you seem to positively surprise. So I'm just thinking how you're thinking about those restructuring charges, and when we're going to see them? And then secondly, with regards to your thinking behind the 100% cash payouts of the dividend and why you chose cash rather than buyback? Is that liquidity? Is it you think that the shares are recently fairly priced at the moment? And how we should think about that going forward i.e. if you're going to pay out more than 60% dividend? Should we think about that as dividend going forward? Is this a signal that we should expect dividends instead of buybacks in the future?

[Xavier Pascal Durand, CEO & GM]

Yes. So I'll let Carine talk about the restructuring charges, but let me talk about the dividends. I mean, as you know, we decided, we would distribute 100%. And the question was in which form, so 60% was a given because it's our policy in terms of the dividend and then the other 40% were, the question as to whether it was going to be a dividend or a stock buyback. And in this manner, it's the Board's decision. As you know, this is the decision that the Board has come up with, and I don't think, I can really make any further comments.

[Carine Pichon, Chief Financial & Risk Officer]

So on restructuring charges, Hadley your question, it's clear that most of the restructuring charges have been booked during the previous year and clearly, at the start of the scheduling plan because we are making a lot of restructuring at that time. So maybe we may have some scheduling this year, but not at the same extent that what we could have had in the past.

[Operator]

[Operator Instructions] We have another question from Thomas Fossard.

[Thomas Fossard, Co]

Just to come back to Hadley's questions. I think that in the full year call, you indicated that the investments you were expecting to do in '19, was expected to be at EUR 25 million if I'm right? How much of these EUR 25 million have you already invested in the business so far this year? That would be the first question. The second question is regarding the loss environments. Obviously, you're reporting very strong loss ratio, maybe -- I mean better than you thought yourself. What are you seeing, or how you could qualify the loss environment, in terms of potency, in terms of severity of unit system a changing pattern. I mean what is probably the main surprise for us is that as you say, I mean the macroeconomic environment is difficult to read. And I mean, actually we've seen some news that for some companies in some sectors, the environment remains tough, but still doesn't translate into a pickup into your loss. So is it just a good risk management? Or I mean, just to better understand what's going on the underlying basis of your business?

[Xavier Pascal Durand, CEO & GM]

Yes, I mean on the loss line, as I said, I mean, it's hard to read the environment. And we're all, as I keep saying, we're all watching extremely closely. Every week, we get the 1,200 claims that come from all sides of the world, and we watch it and like say a note on fire as we say in French. But the -- I think what we've seen particularly in the latest period is a fewer large claims, I'd probably call that way. I think frequency is still creeping up. But I don't see -- we haven't seen the kind of large deals that we could have feared. That -- so it's hard to say, whether it's us or the environment but we're continuing to watch this very closely. In terms of the investments, I'll turn it over to Carine here.

[Carine Pichon, Chief Financial & Risk Officer]

Okay. I think it's -- when we say that we have a [ num-lock ] of EUR 25 million of investments, global investments, IT, people and everything. So it is not comparable with restructuring charges, which is leading to decision we take on restructuring, let's say business, such as the bailout, which was clearly seen as a restructuring, but the investment EUR 25 million you're mentioning is more global, and is including also, I will say, a classical investments in processes, in lean, in regulatory, in strategic as we say the -- half financed by savings. I hope it clarifies.

[Xavier Pascal Durand, CEO & GM]

So these would show up in the running rate.

[Carine Pichon, Chief Financial & Risk Officer]

Yes, correct.

[Thomas Fossard, Co]

Right, so we should -- so we shouldn't -- I mean, so we should expect this EUR 25 million or a significant part of this EUR 25 million additional investment in '19 to be offset by savings coming elsewhere from the business. So net-net, on the cost income ratio that should be a kind of force.

[Carine Pichon, Chief Financial & Risk Officer]

But let's say the difference is fully included in the cost ratio, so it's financed by savings, I know what we said. And all the work we already have done during the past year. No change on that respect.

[Operator]

[Operator Instructions] Sir, for the moment we have no other question.

[Xavier Pascal Durand, CEO & GM]

Okay, well, that's unusual. I think it's great. Probably a good sign. I'll take it that way. Look if we don't have any other questions, I think we can probably cut it here. I just want to thank everybody for joining and being part of this call. We will update you on Q2, I think it's in July. What's the date?

[Unknown Executive]

July 25th.

[Xavier Pascal Durand, CEO & GM]

July 25th. So we'll speak to you then. Thank you very much for joining. And I think we can call off the call now. I'm saying this for the operator.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.