Good morning and welcome to Axactor's second 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 Q2 financials before we give an updated outlook and round off with a Q&A session. As always, you may ask questions live after we are done presenting or through the available chat function. Now let us move to slide three and have a look at the second quarter highlights. Q2 this year has been a strong quarter for the industry, and several peers have delivered good results. Axactor is no exception, and on many KPIs, we are showing the best results since the inception of the company.
Based on high NPL investment levels in the first half, we are raising the CapEx guiding by EUR 50 million, and we now expect to invest between EUR 250 and EUR 300 million for the full year. EUR 223 million is already either invested or committed through one contract and forward flow agreement. The guided CapEx level represents NPL investments of between 2.3 and 2.8 times the replacement CapEx for the year. The comparable number last year was marginally above one, clearly indicating that the market for NPLs is back with full strength after the pandemic. Our cash EBITDA grew 5% year-over-year, and we delivered an annualized return on equity of 13% for the continuing operations. In Q2, the bond market experienced turbulence with cash outflow from investment funds. During the quarter, Axactor repurchased bonds for approximately EUR 37 million in nominal outstanding amount at a substantial discount.
The transactions were financed by using available RCF credit lines and resulted in a one-time positive effect in the financial result of EUR 1.4 million. Please move to the next page for a quick reminder of the most important pillars in the strategy that will lead Axactor to become the industry benchmark. Firstly, in Axactor, we are working extremely hard to blend our NPL book. This means, in a nutshell, to solve all claims with low gross IRR acquired in the first four or five years of Axactor's history with new claims of higher quality and substantially higher gross IRR acquired after 2020 and onwards. We accelerate the blending by investing significantly above the company's replacement capex level of EUR 108 million. As you will see in the coming slides, over the last two years, we have been doing so successfully.
Secondly, we always seek to improve our cost position in all areas. The company was incepted to disrupt the industry on cost to collect, and we have obtained a superior cost position. Currently, we are investing extensively in data-driven valuation and data-driven operations to fuel further. Thirdly, we are pursuing a niche strategy in terms of industry, segment, and market. Our main focus is on bank and finance, primarily business to consumer and security. Organic growth in our six markets to build market position at scale is the main rule. Please move 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. As already mentioned, with increasing NPL investment levels, Axactor is back on the growth track.
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. The last two years have, of course, been heavily influenced by the pandemic in several ways. But regardless of COVID-19, Axactor had a high need to consolidate operations and adjusting the NPL acquisition strategy. Last year, we did a full refinancing of the balance sheet in combination with a EUR 6 million cost reduction program. During the same period, we have done a significant site consolidation in several countries, closing down operational sites, back office functions, and one sales office. In total, twelve sites have been closed down.
A new corporate strategy has been implemented, including a more conservative NPL acquisition strategy backed by significantly more data than what we had access to in the start-up phase of the company. Q1 was the first time since the beginning of 2020 that we saw meaningful growth in our ERC curve, and the trend continued in the second quarter. Let's move to the next slide where we will give more details on the building the book strategy. 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 1 percentage point over the last five quarters
Please bear in mind that one percentage point change in the total NPL book Gross IRR equals approximately two percentage points improvement in the return on equity. If you look at the last two years' vintages, the Gross IRR is substantially above the average book, and the 2022 vintage is currently 3.7 percentage points higher than average. On top of this, the committed investments for the remaining of 2022, 2023, and 2024 is done at 4.7 percentage points higher than the NPL book. The speed of the blending will obviously be influenced by the annual CapEx level. Please move to the next page for more details on the matter. In Q2, Axactor invested EUR 47 million in new NPL portfolios. Q2 is normally a quite active investment quarter, and this year was no exception. However, some of the processes were extended in time and closed in July.
Hence, we will see an overflow on CapEx into the third quarter. Axactor has actual investments and forward flow commitments of EUR 184 million, plus another EUR 39 million in one transaction, securing some EUR 223 million so far for 2022. Based on this, we are increasing the NPL investment estimates to between EUR 250 and EUR 300 million. The updated NPL estimate indicates a level of between 2.3 and 2.8 times replacement CapEx in 2022, securing continuing growth on NPL. I mentioned in my introduction that this quarter was the best for Axactor on many parameters. If you please move to the next slide, I will focus a bit on one of them, the EBITDA percentage. Axactor delivered an EBITDA margin of 50% for the second quarter and 49% year to date. Obviously, we now start to see the positive effect of the major turnaround the company has gone through the last two years.
The key driver is the industry-leading position on cost to collect. Next step is to blend the book with higher Gross IRR portfolios to secure further margin expansion over time. Additional scale effects will also be supportive to the ambition of improved margin. With that, I give the word to Nina for the financial update, starting on slide ten.
Thank you, Johnny. Starting with the development in gross revenue, we see an increase of 5% compared to Q2 last year. As importantly, we are seeing growth in both NPL and CCC segments. Q2 is seasonally a strong quarter, and even though Q2 last year was especially solid, we still managed to exceed that performance this quarter. The NPL segment had a growth of 4% in the quarter, supported by satisfactory investment level during the first half of 2022. Q2 showed good collection in all countries with an overall collection performance of 99%. The CCC segment grew 13% in the second 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 the NPL segment ended at EUR 46 million, up 13% compared to Q2 last year. The top line was, as already mentioned, supported by good collection in all countries. The portfolio amortization rate was somewhat lower in Q2 this year compared to Q2 last year. The impairments booked in Q4 last year are reflected in the lower amortizations this quarter. The contribution margin was at a solid 77%. The market activity for NPL acquisitions continues to be 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 the future profitability for the NPL segment. Please turn to the next slide for comments on the CCC development. The CCC revenues reached EUR 15 million for the quarter. The growth of 13% 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 CCC business has been good so far in 2022, and we see a positive market development, especially in Spain and Italy. C.R. Service continues to deliver performance above business case, and we expect the Italian CCC business to deliver double-digit organic growth in 2022 compared to 2021. The contribution margin ended at 41% for the quarter, and we see that measures implemented on the cost side are having a positive effect. Let us move on to the next slide where I will present more details on the reported financials. Axactor reported total income of EUR 60 million in Q2, up from EUR 54 million in Q2 last year, which represents a growth of 13%. The increase in total income was driven by growth in both the CCC and in the NPL segments.
Amortization rate was lower in Q2 compared to Q2 last year, mainly as a result of impairments booked in Q4 last year. The reported EBITDA came in at EUR 30 million, corresponding to a solid EBITDA margin of 50%. The margin is supported by good cost control in all countries. Cash EBITDA was EUR 58 million compared to EUR 55 million for the same quarter last year. This represents a healthy growth of 5%. Moving on from reported cash EBITDA to interest rate sensitivity on the next slide. The group reported for the second quarter net interest expenses on borrowings of EUR 14.3 million. It is a mixed picture when it comes to positive and negative effects through the quarter, and this slide shows the restated leverage as per end of Q2 of EUR 13.5 million.
Increased interest rate levels will have a negative effect, but we expect this to be offset by the bond repurchases, which will improve the funding cost. The current macroeconomic view points to increasing interest rates going forward. As you can see from the chart, an increase of 1% in interest rates will, given the company's current debt structure and hedging level, increase the quarterly interest expenses by EUR 1.9 million. This leads us to the next slide and the development in the return on equity. We are pleased to see that annualized return on equity for continuing operations is maintaining a good level in Q2 at 13% and 10% for the first half of 2022. The positive return on equity is mostly driven by the improvement in the operating profit.
Net financials include a positive one-time effect of EUR 1.4 million related to the repurchase of parts of the 2 outstanding bonds. This was also announced in a press release last week. As a result of the work to simplify the legal and capital structure, interest limitations are a lesser problem. With improvement in profit, certain group companies have also been able to utilize previous year's tax losses not recognized in the balance sheet. The effective tax rate was thus lowered to 15% in the quarter, with an effective tax rate of 25% year to date. 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 for some more details regarding the balance sheet. The equity ratio continues at a satisfying 29%, and Axactor also has a good liquidity position with available cash and substantial undrawn credit facilities. The investment capacity has increased further to approximately EUR 350 million, supported by good cash collection over the recent couple of quarters, which is equivalent to three times the replacement CapEx level for 2022. It is important to note that the challenge is not access to funding, but rather access to high-quality portfolios at the correct price level. I would also like to confirm that all of the covenants have a comfortable headroom. In summary, we continue 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, the interest rates in Europe are increasing, and it will impact Axactor's cost of funding. A 1 percentage increase in interest rates will increase quarterly interest cost by EUR 1.9 million and reduce the annualized return on equity by 1.5 percentage points. Secondly, we see mixed outlook on backbook collection. On the negative side, rising inflation and interest rates will reduce disposable income for consumers all over Europe. All elements that reduce the debtor's disposable income will potentially have a negative impact on Axactor's backbook. However, on the positive side, low unemployment rate numbers, increasing salaries, and government aid packages are improving the disposable income.
The full net effects are probably yet to be experienced, but so far, we have seen marginal impacts as a result of macroeconomic factors on collections in 2022. Thirdly, Axactor expects to deploy between EUR 250 million and EUR 300 million in new NPL portfolios for 2022. Just to repeat the positive message, Axactor has already secured investments and committed investments of more than EUR 220 million at a satisfying gross IRR level. We expect margin expansion driven by attractive gross IRR levels and improved economies of scale over time. That was what we had on the agenda today. I suggest that we move on to the Q&A session.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, please press star two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Håkon Astrup from DNB Markets. Håkon, your line is now open.
Good morning. Two questions from me. First, on the potential future targets, given the solid performance that you are delivering this quarter and the optics that we have seen over the last two recent quarters, are you contemplating issuing or updating your public financial targets on profitability or dividends?
Yep. We will come back to the market during the fall, Håkon, on that topic. I think you could expect the timing is not fully set, but probably around November, we will come with medium and long-term financial targets to the market, including more comments regarding dividend policy. Like we have said before, we will at the latest pay dividends in 2024 based on 2023 numbers.
Perfect. That was very clear. A second question on the investment, given what you have deployed so far, of course, EUR 223, if I'm correct, the lower end of your new guidance seems rather cautious. Do you agree with that, or is it something that I'm missing?
No, we could agree to that. At the same time, we are not willing to push IRR. As we saw Q4 last year, Q4 is usually the most active quarter. Last year, the prices were pushed quite substantially, and we withdrew from a number of processes. I would say that Q3 has been extremely active. Maybe a lot of the Q4 deals have started earlier this year, but there will be a lot of activity the next four or five months. It's a little bit also if you win one or two of the medium-sized to big ones, yes, then definitely 250 is in the lower range. We prefer to be a little bit cautious on the guidance.
Perfect. Thank you so much.
Thank you. Our next question comes from Joakim Svingen from Arctic Securities. Joakim, your line is now open.
Good morning. I have two questions as well, if I may. The first one is you're showing progress on the Gross IRR the last few quarters. Could you elaborate a bit on how you see this proceeding going forward, and what's your targeted Gross IRR level? Maybe you can start with that.
Yep. I think there's no change in the guiding on the target Gross IRR. We have said that it will be in the range of 18%-22%. As you can see from the numbers now, we are just in the middle or slightly above the average of that target. We don't see any change, at least no significant change, to the Gross IRRs for the next few quarters.
Okay. Thanks. I was just curious because you show some income from reprocessed assets in Q2, also in the continuing business. How do you see this moving going forward? Will that continue in the same path, or should we see more or less going forward?
Well, first of all, I will have to say that reprocessed assets, it's a very marginal part of the total collection. It's a little bit lumpy because it's basically real estate assets that we have reprocessed, and it's a little bit harder to estimate exactly when the sales will happen. I don't have any clear guidance on that, Joakim, but we expect it to still be relatively, say, marginal compared to the NPL part of the rest of the NPL business.
Okay. That's clear. Thanks.
Thank you. As a reminder, if you'd like to ask a question, that's star one on your telephone keypad. Our next question comes from Ulrikke Grøneflåt from Nordea Markets. Ulrikke, your line is now open.
Yeah. Thank you for taking my questions. I have three, if I may. First, I just follow up on Joakim. What is the amount of secured REOs assets as part of your continued business book value?
Yeah. I don't have that number in front of me, but give us a couple of minutes, and I'll come back to it. If you could go to question number two, Ulrikke.
Yeah. Great. I was wondering. I'll take both the questions. The first one is if you're planning on taking any steps to reduce your exposure to higher interest rates, maybe especially the EURIBOR, which gone positive now. Second, I was just wondering a little bit like the next two quarters because your collection excluded the REO repossession was a bit below 100% and how you see this going forward, given all the risks and opportunities.
Yeah. Let me start with reduced interest risk. We have hedged around 23% of the total exposure. Our policy is to within the next 12 months is to increase it to at least 50%. My policy is that it should be going forward between 50%-75%. However, the price of doing the interest rate hedging now is extreme. We have chosen to be a little bit more backward-leaning on it, but the plan is definitely to over time increase the hedging level. Regarding the second question, first of all, the difference between like I said, the collection on repossessed assets are marginal. There are almost no difference between the total collection with or without repossessed assets. For me, it's a little bit I wouldn't say totally irrelevant, but it's so marginal difference, so. We will only report on the total collection going forward.
I think you have the figures in the report to actually calculate it yourself, Ulrike.
We can just also add to your first question was on the amount of repossessed assets. We have at the end of Q2, EUR 2.2 million in repossessed assets.
Yeah. Like I said.
Sorry. What was that? 1.2.
2.2 million in book value.
Okay. Very good. Yeah. I did calculate the collection performance. I was just also wondering if maybe you have some because if you don't book this secured asset gain because it's lumpy next quarter, or if you didn't book it now, it would be like a EUR 2 million underperformance maybe against your curves. This is just my numbers. I'm just seeing if we get a more intense cost of living crisis into the winter months, how comfortable are you with your current collection curves?
We are very comfortable with the curves. Like I said, when it's lumpy, it could also be EUR 2 million above. Like I said, I think it's important to realize this is a very, very marginal part of the collection. Yeah, we don't have any further comments on it.
Well, thank you for that. That's it for me. Thank you so much.
Thank you.
Thank you. We have no further questions from the phone lines, so I'll hand back to the speaker team for any questions from the webcast.
Yep. Very good. We have the first question here is, can you please elaborate further on blending the book? Does this mean that you're combining and splitting portfolios to balance out the returns? I think during the presentation, this question came before we presented. I think we answered this pretty clearly in the presentation. What we mean by blending the book is basically to solve all claims that was acquired with low gross IRR. We solve the old claims, and then we repurchase or we purchase new portfolios, NPL portfolios with a higher gross IRR. Just by mathematics, this will then end up with a higher average gross IRR. That is what we mean by blending the book.
Then we have a second question, and that is, given that Axactor has one of the best cost leadership, will more focus then be put into 3PC versus portfolio investments? The short answer to that is no. We are already focusing a lot on 3PC, especially in countries like Spain, Italy, Germany, and partly Norway. When it comes to Sweden and Finland, we don't have that much 3PC. The cost position is obviously important when we do pricing, but it doesn't change the way we will act in the 3PC market. Nina will take the next probably on the hedging.
Yep. I can just read the question. The EUR 200 million interest rate hedge mentioned in the footnotes of slide 14 of the presentation, is it actually in place already, or is it expected to be entered? I can confirm that the interest rate hedge of EUR 200 million is already in place, but it has a forward start. The agreement is entered, but it will start in mid-December this year.
Thank you, Nina. Next question is, what is the expected effect of rising interest rates to the collections of portfolios purchased? This is, of course, a little bit complex question, but again, rising interest rates on collection is not our biggest concern because we have to be careful taking kind of a country's macro picture and apply it to our debtor base because most of our debtors, especially on the backbook here, they don't have a house. If they have a house and a debt to us, we are actually already on an acceptable payment plan. If not, we will take actions, right? Rising interest rates are definitely a challenge when it comes to funding cost as we have been through. On collections, we don't see it as a big issue, actually. We have the last question so far is regarding macro.
You mentioned only a small effect on collection performance. On the other hand, you do underperform on your collections. What is the reason? What is the actual collection rate versus actual forecast, excluding repossessed assets? The latter part of the question, you have already answered. First part is that yes, but I have to say it's a very small underperformance. I think everyone that really follows this industry knows that sometimes there will be curve revisions based on macroeconomic factors or operational issues. This is the way the business is run. This is the way everyone is doing it. For this quarter, it's just minor revisions. The reason for it is that I think you all know that Axactor does revaluations when it's necessary and has a foundation in the numbers. We have shown that over the last couple of years.
The situation now is completely different. It's a minor adjustment on some of the curves. It's only done where we could really document that it's a delay in cash flow. How could we document that? Well, first of all, a good example is in a couple of the portfolios. We have seen that large one-off payments have been reduced, most likely due to a little bit tougher refinancing environment. We see that a number of payment plans are going up, so clearly indicating that the cash flow will come, but it will come not as a one-off, but in installments over a longer period of time, also accruing interest. It's 100% clear how this should be handled by IFRS, and that is to do curve adjustments. Again, it's only minor adjustments.
That was the last question we have received.
Firstly, I would just like to, let's see. There we have another one. Can you please shed some more light into your expected margin expansion on cost to collect going forward? How will you continue to work on this?
Yes, we could do that. I think what we also said in the presentation that this is a long in the short term, when you deliver 50% EBITDA margin, it's hard to push that a lot in a quarter or two. We are working long term, especially we are investing a lot in more data-driven collection. Basically, take down the cost of collecting the money. I think here it's also important to understand that when we are investing 2.3-2.8 times and maybe even more in some years of replacement CapEx, we are driving scale. The cost base is not increasing at the same pace.
It will be a natural increase in the margin that way. Of course, what we have said with blending the book when we are buying portfolios with a higher margin. I think that's in the combination. We are not guiding on any specific percentage, but we expect it to increase over the coming quarters, maybe not the first or second next quarters, but over the next one to two years, we expect to see a meaningful improvement of the margins. Okay. We also got feedback that there were some issues with the sound in the beginning of the presentation. We will make sure that the full recording will be available on our website shortly. Looks like there are no further questions at this point.
Before we close the call, we would like to encourage all of you to sign up for our new investment or investor relation newsletter. You could do that at our web page, axactor.com. On the web page, you will also find useful information such as analyst consensus, credit rating reports, and a few very nice educational videos on Axactor and the industry. I think it only remains to say thank you all for attending the second quarter presentation, and we wish all of you a great day. Bye.