Welcome to the Intrum Q2 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. I will hand the conference over to CEO Andrés Rubio and CFO Michael Ladurner. Please go ahead.
Good morning, everyone. As the operator indicated, this is Andrés Rubio, and I'm here with Michael Ladurner, our Chief Financial Officer. Excuse me. Thank you for taking the time to listen to this review of our financial results for the second quarter of 2023. We're conducting this call from our corporate headquarters here in Stockholm, Sweden. Before we get into the detailed presentation, I wanted to give you just the main three headline messages from our performance and also our announcement today. The second quarter was a seasonally strong quarter after a weak first quarter, showing strength in both businesses, servicing and investing. We continue to not only execute, but also expand on our strategic initiatives to focus and build our business efficiently.
Third, we're taking this opportunity to explicitly clarify for all our stakeholders our immediate near-term priorities, which are intended to build our servicing cash flow and improve our overall risk profile. On page three, I wanted to start with an overview of the quarter. As I said, second quarter was seasonally strong, during which we continued to execute on our initiatives. We demonstrated the commercial momentum of our servicing business and showed the resilience and strength of our collections capabilities. Top left, on these initiatives, we executed on the previously announced exit of five markets: Brazil, Romania, and the three Baltic States. On the back of this, we are evaluating the potential exits of three further countries, Hungary, Slovakia and the Czech Republic, which are more sizable than our prior exits and will further our focus on our core markets.
In addition, we agreed during the quarter on the purchase of Haya Real Estate in Spain from Cerberus, and completed the purchase of our two servicing platforms and a portfolio from Arrow Global in the U.K. In addition, our proposed announced cost reduction program from last quarter, which had a previously publicly stated target of SEK 600 million, has been thoroughly validated, and we are now comfortable expanding this target to more than SEK 800 million. Top right on overall performance, revenues were up 2%, while EBITDA was down 5%, really driven by servicing commercial growth, early investments, and stronger collections. Bottom left, on servicing, AUM hit an all-time high at SEK 2 trillion, 9% year-on-year, with servicing cash revenue driven principally by 23% growth in Middle and Northern Europe.
Southern Europe had a stable top line and continued to produce significant cash flow. We had great margin momentum in servicing, with 6% quarter-on-quarter growth in margin or expansion in margin, and an increase of the year-to-date margin of 3% during the quarter. In probably what is the most challenging economic environment we've seen in several years, we collected 103% of our active forecast and 110% of our original forecast, with new investments coming in at around a 15% IRR, well above 16%, excluding the Arrow deal, which was priced last year and closed this year, driving the overall expected return on our portfolio to about 14% across our SEK 41 billion book value, up from less than 12% just a year ago.
On page four, we are making a targeted announcement of our near-term priorities. Over the near to medium term, we are prioritizing growing our servicing cash flows and accelerating the reduction of our leverage. On the bottom on the left side of this page, with regard to servicing, our recent increased commercial focus and our management changes, along with our industry-leading product and services portfolio and a focused geographical footprint, should put us in the position to capture increased revenue as we move into a positive multi-year environment where our clients increasingly need our services. This revenue tailwind, combined with our cost reduction efforts and margin focus, should drive greater capital-light servicing cash flow.
In addition to building our servicing franchise, which is fundamental, we are on the right-hand side, taking very specific and direct and immediate measures to accelerate the reduction of our leverage, including utilizing any proceeds from the additional three potential market exits towards reducing debt. We are limiting our balance sheet-funded investments while still exploring an asset management business over the medium to long term. I don't believe that the market fully appreciates the sizable, granular, and self-liquidating nature of our portfolio or our book, where if we invest below replenishment value, our book produces significant cash. We will invest significantly below replenishment levels in 2023 and 2024, and direct this cash flow toward reducing leverage and reducing the dependence on market financings.
In addition an important step is the management, but much more importantly, the board has taken the decision to not recommend for any dividend to be paid in 2024 at the next AGM. This has to be looked at in the context that this year, in 2023, we paid SEK 13.5, which represents an 18% yield at our current stock price level, approximately, and the second installment on that pay, on that SEK 13.5, will be paid later this year. In addition, we're always looking, and we're actively working on additional measures to accelerate deleveraging, and when those become more concrete and actionable, we will come back to the market. All proceeds from these measures will be used to reduce leverage and improve our financial risk position.
At the Capital Markets Day, coming up on September 13th, here in Stockholm, we will expand on these initiatives, we will outline our strategy, and we will provide operational and financial, not just trajectory, but also specific targets. On to page five in the evolving market. The overall market dynamic is one of increased stress in the system, including, as published in our recent European Payment Report, companies across Europe are incurring a total estimated cost annually of EUR 275 billion, chasing late payments, which is, just for context, greater than the GDP of Finland. Inflation remains persistently high, with particular concerns over high prices in countries such as the U.K.
European businesses not only spend on average 74 work days chasing late payments a year, which is the number behind the EUR 275 billion figure. 70% of these companies are actually incurring credit losses in the current environment. The consumer remains under direct pressure with a cost of living crisis, fueled by not only inflation, but also increased interest rates. All of this means that this economic pressure will lead to continued increase of stage two loans, which have nearly doubled since 2020 and reached 10% of all loans. Eventually will filter into credit quality in the financial system with increased NPL volumes and increased demand for our services.
On page six, you see more detail on the positive trends in our servicing business, with the annual contract value of our prospective servicing pipeline continuing a four quarter trend of increasing, and our AUM hitting an all-time high of SEK 2 trillion. As evidence of our improved focus on efficiency and our pricing power in this environment, this new business is being signed and contracted at margins well above our recent historical margins, and this should show in the coming periods. As a consequence of that, you can see in the graph on the bottom half of this page, that this trend has led to a continuation of eight straight quarters of consecutive growth in servicing revenue with a continued high margin. On page seven, you see that our collections business continues to demonstrate strong performance in a difficult environment after a challenging beginning to the year.
During the quarter, our investing business collected 103% against our active and current forecast and 110% of our original forecast. These results continue the trend over the last 18 years, since 2004, where we have an average performance of 107% against original forecast over that entire period. It's accelerating. The improvement is accelerating with 110% for the last four quarters. On the bottom half of this page, you see that this collections performance, driven by our operational capability, has driven rolling-12-month absolute collections on our investment book to continue an increasing trend with 8% growth against second quarter of 2022.
On page eight, I continue to be able to brag that we are in the very privileged position where the more successful we are in collecting on behalf of our clients, we not only drive our own revenue and bring our clients financial benefits, but we also increase our positive societal impact. I'm happy to report that during the trailing 12 months ending at June 2023, we helped 4.6 million customers or consumers become debt-free with Intrum, paving the way for these individuals to reintegrate into the financial system. This figure is up from SEK 4 million and SEK 4.4 million during the last two quarter ends. We continue to get great ratings from consumers, despite dealing with them at a very delicate time, testament to the way we approach collections.
In addition, we collected SEK 14 billion on our own claims, SEK 76 billion for clients during the last 12 months, reaching an all-time high of SEK 92 billion. All of this is what contributes to the table on the right, where we enjoy a very high rating on the ESG front. On page nine, we touch once again on our overarching priorities, which are going to drive our actions and our business over the medium to long term. We want to grow and transform, and we want to simplify and focus. Ultimately, we have the goal of being a results-driven services company, focused on the credit sector and being an important contributor to the financial ecosystem. What does this mean in terms of concrete direction? It means that we want to be commercially close to our clients, to meet their needs throughout the economic cycle.
If we satisfy clients throughout the value chain and become their partners in managing their credit risk through the cycle, we will grow profitably. Second, we want to be capital light, where our growth is not dependent on the size of our balance sheet, but rather on the market effectiveness of our services. Finally, we wanna not just be tech-enabled, but we want to be tech-driven, where ultimately we deploy technology products and tech-driven solutions to solve client problems and needs. On page 10, I just want to reiterate, in conclusion of my section, our progress on the execution of our business building and development initiatives and where this positions us going into 2024 and beyond. As I mentioned previously, we strengthened our business with key acquisitions in the U.K. and Spain, two core franchise markets.
We will selectively pursue other M&A opportunities to improve our business going forward. We executed on the previously announced exits of five markets to reduce our total jurisdictions to 20. We are now looking to further focus our platform with three additional potential market exits. As I announced last quarter, we are implementing a more balanced operating model, where we empower our local market leadership to drive our interactions with customers and clients and drive our performance. We are becoming more efficient with an increase of our cost reduction program, as I mentioned, from SEK 600 million to more than SEK 800 million. All of this is part of a transition year in 2023, where we are building the foundation for our company's business and our company's performance for years to come.
More specifically, these measures, in particular, the full year effects of our acquisitions, plus the run rate cost reductions, will put us by year end 2023 at a run rate profitability, well more than a billion above what we will actually report in 2023 on a like-for-like basis. With that, I'll hand it over to Michael, who will go through the numbers.
Thank you, Andrés. I'm now turning to slide 12. In this seasonally stronger second quarter, in what is a transition year, we saw cash revenues up 2% compared to the same quarter last year, while cash EBITDA decreased 5%. The reduction in cash EBITDA reflects the increasing costs we've previously discussed. As Andrés already mentioned, this development will be addressed through our upgraded cost program of now more than SEK 0.8 billion in annual savings. I will come back to this point in a minute. In CMS, both revenues and profitability are up, a positive development after a number of challenging quarters. Having said that, the efficiency measures we're implementing in the context of our cost program are also very much needed here to drive the margin trajectory.
Our collection performance in investing is improving, with a stable financial result. Strategic markets is stabilizing at a high level of profitability after a prolonged period of significant growth. Cash EBIT is up compared to last year due to lower replenishment CapEx, reflecting the higher return environment with a money on money multiple of 2.3x. Cash net financials and tax are also up compared to the same quarter last year, to a large extent due to increased debt and higher interest rates. On average, we are currently paying circa 5% on our gross debt. Net debt is up 0.4x in a quarter, primarily driven by accelerated investment and adverse effects movements. We continue to be very much impacted by SEK versus EUR depreciation. This alone accounts for about half of the increase in the leverage ratio. Turning to page 13.
As Andrés said, the cost program has been updated. Based on the work carried out and initial successes, we are now confident that we will reach more than SEK 0.8 billion in savings. The majority of these benefits will be achieved by the end of 2023 on a run rate basis, with the cost to achieve range unchanged, 0.75x-1.25x realized benefits. As part of this program, we are addressing the root causes and creating a cost-conscious and continuous improvement culture. We do this through an updated operating model with clear accountability and focus on our clients' and customers' needs. This will enable us to drive profitability for the company beyond the program as demand for our services grows in the current economic environment. I'm now looking at page 14.
In CMS, we're starting to see green shoots, with cash revenues growing 23% compared to last year, of which 10% is organic growth. 6% of the revenues growth represents one month of revenues from the servicing platforms acquired from Arrow in the U.K. Cash EBITDA increased by 33% compared to the first quarter of the year, and adjusted segment margin is up four percentage points over the same period. This, to me, highlights an increasingly positive trajectory in this important segment. Increase in client activities and commercial success in the quarter is visible in the SEK 233 million of annual contract value signed with existing and new clients, which is up significantly from last year. On page 15, you can see that the strategic markets continue to operate at a high margin with stabilizing top line.
The seasonally strong second quarter shows continued high revenues after two years of significant growth in Southern Europe. In this context, cash revenues and cash EBITDA are down 4% and 9% respectively, compared to an exceptionally strong second quarter in 2022. In the strategic markets, we have signed new annual contract value of SEK 112 million in the first half of the year, as well as winning a major contract from CaixaBank in Spain to service their real estate assets. I'm now turning to page 16 in our investing business. Investing continues on its very stable and predictable performance trajectory, with cash revenues steadily growing over the past years to now more than SEK 14 billion on a rolling 12-month basis. Similarly, cash EBITDA contribution from the segment now stands at just under SEK 11 billion.
Collection performance for the quarter was 103% versus active forecast, and in some ways, more importantly, versus original underwriting forecast, collection performance came in at 110%, highlighting our ability to extract value from our book. Our sustained overperformance compared to what we expected when acquiring our circa 20,000 portfolios, is a testament to the stability of collections over time, which is rooted in the quality of our operations, as well as our second to none data assets. As you can see, cash EBIT is disproportionately up compared to last year, and this is, as mentioned before, due to the lower replenishment CapEx, reflecting the current return environment.
We invested SEK 2.8 billion in new portfolios in the quarter at an expected net return of 15%, driven by the circa SEK 1 billion portfolio acquired from Arrow in the U.K., which we closed in the quarter based on the terms agreed last year. As Andrés has said before, balance sheet-intensive portfolio investments will be strictly limited for the remainder of 2023 and 2024. As previously mentioned, for 2023, we therefore expect full year capital deployment to be at circa SEK 5.5 billion, with SEK 4.5 billion already deployed during the first half. Turning to page 17. As you can see in the top left corner, the return gap between our cost of funds and our unlevered underwriting IRR is increasing and reached 3.1x in the quarter.
In the lower left corner, we are disaggregating the underlying drivers of the growth in net debt. In the quarter, we have generated cash of circa SEK 1.7 billion . At the same time, we have cash out for investments of SEK 2.9 billion . We also paid a dividend of SEK 0.8 billion . The second-largest driver of increasing net debt on the reporting date is the depreciating SEK, which moved by about EUR 50 between March and June, heavily impacting our debt and leverage. This factor alone accounted for about half the increase in leverage ratio, or about 0.2x . We currently have SEK 13 billion in available liquidity. The maturity profile of our debt is termed out with principal maturities between 2025 and 2027.
As you can see with the bond issued mid-June, we do not have any additional maturities this year. With that, I hand back to you, Andrés, for some final remarks.
Thank you, Michael. Before we turn into the Q&A session, I just want to reiterate the kind of summary headlines. Good quarter, shows the strength of both our businesses, and I'm particularly encouraged by the growth in Middle and Northern Europe and also the margin expansion. We continue to execute on our strategic initiatives on building our business and focusing our business, and we're actually expanding our focus on that and making that expansion and building our business in an efficient manner. More importantly, the one of the most important announcements today is our specific clarification for all our stakeholders of our intention to address our risk profile over the near term. We're not immune from the risk environment. We have to be understanding of it.
We are going to actively reduce our leverage over the medium to near term, and we are going to take the different measures that I outlined earlier. I think that's good for all stakeholders. With that, I think we can open up the Q&A.
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.
Morning. Thank you, Andrés and Michael. First, on strategic markets, during Q1, you mentioned that we would not see the same revenue growth within SM as we have seen during the last two years. However, margin seems to have stabilized and actually counteract this effect somewhat. Do you believe that today's margins reflect the new normality?
Jacob, it's a very good question. I think what this shows is these are well-managed and scaled markets, and obviously, the margin reflects the value our ad we're able to generate and how well we're able to, in a way, counteract cost pressures in that market. I very much for the near term, see this as a stabilization, and I see a continuation in the margin picture we're seeing at the moment, obviously, always with a bit of a seasonality pattern in it.
Agreed.
All right. Good to know. If we move over to your new targets or initiatives here, you state that you are looking at additional measures to reduce leverage. Could you be more specific? I mean, you named Czech, Slovakia, and Hungary as three countries to divest, but are there more geographies that you could exit?
I don't believe that over the medium term, we will look to exiting any further geographies. Again, these three, we are potentially exiting them. Between now and year-end, we'll clarify that, and if we do, we're gonna use those proceeds, and these are much more sizable markets than the five we exited in the first half of this year. We'll use those proceeds to reduce debt. At that point, we will have down to 17 jurisdictions, and I believe that is actually a core-focused geographical footprint that we want to move forward on based on that. The additional measures could include several other things that all of which would contribute to an accelerated paying down of debt. It could, in theory, be a sale of assets, it could be...
There's a number of theoretical alternatives, Jacob, and at this stage, we're pursuing them and evaluating them, but we don't have anything concrete to report back to the market. When we do, we will, but they're all with the same purpose, which is not building our business, but also at the same time trying to accelerate the repayment of debt.
I think, Jacob, conceptually, if you think about it, these three geographies where we are investigating a disposal, it also very much ties in, into the message we've given. Those markets are very much only investing focused and don't really have a third-party servicing business or a client-based servicing business. That's very much also to be seen in the context of the focus on the underlying servicing business, on the operations, and building those client franchises where we already have a good starting point in those 17 geographies that Andrés mentioned.
All right. Could you remind us of how large the booked are in these countries?
We don't disclose book value by country, but they're very meaningful, I can say.
Double digits, or how should we think?
Yes, multiple hundred million EUR, if you think about it in that context.
All right. Thank you. I mean, stating that the board is looking to cut the dividend already in Q2 this year is quite aggressive, at least in my view. What is the background to this decision? Did the board not expect H2 to be strong at all? It feels a bit early to already cut it.
I think it's important to include that as one measure amongst several with the intention of reducing debt. I think, Jacob, you have to also realize that we declared a thirteen and a half SEK second dividend this year, which at the current price is an 18% yield, and there's still one more payment to go. Many stakeholders, equity as well as bondholders, have asked us to evaluate diverting that cash to reducing debt instead of returning it to shareholders. We have decided to take a pause in 2024 and take that cash and reduce debt as part of the overall reduction in the, in our risk profile. It is a decision that's been taken now by management, but more importantly, board, but ultimately, it's up to the AGM.
Yeah. Yeah, of course, it's up to the AGM, do you think that the board could propose, for example, to cut it in half, or it would pay out at least, you know, 5 SEK or something?
All.
It doesn't have to be the same amount. Do you think it...
All I can say is that today, given everything we know today, our intention is to recommend no dividend. In theory, obviously, the world can change between now and next January, when we have to ultimately provide a recommendation to the shareholders that will be decided upon at the AGM. Today, this is our intention, Jacob.
All right. Thank you for that clarification. I mean, if we move over to your bonds. Oh, I need to ask on this, and I'm a bit sorry if it's a bit prerogative, but we know-
Mm-hmm.
we knew leverage would increase in the quarter, but 4.6x is the highest we've seen in a while and the highest since I began covering you. I understand that from a cash flow perspective, you have stated multiple times that you're confident with this leverage, although it is a bit high. I do need to ask about any covenant breaches. I have looked in the prospectus of the EUR 450 million bond issued in December. First of all, it's over 400 pages long, and not the easiest reading for an equity analyst, but there do seem to be a covenant around 4.25x in leverage ratio that would hinder you to pay out more than 6% of your market cap.
However, the prospect also talks about the possibility to build some sort of basket of income over time that can offset this. Michael, could you help me out here? Have you breached any covenants or have you received any waivers?
We've not breached any covenants. We've not had to ask for any waivers. There is a number of baskets that, in theory, can be utilized for a dividend, just for clarity. In terms of headroom, we have ample headroom versus the covenants that we have to follow.
Just to add to that, Jacob, and first of all, thank you for reading the 400 pages. I want to also just make sure that everyone understands the progression from 4.2 to 4.6, that direction was expected because we closed Arrow, we paid the first installment on the dividend during the quarter, but half of it, 0.2, is from the adverse movement of the SEK versus Euro, which we're predominantly a euro-based operating company, and we report in SEK. There needs to be some context over that variable, which we do not control, obviously.
And Jacob, just to be very transparent, I mean, for the rest of the year, with the measures that we are taking, and assuming flat effects development, we obviously see that leverage ratio starting to move back down.
Yeah.
Yeah. Just so I can go and relax my summer vacation off the next week. Your bank loans doesn't include any leverage ratio covenants either, right?
As I stated before, in terms of the actual covenants that we have, we have ample headroom versus that.
I mean, I want to be clear, because you're obviously doing your job and understanding whether we feel forced in this action. It is our intention to lower our risk profile. You've heard me say before, and you already said it, Jacob, that I'm comfortable that we can sustain this debt, but in the current risk environment, it is prudent to reduce our leverage, and we're going to do so.
All right. Thank you both, and I wish you both a great summer vacation.
Thank you, Jacob. Enjoy.
Thank you.
The next question comes from Patrik Brattelius from ABG. Please go ahead.
Thank you. Yes, a few follow-up questions on the topics already touched upon. Given that you've already exited, a few markets now, and you know the size of those markets, and then if you put that into perspective, these three additional markets that you are potentially exiting. Can you give us a little bit of an rough estimation, what you expect you will be able to, walk away with here in form of cash, please?
Again, these processes are commencing now. They're gonna be concluded between now and year-end. We are exploring potential market exits. It doesn't mean that we definitively will exit them, it'll ultimately depend on what terms are presented to us and whether we find that it's better to sell them or to continue to hold them, but it is our intention to exit. We don't disclose book value by market, but these three markets are much, much more sizable than the five that we've exited previously. As Michael said, they're predominantly investment markets with very little to zero servicing business in each of them. While we don't give specific book value by market, I did already tell Jacob earlier that we're talking several hundred million EUR.
Okay.
To just give you a small pointer to hang your hat on, if you look at our total book value, they're a little bit below 10%, call it around about 8% of our book value as of today.
There you go.
Thanks, very helpful. You have given a forecast or how much you expect to deploy for the full year 2023, but you also talk about in this leverage reduction actions that you will limit your investment for 2024. Can you please share with us a little bit more detail, what, what are you thinking in terms of investments for 2024?
I mean, and Michael can add to this, but the first half of the year, as Michael said, we were SEK 450 or so.
Four and a half, yeah.
We SEK 4.5 billion , sorry SEK 4.5 billion . We expect to invest SEK 5.5 billion for the full year because we do have contractual ongoing arrangements to buy assets. That includes M&A. Next year, we will invest whatever we contractually are required to. We will be very selective at any new investments. I can't say it would be zero, but the conclusion of which is that we are going to be significantly below replenishment CapEx. I would expect a small fraction replenishment CapEx, all of which will produce cash that we can then, as I said earlier, divert to repaying or reducing our leverage.
The only thing to add from my perspective is, obviously, we have an upcoming Capital Markets Day, where we'll come with a financial and KPI trajectory.
The associate targets. We'll be very transparent about how we see the investing business and how we also are trying to develop ways to tap into the value that our pipeline and our underwriting and workout capability will present.
Thank you. Then you say the last half of this 2023, it's roughly SEK 1 billion then, and that is driven by contracts. Then you talk about 2024, also, contracts. Can we take the second half as a run rate of how much you're contractually obliged to invest, or is that an overstatement?
I would argue for the second half, we obviously have very good visibility. That's why we've given this very clear guidance. I would urge you to look at the Capital Markets Day for more detailed guidance for periods to come. As Andrés said, you know, it's really an opportunistic business, and effectively, we're going to a fraction of replenishment rates and what's contractually there. Obviously, that will play out throughout 2024.
To more directly answer your question, obviously, we have visibility over the near term, and to the degree we don't enter into new investments, the contracted forward flows naturally decline over time, if that gives you a directional sense to your question.
Perfect. It does. As a last question, is, if you can share with us any updated view on the Haya acquisition and the impact you expect from that acquisition in the second half of 2023, both on cash EBITDA and also on your leverage ratio, please.
As we said before, in leverage ratio, to tackle that one first, on a pro forma basis, it's neutral to positive, so it's delevering. In terms of the actual impact on the year-end figures, that determines on the exact point in time when we close that. I would more look at the run rate, where it's a significant contributor to the delta that Andrés mentioned earlier, in terms of between cost program Haya, the Arrow platforms in the U.K., that on a delta basis, that adds more than SEK 1 billion to our cash EBITDA.
Yeah, the current expectations will close Haya sometime, probably in September. It may be earlier, but it is the summer, as Jacob indicated in his comments. It's still pending approval. Again, I'll reiterate what Michael just said. Between our cost reductions on a run rate basis, between our full year impact of the Haya and the Arrow acquisitions, where we end up this year, we're already starting next year well above SEK 1 billion, above that figure, on a run rate basis going into next year. On a like-for-like basis, i.e., same business, and also without any reflection of any organic improvement.
Okay, perfect. Thank you. A last follow-up. Given an answer earlier, it sounded like you were not that surprised that the leverage ratio increased quarter-on-quarter here in Q2. Can you then share with us your expectation of the leverage ratio progression for the second half of 2023?
If you look at the underlying leverage ratio development over time, Q2 is usually one where it ticks up a little bit. We have the dividend payments, and generally, it's also a relatively strong investment quarter, though particularly this year, we had this front-loaded pace, also very much due to the Arrow U.K. portfolio, which we contracted already last year. From that perspective, we expected an uptick. Obviously, FX significantly added on top of that. Obviously, on a forward-looking basis, we don't take further effects development into account, and given the investment profile and cash generation profile for the rest of the year, we expect that to start tailing off during the second half and therefore come down.
That is good, but could you be more specific in the level?
I think we'll present a lot of detail on delevering and our leverage trajectory at the Capital Markets Day in a couple of weeks. A couple of months, actually.
Okay, perfect. I, then I'll wait for the CMD then. Perfect. Thanks.
Thank you, Patrik.
The next question comes from Ermin Keric from Carnegie. Please go ahead.
Good morning. Thanks for your presentation and for taking my question. It seems obvious that you are intending to focus more now on the servicing side of the business.
Mm-hmm.
I mean, if we look just historically, before 2022 H2, Intrum has struggled quite a lot to have organic growth within CMS. What's different now? I mean, of course, you're having organic growth now, but we're also seeing margins lower. Over time, should we still expect or what kind of level of organic growth should we expect for the servicing? Should it be at structurally lower margins than it was pre-pandemic?
Since I joined as CEO, one of the main focuses is improving our commercial effectiveness, and ultimately, that manifests itself in focus on our client service business, which frankly, is also the most enduring and recurring and valuable business to our equity and bondholders. You are seeing organic growth. That's a function of an increasing demand for our services. It's a function of also our increasing focus on our pipeline, and you can see that in the numbers I presented earlier in terms of our AUM and our annual contract value. I can tell you right now that we're contracting all that new business at significantly higher margins than we are than we've had historically.
I'm really encouraged by the middle and the North showing top-line growth because it's where we have a more granular, more flow-like client base, but they're clearly demonstrating a need for our services. When you look forward, I do think there are different speeds in different parts of Europe. The North is gonna continue to need our services. We're gonna have to continue to be more efficient and improve our margins. The South, you know, trees don't grow to the sky. They've been incredibly high growth in the last few years, particularly in Greece, but they're also very high margin and very significant cash flow contributors, and I think that will continue. I'm quite happy with the progression on our servicing side, and as you can tell from our comments, that's where we're gonna focus going forward.
I would expect in the first half, the margin improvement has been very significant. In servicing, even when you exclude Greece, which has such a high margin, our margin for the first half expanded 300 basis points above what our margin was at the end of the first quarter. That's significant momentum. I would expect that to continue.
Got it, thanks. On kind of other initiatives, you alluded to that for taking down leverage, you alluded to that you could do other asset sales as well. I think when we spoke about this in Q1, it sounded like it was completely off the table to sell part of the back book. What has changed from now, or from then until now, that this kind of make you more open-minded to that idea?
Well, I mean, I don't think anything's really changed. I think our focus on developing our servicing business and optimizing our capital structure relative to our investing business means we would evaluate potentially a back book deal. It also is in the context of a development of an asset management business, where we want to do potentially a capital partnership over the near term, and then ultimately, over long term, grow our investing business without growing our balance sheet. A back book deal or some kind of a reduction in our assets is completely consistent with that direction. In this environment, I think there are still very large pools of capital who are looking for attractive, granular, consistent, and reliable returns, and our book represents that.
Looking at it as one additional potential measure, although it's not immediately actionable, otherwise it would be in the specific measures I've outlined, but it's something we don't discard, and it's something we're looking at. If and when it becomes actionable on the right terms, which I think is very relevant to your question, then we will come back to the market.
Thank you. That's very clear. Then lastly, maybe on the cost program.
Yes.
First, just a control question? If I understood it correctly, the execution costs, are they still in relation to the previous targets, or is it 0.75-1.25x this factor of the new, larger savings target? Also just the up pricing, is that having anything to do with that you now expect to buy less and therefore can reduce collection capacity to any extent?
I'll start with the first one, and I'll leave the second one to Andrés Rubio. On the first part, very, very simple answer. The way we look at it is whatever we end up saving, whatever those recurring savings are, they have an execution cost, right? A cost to achieve around about 0.75- 1.25x. I think that's how it has to be characterized.
Yeah. It doesn't have anything to do with we are buying less. In fact, our we have about SEK 11.8 billion of cash costs, roughly. The vast majority are the people in the call centers and our operations in IT, and then we have the center, and we have other stuff. PI is a very small portion of that because PI is an inherently or structurally leverageable business with human resources. The reduction in our prospective PI investments this year and next year are not driving that increased cost. They are not. It's more about looking at our platform globally and in its entirety and looking at where we're inefficient and then addressing that inefficiency.
Great. Thank you. If I may just sneak in one last question. Sorry.
Of course.
Just given that you're a little bit changing the trajectory on how you're thinking about the investment business, do you see that having any impact on your franchise as an overall, for your kind of partners?
It's a good question, Ermin. We are going to be extremely selective in how we deploy capital. We are going to increasingly look to bring in third-party capital to invest in the opportunities we can source, and I do not believe that that will materially impact our servicing franchise.
Great. Thank you. Have a nice summer.
Likewise. Thank you.
The next question comes from Brendan Breen from Andromeda Capital. Please go ahead.
Brendan, are you on the line?
Brendan Breen , Andromeda Capital, your line is now unmuted. Please go ahead.
It doesn't seem like he's on the line. Operator, can we go to the next one, please?
The next question comes from Will O'Brien from UBS. Please go ahead.
Hi, good morning. Can you hear me?
Yes. Good morning, Brien.
I just had a couple of quick ones. Maybe just, is there a minimum cash balance you need to run the business?
That seems like a question for my CFO.
It's a very good question indeed. Technically, technically not, but in very practical terms, given that we're a cash-based business, we always keep a certain balance. I would argue that we've worked on reducing that, and I think what we have now in terms of the cash balance in Q2, I think that reflects a good level that gives us very solid buffers. That's the cash balance on the balance sheet. Obviously, on top of that, we have significant access to liquidity that gives us the ability to move and buffer and work throughout the year.
Okay, that's great. Just a second one. I was looking at the offering memorandum for the euro bonds that you issued late last year. It looks like forward flow purchases are roughly 20% of total purchases. Is that a good way to think about on a normalized basis going forward? Just trying to get a feel for what the contractual obligations are in a normal year.
To give you a sense, when we talk about SEK 1 billion for the second half.
Yeah
You sort of split that across the quarters. Obviously, there's always a little bit of seasonality to inflows, but that gives you a sense what it is at the moment. It's also important to say that forward flows, by their very nature, are usually not very long-term agreements, so they tend to phase out. What we have contracted now will obviously structurally reduce over time. For the next two quarters, what I've just told you gives you a sense of what that commitment is.
Just finally, some of your peers, like Lowell here in the U.K., do sort of ABS-type financing or, you know, where they use some of their back book to secure financing at cheaper rates. Have you thought about that, just given your kinda cost of debt today?
One can always think about it, but to answer the point straight on, we, in the way our liability side is structured, have very, very clear rules and limits on how much secured funding we can use, and that's around about EUR 250 million, and some of that is already taken up by a private placement. That's our limitation, and therefore, we do not consider such structures in size, and we also think that relative to our senior unsecured creditors, usage in size would be unfair, apart from the fact that we can't do it.
Okay, that makes sense. Just finally, the two secured bond deals that you did, what was the reason for those? Was it purely to refinance debt coming due? I think the perception in the market was, given the little amount in EUR that you raised, you're kinda highlighting your cost of debt financing being so high. What was the need to do that, those two financings?
... We had SEK MTN maturity coming up, and we continued to work with that investor base and rolled some of that exposure forward.
Okay. You just want-
It's fine.
You just want to maintain access to the SEK market. Okay.
Exactly.
Okay. That's very useful. Look forward to your Capital Markets Day. Thanks very much.
Thank you, Brien.
The next question comes from Rickard Strand from Nordea. Please go ahead.
Hi, and good morning. Two questions from my side. Tying it into Ermin's previous question there about your previous comment about divestment of back book assets being value destructive. Now it seems like the measures you're suggesting to reduce your leverage, it's now up on the table again. Just if you could clarify what's the... Is there anything specific for this market that makes you optimistic that these type of divestments could reduce your leverage here? Is it because you have a very weak profitability here, or that you have see sort of a strong demand for other players to take over these assets?
I think your question has two elements to it. Number one, and I've already answered previously, in terms of any we do not intend on selling any further markets or potentially evaluating an exit of any further markets. I'll address your second half of your question in a second. On the back book, we continually look at what we can do, and there's multiple variables in that equation, and we're not discarding it, we're looking at it, and we would use any proceeds of anything we do to reduce leverage, which is our near-term top priority. Nothing's changed, ultimately. The risk environment, obviously, is different than it was three and six and nine months ago, and we have to reflect that in our actions, and I don't want to discard anything.
On the markets, we're potentially focusing on exiting these markets, not primarily to raise capital, but because it would further add to the focus of our platform on markets where we have sizable servicing businesses and sizable investing opportunities. These markets are predominantly investing opportunity, investing markets. This, we would be doing this no matter what the risk environment was, no matter what the overall environment was, because it's good for our business to focus on fewer, larger jurisdictions where we can have more of an impact across both our businesses. That's, I think that's the answer to your question. If there's anything I missed, please let me know.
Also, as you start reporting this quarter, then the impact from discontinued operations, where the headwind was a bit larger than we forecasted. If you could add any more color on what do you, sort of what's driving this and, how long you think the, this, sort of negative impact on the, P&L will, continue?
What I would say is, Brazil is signed and closed and exited, and there you have the full impact. We have a note in discontinued operations, and you also see it in the delta on how we've disclosed our operating EBIT. When it comes to Baltics and Romania, there we've only signed, and the final effect will obviously then restate or recalculate at closing. This is our best estimate based on what we know today, and therefore, it's been reflected as such. What I would argue there is that on the portfolios, we actually very much see a confirmation of our book values, if not an aggregate, even a premium to that.
When it comes to the Baltic operation, that has been, from a servicing platform perspective, been challenging for a while, and the effect that you see in the discontinued operations note is just reflective of that. This essentially is our best estimate of what the ultimate impact of exiting those geographies is.
Okay, the Baltic and the Romanian negative impact is still to come then, it sounds like?
Rickard, I'm not entirely sure what you mean?
No, just referring to your comments there on that Brazil was seems to be closed, but the Baltics and Romanian deals are still ongoing, so there might be potentially more headwind from those. Have you sort of taken
No. No, we've taken everything into account that we know today.
Yeah
disclosure is very much reflective of that.
Okay, thanks. That's all for me.
Great. Thank you.
The next question comes from Corinne Cunningham from Autonomous. Please go ahead.
Good morning, everyone. A few questions from me, please. On slide 22, can you just clarify, you mentioned certain restrictions and covenants. Can you just clarify, what you see those calculations are for under the fixed charge coverage, the drawn super senior leverage? Also when we were talking a moment ago on the rules that limit super senior, you mentioned EUR 250 million, and yet the slide refers to EUR 1.1 billion. Could you tie those two up? I have a couple of other ones, but perhaps we could tackle the covenant one first, please.
On the covenant one, what I would say is that we have ample headroom under both these covenants that are mentioned there. Obviously for the detailed calculation that is in the documentation. In terms of the headroom, I think there's a difference. In terms of the super senior, obviously, that has its own specific rules in terms of how the headroom is calculated. What I was alluding to is that the overall bond documentation package between how the super senior is structured and all the other bonds are structured, gives us an ability to slot in EUR 250 million between the super senior and the senior unsecured.
Which in the context of the overall stack is a very limited amount, and in the past has been mostly used by a private placement and continues to be used by a private placement at present.
Thank you. Second question is just on cost savings. Of the EUR 800 million expected run rate, if you were to switch back on portfolio investing, going back to a previously normal run rate, would you maintain all of those EUR 800 million, or is it really this is linked more to the CMS type of the business and then portfolio investments, we have to wait and see what happens with partnership agreements, et cetera?
The EUR 800, or more does not change depending upon how much we invest. It is related to our overall platform, which is predominantly a servicing platform. Either we're servicing on behalf of our own PI or servicing on behalf of clients and our central management. It would be there no matter what level we invest.
Thank you. The last one from me is, are you seeing any signs of asset quality issues in your own, portfolio investments? I appreciate you've got the 103%, which looks pretty solid, but are you seeing any early signs, for example, in things like time to collect, etc. ?
Well, I mean, I think one has to look at it on a dynamic basis and over a period of time to answer your question. 103% is a great performance given the current environment. 110% against original forecast shows that we get better over time, and we're prudent in our underwriting. And our scale of EUR 92 billion of total collections is very significant. A year ago, the collections were much higher as a percentage. I mean, they were well above 110%, if I remember correctly, 115%. Obviously there's a trajectory that indicates a more difficult collections environment.
What the, what the wonderful thing is, and I always focus on that 18-year track record, Corinne, you know, it's only dipped below 100 once, and that was at the height of the pandemic, and it came right back. The average over that 18-year period is, like, 107. I'm very confident. This is one of the real stellar things about our business, in that our operational capability allows us to drive collections in a much more consistent and reliable basis, which ultimately drives lower credit risk for our clients and better returns for our own capital when deployed.
I would also not underestimate the effect of diversification in all its meanings, right? I mean, we have jurisdictions that are, at the moment, a little bit more difficult. I would say, if you liken it to a train, the U.K. is probably at the front of the train, and Greece is probably at the back of the train. In the context of our footprint, we have a number of markets. We cover different asset classes, we have different vintages, and overall, how that portfolio is constructed, how granular it is, how much it relies or it's built on payment plans, you know, just leads to that very stable, very predictable outcome, even when the macroeconomic backdrop is somewhat more challenging.
Again, we have a very, very long track record that just shows and highlights that in terms of its stability and in terms of how we get better over time and extract value from that book.
Thank you. That's helpful.
Excellent.
The next question comes from Gustav Larsson from Arctic. Please go ahead.
Good morning, and thank you for taking my questions. Just two short ones from me. A question on the supply side. As MP also previously said, you're monitoring the inflow of financial claims. With the lower investment level, will you be able to direct that towards financial claims, and are you seeing volumes increase there?
As I've said earlier, there are stages to how a crisis evolves related to our business. We see stage two loans. We see clearly our clients are telling us that they're worried about what's coming. Clearly, our clients are asking us to get involved sooner, earlier stage. One of the things you'll hear in the coming periods is that we're trying to get into earlier and later stage. We're in very much in the later stage in some of our markets, we're gonna get into early pre-collections activity because our clients value us as a partner in managing their credit risk, which means helping them avoid a problem. This is in our servicing business. We see increased cases. That's part of what you see in the second quarter with the improved performance in our servicing.
It has not yet manifested itself into a very meaningful increase in PI available volumes. As I've said in the past, I don't believe that will really manifest itself and really accelerate until next year or the year beyond. It will come. There is no doubt about it.
Thank you. Perhaps a bit more medium-term perspective on that. I understand reducing leverage in the short term, but do you see any risks that you're cutting costs now when servicing should cyclically improve and reducing investments when IRRs are rising, and what that could do in the medium term?
Well, I think what it's going to do is, again, I don't think we get the proper credit for how flexible our PI business is. In that, first off, from a infrastructure perspective, we have purely dedicated people managing that pool of capital of around 100 people. Obviously, they depend on the servicer to collect, but managing the investments per se is only about 100 people. It's structurally quite lean. Ultimately, yes, our IRRs have been going up, but what we're going to be doing over the near term is focus on getting more efficient in servicing, focus on understanding how the market's going to evolve, very selectively do investments, contractual stuff, and only new investments on a very selective basis.
Reduce our investment well below replenishment capital, which will, given its granular, self-liquidating nature, produce cash, which we will reduce leverage. This business is also quite flexible in that we could turn it on, given a normalization of the environment and our financial conditions, we could turn it on quite easily. Obviously, those individuals who may not be focusing as much on new investments can focus more on portfolio management and working with our servicer to extract more from our existing assets. I think that ultimately, this is a period where we're prioritizing repayment of debt, but ultimately it's something that we can reverse and actually increase our proprietary investments at any point in time should our conditions normalize.
The other thing that's happening during this period is that we are, as I've said, exploring an asset management model, where we could bring in third-party capital on a tactical or immediate basis, or while we're continuing to take the steps to build a long-term asset management business, which will then grow our investing business, but not necessarily grow our balance sheet, because we'll be managing third-party capital in addition to our own investments.
Thank you very much. That's all from me now.
I think there are-.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Wonderful. Thank you. Well, the operator repeated what I said, there's no one else in the queue. I'd like to thank everyone for taking the time to listen to us today, and also for your continued efforts in following our company. We are obviously available for any follow-on questions, and you can work through your normal lines of communication. I wish you all a wonderful rest of the summer. Thank you.
Thank you.