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.