Intrum AB (publ)

As the operator indicated, this is Andres Rubio, 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 second quarter of 2023. We're conducting this call from our corporate headquarters here in Stockholm, Sweden. Before we get into the detailed presentation, I wanted to give you just the main three headline messages from our performance and also our announcement today. The second quarter was a seasonally strong quarter after a weak first quarter, showing strength in both businesses, servicing and investing. Second, we continue to not only execute, but also expand on our strategic initiatives to focus and build our business efficiently. And third, we're taking this opportunity to explicitly clarify for all our stakeholders our immediate near-term priorities, which are intended to build our servicing cash flow, and improve our overall risk profile. So on page three, I wanted to start with an overview of the quarter. As I said, second quarter was seasonally strong during which we continue to execute on our initiatives. We demonstrated the commercial momentum of our servicing business and showed resilience and the resilience and strength of our collections capabilities. Top left on these initiatives, we executed on the previously announced exit of five markets. Brazil, Romania and the three Baltic states. On the back of this, we are evaluating the potential exits of three further countries, Hungary, Slovakia and the Czech Republic, which are more sizable than our prior exits and will further our focus on our core markets. In addition, we agreed during the quarter on the purchase of real estate in Spain from servers and completed the purchase of our two servicing platforms and a portfolio from Arrow Global in the UK. In addition, or finally, our proposed announced cost reduction program from last quarter, which had a previously publicly stated target of 600 million SEC, has been thoroughly validated, and we are now comfortable expanding this target to more than 800 million SEC. Top right on overall performance, revenues were up 2%, while EBITDA was down 5%, really driven by servicing, commercial growth, early investments, and stronger collections. Bottom left on servicing, AUM hit an all-time high at 2 trillion, 9% year-on-year, with servicing cash revenue driven principally by 23% growth in Middle and Northern Europe. Southern Europe had a stable top line and continued to produce significant cash flow. In addition, we have great margin momentum in servicing with 6% quarter-on-quarter, growth in margin or expansion in margin and an increase of the year-to-date margin of 3% during the quarter. On the bottom right of investing and probably what is the most challenging economic environment we've seen in several years, we collected 103% of our active forecast and 110% of our original forecast with new investments coming in at around a 15% IRR, well above 16% excluding the Arrow Deal, which was priced last year and closed this year. driving the overall expected return on our portfolio to about 14% across our 41 billion SEC book value, up from less than 12% just a year ago. On page four, we are making a targeted announcement of our near-term priorities. Over the near to medium term, we are prioritizing growing our servicing cash flows and accelerating the reduction of our leverage. the bottom on the left side of this regard to servicing our recent increased commercial focus and our management changes along with our industry-leading product and services portfolio and a focused geographical footprint should put us in the position to capture increased revenue as we move into a positive multi-year environment where our clients increasingly need our services this revenue tailwind combined with our cost reduction efforts and margin focus should drive greater capital light servicing cash flow. In addition to building our servicing franchise, which is fundamental, we are on the right-hand side taking very specific and direct and immediate measures to accelerate the reduction of our leverage, including utilizing any proceeds from the additional three potential market exits towards reducing debt. We are limiting our balance sheet funded investments while still exploring an asset management business over the medium to long term. I don't believe that the market fully appreciates the sizable, granular, and self-liquidating nature of our portfolio or our book, where if we invest below replenishment value, our book produces significant cash. We will invest significantly below replenishment levels in 2023 and 2024 and direct this cash flow toward reducing leverage and reducing the dependence on market financing. In addition, an important step is the management, but much more importantly, the board has taken the decision to not recommend for any dividend to be paid in 2024 at the next AGM. And this has to be looked at in the context that this year, in 2023, we paid $13.5 sec, which represents an 18% yield at our current stock price level, approximately. And the second installment on that $13.5 sec will be paid later this year. In addition, we're always looking and we're actively working on additional measures to accelerate the leveraging. And when those become more concrete and actionable, we will come back to the market. All proceeds from these measures will be used to reduce leverage and improve our financial risk position. At the Capital Markets Day coming up on September 13th here in Stockholm, we will expand on these initiatives. We will outline our strategy and we will provide operational and financial, not just trajectory, but also specific targets. Now onto page five in the evolving market. The overall market dynamic is one of increased stress in the system, including as published in our recent European payments report, companies across Europe are incurring a total estimated cost annually of 275 billion chasing late payments, which is just for context, greater than the GDP of Finland. Inflation remains persistently high with particular concerns over high prices in countries such as the UK. European businesses not only spend on average 74 workdays chasing late payments a year, which is the number behind the 275 billion figure, but 70% of these companies are actually incurring credit losses in the current environment. And the consumer remains under direct pressure with a cost of living crisis fueled by not only inflation, but also increased interest rates. All of this means that this economic pressure will lead to continued increase of stage two loans which have nearly doubled since 2020 and reached 10% of all loans and eventually will filter into credit quality in the financial system with increased NPL volumes and increased demand for our services. On page six you see more detail on the positive trends in our servicing business with the annual contract value of our prospective servicing pipeline continuing a four-quarter trend of increasing and our AUM hitting an all-time high of 2 trillion SEC. As evidence of our improved focus on efficiency and our pricing power in this environment, this new business is being signed and contracted at margins well above our recent historical margins, and this should show in the coming period. As a consequence of that, you can see in the graph on the bottom half of this page that this trend has led to a continuation of eight straight quarters of consecutive growth in servicing revenue with a continued high margin. On page seven, you see that our collections business continues to demonstrate strong performance in a difficult environment after a challenging beginning to the year. During the quarter, our investing business collected 103% against our active and current forecast and 110% of our original forecast. These results continue the trend over the last 18 years, since 2004, where we have an average performance of 107% against original forecast over that entire period. And it's accelerating. The improvement is accelerating with 110% for the last four quarters. On the bottom half of this page, you see that this collections performance, driven by our operational capability, has driven rolling 12-month absolute collections on our investment book to continue an increasing trend with 8% growth against second quarter of 2022. On page eight, I continue to be able to brag that we are in the very privileged position where the more successful we are in collecting on behalf of our clients, we not only drive our own revenue, and bring our clients financial benefits, but we also increase our positive societal impact. I'm happy to report that during the trailing 12 months ending at June 2023, we helped 4.6 million customers or consumers become debt-free with Interim, paving the way for these individuals to reintegrate into the financial system. This figure is up from 4 million and 4.4 million during the last two quarter ends. We can continue to get great ratings from consumers despite dealing with them at a very delicate time, testament to the way we approach collections. And in addition, we collected $14 billion on our own claims, $76 billion for clients during the last 12 months, reaching an all-time high of SEC $92 billion. All of this is what contributes to the table on the right where we enjoy a very high rating on the ESG front. On page nine, we touch once again on our overarching priorities, which are going to drive our actions and our business over the medium to long term. We want to grow and transform, and we want to simplify and focus. Ultimately, we have the goal of being a results-driven services company focused on the credit sector and being an important contributor to the financial ecosystem. What does this mean in terms of concrete direction? It means that we want to be commercially close to our clients to meet their needs throughout the economic cycle. If we satisfy clients throughout the value chain and become their partners in managing their credit risk through the cycle, we will grow profitably. Second, we want to be capital light, where our growth is not dependent on the size of our balance sheet, but rather on the market effectiveness of our services. And finally, we want to not just be tech-enabled, but we want to be tech-driven where ultimately we deploy technology products and tech-driven solutions to solve client problems and needs. On page 10, I just want to reiterate in conclusion of my section our progress on the execution of our business building and development initiatives and where this positions us going into 2024 and beyond. As I mentioned previously, we strengthen our business with key acquisitions in the UK and Spain, two core franchise markets, We will selectively pursue other M&A opportunities to improve our business going forward. We executed on the previously announced exits of five markets to reduce our total jurisdictions to 20. We are now looking to further focus our platform with three additional potential market exits. As I announced last quarter, we are implementing a more balanced operating model where we empower our local market leadership to drive our interactions with customers and clients and drive our performance. And we're becoming more efficient with an increase of our cost reduction program, as I mentioned, from 600 million sec to more than 800 million sec. All of this is part of a transition year in 2023, where we are building the foundation for our company's business and our company's performance for years to come. More specifically, these measures, in particular the full year effects of our acquisitions, plus the run rate cost reductions, will put us by year in 2023 at a run rate profitability well more than a billion above what we will actually report in 2023 on a like-for-like basis.

With that, I'll hand it over to Michael who will go through the numbers. Thank you, Andres. I'm now turning to slide 12. In the seasonally stronger second quarter, in what is a transition year, we saw cash revenues up 2% compared to the same quarter last year, while cash EBITDA decreased 5%. The reduction in cash EBITDA reflects the increasing costs we've previously discussed, and as Andres already mentioned, this development will be addressed through our upgraded cost program of now more than 0.8 billion SAC in annual savings. I will come back to this point in a minute. In CMS, both revenues and profitability are up, a positive development after a number of challenging quarters. Having said that, the efficiency measures we're implementing in the context of our cost program are also very much needed here to drive the margin trajectory. Our collection performance in investing is improving with a stable financial result and strategic markets are stabilizing at a high level of profitability after a prolonged period of significant growth. Cash EBIT is up compared to last year due to lower replenishment capex reflecting the higher return environment with a money on money multiple of 2.3 times. Cash net financials and tax are also up compared to the same quarter last year, to a large extent due to increased debt and higher interest rates. On average, we are currently paying circa 5% on our gross debt. Net debt is up 0.4 times in a quarter, primarily driven by accelerated investments and adverse effects movements. We continue to be very much impacted by SEC versus Euro depreciation. This alone accounts for about half of the increase in the leverage ratio. Turning to page 13. As Andrew said, the cost program has been updated. Based on the work carried out and initial successes, we're now confident that we will reach more than 0.8 billion second savings. The majority of these benefits will be achieved by the end of 2023 on a run rate basis. the cost to achieve range unchanged 0.75 times to 1.25 times realized benefits as part of this program we're addressing the root causes and creating a cost conscious and continuous improvement culture we do this through an updated operating model with clear accountability and focus on our clients and customers needs This will enable us to drive profitability for the company beyond the program as demand for our services grows in the current economic environment. I'm now looking at page 14. In CMS, we're starting to see green shoots with cash revenues growing 23% compared to last year, of which 10% is organic growth. 6% of the revenues growth represents one month of revenues from the servicing platforms acquired from Arrow in the UK. Cash EBITDA increased by 33% compared to the first quarter of the year and adjusted segment margin is up four percentage points over the same period. This to me highlights an increasingly positive trajectory in this important segment. Increasing client activities and commercial success in the quarter is visible in the 233 million sec of annual contract value signed with existing and new clients, which is up significantly from last year. On page 15, you can see that the strategic markets continue to operate at a high margin with stabilizing top line. The seasonally strong second quarter shows continued high revenues after two years of significant growth in Southern Europe. In this context, cash revenues and cash EBITDA are down 4% and 9% respectively compared to an exceptionally strong second quarter in 2022. In the strategic markets, we have signed new annual contract value of 112 million ZEC in the first half of the year, as well as winning a major contract from CaixaBank in Spain to service their real estate assets. I'm now turning to page 16 in our investing business. Investing continues on its very stable and predictable performance trajectory, with cash revenues steadily growing over the past years to now more than 14 billion ZEC on a rolling 12-month basis. Similarly, cash EBITDA contribution from the segment now stands at just under 11 billion SEC. Collection performance for the quarter was 103% versus active forecast. And in some ways, more importantly, versus original underwriting forecast collection performance came in at 110%, highlighting our ability to extract value from our book. Our sustained overperformance compared to what we expected when acquiring our circa 20,000 portfolios is a testament to the stability of collections over time, which is rooted in the quality of our operations, as well as our second to non-data assets. As you can see, cash EBIT is disproportionately up compared to last year. And this is, as mentioned before, due to the lower replenishment capex reflecting the current return environment. We invested 2.8 billion second new portfolios in the quarter at an expected net return of 15%. driven by the circa 1 billion SAC portfolio acquired from Arrow in the UK, which we closed in the quarter based on the terms agreed last year. As Andres has said before, balance sheet intensive portfolio investments will be strictly limited for the remainder of 2023 and 2024. As previously mentioned, for 2023, we therefore expect full-year capital deployments to be at circa 5.5 billion SAC, with 4.5 billion SEC already deployed during the first half. Turning to page 17. As you can see in the top left corner, the return gap between our cost of funds and our unlevered underwriting IRR is increasing and reached 3.1 times in the quarter. In the lower left corner, we are disaggregating the underlying drivers of the growth in net debt. In the quarter, we have generated cash of circa 1.7 billion SEC, At the same time, we have cash out for investments of 2.9 billion SEC, and we also paid a dividend of 0.8 billion SEC. The second largest driver of increasing net debt on the reporting date is the depreciating SEC, which moved by about 50 euro between March and June, heavily impacting our debt and leverage. This factor alone accounted for about half the increase in leverage ratio, or about 0.2 times. We currently have 13 billion second available liquidity, and the maturity profile of our debt is termed out with principal maturities between 2025 and 2027. As you can see with the bond issued mid-June, we do not have any additional maturities this year. With that, I hand back to you, Andres, for some final remarks. Thank you, Michael.

So before we turn into the Q&A session, I just want to reiterate the kind of summary headline. So good quarter shows the strength of both our businesses. And I'm particularly encouraged by the growth in middle and Northern Europe and also the margin expansion. We continue to execute on our strategic initiatives on building our business and focusing our business. And we're actually expanding our focus on that and making that expansion and building our business in an efficient manner. But more importantly, one of the most important announcements today is our specific clarification for all our stakeholders of our intention to address our risk profile over the near term we're not immune from the risk environment we have to be understanding of it we are going to actively reduce our leverage over the medium the near term and we're going to take the different measures that I outlined earlier but and I think that's good for all stakeholders but with that I think we can open up the Q&A