Intrum AB (publ)

This is Andres Rubio, the CEO, and I'm here with Michael Lederner, our chief financial officer. Thank you for taking the time to listen to this review of our financial results for the fourth quarter of 2022 and full year 2022. We're conducting this call from our corporate headquarters in Stockholm. If we can move to page three, please. Starting here, I wanted to start with an overview of the quarter and our full year performance. Top left, we had a very strong finish to the year, replacing a seasonally strong fourth quarter 21 with a stronger fourth quarter 22, generating 11% cash revenue growth year on year and 12% quarter on quarter. All segments contributed positively to cash revenue growth with particular contribution from portfolio investments and strategic markets. As a consequence of this strong cash performance and the balancing of interests of all stakeholders, The board are proposing a flat dividend of 13.5 SEC per share, payable in two installments during 2023. Bottom left, regarding our servicing franchise, we continued to perform well with approximately $13 billion of total revenue, an increase of 7%, and AUM up 11% quarter on quarter. Not surprising, given the accelerated environment of new inflows, the AUM grew faster than our revenue. But we have yet to see the full expected increase in flow of financial services claim that we'll talk about more later when we talk about the market environment. In servicing the two markets that have really performed well relative to not only their own expectations but also to other markets are in particular Italy and Greece. Bottom right, our portfolio investments business had a stellar year with collections as a percentage of active forecast of 111% during the fourth quarter and 108% for the full year. This is really a testament to the quality of our underwriting and our workout capabilities. And I think in particularly, it's a result we're satisfied with and we think is impressive given the difficult economic environment. This is a metric which we should all expect somewhat to moderate with the continued worsening of the economic environment for the consumer across Europe. The underwriting IRRs on our new investments reached 15% during the quarter. And in fact, later on, you'll see it reached as high as 17 to 18 percent versus 12 percent in the first half continuing our adjustment to the changes in the overall risk environment top right with regard to 2023 we expect to see an increased flow of financial services claims into our servicing business and a moderate pace of investments reflective of the overall shifting of the risk environment and also our focus and progress towards our deleveraging target on page four We talk a little bit about the evolving market. The overall market dynamic is one of increased inflation and more than doubling of the household cost of borrowing, which leads to a likely recession or at the very least a significant economic slowdown over the near term. Asset investment volumes are expected to be mixed with some increase in secondary volumes expected as a precursor to primary volume increases as specialist investors gear up for future larger volumes and expected higher returns. It is really, focusing on the right-hand side of this page, it's really environments like this, in environments like this, that interim shines. With our multi-market and integrated business model producing, A, greater client wins, 36% increase during 2022 in the annual contract value of new client mandates versus 2021, with some selected win examples in the UK with Sainsbury's, in Italy with Credit Agricole, and in Sweden with Vattenfall. We have a general increase in the client need for our collection services given the environment. We have strong collectability despite the tough macro climate, and we have higher IRRs and new investments. Looking at page five, you can see that when looking at the overall environment, stage two loans have increased from 1.2 trillion to 2 trillion over the last three years, exceeding 10% of total European banking system loans. In the bottom, even more concerning and more recent, household cost of borrowing has more than doubled, going from approximately 1.3% to 2.9% in the second half of 2022. In addition, anecdotally, you know from our consumer payment report, which we published at the end of last year, that one of every three European households has missed a bill payment in the last 12 months, and one in three Europeans expects to miss at least one more bill payment in the coming 12 months. All of this plus our consistent conversations with our clients, indicate clearly to us that there will be a significant increase in MPL inflows over the coming years, which will initially drive the need for our collection services, and then with a lag, will represent a meaningful increase in investment opportunities over several years to come. Slide six is the same slide that we've shown previously, which demonstrates the continuation of what I believe to be our unmatched experience and track record in collections performance, which then translates into consistent investment returns for our portfolio investment business over time. Since 2004, over 18 years, we've grown our annual collections in our PI business over 17 times from 0.8 billion to most recently on a rolling 12-month basis during 2022 of 13.5 billion SEC. Over this extended 18-year period, with a much larger base of annual collections volume, we have averaged over 107% of collections versus original underwritten forecast. In addition to this consistent performance and outperformance, 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% on a rolling 12 month basis. And as you can see clearly from the slide, in that one instance, it's sharp bounce sharply bounced back from this low during the pandemic in 2020 this consistency in collections over the long term combined with the call it 12 to 15 percent IRRs and greater than two times money multiple is in my opinion the best track record in the industry and shows not only the resiliency of our business but also the true benefits of our integrated business model where we have world-class servicing and investment capability combined under one roof Page 7 shows the repricing of both our assets and our liabilities and how they adjust to overtime to the return environment. On the top left, you see the increasing underwritten return on our new investments from below 12% in Q2 22 to a high just below 18% during fourth quarter of 22, which in turn, as you look to the top right, As our book turns over approximately one fifth every year or specifically 19%, you can see that this drives and raises the overall back book return to nearly 14% on average. On the bottom left, we've laid out the high yield market overall yields since 2019. And in dotted lines, you see the five times we've accessed this market with the most recent issuance being in December 2022. As you can see, market yields have decreased since our transaction in December. And with our issuance specifically, which was priced well over 9%, now trading very solidly in the 8% range. On the bottom right, you can see that thanks to our carefully termed out debt and our largely fixed rate debt structure, this 450 million euro issuance at an elevated cost relative to history increased our debt maturity profile only, sorry, improved our debt maturity profile, pushing that important amount out into 2028 and only raised our weighted average cost of debt, approximately 50 basis points from 3.7% to 4.2%. On page eight, we're going to talk about our one interim transformation program. As we've discussed previously, Since I became CEO, we have prioritized a comprehensive review of this program and have validated that the recurring cost benefits of $1 billion SEC are achievable. This is important as we have visibility on these cost savings, but more importantly, this estimation of benefits doesn't fully reflect that this program should make us the most efficient and most highly functioning credit management platform in the market, which in turn should also translate into more new deal wins and more revenue from existing customers. this could be much more enduring and impactful than any estimated cost savings. The top graph shows that we are spending just below expectations to continue this important transformation. It's important to note, as indicated in some of the bullet points on the right, that we are achieving important metrics, which is nearly 20% of all calls being handled by global or central call centers, and our global collection systems are handling approximately 25% of all cases. However, as you can see in the bottom graph, We have deliberately paused migrations during the last two quarters of 22 to ensure the quality of these migrations and that we are operating at least at the same functional level as prior to the migrations and to ensure that future migrations maintain or, more importantly, even improve upon this level of quality of service. On page nine, you can see more on our progress to date. In the top half, you see our rolling 12-month FTE cost to collect is in line with the plan and continues to decrease. And down below, our realized $290 million SEC of cost savings to date. We've realized $290 million SEC of cost savings to date on the way to that $1 billion I referred to earlier. These are two key metrics by which we measure how this program is making us more efficient, but doesn't fully reflect that this program will naturally lead us to have more competitive client offering and enjoy market share growth as a result. Page 10 and 11 are my bragging slides, where I get to highlight the fact that we play an important social purpose while generating also strong financial performance and returns. On page 10, you see various metrics related to most of our key stakeholders, which prove that we, A, have satisfied clients and customers thanks to our ethical and solutions-oriented collections focus. B, we are playing our part in improving the environment and promoting diversity and inclusion. And all of this provides important motivation and increases engagement from our employees. In sum, our industry leading and engaged employees offer solutions to consumers in an ethical and respectful manner, which generates meaningful financial recoveries for our clients on their unpaid claims, all while enhancing the sustainability and the wellbeing of the financial system and economy as a whole. And finally, what in my opinion may be the most important statistic that I cite in this presentation, and that which I'm most proud of, is that during 2022, we have helped 4 million consumers across Europe repay their debt in full and reintegrate into the financial system. Transitioning to page 11, you can see that our capabilities and how we approach our business produces incredibly strong financial results, and this continued during 2022. Last year continued a positive trend where since 2018, we have grown annual cash EBITDA 8% a year and 35% overall. We've increased our total assets while deleveraging from 4.3X to 4.0X. all while increasing our dividend payout to our shareholders by 25% in aggregate and 4% a year, inclusive of the proposed dividend I mentioned at the outset of my comments. With that, I now turn it over to Michael to walk you through some more detailed results from the quarter.

Thank you, Andres, and good morning, everyone. I'm now looking at page 13, Group T Financials. Q4 was a seasonally strong quarter with all segments contributing positively to cash revenues growth. Cash revenues increased 12% to 6.8 billion compared to the same quarter last year. Cash EBITDA increased by 2% to 3.8 billion. On the other hand, cash EBIT decreased 11% to 1.9 billion and cash EPS decreased to 8.6 crowns per share for the quarter. Cash return on invested capital also decreased by 1.7 percentage points to 10.3% compared to Q4 2021. What we see here is continued strong top-line growth and collection performance with the associated activity-driven costs, as well as additional costs supporting our transformation, plus build-out of competences, in particular in commercial and data and analytics areas. Replenishment CapEx is also up, despite an increase in money-on-money multiple to 2.12 times, due to the significant contribution of gross collections from portfolio investments to cash revenues growth. In addition, when looking at cash EPS, we see the increasing cost of funding as well as slightly higher cash taxes coming through. The same pattern is valid for the full year 2022. 2022 cash revenues came in at 24.6 billion, up 11% compared to full year 2021. Cash EBITDA was 13.2 billion, up 8%, and cash EBIT was 6.3 billion, flat compared to last year. For the full year 2022, we used a cash EPS of just under 25 crowns per share and a cash return on invested capital of 8.4%, down 0.5 percentage points year over year. The leverage ratio was four times unchanged compared to Q3 2022 and up 0.1 times compared to Q4 2021. Here we somewhat suffered from the depreciating Swedish crown, adversely impacting the ratio over the course of 2022, as well as settling the derivative agreement with Carval as disclosed during the quarter. I'm now turning to page 14, group cash earnings generation. The chart depicts the developments I've just described very clearly. We have been able to grow cash revenues significantly year over year, up 11%. with portfolio investments and strategic markets being the key contributors. Cash expenses are up 15% due to incremental costs underpinning revenues growth, activities supporting our transformation, and investments and competences. We therefore see an increase in cash EBITDA of 8%. Replenishment capex is up 16% due to the strong collection performance and portfolio investments contributing to cash revenues growth, and cash EBIT is flat at $6.3 billion. Cash net financials are increasing in this rising rate environment, and cash taxes also are resulting in recurring cash earnings of $3 billion. Overall, we delivered just under $10 billion of cash generation for discretionary deployments, $7.5 billion of which we invested in portfolios over the course of the year, $0.9 billion more than our replenishment level of $6.6 billion. From a returns perspective, the recurring cash earnings yield on total shareholders' equity was 13%. Now to the segments. I'm looking at credit management services on page 15. In CMS, we experienced increasing inflows from lower-balance, lower-margin invoices, such as utility bills. Higher-balance, higher-margin financial services claims are still lagging. As Andres has explained, the more challenging economic environment and associated increases in stage two loans are expected to lead to increasing financial services inflows. Increased costs in the segments are due to activity levels required to support revenues generation on invoices and the aging back book in the worsening macroeconomic environments. These dynamics result in cash revenues of 1.1 billion for the quarter of 9% or 2% excluding the impact of FX. Cash EBITDA decreased by 25% to $332 million and cash EBIT by 28% to $315 million compared to Q4 2021. The margin was also negatively impacted. Similarly, for the full year 2022, cash revenues increased by 4% while cash EBITDA, cash EBIT and the margin decreased. I'm now turning to strategic markets on page 16. In our strategic markets, we experienced a seasonally strong Q4 with the full year 2022 significantly outperforming an already strong 2021. Italy and Greece had a particularly good year with more stable performance in Spain, despite losing the CERAB contract. Our operations delivered healthy collection performance with cash revenues up 6.2 billion, or about 10% compared to full year 2021. All other cash metrics also increased significantly year over year, but Q4 was slightly down on the same quarter last year due to fewer transactional items. For Q4, cash revenues came in at $1.8 billion and cash EBIT at $1.1 billion. For the full year, cash EBIT was $3.4 billion, up 13% compared to full year 2021. Strategic markets had a cash ROIC of 30% in Q4 and 22.7% for the full year 2022. We continue to diversify our client base and we're able to add clients such as Credit Agricole Italy underlying the strength of our platform as well as collection performance. We expect the growth and performance trajectory to stabilize in 2023. Turning to page 17, portfolio investments. We delivered strong outperformance both in Q4 as well as for the entire year with collection performance holding up well. Gross collections came in ahead of expectations by 18% for Q4 and 12% for the full year. Adjusting for some small portfolio sales that we concluded during the year, this equates to 11% for Q4 and 8% for the full year. Sales totaled 381 million and generated a capital gain of 106 million. We invested 7.5 billion in new portfolios in 2022. 0.9 billion above our replenishment rate of 6.6 billion. In line with the guidance provided earlier, we saw a more moderate investment pace in Q4 with investments of 1.3 billion at attractive expected returns of just under 18%. We expect a more moderate investment pace to continue through most of 2023. Cash revenues for the segment increased by 20% to 3.8 billion compared to Q4 2021, and 14% to $14.2 billion versus full year 2021. Cash EBITDA increased by 24% to $3 billion in Q4, and 17% to $10.8 billion for full year. Cash EBIT improved by 37% to $1.2 billion in the fourth quarter, and 19% to $4.2 billion year over year. Segment cash return on invested capital was up three percentage points compared to Q4 2021 and increased to 10.5% year over year. I'm now looking at page 18. For completeness, we have included information on the negative adjustment in the Italian SPV carried out in Q4, which are fully in line with the information disclosed in our press release. dated 24th of November and discussed in detail in the context of our investor call on the 28th of November. We have also included additional information on our 10 portfolio joint ventures on slide 35 in the appendix. In aggregate, these exposures currently have estimated remaining collections of $2 billion, or 2.5% of total ERC, and the book value of $1.2 billion, equivalent to 3% of total book value. Turning to page 19. Here we clearly see that while our cost of funds is increasing, so are our underwriting returns as discussed in more detail by Andres earlier. On the funding side, we benefit from a termed out liability structure with main maturities between 2024 and 2028 after the refinancing exercise in December. The average lifetime of our debt is 37 months and we have no material immediate refinancing needs. At the end of Q4, we had available liquidity of 17 billion. I'm now looking at page 20 and our medium term financial targets. We have made progress compared to 2020, but due to the dynamics discussed in detail earlier, current metrics are slightly subdued. The leveraging continues to be the focus with our target ratio of three and a half times to be achieved as soon as possible. In this context, the proposed dividend remains in line with last year at 13.5 crowns per share to be paid in two equal installments in May and November. From a leverage ratio perspective, this equates to about 0.1 times. With this, we also write forward our decade-long trajectory of paying an at least stable dividends. And with that, back to you, Andres.

Thank you very much, Michael. If we can turn to phase 22, please. Now that we have concluded 2022 and I have been confirmed as CEO of the company, I want to give you a glimpse into our overall priorities and also some near-term initiatives. Our strategic priorities remain unchanged, where we want to grow and to be more efficient. I want to categorize this specifically into two themes, which you can see in the middle of page 22, where I and the senior management want to simplify and focus our activities and grow and transform our business. Specifically, these long-term goals and themes translate into some near-term initiatives we will execute during 2023, including A, reorganizing and focusing our geographic footprint. B, expanding our service offering to clients. C, improving the client centricity and commercial of the enterprise. And D, taking steps towards building an asset management business within our current portfolio investments business. As indicated in the bottom of page 22, we intend to conduct a capital markets day during the second quarter of 2023, where we will provide greater detail on these broader themes and the long-term expected development of our business. On page 23, you see some more detail as to how we are simplifying our footprint and focusing our activities. What are we going to do? We will focus on two businesses, servicing and investing. We are going to focus on these two businesses across a more focused footprint, which includes 15 core franchise markets, where we have balanced and sizable businesses including both third-party client businesses as well as proprietary investing. In these markets, our goal is to become the market leader in each and every one of these markets. In addition, we have a group of tactical markets, mostly in Eastern Europe, where we have meaningful profitability and presence, but our activity is almost entirely focused on investing, i.e. not third-party clients, and our operating presence is a direct function of our investment volume. Here our intention is to monitor these markets closely and continually right-size our operating presence in line with our latest investment volumes and hopefully build a client business to balance and create a more enduring business model over time. Finally, in line with focusing our efforts, we are initiating an investigation into the exit of five of our markets where our financial performance and market presence is small relative to our overall scale. This includes Brazil, the Baltics, and Romania, And we're doing this so we can dedicate even more of our resources to our larger franchise markets. On page 24, you will see that we are combining this renewed focus and simplification of the application of our integrated business model with some important client and business initiatives. It is our intention to expand the services to our clients that will include earlier arrears and late-stage real estate solutions, This is already happening in some of our key markets, particularly in Southern Europe, and we expect it to occur across our entire footprint going forward. We are improving our customer and client portals, rolling out a state-of-the-art dialer system, and introducing an end-to-end digital collections capability in some of our key franchise markets during 2023. This will improve our clients' experience and our collections effectiveness, further improving our client and overall growth prospects. Finally, we are formally initiating a process whereby we're taking the first step in creating an asset management business with our investing franchise in the form of seeking a capital partnership where one or more third-party investors will invest alongside our own capital on a systematic basis going forward. All of this is part of our long-term plan for transforming our business and furthering our industry leadership. With that, we're going to conclude our formal and planned remarks and are happy to take questions, as always.

Thank you. If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jacob Hesselvik from SEB. Please go ahead.

Good morning, and first of all, congratulations on being named the permanent president and CEO of Andes.

Thank you very much.

So my first question is on the fears of a recession. In the past tough macro environments, Interim has offset pressure on the collection yield within servicing by leveraging the PI platform. To what extent can you repeat this trick, given that you have a more stretched balance sheet this time?

So, do you mind repeating the question? Because I didn't entirely follow the second half of it. So, fears of a recession.

Yeah, and if we look back, I mean, you had a great slide of how you performed during your previous downturns, etc. But during those times, you didn't have a stretched balance sheet as you have today. Do you think you will be able to repeat this? to repeat your over-collections or your strong performance during an upcoming recession this time as well?

I think, Jacob, this is really a question of timing. If you look at investment volumes, new investment volumes versus investment performance in the existing books, there's a bit of a phasing to that. Obviously, as you go into a recession and as the recession frosts, there is actually not that much investment volume out there. There's a significant bid ask. Unless sellers are forced to, they will not sell. So there's actually less investment volume available. And obviously, as we work down, you see this gradual reduction in terms of overperformance. So far, we've not really seen that yet. I mean, our numbers speak very, very clearly there. But we do expect a moderation in that overperformance. At the same time, we are still in a worsening macro. Obviously, we hope that that will drop over time. And only after that will we see meaningful volumes coming to market. So I think with our focus on performance, with our focus on being the most effective collector, and with our focus on engaging in the capital partnership that Andres mentioned, we are both working through the more challenging times. And again, we've shown during this year that we're quite good at doing that. And we're also positioning ourselves for future investment volumes. But we don't really see them near term. We see them late into 2023 at the earliest. So I think from a facing perspective, we're actually quite well positioned.

No, but I think your question also is very valid in that how relevant and how comparable is this crisis to past crises? This one is much more focused on the consumer, which means that cases are going to increase. Collectability is going to moderate. I said that during my comments. During 2023, our operating capability, we're going to focus on continuing to perform on collectability. However, we can expect to continue to perform at the levels we have. The environment is going to get more difficult. And then through a more moderate investment pace, which I mentioned and Michael just repeated, and also when we see the real volumes available for investment uptick at the end of 23 and into 24, 25, 26, we're going to have the capital markets, capital partnership running, and we're also going to have the leverage to a degree where we will have greater freedom from a capital deployment perspective. And 2023 is that kind of a transition year where we need to focus on operations and set ourselves up for what is going to be a multi-year opportunity going forward.

All right, thank you. But how do you see then cost to collect going forward in the current inflation level?

Yeah, I mean, cost to collect, you saw that we're on track. although I think that's going to continue to be challenging for us, and we're going to continue to work on it. The tools that I mentioned that we're going to bring into the markets are going to improve not only the scale, but also the effectiveness and efficiency of our collection capability. So that'll keep us on track and keep us on track of that improvement path. But it is going to be more challenging. It's inevitable to know that, I mean, in the current environment, collections are going to be more challenging.

Okay, thanks. But what should we expect on the margin side, given... We have some seasonality in Q4. I mean, still, CMS showed a large margin contraction in the quarter, for example.

Yeah, I think the margin in CMS is a function of delayed revenues as well as inefficiencies in some of these tools, particularly end-to-end collections capability. And CMS previously was a kind of broad, everything other than the strategic markets. We've now become a little bit more differentiated, and I would really focus on the north of Europe, which is what we currently call Scandinavia plus Finland. as really the markets where we can dramatically improve our margins and our effectiveness through some of these tools. But then we should be able to improve our effectiveness across our entire platform. And I view that as both inefficiencies as well as lack of recognition of what is inevitably an increase in revenues that's coming.

But it has to be something more than having, you know, you do mention that claims are smaller and you have lower margins and utility invoices, et cetera, within CMS, but still It's quite a big contraction. Is there anything else going on there? Are costs coming up or what is happening here?

There's nothing specific. Obviously, in the current inflationary environment, some of our input costs, such as postage, et cetera, are moving up as well. But in fact, what we notice is we have an increased activity level in those invoices. We obviously need to work our aging back book quite hard. we're missing the higher balance, higher margin financial services claims, which our franchise or our operating platform is most adapted to and actually scales quite well to. And when you put all those factors together, you see the development of revenues versus costs. And obviously collectability is a topic and we're working very hard to drive those collections and contribute positively to the bottom line. Obviously, in this environment, that goes a little bit to the detriment of the margin. But I think that the real differentiators on the margin going forward are those financial services claims, which are due to come based on where we see the stage two loans, and Andres has spoken about that in the presentation. And then an increment to that are the concrete initiatives that Andres has just introduced as well around portals and around digital end-to-end collection.

Okay, thank you. And if we move over to portfolio investments, I mean, the investment pace is down a bit in Q4, and you said on page three that for 2023, we expect to see moderate pace of investments. So could you give us any guidance for 2023? Should it be around replenishment capex rate then at 6.6 billion?

I think that's a fair assumption, recognizing that we're in the first few weeks of the year, and it's going to be more back-end loaded, I would assume.

I also really want to reiterate on that, that we don't invest to volume. Correct. We try to pick the best possible deals out of the very, very large pipeline that we generate and maintain at any given time. So we never manage to a specific volume.

Okay, yeah, that's clear. And if we would just move over to IR, I mean, thank you for page seven, that's very helpful. But how comfortable are you with your current reference curves in light of the quick changing economic environment? How often can you update them? And how do you forecast the IR to develop in the upcoming quarters?

We benefit from the deepest pool of historical, of assets and historical collections performance And we continually update on a regular basis. We also adjust to the environment. And so, listen, I mean, we probably have the best capability of projecting what we can collect going forward of anyone in the industry.

Yeah. But is that due to the one interim, I guess, that you have more data available compared to some peers?

It's not just, no. Historically, we have more data. We're extracting more value from it, more intelligence from it than we ever have, thanks to our one interim data. and also our focus on data analytics, but we just have a larger data set where we can come up with more accurate reference portfolios when we underwrite new portfolios. And we've proven that we can collect over time and we get better at collecting. So we're more accurate in our underwriting. We're prudent in our underwriting and we outperform over time on our collections. I think that's very clear from some of the, from the key pages that you highlighted.

All right. Thanks. And I know I've taken up a bit of time here, but one last question, if I may. On the one interim, we saw no new migrations taking place during the quarter and barely nothing in Q3 either. So how fast is it progressing and what could we expect in the end of 2023?

So I wouldn't just focus on just migrations. What we're trying to do is we're going to migrate in those markets that are both economically important and also are at the end of their existing local system life. We're going to then... introduce functionalities which are part of those migrations. The migration is meant to consolidate systems into fewer number of systems and also to enhance that ability to inject and improve functionality into the markets. We're going to do that during 2023 as it relates to customer and client portals, a dialer system, and end-to-end collections. So we are progressing, but I wouldn't focus just on migrations. One of the reasons we paused it, we've used it in the past. We are going to go into much more detail, I will say, on the one interim in the context of an overall transformation of the company during our capital markets day.

Yeah, all right. I'm happy that you have a CMD. I'm looking forward to it. And thank you for taking my questions.

No, absolutely.

Thank you for your questions.

The next question comes from Patrick Bertelius from ABGSC. Please go ahead.

Just a few questions from my side. So you mentioned that you're not seeing any real case inflow from the financial sector, yet we're seeing many banks are very focused on their cost-cutting measures and their core operations. So do you believe this lack of inflow on new cases is driven by competition and that competitors are grabbing these?

Well, I don't think, I mean, we have existing clients who we have ongoing relationships with where we manage their portfolios. And then we have new clients that put up for competition, new management on the servicing side. And so in our existing inflows, and particularly in the north of Europe, we have not seen the new inflows that you would expect given the stage two loans, given the household cost of borrowing. I would say largely that picture is still very much in its early stages. And we are going to see them. It is inevitable. We are the biggest player. I don't think it's competition. I just think it's a lag in the banking system. And then ultimately they have to come up with a way to service it. And then once they figure out how these assets, how much, what are the inflows and then how these assets behave in a collections intensive environment, they can come up with some view of what the cashflow might be, and then they'll package them and sell them. And that's the way our business progresses. I wouldn't say it's competition. I just think it's the natural progression. And, Not all parts of our geography function equally. Some geographies recognize these more quickly, have these at a steeper curve or at earlier stages in this evolution. Some are later stages, which is the beauty of our multi-market model. We can really go from beginning to the end of an overall European cycle, working with all regions, some that are going to be dealing with this earlier in the cycle and some that will be dealing with it later in the cycle.

I would just add two thoughts to that. I think the first one is that when we look at inflows from financial services, obviously we have inflows from financial services, but on a relative basis, we are still below a longer-term average. And the current environment should actually push us significantly above that average over time. I think that's one consideration. The other one is that over the last couple of years, particularly the last year and a half, we've actually been quite good at signing up additional lacks. And the way most of these contracts work is to essentially say for certain categories of claims at a certain point in time, they come to us. So the way to sort of picture this is we have a pipe installed. once there is enough water on the other side, it will flow through to us. And the key indicator in that is stage two, because as stage two increases, more claims are likely to develop into the stage where they come to us.

Yeah, that's an important point, that last point. I mean, generally speaking, our sales cycle is it takes three to nine months to go from initial discussions to an actual mandate. Then it takes about six to nine months to get up to a run rate revenue. on expected volumes. And then we have that pipe installed with our client. And that's on new business. And during times of more higher flows and higher acute stress in the non-performing loan volumes, that cycle gets compressed. 80% of our business is already existing renewals of existing arrangements. So we already have that pipe installed. And as soon as the new volumes manifest themselves, we start dealing with them. And that's an important way to look at our business. And that all gets compressed and we deal with them faster as the cycle progresses.

I see. It's just that we have been reading about this new case inflow for quite a few quarters now. So I was wondering when that was coming through. And I know that some of your peers are strictly focusing towards the financial sector. So do you still believe that you have the relative strength, given your size, and then the contract with these larger financial firms?

sectors that you will be able to then get these new case inflow in regard regardless without a doubt and this is actually linked to one of the prior questions which Michael highlighted which is our platform is primarily designed for financial service claims right now we have a higher percentage than normal of industrial invoices and a lower percentage than a historical average of financial claims And that's one of the reasons for the margin behavior in some of our markets. And so what we're doing here is we are set up to capitalize on what is an inevitable increase in flows. And I would say without a doubt, we are positioned to probably capture the biggest share of those flows.

Thank you. Then my next question is in regards to the leverage ratio. So it remained flat for the third quarter in the row. despite you're talking about reducing it for the last two quarters at least. So what's the plan here going forward? Should we expect it to decrease driven by an increased cash EBITDA or will you use the cash flow now to try to reduce the net interest bearing debt? And can you give some approximation of when do you feel comfortable that you will be within this target?

Yeah, I mean, we're going to direct marginal discretionary cash flow to reducing our leverage. We have heard it loud and clear from the marketplace. We've had a target out there for a long time, an uncomfortably long time, from my personal perspective, of two and a half to three and a half. We want to hit that three and a half. And we're going to disproportionately allocate excess cash flow to doing that. It's going to benefit us during the first half to three quarters of 2022 that we're probably going to have a more moderate investment pace. So natural cash generation off the platform is going to be directed towards that deleveraging. But I can't give you a specific timetable. I can tell you that we're cognizant of it and we're working towards it as quickly as possible.

And I think sort of another consideration, if you dig into the numbers, I mean, we have shown a good trajectory of growing cash EBITDA. That's been quite substantial over the last couple of years. If you look into the net debt and if you take the last two quarters in particular, you'll see that we've actually, if you strip out the FX effect, we've actually reduced net debt. And that's particularly evident in Q4 if you then also take the derivative settlement with Carvalho into account. So there is a couple of headwinds that have worked against us. We work very hard on both sides of the equation. And we're obviously also working on a toolkit that allows us to drive that down as soon as possible.

Thank you. I understand. And as a last question, then, would be strategic markets have shown pretty strong performance in 2022 overall. So do you expect this strong development to continue when you look into 2023 and this macro environment that we are entering?

Well, I think strategic markets, as you correctly identify, have had an amazing trajectory over the last few years, specifically Greece, Italy, and Spain. They're each at different stages. Thankfully, in each of these markets, we have very significant and ongoing client relationships. So we will continue to benefit from the factors and some of the trends we mentioned earlier about new inflows and claims, et cetera. But at the same time, as I've said often in this forum, as well as in individual investor meetings. Trees don't grow into the sky. It's been an extraordinary ride. It will continue to grow, and we will look to organically and inorganically continue to increase our client relationships to benefit and to improve our leadership in those markets. But the organic trajectory that you've seen over the last few years is going to be difficult to replicate, but will continue to some degree.

I see. Thank you so much.

Thank you very much.

The next question comes from Ermin Kerik from Carnegie. Please go ahead.

Good morning. Good morning, gentlemen, and thanks for the presentation and taking the question. Perhaps starting on the CMS or actually your comments that you've seen 36% increase versus 2021 in servicing contract value. Could you just give us a bit more color on it? Is that in terms of servicing volume on the contract or what is the contract value?

No, we manage a very specific process on an ongoing basis, managing our pipeline on a probability weighted basis across new clients. we on average win about 40 to 45% of new mandates. And on average, our existing contracts get renewed 80 plus percent. What that 36% is, is that annual contract value that we've attained during the year we've actually signed. It's an estimate once you get up to a run rate, but it's that annual contract value of all the new mandates during 2022 versus that equivalent figure for 2021. And it's a leading indicator as to what we think our growth level should be in our servicing business.

Thank you, that's very clear. And if we think about new mandates you're winning, how are those mandates priced compared to existing ones? Is there any margin differential there to talk about, or is it just the mix between financial services and utility sets?

It really varies by both country and also underlying asset class and clients, but generally speaking, and you would expect this actually, because there's a greater need for our services right now, we feel we have decent pricing power. Not always, but across the board on average, we have greater pricing power than we did even a few years ago, I believe.

Okay, thank you. And then on PI, I think it was mentioned here before that replenishment capex could be a good starting point to think about for 2023. When you think about it that way, is that with Interim Spark and then on top you would underwrite for a capital partner? And if that is, is there enough supply to keep returns at the same level as currently to keep that kind of investment level?

Yeah, it's a good question. So we've already got a couple of investments that we've committed to that will close during 2023. I do think that the incremental commitments during the first half are going to be more muted in terms of the volume and the number of transactions and overall volume. I would expect the capital partnership, and it's too long because we're just starting that journey. We're having selected conversations. We will come back hopefully with some news in the first half of this year or two more concretely. But I would look at the capital partnership as allowing us to invest more in total, but slightly less on our side, on our capital. So we invested six or 700 million last year, 750 actually, to be precise. I wouldn't be surprised if our investments came down to five or 600, but we invested a billion plus or minus in total, combined on a systematic basis, side by side with a capital partner. That's the kind of direction we're going in. There's a lot of detail to be filled out behind that. But I think that what that allows us to do is really monetize our Franchise in terms of our ability to identify underwrite onboard and extract return from increasing volumes Then our current capital base allows us to it also will allow us a little bit to become a little bit more of a capital light Which will add to the leverage and also I think the long-term profitability and the long-term quality of earnings from our portfolio investment business Thank you, and then a last question would be more on the overall strategic

had a path of interim now. So the 10% growth target you've had before, is that completely subordinated, or do you still see growth as an important part of interim's DNA going forward?

I will, listen, I'll have Michael comment specifically on the 10%, but the way I look at our companies, we have a tremendous cash flow generation, which we demonstrated, 13.5 billion of cash EBITDA. When you take out kind of cash items before replenishment capex or anything like that. It comes down to about $10 billion. So we have an extremely high cash flow generation, which means we can pay the dividend that we announced this morning. I think we also are counter-cyclical. Add on top of that the fact that demand for our services are counter-cyclical and returns are somewhat counter-cyclical as well. Returns increase in more difficult environments. And then we still benefit long-term from what is a secular trend, which is one has to not go too far into the past to realize that it was the outsourcing of these type of activities by industrial and financial companies was much more limited 10 and 15 years ago than it is today. And it will be greater in the future. So that's a more secular trend. So we have a cashflow paying high yielding stock, which has a counter cyclical element to it and longterm growth drivers. That's the way I look at the, the, the drivers behind our business.

That's very helpful. Thank you.

Thank you for your questions.

The next question comes from Lars Dueser from Deutsche Bank. Please go ahead.

I just jumped on the call, so bear with me if I ask a question that already got answered. On the collection side, if I look at the over-collections in Q4, that's again a very solid performance. It's even sequentially up, despite arguably the macro and cost-of-living crisis worsening across Europe. So what is driving that really? Were there any cash settlements by the legal channel? And also, how do you expect to see this trend, let's say, not only in Q1, but for the rest of the year? Looking at comms, they're obviously printing already much weaker numbers than you guys.

Yep. Go ahead, Michael. Lars, great question. On the sequential point, Q3 is usually seasonally a bit subdued. So seeing a slightly lower level of outperformance in Q3 is nothing unusual. Q4 is usually a strong quarter from a collections perspective. Obviously, we have a push into the year end. But also, our customers want to deal with things and start a new year fresh. So having a strong Q4 is not surprising. you're absolutely right in saying that we've delivered a very, very solid, strong collection performance. Obviously, we've had those small portfolio sales in terms of cleaning up exposures that we're not very focused on or that are not core to what we want to do. But even if you strip that out, we've delivered 108 for the full year and 111 for the fourth quarter, so strong by any measure. It's fair to say, though, in the current environment, we do expect that to moderate. I mean, we've talked all year about settlements coming down somewhat, but I would argue that that performance that we generate out of payment plans, out of finding settlements, having to work a little bit harder in many cases, is a testament to our platform, our data, and how we combine all those tools in finding the right claims to address even in this environment and delivering this performance.

Got it. Got it. Thanks for that, Michael. And then, you know, moving on to the return side, I mean, clearly, you know, cost of capital has gone up across the industry. And so the underwriting requirements for the front book have also adjusted higher. And, you know, you can see that already in your disclosures in Q3 and Q4. On the other hand, if I look at the supply and demand picture, it doesn't seem to be that attractive yet, right? So charge-offs are still relatively muted and, in fact, in parts of Europe still below the pre-COVID level. So, you know, how do these two dynamics tie up? And hence, you know, what can we expect from GMM's IRRs this year compared to 2022?

I would argue that from an IRR perspective, the industry by and large is quite rational. I would argue we're probably a bit faster than most because we monitor this very carefully across all the markets we operate in. But we see, especially from the larger participants, generally quite rational behavior. And obviously, the risk environments and the rates environment have changed. And that is reflected into the required IRRs once you invest. I think from a supply perspective, there is a, I recall, reasonably good underlying level of supply that we tap into. And obviously, most of what we invest into comes out of our servicing and relationship franchise. So I would argue we have, I would call it a captive pipeline, but a privileged pipeline that really helps us in all environments, actually. But the real supply picture that comes out of the current environment that will only start to emerge at your list late into 2023, but it's to our mind really going to drive supply into 24, 25. Yeah.

I mean, I think just to put a little bit more specificity around that, I think larger situations are becoming more rational sooner, smaller situations where there's a little bit more competition, a little bit more niche competitors who perhaps it's more important for them to transact on any individual transaction. that's becoming less. That still is taking more time to adjust. And so, but you see it in our numbers. We were in the first half of this year around 12%. In the fourth quarter, we were at 17 plus or minus percent. In the second half, we were around 15%. So we've already significantly expanded three, four, 500 basis points wider are required return on our assets. Our refinancing in December point to point went from three and change to nine and change. That's already traded down into the eight. because of the moderation of the overall environment. And I think that's just point to point, and we pushed it out five years. But if you look at middle of the curve versus middle of the curve, we used to have an advantage in funding where we were at three to four and our competitors were maybe, say, five, six. We're now going to probably settle at the middle of our curve, I would expect, if you ask me to speculate, somewhere around six, seven, seven and a half, something like that. And I think some of our competitors are going to be significantly wider of that. The funding advantage in an environment where we're at three or four and someone else is at five or six and assets are at 12 is interesting, but not that critical. The funding advantage in the current environment where assets are wider, but our advantage is six, seven, eight versus someone who might be approaching double digits, that's a much more important funding advantage and is one we can actually leverage into improving our market position on the investing side. So I'm quite comfortable with the way we've managed our liabilities and how they reprice. And I'm certain that we're going to demonstrate investment discipline on the IRR side, on the asset side.

Got it. No, that's a fair point. And then, you know, maybe just on that same topic, I mean, we don't expect to reach the level seen during the global financial crisis, though, right? Because, I mean, yes. people are clearly incrementally, you know, more bullish on returns, on GMMs. But at the same time, you know, it doesn't look like that the supply side will be, yeah, full sum and attractive and juicy than what we're seeing, you know, in 2008, 2009, just because there's much less leverage in the system. And it seems like banks are in a much better position. Is that a fair comment or do you disagree and you think we can actually get to such levels?

Michael can probably comment, but I don't necessarily agree with that. I'll give you my perspective. Go ahead, Michael, please.

No, I think one thing I would throw in there is it's hard to compare the two. I think our industry has matured significantly since then. So I think the way that the problem is getting approached on both sides of the equation by sellers and by buyers or by outsourcers and by servicers is a completely different one.

But I would argue on a relative basis, we're going into a very attractive environment. Absolutely.

I mean, I think, I think you have to look at the fact that, and it's a fair point, you know, our volume is going to be greater now versus that crisis. I think this is much more, this crisis can be much more directed at the consumer than that was in 2008, which was largely a wholesale or real estate focused crisis. 2012 in Europe was more sovereign wealth and obviously impacted the wholesale markets, all of which has knock on effects on the economy. But this current crisis is much more acutely focused on the consumer, which leads directly to what we do. And then the point that Michael makes cannot be stated enough, which is the industry in 2008 and 2009 was nowhere near as large, nowhere near as professional. And so dealing with these exposures as they move through the system, even if the even if the banks are in a better position, they want to deal with them. They're better. They're more sophisticated. They want to deal with people like us, an industrial counterparty, not necessarily an opportunistic counterparty, who were the big actors in the prior crises. And they're just more professional and industrialized, and they're dealing with these procedures, which lends itself to moving this through quicker and dealing with people like us and needing to deal with people like us. That's very different this crisis than it was in any prior crisis.

Got it. Got it. Moving on to the cost side, one thing I figured is that the adjusted common costs have been up quite a lot year over year. It seems like they're around 2.5 billion or so, call it 600 million Swedish kronor higher. Of course, there's the transformation spend on one interim, and I think per your previous slides, that was up around, call it 100, 150 million year over year. But then clearly there's still another delta, which is coming from stuff elsewhere. What is driving that increase in 2022, other than maybe unit cost inflation? And then also, can you just give us a bit of a range for 2023 on that number? Transformation spend will come down again. So will that have a benefit also on the common cost side? that would be super helpful for modeling this down the line.

Sure. To walk you a little bit through this, obviously, if you look at just the sort of the nominal values, FX drives cost as well to an extent, right? But on a relative basis, the common costs are up like-for-like. You point out the transformation that's an element. There's also an element of color transformation readiness spending. So basic spending to get things ready to even work into the transformation program. We've also put a good amount of money into our commercial team and into our data and analytics capabilities. And those are really the biggest drivers there. When I sort of roll that forward, it's going to be a very significant focus of mine to take some of those costs back out of the system. I think they've served their purpose. They've supported us into where we are now. But now we need to drive those efficiencies that we've been talking about and looking for. So my expectation is that underlying will take a good amount of that back out. But obviously in 2023, we will have to contend with some cost inflation that is expected, not just for us, but I think for everybody operating in this environment. But my goal is to take it down.

One additional factor that's very important to the overall inflationary factors and the specific structural factors that Michael just went through is how we manage this business from a local versus centralized or global basis. And that's a continual refinement My personal view is in the past that we've probably gone a little bit too central, a little bit too global. We're going to moderate that. That leads to increased centralized cost. And that kind of balance between local, which is where our clients are, where our customers are, where the vast majority of our operations are, and how centralized we are is something that we continually have to refine. And I suspect as we do that and we balance that a little bit more local and global than we have been, you'll naturally see some of those central costs also structurally come down.

Got it. And the $700 million of incremental savings you try to get in this year, they will be obviously also driving down the common costs. So will that accrue to the segments directly? So where do these $700 million of incremental savings that you expect for this year show up in the accounts? And through which line items will they flow segment-wise?

Yeah, I mean, we're going to address that overall, the trajectory and the magnitude of the additional savings. as well as the transformation, as well as the overall development of the company in the capital market. So I don't have a specific answer for you on that today.

Got it. Got it. And then, you know, moving on quickly to the, to the refinancing, you, you did the partial refinancing of the 24 maturities in December. We know that these bonds, you know, become current in July this year. So, you know, clearly you, you want to tackle it. The, the, let's say remaining stop by then. So is there any, you know, what have you said to the market on this? Like, do you plan to tap given that the high yield market had obviously quite a strong run and you see primary deals coming back to the market? There seems to be a window at the moment to do this. Or would you actually say, look, we are happy to keep it outstanding and use our existing liquidity to repay this? That would be the question there.

I think, Lars, my answer is not going to come as a surprise to you. We obviously continuously monitor the market and evaluate what the best course of action is. it's important to say that we have access to market in December. And obviously with that, we've in a way bought ourselves quite a lot of flexibility and freedom to be very opportunistic and to optimize when exactly we go to market over the coming quarters.

Right, right. Okay. And then last but not least, you know, on the dividend, I mean, you know, the board clearly said seems to propose the full amount to be paid this year, $1.6 billion. How did the board come up with that conclusion, given that clearly it's all about leverage and people are worried about the debt stack and people want you to see to deliver not only through cash EBITDA growth, but through generating organic free cash flow? and the dividend will clearly take away a lot of that this year. So maybe you can just walk us through what the thinking was here by the board to propose the full dividend rather than partially or fully cut it, especially as the equity market has been expecting actually a cut. It's not like it hasn't been priced or anything like that.

So I'll address that. I think One thing that I would differ in the way you've characterized it is this isn't the full dividend. The full dividend would be a continuation of our trajectory over the last, I think, 10 or 15 years. We've increased our dividend every year except one. And so the natural progression would have been to slightly increase our dividend. That's not appropriate in the current environment because of our focus on deleveraging, because of the uncertain environment, et cetera. Going to zero was also not something that was appropriate. So then you're talking about what do you do in terms of either flat to down from last year. And the board decided to recommend flat year on year. It is only about $1.6 billion or so out of our significantly greater level of cash flow. And it was a balancing of the interest of all our shareholders, sorry, stakeholders, excuse me. And that was the conclusion. And ultimately, we think that's probably the right answer for all of our stakeholders. We are still going to continue to delever. We're going to focus on deleveraging, but not necessarily at the expense of the dividend.

And also what I mentioned before, if you look at the last two quarters and you strip out the FX effect, we've actually brought that down. And even more so if you then also take out, I would argue, very exceptional derivative settlement with Caravaggio. So we are addressing both sides of the equation and we're really looking at developing the toolkit even further and not just pushing cash even down, which we've done very successfully. So we're addressing really both sides of the equation and leverage as well.

Yeah, I mean, we would be 0.2, 0.3 lower if you took out those effects. And that actually is very legitimate. And then without those effects going forward, you should see a deleveraging is my point.

Very helpful, both. Thank you very much. Thank you.

Thank you, Lars.

Please state your name and company. Please go ahead.

Good morning. Hi, good morning, and congrats on the strong performance. Thank you. i will i will take it from from the last question on the dv since it was asked look maybe i don't remember correctly or or it's wishful thinking but i remember the q3 call um that was before you you came to the market for a refi were you very strongly indicated i think we spent half of the call talking about this that you would prioritize delivering and actually not paying dividends. You top the markets in December and then now narrative is shifting a little bit again. I understand that the whole market has rallied and funding costs are coming down again. But it's hard for me to wrap my head around what will actually happen going forward, not just with the dividend, but also with the delivering. And I fully appreciate that there was this one of payments, Carvel, and the FX that kept leverage up four times. But I have been following the company and been dialing in on this call for the last few years. We are hearing on every call this two and a half to three and a half leverage target, but the goal post seems to be moving. So I'm sorry to be pushy.

No, no, no, no. It's perfectly fine. If I can address your comments, please. So first off, and perhaps I miscommunicated, but I remember the third quarter call perfectly because it was my first call as CEO. And I don't remember it exactly as you characterized it. I do remember saying that we were going to prioritize deleveraging. I do not remember ever saying at the expense of the dividend. I do remember saying that the dividend is one of the variables in the equation, and that is ultimately a board decision. The refi and the accessing the market was in fact just a refi. So it was refinancing an existing exposure and terming it out. And so that wasn't necessarily a deleveraging event. It was actually just terming out of an existing tranche of our capital structure, our debt capital structure. To address specifically our leverage level, the two and a half and three and a half has been out there for a long time. You're 100% correct. I don't think the goalpost is moving. I just don't think we've gotten any closer to the, or not as close as we'd like to, to the goalpost. And when I look at our debt, and there's obviously room for disagreement here, but when I look at our total debt of 52 billion SEC, relative to our 37, 38 billion of invested capital, ERC of 79 billion, just with our assets, I feel comfortable with that debt level. That doesn't even include the fact that we produce several billion SEC every year from our servicing business, which doesn't require capital to produce capital. All that being said, I'm uncomfortable that this target has been out there for that long, that we haven't achieved more progress towards it. Yes, there's extraordinary items. You recognize them. the foreign exchange and the one-off payment to Carvalho in the fourth quarter that otherwise we would have delevered. And we will progress towards it as quickly as we can. But we do have to balance the interest of all our stakeholders. And we have to think about our equity holders as well as our credit investors, as well as what to invest in the business. And we'll continue to do that and we'll progress as quickly as possible to that three and a half. Now, I will say also that When we get closer to that, and also as I've indicated, and the capital partnership is part of this, once we get to that three and a half, we're close to that three and a half, and we actually see the material multi-year significant opportunity to invest capital in these assets at what I think are above average historical returns, we'll have a different conversation with our stakeholders and figure out how best to tackle that. And hopefully by then we'll also have a capital partner, which means we'll naturally be able to capital a greater percentage of it without necessarily using our own capital. But this is an evolving picture, and I know this is probably not an entirely satisfactory answer for you, but I'm trying to give you as complete an answer and as complete context for how we operate and how we look at this issue.

Look, we appreciate that you generate quite a bit of cash, and you do have to keep all your stakeholders happy, for lack of a better word. But I would... The counter argument to that would be that an optimized capital structure actually benefits your equity investors as much as your credit investors. And that would be my last comment on that, I promise.

I'm happy to have an offline conversation about the optimal capital structure and the point in the debt versus equity horizon. So we can have that conversation whenever you'd like.

I'd like to get back then to the NPL supply that you expect. We've been seeing, you know, stage two level indeed increasing, but that's been happening since I think Q1 of 2020 effectively. Yes, it has. Do you have a picture of what the migration from stage two to stage three has been during that timeframe? And if it hasn't happened to the degree that not only you but many of your competitors were expecting previously, how do you expect that to progress in the coming quarters?

It's a really good question, and you're absolutely right that we've started seeing these increases from essentially the pandemic. But there's an interesting factor in this, namely when the pandemic hits, obviously there was a good amount of uncertainty in the system, lockdowns, et cetera. But what then happens, was a lot of that was counterbalanced by government action in terms of government support, expanding balance sheets, central banks taking action, et cetera. What we've now seen, particularly over the course of 2022, is essentially paying for that. I would argue that that has contributed to sort of the inflationary environment that we're now in. So from a stage two perspective, we've seen that pressure building in the system initially the actual transmission to MPLs has been pushed out by that government support, but that's no longer available. And I would argue in the current environment also no longer feasible. I think that money has been spent and we're paying for it in inflation, which then further exacerbates the situation for the consumer. So now we're in a much more normal environment, I would argue, in terms of challenge and crises, where we see the invoices come first, priority of payments. First, you don't pay your you know, buy now, pay later invoice, and then maybe your utility bill, and then at some point that migrates to bank claims, and then eventually also your mortgage, right, as that situation persists. But we have seen, when we are seeing the invoices, we are seeing the stage two loans continuing to go up, and therefore I would argue that more normal transmission mechanism linked to that priority of payments is working, and I would expect to see a to see increases in the MPLs, also in the financial services side, in 2023. Slightly different geography by geography in terms of phasing, but I would argue, for example, in the UK, which is one of the more harder hit economies we're already seeing is.

Yeah, I mean, anecdotally, when we talk to clients, They see the accumulation of stage two and some markets that call them unlikely to pay and other things like that. And obviously, a percentage of them continues to progress towards MPLs. One of the ways that we're trying to both get closer to our clients, get stickier with our clients, and also immunize ourselves a little bit from that progression is to do earlier stage arrears, as I mentioned earlier. And we are already being asked to do that in some of our markets by selected clients. We think that's a trend that's going to continue and going to grow across our entire footprint, which will help us continue to kind of extract value and extract profitability and deploy our operational expertise across a broader set of assets for our clients. I think that's a positive trend.

So on the early stage barriers, could you explain in a little bit more detail, does that mean that you're effectively agreeing on acquiring stage two loans? Does that affect the gross money multiples, a little bit more detail, and that would be great.

Now, it is predominantly a servicing phenomenon, not a PI phenomenon. We are still, our PI business is still focused very much on non-performing loans. But in servicing as a bank, if you put yourselves in their shoes, if we can prevent someone from falling in, if they can prevent someone from falling into NPL, it's of tremendous value to them than having to ultimately activate someone who's already stopped paying. And that's revising, restructuring, lots of things that we do because we ultimately deal with consumers who are in a difficult situation and come up with solutions. You can deploy those in earlier arrears as opposed to formally already someone who's unpaid or has been not paying and needs to be reactivated. And they need our help in that regard. And so that's a servicing phenomenon. To be clear, our portfolio investments activities are still primarily, if only, focused on non-performing loans.

Very, very clear. Thank you. And we look forward to hearing more about the fundraising details and the mechanism there, how that would work. Thank you very much. Great.

Thank you.

The next question comes from Corinne Cunningham from Autonomous. Please go ahead.

Good morning.

Good morning, everyone. A lot of this conversation is surrounded by a stretched balance sheet. Your cost of funding has increased, and yet you still see attractive opportunities going forward. Have you actually thought about or contemplated raising capital, raising your own capital to shore up the balance sheet? Introducing third party capital is perhaps a tactical or pragmatic thing, but it means that you don't necessarily have full control on the volumes of business that you write, and you may also be giving up future returns, given that you see the future as being so profitable. So why not contemplate an actual capital raise and then, I guess, be much freer to move forwards with lower leverage, as you say, more freedom to actually undertake the business opportunities that you see as being out there.

I mean, I can address that, and I'm sure Michael's going to add a comment, but I hope you saw the page that I showed in my presentation from 2018 to today and how we not only have meaningfully better and larger and more profitable and greater financial performance, but we're just a much better company than we were back then. I joined the board of Interim approximately around that time. And our stock price has been up at 300, down to 120, 130, back up almost at 300, back down to what it was recently. Now it seems to be recovering nicely. But we're a much better company today. And I don't think our stock, and I'm a CEO, so obviously I'm going to think that, but I don't think our stock fairly reflects the value of our company. I also, as I explained to the earlier caller or the earlier question, I don't feel that our leverage level, I feel that our leverage level is manageable in the context of the environment, although we are going to focus on slightly deleveraging. And so we don't have any intentions of raising equity capital anytime soon, to be clear. The capital partnership is going to allow us to increase the volume of our PI business, which we have a pipeline of potential PI investments, which is multiples of what we actually invest with our own capital. And what we're going to do is we're going to bring in partners to participate in that while still maintaining a very meaningful share of our own direct capital investment, maybe being a little bit more capital light, but ultimately the quality of those earnings also are quite different. And we're not giving up control because ultimately the beauty of our PI business is that it's, you know, 37 billion stack. It's in 20,000 portfolios. It's incredibly granular. It produces consistently 12 to 15% returns. That is a very unique return profile that can only be generated if you have a capital source or a capital opportunity that's attached to an operating platform, which can identify, underwrite, and more importantly, manage and collect like we are right now relative to underwritten forecasts. I've been an investor for 20 years. I've seen very few pools of capital of this size that behave that way. And so what we're trying to do is just leverage our platform, leverage our opportunity set, invest more, but in partnership with a third party. That's independent from raising equity capital.

Excuse me. I don't see a capital partnership as tactical. I see it as much more strategic. Because at the end of the day, I feel we don't get credit for the franchise value inherent in our PI business. I think from a sort of stakeholder perspective, they look at it much more as a pure investment business. And actually, it's fundamental to our client proposition. And when you think about it, we have a platform that originates a general pipeline, but also very significant pipeline of privileged deals. We have a data asset that we can exploit and monetize much further. Also, in the context of such a partnership, we can underwrite, we can manage, we can generate or add additional fee income streams, such as performance fees, for example. And doing that via third-party capital really allows us to showcase, crystallize, and hopefully also then monetize in terms of the reception we get, the real franchise value of our investment business, while growing the overall bottom line of the company through that.

And it's a fundamental evolution towards more of an asset management model without necessarily uh becoming total capital light we're still going to continue to invest a meaningful amount of our own capital but it's going to become an anchor on a much larger pool of invested assets along with third-party capital that's fundamental and strategic and long-term frankly that's clear thank you great any other questions

The time has unfortunately ran out. If you have any more questions, please reach out to your investor contact at Intram. Now I hand the conference back to the speakers for any closing comments.

No, just a thank you to everyone for taking the time today. Thank you for your efforts in following our company. And I would emphasize what the operator just said, is that if you have additional questions or want to get into more detail, please reach out to any one of us. Myself, Michael, or your IR representative here. Thank you.