Good morning and welcome to Axactor's third quarter presentation. Together with me, I have our CFO, Nina Mortensen. This presentation will be divided into four parts. First, I will take you through Q3 highlights. Then, Nina will go through the financial update before I present an updated outlook. As always, we will round off with a Q&A session. Let's move to Slide 3 and have a look at the highlights for the quarter. Gross revenue increased year over year by 2%. The marginal growth was supported by a small portfolio sale of EUR 4 million in Spain. Adjusted for this, the gross revenue declined 3% year over year. The main reasons are still the economic environment, the debtor relief initiatives from the governments, and the relatively moderate investment levels we had in 2023. However, Cash EBITDA was up 6% year over year, reaching EUR 59 million for the quarter.
Strict cost control in all markets offsets declining gross revenue and inflation. EBITDA ended at EUR 27 million, down from EUR 34 million last year, but still at a healthy margin level of 48%. This number includes EUR 0.8 million restructuring costs in Italy. The annualized return on equity was 0%. We are, as most of the industry, burdened with higher-for-longer interest rates and a challenging collection environment, putting pressure on profitability. Moving on to Slide 4 for more details on accretive investments. Q3 is normally a slow investment quarter for Axactor, which was also the case this year. We invested EUR 30 million at the same price level that we have seen in recent quarters. Accretive investments continue to improve our gross IRR on our backbook, although moderate in Q3 due to the limited new investments in the quarter.
We have been able to improve our total gross backbook IRR with three percentage points during the last three years, going from 15.7% in Q1 2021 up to 18.7% at the end of Q3 this year. We aim to continue to gradually ramp up our investments and still expect to invest up to EUR 150 million for the year, with year-to-date investments at EUR 94 million. But let me underline that we will only invest in what we consider to be attractive enough IRRs. Hence, the final investment level is still uncertain. Let's move to the next slide for more details on the development in operating expenses. Axactor is facing cost pressure with increasing salaries, more expensive IT licenses, and higher office rents, to pick a few examples. We have the ambition to keep operating expenses at the same level in absolute terms year over year.
This means that we need to initiate substantial cost measures to compensate for the unavoidable cost increases. I am therefore very pleased to see that our operating expenses are down EUR 2 million or 5% year over year. The low OpEx ratio of 33% is an important driver of the high Cash EBITDA in the quarter. However, as we expect the cost pressure to continue, we constantly need to improve. Please move to the next slide for a short update on two important initiatives that will help us to reach our ambition on costs going forward. Last quarter, we introduced these two very important projects that, over time, will improve our cost position further. The first one is called Growth Italy and aims primarily to make us more equipped to handle expected growth in the Italian market.
The process is fully on track, and the buildup of NPL-amicable capabilities at Sicily and administration functions in Grosseto goes according to plan. The second initiative, which is to change the IT infrastructure provider to Albania, has moved from the closing of the tender and into the pre-launch phase. We expect to start to migrate the first country to the new infrastructure from Q1 next year. The last point I will make before I leave the word to Nina is regarding interest rates. Please move to the next slide for more comments. As I said during the Q2 presentation, this is not an area that we can really impact that much, except working with the capital structure in different ways to reduce the margins on our borrowing facilities. But I still think it's important to mention it.
A potential decline in interest rates will really move the needle in terms of profitability if the interest forward curves materialize over the next couple of years. Currently, 8% of our net interest-bearing debt is hedged as of end Q3, and you can expect this share to increase over time as we do new investments, and we hedge these new investments correspondingly. We have a positive P&L effect of EUR 1 million per quarter in 2024 and EUR 0.8 million in 2025 from an already realized hedged contract. With approximately EUR 950 million in net interest-bearing debt and 92% being unhedged, it is clear that just a one percentage point reduction in the interest rates will improve Axactor's cash flow and net financial results rather substantially, and hence also the return on equity. That is the good news.
Unfortunately, this will take time, but we will gradually start to see the positive effects from Q4 this year and onwards. Nina, with that, I leave the word to you.
Thank you, Johnny. So now I'll take you through the Q3 financial performance, starting with the overall figures and then a bit more context on what is behind the numbers. Total gross revenue for the group ended 2% above Q3 2023. The challenging macro situation and government-imposed debt relief initiatives continued to impact the collection performance negatively. The relatively moderate investment levels we had in 2023 are also limiting the growth rate. The NPL segment reported a growth of 2% this quarter. The growth was supported by the sale of a small portfolio in Spain of EUR 4 million. The 3PC segment delivered revenues in line with the same quarter last year. Excluding the 3PC businesses in Sweden and Finland that were closed during the fourth quarter of 2023, the growth was 6%.
Let's look a bit more into details on each of the business segments, starting with NPL on the next slide. Total income for the NPL segment ended at EUR 42 million in Q3, down from EUR 52 million in the third quarter of 2023, a decline of 18%. We continued to see a challenging collection environment during the quarter where all markets performed below expectations. The overall collection performance ended at 90% for the quarter. It is important to note that Q3 is a seasonally weak quarter. Total income was negatively impacted by revaluations of EUR 7 million in the third quarter, combined with an increased NPL amortization rate of 33%, up from 24% in Q3 last year. The reduction in total income was partly offset by lower OpEx ratios, and we are pleased to see continued positive results from the ongoing cost improvement projects.
The contribution margin for the quarter ended at 76%, down two percentage points from 78% in Q3 last year. Please turn to the next slide for comments on the development in the 3PC segment. The 3PC revenues ended at EUR 13 million for the quarter, equal to a growth of 6% if we exclude Sweden and Finland, which were closed down last year. The increase was driven by double-digit growth in Norway, as well as a strong development in both Spain and Germany. The Norwegian 3PC business is experiencing solid growth from new sales within the banking and finance segment, a key focus area of Axactor's strategy. The contribution margin was 37% in the third quarter, up from 33% in the third quarter last year. The increase in margin is a result of healthy cost control and the exit of low-margin business.
Let us move on to the next slide, where I will present more details on the reported financials. Total income at group level ended at EUR 55 million in Q3, down from EUR 64 million in Q3 2023. The reduction was, as previously mentioned, impacted by negative revaluations, a higher amortization rate, and a continued challenging macro environment for collections. The EBITDA margin ended at a healthy level of 48% due to strict cost control in all countries. The EBITDA also includes a restructuring provision of EUR 0.8 million related to the site consolidation project in Italy. Cash EBITDA ended at EUR 59 million for the quarter, a growth of 6% from Q3 2023. The increase in Cash EBITDA was driven by a reduction in operating expenses and the sale of a portfolio in Spain.
Now on to the next slide for a look at the development in return on equity and a summary of the Q3 financials. The ROE came in at 3% on a 12-month rolling basis. ROE was negatively affected by the macro situation and increased cost of funding. We are pleased to see that our cost reduction strategy is showing results and is supporting a healthy underlying Cash EBITDA and margin. Another positive development is that our 3PC strategy is working, with continued growth and improved margin this quarter. I'll now hand it back to Johnny for some comments on the outlook.
Thank you so much, Nina. Regarding outlook, there are only a few changes from the Q2 report. And to summarize, we expect to experience a challenging collection environment during the whole of 2024, and we also expect this to continue into 2025. Further, we have very good cost control and expect to be able to absorb any cost inflation through OpEx reductions. As mentioned earlier, we expect only a modest reduction in cost of funding in the short and midterm. We expect to invest up to EUR 150 million, which is in line with the investment target of EUR 100 million-EUR 200 million annually. Year-to-date investments are EUR 94 million. Finally, as of end Q3, we are compliant on all covenants, but given the limited headroom on leverage ratio and interest coverage ratio, we will pay close attention to these going forward. We are continuously working on mitigating actions.
With that, we open up for an opening of the.
If you'd like to ask a question on today's call and you've joined us via the phone, please press star followed by one on your telephone keypad now. Those joining us via the webcast can submit written questions. Our first question comes from Ulrike [Decoene], Nordea. Ulrike, your line is open. Please go ahead.
Yeah, thank you. A couple of questions for me. I understand that under collection was broadly based geographically, but how was it based on vintages? Are the portfolios you bought the latest years performing, and is it a backbook problem, or is it broadly based there as well? And then just on the second question, just wondering what is the risk? What does it take for you to take an impairment? Because if you expect under collection going forward as well, what is the risk to that? And how comfortable can you be that the funding costs are clearly falling, but if you keep under collecting, you could still experience quite a bit of pressure on your ICR. So what's the risk?
Yeah, thank you, Ulrike. So the first one, it's definitely a vintage problem. I'm not going to go into the specific vintages, but mainly it's the portfolios acquired from the inception of the company in 2016 and until 2019 and into 2020. That is the main challenge we have on the collection side. Regarding risk of impairments, well, when you are at 90% collection performance, the longer you are at that level, the more portfolios will pop up on our revaluation list, and some of the under collection or low collection can maybe be explained, but the ones that cannot be explained will require impairment, so now it depends on the collection in Q4 to see if it will be necessary with an impairment or not, and regarding the ICR, as we say, we have very, very little headroom, and we are working on the mitigating actions.
As always, it is improving the collections. It is buying accretive portfolios, and it could be other actions like you saw in this quarter where we had a small, very small, I would say, portfolio sale at close to book value. That will also help.
But the under collection or the net credit loss in this quarter, was that because the trend is not very good, but is a part of it seasonal? I think I understood Nina that way.
Part of it is seasonal, but we are striving to also embed seasonality in our curve. So maybe we haven't embedded enough seasonality. So yeah.
Okay. Thank you very much.
The next question comes from Gustav Larsson from Arctic Securities. Gustav, your line is open. Please go ahead.
Good morning, and thank you for taking my question. I have a question regarding the cost reduction that you're achieving now in Italy, I guess. Can you comment on the annual savings you're expecting from the site consolidation there?
We don't have any, we don't disclose any number on that specifically now, unfortunately. I haven't done the calculation. At least I don't have the number in front of me, unfortunately.
Okay, so we just expect, I mean, relating to your earlier comments about being able to absorb inflation, so costs being flat.
These are two more of the. We have a lot, of course, a lot of initiatives to try to make us able to keep the cost level and also the cost level in absolute terms. Then these are the two, I would say, largest initiatives that will give effect in 2025: the Growth Italy project and to change the infrastructure vendor, which also will be a substantial saving primarily from mid, I would say mid-2025 with the infrastructure because it takes us a half a year or a little bit more to actually do the implementation before we start to see any of the cost reductions from the new price level on infra.
Thank you. Regarding investments, you reiterate your guidance here up to EUR 150 million. Can you give some flavor if you have seen an active Q4 so far, and how are NPL prices developing?
Q4 is quite active. There's a healthy pipeline, I would say, in both Spain and Italy. And we have also seen activity in the Nordics. But to be honest, the prices, at least the way we see it, is moving quickly in the wrong direction. So I'm not sure that we will be able to find the right IRR level for as much as EUR 150, but that is what we are aiming for. But we see that regarding the prices, we see that both competitors are getting a little bit more aggressive, but also we see that new money from funds are coming into the market and want to co-invest and have been able to set up co-investment structures with players in the industry. And we see that that is putting pressure on the prices.
Thank you. Okay, regarding the portfolio sale and Cash EBITDA, when you sold this portfolio, you received the cash, and it contributes to Cash EBITDA. Do you make a pro forma adjustment for the rolling 12 months from this portfolio that you have in your rolling LTM numbers as well, or is that counted as well towards Cash EBITDA?
The sale of the portfolio is also counted in the Cash EBITDA for the quarter, and hence also then included in the last 12 months.
Okay. And just the last question then for me. Regarding the ICR, you have a positive effect from the hedge on your net financial items. Does this support your credit metric level, or is this not counted in your ICR calculation?
Also, the hedge is only in the P&L, so we don't have the cash effect anymore from the hedge, and the ICR is based on the cash metrics, so it's not included in the ICR.
Okay, thank you very much. That's all from me.
Thanks for reminding. If you've joined us by the phone and would like to ask a question, that's star one. We have no further audio questions, so I'll hand the call back to the team.
Okay, then we have a few questions online here. So one is, can you please update us on your bond and RCF financial covenants? Are you still compliant as of this call? Have you had any preliminary discussions with lenders about requesting a waiver? And first of all, a full description of the covenants you can find on page 30 in the report. Yes, we are compliant on all covenants, and no, we have no discussions with lenders about requesting a waiver. And then we have a question saying, can you tell us your updated view on prospect for amending and extending your June 2026 RCF maturity and refinancing of your 26 floating euro bonds? So there is no process for renewals. It's a little bit too early. Normally, we start the RCF renewal process a year in advance.
So that has not started yet, and we are almost two years away from the maturity on the 26 bonds. So also a bit too early for us to start any process on that. And then it's one question, can you give more color on the collection performance? What explains the changes in NWC cash outflow? I think we have already said some; we gave some color on the collection performance, but it's like it's the Sicilian report. It is tough, it's broadly divided, and it's the backbook that we are struggling with. Yeah. And that was the last question from online. So if there are no other questions from the participants, I think we could close down the call. And I thank you all for listening. Have a great day.