Intrum AB (publ)

Good morning, everyone. This is Anders Rubio. As the operator indicated, I'm the CEO of Interim, 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 first quarter of 2023. We are conducting this call from our corporate headquarters in Stockholm, Sweden. I wanted to start, and if we can go to the next page, please, page three, with an overview of the performance in the quarter, but initially, wanted to talk about my impressions the first quarter in my opinion was not a good quarter and is a very clear indication of the external and internal challenges we face as a business revenue increased and there are selected top line and fundamental positives related to both our servicing and investment investing businesses however first quarter EBITDA and our result was unsatisfactory I'm not happy with this performance and I want this to be the performance during this quarter, which happens to be the first quarter since I was named permanent CEO, to be a wake-up call for the organization and a call to action where we learn from our past mistakes and have this quarter serve as a catalyst to face our issues more quickly and more aggressively to drive greater leverage from our obvious strengths over time. The challenges we're facing are several. Negative macro environment, making collections more difficult. This quarter specifically, January and February, proved to be quite difficult. well below 100% of our active forecast with a strong March of almost 107, pulling us up to 100% of our active forecast during the quarter. We also have to face the reality that we are in an inflationary environment and the cost of both human capital and financial capital has increased meaningfully over the recent quarters. We also have a bloated central cost base and greater efficiency potential across the platform as a result of what I believe to be an over centralized business model specifically our one interim program, which I'll address later. These challenges require both tactical and fundamental measures to overcome these hurdles and build our company over time to be not only the biggest, but also be the most functional and profitable in the industry. On the tactical front, we are initiating today and executing immediately a 600 million sec near-term cost cutting program This is merely resetting inefficiencies primarily in our non-production and central costs and will be realized during fiscal year, or sorry, during calendar year 2023. Michael will go into more detail later. On the fundamental front, in line with our overall theme of simplify and focus plus grow and transform, we continue to work on developing our business across key areas in order to achieve our full potential. We want to improve our commercial focus. This includes recent senior management reorganization, where the company is broken into two businesses, servicing and investing, along with some key central support functions, ops and IT, working in partnership with our markets, which have now been reorganized into four regions, north, middle, south, and tactical. We are advancing on the tech front with 2023 bringing us new updated portals, providing both customers and clients a digital self-service capability. We're rolling out the latest generation cloud-based dialer system to make our calling operations more efficient. And we intend to acquire and to roll out an end-to-end digital collections capability during the year. And finally, we are exploring ways to grow our investing business with third-party capital to develop over time an asset management business and moving to a capital-light investing model. Despite these challenges and the disappointing net result, our platform continues to display the greatest size in the industry, and there were very specific positive developments in the quarter. Servicing AUM growth increased by 5%, The annual contract value of our new business sales increased 22%, and we signed over 200 medium and large transactions in our servicing business. On the investing side, we invested over 1.7 billion sec, and we did so at a 16% IR, meaningfully higher than most of the recent quarters. However, the headline here is that we're addressing our challenges head-on over the near term in the cost program, and over time with a more fundamental business transformation. Going now to the next page, on page four, we see the evolving market dynamic. The overall market is one of decreased consumer confidence, more than doubling of the cost of a household mortgage, increase in utilization of consumer debt, and historically high overall inflation. Despite these negative trends, employment has remained strong, as we recently published, which makes this crisis different than past crises, where unemployment was significantly elevated. This is truly an income crisis, not necessarily an employment crisis. It is in environments like this that Interim shines with our multi-market integrated business model producing greater addressing of the greater client need for our collection services. However, we need to recognize and address the fact that we do have challenges. We are a human resource intensive business with 10,000 employees in 24 jurisdictions. And our investing business is a capital intensive business that requires capital to grow and produce profits. Both of these factors are increasing our costs at a higher rate than our revenues and contribute to our margin challenges that we are attempting to correct over the near term with the cost reduction program. So we are not immune to this environment, although it does have benefits on the client side, our operations are affected. Moving to the next page, page five, you see that stage two loans, have increased from $1.2 trillion to over $2 trillion over the last three years, reaching greater than 10% of the total European banking system loans. This increase in credit risk at banks, our primary clients, and the decline in disposable income at the consumer level will contribute over time to the creation of MPLs and reverse the recent trend of declining MPL formation. In addition, as you can see in the MPS sales figures in the boxes below the graph, Banks have become very accustomed to regularly disposing MPLs. All of this, in the context of our recent conversations, specific conversations with our clients, indicate clearly to us that there will be an incremental MPL flow over the coming years, which will initially drive the need for our collection services, and then, with a certain lag, will represent a significant increase in investment opportunities over several years to come. We estimate that these trends will play out during 2023 and lead to meaningfully better market opportunity for us in 2024 and beyond. Looking now at page six, we show the concentration of these stage two loans and the MPLs or the distribution across our four regions, north, middle, south, and tactical. In total, our footprint covers over 90% of European stage two and non-performing loans. So vastly, virtually, excuse me, the entire footprint. As you can see, these markets move at different speeds with the middle and the southern European regions, currently offering the greatest volume opportunities. But specifically in our experience, and as evidenced in the ECPR published last year, there is a spectrum of market developments across our footprint. For example, with the UK being one of the most economically challenged countries currently, with other countries such as Greece still benefiting from the tough decisions taken in that system, in that banking system, at the tail end of the last crisis. Looking at page seven, we see some of the positive trends in our servicing business. Our overall share of bank and financial inflows have led to an increase in our average case values. These interrelated variables have been steadily increasing with a particular rise from the fourth quarter of 22 to the first quarter of 23. These factors contribute to higher potential margin going forward in our client service business. We've had some great commercial wins in the quarter, which I will address later, and Michael will also address in the presentation, which have driven our servicing, i.e., our client service business, to an all-time high in revenue of $13.1 billion, as seen in the bottom half of this graph. All of these factors indicate that we have the potential for sustained growth in earnings from our servicing business for years to come. On page eight, we see an overview of our recent performance in our investing business. After an unusually strong December and fourth quarter 22, as you can see in the main graph, our performance against our active forecast for the first quarter was exactly 100%, which entailed a very slow, as I mentioned earlier, very slow January and February, well below 100%, brought up by a much stronger March at 107%. The first quarter is seasonally slow and a more challenging quarter always for collections, historically. But first quarter 2023 was a particularly weak quarter with an 11% drop quarter on quarter versus a typical drop in recent years of 5%. We've analyzed this shortfall in detail and estimate that approximately 60% or certainly more than half of the incremental decline in this quarter is due to timing effects of certain collections. due to such issues such as the multi-month court system strike, which trapped cash and reduced collections in Spain, and some similar issues in other geographies. The fact that during our second weakest collections quarter in the last three years, we still hit our active forecast is a testament both to the collectability of the granular assets that we manage, as well as our operational collections capabilities. Going to the next page, on page 9, we address directly the one interim transformation program. The one interim program was absolutely necessary in 2020, when we operated largely in an independent fashion across our 24 markets. And this program has different significant benefits from centralization, such as the metric seen on the left side of this page, indicating a run rate recurring savings of $364 million and a very meaningful reduction of our cost to collect. However, while directionally correct, this program as designed, in my opinion, has gone too far in concentrating and centralizing both the management and operations of our diverse business. I believe in a more balanced business model that allows our business leaders in servicing and investing, plus our ops and IT key central function leaders to partner with our local teams to empower them to be as effective as possible with our clients and customers. you can see on the right side of this page we are continuing to work on transforming our business model across several key dimensions within this operating model commercial focus and business leadership across a rationalized footprint expand the effectiveness our client servicing with an expansion of the range of our services to include early and late stage solutions plus an improved self-serve digital interface with our clients and customers and we're exploring capital light paths to growing our currently capital intensive investing business This fundamental change to our business effectiveness combined with the more efficient platform after our near-term cost reduction and the clear positive top-line trends will allow us to gain scale and not only be the largest in our industry, but also the most profitable. We will present the new full potential plan and its associated financial targets during our Capital Markets Day scheduled for this September 13th here in Stockholm. On the next page, on page 10, you see that clearly Interim is in a privileged position whereby the more successful we are in collecting on behalf of our clients, we not only drive our revenues and our clients' financial benefits, but we also increase the positive societal impact that we generate. I'm happy to report that during the last 12 months, we helped 4.4 million customers become debt-free with Interim. paving the way for these individuals to reintegrate into the financial system. This figure compares favorably to 4 million of such cases during calendar year 2022. In addition, we collected 13 billion on our claims and 76 billion against client claims during the last 12 months, reaching an all-time high of 89 billion SEC. As the continuous cycle graph indicates on the right, We provide a greater service to our clients. We allow individuals to resolve their debt and improve their financial health, all while creating a very strong motivating force for our employees and contributing to the proper functioning and health of the overall economy. Finally, on my page 11, before I hand it over to Michael, this is somewhat of a bragging slide as I like to end my section on a bragging slide on both the commercial and operational side. some statistics that show our business is experiencing very strong positive trends which are building on each other over time in servicing we had a 22 increase in the annual contract value of new sales quarter on quarter with a signing of more than 200 medium to large deals in the quarter as a result of these increased client wins our assets under management continue a very positive trajectory with a six percent compound annual growth rate over the last two years On the bottom half of the page, you see our recurring chart that shows our 18 plus year track record in not only growing collections, but also improving on our collections against our original forecast at underwriting. Here you can see that after hitting an all time high of 115% in the fourth quarter of 22, and for the second time over this 18 year period, this figure still landed at a very healthy 112% during the first quarter of 23. As stated previously, when expressed as a percentage of our active forecast, which is the underwriting forecast after upward revisions, this ratio drops to a very still strong 100%. With that, I'll hand it over to Michael, and he'll go through the remainder of the presentation. I'll come back in at the end to do some wrap-up comments.

Thank you, Andres. I'm now turning to slide 13. As Andres has just said, we had a slow first quarter from an earnings perspective, but grew revenues. Cash revenues for the first quarter were up 2% compared to the first quarter last year. In CMS, we saw 7% organic revenue growth driven by increasing assets under management. Portfolio investments also contributed to revenue growth, while strategic markets is stabilizing after two years of substantial growth. However, increasing costs have impacted our bottom line with cash EBITDA down 10% compared to the same period last year. I will come back to this point in a minute and give more details about the cost program we are putting in place. With a lower rolling 12-month cash EBITDA and net debt affected by currency, a performance-related deferred payment to Piraeus Bank and a large portfolio acquisition in Spain carried over from last year, the leverage ratio rose 0.2 times to 4.2 times at the end of the first quarter. Turning to page 14. As I've just described, costs have increased beyond what is supported by our top line growth due to a number of clearly identified root causes. As you can see on the graph on the left-hand side of the page, during the last two years, cash expenses have significantly outgrown cash revenues with a 20% cost increase compared to a 15% increase in revenues. The main driver of the accelerated cost increase was, in the context of decentralization and the one interim transformation program, a duplication of costs in central units where offsetting local cost reductions have not fully materialized. The increased costs are therefore mainly within global and local overheads, and the not insignificant amount were incremental expenses to support the transformation program. Of the total current cost base of 11.8 billion SEC, We have identified circa 5.5 billion SAC as production and sales related costs, which will not fall within the addressable perimeter of this program. This is to safeguard our revenue generation and maintain commercial momentum and focus, also considering the increasing demand for our fair and ethical collection solutions in the current environment. The target for the cost program will be the remaining circa 6.3 billion SAC of non-production costs, And of this, 10% or 0.6 billion ZEC will be targeted, starting immediately. The one of cost to carry out the program will be around one times the recurring reduction of 0.6 billion ZEC, which we plan to achieve on a run rate basis by the end of this year. I'm now looking at page 15. Despite the challenging economic environment, and associated operating challenges we have during the last 12 months been able to generate a recurring cash flow of 8.9 billion SAC. And just to be clear, this is after paying interest in CapEx. The longer-term cash flow generation trajectory is positive and has grown 10% since Q1 2020. It is important to note that the 8.9 billion SAC can, on a discretionary basis, be allocated to deliver, to invest in new portfolios, to grow, as well as to remunerate shareholders. Continuing to page 16. Here we have illustrated the net debt development, which has been essentially stable over the last three years. During these three years, we have generated circa 4.6 billion in cash flows, including investments in new portfolios of circa 21 billion SEC. This is after servicing our debt and paying taxes. The cash generated has been largely paid out in dividends to our shareholders, keeping the underlying net debt essentially flat. The 15% growth in cash EBITDA over the same period has therefore been funded by internally generated cash. The incremental net debt increase is due to adverse effects movements of 0.9 billion SAC and one-off items, such as the settlement of the Carvalho Derivative Agreement, acquisition of minority stakes in consolidated companies and deferred M&A payments totaling circa 2.5 billion SEK. I'm now looking at page 17 in our credit management segment. Total cash revenues are 12% compared to last year. Of this increase, 7% comes from organic growth. This reflects the increased assets under management from clients seeking our support to fairly and ethically collect on their behalf and our increased commercial focus. However, the increase in cost outstrips the top-line growth in the segment. This is in the context of the current environment, which requires us to increase our efforts to collect on cases, but also the factors previously described, which are to be addressed with our cost program. As Andreas also pointed out, there are some positive underlying signals with increasing volumes of new cases coming from the bank and finance sector. We're cautiously optimistic about the near-term future, where we see increasing demand for our services and also a trend of clients seeking solutions for early arrears. Onto strategic markets on page 18. Our strategic market segment is up to two years of substantial growth, stabilizing, with adjusted revenues down 5% to 1.45 billion ZEC, compared to 1.5 billion in the first quarter 2022. Costs have also here grown faster than revenues, with earnings down 21% in the quarter. The margin remains strong, 37%, on a rolling 12-month basis. A more pronounced seasonality is also consistent with a tougher economic environment. In strategic markets, we had some notable client wins during the quarter. For example, in Italy, we signed agreements for €520 million of additional contributions to the UTP Italia credit fund from leading banks. including our new client ikea now turning to page 19. our portfolio investment segment continues to generate stable returns with minimal volatility cash revenues are two percent to 3.4 billion sec compared to q1 last year and the segment cash ebitda is up four percent to 2.6 billion sec Adjusted segment earnings are lower than during the same period last year due to lower accounting earnings recognition on our portfolio joint ventures. The adjusted return on investment for the segment of 13% is in line with the first quarter last year. Coming back to the stability of cash earnings, I would like to point out the graph in the top right hand corner. The cash EBITDA has continuously grown at a CAGR of 14% over the last two years. highlighting the strength of our diversified and granular back book. Investments in the quarter came in at 1.7 billion SEC, slightly ahead of guidance. This was driven by a large portfolio in Spain carried over from 2022. The expected unlevered investment return on new investments is up three percentage points to 16%, continuing the development we observed during the second half of 2022. On to page 20. Here we are giving a first glimpse into what our new reporting structure will look like. The segmentation will be in line with the operating model changes we recently initiated. Going forward, we will focus on our two businesses, servicing and investing. The business line view will be complemented by a regional split. Northern, middle, and southern Europe are franchise markets, as well as the tactical markets. I'm now looking at page 21. As you can see in the top graph, unlevered underwriting IRs are continuing to increase as we are investing in new portfolios with a higher expected return. The return gap of average underwriting IRs compared to average cost of funds is 2.9 times. We do expect the interest rate cost to increase as debt is being refinanced. However, thanks to proactively addressing the maturity profile in the past, we have turned out maturities which will gradually refinance as they become current. have access to a range of funding sources and we actively monitor and assess different opportunities to maintain our relative advantage regarding the leverage ratio as mentioned we remain committed to our target of three and a half times which we want to reach as soon as possible page 2022 22 and looking at the medium-term financial targets presented at the last capital markets day in 2020 As of Q1, all metrics are somewhat subdued. Expected financial trajectory and targets will be updated at the Capital Markets Day on the 13th of September here in Stockholm. Now over to you, Andres, for some concluding remarks.

Thank you, Michael. Page 24. So here on this page, you see some very specific indications of strength of our servicing business on the top left and investing on the top right. Regarding servicing, you see annual contract value of new business, AUM growth on an improved mix of business, and leveraging our footprint, which covers almost all of NPLs across Europe. On the right-hand side, with regard to investing, collection strength despite headwinds, moderated investment pace but at very high returns, and clear indication of more to come in terms of NPL flows. In terms of how we move forward, we are adjusting our business model to be more balanced. We're centralized businesses, i.e. servicing and investing, plus key central functions, partner with market-based professionals to push our business with clients and customers. We are continuing to develop our commercial sharpness through our management changes and also our tech developments. We have the aim of leveraging our leadership position and being not just the biggest, but also the best in terms of client service and profit. We are directly addressing our lost efficiency over the last three years with a near-term cost reduction program to be realized in 2023. And we continue to build on key initiatives, including our divestitures and our selected markets and our capital-like growth plans for our investing business. In sum, it was a disappointing quarter, which demonstrated some very tangible evidence of our strengths. We have near-term greater efficiency opportunities to reset our platform. And on that platform, we have very important long-term fundamental opportunity to meaningfully grow and improve our business through a bottom-up transformation. All of this on the long-term, we will, as I said earlier, provide a comprehensive update at our Capital Markets Day on the 13th of September here in Stockholm. So with that, I think we've concluded our prepared remarks. And we are happy to open it up to questions.