Intrum AB (publ)

Thank you very much, Operator, and good morning, everyone. I am Andres Rubio, the CEO of Intram, 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 third quarter of 2022. We are conducting this call from the headquarters of our Greece business in Athens. We're here celebrating the third anniversary of our entry into this market with a strategic partnership with Piraeus Bank. In the three years since the initial partnership with Piraeus, we have grown in this market to be a clear leader with $60 billion of assets under management, 1,800 employees serving not only the Greek market but also conducting call center services for several other interim markets, and 17 third-party servicing clients. During this time, and commensurate with this business growth, Greece has become one of the best-performing markets amongst our 24 markets in Europe. Now on to the results presentation. Starting on page three. What I wanted to do here is start with how I see the business and some initial impressions from my first two months as CEO. As you can see here, I view our business as one single operating platform that does one thing, collect on unpaid claims on behalf of third-party clients or on behalf of our own portfolio investments or PI business. This platform is the largest in the industry with 10,000 employees in 24 countries across Europe. On the servicing side, we have the trust of 80,000 clients, and we make contacts, not just telephone calls, but confirmed communication across a wide range of channels with 250,000 consumers or customers per day. over 60 million of these communications per year. This business has over 10 billion SEC third-party servicing revenue and 3 billion SEC internal servicing revenue on a rolling 12-month basis. And in the last, and grew AUM 10%, cash revenue 12%, and cash EBIT 19% versus third quarter 2021. and with recent very significant and key client wins across our platform, but particularly in Italy with Credit Agricole and the UTP Italia Fund, and in Switzerland with Chembra Bank. On the PI side, this business is also the biggest, and in my opinion, the best in class, with $40 billion of book value of investments and greater than $80 billion of estimated remaining collections, with significant granularity across 19,000 portfolios and generating mid-teens ROI and an unmatched track record dating back over nearly 20 years. With regard to my first and initial impression, I'm incredibly impressed, as these numbers indicate, with the sheer scale and breadth and depth of our business, plus the significant cash generation and the resiliency of our business. You'll see many of these themes coming through in the subsequent pages in this presentation. But above all, I'm incredibly impressed with the consistent quality and the high motivation of our employees. Finally, we need to keep in mind the importance of what we do at Intram. We not only collect on the claims of our clients, but more importantly, we connect with and offer solutions to a vast number of consumers across Europe. In 2022 years to date, I'm incredibly proud to say that we have helped Two and a half million consumers across Europe repay their debt with interim full and reintegrate into their financial system. People talk understandably about sustainability in the context of the environment. What we do is fundamental to the sustainability and the proper functioning of the financial system and economy as a whole. Now on page four. Here, regarding servicing, we believe the market dynamic is going to put a tremendous pressure on the consumer and therefore increase the demand for our collection services and solutions. High inflation and low growth are contributing to a severe economic environment. Greater than 20% of consumers in Europe are having difficulty in paying their energy bills. On top of this, with higher interest rates, that same consumer's car loan, mortgage, or other household costs are increasing as well, piling pressure onto the consumer. We have seen this already manifest itself in the increase of our industrial clients needing our help on the payment of their invoices, and have heard from our clients and observed that this trend of delinquency is shifting into the financial system, with Stage 2 loans continuing to increase and reaching 9.5% of European credit assets, and consumer credit usage also increasing. All of this means that there will be greater demand for our servicing capabilities over the near term, initially with regard to invoices, something we've already seen for several quarters, and then transitioning to higher margin financial claims, and then eventually to meaningful PI opportunities. This is a perfect example of the counter-cyclical nature and resiliency of our core servicing business. Page five. These developments can be seen on this page where off of a Q1 2021 low point, we have our AUMs have grown 7% per year. Our collections have grown 24%, but there's been a muted effect. on servicing revenue in EBIT as the revenue conversion of these collections have yet to increase given the lag regarding financial institution claims. Looking at page six. Regarding portfolio investments. This market is affected by the following factors. Across the board funding cost increases. More difficulty to collect given the tough macro environment. a natural lag in the accumulation of MPLs leading to portfolio sales by financial institutions. But there is a more developed MPL industry in market now than in past, which will lead to more orderly sales increases, unlike past crises. And there has been a replacing of risk across the spectrum. These factors are very evident in our results, given that our underwritten IRRs in the third quarter are at 15% versus 12% in the first and second quarter. We completed $1.3 billion SEC in the quarter of PI deals at 15%, but even just as importantly, or more importantly even, at a money multiple of 2.3x. We have controlled funding costs, given ample liquidity of $17 billion, and termed out debt, but we don't have any meaningful maturities until 2024. And collections, yes, are down from the 110% year-to-date average, but at 106 are still meaningfully above our original forecast. Turning to page seven. This slide shows the fact that no one in the world has our experience and track record in collections performance, which then translates to consistent investment returns for our PI business. Since 2004, over 18 years, we have grown our annual collections for our PI business 16x, from a little bit under a billion, i.e. 0.8 billion, to 12.9 billion SEC annually. And we've expanded from purely consumer unsecured to also include almost 1 billion SEC of secured collections. Over this extended time period and with a much larger base of annual collections, we have averaged over 18 years, 106% collections versus original underwritten forecasts. We have demonstrated extreme resiliency having endured three crises with the global financial crisis, the European sovereign wealth crisis, and the global pandemic. Yet our collections have never fallen below 98% of original underwritten forecasts on a rolling 12-month basis, and in every case, has sharply bounced back from these lows. This consistency in collections over the long term, combined with the 12 to 15% IRRs and greater than two times money multiple, In my opinion, it's the best track record in the industry and shows not only the resiliency of our business model, but also the benefits of our integrated business model, where world-class servicing and investments are combined under one roof. Page eight, transitioning now to the One Income Transformation Program. In my first two months, I have prioritized a comprehensive review of this program, And I'm glad to say that we have validated that the recurring cost benefits of $1 billion are achievable. This is important as we have visibility on these recurring cost savings, but it is also important to note that this estimation of benefits doesn't reflect that this program should make us the most efficient and the most highly functioning credit management platform in the industry, which in turn should translate into more new client wins and more revenue from existing customers. This could be much more than and more enduring and impactful than the estimated recurring cost savings. As you can see in the bottom graph, we have paused migration during the quarter to ensure the quality of past migrations, where we are operating at least at the functional level prior to migration, and to ensure that future migrations maintain this level of quality of service. On page nine, here you can see the progress to date where we have continued to build out our four global front offices, one of which is here in Athens, now serving 18 interim markets and 20% of all calls and growing, all while not sacrificing quality with higher customer satisfaction than the local front offices. This effort has driven greater efficiency with cost to collect dropping to 5.3% of collections during the third quarter of 2022 versus 6.1 in the third quarter of 2021 and dropping nearly 20% on a like-for-like basis since the prior peak in earlier 2021. All of this while we are ahead of the expected cost saving realization on the transformation program on a run rate basis. We will continue our review and optimization of this program, and I will come back with a more detailed review of the transformation early in Q1 2023. Pages 10 and 11 are my bragging slides, where I get to highlight the fact that we play an important social purpose while generating strong financial performance and returns. On page 10, You see the virtuous cycle of our employees offering solutions to consumers in an ethical and respectful manner, generating financial recoveries for our clients on their unpaid claims, and enhancing the sustainability and well-being of the financial system and the economy as a whole. It bears repeating, and I'm very proud that in 2022 years to date, we have helped 2.5 million consumers across Europe repay their debt, and reintegrate into the financial system. And listening to phase 11, you can see that we play this important role in the functioning of the financial system and economy while producing incredibly strong financial results. Since 2018, we have grown annual cash EBITDA by 35% overall and 8% annually. We've increased our total assets from 76 billion SEC to 92 billion SEC, all while deleveraging from 4.3 to 4.0. And we are increasing, we have been increasing our dividend payout to our shareholders by 25% in aggregate and 7% a year. After highlighting this long-term strong financial performance, I now turn it over to Michael to walk you through the results from the quarter. thank you andrew good morning everyone i'm now turning to page 13 of the presentation our group key financials the third quarter was as expected seasonally slower but with continued strong underlying performance despite an increasingly challenging macroeconomic backdrop While the pre-announced negative adjustments following the Q3 revaluation impacted accounting earnings leading to a loss, they are non-caption nature and principally related to one portfolio with no read-across to the overall investment book. I will cover this point in more detail later in my presentation. We saw a continuation of trends from the preceding quarters, with all three segments contributing positively to 9% growth in cash revenues compared to Q3 2021. CMF inflows are still skewed towards invoices, with increasing collection and costs, but lower revenue conversion, while strategic markets and PI continue to perform well. The overall cost development is impacted by the level of operating activity underpinning the growing collection trajectory, as well as the range of projects with supporters in becoming an ever more effective and efficient market leader and shaper. In rolling 12-month terms, cash revenues, cash EBITDA, cash EBIT, and cash EPS are all again up, with cash EPS also again above 30 crowns. On the leverage side, the ratio is four times, principally due to the continued adverse currency development, with the Swedish crown depreciating a further 2% versus the euro in the quarter. This effect alone negatively impacted our gross debt by circa 0.6 billion and our net debt by circa 0.4 billion. Cash EBITDA at the same time continues to increase on a rolling 12-month basis and is now up to 13.2 billion. Overall, in the third quarter, we delivered cash revenues of 5.8 billion, cash EBITDA of 3 billion, cash EBIT of 1.4 billion, cash earnings per share of 2.48 crowns, and the cash return on invested capital of 7.3%. I'm now looking at the next page, page 14, group cash earnings generation. Year-over-year growth in cash revenues of 10% drives the growth in cash EBITs of 13%, cash EBITs of 15%, and recurring cash earnings of 25%, while cash expenses are up 7%. What this also shows is that underlying on a rolling 12-month basis with a cash EBITDA of $13.2 billion, we essentially generate $13.2 billion that net of cash finances and tax we can deploy on a discretionary basis, which means that we self-generate the means to invest in our business, invest in portfolios to both replenish and grow, as well as paying a substantial dividend. while keeping gross debt, margin debt, and substantially growing cash EBITDA. From a returns perspective, this then equates to recurring cash earnings yields on total sales with equity of 16%, as well as the return on equity of 17%, based on adjusted net income. The substantial cash generation together with our strong liquidity of circa 17 billion, our track record of resilience and the diversification between servicing and investing gives us a good starting position to both manage through challenging times, as well as the flexibility to act on attractive opportunities in dislocated markets. Now onto the segments and starting with TMS of page 15. Andres has already given you a perspective on the key developments here, which are a continuation of what we have observed in the preceding quarters, both in terms of segment dynamics as well as results. Collections in the segment are increasing, up 30% versus Q3 2021, with the associated activities also driving costs. However, revenues are still lagging as the inflows and collections are still skewed towards lower balance, lower margin invoices, and therefore lower revenue conversion. The current environment, where more than one-fifth of European households are struggling to pay their energy bills and consumer credit balances are rising, should not only continue to underpin invoice inflows, but also translate into increasing financial services claims over time. Financial services claims are generally higher value and higher margin and will positively impact revenues and the segment margin in due course. In Q3 2022, we produced cash revenues of $1.04 billion, cash EBITDA of $360 million, and cash EBIT of $346 million. This translates into cash return on invested capital of 7% per quarter, as well as an adjusted segment margin of 20%. Now turning to strategic markets on page 16. This segment yet again delivered continued strong performance across all three geographies with cash revenues increasing by 22%, cash EBITDA by 45%, and cash EBIT also by 45% compared to the same quarter last year. This very positive development is also clearly visible on a rolling 12-month basis. Greece continues to perform very strongly. Efficiency and effectiveness of the Italian platform have significantly improved over the last 24 months, a development that is clearly reflected in segment performance as well as externally recognized with more new client wins, as mentioned by Andres. In Spain, the off-courting of SRAD volumes has now been completed, with the associated loss of revenues going forward. As previously mentioned, the expected bottom-line impact of this is immaterial. In the season, the lower third quarter cash revenues came in at $1.4 billion, cash EBITDA at $718 million, cash EBIT at $699 million, and cash return on invested capital at 18.6%. In Q3, she adjusted segment earnings margin with 32%. I'm now looking at portfolio investments on page 17. In portfolio investments, Q3 was again a strong quarter with collections outperformance versus active forecast of 106%. The Q3 reduction in outperformance versus previous quarters and also the year-to-date level of circa 110% is consistent with a gradual normalization in the context of economic cycles. A more challenging macro environment primarily leads to fewer and lower settlements while sustainable payment plans remain stable and resilient. Gross tax collections of 3.2 billion increased 7% compared to the same quarter last year. All other key metrics also improved in Q3, with cash revenues up 6% to $3.4 billion, cash EBITDA up 8% to $2.5 billion, and cash EBITDA up 10% to $999 million compared to Q3 2021. The adjusted return on investments was stable at 14%. In Q3, we also saw the first tangible signs of a potential market repricing that like-to-like yields up compared to preceding quarters, and then IRR from new investments of circa 15%, with a money-on-money multiple of 2.3 times. Our investment pace was more moderate, with 1.3 billion deployed, as we become even more selective in the current dislocated macroeconomic environment.

Page 18.

Here I wanted to give you some additional detail on the pre-announced negative devaluation adjustments. Final adjustments of 3.2 billion are very much in line with the range previously communicated. All adjustments are non-cash, principally related to the Italian JV portfolio with no near-term impact. In aggregate, these adjustments reduced ERC by circa 2% relative to Q2 2022 and impact collection expectations in 2025 and onwards. The factors driving these adjustments are portfolio-specific with no read-across to other exposures we have invested into, which has been confirmed by a thorough risk-led exercise. It also needs to be mentioned that outside the effective exposures, we have a positive revaluation of $40 million for the quarter, supported by continued outperformance versus the active forecast. Out of the total $3.2 billion, $1.7 billion are impairments in participation in joint ventures, $0.9 billion reduced earnings in joint ventures, $0.4 billion are related to an impairment in client relationships, with an additional $95 million fair value loss. Turning to page 19. The chart on the left clearly highlights the dynamics I mentioned earlier in the context of portfolio investments with the average rolling 12-month underwriting IRR starting to turn up. Given the increase in cost of credit, this is then also reflected in cost of funds increasing. As a reminder, our reliability structure is termed out with principal maturity between 2024 and 2027 and largely fixed rates, i.e. 72% of net debt. We're currently considering options to refinance the 2023 and 2024 bond maturities. Our liquidity stands at $17.3 billion at the end of the third quarter. Looking at page 20, Here I've tried to depict some key elements underpinning our business model. We generate a substantial amount of cash. RTM cash EBITDA was $13.2 billion, while the average over the last three years was $12 billion. Our cash generation is resilient and growing, also due to the offsetting characteristics of servicing and investing throughout the cycle. Let's call it an internal hedge. The use of this cash generation, excluding debt service and tax, is largely discretionary. We have used some of this cash generation to replenish and grow our portfolio investment business, which as of today is run as a self-financing cash compounder. We have therefore over time built a business with a current book value of $40 billion and estimated remaining collections of $83 billion. This business is self-liquidating, with over the last three years, on average, 19% per annum being priced and prevailing market conditions. This business is also highly resilient, with an RTM index versus original undividing expectation of no lower than 98%, and on average, 106% since 2004. Similarly, circa 20% per annum of our gross debt, which is termed out at a largely fixed rate, will on average reprice over the coming five years, and we have liquidity of 17 billion. In aggregate, this means that we have repricing on both the asset and liability side, integrating market pricing in terms of returns and costs as we move through time, combined with significant and resilient cash generation and a substantial liquidity buffer. These factors give us the confidence and flexibility to face challenging times and exploit opportunities as they arise. I'm now turning to page 21. It was nearly two years ago, in November 2020, that we held our Capital Markets Day, on the back of a few free 2020 figures. It is now also just over two years that I have acted as Chief Financial Officer for Interim. This then gives me the opportunity to not just focus on the challenges, but also on what we have achieved during these two years. To put it into a nutshell, we have significantly grown our cash generation with RTM Cash EBITDA up 14% to $13.2 billion over the last two years, increased recurring consolidated cash EPS by circa 10 crowns at 35%, Improved our profitability with a cash ROI of 1.4 percentage points and added to our dividend year after year. All of this while leveraging from 4.2 times to 4 times, with more to come. So overall, we've made substantial progress versus our medium-term financial target, balancing growth, shareholder returns, and leverage while navigating a changing, difficult operating environment in coverage with the current challenges. And now back to you, Andres, with the concluding remarks. Thank you, Michael. Now going to page 23, I would like to make some concluding remarks on our outlook going forward. With regard to servicing, we expect marked increase in the demand for our services and a renewed client focus and deployment of technology, excuse me, to increase both our revenues and margins meaningfully. On PI, our portfolio investments, we expect to collect with more difficulty but still above original forecast while selectively investing and investing at higher IRRs. On the platform, we expect to continue our progress to be the most efficient and most highly functional operating platform in the industry. More specifically on the financial outlook, we expect a seasonally strong servicing fourth quarter to end the year on a high note. We expect selected PI investing as the environment adjusts to higher cost of risk. And we are going to continue to focus on growth, commercial success, and cash generation. Finally, we will continue to work towards achievement of all our financial targets as soon as possible, including in particular the leverage ratio of 3.5x, and greater than 30 sec cache EPS. With this, I'd like to thank you for listening to our presentation and turn it back to the operator for questions.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw a question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jacob Heselvik from SCB. Please go ahead.

Thank you. And good morning, Andres and Michael. So my first question is on leverage. You stated before that your target was to reach a ratio of three and a half by the end of this year. But in your comment, Andreas, you now state that you aim to achieve it as soon as possible. Can you give us any more clarification on the timeline, please?

Jacob, I'll start and then hand over to Andreas. essentially where we started the year was with a very clear plan and trajectory to get to three and a half times we are executing on that time and trajectory the element that we can't control is foreign exchange and about 70 percent of our debt is euro denominated as or our revenue so it's pretty well matched but what happens is we move through time and the SEC is depreciating versus Euro, we translate our balance sheet at spot and our P&L at the average. So that is the one effect that we cannot control. And just to give you a sense, we started the year at a Eurosec exchange rate of around about 10.2, 10.3, and we're up to nearly 11. So what I'm trying to say with this, from an underlying trajectory, we're executing what we plan to do, which is consistent with getting the leverage down to the ballpark we've mentioned, but we're contending against an FX situation that's out of our control. But that does not change our commitment and our focus to get down to that ratio as soon as possible. Listen, on leverage, we've heard the market. We understand the need to de-lever in this uncertain environment. We maintain that target of three and a half by year end, and we're going to get as close as possible, if not achieve it.

Okay, so if FX suddenly were to reverse, you might think you are able to do it by Q4 this year still?

Yeah, we can't control FX. Putting FX aside, we can only control actually deleveraging, and we're going to achieve this goal.

Okay, perfect. If we then move to slide 19, we can see that your cost of fund continues to increase slightly. Have you been able to update your reference curves to reflect the new macro situation when purchasing new portfolios? And how often do you update your funding cost as your discount rates?

To give you a sense, and this again ties into how we operate, we have a ongoing process where we update our hurdle rates and a key input into those hurdle rates is the funding cost, not on a locked in basis, but on a risk adjusted current basis as we look at our entire footprint, right? so from that perspective we're obviously updating our own perspective but we're also starting to see repricing in the market so when we look at this order we've invested as an average ira 15 last two quarters run by 12 if you look at this in a real life-to-life basis on the deal we reinvested this is up one two a bit more than two percentage points So we are starting to see that repricing. And as I mentioned, and this is really important to me, our assets and liabilities, we price over time. Our liabilities are turned out, largely fixed rate, and our assets are self-liquidating, and we choose to deploy some of the cash we generate into replenishing and growing. And thereby, both sides update the pricing in accordance with the prevailing market conditions at the same time. I also think, I mean, it's very clear, and I tried to state in my comments that we're being selective in PI because the market hasn't fully adjusted. And we're not going to do deals for the sake of doing deals. We're going to do deals that we think we're getting paid appropriately for the risks. And I would also highlight that while in the secondary markets our funding costs have expanded, they've expanded less than all our direct competitors. So in this environment, this should actually become a competitive advantage for us over time.

Yeah. All right, perfect. And if I may move over to collections, how do you see collections has developed in October and what input has made it worse? I mean, you said electricity bills, so what's 23% in Europe is having issues and the prices haven't moved up that much yet. But then gas and petroleum prices are down. So is it just... What is the biggest input here going forward or the main challenge, you think?

I think, again, this is a differentiated impact across geographies. You know, Scandinavia has slightly different dynamics and rules around energy prices versus, for example, the UK or France, right? So the repricing and resetting happens at different paces. But I think what we can all agree on And I think what we see wherever we operate is that the current environment is increasingly challenging for the consumer, which is not just something we feel. It's borne out by statistics with 23% of European households being challenged to pay their bills, which is something we see in stage 2 loans continuing to increase. which we see in consumer credit increasing and is also borne out by our numerous signed conversations, largely with European banks and obviously all the other companies we serve as well, showing that delinquencies are on the increase. I think having the experience of being in this industry in the past, uh crises i think the beauty of where we are now with interim is we have the resiliency of collection so we've never dropped below 98 or 99 in the most severe of economic environments so that's number one um and um number two we um apologies i've uh missed my train of thought but uh and also what we have now is a much more orderly NPL market. And so our clients are clearly going to see an accumulation of NPLs. We see it. I've seen it in past parentheses. I'll see it this time. What's different this time is that it's a much more orderly NPL market. And so you're going to see gradual increases, but definite increases in servicing volume and then in PI volumes. So it's not going to be an abrupt have-to-sell type of an onslaught. It's going to be a gradual increase and an inevitable increase. And being the leading industrial player, we stand to benefit from that.

Yeah, that's good. Thanks for the color. And just one last quick question from me. I mean, looking forward, will you decrease amicable collections and rather focus more on legal collections in order to get the low willingness to pay segment to actually pay its bills?

as on slide six i believe you said non-payers are more challenging to activate in adverse macro i i think this is less of a comment about amicable versus legal we obviously always try to do the appropriate thing for our customers in an ethical manner right this comment is much more about if the backdrop is challenging then when you make that first contact to get over the hurdle to establish a payment plan to to to become a payer to start in the past to being reintegrated into into into the financial society is that a little bit more difficult shifted strategy focus heading into the recession of preparing that you're going to do more legal collections now no honestly what this what this depicts is an environment which leads to increasing volume being externalized and driving our servicing inflows. But at the same time, given the macroeconomic challenges, we see collectability come down a little bit. But the volume effect generally outweighs the collectability. And that also then translates across to PI, where in the first instance we see the collectability and then the further investment opportunities down the line, which is really what Andres talked about before, how our two businesses balance themselves or balance each other as we move through the cycle, which leads to the stability of cash flow generation that we've exhibited over decades. All right.

Thank you so much. Thank you for your questions.

Thank you. The next question comes from Patrick Ratliff from ABG. Please go ahead.

Thank you. So my first question is to Andres. And I was wondering if you could talk a little bit Your view now being a new CEO on deleveraging and what is a sustainable long-term leverage ratio for in-term in your view?

So on deleveraging, I mean deleveraging is important in a number of factors. Obviously, when we think about the deployment of our capital, as Michael said, we have a very large cash generation, and we can invest that in portfolios. We can invest it in our servicing business. We can invest it in dividends. We can invest it in deleveraging. And we have to evaluate all of that. But today, I believe that we do need to delever at least to our target of 3.5x. And then at that point, focus on cash generation and maintenance of leverage. Today, I'm very comfortable with our leverage level, although we are progressing towards that three and a half level because we have ample liquidity. We have termed out debt. And we have two businesses that reprice. And also, we have a very large asset base in our $40 billion of book value, $80 billion of ERC relative to our debt load. So I'm very comfortable. And I think the market reflects the fact that on a relative basis, We're much better than our competitors, which is a comparative advantage that will manifest itself over the coming months, as I said earlier. And we're much better than our competitors on an absolute basis. But regardless, long-term, I'd like to get down to that 3.5 target, and then we will reassess how that should proceed. But we're always going to focus on cash generation. But just to reiterate – It's getting there as soon as possible. Correct. And we're getting there. That is an objective, and we're getting there as soon as possible.

Okay, thank you. And you talk about being more selective here in your investment pace for new portfolios in Q4. But you also talk about coming down as soon as possible with the leveraging to the target ratio. So how should you think about investments in new portfolio in 2023 more granularly, please?

I mean, 2023, I suspect... that what you're going to see is this wave. Right now, we're seeing the invoice wave. Then you're going to see NPL starting to accumulate, the Stage 2 loans starting to turn into non-performing loans, which is going to impact our servicing business first. And then I suspect that in the latter half of 2023 is when you're going to see acceleration of PI opportunities. So, I would suspect at the beginning of 2023, it will be similar to 2022 in terms of the opportunities. While the market is adjusting, we're going to be selective. And then I think we're going to be in a great position to capitalize on what will be an increased volume of PI opportunities going into the latter half of 2023 and into 2024. That's the way I view the progression of the opportunities.

And in total investments, do you think that will, you write here 7.5 billion in 2023, do you think that will be larger in 2023 given this opportunity or approximately at the same level or what do you think?

Patrick, just to make one point right here, we do not have volume targets and investments. That's the wrong thing to do. We are now obviously approaching that end of the year, so we have a good view of roundabout where we would land, but our primary focus is on doing good deals. So we are driven by our internal capacity, what we can do, and by what's available, and we try to be selective, pick out appropriate deals with the right risk return, and then deliver. And again, the chart that Andres showed and commented really is a testament that we don't just do this today, but we've done this over nearly 20 years, right? Yeah, I've been an investor in the NPL world for 20 years. You don't invest for the sake of investing. I think I said that earlier in some of my comments or maybe in response to the first question, but we're going to be opportunistic and we're going to be careful and we're going to invest where we think we're getting paid for the risk. I can't predict whether it's going to be the same volume, greater or lower. I can tell you that over the coming years, I expect greater volumes. and i also suspect that we will explore other things like not only investing our own capital but potentially partnering or investing third-party capital to grow our pi business because the pi business has growing opportunities in my opinion great uh thank you and just as a last question here you talked about it throughout the

uh presentation but if we can really dig down into the the coming quarters this adverse macro scenario where new case inflow benefits while collectability is negatively impacted how do you expect this to play out in the short term is there any lag effect here which which we will see first into the numbers please

I mean, I think you're seeing it already in our numbers. This is more of a phenomenon in what we call CMS versus strategic markets currently. And I suspect that's going to reverse itself going into year end and the beginning of next year as you see those phase two loans become NPL and you see consumer – the pressure on consumers is inevitably going to leave and higher interest rates is inevitably going to leave. to greater volumes and we're going to start seeing that in my opinion or you can never have a perfect crystal ball into year end and certainly into the beginning of next year. Yeah and then it's important to also recognize that once you see the inflows there's a certain small time lag until they turn into revenues and then obviously you have compounding effects because obviously we've had lower insights from financial services for quite a while. So, you know, this builds up over time, but I've talked about that previously. And again, I said it earlier, I've been doing this for 20 years. It's inevitable. It's coming. What's great now is that we have an orderly market and that we're the leading industrial player.

Perfect. Thank you so much.

Thank you. Thank you. The next question comes from Ermin Kerek from CanAge, please go ahead.

Good morning. Thanks for the presentation. A few questions, if I may. Maybe if we start on slide number five, just to understand, it looks like the collections have continued to increase at quite a strong pace, but we don't really see any impact on the revenues. And I know before we talked, obviously, about the mix with lower financial claims and so on. But is there still actually a churn of financial claims and kind of an increasing tilt towards utility bills and so on? Or have we seen a bottom of that kind of mixed shift already?

I mean, it's a very good question. So what we're trying to show on this page is that in terms of business activities and inflows and then ultimately also collections, we're moving up. where we're lacking some of the revenue conversion, which is largely due to that financial services inflow effect. This is really what that fundamentally depicts. I think in terms of where we are in financial services, I'd be very hesitant to call it green shoes, but generally in our conversation throughout the quarter with the various markets, we do see no initial sun. It's a bit uneven across the footprint, but I think it's more important just to sort of go back to what Andres just said, it's a little bit inevitable. We see it moving through the pipe. And for me, from the final perspective, you have a more challenging environment First, you see the invoices, that's what we're seeing, but that's driving costs because there's activity to collect and it's driving collections and revenues to a lesser extent. The next step is really the financial services where we're seeing stage two increasing, which will have to translate into NPL. And that obviously then creates the basis for gradual increase in the PI business in due course. yeah i mean again i've been doing this for a long time i found a little bit like a broken record i speak to many banks across europe every single one of them are assuming this is going to happen what's great now is that the our industry is much more established the relationship with our clients is much more established and you're going to see a much more direct relationship of accumulations and deals to our servicing activity and then with a lag ci opportunities in my opinion it's inevitable it will come We can't really call the bottom. I don't know. But we will see this in the coming months. I'm sure of it.

Great. Thanks. That's helpful. Then on slide number seven, I think that's a very helpful slide to get to. Thanks for that. But just if you could give us your thoughts on that the portfolio has kind of changed in composition maybe from the financial crisis, both with having a bigger exposure to Southern Europe but also as we have some secured assets in the mix. So do you think the risk is lower on secured? Could you give us any flavor on what kind of the average LTV there's there, for instance, and also on the regional exchange, how that plays in?

I mean, obviously, every portfolio is a living thing over nearly 20 years, right? And the world has changed. But I think what is important is that our key principles and how we approach this business have changed. The person might be learning a lot as we move through time. So from the non-secure perspective, there's a dynamic, even though they're specific to each individual market and portfolio, but there's some general conclusions, which is when you're very granular, very diversified and focused on sustaining the payment plan, then you create resilience and you also do right by your customers because you are able to look at their individual circumstances and offer them a path for reintegration into financial society. Now I think this also very clearly highlights that we have complemented this unsecure history with a bit of uh secured uh exposures but you can also see that that has a relatively limited impact in terms of total drop selection and also from an investment perspective our book is very much majority eighty percent or eighty percent flat on security So obviously secured has, depending on the specific situation, more volatility. For example, in the pandemic, when the court system initially shut down, that had a more pronounced impact on secured than unsecured. But overall, it's really that diversification, the mix, and our approach in being very careful in terms of only investing in what we can operate and on having superior data that really differentiates us and that really, I think, in this chart tells the story of resilience and success over a very long period of time. Yeah, I mean, I think The fact that we are much bigger now than we were gives us more data. The fact that we're more geographically than we were previously is more diversified data. We can do better underwriting. We have better underwriting analytics. And we're also prudent. And the vast majority is still unsecured, as Michael said. So secured is a natural evolution of our PI business, but it's still a very small piece of our global picture. And being this big in this many geographies is better, because I think we can better capture the risk opportunities that are available, the opportunity, the return opportunities that are available to us relative to the risk.

Great. That's very helpful. And then on one interim, We can see that the migration of cases had a little halt in Q3, as you mentioned. Could you just give us some flavor now? We've been about two years into your program. What is the feedback? Do you see any change kind of in quality or efficiency when you have migrated? Is that a cause for having to pause it a little bit before you continue on? Or is there any other reason for this little pause now in Q3?

There's various factors here. As everyone who's ever operated in any kind of an industrial or technological environment, migrations are complicated. But we have the benefit also of having a cap compliant portfolio investments that we can migrate before we migrate third party volumes. And our collections on PI have been great. So I think the functionality of Some of the migrated cases or some of the markets that have migrated has not been at the level that I would have liked. That's one of the reasons we hit the pause button. But the returns and the collections are a testament to our people. The collections continue to perform. And we want to get that right so that we can accelerate it. And we don't migrate for migration's sake, just like we don't invest in it. We actually migrate to make sure that we're capturing the opportunities of cost savings and we're capturing the opportunities to improve costs. functionality which this does and we're doing so in the most important and the most prudent and the markets where we think this is going to have the greatest return not in every single market at one time but migrations are complicated and we're going to have ups and downs going forward there's no doubt about it that's the reason for the pause and maybe a bit from the cfo perspective but to my mind The whole, the whole one inch here really builds on people and processes and systems. It's changing across all these dimensions, but you know, what's really important to me is that the cost to collect, right. And you see that that's moving in the right direction. And that means that the elements are starting to play together. That's really a curve that we want to expand and continue on. 100%.

Thanks. And then maybe one final question. Maybe a little bit tricky one. But when you mentioned now on the financial targets, which ones you are focusing the most on, it sounded like it was kind of the cash GPS and the leverage. So are those superior to the dividend, for instance?

No, but those are the two that I chose to highlight in my commentary. Leverage is obviously very topical. The questions have indicated that today. Cash EPS to me is the ultimate measure of our profitability to our shareholders in cash forms. And I wouldn't say it's superior or inferior to the dividend. I would just add to that. We've tried to illustrate that in terms of what we've done over the last two years, right? We really focus on progress in all of those. And I think Andres made the point also very clear in his concluding remark. We focus on achieving all our medium-term financial targets. Average being particularly topical, so we've singled it out. So we focus on achieving all of those. Yeah, I wouldn't read into that commentary. Great. Thank you very much. Thank you very much.

Thank you. The next question comes from Wolfgang Felix from Sharia. Please go ahead.

Thank you. I really only have one question left, I think, maybe two. First of all, back to that slide seven, which I think is really good to have. Thank you. If I go back to 2011, low point of 99%, that sort of came two years-ish after the great financial crisis. and not that we perhaps have a great financial crisis right now but uh would you sort of envisage that perhaps the low point irrespective of the absolute level 99 98 or perhaps above 100 um is about two years away from from from where we are now you think uh is that a sort of reasonable way of thinking forward or do you anticipate a different speed of the cycle

It's a good question. I think we're going to see a steepness in our collections over the coming years. I think it's going to be more difficult to collect on a unitary basis. There's no doubt about it. But whether it's one to two years or three years, I don't know. I do think we have a better functioning market, and we are certainly more capable today than we were during the pandemic, than we certainly were in the early part of this past decade. So hopefully we don't hit these levels of bottoms. But it's inevitable that it's going to be more difficult to collect going forward. It's inevitable. I would just add I think that the shape of how it pans out exactly also depends a little bit on the degree of government intervention across the footprint, right? There will be a cycle, I think that's normal, but exactly how that moves over the coming quarters and years is very hard to predict. I think fundamentally when I look at our business zone, as we've shown, Given that we're exposed to servicing and investing, we continue to grow cash generation throughout difficult times. I think that's number one. And I think fundamentally, the macro trends that support growth in our industry are a bit decoupled from that cycle. That's much more about outsourcing. It's much more about development of the financial system. It's much more about concentration of our clients into the best suppliers. given the quality that they look for. And I think given that we're the market leader, given that we're building scalability, and we are striving to be more effective and efficient, we're very well positioned to capture that opportunity, not just over the coming quarters, but over the coming years. And I think it's very important to highlight that we are definitely better than we were even as recently as a few years ago. Part of the one-inch transformation is not just the migrated cases that everyone seems to focus on, but it's giving our people better tools. So giving them digital tools, particularly in the north of Europe, to deal with a more granular and sophisticated and mature client base. Using our data, we have a number of test cases right now that have very meaningful profit and collections impact. That's stuff we didn't have three or four years ago, and so that will also mitigate the steepness of this decline, I think. And historically, we've been very resilient. I think we're going to be even more resilient with these tools, which all come as part of our natural evolution, but also the focus on it from the one-inch program.

Okay, thank you. That's certainly very helpful. And then my only remaining question, I guess, is around how you set your discount rate with respect to your back book um and i i mean not so much the jvs but what you have on your own 100 owned book um and how is that related to your funding cost um how do you set how do you set that level i suppose in a way to help us understand when and how you are valuing that book as we go through obviously quite some significant changes in macro rates overall.

Sure, I take that one and I apologize in advance. This is going to get a little bit technical. So in terms of our on-balance sheetbook that health and maturity at amortized cost which means in terms of accounting standards we're subject to IFRS 9 which means that we lock in the effective interest rate at inception so when we do an investment we look at the rate of discounts that we get on that investment and that does not change over time but as i said our investments are self-liquidating so as we replenish and grow we integrate market pricing over time into that book But it's important to note that it's our back book. We set the discount rate initially. We have an underwritten IRR, and we've outperformed across, as you see on page 7, at 103 on average over 18 years, and with much more collections, much bigger business now than at the beginning of that period. So there's a resiliency here that I think means – That, you know, it's not just a technical point, as Michael said, but a legitimate point where we produce cash flows and we're much less sensitive to negative macro alignment. So we shouldn't have big swings in the discount rate or in the return or the value realized from our backdoor. We do adjust on all new investments, as we've already highlighted a number of times in today's session. Well, that's very helpful. Thank you. Correct, correct, correct. Yeah. Thank you. Thank you.

Thank you. The next question comes from . from Jefferies. Please go ahead.

Hi. Good morning, and we hope you're enjoying the Athenian sun. We're quite jealous from where we are. look i'll apologize in advance because i'll i'll dig down a bit to to some of the questions i have already been asked um so if you may give us a little bit more detail on how you're thinking about the maturities of your bonds meaning are you do you want to when the market stabilizes a bit do a more holistic refinancing or address the maturities one by one as as as they come due and how you're thinking about the um currency composition of of your debt moving forward as well um that's the first one that'd be very helpful um to know um i i have a couple of others did we answer that now before you get to your second one yes yes please perfect michael you want to start making stars in that so um as i as i've stated

We're obviously looking into refinancing of the 2023 and 2024 maturities and we're actively observing the market as it develops. I think in terms of your question of doing something that's more realistic, I think one of our competitive advantages is that we're termed out, is that we have locked in rates that extend by far into the future and that are quite attractive i mean let's recall 70 percent of our of our net death is fixed rate so i think from that perspective it's really addressing those maturities and maintaining a termed out structure because we really see that as a competitive advantage just to reiterate i think in terms of currency composition i mentioned it briefly before so 70 percent of our cross-debt is Euro denominators and round about 70% of our revenues are Euro denominators as well. So from that perspective, the mix we have and the approach we have is something that is appropriate to our business and that we want to carry forward into the future. obviously having said that we always explore efficiencies and other pockets of funding as they develop but on a bit of growth strokes approach we want to stay termed out we don't want to have too much of maturity in any individual in any individual maturity bucket and we see this as a competitive advantage and again we reprice over time on the assets and the liability side

That's very clear and helpful. Thank you. We understand that obviously you need to do right by all your stakeholders. So help us reconcile a bit. First of all, we've been following the company for quite a while. If I remember correctly, before COVID, which was a very different world, your medium to long-term leverage target was two and a half on the low end. Is that something that you've revised or you still think you can achieve? Or is three and a half times where you'd be happy to be at?

uh also in the in the long term so so maybe just a small technical point before i hand it over to andre but our leverage target has consistently been two and a half to three and a half obviously we were working towards that didn't probably make as much progress as we would have liked to and then in the context the president had to push it out in time right but the target per se is unchanged and our One of our key goals, our key goal is really to get to that 3.5%. I think to discuss what happens next is a little bit premature. Let us focus on getting there. We believe, given all the characteristics that we've laid out, the cash generation that we have, the resilience that we've demonstrated, 3.5% is a good level for starters. Let us get there, and then we can see how we develop further. But Andres, maybe... reiterating what I said earlier, kind of repeating somewhat what Michael just said. Our goal is two and a half, three and a half. That was the stated goal. We're going to get to three and a half as soon as possible. I think reducing to that level is beneficial to all stakeholders. When we get to that level, I want to personally reassess how we addressed it. And I want to always focus on growing our cash. So even if we don't, even if debt remains constant, we're going to grow our cash flow production. So we will be levered that way. And I'm comfortable with our debt load today given the fact that we have liquidity. It's turned out. Our debt has turned out. Our maturity has turned out. The businesses, as Michael very well demonstrated, adjust to the environment. meaningfully every year. And you have to look at our PI book, which is our fundamental asset, and the ERC against that PR book, which is our debt load, to see that, you know, it's, you know, I'm not worried about the debt level. In the market context, we need to be prudent. We need to be thinking about all our stakeholders and long-term benefits of our business. And as Michael answered your prior question, we're going to be both tactical as well as strategic in looking at how we deal with our maturities.

Fair enough. I'll stop with the debt questions now then. I'm sure you're tired of answering them. On your PI, you mentioned it was 80% unsecured versus 20% secured. Obviously, it will depend on the market opportunities moving forward, but is that a ratio you roughly want to maintain is the first part of the question. and the second part of the question more of a judgment call and maybe a little bit color on what you're seeing now in in your markets you think there will be more unsecured or more towards skewed towards the secured the supply that will steadily come uh come into market um in the coming months

I'll start with the second question. I think it's a bit, it's a bit part of the funnel we discussed, right? I mean, you start with the invoices, you go to financial services, it goes first to servicing, then it creates the opportunity. But if you think about the priority of payment from an individual perspective, right? First, you maybe missed the payment on a Klarna invoice, right? To give an example. Then maybe your credit card becomes a bit more difficult. But I think your mortgage is the one element that you maintain as long as you can. So that, I think, gives a sense to the timing that then also translates into potential timing for assets coming to market. But I think in terms of that and the mix, I'm handing it to Andres. No, I mean, it's important to note that 80-20 is the mix of the current value. It's not the mix of our more recent investments. Our more recent investments have been more skewed towards unsecured. And I think you have to also put it in context. The unsecured market is large, but it is much smaller than the secured market. So we're going to continue to grow our position within unsecured. That's our core expertise. And we're going to continue to grow it in security. But I can't tell you what ratio there is going forward. We can grow on both sides. Much smaller based on security, but we're going to grow in both asset classes.

Thank you very much. All very clear.

Thank you. And I can assure you that this 28 degrees sun here in Athens is wonderful. But I will be in Stockholm next week, so...

Thank you. The next question comes from David Johnson from Nadia. Please go ahead.

Hi, good morning. I guess most of my questions have been answered already, but one more question on the topic of rising funding costs, if I may. So how would you describe the price discipline currently among portfolio bidders, and how do you expect that to develop ahead? Thanks.

It's a very good question. As we said, we see initial signs that the market is starting to adjust. I think, without blowing our own trumpet, we feel that we're quite sophisticated. We look at our price rates in a continuing basis, so we started integrating that far earlier than a lot of other market participants, but now we see them we see them falling too i think the other element is there hasn't been real refinancing in the sector overall i think once we started seeing that i would i would think that discipline would accelerate but i think tomorrow in perspective we look at mark to market pricing in terms of our own risk appetizing our hurdle on a continuous basis yeah i mean even though we have fixed term funding and it's turned out in this largely fixed rate We adjust to the environment today, which includes the elevated funding costs when we look on the right, which as you've seen it in this quarter, 15 versus 12. And that's a clear evidence of the fact that we're adjusting. And that will impact on volume. Some quarters will invest more or less because we just don't find the opportunities that are going to pay appropriate to the risk. And that's the way the business is. So we continually adjust to the current market environment, the risk environment, even though our debt is prudently turned out at largely fixed rates.

Very helpful. Thanks.

Great. Thank you.

Thank you. The next question comes from Lars Duesen from Deutsche Bank. Please go ahead.

Good afternoon, everyone. Thank you for, you know, taking the questions. First of all, if we assume that the high-yield market remains, you know, in a difficult place and probably shut for a few more quarters, Would you consider repaying the near-term maturities with your existing liquidity? Because clearly you have like 17.3 billion. The RCF is obviously well protected from a springing maintenance government perspective. So this is really liquidity which sits with you and could be used in my book. But it would be interesting to hear your thoughts.

I think in general terms, and maybe that's also a competitive advantage, we have that significant access to liquidity, number one. Number two, we are turned up. We don't have shifts in our maturity profile, but we have it well spaced out. So between our cash generation, our liquidity, we maintain a lot of optionality as we move through time.

we are not beholden to the environment in a given quarter so from a risk perspective i would think this puts us into into a relatively good position very clear um and then moving on with with the last questions um when i when i think about next year um you know obviously the question on the call has been asked about where will your portfolio purchase level go but In my view, it has to be somehow related to what's happening on the collection side. And it seems like leverage is really what you are solving for here. You want to get to three and a half times as soon as possible. So would it be fair to assume if next year collections come in well below par in a stress case, that you would make sure portfolio purchases get trimmed accordingly to protect your leverage and make sure you can reach that target? Or are we still looking at, you know, 8 billion of a spend per annum? Yeah, I look at the connection in a slightly different way.

If you assume a bad environment, right, that will drive servicing inflows and servicing over time, right? And on the other hand, obviously, our collections performance, given that we price our own track record and operations, and I would argue we have the largest database there is. is obviously then integrated into how we look at portfolio investments in our aquaponics. So I think you're on to something, but it's the other way around from my perspective. I completely agree with what you just said.

Understood. And then last but not least, if you look into your collection performance right over the cycle, It looks like you have always consistently been around 105 to 110%. There was obviously also a change in ERC accounting, so it might have come down a bit, but it was always well above par, meaning that probably you guys are more prudent or have just better underwriting skills or better collection skills, whatever it is, but doesn't that buffer help you also you know going into next year so that we probably you know don't drop materially and can still maybe defend around offers you know look through the cycles looking at peers in good times in the bad times they have been in the low 90s so just to get an understanding of that as well please

Yeah, again, it's quite a slightly different twist than this. When you look at that slide, we've on purpose given you two lines. One is the active forecast as it's developed through time, and that's principally then also impacted by revaluation. We've also given you the original forecast, which is really the level at which we underwrite. And I think there, we really show that with 106%, since 2004 we really do get better over time and we outperform and i think the other page i would i would draw your attention to in uh in our investor presentation is page 33 because they're on the vintage faces and this is the unsecured book which is the vast majority of what we do you really see that every single vintage we put on our books It stabilizes, and then it starts improving as we get better. When we price a portfolio, we never price in future improvements. We only price in what we have actually delivered in our operation. And I think these factors that we've listed throughout the pool today, together with that a track record of continuous improvement that we don't up front really drives that outperformance and will continue to drive that outperformance. And you're absolutely right. That is a buffer that we inherently have that's built on the quality of our underwriting, the quality of our operation, and the resilience that we've demonstrated. I mean, I think the answer to this question and the answer to your prior question, from my perspective at least, is I'm not worried about collections. You highlighted the fact that, yes, it's going to drop. And I've talked about the fact that it is going to be more difficult. But even this quarter, we're at 106. That's partially August is a complicated month, a slow month. But it's also somewhat of a slowdown because it's more difficult to collect versus 110% to get to date. But, you know, and that's a function of our underwriting and our collections capability. You know, as an investor, which I have been for the last 20 years, there are not many pools of capital of 40 billion SAC, or roughly speaking, 4 billion euros, that produce 12% to 15% unlimited returns across this general granularity, 19,000 portfolios, consistently over time. That's really only possible because of our integrated business model, because that pool of capital is attached to our industrial platform in these markets and our servicing platform and and collections doesn't worry me what i do what we do focus on is the discipline of investing at the right level of expected return which we have already talked about but performance on what we already own and what we are going to own against forecasts doesn't worry me because we have the best data set we have the best industrial capability and we're prudent underwriters

Very, very clear both. I guess the last question then, we spoke about that book base, 80% coming from the unsecured side, 20% from the secured side. But can I just ask that 20% from the secured side, that includes the JVs, right? So if I look at own balance sheet assets only, the unsecured mix is much larger.

no absolutely i mean again we have to break down bar erc which includes uh the cash returns from from the jvs as well if you look at that on page 32 of our presentation uh security makes up 14 real estate one percent unsecured 85 and we've given you the collections uh from from two different buckets inside south So around about 20% is actually on the larger end, right, to really simplify.

No, very clear. And clearly the secured assets sitting in the JVs, I mean, the cash contribution from these JVs is clearly different, as we know, right, because you are not expecting to receive any cash at least out of the Intesa JV for the next three years or so, as you pointed out. Very clear. Very clear. Okay, thank you. Thank you for your questions.

Thank you. This concludes our question and answer session. I would like to turn the conference back to Andres Rubio for any closing remarks. Over to you, sir.

No, I would just like to thank everyone for their time. We're incredibly proud of the results, and we look forward to engaging with some of the market participants on a more one-on-one basis going forward. But thank you for your time today to listen to this call and for your questions.