Welcome to the Axactor SE presentation of the Q4 2021 results. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Johnny Tsolis. Please go ahead with your meeting.
Good morning and welcome to Axactor's fourth quarter presentation for 2021. As most of you noted, on January 17th, Axactor provided a market update that included key financial figures for Q4. In many ways this presentation might be regarded somewhat as a non-event as there has been no material changes to the figures since that release. However, we still hope we will take the time for a recap, and we will add some more flavor on where we stand in terms of CapEx levels, et cetera, going into 2022. With that in mind, we will structure the presentation a bit differently than what we normally do and keep it short and sweet. As always, I will start by giving a recap of who is Axactor. Then I will present fourth quarter highlights and outlook before we go to the Q&A session.
Now let's move to slide three for a short company introduction. Axactor was established in 2015 with headquarters in Oslo. Our main focus is on collection and acquisition of non-performing loans from financial institutions. We are both buying non-performing loans and do collection on behalf of banks and other financial customers. Axactor operates in six European countries: Spain, Germany, Italy, Norway, Sweden, and Finland, and we are now close to 1,260 employees after the recent acquisition of CR Service in Italy. The company is listed at Oslo Stock Exchange, and our main shareholder, Geveran, owns approximately 46% of the shares. Please move to the next page for details on our strategic positioning. Axactor is pursuing a niche strategy to disrupt the industry on cost to collect. The main elements of this strategy are the following.
We have carefully selected the six markets where we believe to have the best risk reward. These markets have well-developed and functioning legal systems for debt collection, an efficient market for portfolio transactions, and financial institutions that are actively using the 3PC market. Main focus is on fresh business to consumer unsecured debt within the bank and finance segment. The explanation is high volumes in combination with high average claim size. The financial institutions are willing to pay for the additional value created by Axactor. Axactor also clearly prioritize the combination of NPL acquisitions and third-party collection. In addition to be a product area with attractive margin, this strategy gives scale advantages without requiring significant capital. It offers access to relevant data. It has a clear diversification effect and strengthens customer relationships.
The cost to collect level in 2021 was at par with 2020, but with continued innovation and growing economies of scale in 2022, we expect further improvement. However, legal costs might be highly dependent on inflow of volume and freshness of new claims. That was just a short recap of Axactor, and I will now move to slide six for Q4 highlights. As mentioned in the introduction, the Q4 financials was already disclosed in January. The numbers were obviously highly impacted by the EUR 43 million negative revaluation. A majority of the revaluation relates to legacy portfolios acquired during the startup phase of the company. On a more positive note, cash EBITDA were in line with last year, adjusted for REOs and the EUR 2.2 million one-off settlement cost we booked in Q4.
The NPL investments increased for the second quarter in a row, up to EUR 54 million. This is substantially above our replacement CapEx and gives an important indication that the market for portfolio transactions are normalizing. Let's move to the next slide for comment on 2021 full year financials. In 2021, gross revenues and cash EBITDA were up 6% and 7% correspondingly compared to 2020. At the same time, the book values was reduced by 7% year-over-year. During the year, we implemented a cost reduction program with an annual saving of EUR 6 million. The cost of funding was reduced through a successful bond placement in the European high yield bond market, and Axactor also obtained credit rating with S&P and Moody's.
The NPL investment has turned into growth during the second half of 2021, and the transactions have been done at satisfying gross IRR levels. Let's move to the next slide for comments per business segment. Axactor acquired NPL portfolios at a gross IRR of 23% in 2021, 8 percentage points higher than the gross IRR on the total NPL back book at year-end 2020. We saw growth in NPL investments during the last two consecutive quarters, and EUR 117 million is already secured in estimated commitments for 2022, done at a gross IRR of 22%. The negative trend on 3PC revenue year-over-year has turned into growth, and the contribution margin has improved to 47%.
The acquisition of CR Service comes with a recurring annual 3PC revenue of approximately EUR 6 million with effect from January 1st. Regarding REOs, Axactor has sold off approximately 90% of the portfolio in terms of value. Gross revenue for the REO segment came in at EUR 40 million in 2021, and consolidated book values are down to only EUR 29 million at year-end. In 2022, the REO segment will be reported as discontinued operations in the financial statement. Please move to the next slide where I will give some more flavor to certain balance sheet items and funding considerations. Axactor has a very strong balance sheet following the full refinancing of the company in 2021. Our equity ratio is at a satisfying level of approximately 30%, also after the revaluation. The liquidity situation is good as well.
We have more than EUR 40 million in cash and substantial undrawn credit facility. As for the rest of the industry, the challenge is not access to funding, but access to high quality portfolios at the correct price level. Axactor has at least EUR 300 million in investment capacity, which is approximately 3x our replacement CapEx for the year. Regarding covenants, we are obviously in all green and with comfortable headroom. You may see more details on covenants in the supporting material. Please move to the next slide for more comments on investment levels. NPL investments continued to increase also in Q4, ending up at EUR 54 million. Axactor participated in several portfolio acquisition processes during the quarter, and activity was more or less at a normalized level. However, in some cases, the size of the portfolios has been reduced compared to pre-pandemic levels.
As for earlier in the year, we saw price levels in many transactions being too aggressive for our taste. Hence, although increasing investment level, EUR 54 million must be still considered moderate to the last quarter of the year. With that said, we see less seasonality in when transactions are coming to the market compared to historical patterns. We expect NPL investments to be between EUR 200 million and EUR 250 million for 2022. A substantial part of this CapEx will be acquired through our forward flow contract. Please move to the next slide for more detail. During 2021, Axactor invested EUR 71 million through forward flow agreement.
For 2022, we have already signed volumes for an estimated amount of EUR 117 million, and expect to sign further contracts throughout the year, increasing the investment on forward flow contracts even further for both this and next year. In combination with volume of transactions, the forward flow contract is expected to secure healthy growth for the NPL segment going forward. On the next slide, we will show more detail on what price levels that we are currently acquiring at. The single most important profit improvement initiative for Axactor is to increase the portfolio profitability. The gross IRR on our total NPL book is now gradually increasing, up 0.6 percentage points last 12 months.
It might seem moderate, but please remember that everything else equal, a 1 percentage point increase in gross IRR on the total NPL book equals a 2% improvement in return on equity. The committed NPL investments for 2022 are done at a 5.6 percentage points higher gross IRR than the current NPL book. This blending the book strategy will continue to improve the average gross IRR for the next quarters and years. Before we go to outlook, please move to the next slide for some concluding remarks on our cost reduction program. Axactor is continuously working on implementation of cost reduction initiatives to increase profit and improve our competitive position. From Q4 2019 to Q4 2020, we've reduced our actual cost base by 4%.
Last year, the cost improvement continued, and we were able to further reduce the actual cost base by another 5% from Q4 2020 to Q4 2021. We have finalized and delivered on the cost project that we introduced last year. Now we are working on continuous improvement and strengthening the cost culture rather than any large transformation or cost programs. This concludes the walkthrough of the highlights. Please turn to slide 15 for an updated outlook. The large negative revaluation booked in the fourth quarter reduces downside risk for future collections, which is expected to fluctuate around 100% going forward. The cost reduction program has delivered above expectation, rendering a lower cost base going into 2022 than what we had at the start of 2021.
Axactor has estimated NPL investment commitments for EUR 117 million for this year at a satisfying gross IRR level of 22%. Further, Axactor expects to deploy between EUR 200 million and EUR 250 million in NPL portfolios for the coming twelve months, well above replacement CapEx level of EUR 108 million, which is important to continue to grow top line and hence scale. The acquisition of CR Service in Italy comes with a recurring annual 3PC revenue of approximately EUR 6 million with effect from January first this year, which will be an important contributor for 3PC growth in 2022. With this, we conclude the presentation and we will now open up for questions. Please remember that you can find more information in the supporting information and appendix attached.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Joakim Svingen from Arctic. Please go ahead.
Yes. Good morning, and thank you for taking my questions. I have three questions. The first one is related to 3PC. What contribution margin from the CR Service EUR 6 million should we assume for 2022 and 2023? The second question is relating to the discontinued business and how that will affect the P&L going forward. Is it so that you will report just net contribution below operating profit from Q1 2022? The second one is relating to new investments made. Have you made any changes to your assumptions around collection costs given the issues with the legacy portfolios? Or is it just changed assumptions to basically the amounts collected? Thanks.
Yes. Thank you, Joakim. Regarding the first question, we don't disclose contribution margin on a company basis for the acquisition as such. That is a little bit too detailed to what we can disclose. What I can say is that the 3PC margin in Italy would normally be lower than in some other markets. It might be that it will be a little bit lower than the average for the group. We don't go out with specific numbers on it. The second question regarding discontinued business, yes, it will be reported below the tax line. When it comes to new investments and costs, it's not the costs related to the legacy portfolios that has been the issue.
The cost we have under full control. In every portfolio transaction, we do a separate estimate for specifically that portfolio, what it will take in terms of OPEX, external, legal costs and so on. The impairment or revaluation will not have any effect on how we look at the costs in the new transactions.
Okay, thanks.
The next question comes from the line of Håkon Astrup from DNB Markets. Please go ahead.
Good morning. Thank you for taking the question. Just one from me. When I looked at the changes you have made in the collection curves now compared to the updated or the one you updated in Q3, it seems that most of the changes have been done in the front end of the curve, with only limited changes towards the back end of the curve. Can you give us some more flavor on that piece and why that is the result of the revaluation?
Yeah, it's a correct observation. It's basically the two first years that most of the effect has been taken down. The reason for it is that we expect to meet the curves at some point after those. It's the individual portfolio by portfolio, but in general, you can say after two years, we will at some point meet the original curve, of course.
Okay. Just help me on something here because if I remember correctly, most of the revaluations were made on the legacy portfolio back in 2018. I was perhaps thinking that because this is also old portfolio that will, say, impact the entire curve, but this only seems to be the front end of the curve. Is there anything else you can add here, or is it just yeah, everything, anything you can say would be helpful.
I don't have anything to add other than we have done the evaluation, and we believe that the reduction in the curve the two first years is what is necessary to get back on the original curve.
Okay, thank you.
Just as a final reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. I have one more question from Ryan O'Hagan from EIP. Please go ahead.
Hi, guys. Thanks for taking my question. I appreciate the update on this. Could you potentially give us a little bit of color on the CapEx spent through January and the first part of February, and whether that's come from your forward flow agreements or separate market transactions? Separately, could you maybe give us an update on how the collection curve through the kind of first six months of the year has tracked to the revisions you made at the last round? Thanks.
I have, Ryan, your questions here. I have all of them on hand that you have sent in. First of all, we will obviously not comment specifically on the first six months of the year as this is a call and not investor information that will go to all investors. But what I can say is that we expect to deliver Q1 and the coming quarters according to the active forecast and fluctuate around 100% as we have stated earlier. When it comes to the CapEx in the first six weeks of the year, we don't comment specifically on that. We have already commented, I think, in the materials somewhat on forward flow for the next 12 months.
We are in several one-off transactions as well, and we expect to also close one-off transactions in Q1. We don't have a split on that now, but I think you will find the material in the material a good estimate of the forward flows, at least. Did you have one more question, or those were the? I also see it's a question here from you, I think, on headroom on covenants, looks low.
Yeah.
You say. Can you please elaborate? Well, first of all, I don't share your opinion that the headroom is low, but I assume that you are referring to the loan-to-value covenant, which is at 72%. We regard it as really comfortable. The reason is, of course, that in a normal quarter, our cash EBITDA less interest expense is more than our forward flow commitment. We are in a position that we could really control this more or less 100%. For us, we feel that the headroom also on the loan-to-value covenant is more than sufficient.
Got it. That's super helpful color. Thanks, guys, and I appreciate you taking the question.
Sure.
As there are no further audio questions, I'll hand it back to the speakers.
I will continue on the list here. I see we have one question here. How has the collection performance versus active forecast developed year to date? Like I said, obviously, we're not commenting on this call on the first six weeks of the year. I'm afraid you have to wait until Q1. Like I said, we expect it to be for the quarter at 100%. We have the next question. Have you started to see European portfolios that has arisen from the new NPL provision rules of 100%? That is from Jan Erik Gjerland in ABG Sundal Collier. It's no. I think the short answer to that is no. We see transactions, but it's we cannot say that is related to the new provision rules.
It's some of them, or most of them are basically annual transactions that we have seen for a long time. What I can say is that the seasonality in when transactions are coming to the market is less and less obvious than what it used to be a few years back. I cannot say that it has come in a flow of new portfolios due to the provision rules. We have another question here. Why are you more optimistic on the more recent acquired portfolios than the legacy? Could you give some more color on the non-legacy portfolios that could give us more comfort? Thank you. Yeah.
Here we have. I think we have mentioned this also during the market update that we have done a lot of different things to prevent reoccurrence of the past. First of all, we have changed the acquisition strategy dramatically and buying more or less only from companies or banks that we know well. We know the credit policy, and in many cases, we have the 3PC claims before we buy the portfolio, which of course gives us much more information regarding the claims that we are working on. Secondly, we will stick to strategy. If you look at the history, you will see that a large part of the underperformance, yes, some of it is of course on the NPL, but remember that the really big mistake here was the REOs.
It was the real estate that that was bought in Spain in 2017 and 2018, in combination with some of the secured portfolios. Here it is just clear that the due diligence was not good enough, and this was outside strategy. This was not something that Axactor should have done, and we didn't have the competence to do it, and we will not do those types of off-the-strategy events again. We have also gained much more relevant data. Remember, we started off late 2015, and we acquired a few portfolios in 2016. When we acquired in 2017 and 2018 was a lot of portfolios in Norway, in Sweden, and so on. We didn't have any portfolios in those markets.
We didn't have any experience in buying portfolios at all. The companies that we acquired was pure 3PC companies with no competence in buying portfolios. Of course, there are also a lot of uncertainty in how the curves on NPLs would look like when we didn't have that data. Now, we have been in business for six years, and in most markets, four or five years. We have a completely different set of data tools to build the curves in a much better way. Operationally, we are, of course, in a completely different stage than we were just two years ago, where we have implemented machine learning, we have debtor portals, we have improved our scorecards, we have a fully implemented data warehouse, just to mention a few things.
The onboarding process has been completely revamped. We see much less risk in taking on new portfolios, and especially on forward flows that we have been much better at doing put backs and so on on claims that we are not obligated to buy under the forward flow agreements. Then the last point I would like to mention is that we have done huge changes to the contracts that we use. For example, for the forward flow contract now, all contracts have volume caps, they have balance band pricing, put back mechanisms, which we really also follow up on. Some of them has actually also a pure straight up cancellation opportunity, which was not the case in the past.
I hope that could give you a little bit more comfort on that, Jan Erik Gjerland. We don't have any more questions from the audience here on our screen, at least. Unless you have, I don't know if there are any new on the audio.
We don't have any further questions.
Okay. Well, in that case, thank you so much for calling in, and we wish all of you a great day. Bye.
This concludes our call.