© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Intrum Q2 2023 Report Presentation. [Operator Instructions]Now I will hand the conference over to CEO, Andres Rubio; and CFO, Michael Ladurner. Please go ahead.
Good morning, everyone. As the operator indicated, this is Andres Rubio, 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 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 3 headline messages from our performance and also our announcement today. First, 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 3, I wanted to start with an overview of the quarter. As I said, second quarter was seasonally strong, during which we continued 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 5 markets; Brazil, Romania and the three Baltic states. On the back of this, we are evaluating the potential exits of 3 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 Haya Real Estate in Spain from Cerberus, and completed the purchase of our 2 servicing platforms and their portfolio from Arrow Global in the U.K.In addition or finally, our proposed announced cost reduction program from last quarter, which had a previously publicly stated target of SEK 600 million has been thoroughly validated, and we are now comfortable expanding this target to more than SEK 800 million.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 SEK 2 trillion, [Technical Difficulty] 9% year-on-year with service [Technical Difficulty] cash revenue driven principally by 23% growth in Middle and Northern Europe. Southern Europe had a stable topline 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, in 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 SEK 41 billion book value, up from less than 12% just a year ago.On Page 4, we are making a targeted announcement of our near-term priorities. Over the near to medium term, we are prioritizing growing our servicing cashflows and accelerating the reduction of our leverage. On the bottom -- on the left side of this page [Technical Difficulty] with regards 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 a 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 levers including, utilizing any proceeds from the additional 3 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 financings.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, 2023, we paid SEK 13.5 which represents an 18% yield at our current stock price level approximately. And the second installment on that pay -- on that SEK 13.5 will be paid later this year.In addition, we're always looking, and we're actively working on additional measures to accelerate deleveraging, 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, on to Page 5 and 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 SEK 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 U.K. European businesses not only spend on average 74 workdays chasing late payments a year, which is the number behind the SEK 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 2 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 6, you see more detail on the positive trends in our Servicing business with the annual contract value of our perspective servicing pipeline continuing a 4 quarter trend of increasing, and our AUM hitting an all-time high of SEK 2 trillion. 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 periods. 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 8 straight quarters of consecutive growth in servicing revenue with a continued high margin.On page 7, 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 a 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 8, I continue to be able to brag that we are in a 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 Intrum, 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 2 quarter ends.We continue to get great ratings from consumers, despite dealing with them in a very delicate time, testament to the way we approach, collections. And in addition, we collected SEK 14 billion in our own claims, SEK 76 billion for clients during the last 12 months reaching an all time high of SEK 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 9, 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 strengthened our business with key acquisitions in the U.K. and Spain, 2 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 5 markets to reduce our total jurisdictions to 20. We are now looking to further focus our platform with 3 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 SEK 600 million to more than SEK 800 million.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-end 2023 at a run rate profitability well more than SEK 1 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 this 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 cost we previously discussed, and as Andres already mentioned, this development will be addressed through our upgraded cost program of now more than SEK 0.8 billion 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 are 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 stable financial results, and strategic markets 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 0.4x in the quarter, primarily driven by accelerated investment and adverse FX movements. We continued to be very much impacted by SEK versus Euro depreciation. This alone accounts for about half of the increase in the leverage ratio.Turning to page 13. As Andres said, the cost program has been updated. Based on the work carried out and initial successes, we are now confident that we will reach more than SEK 0.8 billion in savings. The majority of these benefits will be achieved by the end of 2023 on a run rate basis, with the cost to achieve range unchanged, 0.75 times to 1.25 times realized benefits.As part of this program, we are 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 1 month of revenues from the servicing platforms acquired from Arrow in the U.K. Cash EBITDA increased by 33% compared to the first quarter of the year and adjusted segment margin is up 4 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 SEK 233 million 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 topline. The seasonally strong second quarter shows continued high revenues after 2 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 SEK 112 million 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 and 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 SEK 14 billion on a rolling 12 month basis. Similarly, cash EBITDA contribution from the segment now stands at just under SEK 11 billion.Collection performance for the quarter was 103% vs 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 none 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 SEK 2.8 billion in new portfolios in the quarter at an expected net return of 15%, driven by the circa SEK 1 billion portfolio acquired from Arrow in 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 SEK 5.5 billion with SEK 4.5 billion 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 3.1x 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 SEK 1.7 billion, at the same time, we have cash out for investments of SEK 2.9 billion, and we also paid a dividend of SEK 0.8 billion.The second largest driver of increasing net debt on the reporting date is the depreciating SEK, which moved by about SEK 0.50 between March and June, heavily impacting our debt and leverage. This factor alone accounted for about half the increase in leverage ratio or about 0.2x.We currently have SEK 13 billion in 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 headlines. 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 to near-term, and we're going to take the different measures that I outlined earlier, and I think that's good for all stakeholders.And with that, I think we can open up the Q&A.
[Operator Instructions]. The next question comes from Jacob Hesslevik from SEB.
So, first on strategic markets. During Q1, you mentioned that we would not see the same revenue growth within SM as we have seen during the last 2 years. However, margin seems to have stabilized and actually counteract this effect somewhat. So do you believe that today's margins reflect the new normality?
Jacob, it's a very good question. I think what this shows is these are well managed and scaled markets, and obviously the margin reflects the value add we're able to generate and how well we're able to, in a way counteract cost pressures in that market. So I very much for the near-term, see it as a stabilization, and I see a continuation in the margin picture we're seeing at the moment, obviously, always with a bit of a seasonality pattern in it.
Agreed.
All right. Good to know. If we move over to your new targets or initiatives there, you state that you are looking at additional measures to reduce leverage. Could you be more specific? I mean, you named Czech, Slovakia and Hungary as 3 countries to divest, but are there more geographies that you could exit?
I don't believe that over the medium term we will look to exiting any further geographies. And again these 3, we are potentially exiting them, between now and year-end we'll clarify that. And if we do, we're going to use those proceeds, and these are much more sizable markets than the 5 we exited in the first half of this year. We'll use those proceeds to reduce debt. So at that point, we will have down to 17 jurisdictions and I believe that is actually a core, focused, geographical footprint that we want to move forward based on that.The additional measures could include several other things that all of which would contribute to an accelerated paying down of debt. It could in theory be a sale of assets, it could be -- there's a number of theoretical alternatives, Jacob. And at this stage we're pursuing them and evaluating them, but we don't have anything concrete to report back to the market. When we do, we will. But they're all with the same purpose, which is not building our business, but also at the same time trying to accelerate the repayment of debt.
I think Jacob, conceptually, if you think about it, these 3 geographies where we are investigating a disposal, it also very much ties into the message we've given. Those markets are very much only investing focused and don't really have a third-party servicing business or client base servicing business. So, that's very much also to be seen in the context of the focus on the underlying servicing business on the operations and building those client franchises, where we already have a good starting point in those 17 geographies, that Andres mentioned.
All right. And could you remind us of how large the books are in these countries?
We don't disclose book value by country. But they're very meaningful, I can say.
Double-digits or how should we think?
Yes. Multiple EUR 100 million, if you think about it in that context.
And then, I mean, stating that the Board is looking to cut the dividend already in Q2 this year, is quite aggressive at least in my view. So what is the background to this decision? Did the Board not expect H2 to be strong at all? Is it a bit early to already cut it?
No. I think it's important to include that as one measure amongst several with the intention of reducing debt. I think, Jacob, you have to also realize that we declared a SEK 13.5 dividend this year, which at the current price is an 18% yield, and there's still one more payment to go. Many stakeholders, equity as well as bondholders have asked us to evaluate diverting that cash to reducing debt instead of returning it to shareholders. And we have decided to take a pause in 2024 and take that cash and reduce debt as part of the overall reduction in our risk profile. It is a decision that's been taken now by management, but more importantly Board, but ultimately it's up to the AGM.
Yes, of course it's up to the AGM, but, do you think that the Board could propose for example to cut it in half where it would pay out at least SEK 5 or something, it will have to be the same amount, or do you think...
All I can say is that today, given everything we know today, our intention is to recommend no dividend. In theory, obviously the world can change between now and next January when we have to ultimately provide a recommendation to the shareholders that will be decided upon at the AGM. But today, this is our intention, Jacob.
All right. Thank you for that clarification. And then, I mean, if we move over to your bonds, I need to ask on this, and I'm a bit sorry if it's a bit provocative. But we know -- we knew leverage would increase in the quarter, but 4.6x is the highest we've seen in a while, and the highest since I began covering you. And I understand that from a cash flow perspective you've stated multiple times that you're confident with this leverage, although it is a bit high. But I do need to ask about any covenant breaches. I have looked in the prospectus of the EUR 450 million bond you issued in December.Well, first of all, it's over 400 pages long and [indiscernible] reading for an equity analyst. But there do seem to be a covenant around 4.25 times in leverage ratio that would hinder you to pay out more than 6% of your market cap. However, the prospect also talks about the possibility to build some sort of basket of income over time that can offset this. So Michael, could you help me out here? Have you breached any covenants or have you received any waivers?
We have not breached any covenants. We've not had to ask for any waivers. There is a number of baskets that in theory can be utilized for a dividend, just for clarity. And in terms of headroom, we have ample headroom versus the covenants that we have to follow.
Yeah. And just to add to that, Jacob -- and first off, thank you for reading the 400 pages. But I want to also just make sure that everyone understands the progression from 4.2x to 4.6x, that direction was expected because we closed Arrow, we paid the first instalment on the dividend during the quarter, but half of it 0.2x, is from the adverse movement of the SEK versus Euro, which were predominantly a Euro-based operating company and we report in SEK. So there needs to be some context over that variable we do not control, obviously.
And Jacob, just to be very transparent. I mean, for the rest of the year with the measures that we are taking, and assuming flat FX development, we obviously see that leverage ratio starting to move back down.
Yes. And just so I can go and relax in my summer vacation after next week. Your bank loans doesn't include any leverage ratio covenants either, right?
No, as I've stated before in terms of the actual covenants that we have, we have ample headroom versus [indiscernible].
I mean, I want to be clear, because you're obviously doing your job in understanding whether we feel forced in this action. It is our intention to lower our risk profile. You've heard me say before, and you already said it Jacob, that I'm comfortable that we can sustain this debt. But in the current risk environment, it is prudent to reduce our leverage and we're going to do so.
The next question comes from Patrik Brattelius from ABG.
Yes, a few follow-up questions on the topics already touched upon. Given that you have already exited a few markets now, and you know the size of those markets, and then you -- if you put that into perspective, these 3 additional markets that you are potentially exiting, can you give us a little bit of an rough estimation, what you expect you will be able to walk away with here in form of cash, please?
Again, we don't -- these processes are commencing now. They're going to be concluded between now and year-end. They are -- we are exploring potential market access. It doesn't mean that we definitely we will exit them, it will ultimately depend on what terms are presented to us and whether we find that it's better to sell them or to continue to hold them, but it is our intention to exit.We don't disclose book value by market, but these 3 markets are much, much more sizable than the 5 that we've exited previously. As Michael said, they're predominantly investment markets with very little to zero servicing business in each of them. And while we don't give specific book value by market, I did already tell Jacob earlier, that we're talking several hundred million euros.
Okay.
To just give you a small pointer to hang your hat on, if you look at our total book value they're a little bit below 10% or around about 8% of our book value as of today.
There you go.
Very helpful. You have given a forecast or how much you expect to deploy for the full year 2023. But you also talk about in this leverage reduction actions that you will limit your investment for 2024. Can you please share with us a little bit more detail what are you thinking in terms of investments for 2024?
So -- I mean, and Michael can add to this, but the first half of the year as Michael said, we were [ SEK 450 million ] or so -- SEK 4.5 billion, sorry, SEK 4.5 billion. We expect to invest SEK 5.5 billion for the full year, because we do have contractual ongoing arrangements to buy assets, that includes M&A. Next year, we will invest whatever we contractually are required to, and we will be very selective with any new investments. I can't say it would be zero, but the conclusion of which is that we are going to be significantly, significantly below replenishment CapEx. I would expect a small fraction of replenishment CapEx, all of which will produce cash that we can then as I said earlier, divert to repaying or reducing our leverage.
The only thing to add from my perspective, because obviously, we have an upcoming Capital Markets Day, where we'll come with a financial and KPI trajectory and associated targets. And we'll be very transparent about how we see the Investing business and how we also are trying to develop ways to tap into the value that our pipeline and our underwriting and workout capabilities represent.
Thank you. And then you say, the last half of this 2023, it's roughly SEK 1 billion and that is driven by contracts. And then you talked about 2024 also contracts. So, can we take the second half as a run rate of how much you're contractually obliged to invest or is that an overstatement?
No, I would argue for the second half, we obviously have very, very good visibility. And that's why we have given this very clear guidance. I would urge you to look at the Capital Markets Day for more detailed guidance for periods to come. As Andres said, it's really an opportunistic business and effectively, we are going to a fraction of replenishment rates and what's contractually there. But obviously that will play out throughout 2024.
But, to more directly answer your question, obviously we have visibility over the near-term and to the degree we don't enter into new investments, the contracted forward flows naturally decline over time, if that gives you a directional sense to your question.
Perfect, it does. And then as last question, is, if you can share with us any updated view on the Haya acquisition and the impact you expect from that acquisition in the second half of 2023, both on cash EBITDA and also on your leverage ratio, please?
As we said before in leverage ratio to tackle that one first, on a proforma basis, it's neutral to positive, so it's de-levering. And in terms of the actual impact on the year-end figures, that determines on the exact point in time when we close it. So, I would more look at the run rate where it's a significant contributor to the delta that Andres mentioned earlier, in terms of -- between cost program, Haya, the Arrow platforms in the U.K., that's on a delta basis that adds more than SEK 1 billion to our cash EBITDA.
Yes, the current expectation is we'll close Haya sometime probably in September, maybe earlier, but it is the summer as Jacob indicated in his comments. But it's still pending approval. But again, I'll reiterate what Michael just said, between our cost reductions on a run rate basis, between our full-year impact of the Haya and the Arrow acquisitions, where we end up this year, we're already starting next year, well above a SEK 1 billion above that figure on a run rate basis going into next year. On a like-for-like basis, i.e., same business-same business, and also without any reflection of any organic improvement.
Okay, perfect. And a last follow-up there. Given an answer earlier, it sounded like you were not that surprised that leverage ratio increased quarter-on-quarter here in Q2. Can you then share with us your expectation of the leverage ratio progression for the second half of 2023?
If you look at the underlying leverage ratio development over time, Q2 is usually one where it takes up a little bit, we have the dividend payments, and generally it's also relatively strong investment quarter. Though particularly this year, we had this front-loaded pace, also very much due to the Arrow U.K. portfolio which we contracted already last year. So from that perspective, we expected an uptick, obviously FX significantly added on top of that. Obviously, on a forward-looking basis, we don't take further FX developments into account. And given the investment profile and cash generation profile for the rest of the year, we expect that to start tailing off during the second half and therefore come down.
That is good, but could you be bit more specific in the level?
I think we'll present a lot of detail on de-levering, and our leverage trajectory at the Capital Markets Day in a couple of weeks.
Couple of months, actually.
Okay, perfect. Then I'll wait for the CMD, then.
The next question comes from Ermin Keric from Carnegie.
It seems obvious that you are intending to focus more now on servicing side of the business. I mean, if we look just historically, before 2022 H2, Intrum has struggled quite a lot to have organic growth within CMS. What's different now? I mean, of course, you're having organic growth now, but we're also seeing margin lower. So, over time, should we still expect -- or what kind of level of organic growth should we expect for the servicing? And should it be a structurally lower margins than it was pre-pandemic?
So, since I joined as CEO, one of the main focuses is improving our commercial effectiveness, and ultimately that manifests itself in focus on our client service business, which frankly is also the most enduring and recurring and valuable business to our equity and bondholders. You are seeing organic growth, that's a function of an increasing demand for our services. It's a function of also our increasing focus on our pipeline and you can see that in the numbers I presented earlier in terms of our AUM and our annual contract value. I can tell you right now that we're contracting all that new business at significantly higher margins than we are -- than we've had historically.And I'm really encouraged by the middle and the north showing topline growth because it's where we have a more granular, more flow-like client base, but they clearly demonstrating a need for our services.So when you look forward, I do think there are different speeds in different parts of Europe, the North is going to continue to need our services. We're going to have to continue to be more efficient and improve our margins. The South, you know, trees don't grow to the sky, they've been incredibly high growth in the last few years, particularly in Greece, but they're also very high margin and very significant cash flow contributors. And I think that will continue.And I'm quite happy with the progression on our servicing side and as you can tell from our comments, that's where we're going to focus going forward. I would expect -- and in the first half, the margin improvement has been very significant. In Servicing, even when you exclude Greece, which has such a high margin, our margin for the first half expanded 300 basis points above what our margin was at the end of the first quarter. That's significant momentum, and I would expect that to continue.
Got it. Then on kind of other initiatives you alluded to that -- for taking down leverage. You alluded that you could do other asset sales as well. I think when we spoke about this in Q1, it sounded like it was completely off the table to sell part of the back book. What has changed from now -- or from then until now, that does kind of make you more open-minded to that idea?
Well, I mean I don't think anything has really changed. I think our focus on developing our servicing business and optimizing our capital structure relative to our investing business, means we would evaluate potentially a back book deal. It also is in the context of the development of an asset management business, where we want to do potentially a capital partnership over the near-term and then ultimately over long term grow our investing business without growing our balance sheet, and a back book deal or some kind of a reduction in our assets is completely consistent with that direction. And in this environment, I think there are still very large pools of capital who are looking for attractive, granular, consistent and reliable returns and our book represents that.So looking at it as one additional potential measure, although it's not immediately actionable, otherwise it would be in the specific measures I've outlined, but it's something we don't discard, and it's something we're looking at. And if and when it becomes actionable on the right terms, which I think is very relevant to your question, then we will come back to the market.
And then lastly, maybe on the cost program.
Yes.
So, first just the control question, so if I understood it correctly, the execution costs, are they still in relation to their previous target or is it 0.75x to 1.25x the factor of the new larger savings targets? And also just upsizing, is that having anything to do with that -- we now expect to buy less and therefore can reduce collection capacity to an extent?
Okay. So I'll start with the first one and I'll leave the second one to Andres. But on the first part, very simple answer, the way we look at it is, whatever we end up saving, whatever those recurring savings are, they have an execution cost, right, a cost to achieve roundabout 0.75x to 1.25x. I mean, that's how it has to be characterized.
Yes. I mean, it doesn't -- this doesn't have anything to do with we are buying less. In fact, our -- we have about SEK 11.8 billion of cash costs roughly. The vast majority are the people on the call centers and our operations in IT, and then we have the center and we have other stuff. PI is a very small portion of that, because PI is an inherently or structurally leverageable business with human resources. And the reduction in our prospective PI investments this year and next year are not driving that increased costs, they are not. It's more about looking at our platform globally and in its entirety, and looking at where we are inefficient and then addressing that inefficiency.
Great. If I may just sneak in one last question, sorry. But just given that you're a little bit changing the trajectory on how you're thinking about the Investment business, do you see that having an impact on your franchise as an overall for your kind of partners?
It's a good question, Ermin. We are going to be extremely selective in how we deploy capital. We are going to increasingly look to bring in third-party capital to invest in the opportunities we can source. And I do not believe that, that will materially impact our servicing franchise.
The next question comes from Brendan Breen from Andromeda Capital. The next question comes from Brian O' Brien from UBS.
I just had a couple of quick ones, maybe just, is there a minimum cash balance you need to run the business?
It seems like a question for my CFO.
It's a very good question indeed. Technically not, but in very practical terms, given that we are a cash-based business, we always keep a certain balance. I would argue that we've worked on reducing that, and I think what we have now in terms of the cash balance in Q2, I think that reflects a good level, that gives us very solid buffers. That's the cash balance, On the balance sheet obviously, on top of that, we have significant access to liquidity that gives us the ability to move and buffer and work throughout the year.
Okay, that's great. And then just a second one, I was looking at the offering memorandum for the Euro bonds that you issued late last year. It looks like forward flow purchases are roughly 20% of total purchases. Is that a good way to think about on a normalized basis going forward? Just trying to get a feel for what the contractual obligations are in a normal year.
To give you a sense of -- when we talk about the SEK 1 billion for the second-half, and you sort of split that across the quarters, obviously, there is always a little bit of seasonality to inflows. But that gives you a sense of what it is at the moment. It's also important to say that forward flows by their very nature are usually not very long-term agreements. So they tend to -- to phase out. So what we have contracted now will obviously structurally reduce over time. But for the next 2 quarters, what I've just told you, gives you a sense of what that commitment is.
Okay. And then just finally, some of your peers like Lowell here in the UK do, sort of, ABS type financing or where they use some of their back book to secure financing at cheaper rates. Have you thought about that, just given your kind of cost of debt today?
One can always think about it, but to answer the point straight on, we in the way our liability side is structured have very, very clear rules and limits on how much secured funding we can use, and that's round about EUR 250 million and some of that is already taken up by private placement. But that's our limitation, and therefore, we do not consider such structures in size, and we also think that relative to our senior unsecured creditors, usage in size would be unfair, apart from the fact that we can't do it.
Okay, that makes sense. So just finally, the new [ SEK ] bond deals that you did, what was the reason for those? Was it purely to refinance debt coming due, because I think the perception in the market was, given the little amount in euros that you raised, you're kind of highlighting your cost of debt financing being so high. What was the need to do that, with those two financings?
We had SEK MTN maturity coming up, and we continued to work with that investor base and roll some of that exposure forward.
So you want to maintain access to the SEK market. Okay.
Exactly.
Okay. That's very useful. Look forward to your Capital Markets Day.
The next question comes from Rickard Strand from Nordea.
2 questions from my side. Tying it into Ermin's previous question there about your previous comment about divestment of back book assets being value destructive, but now it seems like the measures you're suggesting to reduce your leverage, seems to -- it's now up on the table again. Just if you could clarify what's -- is there anything specific for these market that makes you optimistic that these type of divestments could reduce your leverage here? Is it because you have a very weak profitability here or that you have -- so a sort of a strong demand for other players to take over these assets?
So, I think your question has 2 elements to it. #1, and I've already answered previously, in terms of any -- we do not intend on selling any further markets or potentially evaluating the exit of any further markets. I'll address the -- your second half of your question in a second.On the back book, we continually look at what we can do, and there is multiple variables in that equation, and we're not discarding it, we're looking at it and we would use any proceeds if anything we do, to reduce leverage, which is our near-term top priority. But nothing has changed ultimately. The risk environment obviously is different than it was 3 and 6 and 9 months ago, and we have to reflect that in our actions, and I don't want to discard anything.On the markets, we're potentially focusing on each of these markets, not primarily to raise capital, but because it would further add to the focus of our platform, on markets where we have sizable servicing businesses and sizable investing opportunities. These markets are predominantly Investing markets. And so this -- we would be doing this no matter what the risk environment was, no matter what the overall environment was because it's good for our business to focus on a fewer larger jurisdictions where we can have more of an impact across both our businesses. And that's -- I think that's the answer to your question. If there's anything I missed, please let me know.
Then also, as you report -- started reporting this quarter then, the impact from discontinued operations, whether your headwind was a bit larger than we forecasted. If you could add any more color on what you -- sort of what's driving this and how long you think, this sort of negative impact on the P&L will continue?
What I would say is, Brazil is signed and closed and exited, and there you have the full impact. We have a note in discontinued operations and you also see it in the delta on how we've disclosed our operating EBIT. When it comes to Baltics and Romania, there we've only signed, and the final effect -- we'll obviously then restate or recalculate at closing. But this is our best estimate based on what we know today and therefore it's been reflected as such.What I would argue there is that, on the portfolios, we actually very much see a confirmation of our book values, if not in aggregate even a premium to that. When it comes to the Baltic operation that has been from a servicing platform perspective, been challenging for a while, and the effect that you see in the discontinued operations now is just -- it's just reflective of that. So this essentially is our best estimate of what the ultimate impact of exiting those geographies is.
Okay. But the Baltic and the Romanian negative impact is still to come then, it sounds like?
Rickard, I'm not entirely sure what you mean.
No, I was just referring to your comments down that Brazil was -- seems to be closed, but the Baltics and Romanian deals are still ongoing. So there might be potentially more headwind from those, or have you sort of taken...
No. We've taken everything into account that we know today and the disclosure is very much reflective of that.
The next question comes from Corinne Cunningham from Autonomous.
Few questions from me, please. On slide 22, can you just clarify, you mentioned certain restrictions in covenants. Can you just clarify what you see those calculations are for under the fixed charge coverage, the drawn senior leverage? And also when we were talking a moment ago on the rules that limit super senior, you mentioned EUR 250 million and yet the slide refers to SEK 1.1 billion. So could you tie those two up? I have a couple of other ones, but perhaps we could tackle the covenant one first, please?
So on the covenant one, what I would say is that we have ample headroom under both these covenants that are mentioned there. And obviously, further detailed calculation, that is in the documentation. In terms of the headroom, I think that there is a difference. In terms of the super senior, obviously that has its own specific rules in terms of how the headroom is calculated. What I was alluding to is that the overall bond documentation package between how the super senior is structured and all the other bonds are structured gives us an ability to slot in EUR 250 million between the super senior and the senior unsecured, which in the context of the overall stack is a very limited amount, and in the past has been mostly used by private placements and continues to be used by a private placement at present.
And second question is just on cost savings. So, of the SEK 800 million expected run rate, if you were to switch back on portfolio investing, going back to a previously normal run rate, would you maintain all of those SEK 800 million, or is it really -- this is linked more to the CMS type of the business and then portfolio investments, we have to wait and see what happens with partnership agreements, et cetera?
The SEK 800 million or more does not change, depending upon how much we invest. It is related to our overall platform which is predominantly a servicing platform, either we're servicing on behalf of our own PI or servicing on behalf of clients and our central management. So it would be there, no matter what level we invest.
And then last one from me is, are you seeing any signs of asset quality issues in your own portfolio investments? So, I appreciate you got the 103%, which looks pretty solid, but are you seeing any early signs for example in things like time to collect, et cetera?
Well, I mean I think -- I think one has to look at it on a dynamic basis in over a period of time to answer your question. 103% is a great performance given the current environment, 110% against original forecast shows that we get better over time and we're prudent in our underwriting. And our scale of SEK 92 billion of total collections is very significant. But a year ago, the collections were much higher as a percentage. I mean, they were well above 110% if I remember -- 115%. So obviously, there is a trajectory that indicates a more difficult collections environment.But what the wonderful thing is and I always focus on that 18-year track record, Corinne, it's only dipped below 100% once, and that was at the height of the pandemic and it came right back and the average over that 18-year period is like 107%. So, I'm very confident. And this is one of the real stellar things about our business, and that our operational capability allows us to drive collections in a much more consistent and reliable basis, which ultimately drives lower credit risk for our clients and better returns for our own capital when deployed.
And I would also not underestimate the effect of diversification in all its meanings, right? I mean, we have jurisdictions that are -- at the moment a little bit more difficult. I would say if you liken it to a train, the U.K. is probably at the front of the train and Greece is probably at the back of the train. But in the context of our footprints, we have a number of markets, we cover different asset classes, we have different vintages, and overall how that portfolio is constructed, how granular it is, how much it relies or it's built on payment plans, just leads to that very stable, very predictable outcome, even when that macroeconomic backdrop is somewhat more challenging. And again, we have a very, very long track record, that just shows and highlights that in terms of its stability and in terms of how we get better over time and extract value from that book.
The next question comes from Gustav Larsson from Arctic.
Just two short ones from me. A question on the supply side of NPL. So previously you said you're monitoring the inflow of financial claims. With a lower investment level, will you be able to direct that towards financial claims, and are you seeing volumes increase there?
So as I said earlier, there are stages to how a crisis evolves related to our business. We see Stage 2 loans, we see clearly our clients are telling us that they're worried about what's coming. Clearly, our clients are asking us to get involved sooner, earlier stage, one of the things you'll hear in the coming periods, is that we're trying to get into earlier and later stage, we're in very much in the later stage in some of our markets, but we're going to get into early pre-collections activity, because our clients value us as a partner in managing their credit risk, which means helping them avoid a problem.But this is in our servicing business. We see increased cases, that's part of the -- what you see in the second quarter with the improved performance in our servicing. It has not yet manifested itself into a very meaningful increase in PI available volumes. And as I've said in the past, I don't believe that will really manifest itself and really accelerate until next year and the year beyond. But it will come, there is no doubt about it.
So, perhaps a bit more medium term perspective on that. I understand reducing leverage in the short term, but do you see any risks that you're cutting costs now and servicing should cyclically improve, and reducing investments when IRRs are rising, and what that can do in the medium term?
Well, I think what it's going to do is -- again, I don't think we get the proper credit for how flexible our PI business is. In that, first-off from a infrastructure perspective, we have purely dedicated people managing that pool of capital of around 100 people. Obviously they depend on the servicer to collect, but managing the investments per se is only about 100 people. So it's structurally quite lean, and ultimately, yes, our IRRs have been going up. But what we're going to be doing over the near-term is, focused on getting more efficient in servicing, focused on understanding how the market is going to evolve, very, very selectively do investments, contractual stuff and only new investments on a very selective basis, reduce our investment well below replenishment capital, which will -- given its granular self-liquidating nature produce cash, which we will reduce leverage. But this business is also quite flexible and that we could turn it on, given the normalization of the environment and our financial conditions, we can turn it on quite easily. And obviously those individuals who may not be focusing as much on new investments, can focus more on portfolio management and working with our servicer to extract more from our existing assets.So I think that ultimately, this is a period where we're prioritizing repayment of debt, but ultimately it's something that we can reverse and actually increase our proprietary investments at any point in time, should our conditions normalize.The other thing that's happening during this period, is that we are, as I've said, exploring asset management model, where we could bring in third-party capital on a tactical or immediate basis or while we're continuing to take the steps to build a long-term asset management business, which will then grow our investing business, but not necessarily grow our balance sheet, because we'll be managing third-party capital in addition to our own investments.I think there are...
There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.
Wonderful. Thank you. Well, the operator repeated what I said. There's no one else in the queue. But I'd like to thank everyone for taking the time to listen to us today and also for your continued efforts in following our company. We are obviously available for any follow-on questions, and you can work through your normal lines of communication. And I wish you all a wonderful rest of the summer. Thank you.
Thank you.