Welcome to the Intrum Q1 2024 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to CEO Andrés Rubio and Interim CFO Emil Folkesson. Please go ahead.
Good morning, everyone. From a gray and slightly chilly Stockholm, thank you for joining us here this morning. As the operator said, I'm here with Emil, and we're here to present the results for the first quarter of 2024. So with no further ado, I'll jump into the presentation, and obviously, at the end, as always, we will have time for Q&A. But starting on page 3, I would characterize the quarter as being one where we delivered good results, despite this being a seasonally slow quarter, and in particular this year, because this year, Easter holiday fell in the first quarter, and it more typically falls in the second quarter, as it did last year. So comparatively, our figures are that much more impressive, in my opinion.
Top left, overall, top line growth of 8%, EBIT growth of 8%, EBITDA growth of 2%. This has been driven by M&A as well as organic growth that we'll get into. We continued to extract cash from our backbook and our leverage ratio was stable, but would have declined had it not been for some headwinds on the FX front. Looking at the two businesses on the bottom half of the page, bottom left, external top line is growing 16% in servicing, again, driven by M&A, but as well as organic growth in North and Middle Europe. And also see that growth is also being driven by last year having been a record year for new contracts. Some of those are starting to filter into our revenue and driving the top line.
And as you can see, even though last year was a record year for new contract or annual contract value, ACV signings, the first quarter, quarter-on-quarter, is still up 11%. So we are compounding our new contract volumes on what was a record year last year and demonstrating the significant momentum in this business. The margin for the quarter was structurally low, because first quarters are traditionally lower margins, but year-on-year it was flat. I'll remind you that for the prior three or four quarters, the year-on-year comparison has been in a negative trend. It looks like we're stabilizing that and setting ourselves up for a second half of the year where we get back up to high teens, and I'll get into that more on a later page. But servicing is driven by significant momentum.
Investing, bottom right, despite it being a very difficult situation for the consumer, a very difficult economic conditions in the real world, we collected 100% of our active or updated forecast, so that is a very good outcome, in my opinion. I'll remind everyone that active forecast is an updated forecast, but these levels of collections that we realized in the quarter are actually 109% versus our original underwriting forecast. So we continue to significantly outperform our original forecast at the time of purchase of our portfolios. We did increase slightly our cash EBITDA, sorry, our top line, and decreased slightly our cash EBITDA, but largely speaking, that business was flat from a top line and EBITDA perspective.
We did invest SEK 371 million, a little bit below the typical SEK 500 million quarterly rate, as of the middle of last year, but we did so at a higher IRR, 17 versus last year, which was 16. Top right, we need to be mindful continually of developing the business and also being mindful of cost. With regard to cost, there's a both tactical and a fundamental element to this. Last year, we announced SEK 800 million, that was expanded from SEK 600 million, of cost savings. Through the end of the first quarter, we realized SEK 500 million of it. The remainder will be realized throughout 2024. On top of that, we have identified, are beginning to implement, and expect to realize a little bit more than half this year and the remainder next year of an additional SEK 700 million.
When you look at all of our tactical cost reduction programs, the SEK 800 million and the SEK 700 million, we have SEK 1.5 billion that began last year and will be fully concluded during 2025. That's near term, and that's tactical, and that's necessary, frankly. But long term, if we're going to structurally improve our cost competitiveness while at the same time improving our service quality, it has to come down to technology. And I'm very, very happy to announce an important milestone where we have gone live in the Netherlands with Ophelos, which is our AI-based autonomous debt resolution platform we acquired last year. Early indications, as I'll give you a little bit more detail later on in the presentation, are quite encouraging.
And then ultimately, on our financial front, I'm sure many of you are going to be eager to ask questions, but I'll preempt them now. We are in the discussions with our various creditors. Those discussions are ongoing. I would characterize them as constructive and solutions-oriented. As I've stated in the past, we have liquidity for this year and for next year, but beyond that, given where the market is, the market levels are right now on our bonds in particular, we cannot be assured of continued market access on acceptable levels. So therefore, we are proactively and holistically initiating a dialogue to reshape and realign our capital structure with our business and allow us to perform and deliver on our business plan. Those discussions, as are the front book discussions, which I've referred to many times in the past, are ongoing.
When there is more to report, we will come back to the market. On page four, the market, the environment. The environment continues, particularly as it relates to figures coming out of the financial system, favor the demand for our services. So top left, EU NPLs, both in aggregate as well as on a ratio basis, have increased going into the end of last year. Stage Two loans, which are a precursor to non-performing loans, continue to increase in the second half of last year. Top right, you're seeing this economic slowdown, which we're in the midst of. We're not out of it by any means, and obviously, from an interest rate cycle, you're seeing that we're now going into an easing cycle, which indicates that we have significant softness economically. That economic slowdown is starting to creep into unemployment. It had not yet.
This had been a crisis which was impacted by people having jobs and income, but having too many costs. Now, we see some uptick in unemployment, which would add another leg to this economic downturn and another element of pressure on the consumer. And then also, as you can see, while we are at the point where more expectations are for rate cuts going forward, particularly in Europe, relative to the global central banks, that still doesn't mean that we're out of the woods. We still haven't fully felt the brunt of the original inflation, as well as the original increase in interest rates.
So the headline here is that the pressure on the consumer is not abating, and it will lead to continued pressure on companies to collect on their invoices and banks to collect on their loans, which means there will be continued demand for our services going forward. You see that in our new contract volume and our AUM trends. Now, looking at page five, let's look directly at servicing. Here, we've attempted to, I think for the first time, to connect some of the key metrics and operating drivers with our revenue evolution. So on the top half, you see, and I've said this before publicly, but I want to demonstrate it very explicitly here graphically. We have AUM, which is, the nominal value of the claims that we manage, the claims that we collect against, and these are external claims.
That's SEK 970 billion. It was a bit higher than a trillion a year ago. But we collect against those. How much we collect is that ratio in the middle. So it was 11% this year. It was 9% last year. So we've collected more against our total collectible value or AUM. That generates collections during the period of SEK 102 billion, out of which we gain a commission, which is consistent at 11%, and there's your 11.4. So that was our revenue in 2023. And the year prior, you see the progression of SEK 1,015 billion, 91 at 9% and 10.4. So you see right there, just a mere increase in our collections rate, even though our AUM declined a bit, led to a significant increase in revenue.
That's more of a top-down view of the revenue evolution. When you look down below, we look at it period on period. And here you see the EUR 9.7 billion on the bottom left, which was the top line in 2021. You add to it our new annual contract value that was put on the books and actually realized during 2021 or during 2022, excuse me, of EUR 0.5 billion, and then you have an additional one-off of 0.3, and you get to the EUR 10.4 billion in 2022. You add to it another EUR 0.5 billion of annual contract value, which was signed in 2021, but realized during sorry, signed in 2022 and realized during 2023, and you add our M&A with some one-offs, and you get to the EUR 11.4 billion.
What's great about this is in another indication of the momentum in this business is, last year was a record year for annual contract value. Net of churn was SEK 1.4 billion, almost three times the prior two years' run rate. So we expect that to start floating into our revenue during 2024, and again, lead to probably another record year and a significant uplift to that 11.4. The next page looks at the same progression, but also looks at margin. I already referred to margin during the quarter being flat, 10% this quarter versus 10% a year ago. This reverses a trend or stabilizes, I should say, a trend of the prior four quarters, which you can see here very clearly, of having the RTM margin decline from 19%-15%.
We believe that by the end of the year, we will reverse that trend and get into the high teens, and we continue to be committed to our goal of getting that margin very significantly into the twenties by 2026. Why do we believe that? In part, because of the data on the bottom half of the page. Organic growth in Northern Europe was 2%, although in the first quarter, I think partly because of the Easter holiday, also partly because of other issues, it was negative, but on a trailing twelve-month basis, Northern Europe organic growth was 2%. Middle Europe, which is our largest economic catchment area, grew a very healthy 11% on an organic basis. And then while the negative five looks disappointing at face value, that last quarter was negative six.
And that region of South is our largest revenue region, our largest stock, AUM region, and so a small decline or a small improvement from -6% to -5%, actually yields a significant amount of improved bottom line. And that's being driven across all the markets, but in particular, because our Italian business had a banner first quarter and looks to have an exceptional 2024. Why are we comfortable on margins? You can see the bottom half of that bottom part of the graph. So our new business, starting with last year's SEK 1.4 billion and continuing during the first quarter, we grew 11% year-on-year. So it's continuing to accelerate our new contracts are all at significantly higher margins. So we see here that historically, Northern Europe, the margins were 15%. Our newly underwritten business in the last 12 months was around 38%.
Middle Europe, similar, 15 historically, looking forward, 31. Then roughly, it's a little bit below, but it goes up and below, and it goes roughly above or below historical numbers in Southern Europe. These improved specific contract margins, plus the cost cutting I mentioned earlier, are both going to drive that margin up, and it looks like the decline is stemming, stabilizing, and hopefully we're at an inflection point. Next page, page seven. We're in investing. This is the same picture it has been since the middle of last year. Dramatically less investments, net extraction, and in the last 12 months, we've extracted SEK 6.4 billion. And ultimately, that was a lot less. That was less than SEK 3 billion before, on an equivalent trailing twelve month as of last year.
So we are net extracting cash, and this is consistent with our strategy of downsizing our direct portfolio. In the future, coming up with a third-party capital solution to continue to ramp up our investments without ramping up our proprietary balance sheet, and ultimately taking that cash flow and addressing our capital structure. When you look at the next page 8, you see continued collections momentum. This is not just a evidence of, you know, a larger portfolio, but it's an evidence of an ability to collect. We, as an industrial collector, can manage these things dynamically, and as a result, we manage and hit active forecasts, but we significantly exceed historical forecasts.
So as you can see, this is just a statistical demonstration of how difficult it is to collect, because in 2021 and in 2022, even against active forecast, our ability to collect was a bit ahead of active forecast, which is continually updated. Right now in 2023, you see it's been consistently at or around 100%, which shows we're still doing a very good job, we're being dynamic, we're, we're dedicating resources to make sure we collect what we expect, but we're not having that marginal performance that we had historically against active forecasts, which is a demonstration of the difficulties in collecting in the current environment. Finally, on page 9, as it relates to ESG, on the Carbon Disclosure Project, we have a very high score, higher than our sector, higher than the global average.
Somewhat expected, but still we're higher than averages because we're not an industrial company. Bottom left, we continue to get significantly high customer satisfaction ratings. These are customers or consumers, despite the fact that we're interacting with them in very large scale, as well as at a very difficult moment for them. A testament to our solutions orientation of our collection strategy. We continue to collect at record levels. SEK 120 billion, I think, is an all-time high in terms of our collections, both on behalf of our clients as well as our own book. And then the top right, again, a number I'm very proud of, just under 5 million people we helped become debt-free, and ultimately, allowing them to reintegrate into financial society or the financial infrastructure, you know, on a very, very important role.
We don't just collect and make money off of it, we also help people on large scale. With that, I'll turn it over to Emil, who will deal with some of the financials, and then I'm gonna come back with two or three key messages, and then we'll go to Q&A.
Thank you, Andrés. Please go to page 11. So this is the 5th consecutive quarter with growing adjusted income, and adjusted income was SEK 4.9 billion in the quarter, or up 8% compared to last year. And as mentioned, this is primarily driven by our servicing segment. And despite the challenging operating environment as described, and adjusting the EBIT for costs related to the cost initiatives and M&As we executed upon during 2023, we do see a corresponding increase in adjusted EBIT up 8% or SEK 1.2 billion for the quarter. The increase in adjusted net financials reflects the higher interest rates and higher gross debt. So our effective interest rate is up 80 basis points in the quarter, and an average gross debt is up SEK 3.7 billion.
In the net financial items in the report, you'll also find a positive impact from the bond tender offer we executed in February, which resulted in a positive effect of SEK 196 million for the quarter. The leverage ratio remained at 4.4x during the quarter. Adjusted for the unfavorable FX movement, the leverage ratio would have been 4.3 net debt to cash EBITDA by the end of the first quarter. I'm now looking at page 12, our servicing segment. In the first quarter, we saw a significant increase in external income amounting to SEK 2.9 billion, or an increase of 16% compared to last year.
The increase is mainly driven by the acquisition costs, but also, as you saw on page 16, on an RTM basis, we grew 2% in Northern Europe, 11% in Middle Europe, and for the full segment, we had a flat organic growth on a trailing twelve-month basis. In the quarter, and taking into account the seasonality effect and the calendar effect of Easter, we had a negative organic growth of -2% for the segment. Adjusted EBIT is up 8% versus first quarter 2023, translating into a flat margin of 10%.
Cost continues to be a focus, and we have been and want to reiterate what Andrés said before. We expect the initiatives that we made by the end of 2023 and now during the beginning of 2024 to come into effect in the margin by the second half of this year. Turning to page 13 and our investing business. As a function of the slower investment pace, we will have a natural reduction in the income and also the adjusted EBIT. So the adjusted income decreased 3% and the adjusted EBIT decreased 6% during the quarter. And again, reiterating, we had a tough environment, but we continued to deliver 100% versus active forecast. And remember, again, versus the original underwriting, we delivered 109% of the forecast during the quarter.
The new investment we made during the quarter was approximately SEK 400 million. It's in line with the reduced investment pace that we announced during the second quarter last year, and they were made at an underwriting IRR of 17%. During the first quarter, we did extract a bit more than SEK 2 billion of net cash from the segment. Now turning to page 14 and the follow-up of the cost initiatives we took, we launched in Q2 last year. So to date, we have really realized the majority of the cost programs. The target was to achieve more than SEK 800 million in annual cost savings. To date, we have realized SEK 500 million and expect the remaining to be realized during 2024.
In the graph, we're trying to visualize the effect compared to the baseline cash cost, which was the first quarter of 2022. The first bar is the actual realized savings of SEK 500 million. The second bar shows that the like for like organic reduction in our income has reduced the cost before further with SEK 500 million. And as we acquired Haya and the two Arrow platforms in UK in 2023, the costs were having increased by SEK 1.3 billion and reversed the realized savings from volume and executed cost savings initiatives. And on top of that, we have the fourth and the fifth bar, which represent the inflation and the currency effect.
All these are adding to an increase in the cash cost of SEK 1.2 billion... sorry, SEK 1.6 billion. As this has been talked about for the last couple of quarters, we continue to monitor the cost development, and we have identified a further SEK 700 million that we will implement and execute during 2024 and 2025. Turning to page 15, I would like to walk you through the net debt development. The cash flow that we have generated in the quarter of SEK 1.2 billion has been used to invest approximately SEK 400 million and repay debt. However, as said before, the adverse FX movement increased the reported net debt by SEK 1.3 billion to SEK 57.9 billion.
In the bottom left corner, you can see that there's a healthy—still a healthy return gap of our trailing 12 months underwriting IRRs compared to our average cost of funds, and it's approximately 3 times larger. So with that, Andrés, I hand it back to you for some concluding remarks.
Perfect. Thank you very much, Emil. I wanted to, before I wrap up the presentation and move to Q&A, talk about two trends which are important trends, long-term secular trends, which are going to impact us and our industry directly, both of which are also going to be significantly favorable for Intrum. Those two trends are regulation and technology. So now turning to page 17, you have a very brief overview of the NPL Directive. Many of you know that the EU has implemented an NPL Directive to assist banks in how they deal with their NPLs. There's a bit of an explanation on the left-hand page. Banks can either sell NPLs to credit purchasers or utilize licensed credit servicers to collect on their behalf. The directive specifically requires both credit servicers and credit purchasers to be licensed in all jurisdiction.
We act in both capacities as a purchaser and a servicer, and we act in almost all jurisdictions in Europe. So this clearly is gonna have a very direct impact on our operations. Directive specifically regulates customer protection, complaints, information duties, internal controls, rules for outsourcing, reporting, supervision, and cooperation with the regulatory authorities. It is important to note that while we are being regulated more like a bank, the capital and liquidity requirements put on a bank are not extending to us as an industry. And this is being implemented across all of our markets. Why is this beneficial to us? This puts a heightened burden, and sensitivity, and requirement when a bank takes a step towards dealing with its NPLs, either by selling it or by handing it over to someone else to collect against those claims on their behalf.
That is a heightened level of scrutiny, that is a heightened level of required regulatory robustness on the part of the counterparty, which for us, having been in this industry, in some cases for a century, in almost all cases for decades, and having been operating in all the different markets, we provide a much safer and more stable and reliable counterparty than almost all of our competitors. We are already today, by virtue of historically already adopting a high level of governance, almost bank-style governance, as well as operating in all of these countries in large scale and with regulated entities, counterparties, we are already compliant with the directive in almost all our countries.
This is also going to be important in that it's going to harmonize processes, which is also to our benefit, because we can deal with more counterparties in a more consistent fashion, which helps us deal with them more effectively and also be more cost-effective and efficient in our own processes. And this is going to require anyone who's outside of the EU to have an on-the-ground representative who is licensed in whatever jurisdiction we're dealing with, either as a servicer or as an investor, which will... And as the market leader, we will be the logical candidate for any major player, external or outside the EU, who wants to go into the EU in either capacity, benefiting both our investing business and our servicing business long term. So this is, I've said it before, more regulation is good for us...
because it differentiates us, it limits our competitors who do not have the capacity to to portray this level of of reliability or invest in the level of compliance and regulatory compliance that we do. And ultimately, over long terms, it means we're going to be able to win more business, as well as price our business more favorably. Now, on page 18, we see technology. As I said earlier, we launched Ophelos in the Netherlands. It is extremely early days, but the indications are positive. Here you see three individual cases where, from a specific client, in this case, a BNPL lender, who uploads automatically to us between 5 and 50 cases per day. Their average claims are EUR 90, so very small claims, which, if we have a high cost, can eat into the net collections for our client and also our revenue.
So it's very important that we're efficient, the smaller the claim. Here you see three cases, all of which where we, within minutes of receiving the claim, analyzed the consumer, analyzed the claim, sent an email with a link to a portal. In the top case, within minutes, we had a full payment on a EUR 81 claim. In the middle case, we had a consumer go to the portal on a delayed basis and then ultimately enter into a partial payment. Then in the bottom, we also had a case where on a very large claim, EUR 385, the email was sent. With a delay of a few days, the customer did go into the portal, and with a delay of a few days after that, they paid in full. So it shows the effectiveness.
It demonstrates the effectiveness of the digital path to incite collections activities, even on a delayed basis. Even if it's not immediate, they come back to it. It's makes it easier for the customer to pay. The customer has a better experience, and there is no human interaction. It's 100% managed by technology. All of the data points, all of the clicks, from when they open the email to when they go to the portal, to where they click in the portal, to where their mouse hovers in the portal, we gather data, which then is fed back into our algorithm, which allows us to more accurately predict how future consumers of similar profiles will act. I get incredibly excited, as you can tell by the tone in my voice when I see this.
It is extremely early days, but if you look at this impact and the projected across the 159 million actions we take, of which 97% are not self-serve, of which more than half are more traditional phone calls and less physical letters, it is vast. When you look at this impact on the 6,000 people we have in 41 call centers, the potential here is vast to not only improve our efficiency of collection, reduce our cost to collect, but improve our ability to serve, improve the product, both of which are going to structurally improve our company over the medium to long term. So I, I'm incredibly excited about this.
Wrapping it up on page 19, we had, again, a good quarter, delivering good results in what was a seasonally low, seasonally slow quarter, which also included, again, Easter during the first quarter rather than the second quarter. So our results, I think, are that much more impressive. You do see the beginnings and the direction of our strategy of being more operationally efficient, tech driven, being more client-centric and being more capital light. And we reiterate and commit, reiterate our commitment to our targets as set out at the Capital Markets Day last year. So we are growing at levels higher than what we anticipated and will continue to grow at high levels of top-line external servicing income. We are moving towards that very solidly mid-20s margin, and we believe we are absolutely going to get there.
We have already pro forma for the Cerberus deal, although this figure is yet to have that impact, but pro forma for the Cerberus deal, we've already hit a lower level of portfolio balance on our proprietary portfolio, and while in the quarter it was stable, it would have declined a little bit. We're a little bit below. We're about 0.2 below last year. We are directionally correct, but it's still early days. But we are committed to delever between now and 2026 to the 3.5 level, and importantly, beyond then, to continue to delever, to continue to lower that ratio to hopefully 3 and below in the subsequent years to 2026. So with that, we can turn it over to Q&A.
One thing before we start Q&A, and as always, Jacob will be the first question. So thank you, Jacob, for always being first in line. But I want to preempt again and repeat something I said earlier. As it relates to any possible realignment, reshaping, restructuring, however you want to call it, of our capital structure, those discussions are ongoing. We do not have anything to report yet, and so I'm going to be very limited in anything I can comment on it. I'm sure you'll still try to ask, but I want to preempt you. And when we have something to report, we will come back and report on it. But with that, I think, operator, we can open it up for Q&A.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Jacob Hessle from SEB. Please go ahead.
Good morning, Andrés and Emil.
Good morning, sir.
If we skip my first question, as you won't give us any timeline on the capital structure, are you also looking at potential M&A solutions for Intrum, or is the board only focused on Intrum reaching a solution with credit owners? I can tell you right now, we're not contemplating any major M&A activity.
Okay, good. On the P&L, can you comment on the indirect cost, which increased substantially in Servicing, especially Investing in the quarter?
I think that's a factor of the inflationary environment we've seen and FX compared to last year. I mean, they have the same sequencing as when we go through the cost program.
Okay. And if we look on servicing, I mean, I read your comment on direct costs, stating that you're handling higher volumes than a year ago on top line. But if we compare to Q4, I mean, income is down SEK 400 million, but direct cost is more or less flat.
Well, that. Oh, go ahead, Emil, if you'd like, or I can. I mean, I think you need to understand that while the first and the third quarters are slow, the second and the fourth quarters are strong. Our costs. There are some costs that are quite linear, but our activity raises and lowers. So that phenomenon is not terribly surprising to me because you have higher margins in the second and the fourth quarter, traditionally. Which again, just shows you that the revenue comes in at a much higher incremental margin because you have certain costs that just happen every month, but other costs that are directly tied to activities. So that's not entirely surprising. The fourth quarter is our highest margin month, quarter, excuse me. The first quarter is one of our lowest, if not the lowest, actually.
Okay. Yeah, that's fair enough. But if we look on page 14, I mean, costs in acquired businesses rose by SEK 500 million to SEK 1.3 billion from just a quarter ago. So how do you expect these costs to develop during the rest of the year?
You mean in the presentation, so the cost bridge?
Yeah, exactly.
Mm-hmm. No, I think the cost for acquired business, you know, when we closed them, I mean, it was June and September last year, and this is on an RTM basis. So the acquired, the third bar will increase a bit, but on the right-hand side of the dashed line, you will have reduced inflationary pressure on the costs. Then FX is obviously completely out of our-
I mean, we did 2 acquisitions last year, 1 in Spain, 1 in the UK, to make us market leaders. What market leadership allows us to do is it gives us a much larger revenue base, a much broader client base. It allows us also to affect synergies, which have not been in those numbers, as well as affect the cost reductions and margin improvements that we're doing across the entire company. So again, on our margin, which is this directly relates to it, we have a trailing twelve-month margin of 15%. It's come down from 19% the year prior. I believe that's stabilizing and ready for a turn in the second half, which I said earlier, back up to the high teens, and then we're still committed to our mid-twenties target in 2026.
We do not anticipate any additional M&A for now, and those were the two large acquisitions. In addition, last year, we did do eCollect and Ophelos, which are gonna be felt more over time and more structurally and fundamentally, like I described earlier on my page.
Okay, thank you for that. And just lastly, can you help me understand why you have allocated more income towards Northern Europe while decreased income in Southern markets?
Poland. With Poland is now a part of Northern Europe.
It's a good, it's a good question. It's a structural shift for us. We have moved Poland into Northern Europe as a region. It previously was in Eastern Europe or tactical markets. We're gonna keep it there. Historically, it was part of Northern Europe as well, so it is along with Denmark, Sweden, Norway, and Finland. We've added Poland. Poland is an important economy. It's one that's growing significantly, that in many respects, could be one of the biggest in Europe, a decade from now. So it's an important economy for us, an important market for us, that is actually dramatically improving, this year versus last year. On the tactical markets, I will also comment on it. We are not exiting those markets.
After the larger Cerberus deal, we do not feel a need for liquidity purposes to sell any more assets, and those markets are high return, frankly, higher risk, but also higher return and very high cash flow markets. They're almost 99%-100% PI or investing markets. The platforms exist to manage our own books, and we have now decided to retain them. We have named a new head of that region, which we're going to rename from Tactical Markets to Central and Eastern Europe. But more to come on that next quarter as that new structure settles in.
Thank you for that clarifying answer, and you also answered my next question, which was my final one. So, thank you very much.
Thank you, Jacob.
The next question comes from Patrik Brattelius from ABG. Please go ahead.
Thank you. Good morning. Can you hear me?
Yes. Good morning, Patrick.
Morning.
Thank you. Thank you. Okay, so I start with the divestment of Cerberus. Can you please share any updates on timeline and also any updates of your latest expectations of one-off effects driven by this transaction?
So on timing, I'll address timing, and Emil can address one-off effect. On timing, it is pending one regulatory approval. We have been in active dialogue with the regulator. We actually visited with the regulator, it's in Poland, last week. We should be closing it in the next 1-2 months. They've assured us of that timing, but obviously it's a regulator, so you never know until it happens, but that is the only requirement and the only remaining condition to close.
Yeah, and on the one-time effect, I mean, it's you have a couple of components, but you have the discount of 2% on the versus the book value, which is a fixed effect, and then you have the P&L effect building up since the economic transfer date, which is the first of October last year. So it increases with approximately SEK 200 million per quarter. And then the unknown is the FX effect, because we have an embedded FX position since we're selling companies that is currently reporting in other comprehensive income that will go through the P&L, which will offset that negative effect. But the magnitude of that FX effect, it's too hard to say since we don't have final closing dates.
Mm-hmm.
When this transaction is finalized, will you send out a press release detailing out the different one-offs?
We will explain its final impact on liquidity and its impact on accounting at the time of closing. Yes.
Perfect. Thank you. And then, within servicing, it sounds like a theme across the debt collection space to go this route. Can you please elaborate what you have seen in terms of competition for the last nine months?
I just out of curiosity, I don't know exactly what you mean by go this route. I mean, I can comment on competition, but I just want to get proper context for your question, please.
Well, within the space, I hear more and more debt collectors saying that they're focusing on servicing and just like you are. So I wanted to see how you view the competition, how that has developed for the last 6-9 months.
Sure, sure. I can certainly comment on competition. I have to tell you that I don't necessarily see that same trend of everyone turning towards servicing. However, in the last, call it 6-18 months, our win rate when we go and compete for client mandates has increased from approximately 40% to above 50%. We had disclosed some of that in the past quarters, actually, and that trend continues. I would say that that trend also is not a factor of being the lowest priced. We are not the lowest priced, almost consistently across the board. We are providing a more comprehensive and reliable service.
We are providing now a more technological face to our project, to our service offering, and we're underwriting them with a better margin, such that we can be more precise in our pricing. So, if anything, we are feeling that we are more competitive, although that doesn't mean the competition doesn't exist. Competition is very much market by market. It is not comprehensive across the board. We don't have the same competitors in Spain or in Greece that we do in Denmark or Finland or Norway. But as I said earlier, we are consistently in all those markets. We're the only one in all those markets, really.
As I said earlier on the NPL Directive, that's going to further fuel our competitive advantage because competitors are not going to be able to invest or convey the level of reliability that we can to banks, where now it's a much bigger decision whether you outsource or whether you sell.
And then as a follow-up then, in which regions do you see your, your competitive advantage being stronger, versus?
Mm-hmm
where it's weaker?
Well, I mean, I think there it's not necessarily weak versus strong. I would say they're structurally different markets. In south of Europe, you know, we are the biggest, so we have all these inflows, but there, they're stock markets. So our overall business is more related to collecting against very large stocks as opposed to having a lot of new business come in. In the middle and the north, that's completely different. In the middle of the north, we're incredibly competitive. It's a business that renews itself more regularly, so that competition and competitive position is tested more regularly, and that's where we're strongest. But because there's more competitive activity, if I'm explaining myself. But ultimately, we are incredibly strong in the middle and the north, but that business requires us to continually tender.
In the south, we're the strongest, but there's not that much competitive tender, client tender activity.
I understand. Thank you. That was all my questions.
Thank you, Patrick.
Thank you.
The next question comes from Ermin Keric from Carnegie. Please go ahead.
Good morning. Thanks for taking my question. So, maybe if we start on slide number 14, just to understand that one a little bit more. So how do you expect that the inflation will look 1 year from now, if we look at that bar? Just to get a sense for what are the net cuts and what's more just upsetting underlying inflation from the ongoing and new cost program. Thank you.
Thank you, Ermin. I'll address it conceptually. Maybe Emil wants to add to something more numerically, but that bar is one of my biggest sources of frustration because we're cutting all these costs, but I feel like we're running in place in part. Now, that's partly because we haven't fully realized that we've only realized SEK 500 million out of what is now SEK 1.5 billion of targeted cost cutting. So we are going to outstrip inflation significantly when it's fully realized, and we're going to structurally lower our costs, but it feels like we're running in place because we still have a very large cost base, even after these cost cuts, that is subject to inflation. That's why things like Ophelos are so fundamentally important, and that, you know, no amount of estimation for us over time can really-...
properly prognosticate the impact of that technology and structural change. But that 0.6 is very frustrating. Obviously, it's going to abate. I don't wanna preempt Emil, but it's gonna abate because inflation is coming down, but it's still gonna be a significant number, and I think you're gonna see an outweighing of cost-cutting versus inflation, but it's gonna take some time. And we still have to deal with the structural competitiveness, both from a cost perspective and a quality of service perspective of our offering, which is really down to technology, not tactical cost-cutting. But go ahead, Emil, please.
No, I mean, to echo that, I mean, it will come down, the inflationary impact, and it comes, it hits our platform with a lag of approximately six months as well. So you have a bit of decay when you see it in the general economic environment compared to when we observe it in as actual costs achieved. Going forward, let's see how to report on the inflation when it comes to the starting point, but that has an impact. Now we have reported versus the baseline cost, which was the first quarter in 2023.
Well, thank you. That's helpful. Then a question on slide number five. Sorry. So just to understand, how come the AUM is actually down year-over-year, despite M&A and that you've had quite successful momentum on the ACV signings?
Yeah, I mean, you're right, in that we have. We've done M&A, we've done other things, but also in the first quarter of last year, technically speaking, we still had Sareb on the books, and that's what distorts the picture a bit. I would focus more on the much higher collections, Ermin, if I were you. But on the AUM, yes, it's slightly down because Sareb was in the old number and isn't in the new number, so that, by definition, is less. We lost that contract. We were not making money, significant money on that contract. It was a good thing that that was granted to someone else. And we had last year, even when you pro forma for that, our AUM did grow, actually. Ex- Sareb , to be clear.
Okay, thank you. But then continuing on the same slide, the conversion rate that stayed flat, and I would think Sareb was a fairly low conversion rate. And your winning contracts at higher margin, and my understanding has been that that's been on pricing rather than including your own internal efficiency measures. So why aren't we seeing the conversion rate coming up?
The conversion rate, I don't know if it's rounding or not, it is trending up, but we're talking about a very large base of assets and a very small amount of incremental collections or a very small amount of incremental conversion rate leads to a significant amount of incremental revenue. But you're right, you should see that conversion rate come up somewhat, but I would say the underwriting of the new business is somewhat related to pricing, but it's also much more related to our more precise underwriting on the cost side and making sure that we're not doing unnecessary actions. So because historically, we focus more on actions than the results, we're turning that around, which means we can look at a much higher margin given the same level of revenue.
So you're gonna see some movement, and these are big variables across 20 countries, all of which are different and move in different directions, but you're gonna see some movement in that, but it's not gonna be as much as you think, Ermin.
Great, thank you. And then one final question would just be... I mean, you're talking a lot about the IT transformation and the possibilities with Ophelos, et cetera. Is there any balancing that needs to be made between kind of pushing for this because it's gonna future-proof the business, versus kind of trying to save up liquidity for future maturities, et cetera?
Well, thankfully, technology is also not capital-intensive, necessarily. We have to roll out Ophelos to our countries. We're rolling it out later on this year to two other major markets after the Belgian and Netherlands launch. It was launched in the Netherlands. It's now being launched this week, I think, in Belgium. Those markets are run in conjunction and under our structure. Then it's next gonna go to Spain, and then it's gonna go to France. But that's not a capital-intensive activity. It's actually a very critical industrial activity, reshaping our operations and providing much lower costs in a digital form, as the evidence shows. But that's not in lieu of cash flow. If anything, once it settles in, it'll improve our cash flow, actually. So that's not. I'm not trading off dealing with maturities by developing technology.
We did spend, you know, several tens of millions of EUR in buying these two acquisitions, but that's gonna more and more than pay off, I mean, by many, many, many multiples over a short period of time. And this is an example also, Ermin, of, you know, you need to develop and deal with your challenges. You need to deal with your challenges and deal with, like, tactical costs, but at the same time, develop the company. You called it future-proof, however you wanna call it, but I think we need to do both. You need to have... One of my shareholders once said to me: "You need to have your foot on the brake and the accelerator at the same time." That's often the case, and this is evidence of that.
Very good. Thank you for the call. That's all for me.
Thank you, Ermin.
The next question comes from Wolfgang Felix from Sarria. Please go ahead.
Good morning, Wolfgang.
Yeah, hi. Good morning. How are you?
Good. Good. Good.
I'm probably dwelling again on the same two slides, 5 and 6, to try and understand the growth in your servicing business. I mean, obviously, that's what we're focusing on most, I think now. Can you... In part, the question was just being asked already. So we've had that decrease in AUM. You've... you're out of Sareb .
... now, how should I think of that ACV development going forward? And, also in light of you were saying that the northern markets have more churn than the southern markets on the bottom of page six. I think if I'm correct, that ties in with that.
Mm-hmm.
And, so if that is so, and we're having this slightly increasing conversion rate that you were talking about, obviously with cost inflation, et cetera, but how should I sort of project that? I guess, the way I would model your business would be off of AUM first, and then I'm not entirely sure I fully grasp how to model the ACV off that and how I should be looking at that going forward, possibly by region or however.
Again, what we've tried to do here is give you a top-down as well as a year-on-year incremental analysis-
Mm-hmm.
Out of see the evolution of our revenue. You're right, in that you should look at AUM, recovery rate, and conversion rate to get to a revenue, and we've given you the example here at the top. And yes, Sa reb kind of muddies the waters a bit in terms of the analysis, but we can come back to you offline and kind of show you the-
No, that's fine.
But I would look at the bottom as ACV typically takes, call it six to more than six months to more than a year to fully hit, because we need to onboard, and then we need to ramp up clients. So I would look at the ACV of the 1.4 as coming in partly during 2024 and then fully into during 2025. That's the way it works. And ultimately, sometimes we don't hit full ACV. Sometimes, for whatever reason, the projections originally, some cases we outperform, some cases we underperform, but net-net is probably slight underperformance relative to pure ACV. But that would give you an idea.
Mm.
that 11.4 is gonna be squarely, you know, into the high 11s, into the 12s, on a subsequent period. We can come back to you. We, we do not have a projection of our AUM, so to speak, and we can talk to you offline.
Mm.
may help you understand this better, and we'll also talk to the other analysts, to understand this better. But this was our attempt to give you an ability to more easily project and understand our evolution, but also project it.
That's very much appreciated. And then, the growth that you're showing in the SLEs on-
Yeah
the bottom of page six, are you anticipating that kind of growth rate going forward? Are you anticipating these kinds of margins, going forward, particularly in Northern and Middle Europe? And how should I think of Southern Europe if this is more of a stock market and you're not reinvesting as much?
So, the Northern and Middle Europe, as that ACV comes into effect, you're going to see-
Mm
The increase in the Northern and Middle Europe margins come into effect. It's not gonna be in total because you still have the legacy. You still have some very large existing clients who are at structurally lower margins.
Mm-hmm.
But it is going to contribute disproportionately where incremental unit of revenue is gonna bring a much higher unit of SLE and then ultimately EBIT in the North and Middle. And I would expect organic growth to continue in this proportion, very strongly in Middle, less so, and the first quarter was a bit of an anomaly, but less so, but still positive, meaningfully positive organic growth in the North. The South eventually will twist. Now, will turn, but let me explain what I mean by that. So the South was really characterized by initially Spain, then Italy, then Greece, very large one-time transfers to the servicing market. So you have a massive amount of assets that are transferred at one time, such that the collections against that stock outweigh any new inflows.
New inflows exist in those markets, by the way, so there is—there are new inflows.
Yeah.
They're just, they're just not fully offset by collections, so they're not exceeding collections yet. At some point, they will, once we work through it. But, you know, you're talking about very large stock markets, where probably our collections rate is not 11, it's probably 5, 6, 7. So you've got a long time to work off that stock, and you have a long time to make revenue off of it. That will... I was very encouraged by the -6 going to -5 because that has a big impact. I'm very encouraged about what's going on in Italy. But Italy, Spain, and Greece are our highest cash flow markets, and any movement in these things have a significant proportion or a significant impact in our overall profitability.
But that top-line dynamic still exists, which is different than the Middle Europe, where you might have countries with 30% or 40% recovery rates who turn over every 2 years, whereas in the South, it probably turns over every 20 years, just to give you an idea.
Yeah. Okay, thank you very much, and good luck over the next weeks.
Thank you, Wolfgang.
Thank you.
The next question comes from Angeliki Bairaktari from J.P. Morgan. Please go ahead.
Good morning, and thank you for taking my questions. If I may, follow up on slide six as well. You mentioned there for Southern Europe, -5, but if I look at the foot note, you say that, you know, adjusted for extraordinary items, it was actually -13%, and I think that's still an improvement. I think last quarter it was -14. But nevertheless, I just wanted to understand. That -13% organic, is that coming mainly from Greece? So which market is actually seeing that decline in the organic revenue growth?
And secondly, can you break down the servicing margin in Southern Europe into sort of the margin that you have seen historically in Greece versus Italy versus Spain, so that we can understand, you know, sort of the different dynamics of how the organic top-line growth is translating into sort of EBIT, EBIT developments. And then, another question on investing. Out of the last 12-month collections of around SEK 14 billion, how much came from portfolios purchased over the past two years? And how much from portfolios purchased in 2018 or earlier? I'm just trying to understand out of sort of a year of collections in investing business, how much is attributable to the sort of older purchase portfolios? Thank you.
Great, so you asked three questions there. Emil?
Yeah. If I start with try to take them in order, the one-time effect, and we commented on that on the first quarter earnings call. It was one of settlements in Italy and Greece, in Q4 2022. And then we don't give details on margin per country levels. So that-
We do on a regional basis, and that's in our disclosure, but we don't do it individually between Greece, Spain, Italy, or Portugal, for example, in the southern region.
Can I ask, is there a big difference? Can you at least guide us in that? Like, is it that one would be at, like, 40% and the other one at 10%, or are they all kind of, like, similar, close to the 24% that we see there in the slide?
No, I would say Greece is higher. Spain and Italy are lower, and that's actually part of the evolution of these markets. Again, and I've talked about this a lot, these are stock markets where also they were externalized, and they were contract purchases. Spain was first in the early parts of the 2010s. Most, if not all of that financial effect, which translates to a higher margin, is gone in Spain. We've now won the BuildingC enter contract without any upfront payment. We've also extended existing contracts that originally had a financial payment, but on a lower margin, but extended them without any further payment, which just is an evolution, is an industrialization of the market, as opposed to initially, in all three of these markets, they were industrial as well as financial transactions.
In Italy, we are performing exceptionally well, higher margin than in Spain, but still, because it's the most recent transaction, it's one of the largest, the one in Greece. Greece is the highest margin of the three, of the three big markets. There's obviously Portugal, but Portugal is different. Portugal doesn't behave in the same way as the other three large markets. Hopefully, that gives you enough color and some help.
Yes, very helpful.
Okay, great.
And-
Thank you.
Sorry, and on the-
Go ahead.
On the collections?
Oh, collections.
Sorry, it was in the portfolio investments, right?
Yes.
Yes, exactly. So out of the sort of one year of gross collections that you have within the investing business, I was just wondering, if I look at the last 12 months, it's around SEK 14 billion. So I was just wondering, how much of that is coming from recently purchased portfolios, like, you know, over the past two years? And how much is actually coming from portfolios that were purchased before 2018? And I'm asking that question because when I look at your annual report, I can see that 36% of the receivables are that are still sort of in the book, in terms of ERC, reflect portfolios purchased before 2018.
I think we tend not to discuss those details, but a general guidance on how I would look at it from an external perspective is to look at the ERC curve and the decay. And that represents the full portfolio, obviously. So you have to make assumptions on the composition of the ERC in terms of percentage of the vintages. But that I think you have from the annual report. And-
But I think... Go ahead, Emil, yeah.
And then I think we have said, you collect probably half of the expected cash flow from a singular portfolio in the first 3-4 years-
Right
... typically basis.
I mean, tails are important, and you're bringing that up. And the—to the degree, one-third of our portfolio is older than 2018, those do contribute, but they don't contribute 36% of ERC. As Emil said, there are distinct curves which are actually quite uniform. And if you look at our current book value, pro forma for the Cerberus deal, I think it's SEK 25 or 26 billion. I think that's gonna yield a little bit over SEK 50 billion of estimated remaining gross collections, but the weighted average life of that ERC curve is, like, 4 years and a bit. So you're gonna get half of it in the next 4 years. That gives you a sense and to the degree...
That may extend a bit because we're under investing relative to replenishment, but it doesn't extend that much because we're talking about a very granular and vast portfolio. So that and hopefully, that gives you some color as to how to look at the profile of the investing portfolio.
Can I ask a follow-up on that? Do you ever write off whatever you have bought? You know, if the tail is not able to be collected within a reasonable timeframe, would you then write that off?
We do so not on a portfolio level basis, but sorry, on an overall portfolio basis. We do it on a specific portfolio basis. Such as an example, in the fall of 2022, we saw the tail coming down in Italy, and we wrote it down. So we do that, and that's part of the continual revaluation. So our annual, our active forecast updates for overperformance and underperformance. And so we continually view it. We only adjust relative to expected volumes. We don't adjust if the interest rate environment changes or anything like that. We don't. We only look at if we're gonna collect more, we write it up. If we're gonna collect less, we write it down. We do that on an individual portfolio basis. In Italy, it was quite sizable, so that had an overall impact.
Generally speaking, the net adjustments are upwards 'cause we outperformed, as evidenced by this quarter, where we're 109% of underwriting forecast.
Thank you very much. That's very clear. Thank you.
Thank you.
Well, one last correction, sorry, on, on the first quarter. It was actually Spain and Italy that had one of the effects-
Spain and Italy, yes.
Sorry.
Yes. All right, I think we're on to our last question.
The next question comes from Jacob Hessle from SEB. Please go ahead.
Yeah, hi again. Yeah, hi again. I just have one more question. Looking at employees, it's down from Q3, Q4, but still up year over year, and especially if we go, add an additional year back. And I hear your comments on Ophelos and the cost-saving program, but shouldn't there be a huge potential here to do additional cuts?
So the whole point of this is... You're, you're absolutely right. The whole point of it is that the M&A, for example, Spain, we now have 2,000 people in Spain. We're conducting a very large reduction in force, which is part of the original SEK 800 million of cost savings, which cannot take effect until the second quarter of this year. So you're going to see that number start declining quite dramatically going forward, but you're 100% correct. That is more tactical, and then you have the fundamental change over the coming years of something like introducing Ophelos, where, you know, some of our easiest, a very large proportion of our cases are gonna be managed without any human interaction, which will naturally lead to further reductions in human personnel.
But you're right, that's a timing issue, what you've noticed, because of timing. M&A added, but we haven't fully implemented all the headcount reductions. But over time, we should implement even more due to the fundamental change due to technology.
But how much do you think we could pick out? A 1,000 people, 2,000?
I think that's an important question. I think one of our operational priorities is put tech in, and get people out. We have 6,000 people in 41 call centers, plus a whole bunch of other people in ops and IT. I think a very meaningful reduction of that number is possible over the next 3-5 years. And by very meaningful, could be half.
All right. Thank you very much.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you, operator, and thank you everyone for your Q&A and for your double question, Jacob. As always, you're a very active participant in our calls, and we appreciate that. But again, we have... I just wanna wrap it up for two seconds. We have a distinct journey ahead of us. We're transforming the company from an industrial perspective, from a commercial perspective, from an operating perspective. We're transforming the company from a financial perspective. We're adjusting the capital structure. We're bringing in third-party capital. We have a long journey ahead of us. I think we're already demonstrating on a directional basis, the returns on that new strategy. And I continue to be impressed by my colleagues internally, who are highly skilled, but also, more importantly, highly motivated in our new vision.
I wanna just thank all the external stakeholders in following us and accompanying us on this journey. We are extremely confident that when we come out the other side of the vast majority of this transformation activity, you never stop transforming, but it's going to be very intense for the coming years. But we will emerge as a much better company that's gonna provide a better service to our clients. It's gonna be more efficient and therefore provide a better return to our shareholders, but also be a better place to work. So thank you all, and we will talk next quarter.