Intrum AB (publ)

Welcome to this presentation of the first quarter results of 2020 for Intram. I'm Michael Eriksson and we will now walk you through the quarter results and pay special attention to some analysis of the potential consequences for Intram with the focus of course on our cash flow and the projections for the rest of 2020. I expect this presentation actually to take a little bit more than 30 minutes so since we have allocated one hour to this call it unfortunately will be a little bit less of time for Q&A but we'll try to manage the time as good as we can. First of all I must say I'm actually satisfied with the result for the first quarter given the circumstances and I would like to characterize our performance as stable in an uncertain environment. If you look at our cash EBITDA, it actually increases by 14% compared to the first quarter of last year. And if you look at the stability of the company, at the end of the first quarter, the end of March, we actually had 13.5 billion Swedish kronor in available liquidity in the group. Well, since the outbreak of COVID-19, we have conducted an early management call every morning to share the development in our different markets. And we have also involved all our country managers on a regular basis. And of course, listen to their experience from the respective countries to make sure that we are on top of what's going on. So it's been, you can say, a daily monitoring of the events in the group. With that, I turn over to the first page of the presentation, labeled Q1 Highlights. This quarter has been very unusual and challenging in many ways. It has affected not just our group, but also, of course, our clients and customers. Our reported adjusted result for the quarter is close to 1.1 billion Swedish kronor. That is 19% lower than Q1 2019. But our cash EBITDA is a little bit over 2.6 billion Swedish kronor, and as I said before, 14% higher than the first quarter of 2019. And as I said in the beginning, we have ample available liquidity in the end of March of 13.5 billion Swedish kronor. In this circumstances, I think it's important to note, and we have disclosed it earlier, that we estimate that over 80 percent or close to 85 percent of our collections are actually generated through automated and online payments and that 73 percent a little bit over 70 percent of our total collections amounts is generated without the involvement of legal proceedings which tells you a little bit of the underlying strength of the of our cash flows The result is affected by revaluation of a little bit over 600 million Swedish kronor and lower revenue from joint ventures. If you look at the red valuation, it reflects our expectation of delayed cash flows in the quarters to come. If you actually look at our collection in the first quarter, it is above our active forecast and it doesn't really give an indication of a revaluation. but we take you can say a cautious measures if we look at the quarters to come and if you look at the collections in april it actually indicates that our provisions is on a margin conservative fx impact our leverage level and despite the strong cash ebitda contribution the net attribute dr is 4.5 in the end of the quarter up 0.2 percentage points and that is due to a weaker swedish chrono for those of you who have followed us for a while i would like to remind you that we have changed our segment reporting starting from this quarter the kobe 19 has a clear impact on primary our new segment strategic markets due to the lockdown in spain italy in greece in the other 22 markets we know the more stable performance with expanding margin, France and Portugal being the exceptions. On the investment side, we note lower performance than expected, but collections are still above our active forecast in Q1. This is good proof that we have been able to operate in all markets during this pandemic. Our diverse business model is resilient and we note a strong cash flow generation overall. We have made an analysis of the consequences of the downturn in 2008-2009 using our current portfolio and business mix. And Anders will later take you through the conclusions of this analysis, and of course also go through the quarter in more detail. Turning to the next slide, labeled Outlook. Now, what do we see ahead of us? Europe will gradually open up in the second quarter. Already today, we have more than 50% of our staff in Italy back in the office and all 30 offices in 22 locations in Italy are open. We are following local guidelines, of course, but we actually will gradually increase the presence in the office and expect to be within a couple of weeks to have 80% of our staff in Italy back in the offices. Courts are also gradually opening up in Southern Europe, even though it will be a step-by-step approach. If you look at Italy, for example, we expect the courts to start to reopen from next week, but the larger courts in Milan and in Rome will not open until June or July. But of course, there will be a backlog to deal with and that challenge will be evident in all of these markets in Southern Europe. But there is a clear pleasure from the business community of not closing the course fully for the traditional summer vacation to manage this backlog. We see limited or no impact on our pipeline for servicing contracts within traditional collections, CMS. On the contrary, we actually expect increased activity from our clients later in the year with higher volumes. Clients are expecting growing volume in non-performing exposures in the months to come, and I think that is obvious for everyone. We are committed to a leverage target of 2.5 to 3.5 in net debt to cash EBITDA, even though we will not be able to reach it by the end of 2020. We are reducing our investment level to a level in line with keeping the portfolio stable, and we do not see any material M&A activity during the year. Many larger portfolio transactions have natural causes being delayed in the first quarter, But there are small evidence in the market of, you can say, significant price adjustment reflecting higher refinancing rates and added uncertainty in the small number of smaller transactions that we have seen being executed in the last two months. To conclude, we expect continued challenges in the next two quarters with flat or similar results in Q2 and Q2. to the q1 basically resulting q2 and q3 in line with q1 and we forecast to be back in the more normal or normalized operations in the fourth quarter i now turn to slide number four leading the way during kovid 19. our core values have always guided our actions From very early on in this pandemic, our employees demonstrated a high degree of empathy towards both clients and customers. We introduced freezing of interest calculation and prolonged payment plans in some markets. We suspended our fee collection activities in many markets, and we revised our written and verbal communication to be even more sensitive. All in all, our value-based approach to collections has really served us well in the last two months. Turning to the next slide. Our daily business operations. Since the outbreak of COVID-19, we have conducted a daily early management call to share experience, numbers, and of course, action planning. Already in January we began instructing our staff to carefully follow the health guidelines of the World Health Organization and in a matter of weeks we took a further step to organize efforts in all our 25 countries to work from home. Today we have 75% of our staff working remotely and more than two-thirds are working in our production systems all through secured connections. We have enhanced our internal communication to secure best practices shared between markets and also to keep up motivation and engagement. And you can say that our markets or our operations has been open in all markets during from day one in this pandemic. As I earlier said, we have been and are able to operate also in Spain, Italy, Greece, and france and portugal who has been clearly impacted other markets besides those five has been affected to a lesser extent and now we see the markets are gradually opening up and we of course we are coordinating all our efforts and group level to secure that local guidelines are followed and our staff is protected Turning to slide six, preparing for post-COVID-19. Before I hand over to Anders, I would like to cover some other important points. We have revisited all local and group initiatives due to new circumstances and reprioritized projects aiming at cost saving and of course to protect the margin in our business. At this point we have also assessed the government support programs provided in certain markets, but as you know this type of support often comes with some obligations and we are following local advice. We have applied and been approved in a couple of the markets and of course we see some short benefits in the second quarters to this support from local governments. I would like to point out that we are also accelerating the transformation of Intrum. We will hold on to our ambition to find solutions to leverage our scale and offer cost-efficient products to our clients. The transformation aims to utilize, to a much larger extent, standardized and centralized solutions, both in support functions and frontline, facing clients and customers. This journey has already started and today we operate on one outsourced IT infrastructure. It's actually an infrastructure who have served us very well during this pandemic. But we have also implemented since last, during last year, a common IT solution for HR and for sales. And we have also invested in a common telephone system in the group. This work will continue and is now accelerating the transformation towards one interim. There are a lot of evidence of discussions in the markets, of course, of the consequences of COVID-19. Our clients expect growing volumes of late payments and non-performing exposures. Interim has a stable platform, strong liquidity, and resilient cash flow generation, and we're prepared to stand even stronger from an operational perspective when the markets normalize. I think it's fair to say that Intrum has proven to be able to handle this unprecedented time through a solid IT infrastructure, dedicated managers and loyal staff, And I would actually like to take this opportunity to thank all our employees for their fantastic contribution during these last months. And now Anders, over to you for the first quarter in more detail.

Thank you Mikael, and good morning everyone. So we turn to page 8, Group Financials in summary, in the presentation. And as you can see in total, we do see an effect of COVID-19 into our financial results for the Q1 2020. And it's especially pronounced in the strategic markets, as well as the contribution from the SPV in Italy. On a reported basis, our revenues declined 11% to 33.33, which does include the negative effect of the revaluations of the book. On an adjusted revenue basis, our revenues grew 11%, year-over-year to 39.69. Our reported EBIT is 4.59, which includes the negative revaluation effect of 6.36. EBIT adjusted was 10.95, down 19% year-over-year, which corresponds to 255 million SEC lower than last year, which is fully explained by the lower contribution from the SPV in Italy. Adjusting for that, the underlying profit contribution is up 2% year-over-year. Our reported earnings per share is a negative 0.25 krona per share in the quarter. However, on the cash basis, our cash revenues grew 16% to 52.50 and our cash EBITDA up 14% year-over-year to 26.33. Our leverage ratio increased 0.2 times to 4.5 in the quarter, which is fully explained by the change of the currency between particularly the SEC-euro exchange rate at the end of the quarter, which fully explains the increase in the leverage ratio. Our net debt at the end of the quarter is 51.3, which is an increase of 2.2, which is, as I said, driven by the translation, particularly from euro to SEC. On an FX-adjusted basis, we actually did reduce the net debt in the quarter by about 200 million. Looking at the segments, so moving to page 9 in the presentation, which is now according to our new segment disclosure, our credit management services segment, which is the servicing in the 21 markets not included in strategic markets. We saw a limited impact of COVID-19 in the quarter with stable performance and expanding margins. Revenues declined one percentage point to 17.05 on an FX organic underlying basis that's a negative four percent which does reflect the challenges specific in France and Portugal from COVID-19. Service line earnings on the other hand was up two percentage points year over year to 4.20 which corresponds to service line margin increase of 1 percentage point to 25%. Cash EBITDA contribution from the segment was 499 minus 1% year over year. For credit management services, as also Mikael commented upon, we are cautiously optimistic regarding the outlook for CMS in many markets where we do expect to see increased CMS volume flow in the coming quarters. Moving to page 10, strategic markets, which is the servicing business in Spain, Italy and Greece. We do see a significant impact of COVID-19 in March. Revenues are up 8 to 1% to 11.94%, which is driven by the acquisitions in Spain and our platform in Greece. service line earnings though is 102 million down one percentage point year-over-year which corresponds to service line margin of nine percent down seven percent year-over-year down from an already challenging quarter one 2019. however the cash evita contribution from strategic markets was 328 up 24 year-over-year clearly COVID-19-driven lockdown in these countries in the south of Europe had a pronounced negative effect on the business in Q1. In quarter seasonality, March is normally the strongest month of the quarter and clearly with a strong effect of the lockdown in March, it did have a meaningful impact on the quarter overall. In April, We continue to see a challenging operating environment, whilst we are now seeing the gradual reopening, with quartz activity resuming in May and June, which makes us more optimistic for an improvement in the coming months, as the majority of the claims we serve in these markets are secured and rely on the quartz being effective. Moving to page 10, portfolio investments. Portfolio investments saw a limited impact in March of COVID-19. Our gross collections for the quarter increased 7% year-over-year, and revenues adjusted came in minus 4% to 17.21, which is driven by higher amortization and lower real sales activity, despite an increase in gross collections. The earnings from JV contribution was down 279 million to 81 million in the quarter. However, the cash flow from the JVs increased to 152 million. Service line earnings for the total for portfolio investments was down 20% to 1037. And cash EBITDA for the segment was 2239, up 14% year-over-year. Return on investments for portfolio investments adjusted for the book value revision is 11%, and if we look on the underlying, excluding the SPV, it was 13%. New investments in the quarter was 16.50, and we invested predominantly in the northern half of Europe. Book value at the end of the quarter was 36.3 billion, up 16% year-over-year. portfolio investments in the quarter we do have a revaluation of 636 million which corresponds to approximately 1.8 percent of the book value and is approximately two times the normal quarter we also do have we have no upward revaluations as we have normally had in most quarters due to the uncertainty of covid 19. It is important to note, as also Mikael was referring to, that the re-evaluations are based on our future expected performance of collections in the coming quarters and is not based on underperformance in Q1. We do expect to see a delay in collections with the most pronounced effect in Q2 and Q3 2020. Also, it's important to note that our experience points to that we will recapture those collections over the life of the portfolio. So from that perspective, it's a matter of a timing effect. In terms of market outlook, we do see many transactions delayed at the moment into the second half of 2020, and we do expect significant volumes in the fourth quarter and moving into 2021. In terms of return on investment or IRR on transactions completed since the COVID-19 outbreak, we have seen materially higher IRRs, but it does remain to be seen if the market will stabilize at these new levels once the dust settles. Moving to page 12, portfolio investment collections versus active forecast. In Q1 2020, our portfolio performance was 103% versus active forecast. And in March, our portfolio performance was 100%. In April, we do see collection levels which are in line with our 2019 collection level, but although they should have been higher due to the investments made and the growth of the book. This is clearly the effect of COVID-19. But it's also clear that the impact is concentrated in the most affected markets in Southern Europe, whilst Western, Eastern and Northern Europe see a very benign impact. And that is obviously supported by the fact that we have 73% of our collections in total based on amicable collections, and 85% of the payments generated from automated or online payments, providing stability of the collections. If you look on the right-hand side, Experiences from previous crises show that in a crisis scenario as similar to what we're looking at now, we would see an initial drop in collections at the onset of the crisis, but with a subsequent recovery. The chart on the right overlays the 2008-2009 experience on our current portfolio shape and size. As you can see, we would move from a position of outperformance to a temporary position of underperformance. It is important, though, to see that the chart is cumulative. So as you can see, already after 12 months, we reached the inflection point. And after 24 months, we are back to the active forecast in totality, in total cumulative collections. Also, as you can see from the chart, over the life of the portfolio, we do not expect to lose any collections, which supports our view that this will be a delay in the timing of the collections. moving to page 13 cash flow evolution in the first quarter of 2020 our cash flow was 2.3 billion sec up 68 year-over-year and that was supported by a strong cash evita of 2.6 billion up 14 year-over-year as well as positive development of our networking capital On a rolling 12-month basis, our cash flow is 8.3 billion, which corresponds to 15% CAGR, since the combination between Interministerie and Lindorf. And our cash EBITDA is 11.5 billion SEK, corresponding to a 14% cumulative annual growth rate. Looking at the cash generation of the group, cash revenue in the rolling 12-month basis is 20.6 billion, and our cash EBITDA excluding the performer for M&A, 11.0. That corresponds to cash EBITDA margin of 53%. So we deduct the interest, tax, and other non-cash items in CapEx. That leaves us with 7.7 billion of free cash flow. That is more than sufficient to cover our portfolio investments, our dividends, and our buybacks. Moving to page 14, funding sources and maturity profile. We are very pleased with the reshaping of our balance sheet that we did in 2019. We now have ample liquidity of total 13.5 billion SEC at the end of the first quarter 2020. We also have ample headroom under our covenants. On the right-hand side, you can also see our maturity profile, which shows that we have limited maturities in the next years, which means that we have sufficient capital generation and liquidity to meet all upcoming maturities and makes us independent of the capital markets for the coming years. We move to page 15, net debt and illustrative impact from new investments. As we stated, our cash EBITDA for the rolling 12 months is 11.5 billion, and our net debt is 51.3 billion, corresponding to a leverage ratio of 4.5 times. However, that does include also our investment in the SPV in Italy. Our SPV in Italy obviously was an upfront investment, but has contributed limited to our cash EBITDA in the period. contributed from the SPV investment, our underlying leverage ratio is 4.1 times. And the SPV leverage itself, so the leverage that is remaining in the SPV itself, is currently standing at 2.4 times, which means had we consolidated actually the SPV, we would have a meaningfully reduced the group leverage ratio. Clearly, Interim has had elevated leverage ratios over the recent periods due to the significant business expansion since the merger between Lindorf and Interim Stuttgart in 2017. To illustrate the impact of growth in portfolio investments, we wanted to present you with a worked example. So on the right-hand side, you can see that if you imagine that you buy a 1 billion SEK portfolio at 14% IRR and you fund it fully with a drawdown from the RCS. Clearly, Immediately after buying the portfolio, it does increase the net debt to EBITDA ratio. And as we only gradually recognize the cash flow into our cash EBITDA. But already at 12 months, so in what is labeled Q4 in the chart, you can see that it goes down rapidly to 2.7 times, which means that it is actually accretive to our leverage ratio already within 12 months. And it's actually also at the lower end of our long-term target leverage ratio range. So to wrap up this section, moving to page 16 in the presentation. Resilient business model through the economic cycle. Now in a shifting economic environment, we see the benefits of the integrated business model and the resilience through the cycle. Clearly, in the up cycle, we have experienced over the last few years, we have benefited from lending volume growth, increasing debt sales, strong repayment capacity, and backdoor collectability. But also, we have seen limited new case inflow in CMS, and we've also seen expanding credit lending criteria. So now, when we face the down cycle, we see that we expect higher NTL formation, increased case flow into CMS, and demand for our services. but also a more challenging collection rate. So overall, we see that these factors help to balance the peaks and the troughs of the cycle, creating a more limited cyclicality environment as we have both legs to stand on. And with that, I hand it back over to you, Mikael.

Well, thank you, Anders. And let's now turn to page number 18, short and medium-term focus in 2020. Our first priority is the well-being of our employees and of course mitigating the headwind that we experience in the markets. We track the health of our employees on a daily basis and we pay special attention now when offices gradually open up again. It requires adjusting the working environment to local requirements to secure the health of our staff. At the same time, we focus on both short and midterm actions to mitigate the effect of COVID-19. We are prioritizing all initiatives to save cost with the ambition to restore the EBIT margin in 2021. We're also utilizing 2020 to accelerate the transformation of interim as I've talked about before. As you remember, we entered 2020 in fairly good shape after delivering on an efficiency program in the second half of 2019. Reaching our target for 2020 that we stated in 2017 required a flawless execution and we felt in the beginning of the year that our targets were within reach. Today it is obvious that we will not reach our targeted EPS level in the end of 2020. Besides focusing, of course, on the short-term cost initiatives, we will also use 2020 INSTEP to accelerate the transformation of INTROM that was initiated last year and led to the reorganization of the group that we talked about today. The transformation includes utilizing standardized and centralized resources to a much larger extent, both for support and front office activities, and it will allow Interim to leverage our scale from all our markets and deliver cost-efficient solutions to our clients and secure our market-leading position. We will continue to build on our position as the preferred speaking partner to large financial institutions throughout our markets. We have not abolished our leverage target. The target is still to be at the net debt to cash EBITDA between two and a half to three and a half. We will not reach it in 2020, but the ambition is there and the target is clear. As you know, we have postponed our Captain Markets Day to after the summer. We will then take the opportunity to talk more about the transformation of Intron and the long-term impact. And we will also give you new guidance for both our growth and EPS ambitions. We will see new non-performing exposures being generated in Europe in the aftermath of COVID-19 that will drive additional demand for our services in many markets in the years to come. Interim is very well positioned to capture that opportunity. We are prepared to meet that demand. With that, we complete the presentation and I'm pleased to say that we didn't use that much more than the 30 minutes and we open up for Q&A.