Welcome to the Intrum Q1 2023 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 star five on their telephone keypad. Now, I will hand the conference over to CEO Andrés Rubio and CFO Michael Ladurner. Please go ahead.
Good morning, everyone. This is Andrés Rubio. As the operator indicated, I'm the CEO of Intrum, and I'm here with Michael Ladurner, our chief financial officer. Thank you for taking the time to listen to this review of our financial results for the first quarter of 2023. We are conducting this call from our corporate headquarters in Stockholm, Sweden. I wanted to start. If we can go to the next page, please. Page three, with an overview of the performance during the quarter. Initially, I wanted to talk about my impressions. The first quarter, in my opinion, was not a good quarter and is a very clear indication of the external and internal challenges we face as a business. Revenue increased. There are selected top line and fundamental positives related to both our servicing and investing businesses.
First quarter EBITDA and our net result was unsatisfactory. I am not happy with this performance, and I want this to be the performance during this quarter, which happens to be the first quarter since I was named permanent CEO to be a wake-up call for the organization. A call to action where we learn from our past mistakes and have this quarter serve as a catalyst to face our issues more quickly and more aggressively to drive greater leverage from our obvious strengths over time. The challenges we're facing are several. Negative macro environment, making collections more difficult. This quarter, specifically January and February, proved to be quite difficult. Well below 100% of our active forecast, with a strong March of almost 107%, pulling us up to 100% of our active forecast during the quarter.
We also have to face the reality that we are in an inflationary environment, and the cost of both human capital and financial capital has increased meaningfully over the recent quarters. We also have a bloated central cost base and greater efficiency potential across the platform as a result of what I believe to be an over-centralized business model, specifically our ONE Intrum Program, which I'll address later. These challenges require both tactical and fundamental measures to overcome these hurdles and build our company over time to be not only the biggest, but also be the most functional and profitable in the industry. On the tactical front, we are initiating today and executing immediately a SEK 600 million near-term cost-cutting program.
This is merely resetting inefficiencies, primarily in our non-production and central costs, and will be realized during fiscal year or, sorry, during calendar year 2023. Michael will go into more detail later. On the fundamental front, in line with our overall theme of simplify and focus, plus grow and transform, we continue to work on developing our business across key areas in order to achieve our full potential. We want to improve our commercial focus. This includes recent senior management reorganization, where the company, excuse me, is broken into two businesses, servicing and investing, along with some key central support functions, ops and IT, working in partnership with our markets, which have now been reorganized into four regions: north, middle, south, and tactical.
We are advancing on the tech front with 2023 bringing us new updated portals, providing both customers and clients a digital self-service, excuse me, capability. We're rolling out the latest generation cloud-based dialer system to make our calling operations more efficient, and we intend to acquire and to roll out an end-to-end digital collections capability during the year. Finally, we are exploring ways to grow our investing business with third-party capital to develop over time an asset management business and moving to a capital-light investing model. Despite these challenges and the disappointing net result, our platform continues to display the greatest size in the industry. There were very specific positive developments in the quarter. Servicing AUM growth increased by 5%.
The annual contract value of our new business sales increased 22%. We signed over 200 medium and large transactions in our servicing business. On the investing side, we invested over SEK 1.7 billion. We did so at a 16% IR, meaningfully higher than most of the recent quarters. The headline here is that we're addressing our challenges head-on over the near term in the cost program and over time with a more fundamental business transformation. Going now to the next page. On page four, we see the evolving market dynamic. The overall market is one of decreased consumer confidence, more than doubling of the cost of a household mortgage, increase in utilization of consumer debt, and historically high overall inflation.
Despite these negative trends, employment has remained strong, as we recently published, which makes this crisis different than past crises where unemployment was significantly elevated. This is truly an income crisis, not necessarily an employment crisis. It is in environments like this that Intrum shines with our multi-market integrated business model, producing greater addressing the greater client need for our collection services. However, we need to recognize and address the fact that we do have challenges. We are a human resource-intensive business with 10,000 employee in 24 jurisdictions, and our investing business is a capital-intensive business that requires capital to grow and produce profits. Both of these factors are increasingly increasing our costs at a higher rate than our revenues and contribute to our margin challenges that we are attempting to correct over the near term with the cost reduction program.
We are not immune to this environment, although it does have benefits on the client side, our operations are affected. Moving to the next page five, you see that Stage two loans have increased from SEK 1.2 trillion to over SEK 2 trillion over the last three years, reaching greater than 10% of the total year-end bank- European banking system loans. This increase in credit risk at banks, our primary clients, and the decline in disposable income at the consumer level will contribute over time to the creation of NPLs and reverse the recent trend of declining NPL formation. In addition, as you can see in the NPL sales figures in the boxes below the graph, banks have become very accustomed to regularly disposing NPLs.
All of this, in the context of our recent conversations, specific conversations with our clients, indicate clearly to us that there will be an incremental NPL flow over the coming years, which will initially drive the need for our collection services, and then, with a certain lag, will represent a significant increase in investment opportunities over several years to come. We estimate that these trends will play out during 2023 and lead to meaningfully better market opportunity for us in 2024 and beyond. Looking now at page six, we show the concentration of these Stage two loans and the NPLs or the distribution across our four regions: North, Middle, South, and Tactical. In total, our footprint covers over 90% of European Stage two and non-performing loans, virtually, excuse me, the entire footprint.
As you can see, these markets move at different speeds with the Middle and the Southern European regions currently offering the greatest volume opportunities. Specifically in our experience, and as evidenced in the ECPR published last year, there is a spectrum of market developments across our footprint. For example, with the U.K. being one of the most economically challenged countries, and currently, with other countries such as Greece still benefiting from the tough decisions taken in that system, in that banking system at the tail end of the last crisis. Looking at page seven, we see some of the positive trends in our servicing business. Our overall share of bank and financial inflows have led to an increase in our average case values. These interrelated variables have been steadily increasing with a particular rise from the fourth quarter of 2022 to the first quarter of 2023.
These factors contribute to higher potential margin going forward in our client service business. We've had some great commercial wins in the quarter, which I will address later, and Michael will also address in the presentation, which have driven our servicing, i.e., our client service business, to an all-time high in revenue of SEK 13.1 billion as seen in the bottom half of this graph. All of these factors indicate that we have the potential for sustained growth in earnings from our servicing business for years to come. On page eight, we see an overview of our recent performance in our investing business.
After an unusually strong December and fourth quarter 2022, as you can see in the main graph, our performance against our active forecast for the first quarter was exactly 100%, which entailed a very slow, as I mentioned earlier, very slow January and February, well below 100%, brought up by a much stronger March at 107%. The first quarter is seasonally slow and a more challenging quarter always for collections historically. First quarter 2023 was a particularly weak quarter with an 11% drop quarter-on-quarter versus a typical drop in recent years of 5%.
We have analyzed this shortfall in detail and estimate that approximately 60% or certainly more than half of the incremental decline in this quarter is due to timing effects of certain collections due to such issues such as the multi-month court system strike, which trapped cash and reduced collections in Spain, and some similar issues in other geographies. The fact that during our second weakest collections quarter in the last three years, we still hit our active forecast, is a testament both to the collectibility of the granular assets that we manage, as well as our operational collections capabilities. Going to the next page, on page nine, we address directly the ONE Intrum Transformation Program. The ONE Intrum Program was absolutely necessary in 2020, when we operated largely in an independent fashion across our 24 markets.
This program has driven significant benefits from centralization, such as the metric seen on the left side of this page, indicating a run rate recurring savings of SEK 364 million, and a very meaningful reduction of our cost to collect. However, while directionally correct, this program as designed, in my opinion, has gone too far in concentrating and centralizing both the management and operations of our diverse business. I believe in a more balanced business model that allows our business leaders in servicing and investing, plus our ops and IT, key central function leaders, to partner with our local teams to empower them to be as effective as possible with our clients and customers. You can see on the right side of this page, we are continuing to work on transforming our business model across several key dimensions within this operating model.
Commercial focus and business leadership across a rationalized footprint. Expand the effectiveness of our client servicing, with an expansion of the range of our services to include early and late-stage solutions, plus an improved self-serve digital interface with our clients and customers. We're exploring capital-light paths to growing our currently capital-intensive investing business. This fundamental change to our business effectiveness, combined with the more efficient platform after our near-term cost reduction and the clear positive top- line trends, will allow us to gain scale and not only be the largest in our industry, but also the most profitable. We will present the new full potential plan and its associated financial targets during our Capital Markets Day scheduled for this September 13th here in Stockholm.
On the next page, on page 10, you see that clearly Intrum is in a privileged position whereby the more successful we are in collecting on behalf of our clients, we not only drive our revenues and our clients' financial benefits, but we also increase the positive societal impact that we generate. I'm happy to report that during the last 12 months, we helped 4.4 million customers become debt-free with Intrum, paving the way for these individuals to reintegrate into the financial system. This figure compares favorably to 4 million of such cases during calendar year 2022. In addition, we collected SEK 13 billion on our claims and SEK 76 billion against client claims during the last 12 months, reaching an all-time high of SEK 89 billion. As the continuous cycle graph indicates on the right, we provide a greater service to our clients.
We allow individuals to resolve their debt and improve their financial health, all while creating a very strong motivating force for our employees and contributing to the proper functioning and health of the overall economy. Finally, on my page 11, before I hand it over to Michael, this is somewhat of a bragging slide, as I like to end my section on a bragging slide on both the commercial and operational side with some statistics that show our business is experiencing very strong positive trends which are building on each other over time. In servicing, we had a 22% increase in the annual contract value of new sales quarter-on-quarter, with the signing of more than 200 medium to large deals in the quarter.
As a result of these increased client wins, our assets under management continue a very positive trajectory with a 6% compound annual growth rate over the last two years. On the bottom half of the page, you see our recurring chart that shows our 18-plus year track record in not only growing collections but also improving on our collections against our original forecast at underwriting. Here you can see that after hitting an all-time high of 115% in the fourth quarter of 2022, and for the second time over this 18-year period, this figure still landed at a very healthy 112% during the first quarter of 2023. As stated previously, when expressed as a percentage of our active forecast, which is the underwriting forecast after upward revisions, this ratio drops to a very still strong 100%.
With that, I'll hand it over to Michael and he'll go through the remainder of the presentation. I'll come back in at the end to do some wrap- up comments.
Thank you, Andres. I'm now turning to slide 13. As Andres has just said, we had a slow first quarter from an earnings perspective, but grew revenues. Cash revenues for the first quarter were up 2% compared to the first quarter last year. In CMS, we saw 7% organic revenue growth driven by increasing assets under management. Portfolio investments also contributed to revenue growth, while strategic markets is stabilizing after two years of substantial growth. However, increasing costs have impacted our bottom line with cash EBITDA down 10% compared to the same period last year. I will come back to this point in a minute and give more details about the cost program we are putting in place.
With a lower rolling 12-month cash EBITDA and net debt affected by currency, a performance related deferred payment to Piraeus Bank and a large portfolio acquisition in Spain carried over from last year. The leverage ratio rose 0.2x- 4.2x at the end of the first quarter. Turning to page 14. As I've just described, costs have increased beyond what is supported by our top- line growth due to a number of clearly identified root causes. As you can see on the graph on the left-hand side of the page, during the last two years, cash expenses have significantly outgrown cash revenues with a 20% cost increase compared to a 15% increase in revenues.
The main driver of the accelerated cost increase was in the context of decentralization and the ONE Intrum transformation program, a duplication of costs in central units where offsetting local cost reductions have not fully materialized. The increased costs are therefore mainly within global and local overheads, and the not insignificant amount where incremental expenses to support the transformation program. Of the total current cost base of SEK 11.8 billion , we have identified circa SEK 5.5 billion as production and sales related costs, which will not fall within the addressable perimeter of this program. This is to safeguard our revenue generation and maintain commercial momentum and focus. Considering the increasing demand for our fair and ethical collection solutions in the current environment.
The target for the cost program will be the remaining circa SEK 6.3 billion of non-production costs, and of this, 10% or SEK 0.6 billion will be targeted starting immediately. The one of cost to carry out the program will be around 1x the recurring reduction of SEK 0.6 billion, which we plan to achieve on a run rate basis by the end of this year. I'm now looking at page 15. Despite the challenging economic environment and associated operating challenges we have during the last 12 months been able to generate a recurring cash flow of SEK 8.9 billion. Just to be clear, this is after paying interest in CapEx. The longer- term cash flow generation trajectory is positive and has grown 10% since Q1 2020.
It is important to note that the SEK 8.9 billion can, on a discretionary basis, be allocated to delever, to invest in new portfolios, to grow as well as to remunerate shareholders. Continuing to page 16. Here we have illustrated the net debt development, which has been essentially stable over the last three years. During these three years, we have generated circa SEK 4.6 billion in cash flows, including investments in new portfolios of circa SEK 21 billion. This is after servicing our debt and paying taxes. The cash generated has been largely paid out in dividends to our shareholders, keeping the underlying net debt essentially flat. The 15% growth in cash EBITDA over the same period has therefore been funded by internally generated cash.
The incremental net debt increase is due to adverse effects movements of SEK 0.9 billion and one-off items such as the settlement of the CarVal derivative agreement, acquisition of minority stakes in consolidated companies, and deferred M&A payments totaling circa SEK 2.5 billion. I'm now looking at page 17 and our credit management segment. Total cash revenues are up 12% compared to last year. Of this increase, 7% comes from organic growth. This reflects the increased assets under management from clients seeking our support to fairly and ethically collect on their behalf and our increased commercial focus. The increase in cost outstrips the top- line growth in the segment.
This is in the context of the current environment, which requires us to increase our efforts to collect on cases, but also the factors previously described, which are to be addressed with our cost program. As Andrés also pointed out, there are some positive underlying signals with increasing volumes of new cases coming from the bank and finance sector. We're cautiously optimistic about the near-term future, where we see increasing demand for our services and also a trend of clients seeking solutions for early arrears. Onto strategic markets on page 18. Our strategic market segment is after two years of substantial growth stabilizing with adjusted revenues down 5% to SEK 1.45 billion compared to SEK 1.5 billion in the 1st quarter of 2022. Costs have also here grown faster than revenues, with earnings down 21% in the quarter.
The margin remains strong, 37% on a rolling 12-month basis. A more pronounced seasonality is also consistent with the tougher economic environment. In strategic markets, we had some notable client wins during the quarter. For example, in Italy, we signed agreements for EUR 520 million of additional contributions to the UTP Italia Credit Fund from leading banks, including our new client, Eclair. Turning to page 19. Our portfolio investment segment continues to generate stable returns with minimal volatility. Cash revenues are up 2% to SEK 3.4 billion compared to Q1 last year, the segment cash EBITDA is up 4% to SEK 2.6 billion. Adjusted segment earnings are lower than during the same period last year due to lower accounting earnings recognition on our portfolio joint ventures.
The adjusted return on investment for the segment of 13% is in line with the first quarter last year. Coming back to the stability of cash earnings, I would like to point out the graph in the top right-hand corner. The cash EBITDA has continuously grown at a CAGR of 14% over the last two years, highlighting the strength of our diversified and granular back book. Investments in the quarter came in at SEK 1.7 billion, slightly ahead of guidance. This was driven by a large portfolio in Spain carried over from 2022. The expected unlevered investment return on new investments is up three percentage points to 16%, continuing the development we observed during the second half of 2022. Onto page 20. Here we are giving a first glimpse into what our new reporting structure will look like.
The segmentation will be in line with the operating model changes we recently initiated. Going forward, we will focus on our two businesses, servicing and investing. The business line view will be complemented by a regional split. Northern, Middle, and Southern Europe are franchise markets, as well as the tactical markets. I'm now looking at page 21. As you can see in the top graph, unlevered underwriting IRRs are continuing to increase as we are investing in new portfolios with a higher expected return. The return gap of average underwriting IRRs compared to average cost of funds is 2.9x. We do expect the interest rate cost to increase as debt is being refinanced. However, thanks to proactively addressing the maturity profile in the past, we have turned out maturities which will gradually refinance as they become current.
We have access to a range of funding sources. We actively monitor and assess different opportunities to maintain our relative advantage. Regarding the leverage ratio, as mentioned, we remain committed to our target of 3.5x, which we want to reach as soon as possible. Page 22. Looking at the medium-term financial targets presented at the last Capital Markets Day in 2020. As of Q1, all metrics are somewhat subdued. Expected financial trajectory and targets will be updated at the Capital Markets Day on the 13th of September here in Stockholm. Over to you, Andrés, for some concluding remarks.
Thank you, Michael. Page 24. Here on this page you see some very specific indications of strength of our servicing business on the top left and investing on the top right. Regarding servicing, you see annual contract value of new business, AUM growth on an improved mix of business and leveraging our footprint, which covers almost all of NPLs across Europe. On the right-hand side, with regard to investing, collection strength despite headwinds, moderated investment pace, but at very high returns and clear indication of more to come in terms of NPL flows. In terms of how we move forward, we are adjusting our business model to be more balanced, where centralized businesses, i.e. servicing and investing, plus key central functions, partner with market-based professionals to push our business with clients and customers.
We are continuing to develop our commercial sharpness through our management changes and also our tech developments. We have the aim of leveraging our leadership position and being not just the biggest, but also the best in terms of client service and profit. We are directly addressing our lost efficiency over the last three years with a near- term cost reduction program to be realized in 2023, in 2023. We continue to build on key initiatives, including our divestitures and our of selected markets and our capital like growth plans for our investing business. In sum, it was a disappointing quarter, which demonstrated some very tangible evidence of our strengths.
We have near term greater efficiency opportunities to reset our platform, and on that platform, we have very important long-term fundamental opportunity to meaningfully grow and improve our business through a bottom up transformation. All of this on the long term, we will, as I said earlier, provide a comprehensive update at our Capital Markets Day on the 13th of September here in Stockholm. With that, I think we've concluded our prepared remarks, and we are happy to open it up to questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jacob Hesslevik from SEB. Please go ahead.
Good morning, Andres and Michael. I think the first question has to be on the margins in the different divisions. CMS continues to show a large margin contraction in the quarter. Previously you have said we need financial claims to pick up in order to support a margin expansion. Now you state that costs are too large. What has changed? Do you not expect financial claims to enter the market during 2023, or has something else happened on the cost side?
Good question, Jacob. I think it's a function of both, top- line, as well as costs. What we've stated is that we've seen financial services claims coming back, but we're only seeing that the beginning of that. That's not essentially fully dropping into revenues or the bottom line, but we're obviously monitoring that inflow very carefully. On the other hand, as Andrés has laid out, in terms of our operating model, we've probably shifted the dial a bit too far to global. In general, non-production costs, both global and local, have increased too far. It's really a combination of both the factors and the cost side. Also, at the segment level, will to an extent be addressed by the cost program.
Obviously, we also operate in an environment where it's that little bit more difficult to collect. Overall, that additional average still produces a positive contribution to the bottom line on a relative basis.
I mean, I think it is a factor, Jacob, of claims mix, overhead, granularity of client base. I mean, that margin is driven by selected geographies. We call it CMS, which is everything except the strategic markets currently. It groups together several markets, some of which are very margin-challenged because they have a granular client base who's more difficult to service. They have greater overhead. They have not benefited from the improved claims mix. The way we currently disclose it in terms of CMS doesn't give you the complete picture. We absolutely have a margin challenge in some of our markets that we're trying to address both near- term tactically with the cost reduction program. Long term, more fundamentally with things like digital collections, which are gonna be particularly relevant in the north of Europe.
I also think that the new disclosure, which Michael Ladurner gave you a bit of a preview on, which we'll look at servicing, investing, and consolidating. There's a complete read across between our two businesses and how we report on a consolidated basis. Also we'll give you revenue and EBITDA by North, Middle, South, and Tactical. We'll give you a much better picture as to where we have our challenges and where we have our strengths in our business. It focuses and simplifies the way we report, but also the way we manage our business. It's absolutely something we're going to directly address, Jacob Hesslevik.
All right, thank you. If we move over to strategic markets, the margins actually held up pretty well. Was it affected in any way by the court strike in Spain, which you mentioned in the PI division?
It absolutely was. I mean, the court strike in Spain for three months, we basically didn't collect on any legal claims. The strategic markets in general have grown so much recently. that we expected the revenue growth to somewhat moderate. That's not unanticipated, and we talked about that with all of you previously. The margins are quite high in those, in those markets. It's a sophisticated servicing market. It's a concentrated servicing market. We don't have the level of granularity in the client base that we do more in the middle and the north, and that leads to better margins and a better ability to affect your margin over time.
I suspect that we'll see moderate growth going forward, but we will be able to really manage positively the margin in the strategic markets quite favorably.
We could almost say that if we were to exclude the court strike or adjust for the court strike, the margins could actually be up this quarter in SM?
Well, that, I mean, that would have led to greater collections, which would have led to greater margins than what we reported. Yes. Still, the headline in strategic markets is not... I mean, that's a one-off issue in Spain, but the reality is that the revenue growth, as I said just a second ago, the revenue growth is gonna be more moderate relative to the last few years where there's been significant revenue growth. The margins are gonna be attractive, and we're gonna be able to manage those margins across a more concentrated customer base to improve them over time.
This is also from my perspective, it's exactly as Andrés describes it. I mean, we've had great progress over the last two years. We've indicated before that we expect a stabilization at a, I would argue, high level. Obviously this quarter we had some specific impacts, but that always happens and, you know, with a sort of more challenging environment, probably seasonality is also a little bit more pronounced. If I look at this across the year, I think we'll have a good market and a good margin in strategic markets, but will not have the growth that we've had over the last two years.
Yeah, that's good to hear. On PI, I mean, thanks for the clarification of the 11 points there. How much is due to consumers actually having less disposable income if we exclude the five points due to seasonality?
Well, I mean, if you look at the 6%.
Yeah.
We went in there and said a little bit more than half of that is the seasonal timing and other things. The remainder, so a little bit less than half, is really due to it's tough out there.
Yeah.
People have less disposable income. This crisis is interesting because as I said in my comments, it's not like the past crises. People aren't losing their jobs, but they just don't have enough income and they can't meet their bills. That leads to a prioritization of bills, and some bills aren't paid and some are. The prioritization is obviously the most important thing. Your mortgage, some of your children, et cetera, et cetera, and some more marginal bills are not getting paid. That means that certain types of claims, particularly non-financial claims, are more difficult to collect against. Financial claims, flows are slow in growing, although we see that, as I indicated in my pages, and will come, but are not as strong as you would expect in an early crisis, which had unemployment rising.
If I had to put it into numbers and sort of split the gap into three, I'd say, you know, you mentioned the court strikes that we talked about. Around 60% of that gap is timing. Being a little bit self-critical, I'd say 10% of the gap we can actually be more effective if we really push ourselves.
Operational, yeah.
About 30% or thereabout of the gap, right, is probably related to the current macro on a relative basis.
Yep.
All right. That makes sense. When we move over to financing, you have a bond in SEK 2.9 billion outstanding, which is maturing this summer. First of all, it seems that you have an increased coupon rate. Have you taken a step up or is it floating? Second, how do you plan to refinance this one? To use RCF or do you have any other methods planned?
Jacob, our SEK MTNs are floating rate. You're correct in that. We disclosed that as well in our appendix. In terms of addressing that, we obviously look at all available options, including accessing the market, but also taking into consideration the very substantial liquidity that we have.
Okay, great. Just one final question, if I may. On tactical markets, on your new split where you have one called tactical markets, you mentioned during the last quarter that you would exit five markets in Eastern Europe. Could you comment on which ones and what is the timeline for this transaction?
The five countries include four in Eastern Europe and then Brazil. It's Brazil, it's the Baltic republics, the three Baltic republics and Romania. We are in a process of divesting those five markets. It's been advanced. We're in specific bilateral discussions and we expect to be able to announce something before the end of the second quarter.
All right. Thank you so much.
Thank you, Jacob.
The next question comes from Ermin Keric from Carnegie. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. First off, maybe on the leverage, should we expect that to move further up in Q2 given the dividend and that you're closing the Arrow servicing M&A as well? Do you still think it's the right decision to proceed with the dividend given the headwind you have currently on leverage?
I'll comment on the trajectory first. Obviously Q2 is always a somewhat challenging quarter for the leverage, and you're absolutely right, we'll pay the dividends and we expect to close in the Arrow transaction, which includes portfolio, puffed portfolio, as well as the M&A. I would expect Q2 again in line with preceding Q2s to not be the easiest quarter from a leverage perspective. This is not to take it away from the fact that we are working on the leveraging and getting leverage down to our target as soon as possible. In terms of the dividend, I would hand over to Andrés.
No, I mean, we have proposed the dividend. We don't. We expect to pay it. As we said at the first quarter, our view is that we need to think about all those different uses of our free cash flow that Michael outlined in his prepared remarks. One of which is remunerating this to our shareholders. For now, we anticipate keeping our dividends stable. We also do, on margin, want to de-lever. We're going to delever organically. We're going to over time measure or evaluate other measures to take that down. We still have the goal of bringing down leverage. It's the prudent thing to do in this environment. I'm not worried about our leverage level, to be very clear.
I wanna be, and I've said that in the past in these calls, I'm not worried about our leverage level. I think it's more than manageable. Regardless, we are still listening to the market and moving in that direction.
Maybe on the dividend specifically, it's obviously the proposal from the board to the AGM...
Correct.
which will be held today. The AGM is called upon to vote and decide on that dividend, and we'll obviously carry out the result of that vote.
Correct.
Got it. Thanks. Thanks for the answer. Maybe just continuing a little bit on that. It sounds like you're alluding to that you might let some of the debt actually turn into current debt. For instance, the euro bond that's maturing next year. Is that the right way to perceive it, that you feel so comfortable with what you have at hand that you could let that go into current debt? If so, how do you think that will be viewed upon by rating agencies if you see a risk of rating downgrades?
I think, Ermin, we have a very significant liquidity buffer. We have a termed- out liability structure. We've demonstrated at the end of last year, our access to the market by addressing half the 2024 maturity. We have now a bit of ability to time how we address the remainder of that maturity, but that's certainly a topic that we will look into during the remainder of 2023.
Got it. Thanks. just, I mean, you have mentioned the, that you're looking at some disposals or capital partnerships. I suppose the capital partnership on the front book is beneficial longer term because it's capital like.
Correct.
To address the leverage issue more short term, I suppose that would also be maybe selling part of your back book. Is that something you're considering? Also, I mean, that would then bring down your future earnings.
Correct.
How do you balance that?
No, I'll go ahead and address it, Michael. It's a logical question, Ermin, but it's not one that I think we should pursue for the simple fact that mathematically it doesn't make sense. We'd be destroying value that way. To sell our back book, which yields right now on average around 14%, to then go and pay off debt, which our average cost of debt is 4.2%, that's obviously going in the wrong direction. That's deleveraging, and as you correctly said, to the degree you delever, immediately it'll have an immediate effect, but over time, your earnings decline as well. I think it's much more important to focus on just growing our earnings, particularly from servicing, look at the progression of our capital structure and, you know, opportunistically see if there's other ways of deleveraging.
Over time, looking at the front book on a capital light basis, as you correctly identified, is gonna allow us to grow our investing business, moderate our balance sheet intensity, increase the perimeter of assets we service with a larger perimeter of assets that we buy, and create new income stream from the third party capital that will be invested alongside our own capital. All of which is great, but as you correctly said, also takes time to scale up, et cetera, but is the right direction, is the direction we're going in. Doing the back book is value destructing, and I don't think in the end is the best thing for the shareholders.
I think it's important to note that, you know, fundamentally, we try to take decisions and manage the business in such a way that does not just cater for a very short-term one-time effect, but has a substantial medium-term negative. We really look at building a positive, attractive, fundamental trajectory for this business.
Correct.
Thank you. That's very clear. Just one short last question. On the return gap, it's currently 2.9. We're seeing that your financing cost is coming up, but so is your underwriting IRRs. If you would just take a rough guess, where do you think that gap is in, let's say, three to five years?
That's a good question.
That's a really good question, Ermin. I think it's very difficult to look at the crystal ball, but what's important and what we see very clearly is that when we have an interest rate environment where rates are somewhat higher, this translates rather quickly into an increased return requirements or increased returns being available in our investments. The two move in sync. We've had a long period and where, you know, rates were very low, and there is a question, what happens when rates rise? Now rates are rising, but we're also seeing the returns going up.
As we've laid out before, we have a reasonable match between our assets and liabilities in terms of how they reprice, given that we're termed out on the liability side and we collect and reinvest on the asset side.
I mean, I think Ermin, historically, we've invested at around 12%-13%, and we've had cost of capital of 3%-4%. Obviously, that's now come up to most recently 16%. Our cost has come up, although because of the term out debt structure, it hasn't been felt as much. Inevitably, that's gonna compress. I mean, I think in long term, where does our debt settle? It's, you know, I'm sure many people on this call have a point of view, but it's not gonna be 3%-4%, but it's also not gonna be 8%, 9%, or 10%, in my opinion. It's gonna be 6%, 7%, something like that. Where do our long-term returns on our asset investments, the IRRs on our investments? It's not gonna be 16%, but it's probably not gonna be 12% for a while either.
It's gonna be somewhere in between. This is the reason. This is purely on a unit basis what the economics are when we deploy 100% of our own capital. This is why the capital partnership over time is so critical. Effectively, we're gonna be making money without deploying capital. We don't have to worry about this capital spread. We're gonna be creating incremental revenue and incremental profits that are capital light, which is very, which is the right way to grow that business.
Very good. There are a lot of questions, so thanks for addressing all of them. Thank you.
Thank you, Ermin.
The next question comes from Patrik Brattelius from ABG. Please go ahead.
Thank you. My first question would be a little bit a follow-up to the previous question that was asked about the capital partnership. Could you elaborate a little bit more then how you from Intrum's side would how a perfect setup in this capital partnership would look like?
Today, and I'll look at last calendar year, we invested roughly SEK 7 billion-8 billion, and it was 100% our capital. Today, we have SEK 38 billion in our investment book, and it's 100% our capital. How do I see that moving forward? Ideally, we're investing more, so not SEK 7 billion-8 billion, maybe SEK 10+ billion. Instead of it being 100% our capital, it would be 50% our capital, 50% a third-party capital. That has the benefits I outlined in the prior, in response to the prior question, which is it increases our overall rate of investments, the perimeter of assets that we service. It gives us income from that third-party capital and allows us to moderate our balance sheet intensity. Where do I see this long- term?
I see us long term being able to build on the back of our franchise and our footprint and our operating capability, a asset management platform where we continue to have EUR 2 billion-3 billion now, I'm switching to euros, sorry, of our own capital anchoring a credit business that could be many multiples of that. Across not only consumer unsecured, but consumer secured, which our platform perfectly fits, as well as things like debt consolidation. That's down the road. That's part of our full potential. We're gonna move towards that over the near term, this is still evolving. We are in discussions. We've had already reverse inquiries. We're in extensive discussions with a number of parties about who could be that right partner to help us get this off the ground.
We'll have more news later in the year on that. It's a very important fundamental direction that we wanna make sure we do right now. That's the long-term and near-term profile that we desire to go in.
Thank you. And then, my next question would be if you could elaborate a little bit more clearly on the expected savings from the cost program on more like a quarterly basis here, how you view it here in 2023, and also any associated one-off cost on a quarterly basis, please.
Patrik, I'll start with the one-offs. Obviously the one-offs are generally a little bit front-loaded, but on average, we said that we expect that for SEK 0.6 billion, we expect round about the same amount of one-offs. In terms of quarters, we're kicking this off now. On a run rate basis, we expect to realize the first little bit already in Q2, but obviously, we'll come to the total amount during the course of 2023.
Okay. Thank you. Got you. You often talk about the positive seasonal effects in Q2 and Q4. However, with this backdrop of increasing cost base that we see here in Q1, how should we think about this effect, looking into the next quarter, please?
I mean, Patrik, on a relative basis, I still expect Q2 and Q4 to be the strong quarters. I mean, one indication of that is even if you look at the pattern inside Q1, Andrés mentioned that in his introduction. January, February, relatively slow with a good pickup into March. That sort of creates the ramp into the second quarter. Obviously, the summer quarter is traditionally slow, particularly in Southern European geographies, where obviously our costs keep running, but the business activity is much lower, and usually, we then have a very strong finish to the year indeed. I would not expect this year to be different.
Thank you. That was all for me.
Great. Thank you, Patrik.
Thank you.
Please state your name and company. Please go ahead.
Hello?
Hi, can you hear me?
Well, we can hear you now. Hi.
Hi. Hi. Yes, thank you for taking my question. This is Manu from Chenavari. You mentioned in the call that collections in January and February were running much lower than 100%, and that this picked up in March at 107%. Can you please give us an idea of what percentage the collections were actually running at in January and February? you know, I think you mentioned like 60% of this underperformance was mostly due to the court collections in the court strike in Spain. Can you clarify that if that is still true when you take the full collections into account?
Sure. January and February are roughly between 95% and 96% of our active forecast. With the 107% in March, it brought us up as an overall for the quarter at right bang on 100% of our active forecast. Typically, between the prior quarter and the next quarter, it's down 5% or so, but percentage points, ours was down 11%. Because it was 111% and plus in the fourth quarter of last year. That delta is wider than normal. It is usual to decline, but not to that degree. Of that delta, the difference between down 11% and down 5%, as I said earlier, the more than half is due to those timing factors. The most evident one...
There are several, but the most evident one is the court strike in Spain, which led to Spain underperforming. In other markets, we have very strong performances. That timing factor was more than half of it. As Michael alluded to, there is an element of it that operationally we could have done better, particularly in January and February. We started addressing it, and we improved and saw the benefits of it in March. Then the rest is just it's a tough market. It's the most difficult collections environment in recent history for us. Obviously, that differs by market, but overall that's the case.
As I said earlier, for it to be probably our worst collections quarter in the last three years, our second worst, excuse me, collection quarter in the last three years, to have hit 100% of our active forecast and to have hit 112% of our original forecast, I think that's a pretty good outcome. I think that shows the strength of the platform and the collectibility of the asset class, but it's still a challenge. It's still a real challenge. I don't wanna undersell the challenge. It's still a challenge.
Sure. Just on that 107% in March, have you seen that sort of momentum continuing into Q2 so far in April?
We have seen a more positive trajectory. I don't have the latest info as to whether it's above or below March, but yes, we continue to see the positive trajectory. I would reiterate what Michael said in the last question, which is the second quarter from an EBITDA perspective should be better than our first quarter, which it always seasonally is. I think in this case, and particularly given the performance in the first quarter, we should see that. We should see the beginnings of, on a run rate basis, the cost program as well. We also have the cash flow issues that we addressed when one of the prior callers asked about in terms of the dividend and other things that are happening in the second quarter. There's going to be pluses and minuses.
Okay, understood. I mean, on the collections itself, given the weaker macro environment, are you seeing default rates rise at all? Is it sort of, you know, these sort of unique issues that impacted Q1 specifically?
We are dealing primarily with things that have already defaulted, so we're seeing increased volumes coming in. The bottom line is we collect, and we're effective when we're able to get people on payment plans. You can see the level of payment plans with a little bit of a lag impacts our collectibility. In November, December, we saw a decline in promises to pay and kind of how much people wanted to pay. We saw that effect in January, February. Then people who promise sometimes fall away, the loyalty index we call it. You know, we have the, the, the progress is seen that way. Ultimately, the most difficult thing is getting people on payment plans. That's the difficulty.
It's not about default rates increasing. Default rates increasing actually increase our cases, which we've seen and we showed in our presentation. The collectibility is more about how much income does this individual have? What are their other obligations? Can they get on a payment plan? How high or how significant can that payment plan be? If they can't, how do we then stay on top of that customer to get them on as soon as they can? That's what we do. I mean, we try to help these individuals and in the process collect for our clients.
If you, if you disaggregate the collection of our portfolios, I mean, payment plans are really the vast bulk of it. It gets a little bit more difficult in terms of time and effort to get people on a plan. You have to put a little bit more time and effort into maintaining them staying on a plan. The other element that is relevant in this type of environment is the sort of second stream, which has a much lower incidence, but nevertheless, it adds to the overall collections, which is settlements. Settlements are on one hand driven by the availability of credit to a certain extent, but also by consumer confidence.
If you feel good about the future and you think things are gonna get better, you're more inclined to say rather than going on a payment plan, "Look, I'll put myself out there. I'll sort this out now." That happens less frequently.
Correct
... and with lower volumes in an environment like this. That's normal, and we've seen that in previous cycles. PI, as the environment becomes more difficult, the outperformance comes down somewhat. As the environment improves, that outperformance goes up.
Okay, understood. Just one final question on the cost base itself and specifically the cost increase. I mean, you have had
Quite a significant cost increase in Q1 versus last year in absolute terms. Not on a margin basis. I see around what 15% increase in collection costs and almost a 40% increase in non-production costs.
Yeah.
I mean, what has really caused this? You know, I'm slightly confused. I mean, of course, on a margin year, you know, collections are down, margin comes down, margin increases, cost margin increases. I get that. In an absolute basis, what has actually caused this? Where did it go wrong?
Michael addressed part of this in his page on our total cost base. Roughly half our cost base are non-production costs, half are production. These have your numbers are spot on, have dramatically increased. The ONE Intrum Program, which was implemented in 2020, moved to a completely centralized model for both operating and managing our business. That led to a significant ramping up of cost at a centralized basis. In my opinion, we can't manage two businesses across 24 jurisdictions in that fashion. We have to be somewhat more balanced. We have to centrally manage it and coordinate it, but we have to partner and execute and operate on a local basis. That's led to a dramatic increase in centralized costs and not a higher and not a corresponding decline in both markets.
Therefore, that is what we're attacking. The SEK 6 billion or the SEK 600 million that we're identifying in the near term cost reduction program is part of that roughly SEK 6 billion non-production costs. We need to regain that efficiency. What that does is it gets us back to over the last three years, getting to roughly a 60%-70% margin on the incremental revenues. That's where we gain scale. I used the word scale and size alternatively in my presentation deliberately because scale means when you grow revenue, your margin doesn't decline. Actually, your margin goes up because the marginal revenue, the margin on that incremental revenue is much higher because you're amortizing a base of operations and a base of costs. We've gotten away from that, and we need to correct it.
That's a near-term tactical measure to regain the efficiency we've lost. It's a reset of our platform. On that platform, when we make it more efficient, we're going to then build the full potential plan, which we'll lay out and disclose later this year.
Understood. Thank you very much.
Thank you.
The next question comes from Louise Miles from Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for taking my questions. I just want to ask a couple of clarification points, actually, based on some of the earlier questions. On the cost-saving initiatives for the SEK 0.6 billion, I think you mentioned that, you know, there's gonna be a similar level of one-off costs in order to achieve that saving, so the SEK 0.6 billion. Typically, those are up-fronted. Obviously, it's gonna take a while to actually achieve the cost savings anyway, you know, out to the end of this year. Am I right in thinking that the second quarter costs, you know, things could get worse before they get better in terms of total costs?
Louise, we'll take the costs to achieve as IACs.
Mm-hmm.
I would not think that they settle all into one quarter, obviously we'll take them over the rest of the year. In terms of achieving the savings, that we'll achieve on a run rate basis. You're correct. There's a phasing point in that.
The SEK 0.6 billion, we will be at that level we expect to be at that level on a run rate basis by the end of the year. During the interim between now and then, we'll phase in the IACs, which are the one-off costs, largely severance and other necessary costs to achieve the savings during the interim periods, the second, third and fourth quarter.
That SEK 0.6 billion, that doesn't allow for inflation, right? It's just SEK 0.6 billion versus the costs.
It's-
today, at the end of the year, whatever it was. Whatever that number point was.
It's an absolute target. It's an absolute target. Correct.
Okay.
It's relative to today's cost, yes.
Okay. Great. My other question is on slide 21. Someone else asked about this. They said that, and you mentioned that you're increasing your IRRs in line with the cost of debt. The gap, the 2.9x-
Yes.
to stay level. It's my understanding that the IRR is pre-expenses.
No.
It is not.
Expenses come out off of that. Oh, okay, fine. It's the net IRR, that number.
Yeah. To be clear, that IRR is before leverage, but after collections expenses.
Louise, also mathematically on a multiple basis, right?
Yeah.
If your baseline, as in the cost of funds increases at the same rate as your return line, then on a multiple basis, that gap will get squeezed. On an absolute basis, it will stay the same.
Yeah. Understood. Okay. That's cleared that question up. Thanks very much.
Thank you, Louise.
Please state your name and company. Please go ahead.
Hello.
Hi, it's Aditya from BlackRock. Two questions. One just to follow up on costs and what you've seen in Q1, how are we away from the SEK 600 million that you're looking to save, how much of that are we gonna see a repeat of the increase in costs are we likely to see a repeat in other quarters? How should we be thinking about that? The second one is on cash spend towards portfolio purchases, how are you thinking about that for the rest of the year?
It's as I've said before, we, on a run rate basis, expect to achieve to SEK 0.6 billion by the end of this year. Obviously that will phase in over the quarters, we're starting to execute effective immediately. In terms of cash spend on portfolios, in Q1, we had a portfolio, large portfolio in Spain carried over from 2022. I think we've talked a lot about the acquisition in the UK that we expect to close in Q2. The first half from a portfolio perspective will run a little bit ahead. Overall, I would still confirm our guidance of being around replenishment or even a little bit below. We'll have to see what the work looks like into the end of the year.
Andrés, maybe you wanna add to this?
No. I don't think I need to add to any. I think that was a perfectly appropriate answer.
Thanks. On like the cost side, I was just wanting to know outside of what the SEK 600 million that you are expecting to save, how much of an increase that we saw this quarter are we likely to see in the future quarters?
I would argue it's not the easiest environment. We've obviously carved out a good chunk of the cost base that we'll not address with this program because that's all the production costs that support our revenue trajectory. It's fair to say that both on the revenue side as well as on the cost side, that we do operate in an inflationary environment, and we have to manage that to the best extent possible. I think what's crucial in this is that really the relationship between non-production and production costs has gone out of whack, as has been pointed out before. Now we're addressing and rightsizing that, and at our Capital Markets Day, we'll then really talk about from that reset base, what's the way forward? How do we achieve our full potential?
What is the financial trajectory and targets that go alongside that?
Correct.
Thank you. Can I ask just in light of that, is there an estimate you have on your reaching that, leverage target?
As we've stated before, we're working on it. We're looking at all options possible, but at the same time, in the interest of our stakeholders, we're not gonna do it in a way that hurts our business in the medium term. We'll look at all levers. We'll grow our non-capital- intensive earnings, and we'll aim to reach it as soon as possible.
We're going to outline at the Capital Markets Day in September our view of leverage and our path towards that in more detail.
Thank you.
Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you, operator. As I was saying, I think that's all the questions. We appreciate your time. We appreciate your interest in our business. We appreciate your questions. We remain available for further follow-up. You have your contacts at our IR. Please, we look forward to engaging you further in the future. Thank you again for listening today.
Thank you.