Earnings Call: Q1 2021

Apr 29, 2021

Thank you so much, and good morning, everyone. This is Anders Zangdol. With me today also as the operator said, I have Michael Ladurner, our CFO as well as Kim Ilk Fokuson, our Head of IR, for questions later on. We turn to Page 3 of the presentation, the highlights of Q1 2021. I'm pleased to present a robust Q1, especially in light of the pandemic that continued to affect the operating conditions across our markets. But more importantly, during the second half of the quarter and into April, we see very strong underlying momentum moving up across most of our markets. Is overall, the result of the quarter was supported by the diversification of our business, where a somewhat softer CNS performance was outweighed by strong performance in portfolio investment and strategic markets. This continued robust performance allowed us to deliver continued growth in our key cash metrics, where our cash revenue grew 6% on a constant currency basis, our cash EBIT grew 24% year over year. And our rolling 12 months cash EPS exceeded SEK 30 per share for the first time. Also our rolling 12 month cash ROIC is now up to 8.2% versus 6.6% in the Q1 2020, demonstrating further progress towards our medium term financial targets. The leverage ratio increased somewhat to 4.1 due to unfavorable FX development in the translation or net debt at the end of the quarter despite underlying deleveraging. Looking across our market, we see clear signs of recovery starting to come through, supported by improving business and consumer confidence. This was, for example, evidenced by the very strong results seen in our real estate servicing business in Spain as well as the increasing level of new inflows in CMS, it started to emerge towards the second half of the quarter. We believe that we passed an inflection point during the quarter, and we see a very positive momentum across all of our markets. In our servicing business, we see continued growth in our pipeline, and we signed a record level of new business during the quarter. And across our footprint, we see increasing demand for our services as our clients look to address their NPM servicing needs. In portfolio investments, we invested SEK 1,700,000,000 in new portfolio acquisitions at return levels substantially above the pre COVID levels, continuing the trend from 2020 or at attractive mid teen returns. We expect to continue to gradually increase the deployment pace during 2021 against this favorable returns backdrop. I'm also proud that Interim was awarded the best in class sustainability risk rating from Sustainalytics. Not only were we rated number 1 in our industry sub segment, is among the top 4% globally, among all the 13 more than 13,000 companies rated. This is a strong endorsement of our clear and defined sustainability framework and targets as well as the work we've done for many years in relation to our ethical collections agenda. Furthermore, we're well on track with our 1 interim transformation program, where we delivered a number of important milestones during the quarter. I'm happy to see that we are well ahead of schedule in respect of case migrations to the new platform, so that our FTD cost to collect KPI remains on target. If we move to Page 4, is looking at the servicing side of the business. Overall, the servicing business displayed mixed performance across markets. But during the quarter, a positive underlying trend emerged, supporting sustainable servicing growth across our footprint. We saw a meaningful improvement in consumer confidence of 7% year over year, which is supportive of a gradual return to normalized post COVID environment. The pace of vaccination, while somewhat varying in 4 countries, is an important driver of improvement in sentiment. In terms of post COVID opportunity set, we continue to expect a significant increase in post COVID NPL formation on our bank client's balance sheet, which we expect to translate into greater new volume flows towards the later part of 2021 and into 2022. As mentioned earlier, we saw an important turning point in terms of new case inflows in CMS during the quarter, we expect to see a gradual return to normalization during the coming quarters through 2021. This we expect will support positive revenue development and margin improvement during the year. Furthermore, we are constructive regarding the outlook for specific markets where we where the operating environment is rapidly improving an improvement in sentiment is already showing positive effects as seen, for example, in the level of riboset sales in Spain. Is we move to Page 5, portfolio investments. On the portfolio investment side, we see increasing portfolio sales activity from our clients, which we expect to continue accelerating through the year. We also continue to see attractive underwriting returns well above pre COVID levels. Many sellers stone sales activity during 2020, and now we see sellers coming back to market. Given the combination of pent up postponed supply and volume buildup due to the pandemic, we expect the portfolio sales market to remain very active this year and next. From an interim perspective, we expect to revert to normalized investment level in 2021, meaning the flowing capital in as our replenishment rate is sufficient to grow the investment business at a rate consistent with our medium term financial targets of double digit growth as well as delivering on our deleveraging target of reaching 2.5x to 3.5x by the end of 2022. To move to Page 6. As I said, I'm extremely pleased with our best in class sustainability risk rating awarded to the hard work the whole organization has been doing to lead our industry in terms of fair and ethical behavior is our clear and well defined sustainability targets. To us, at Incluem, the best in ESG is at the core of what we do, we see that we have an important role to play to support societies as they are setting the path back to recovery post pandemic. We move to Page 7. Our 1 interim transformation program implementation is pursuing according plan is well on track. And I'm pleased to say that we are off to a very good start. As of the end of Q1, our case migration KPI is well ahead of plan, and our FTE cost collect KPI is on track. We've also continued to ramp up activity level in our multi language contact centers in Athens and Bucharest, which we opened during the quarter. And we expect to have our center in Malaga opened before the end of Q2. We have also now made very good progress on our data and analytics efforts to ensure that we have all the data accessible in support 1 global beta hub. This allows us to now be able to start leveraging advanced analytics across our footprint to support our global operating model. So with that, I hand it over to you, Mikael, to talk us through the numbers in more detail. Thank you, Anders, and good morning. I'm now looking at Page 10, Group Key Financials. Q1 was a robust quarter. We continued to improve our cash metrics quarter over quarter as well as an evolving 12 month versus full year basis. This positive development is particularly noteworthy in the context of the COVID-nineteen pandemic continuing to impact The economies and societies we operate in. Cash revenues grew by 6% in constant currency quarter over quarter to 5,200,000,000 And we're flat including the currency effect. Cash EBITDA increased by 3% to 2,700,000,000. On a rolling 12 month basis, cash EBITDA came in at SEK 11,686,000,000, a small improvement compared to full year 2020. Cash EBIT for the quarter came in at SEK 1,365,000,000, up 24% from Q1 2020. Cash EPS was SEK0.057 per share for the quarter and SEK0.32 per share for the rolling 12 months. Cash ROIC for the quarter was 7.8%, while on a rolling 12 month basis, we continue to improve our returns and are now at 8.2% Compared to 6.6 percent at the end of Q1 2020. The leverage ratio adversely affected by the FX development during the quarter Increased by 0.1x to 4.1x compared to full year 2020. This development is entirely due to the FX movement during Q1, Which increased net debt by €900,000,000 outweighing underlying deleveraging of €300,000,000 as well as the increase in rolling 12 month Cash EBITDA. While we are still impacted by the ongoing pandemic, continuous improvement throughout Q1 and good momentum supported by the increasing economic and consumer sentiment that Anders mentioned earlier are indicators that we may now have reached a turning point Towards gradual normalization. Now turning to Page 11 and our continued growth in recurring cash earnings. Overall, we see a very positive growth trajectory over the last five quarters as well as good momentum for the remainder of the year. Cash revenue is up 3% year over year to €21,400,000,000 and cash EBITDA 6% to €11,700,000,000 again highlighting the operating leverage inherent in our size and scale. Cash EBIT and recurring cash earnings have increased Even more significantly year over year, with lower replenishment CapEx also due to a rolling 12 month money on money multiple expansion to 2.18x. Looking into the operational drivers behind these developments, we see a softer CMS contribution more than Satisfy portfolio investments in strategic markets. Summing up, we again see a trend of continuous improvement in recurring cash earnings With significant growth year over year. Now focusing on the segments. I'm looking at Page 12. CMS again experienced somewhat lower case volume inflows on aggregates due to COVID-nineteen and an adverse FX development negatively In cash revenues, which were down 9%, 5% in constant currency quarter over quarter to 1,030,000,000. However, as mentioned before, we also saw a relative improvement during the latter part of the quarter and feel that an inflection point may have been reached. Cash EBITDA reduced to $412,000,000 in Q1, down 17% quarter over quarter. For cash EBIT, we observed a similar development with €396,000,000 for the quarter, down 11%. Segment cash ROIC decreased by 0.5 percentage point to 8.3% quarter over quarter. Stability is currently also impacted by the lower share of fresh cases in the overall claim mix. We expect revenues as well as profitability to recover as volume inflow Turning to Page 13. Strategic markets continued to improve and had a strong quarter Despite the continued impact of the COVID-nineteen pandemic on Italy, Spain and Greece. Of particular note is the positive contribution from real estate servicing in Spain, as mentioned by Anders earlier. Cash revenues increased by 21% to SEK 1,346,000,000 quarter over quarter against foreign exchange headwinds. Growth at constant currency came in at 28%. Cash EBIT also more than doubled to $645,000,000 quarter over quarter. The quarterly segment cash flow, therefore, increased From 7.1% in Q1 2020 to 16.3% in Q1 2021. Also looking at rolling 12 month figures, I would like to again highlight the growth trajectory across all cash metrics. Focusing on portfolio investments. I'm now on Page 14. The portfolio investment segment showed increasing momentum throughout quarter following a strong end to 2020. Overall portfolio investments exceeded collection expectations, The active forecast by 5% for the quarter. Cash revenues reduced by 5% to 2.8 $6,000,000,000 quarter over quarter, a 1% growth in constant currency. Cash EBITDA decreased by 7% to $2,089,000,000 for the same period. Cash revenues and cash EBITDA were negatively impacted by a reduction cash flow from joint ventures quarter over quarter. Cash EBIT was flat quarter over quarter and came in at 830,000,000 Supported by lower replenishment CapEx also due to a higher rolling 12 month money on money multiple. Of SEK1.739 billion were well ahead of the replenishment level as well as the investment level observed in Q1 2020 And came at attractive returns significantly above pre COVID comparables. Now looking at Page 15. The difference between our cost of funds and the last 12 month average unlevered underwriting IRR continues to widen and now stands at 4.5 times. Interim bonds have continued to perform well in a generally positive market, highlighting the strength of our credit. At the end of Q1, we had available liquidity of SEK 18,000,000,000 and no significant upcoming debt maturities before 2024. Turning to Page 16 and focusing on progress towards the new medium term financial targets. Rolling 12 month cash ROIC is continuously improving and now stands at 8.2% versus a target of greater than 10%. Recurring consolidated rolling 12 month cash EPS is exhibiting strong growth and now stands at SEK 30.2 per share, is supportive of our target of more than 10% growth on average per annum. Deleveraging is progressing on the trajectory to reach the 3.8 times area at year end 2021 and meet our target of a leverage ratio between 2.5x and 3.5x by year end 2022. The slight uptick in Q1, as mentioned before, is due to an adverse foreign exchange development outweighing underlying deleveraging An increase in the rolling 12 month cash EBITDA. In summary, progress towards achieving our medium term targets is fully on track. And now back to you, Anders, for some final remarks. Thank you, Michael. If we move to Page 18, just to summarize. So overall, as also Michael pointed out, I'm very happy about the robust performance in the Q1, which was supported by the diversification of our business, where somewhat softer CMS performance was more than outweighed by strong performance in portfolio investments and strategic markets. Looking at our agenda going forward, we will, during 2021 beyond, continue to address our strategically important ESG agenda and continue to build Vethim as an integral part of our business globally. We are committed to reaching the targets we set out, and I look forward to continuing to update you on them as we progress. The 1 interim transformation program is a fundamental change for us as a company, and we remain firmly on track. 1 in term means a complete overhaul of how we operate as a company, a complete redesign of our operating processes and how we deliver our services to our clients. We're doing that by leveraging technology, data and analytics to be able to strengthen our value proposition, improve our efficiency and enhance our competitive position. The transformation enhances our client relevance. It underpins our ability to compete and win more business organically, and it supports our growth agenda. Combined with a positive economic outlook and increasing client demand, we believe Inclume is well positioned for sustainable long term organic growth. So to summarize, this was a strong quarter given the continued pandemic operating conditions, but more importantly, with the strong momentum in the underlying business across all our segments. In terms of near term outlook for our 3 segments, I would highlight for portfolio investments, we expect to continue to see strong collection performance as well as accelerating investment pace at attractive mid teen returns, supporting double digit growth. In CMS, the positive new case inflow trend that emerged during the quarter, we expect to drive revenue growth and restore margin levels over the coming quarters. We also see client demand continue to increase, driving continued pipeline growth and new contract signings. And in strategic markets, we see operational conditions rapidly improving, a normalization will allow us to exploit the full potential of our market leading Southern European franchise. And with that, I think we conclude the presentation, and we'll go to Q and A. First. Thank all first. Our Our first question comes from the line of Julia Vrasko at JPMorgan. Please go ahead. Your line is open. Good morning. Thank you for taking my questions. And apologies in advance if it's covered somewhere in your presentation or the release. It is quite a busy morning today. So I wanted to ask you to give some more color on the progress of INCHEM 1 program. How much have you spent so far on various initiatives, CapEx, OpEx versus your budget and what sort of phase in should we expect going forward? So that's my first question. The second question I have is on the development in Spain. So you noted an improvement in the real estate servicing. I'm just wondering if this is a one off, some sort of catch up or is this sustainable? And could you also provide some color On the other regions in that division, how is Greece, how is Italy? And then my other question is, Could you provide some insight on portfolio purchases in Q1? What sort of asset and region mix was achieved? And I think there was supposed to be some catch up in the booking of these investments from Q4. So I would assume that Q1 is maybe a little bit officially inflated. So what base of investment should we be assuming through the rest of the year, please? Thank you, Giulio. Good morning. To start off with the 1 interim on your question on or as I said, we're well on track, and we passed a number of important milestones during the quarter, and we made it out a little bit on Page 7 in the presentation, both in terms of the budget as it's laid out. You can see at the top of the page there, how the budget sort of is laid out and what sort of how it's spread out across the years. I mean, to date, we've spent 29% of the total program budget. And in aggregate, since start, we were about 7% below budget today. But we'll have a little bit of fluctuations from quarter to quarter, and we expect to end up on budget by the end of the time of the program. Turn to the second question around the strategic market. Sorry, but is there any can I just interrupt? I'm really sorry. Is there any detail on CapEx, OpEx in that spend. Julia, if I can take that one. What I would reflect is the detail we've given in the context of the Capital Markets Day, where we give a I think on Page 65 it was, we gave we give a breakdown in terms of how we see the split between CapEx and OpEx over the course of 2021 and also beyond, I think in general, those parameters still hold very much true As also in terms of the quarter, we're very much tracking online with what we've laid out in the context of the Capital Markets Day. Okay. Thank you. All right. So then to your second question around strategic markets. I mean, we see a notable uplift in, as you said, business and consumer confidence across many markets, but it was particularly visible also in Spain, where we see a real estate market with high liquidity and large number of transactions, and that is continuing, and it's a very active market now. We saw last year, obviously, that with the lockdowns, there was some physical restrictions to the ability to do this and as well as the lower consumer confidence. But with now with the increasing consumer confidence and the also the strong sort of support mechanisms that are coming through, including the review packages and whatnot, is supporting overall confidence in the economy. There's also visible, by the way, our amicable collection activities, where we see very strong performance on all amicable activities. And that goes for Italy and Greece as well, where amicable activity is now at a very good pace, and we see a rapid return to normality on the Amicable side. On the legal side, we continue to have delays because obviously, with the lockdowns and the restrictions that have been, the pace of of legal activity, what slowed down during 2020? We are seeing better pace gradually coming Drew, but that is going to take longer time to restore to normality. But overall, we are very, as I said in my introductory comments, is very constructive about the performance in our specific market units for the year 2021. Then if we go to the point around portfolio purchases, we invested at the SEK 1,700,000,000, which is in excess cycling expenses of what we did in Q1 2020. And yes, you're right, we had some carryovers from Q4, but it's also fair to say that we haven't impacted even more carriers into Q2 from Q1. So the activity level is increasing, and we see continued as an acceleration of deployment pace coming through during 2021. As we have seen, sellers who have postponed transactions during 2020 are now coming back to market for realizing those transactions. And we also we're seeing the buildup of portfolios on the back of the pandemic is slowly coming through the system, and we're seeing the first signs of some pandemic portfolios coming to market as well. Supporting, I think, the commentary that we expect a continued very high level of activity in the market for the coming quarters of 2021 and into 2022 has continued attractive investment return levels. And could you give any insight on sort of asset and regional mix when it comes to those investments? Is it just one area or is it broad based? Is I would say unusually broad based. I mean, normally in a quarter, you have some area that is more active than another, but over time, it evens down. I would say the first quarter was very broad based and no particular concentration in any geographic area. And also, I mean, we have, as you know, a 80, 20 more or less unsecured, secured mix in our book. I would say that the continued activity is in line with are quite back to the distribution from Unsecured and Secured. So very broad based increase in activity. Thank you very much. Thank you. Our next question comes from the line of Hermann Kirch of Carnegie. Please go ahead. Your line is open. Good morning. Thanks for taking my questions. The first one, if I could start maybe on the 1 income program. I know it's early days, But if you look on the case migration there and the trajectory, is that lumpy? Or do you see anything that makes you believe that You would actually have a much faster migration overall on the program than you initially envisaged. Good morning, Erwin. I'd say on one interim, we're extremely pleased, not only with the fact that we've been able to migrate more cases a bit faster than we had originally planned, are the fact that we've now been able to do large scale migrations without any hiccups as we have a concept, migration concept that has really proven to work extremely well. Gives us a lot of confidence in our ability to execute the program on the time line that we set out. Then, overall, I'm sure we're going to be a little bit above and little bit above throughout the time of the program. So I wouldn't expect us to be dramatically ahead of the curve for the totality of the program. I mean it feels very good to be off to a good start, but also perhaps more importantly, with a high degree of execution precision. And that's what I would probably highlight more than the fact that we're ahead of ahead of the trajectory. That's very helpful. Thank you. Then if we move over to the PI segment, I mean with your change in accounting in Q4, we perhaps expected over collections to be almost more neutral. Would you say the 105% Q1 are representative of what you would expect going forward as well. Good morning, yes. Thank you, Erwin. I mean, you're right, with the alignment to accounting practice as we did at the end Q4, the logical conclusion was to have a performance closer to the active forecast. So that's absolutely correct. I think that in that light, I'd say we're even more happy to see the strong performance of the Q1. And we also see very good momentum in the Q2 of collections and from CDO collections. So that makes us very confident that we can continue to have a strong collection performance for the coming quarters. So but we're feeling very confident about that. Thanks. And then 2 more questions, if I may. I can take them together. But 1st on Piraeus, have you put any kind of break up fee or so for the portfolio that you've acquired from the Phoenix and Vega portfolio that today is press release. And then just also the last question, I can take it by the way. So on the Inertesa SPV, in your here, you're showing us that you expect around SEK 600,000,000 of cash flows the coming year. And in Q1, we had SEK 44,000,000. When do you expect that ramp up of cash flows to come in? Perhaps if I start with the Greece question and Michael even cover the Italy question. In Greece, no, we have not booked any one off piece in the Q1 in Greece. So it's all organic performance in the strategic markets overall and including in Greece, whereas we said at the end of Q4, very pleased with the performance in Greece. It's really we've been delivering on our original expectations despite COVID, and that's from and solid performance in Greece continues into 2021. Michael, if you want to comment on the Italian question. Yes, happy to. I think if we look at Q1, obviously, there's a time lag between The underlying or small time lag between the underlying collection performance and thus receiving cash through the structure. So what we see now is obviously still somewhat impacted by the pandemic and the associated slowdowns in the legal systems in particular. Now we still see those in general, but also it's it must be said that from a momentum perspective And from a coming out of the pandemic perspective, we see a good trajectory for the geography overall for the remainder of the year. And that will also then reflect itself as we expect into the cash received from the JV. Great. Thank you very much for taking the questions. Thank you, Ermin. Thank you. Our next question comes from the line of Amil Curia of SEP. Please go ahead. Your line is open. Thank you, operator. Good morning, Anders and Michael. Two questions. Let me perhaps do both straight away. First off, on the strategic market EBIT margin, I mean, it has been quite lumpy historically, and Q1 hasn't been the best quarter yet. You're delivering Very impressive margin numbers in this quarter. Is this a smoothening? Have you been in some way been able to take away some of the seasonality in the business or is this a new base, if you will? And then the second question, perhaps going All the way back to the first question, one tempt asks tends to ask when looking at Intrum for the first time, And how do you incorporate now that we're out of or increasingly going out of this big black swan event, how do you incorporate Sort of broader macro risks into the modeling of new portfolios, how to incorporate, Well, the broad picture here, just out of it, out of a big, again, black swan of them. Good morning, Ramin. Thank you for the question. In terms of the strategic markets, you're right, we have had some volatility in the margins there. I would say that what we see in the Q1, as far as my introductory comment, is a rapid improvement in the operating conditions as well as the sentiment in those markets. We're seeing a stronger underlying activity. So what we're seeing now is the start of what we would label the normalization. And we believe we have significant potential to exploit the potential in our Southern European franchise as that hasn't been operating at full capacity for the last while due to COVID, in particular. And now with the improvement that we're also considering the efficiency improvements and other measures taken prior to COVID, we can now see the underlying operating leverage in those entities coming through. So we're pleased with the margins, but we also see that we have continued improvements to come through as we go into full normalization in those markets. As well as I would also point out the ability for us now to start adding new volumes based on the post pandemic market opportunity that we see coming through. In terms of macro risks and modeling, I don't know, Michael, if you want to comment on that. Yes. Ramiel, I understand you referenced portfolios in particular. I think I'd say 2 things. Obviously, in terms of our valuation models and our continuous modeling of the portfolio As we go through the reevaluation process, we consider such risks. What I would also say, and I think The pandemic has shown this quite clearly. Overall, the macro has a very muted effect in us. And we've shown this throughout the pandemic. I think if you go back to the global financial crisis, you see the same trend. So yes, we do incorporate it and But we also have to note that the impact on us is very much muted. Clear. Thank you both. Thank you. And we have one further question in the queue so far. That's from the line of Hans Huynh of Credit Sykes, please go ahead. Your line is open. Good morning, guys. Can you hear me okay? Yes, we can. Yes. Great. Thank you very much for taking the question. I've got 2, if I may. So first one is about the CMF. So in your opening remarks, you mentioned about the inflection points may have reached. So I was wondering, could you elaborate a little bit more in terms of our basis give you the confidence that you will cut off that way. And the second question is about the strategic market. So we have heard that your comment about the tone of the business in this segment. However, I'm just wondering if you could you talk a little bit more specifically about the cash flow outcome in this tariff rates, I. E, how much cash flow is diverted to debt at The SPV level and how much left over for the group. Thank you very much. Yes, thank you and good morning. In terms of maybe I can start with the first question and Michael, if you want to cover the second. In terms of the CMS business, as we have commented upon throughout 2020, due to the pandemic, we have seen lower new case inflows during the last 12 months, which our CMS business is to larger extent early at earlier years and where we turn around the stock of cases in a much faster way than, for instance, in the strategic markets has longer lead times. And because of that effect of lower case inflow during 2020, obviously, we have seen a more challenging development on the revenue line and for that matter on the margins in CMS. What we did see in margin during the first quarter was what we believe now is an inflection point. We're starting off at lower UKs inflow levels at the beginning of the quarter. During the quarter, from sort of mid and the second half of the quarter, we started to see for some of our major CMS markets that the inflow levels increased, not quite fully back to normal, but a good way on the way back to normal in several markets. And I think that combining that with the ending of number of moratoria, the increased consumer and business confidence. And obviously, we're also on the non bank side are dependent on the general level of revenues and so forth. That drives multiple invoices. That gives us confidence that we will revert back to a normalized level of case inflows in the CMS business during the coming quarters. It's also fair to say that the and combining that, by the way, with the fact that we now also have a record pipeline and a record new ACV signing, we call ACV annual contract value of new contracts in servicing. Gives us good confidence that we are on have reached the inflection point for the CMF business coming out of the pandemic and going towards normalization. And I mean the transmission time for the CMS UK inflows is relatively faster, it takes about 90 days on average to get new case input translate into revenues. And then obviously the new pipeline and new contract signings obviously have a slightly longer lead time as you also commented upon I think at the end of the Q4 where it takes 2, 3 to 4 quarters on board and ramp up volumes under new contracts. But it gives us a good underlying basis for being optimistic about the revenue development of CNO. And maybe to answer your second question, and I'm just repeating it to make sure I've understood it correctly. As I heard you, you were interested in terms of how much of the JV portfolio collection is effectively to our benefit versus the senior lenders. And I think there I would draw your attention to the fact that for 2020, we the senior debt came down by about SEK 4,000,000,000. So that indicates that the vast majority of the overall collections in the JV portfolio is used to pay down Senior leverage and to and a smaller part also for interest and the remainder is available to the investors in the junior and mes notes. That's very clear and helpful. Thank you very much. First take you. There seems to be no further questions on the line. So I'll hand back to our speakers for the closing comments. Thank you, operator. Well, thank you so much for joining in and listening to our Q1 results announcement, and we will close the call there. Thank you very much. Thank you.