The presentation of Q1 2022 Results Call. My name is Ruby, and I will be your moderator for today's call. If you would like to ask a question during the presentation, please press star followed by one on your telephone keypad, or you can submit a question via the webcast. I will now hand over to your host, Johnny Tsolis, CEO, to begin. Please go ahead.
Good morning, and welcome to Axactor's first quarter presentation for 2022. This presentation will be divided into four parts. First, I will take you through the highlights of the quarter. Then our CFO, Nina Mortensen, will present Q1 financials before we give an updated outlook and round off with a Q&A session. As always, you may ask questions live after we're done presenting or through the available chat function. Now let us move to slide three and have a look at the highlights for the quarter. After a rough second half of 2021, and in particular, a slow Q3 in terms of NPL collections, it is comforting to see that our collection performance is back at 100% of active forecast. Last year's reevaluation obviously helped, taking future collection curves down, but in general, the positive trend we saw in December has continued into 2022.
At the end of last year, we saw indications that the market for NPL transactions were coming back with full strength, with higher volumes coming to the market. This continued into first quarter, and Axactor did invest substantially in Q1, reaching EUR 80 million in NPL investments. With these investments, in combination with already committed forward flows for the rest of the year, Axactor will, at a minimum, invest 50% more than replacement CapEx in 2022. Our cash EBITDA grew 10% year-over-year, and we delivered an annualized return on equity of 8% for our continuing operations, meaning all operations less REO segment. Please move on to the next slide, where you will see that Axactor is back on the growth track after a period of consolidating operations and improving the balance sheet.
We thought it would be a good idea to recapture our historical estimated remaining collections or ERC development to give the audience some insight to how we look at the past and the present regarding growth in the NPL segment. Obviously, the first four or five years was characterized by several M&A transactions as we were building our platform structure. At the same time, Axactor was investing aggressively in new portfolios in order to build scale. NPL investments were particularly large in 2017, 2018, and 2019, resulting in a strong growth in both NPL collections and ERC. The last two years has, of course, been heavily influenced by the pandemic in several ways. Regardless of COVID-19, Axactor had a high need to consolidate operations and adjusting the NPL acquisition strategy.
During the last six quarters, our NPL investments has been limited, both due to capital limitations for Axactor from the beginning of 2020, but also the market in general, which offered much lower volumes for sale. To summarize some of the main milestones the last two years, I would like to mention the following. The most important one was the full refinancing of the balance sheet last year. We also successfully implemented a EUR 6 million cost reduction program in 2021. During the period, we have done a significant site consolidation in several countries, closing down operational sites, back-office functions, and one sales office. In total, 12 sites have been closed down.
As you are aware, we have done reevaluations of the NPL book in both 2020 and 2021, particularly portfolios acquired in the growth period previously mentioned, but also due to the unattractive investment in Spanish REO. A new corporate strategy has been implemented, including a more conservative NPL acquisition strategy backed by significantly more data than we had access to in the startup phase of the company. Finally, we have sold off more than 90% of the REO assets in terms of value, leaving a moderate book value of EUR 23 million by the end of Q1. From Q4 last year, the investment in NPLs was again higher than our replacement CapEx, and the same was the case for the previous quarter. Of course, it is not difficult to deploy NPL CapEx in a booming market.
As you will see later, Axactor has done so at satisfying gross IRR levels and substantially above the average IRR level that we have achieved in our first five years of operations. The positive effect can be identified as growth in our ERC figure, which will continue to grow because of increased NPL investments going forward. Let's move to the next slide, where I will give some additional comments why I think Axactor is in an excellent position to accelerate going forward. I already mentioned some of the main changes Axactor has gone through the last couple of years. I think it's fair to say that what we have been through as a company is actually closer to a transformation than anything else. We are, of course, the first one to admit that the financial result has been disappointing.
However, please bear in mind that when a company invests in assets with a 15-year collection term, where the gross payback on portfolio is typically between four to six years, it takes a long time to see the effects of the improvements. It could take two, maybe three years before we start to see the results of the transformation in the financial figures. With this in mind, I would like to underline a few very important indications on why we believe Axactor has such a solid foundation to accelerate going forward. Firstly, we are winning close to 80% of all 3PC benchmark we participate in.
Unlike NPL, where you can buy a market share by simply bidding more than competitors, winning benchmarks on 3PC requires a highly skilled organization, excellent reporting systems, and not to forget, a 3PC relationship in the first place, which is not easy at all to gain as long as you require a sensible margin on your services. Secondly, Axactor has managed to become industry leading on cost to collect. The last two years, hard focus on cost in combination with low legacy structure are keywords in this regard. Further, Axactor is ranked by Sustainalytics as one of the top five companies worldwide on ESG. We consider this as a real proof of quality, and we know that investors does as well. Another important element is the debtor satisfaction.
We are measuring our debtor satisfaction in all Axactor countries, and on average, we score 4.6 out of 5. Needless to say, this is a very strong result and further confirms that Axactor is treating the debtors fairly and with respect. The same high level of satisfaction is seen when we ask our customers how satisfied they are. The score gives Axactor 8.5 on average out of 10. This is a result that I am particularly proud of and really sets the benchmark for the industry. The last part of the equation, and what really puts us in a unique position for the future, is our highly skilled and motivated employees.
In 2021, we were introducing Great Place to Work certification, and we managed to be certified in five out of six countries in the initial year, which must be considered to be a very strong result. In my view, the combination of these elements puts Axactor in an excellent position for the future. Please move to the next slide, where we will go a bit more into detail on collection performance. As I mentioned earlier, we are pleased to see that the collection performance versus active forecast is back on our long-term target of 100%. This was, of course, supported by the revaluation we did last year, but also a result of increased cash collection for the quarter. Last 12-month collection performance is now at 95%, but will gradually improve as Q3 and Q4 last year is taken out of the rolling 12-month figure.
Even though we might see smaller deviations from the target level in certain quarters, we do believe the long-term average performance will fluctuate around 100%. Please move to the next slide for additional comments on NPL investments. I have already elaborated a bit on the uptick in NPL investments, but I would like to repeat that there are many deals in the market, but the quality is varying a lot. Several banks and firms are taking the opportunity to sell off all their back books as the price level is quite aggressive. The fact is that the collection companies still needs to refill volumes after the pandemic. For Axactor, Q1 is the third consecutive quarter in a row that our NPL investments has increased. We stick to our current guiding of EUR 200 million-EUR 250 million in investment for 2022.
Again, I would like to underline that we will only invest as long as we see gross IRRs at a satisfying level. We will not invest just to fill up the machine. Let us move to slide eight, where we give some data to back up our current CapEx evaluation. Our estimated replacement CapEx is EUR 108 million. This represents the investment level where everything else equal, our NPL book values will stay constant. To simplify, we acquire new volumes equal to what we collect. We have already signed NPL investments of close to EUR 160 million for 2022, which consists of the combination of the EUR 80 million invested in Q1, and the commitment for the flow of volumes for the rest of the year.
At this point in time, we know that 2022 investments will exceed replacement CapEx by approximately 50%, and this will increase further over the coming quarters. We now need to close approximately EUR 90 million in additional CapEx at a satisfying price in order to reach the upper range of the guided CapEx level. We believe this should be realistic to achieve, especially knowing that Q2 and Q4 normally are the most active transaction quarters for the industry. Even more important than the CapEx level is the price level. Please move to the next slide for more details on that. Axactor's single most important profit improvement initiative is to buy portfolios at a satisfying gross IRR level. As you can see from the graph on the left-hand side, the average gross IRR on the total NPL book is steadily increasing quarter by quarter.
We have managed to increase the gross IRR book by 0.8 percentage points year-over-year. This might seem moderate, but please remember that we only invested EUR 114 million last year compared to a back book of EUR 1.1 billion. As you can understand, it takes time to blend the book with higher IRRs. Also, a one percentage point change in the total NPL book gross IRR equals approximately two percentage points improvement of the return on equity. If you look at the last two-year vintages, the gross IRR is substantially above the average book, and the 2022 vintage is currently 4.4 percentage points higher than the average. For the administration, this represents the most important indication that Axactor is on the right track to improve profitability.
With that, I give the word to Nina for the financial update, starting on slide 11.
Thank you, Johnny. Starting with the development in gross revenue, we see an increase of 3% compared to Q1 last year, and we are pleased to see growth in both NPL and 3PC segments. NPL segment had a growth of 1% in the quarter despite low investment levels and decreasing book values during 2021. Q1 showed good collection in all countries with an overall performance of 100%. The 3PC segment grew 14% in the first quarter, driven by the acquisition of C.R. Service in Italy. Let's now look a bit more into details on each of the business segments, starting with NPL on the next slide. Total income for NPL segments ended at EUR 43 million, up 9% compared to Q1 last year. The top line was, as already mentioned, supported by good collection in all countries.
The portfolio amortization rate was somewhat lower in Q1 this year compared to Q1 last year. Impairments booked in Q4 last year are reflected in the lower amortization this quarter. The contribution margin was at a solid 77%, the same level as in Q1 last year. The market activity of NPL acquisitions is high, and we have already secured a healthy book value growth for the coming quarters. Together with a satisfying gross IRR, we expect this to contribute positively to future profitability for NPL segment. Please turn to the next slide for comments on the 3PC development. The 3PC revenues reached EUR 13 million for the quarter. The growth of 14% was mainly driven by the acquisition of C.R. Service in Italy. Even without the acquisition, the segment still reported marginal growth.
The market activity for a 3PC business has been high so far in 2022, and we signed several significant 3PC contracts during the first quarter. We see a positive market development, especially in Spain and Italy, with the easing of the moratorium. We also see a positive change in the bank's willingness to sign new contracts and that the market is improving with increasing pipeline across several countries. The contribution margin ended at 34% for the quarter, and we see that measures implemented on the cost side last year are having a positive effect. Last year was impacted by restructuring costs of EUR 2.8 million, and adjusted for this, the margin would have been around 30% in Q1 last year. Let us move on to the next slide, where I will present more details on the reported financials.
We reported total income at a group level of EUR 56 million in Q1, up from EUR 51 million in Q1 last year, which represents a growth of 10%. The increase in total income was driven by growth in the 3PC segment and the collection performance in the NPL segment. As already mentioned, the overall collection performance in the quarter was back at 100%. The amortization rate was lower in Q1 compared to Q1 last year, mainly due to lower book values as a result of impairments booked in Q4 last year. The reported EBITDA came in at EUR 27 million, corresponding to an EBITDA margin of 48%. The margin is supported by good cost control in all countries. Cash EBITDA was EUR 48 million compared to EUR 44 million for the same quarter last year. This represents a solid growth of 10%.
On the next slide, we will look closer at return on equity development. The return on equity level has been, as you can see on the chart, quite volatile over recent years and has been negative during the last two years with COVID-19. We are pleased to see an analyzed return on equity for continuing operations of 8% in the first quarter, which is a step in the right direction to deliver profitable growth going forward. The positive return on equity is mostly driven by the improvement in operating profits, but net financial items are also showing a positive development. We have taken measures to reduce the net FX exposure through 2021, and the FX impact for the first quarter this year was close to zero compared to negative EUR 3 million last year.
The effective tax rate was 39% in the quarter and is impacted by interest rate limitations in some of the Nordic countries. Measures have been initiated to reduce the impact and the expected tax rate to be reduced over the coming quarters. I would like to point out that the return on equity might vary from one quarter to the next due to seasonal fluctuations, but we do expect the trend to be positive year-over-year going forward as the underlying business improves. Let's move to the next slide. The group has a strong balance sheet following the refinancing of the company in 2021. The equity ratio is at a satisfying 29%, even after a negative revaluation in Q4 last year.
We also have a good liquidity position with available cash and substantial undrawn credit facilities. We have approximately EUR 300 million in investment capacity, which is almost 3x the investment CapEx level for 2022. It is important to note that the challenge is not access to funding, but access to high quality portfolios at their correct price level. I would also like to confirm that all of the covenants have comfortable headroom. In summary, we have taken a first step in the right direction on profitability, and we are in a solid position for future growth. I'll now hand it back to Johnny for an updated outlook.
Thank you so much, Nina. In our updated outlook, we have three items that we would like to share and underline. Firstly, European consumer consumption are returning as restrictions related to the pandemic are lifted. We expect a gradual increase in formation of new NPLs, which in turn will increase the volumes in both the 3PC and the NPL market. Secondly, we see an increasing geopolitical risk in Europe with the ongoing conflict in Ukraine. The war has a marginal effect on Axactor's operations so far. However, the increase in energy and food prices and increasing interest rates might affect Axactor negatively going forward. Actually, all elements that reduces the debtor's disposable income will potentially have a negative impact on the Axactor back book. Finally, Axactor expects to deploy between EUR 200 million and EUR 260 million in NPL portfolios in 2022.
Just to repeat the positive message, Axactor has already secured investments and committed investments of close to EUR 160 million for 2022 at a satisfying 21% gross IRR level. That was what we had on the agenda today. Before we go to Q&A, I would just like you to have a look at the next page as we have launched a few new initiatives in order to make us more available and transparent in terms of investor relations. First, I would like to inform you that on Monday, May 2nd, we will present at Investorweb with Tiril Sørli from Sparebanken Loan Market as moderator. It will be a great opportunity to ask questions and to learn more about Axactor and the industry. I recommend everyone to listen in. We also encourage you to sign up for our new investor relation newsletter.
You can do so at our webpage, axactor.com. In addition, we have just recently shared investor information such as analyst consensus and target prices, in addition to credit rating reports. I especially recommend you to have a look at our educational videos that we launched this morning, which you can also find on our website. With that said, let us open up for questions.
If you would like to ask a question, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. If you change your mind, please press star followed by two. You can also submit a question via the webcast. Our first question this morning is from Rickard Hellman of Nordea Credit. Your line is now open. Please go ahead.
Thank you. I have two questions. To start with, the increased cost environment also seen in the inflation. Have you got some indications that will affect your collection ability during Q1 or going forward as well?
Thank you for the question. We have seen a few indications that some debtors are calling in asking for reduced amounts in payment plan. That is the most concrete example I can give you, actually. Not to a large extent so far. Of course, with increasing inflation and potentially higher interest costs for consumers, it could not be ruled out that we will see more and to a larger extent going forward.
So far we're limited at least.
Yeah. So far limited. Yes, correct.
Okay. Thank you. The next question regarding your guidance to investment levels and also the fact that you have been able to invest quite a lot of that guidance. How should we interpret that. Will you cherry-pick to get up to that level or could we expect you actually increase the investments above?
I think currently we stick to the EUR 200-EUR 250 million guidance. As we said in the presentation, there is a lot of deals in the market, but also the competition is quite fierce. We would evaluate every opportunity and as long as we could achieve the desired IRR, we are willing to invest also above the guided amount. We have capacity to invest up to 300 without pushing covenant limits. There's definitely room for more. I think to be realistic, given the price and the price range we see in the market, we should be satisfied with reaching the EUR 200-EUR 250 million mark at satisfying IRRs.
Okay. Do you see any big differences between the different markets or regions behind the competition? I have noted some of your peers are a lso stating that competition is very fierce.
I would say that it's fierce in all markets, all our six markets. There's normally everything from three up to 10 bidders on most of the portfolios. What I can say is that there's a widespread in how many deals that is coming to the market. For example, in Spain, we see a lot of deals coming to the market. That's maybe the most active market for us for the next two, three quarters. When it comes to the competition, I would say that it's competition in all markets and quite fierce for the moment.
Okay. Thank you.
Thank you.
We do have a further telephone question, but as a reminder, it is star followed by one, should you wish to ask a question. Our next question is from Neil Simpson of ICG. Your line is now open. Please go ahead.
Hi. Thanks for taking my question. First one's just a quick one. 3PC revenue, what was the contribution of C.R. Service? Or maybe what was the organic growth? Another way to ask that question.
When it comes to the 3PC on the revenue side, the growth is driven by 3PC. Sorry, C.R. Service in Italy. That's mostly all of the growth. If we adjust for that, we are marginal on the positive side.
Just to maybe dig into that a bit deeper. On the excluding C.R. Service, you mentioned that you were seeing some improvement in Italy as moratoriums come off. Can you just go into why you're not seeing any kind of, you know, organic growth?
Yeah. First of all, we see that volumes are coming back on 3PC in Spain and Italy primarily. At the same time, we see that the default rates are historically low in most markets, and particularly in Norway, and it has also been in Germany. Volumes has been lower in those markets. In addition, as you might know, that a couple of years back, or maybe a little bit less, the fee regime in Norway was changed. We are getting less revenue on the on the Norwegian 3PC business. This is more than compensated by the increase in Italy.
Okay. Got it. As you think about the outlook, obviously Q2 last year was very strong. How do you think will comp relative to the prior year just for the upcoming quarter?
We are not guiding specifically on the next quarter, but I think what we could say on the CapEx side, I think it will, as you can understand, if we are to reach EUR 200-EUR 250, we still need to invest for the rest of the year. I think that Q2 will be a quarter where we are in a position to invest more than what we have already committed under forward flows. We anticipate, based on what we see now, that the positive development on 3PC will continue. As I also mentioned in the outlook, it is, of course, a bit uncertain how the debtors will behave if energy prices and inflation continues to stick and to increase.
As a basis, we believe that we will see. The Q2 has historically been a strong quarter, and we don't see any reason why it should not be also a good quarter this year.
Okay. Got it. Because in prior quarters, you've given us the ERC for the next four quarters split out. I don't believe it's in the presentation this time. Could you give us some indication of what ERC will be for Q2?
Not in the presentation, but it is in the report.
Okay. I must have missed it. Last question. You mentioned increase in leniency calls. What about discretionary payments? You know, payments outside of the normal scheduled plan. Are you seeing any kind of changes in consumer behavior and how they, you know, maybe make additional payments?
No, not really. Not that we could.
Okay.
No, not really.
Okay. Thanks. That's it for me.
Our next question is from Elise Evans of Man GLG. Your line is now open. Please go ahead.
Hi. Thank you very much for the presentation. A couple of questions from my side. A lot of competitors have seen the number of NPL deals coming to the market much below what they were expecting and the market was expecting overall. I'm assuming this is what is driving high competition for new portfolios. And I'd like to understand a bit better, how do you see the situation developing from that side? And also my second question is around the risk of a combination of the higher prices for portfolios and the deteriorating economic environment impacting collection rates. I'd like to get a bit of your view on that and also what discount in collection rate do you model for this portfolio you are buying at the moment?
Because obviously, you know that there's gonna be an impact which is difficult to evaluate, but I'd like to understand a bit better, you know, how you approach, that. Thank you.
Not sure if I grasped the first part of the question entirely, but if you asked about the volumes that comes to the market, yes, we see significant volume coming to the market. Not sure if it's so surprising. I think we have been waiting for it. It's probably driven by the fact that the prices at the end of Q1 was increasing quite substantially or basically throughout the whole year as the collection companies needed to refill and push prices on the few deals that was available last year. That again has created that environment where banks and sellers have seen that prices has been attractive and are now pushing a lot of deals into the market. Let's see how prices will develop going forward.
It is true that the industry has refinanced and there's a lot of capacity available, both because the companies have during the pandemic also have had a high cash flow that could be reinvested, but also because we have seen competitors setting up co-investment vehicles with high capacity that needs to be refilled. We've also even seen new companies coming to the market with deep pockets and willing to take a high risk on portfolio acquisitions. I hope that answers the first part of the question. The second part of the question I will say that for Axactor, we are not pushing the risk on portfolios.
A couple of years back, we introduced kind of adjustments to our acquisition strategy, and we are primarily buying portfolios from very well-known sellers known to us. So either we have done 3PC on the claims, or we have done transactions with the selling banks previously. That is a big advantage because then we know what kind of risk profile the bank has and what kind of credit policy that lies beneath the credit giving. This is what we are looking for. If we are not reaching the required IRR, gross IRR, on our portfolios, we will simply not buy. That was what you saw the result of last year.
It was not because there was no deals coming to the market, it was just simply prices being too high, and we did not have the appetite to push the risk, and we will not have the appetite to push it this year either. Because of the increased volumes, there are possibilities for us to buy for the guided amount at, as you can see, satisfying gross IRR levels. When it comes to what kind of discounts we put into our valuation models, that is a very detailed question, and it will vary from portfolio to portfolio and from country to country. I actually cannot answer you very specifically on that one.
Yeah, sorry, I was not necessarily looking for a very, you know, quantified answer, but just trying to understand how you approach that. Because there's this lack of visibility around collection rates, given the deteriorating economic environment, the high inflation and the reduction of disposable income. And then, you know, like you buying portfolios in a very competitive environment where, you know, like prices are actually higher than what was expected. It's interesting to hear that volumes are high because I've heard from, you know, like other players in the area that actually volumes were slightly lower than what was expected. That doesn't look like you share that view. I think that was more my question.
Okay. Thank you.
We have no further telephone questions, so I will hand over to the speakers for any questions via the webcast.
Okay. Thank you very much. Well then we have gotten three questions that we will answer from here. Now the first question is actually consisting of three sub-questions, so I will read it out. It says you talked about NPL cash collections at 100% of active forecast in Q1 2022. The question is how often do you update your active forecast? The answer is that we update the active forecast monthly, but of course we only do changes if it's necessary. It's not like we are updating active forecast on all portfolios every month. If we see the need to do changes, it is done on a monthly basis. Second part of the question is what is the definition for active forecast?
Well, what I can tell you is what's the basis for it. It's the ERC curve that is again kind of the basis for our book values. Those are the most important ingredients in the definition. The last part of the question is that the latest business target or is it more of an accounting curve target? The answer is actually it is our business target, but it's also at the same time the basis for the book values of the portfolios. Second question will be answered by Nina.
Yeah, I can read it out loud. Could you please restate the amount of overall cost savings Axactor benefited from due to the cost reduction programs in 2021? The cost program that we initiated and also implemented during 2021 has an annual saving of EUR 6 million. We expect that also to mostly come into also the 3PC business during this year. The next question, could you provide the EBITDA for Q1 2022 excluding the contribution from the acquisition of 3PC in Italy, please? We don't give that detailed numbers and also the C.R. Service are already been integrated with the Italian 3PC business, so we don't have those figures isolated either anymore.
The next question is, last 12 month EBITDA after the consolidation of Spanish REO came in at EUR 190 million for 2021 versus EUR 224 million before the consolidation. Can you comment on the difference, please? To be honest, we need to come back to you on that one. I don't have that detailed answer on that here as I'm sitting. What I suggest is that we come back to you on your email and answer you that during the day, if that is okay. That was all the questions that have come into us. Yeah, let's see here. Now we have another one actually. Follow-up on forecast. You have a quarterly ERC forecast of EUR 68 million in Q4 and reported collection of EUR 64 million in Q1.
Does this mean that after the forecast last month was lowered to EUR 64 million to reach 100%? No, that is not the case. I think here it's important to remember that we have a total ERC of EUR 2.3 billion. There will always be changes like this in a quarter. It's influenced by several things. For example, this quarter, it was influenced by a few secured assets that was delayed in realization in Spain. That asset has been moved. I think if you look at the other companies in the industry, you will see that this is not uncommon, and most company will experience a deviation between ERC and actual collection on a quarterly basis.
There are also other elements that could influence. It could be currency, it could be other stuff. It's natural. You will have to expect a certain amount of deviation on a quarterly basis like this. Yeah. That was. We don't have any more questions here on our screen. Thank you all for calling in, and we wish all of you a great day.
This concludes today's call. Thank you for joining. You may now disconnect your line.