Good morning, welcome to Axactor's Q1 presentation for 2023. This presentation will be divided into four parts. First, I will take you through the highlights of the quarter. Our CFO, Nina Mortensen, will present Q1 financials before we give an updated outlook and round off with the Q&A session. As always, you may ask questions live after the presentation or through the available chat function. Now let us move to slide 3 and have a look at the Q1 highlights. As most of you have noted, we have renewed our EUR 545 million RCF well within our previously announced timeline. The new agreement is a three-year contract with the option to extend the maturity with additionally two years. The two year extension option is subject to a separate credit approval. Cash EBITDA was up 4% year-over-year.
In addition to macroeconomic headwinds in the Nordics and in Germany, a strike in the Spanish court system and unfavorable effect movements has had a negative impact on Cash EBITDA. Estimated growth would have been 11% given constant currency and normalized legal cash flow in Spain. The EBITDA margin has stabilized at a high level, reaching 49% for the quarter. Actual EBITDA reached EUR 30 million, up from EUR 28 million same quarter last year, again, despite somewhat more challenging collection environment in certain countries.
Return on equity ended at 8% for the quarter, which is in line with Q1 last year. Please bear in mind that Q1 is normally one of the seasonally weaker quarters for the collection industry. The funding cost has also, of course, increased compared to last year, making 8% for Q1 an acceptable level in our view. Please move to slide four for a short recap of our strategic direction. Going forward, we will stick to our successful strategy that we developed in 2020. Axactor has a strong focus on doing accretive portfolio investments, and as we have seen over the last couple of years, we have done so successfully.
Axactor's single most important profit improvement initiative is to buy portfolios at a satisfying gross IRR level. Secondly, we are always seeking to improve our cost level. Axactor was intended to disrupt and we obtained a superior cost position. A natural result of this is that our EBITDA margin is high compared to peers, especially when you consider that we have a meaningful share of 3PC business that has a lower EBITDA margin than the NPL business. Thirdly, we are pursuing a niche strategy in terms of industry, segments and markets.
Priority is on the bank and finance segments, which counts for the vast majority of our business. We have chosen the six markets in Europe we believe to be the most attractive over time. All of our markets are mature in terms of NPL transactions, has a stable legal and political environment, and has proven to provide attractive returns over time. Axactor has had a healthy ERC growth since ARM 2021. Please move to the next slide for a graphical overview of the ERC development. It is clear that as investment levels are increasing, the same will be true for the company's ERC. Q1 showed a stabilization of the growth we have seen throughout 2022. Since Q4 2021, Axactor's ERC has grown by a healthy 18%. For Axactor, ERC growth through CapEx deployment is not the most important KPI.
When the investments are done at the attractive gross IRR levels we have been achieving over the last two years, the growth is obviously positive. Let us move to the next slide, where we'll give a more detailed overview of our accretive investments in NPL portfolios. 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 back book by 1.7 percentage points over the last two years. Please bear in mind that a one percentage point increase in the total gross IRR equals approximately two percentage points improvement in the return on equity.
Last 12 months investments has been done at an attractive level of 32.2% gross IRR, which is 4.6 percentage points higher than our average NPL book. Future NPL commitments are also approximately at the same level. One other thing that is important to note is that we currently see a substantial increase in gross IRRs on newly signed acquisitions. The volume is still moderate as sellers and buyers are working to absorb the new price level. The speed of the gross IRR blending will obviously be influenced by the annual CapEx level. Please move to the next slide for more details on the matter. As announced earlier this year in connection with the launch of our financial targets, we expect an investment level of EUR 100 million-EUR 150 million for 2023.
Our replacement CapEx is estimated to be approximately EUR 114 million. The estimated investment level does imply a constant or moderately increasing NPL book year end, depending on where in the investment interval we are ending up. NPL investments for Q1 reached EUR 33 million, with another EUR 42 million committed for the rest of the year, we have already EUR 75 million of investment. However, given the relatively low number of transactions in the market, it is hard to say where the price level will end up when the larger volumes will start to move, normally in Q2 and in Q4. Until the substantial price change we have observed lately also materialized in larger transactions, Axactor will be moderate in terms of new portfolio investment. Please move to the next page for a short comment on our cost development. Let me start with the conclusion.
Axactor continues to have one of the best cost positions in the industry, particularly within NPL cost to collect. For the quarter, our cost to collect ended at 39%, which was the same level as for 2022. Axactor's strong cost discipline is now materializing in an EBITDA percentage that is among the best in the industry, 49% for Q1 . We believe there is still improvement potential as we continue to do accretive portfolio investments, and they will lead to further margin expansion over time. Additional scale effects and more data-driven operations will also be supportive to the ambition of improved margins. That rounds off the Q1 highlights, and I will now leave the word to Nina for our financial update starting on page 10.
Thank you, Johnny. Let's start with the development in gross revenue, where we also this quarter continue to see a healthy growth with an increase of 5% compared to the same period in 2022. The gross revenue was, however, negatively impacted by both currency, as NOK and SEK have weakened against euro, and the legal strike in Spain. Adjusted for these two effects, the estimated gross revenue growth was 11%. The NPL segment reported a growth of 7% this quarter, supported by the solid investment level during 2022. The CCC segment experienced a decline of 4%, mainly due to the strike in Spain and a negative currency impact. Let's look a bit more into details on each of the business segments, starting with NPL on the next slide.
Total income for NPL segment ended at EUR 49 million in Q1, up from EUR 44 million in the first quarter, 2022, with a satisfying growth in total income of 12%. The contribution margin for a segment was 76%, the same level as in Q1 last year. We are pleased to see both a solid growth and stable margins despite the current headwinds. The collection performance ended at 98% for the quarter. Debtors in the Nordics and Germany are opting for longer payment plans with lower monthly installments. The trend is that bailiffs are offering debtors more flexible terms due to higher living costs. This includes higher reservation amounts and payment-free months in several markets. Collections were, as mentioned, also adversely impacted by the legal strike in Spain.
On a more positive side, we see that continued strict cost control in all countries helps us occur a healthy margin. In addition, the strike is now over, and we expect to be able to make up for a shortfall from Q1 over the coming two to three quarters. We expect NPL segment to continue to see significant revenue growth given the high investment level last year. Please turn to the next slide for comments on the development in Triple C segment. The Triple C revenues reached EUR 13 million for the quarter. Adjusting for Spain and the negative impact from the strike, this segment reported a growth of 4% in the Q1 compared to the same period last year. The contribution margin ended at 31% for the quarter. Axactor is currently going through all Triple C contracts and will terminate those with lower than acceptable margins.
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 62 million in Q1, up from EUR 57 million in Q1 2022. The total income level in Q1 was especially supported by good growth in the NPL segment. The reported EBITDA came in at EUR 30 million, corresponding to a strong EBITDA margin of 49%. The EBITDA margin is supported by good cost control in all countries. Cash EBITDA ended at EUR 51 million for the quarter, compared to EUR 49 million for the same quarter in 2022, equal to a growth of 4%. In constant currency and the normalized legal cash flow in Spain, the estimated growth was 11% in Q1. Moving on from reported Cash EBITDA to some comments on the funding situation on the next slide.
We are pleased to see the RCF refinance in April, ahead of the original timeline. The facility has been structured with satisfactory terms and a three year maturity, with the option to extend the maturity by an additional two years. In addition, Axactor has two bonds outstanding. The ACR02 is maturing in January next year, and out of the original EUR 200 million outstanding loan, we have repurchased EUR 44 million. Axactor has also repurchased an additional EUR 90 million of the ACR03. The ACR03 is maturing in September 2026. We are paying close attention to the bond market, and the plan is to refinance the ACR02 during Q2 or Q3 this year. Let's move on to the next slide and an update on hedging.
Axactor currently has in place a one-year hedge amounting to EUR 573 million with a strike of 0.5% Euribor and with maturity end of this year. The current one-year hedge was obtained by swapping with a previous three-year hedge of EUR 200 million. In accordance with IFRS, the positive market value of the hedge needs to follow the original three-year duration. This means that the Q1 interest expenses in the P&L have lower interest rate protection than the current hedge. We have now secured longer term interest rate protection for a three-year period.
Let's move on to the next slide and the development in return on equity. We are pleased to see that return on equity for continuing operations for the last 12 months is stable at 10%. This underpins the consistently solid financial results in 2022 and in Q1, 2023. Return on equity ended at 8% for the quarter, the same level as in Q1 last year. I'll now hand it back to Johnny for an updated outlook.
Thank you so much, Nina. In our updated outlook, we have four items that we would like to emphasize. Firstly, we expect to continue to do accretive investment on NPL deals with a minimum of 25% gross IRRs compared to the back book at 17%. Secondly, we expect a minimum growth of 10% on interest income for 2023. We also expect growth in the 3PC market, driven by the increased default levels. Currently, we are reviewing customer profitability on 3PC, and we expect the results to be termination of some of the contracts during 2023 due to too low profitability on these. Thirdly, regarding funding, we have an interest hedge that secures partial protection of the financial expenses for 11 more quarters, and we plan to refinance our bond ACR02 in Q2 or in Q3.
Regarding collections, we expect continued negative macroeconomic impact in the Nordics and in Germany, and our collection curves are adjusted to reflect the current macroeconomic conditions. With that, I suggest that we open up for questions. In collections, we expect continued negative macroeconomic impact in the Nordics and in Germany, and our collection curves are adjusted to reflect the current macroeconomic. That I suggest that we open up for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. Ask your question, please ensure your phone is unmuted locally. Our first question today goes to Ulrik Zürcher of Nordea. Ulrik, please go ahead. Your line is open.
Hi. Thank you for taking my questions. I actually have one question, I was wondering how should we think about your investments after 2023? Like, you obviously look set to increase your gross IRR, but it looks like you will still be, even with the refinancing of the bond, you'll still be constrained by the LTV covenant to actually deploy growth CapEx, like, to grow your NPL book.
I think we to some extent that could be true. It's of course still a lot of variables that we need to need to consider when we come to 2024. I think when we launched the financial targets, we did indicate that investment levels would increase again compared to the 100 to 150 that we have set for this year. The ambition is definitely to increase. Again, we will always consider the relevant IRR levels in the market. What we do see now is that these gross IRRs are increasing quite substantially.
Like we said, the volumes are so low that we are not sure it will be possible to deploy EUR 200 million-300 million at this level. The ambition is to take up the investment level again according to the level that we set in the financial targets. I admit that it might be if we get delays in collection, for example, we are using the cash flow to reinvest. That could be a constraint. Also bear in mind that LTV covenant is 75% on ACR02, Ulrik, that will be refinanced. The ambition is to align covenants with ACR03, which is 80%. There will be a small change there.
That was my next question, which bond it was the covenant is on. Yeah. Thank you, Johnny. Yeah. Excellent. Thank you.
Thank you.
Thank you. The next question goes to Jan Erik Gjerland of ABG. Jan, please go ahead. Your line is open.
Yes. good morning, and thank you for taking my questions as well. Could you shed some more light into which markets you see these kind of improved IRR levels? As I said, the volumes are thin, so it's probably too early to say call it a new trend, but it looks promising, if anything. Where is it? Is in the Nordic or is it in the South or in the middle of Europe or where are we in in that-
Yeah.
geographic context?
Yeah. We see it particularly in Spain and Italy, where prices have adjusted on the transactions we have done. Again, let me emphasize, there has not been any large transactions at this price level. We have not, we have only done smaller bilateral transactions at very, very high gross IRRs. It's like we don't know what the level will be when the larger transactions in Q2 and Q4 are going down. We see it clearly in Italy and Spain. With in the Nordics, it's a little bit more difficult to say because here you have mostly forward flow contracts that are renewed. At least we have not had anyone up for renewal the last couple of quarters. It's a little bit hard to say where the new level will be.
There has been one large transaction in Finland, but we did not participate or and then of course did not win it, so we don't know what price level that is done at. That will be a good check, if that price will be revealed in some way. When it comes to Germany, the large transactions are usually in Q3, so a little bit too early to say. Also the German market is quite depending on forward flow contracts, which at least we have not renewed any of them.
Okay. Perfect. Thank you for that. When it comes to the 3PC, you say that you're reviewing some unprofitable contracts. Is it a large volumes we are talking about and which kind of geographies is that in, too, as well, please?
Yeah. It's not large volumes. It's not affecting Italy and Spain at all, which counts for, like, EUR 40 million plus of the total 3PC volume. It will be to some extent Germany. For Norway, we have already gone through most of the contracts and some has been canceled. We have Sweden and Finland left, which we also will have a look into. All in all, it will only be a relatively marginally reduction of revenue due to these anticipated cancellations.
Okay. finally then on this macro trends, so in Nordics and Germany, it sounded like it was bailiffs rather than yourself who had done this kind of, easing in the terms. How do you review then house price inflation, et cetera, in the different countries versus this bigger tickets? I think I re-read about in your report. How should we read the bailiffs versus your expectations going forward, and if this is spreading to the south of Europe as well?
Yeah. I think, just to be a little bit more precise on what's happening in the bailiff system. Of course it's a result of inflation that the bailiffs are giving the debtors some kind of relief. It could come in different shape and form. One shape that we have seen is that they grant more payment-free months than what they normally would do. Also the reservation amount, so the amount that the debtor is allowed to keep after a salary reduction is increased, and that is of course for the debtor.
Mm.
should be in a position to handle inflation. I think also remember that our book, especially in Sweden and Finland and partly Norway, is relatively. It's not old in that sense, but it's more mature. For example, in Finland and Sweden, most of our claims are in legal process. This really hits our legal cash flow in the short term. However, since these claims will be repaid over a longer period of time with interest accruals, it's for the book values, it has not a big effect, but for cash, it has a bigger effect.
Mm.
We don't see any signs that this is actually spreading to the south of Europe, because there you have, we are using the normal legal system where you don't have the same mechanism. The authorities, if you could call the bailiffs that, they don't have the same opportunity to instruct the bailiff system to be a more political tool, so to speak.
Okay.
We don't see any sign, and we don't expect that to be an issue either.
Could I just have one following up on the funding side? You said that you expect to do some refinancing maybe in the Q2 , which we are in the middle of, or in the Q3 . What should happen to the market so that you do it prior to the summer rather than after to the summer?
Well, we are working on different tracks to refinance it. If we assume that you ask what... If we're gonna use the regular bond market, which is one of the tracks, then it must tighten in quite a bit. To be honest, the probability of this happening on this side of the summer is, I would say, relatively low, but there is a chance. We saw that just a few weeks back, the bond market was tightening in quite a bit, but then we got all the disturbance in the bank market that kind of stopped that good trend. It's... I've seen peers do transactions in the market at terms that is, yeah, better than what we have on the ACR02. It might be, but right now I think it's more likely that it will be Q3 than Q2.
Perfect. Thanks a lot for your time.
Thank you.
Thank you. Our next question goes to Håkon Astrup of DNB Markets. Håkon, please go ahead, your line is open.
Good morning. Start off with 1 high-level question on your return on equity target. I noticed that you are not, say, mentioning the above 9% for 2023 today. Is there any reason for this? Do you think it will be more difficult due to the accounting of the hedge, et cetera, or what do you think about that?
Well, the accounting of the hedge certainly doesn't help. We still stick to the guiding that we will reach 9% for the year. We have 8% for Q1, which is normally one of the two weakest quarters in the year. We will do anything we can to mitigate. Right now I think it would be too early, Håkon, to say that we are not reaching 9 for the year when we are at eight for Q1. We are still fighting to reach the 9% for the year.
Thank you. That was very clear. Then next on your, say, collection performance now at 98%, should we expect or if that continues, should we expect that you need to do some write-downs to reflect that level?
Our curves, active forecast going forward are always up to date, so to speak, to the current situation. If we continue at 98 for a very long time, remember we have performance criteria that we need to meet, and that says down 10% compared to active forecast. 90% or up to EUR 100,000 per portfolio. If we get into that position per portfolio, it's not calculated on our total book, it's calculated portfolio by portfolio. Any portfolio that goes down to 90% performance or EUR 100,000 below the forecast will need to be reviewed. If the total book stays at 98, we don't expect any large write-downs.
At least that will take a very long time. Said that we are adjusting quarter by quarter. I think also we had this quarter EUR a few hundred K. I don't recall exactly the amount. It's a relatively moderate one. As an adjustment to count for any delays in collection. I would say 98% is not a critical number at all. I think it's fair to re-bear in mind that I think it was the industry leader presenting the other day, said that Q1 was the toughest quarter collection-wise they have ever experienced. It's, it has been a tough one, and still it's 98. It's not... That level is, I think for Q1, that is, we don't look at that as any drama to that at all, I think.
Makes sense. On the refinancing discussion of the ACR number two.
Yeah.
You mentioned that you are, say, seeking to increase the leverage covenant. What terms do you expect and if that proves difficult, what alternatives do you have if it's difficult to achieve those terms that are your targets?
Well, there are several options. One would be just to continue to deleverage. As you can see, we are not deleveraging too much in Q1 and also in Q2, if you look at the supporting material because we have forward flow contracts. Those are more or less expiring after the second quarter. Then we could relatively rapidly start to deleverage. But we will never be in a position where we could repay the full ACR02 in January next year. Then it will be a refinancing.
Either you go to the market to ask for a lower amount in the bond market, or you could always discuss with the banks a bridge financing, or you can actually also invite in more banks in the bank consortium. There are also other alternatives to look into. I think now the total outstanding amount on ACR02 is relatively low compared to our total debt. Again, this will be handled in a good way. This is not critical for us at all in the EUR 54 left. Then also bear in mind we have bought back EUR 19 million of ACR03 that we could swap. Actually you can see that the amount outstanding, with deleveraging will be relatively low when we come to year-end, 2023.
What kind of terms will be unacceptable for you in terms of refinancing-wise if you were to use the bond market?
No, that I think it's actually more a question for the board to decide. Obviously we could use the bond market right now, but I think that to pay around 800 basis points plus Euribor is a little bit too much. We would right now prefer to deleverage. If we see that the prices continues the trend that we have observed through Q1 , that conclusion could change during Q2 and Q 3. As you understand, it's just about mathematics. If gross IRRs reach a certain level, it could be possible to pay what the bond market requests. Right now, it's we would prefer to hold back.
Makes sense. Then one last, technical question, from me. In, in the past, you have provided some short term guidance on the interest rate expense for the next quarter as it already is been decided in the beginning of the quarter. Is it possible to do a similar for the second quarter?
Yeah. We gave some more sensitivity also in just previously. Now we also gave an update, I think also with the hedge, that also is setting the what's expectations for the inter-interest expense and financials going forward. We can also discuss this maybe a little bit more in details offline as well.
Yeah. Okay. Do it offline. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Our next question goes to Rickard Hellman of Nordea. Rickard, please your headline is open.
Thank you. Hi, everyone. Only one question is related to collection performance. As I understand also Spain or the striking in the court also negatively affected the performance. Have you made any assessment of how performance would look like excluding the court strike?
To be honest, we probably have done it internally, but there's nothing that we are sharing with the market, unfortunately, Rickard.
No. Okay.
We have said that we are expecting to catch up during the next two, three quarters. Even though it did give an impact, it again, it's not dramatic. I think you see that with 98%. It's for example, we have seen during the pandemic when the court system was really shutting down that was real drama. This time it gives a delay. What we did operationally was that we continued to work on our side and sending cases and so on to be first in the queue when things open up. Also it was not completely shut down. It was more like running at 30% capacity or something like that. Why is that important? It's because we think that they will catch up relatively quickly again over the next few months.
Okay. Thank you. On that note, perhaps more of curiosity from my side, I mean, how would you assess the court system in these countries, especially Italy and Spain then, are working? I mean, if we remove the strike, are they in a full up to speed and running, you know, without any delays for, from COVID, now it's just ordinary proceeds or procedures?
Unfortunately, I have to say it's still a bit of delay in. Not just in Spain and Italy. We see the same in Germany. Also, I think it's fair to say that even the Nordic bailiff system are still. I'm not sure if it's because of the COVID, but at least there are some capacity issues. We see that it takes a little bit longer time to process to process claims than what it has done in periods where it has really been running smoothly.
Yeah. I mean, you also recall you referred to some kind of IT change in the Swedish bailiff system that delayed the collections as well a year ago or something.
Yeah.
Is that still?
No. The IT systems is clear. As you know, in Sweden, there is the situation with increasing indebtedness is putting pressure on the bailiff system. There have been much more applications for debt restructuring. They are doing these changes to reservation amounts and so on. I think we could say that the Swedish bailiff system, they have their handful.
Yeah. Okay. Yeah. More ordinary business then. Yeah.
Yeah.
Okay. Thank you very much.
Thank you.
Thank you. We have no further audio questions. I'll now hand back to the management team for any.
Thank you. Yes, we have a few questions here on the stream. The first one is, did the coupon change when you renewed the RCF? If so, what was the old and the new margin? Now we don't reveal the margin levels on the RCF, but what we did say in advance is that in order to get to be satisfied, we want at least the same terms or better. We have said that we are satisfied. I think that is what we need to say on that. I can also say there's no material change. The second one is, I think we already answered it.
It's regards to collection performance, it says considering collection performance slightly below curves during the last couple of quarters, if there is any write down on these levels. I think we have already answered that. The last question is what was the target gross money multiple for NPL purchases made during Q1 2023? We don't reveal any money multiple targets. We have used gross IRR as a target, it gives some of the same information. That is what we are disclosing. How will you expect the NPL supply demand picture Change going forward? Well, I think we also may have already discussed it quite a bit.
We expect increased supply, and we expect the demand side to be a bit constrained, both by the fact that the bond market is still a little bit tough. It's open, but we see that the industry still have to pay relatively, I would say, big spreads in our view at least. That is a challenge. Also we see that some of the largest peers, they need to delever in order to reach their financial targets. That should also indicate that maybe the acquisition level or the demand side from the industry will go down going forward. We, like I said, we have seen improvements.
We have not provided any data at this point in time, and that is because the amount that we have invested in new deals are relatively modest. I think it would be a little bit misleading to show you the gross IRRs on the newly signed deals. We'll potentially come back to it in Q2 or in Q3, where we have more volume to back the new gross IRR levels. That was all the questions we had here on the stream. Unless there are any further questions from the moderator.
We have no further questions.
Okay. Thank you so much for attending and wish all of you a great day. Bye-bye.
Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.